BOKF-2012.09.30-10Q


 

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 September 30, 2012
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: 68,215,354 shares of common stock ($.00006 par value) as of September 30, 2012.
 




BOK Financial Corporation
Form 10-Q
Quarter Ended September 30, 2012

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)
Nine 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 $87.4 million or $1.27 per diluted share for the third quarter of 2012, compared to $85.1 million or $1.24 per diluted share for the third quarter of 2011 and $97.6 million or $1.43 per diluted share for the second quarter of 2012. Net income for the second quarter included a $14 million pretax gain on sale of common stock received in settlement of a defaulted loan and an $8.0 million negative provision for credit losses.

Net income for the nine months ended September 30, 2012 totaled $268.6 million or $3.92 per diluted share compared with net income of $218.9 million or $3.19 per diluted share for the nine months ended September 30, 2011.

Highlights of the third quarter of 2012 included:
•
Net interest revenue totaled $176.0 million for the third quarter of 2012, compared to $175.4 million for the third quarter of 2011 and $181.4 million for the second quarter of 2012. Net interest margin was 3.12% for the third quarter of 2012. Net interest margin was 3.34% for the third quarter of 2011 and 3.30% for the second quarter of 2012. Net interest revenue in the second quarter of 2012 included $2.9 million from the full recovery of a nonaccruing commercial loan. Excluding this recovery, net interest margin was 3.25%. Net interest earned from the increase in average loan and securities balances was largely offset by the reinvestment of cash flows from the securities portfolio at lower current market rates and decreased loan yield.
•
Fees and commissions revenue totaled $166.3 million for the third quarter of 2012, compared to $146.0 million for the third quarter of 2011 and $154.5 million for the second quarter of 2012. Mortgage banking revenue increased $20.8 million over the third quarter of 2011 and $10.7 million over the second quarter of 2012 due primarily to an increase in loan production volume and improved pricing of loans sold. Nearly all other fee-based revenue sources increased over the prior year and quarter.
•
Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $212.8 million, up $17.1 million over the third quarter of 2011 and up $1.2 million over the previous quarter. Personnel costs increased $19.5 million over the third quarter of 2011 due largely to incentive compensation and were flat compared to the second quarter of 2012. Non-personnel expenses decreased $2.5 million compared to the third quarter of 2011 and increased $725 thousand over the prior quarter.  
•
No provision for credit losses was recorded in the third quarter of 2012 or the third quarter of 2011. An $8.0 million negative provision for credit losses was recorded in the second quarter of 2012. Net loans charged off totaled $5.7 million or 0.19% of average loans on an annualized basis for the third quarter of 2012 compared to $4.8 million or 0.17% on an annualized basis in the second quarter of 2012 and $10.2 million or 0.37% of average loans on an annualized basis in the third quarter of 2011.
•
The combined allowance for credit losses totaled $236 million or 1.99% of outstanding loans at September 30, 2012 compared to $241 million or 2.09% of outstanding loans at June 30, 2012. Nonperforming assets totaled $264 million or 2.21% of outstanding loans and repossessed assets at September 30, 2012 compared to $279 million or 2.38% of outstanding loans and repossessed assets at June 30, 2012.
•
Outstanding loan balances were $11.8 billion at September 30, 2012, up $256 million over June 30, 2012. Commercial loan balances increased $221 million or 13% on an annualized basis. Commercial real estate loans increased $39 million and residential mortgage loans increased $14 million over June 30, 2012. Consumer loans decreased $18 million.
•
The available for sale securities portfolio increased by $1.1 billion during the third quarter to $11.5 billion at September 30, 2012. The Company increased its holdings of low duration residential mortgage-backed securities guaranteed by U.S. government agencies during the third quarter.
•
Period-end deposits totaled $19.1 billion at September 30, 2012 compared to $18.4 billion at June 30, 2012. Interest-bearing transaction accounts increased $451 million and demand deposit accounts increased $408 million, partially offset by an $86 million decrease in time deposits.
•
The tangible common equity ratio was 9.67% at September 30, 2012 and 10.07% at June 30, 2012. The tangible common equity ratio is a non-GAAP measure of capital strength used by the Company and investors based on shareholders’ equity

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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 13.21% at September 30, 2012 and 13.62% at June 30, 2012.
•
The Company paid a cash dividend of $26 million or $0.38 per common share during the third quarter of 2012. On October 30, 2012 the board of directors approved a quarterly cash dividend of $0.38 per common share payable on or about November 30, 2012 to shareholders of record as of November 16, 2012. In addition, on October 30, 2012, the board of directors approved a special cash dividend of $1.00 per common share payable on or about November 30, 2012 to shareholders of record as of November 16, 2012.
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 $176.0 million for the third quarter of 2012 compared to $175.4 million for the third quarter of 2011 and $181.4 million for the second quarter of 2012. Net interest margin was 3.12% for the third quarter of 2012, 3.30% for the second quarter of 2012 and 3.34% for the third quarter of 2011. 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 increased $643 thousand over the third quarter of 2011. Net interest revenue increased $18.3 million primarily due to the growth in average loan and securities balances. Net interest decreased $17.4 million due to 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, partially offset by lower funding costs.

Net interest margin declined compared to the the third quarter of 2011 due primarily to lower yields on our available for sale securities portfolio and loan portfolio, partially offset by lower funding costs. The tax-equivalent yield on earning assets was 3.47% for the third quarter of 2012, down 44 basis points from the third quarter of 2011. The available for sale securities portfolio yield decreased 45 basis points to 2.38%. Cash flows from these securities were reinvested at current lower rates. Loan yields decreased 38 basis points due primarily to a combination of narrowing credit spreads and lower market interest rates. Funding costs were down 24 basis points from the third quarter of 2011. The cost of interest-bearing deposits decreased 15 basis points and the cost of other borrowed funds decreased 18 basis points. The average rate of interest paid on subordinated debentures decreased 281 basis points compared to the third quarter of 2011. The interest rate on $233 million of these subordinated debentures converted from a fixed rate of interest of 5.75% to a floating interest rate based on LIBOR plus 0.69% as of May 15, 2012. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 17 basis points in the third quarter of 2012 compared to 19 basis points in the third quarter of 2011.

Average earning assets for the third quarter of 2012 increased $2.3 billion or 11% over the third quarter of 2011. The average balance of available for sale securities, which consists largely of U.S. government agency issued residential mortgage-backed securities, increased $1.4 billion. We purchase these securities to supplement earnings and to manage interest rate risk. Securities were purchased to productively deploy liquidity provided by recent deposit growth and the Company's strong capital position. Growth was primarily in short-duration U.S. government agency residential mortgage-backed securities and U.S. government agency commercial mortgage-backed securities. Average loans, net of allowance for loan losses, increased $921 million over the third quarter of 2011 due primarily to growth in average commercial loans.

Average deposits increased $545 million over the third quarter of 2011, including a $1.6 billion increase in average demand deposit balances, partially offset by a $590 million decrease in average interest-bearing transaction accounts and a $549 million decrease in average time deposits. Average borrowed funds increased $637 million over the third quarter of 2011.


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Net interest margin decreased 18 basis points compared to the second quarter of 2012.  Excluding the impact of the interest recovery in the second quarter, net interest margin decreased 13 basis points. The yield on average earning assets was down 17 basis points. The yield on the available for sale securities portfolio decreased 16 basis points primarily due to reinvestment of the cash flows from the securities portfolio at lower current rates. The loan portfolio yield decreased 15 basis points largely due to renewals of maturing fixed-rate loans at current lower rates and narrowing credit spreads in this prolonged low interest rate environment, and a reduction in fees recognized when loans prepay. The cost of interest-bearing liabilities decreased 4 basis points from the previous quarter, including a 116 basis point decrease in the average rate paid on subordinated debentures due to the change from a fixed to floating rate of interest.

Average earning assets for the third quarter of 2012 increased $1.2 billion over the second quarter of 2012. The average balance of the available for sale securities portfolio increased $967 million. Average outstanding loans, net of allowance for loan losses, increased $136 million largely due to growth in average commercial loan balances. Average deposits increased by $325 million during the third quarter of 2012, including a $440 million increase in demand deposits, partially offset by a $60 million decrease in interest-bearing transaction accounts and a $63 million decrease in time deposits. The average balance of borrowed funds decreased $34 million and the average balance of subordinated debentures decreased by $5.2 million.

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. As shown in Table 1, increases in net interest revenue have been based on growth in average earning assets. Net interest margin may continue to decline as our ability to further decrease funding costs are limited. Assuming short and intermediate interest rates stay low, net interest margin could migrate below 3%. Although we have sufficient capital and liquidity, our ability to continue net interest revenue support through asset growth without accepting excessive risk in a rising interest rate environment may be constrained.


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Table 1 – Volume / Rate Analysis
(In thousands)
 
 
Three Months Ended
Sept. 30, 2012 / 2011
 
Nine Months Ended
Sept. 30, 2012 / 2011
 
 
 
 
Change Due To1
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield /
Rate
 
Change
 
Volume
 
Yield
/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Funds sold and resell agreements
 
$
(2
)
 
$
2

 
$
(4
)
 
$
(3
)
 
$
2

 
$
(5
)
Trading securities
 
66

 
272

 
(206
)
 
(100
)
 
878

 
(978
)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
1,365

 
1,251

 
114

 
4,936

 
5,055

 
(119
)
Tax-exempt securities
 
(471
)
 
(210
)
 
(261
)
 
(1,775
)
 
(1,524
)
 
(251
)
Total investment securities
 
894

 
1,041

 
(147
)
 
3,161

 
3,531

 
(370
)
Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(6,558
)
 
4,565

 
(11,123
)
 
(24,311
)
 
13,819

 
(38,130
)
Tax-exempt securities
 
174

 
220

 
(46
)
 
210

 
425

 
(215
)
Total available for sale securities
 
(6,384
)
 
4,785

 
(11,169
)
 
(24,101
)
 
14,244

 
(38,345
)
Fair value option securities
 
(3,413
)
 
(1,820
)
 
(1,593
)
 
(6,088
)
 
(1,744
)
 
(4,344
)
Residential mortgage loans held for sale
 
694

 
1,022

 
(328
)
 
1,402

 
2,196

 
(794
)
Loans
 
(1,257
)
 
9,702

 
(10,959
)
 
9,548

 
29,765

 
(20,217
)
Total tax-equivalent interest revenue
 
(9,402
)
 
15,004

 
(24,406
)
 
(16,181
)
 
48,872

 
(65,053
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
(2,082
)
 
(294
)
 
(1,788
)
 
(8,398
)
 
(704
)
 
(7,694
)
Savings deposits
 
(56
)
 
35

 
(91
)
 
(157
)
 
101

 
(258
)
Time deposits
 
(4,352
)
 
(2,397
)
 
(1,955
)
 
(11,249
)
 
(6,137
)
 
(5,112
)
Funds purchased
 
497

 
175

 
322

 
887

 
519

 
368

Repurchase agreements
 
(214
)
 
(6
)
 
(208
)
 
(1,238
)
 
87

 
(1,325
)
Other borrowings
 
(962
)
 
(328
)
 
(634
)
 
(1,793
)
 
(2,005
)
 
212

Subordinated debentures
 
(3,152
)
 
(494
)
 
(2,658
)
 
(5,206
)
 
(1,081
)
 
(4,125
)
Total interest expense
 
(10,321
)
 
(3,309
)
 
(7,012
)
 
(27,154
)
 
(9,220
)
 
(17,934
)
Tax-equivalent net interest revenue
 
919

 
18,313

 
(17,394
)
 
10,973

 
58,092

 
(47,119
)
Change in tax-equivalent adjustment
 
276

 
 
 
 
 
40

 
 
 
 
Net interest revenue
 
$
643

 
 
 
 
 
$
10,933

 
 
 
 
1 Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.


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Other Operating Revenue

Other operating revenue was $179.9 million for the third quarter of 2012 compared to $173.6 million for the third quarter of 2011 and $186.3 million for the second quarter of 2012. Fees and commissions revenue increased $20.3 million over the third quarter of 2011. Net gains on securities, derivatives and other assets decreased $24.1 million compared to the third quarter of 2011 due primarily to a decrease in gains on sale of fair value option securities which are primarily held as an economic hedge against changes in the fair value of mortgage servicing rights.  Other-than-temporary impairment charges recognized in earnings in the third quarter of 2012 were $10.2 million less than charges recognized in the third quarter of 2011.

Other operating revenue decreased $6.3 million compared to the second quarter of 2012. Fees and commissions revenue increased $11.9 million. Net gains on securities, derivatives and other assets decreased $17.9 million. The second quarter of 2012 included a $14.2 million gain from the sale of $26 million of stock received in settlement of a defaulted loan. Other-than-temporary impairment charges recognized in earnings were $246 thousand more than charges recognized in the second quarter of 2012.


Table 2 – Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
 
 
 
 
Three Months Ended
 
 
 
 
 
 
2012
 
2011
 
Increase(Decrease)
 
% Increase(Decrease)
 
June 30, 2012
 
Increase(Decrease)
 
% Increase(Decrease)
Brokerage and trading revenue
 
$
31,261

 
$
29,451

 
$
1,810

 
6
 %
 
$
32,600

 
$
(1,339
)
 
(4
)%
Transaction card revenue
 
27,788

 
31,328

 
(3,540
)
 
(11
)%
 
26,758

 
1,030

 
4
 %
Trust fees and commissions
 
19,654

 
17,853

 
1,801

 
10
 %
 
19,931

 
(277
)
 
(1
)%
Deposit service charges and fees
 
25,148

 
24,614

 
534

 
2
 %
 
25,216

 
(68
)
 
—
 %
Mortgage banking revenue
 
50,266

 
29,493

 
20,773

 
70
 %
 
39,548

 
10,718

 
27
 %
Bank-owned life insurance
 
2,707

 
2,761

 
(54
)
 
(2
)%
 
2,838

 
(131
)
 
(5
)%
Other revenue
 
9,476

 
10,535

 
(1,059
)
 
(10
)%
 
7,559

 
1,917

 
25
 %
Total fees and commissions revenue
 
166,300

 
146,035

 
20,265

 
14
 %
 
154,450

 
11,850

 
8
 %
Gain on other assets, net
 
125

 
351

 
(226
)
 
N/A

 
2,990

 
(2,865
)
 
N/A

Gain on derivatives, net
 
464

 
4,048

 
(3,584
)
 
N/A

 
2,345

 
(1,881
)
 
N/A

Gain on fair value option securities, net
 
6,192

 
17,788

 
(11,596
)
 
N/A

 
6,852

 
(660
)
 
N/A

Gain on available for sale securities
 
7,967

 
16,694

 
(8,727
)
 
N/A

 
20,481

 
(12,514
)
 
N/A

Total other-than-temporary impairment
 
—

 
(9,467
)
 
9,467

 
N/A

 
(135
)
 
135

 
N/A

Portion of loss recognized in (reclassified from) other comprehensive income
 
(1,104
)
 
(1,833
)
 
729

 
N/A

 
(723
)
 
(381
)
 
N/A

Net impairment losses recognized in earnings
 
(1,104
)
 
(11,300
)
 
10,196

 
N/A

 
(858
)
 
(246
)
 
N/A

Total other operating revenue
 
$
179,944

 
$
173,616

 
$
6,328

 
4
 %
 
$
186,260

 
$
(6,316
)
 
(3
)%

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 third quarter of 2012, 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 are causing net interest revenue compression are also driving strong growth in our mortgage banking

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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 $1.8 million or 6% over the third quarter of 2011. 

Securities trading revenue totaled $18.9 million for the third quarter of 2012, up $3.2 million over the third quarter of 2011. 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. Customer hedging revenue totaled $2.0 million for the third quarter of 2012 compared to $3.3 million for the third quarter of 2011.

Revenue earned from retail brokerage transactions decreased $697 thousand or 9% compared to the third quarter of 2011 to $6.7 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, totaled $3.6 million for the third quarter of 2012, a $641 thousand or 21% increase over the third quarter of 2011 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 decreased $1.3 million compared to the second quarter of 2012. Securities trading revenue increased $2.9 million over the second quarter of 2012. Excluding the impact of a $2.9 million recovery from the Lehman Brothers bankruptcy in the second quarter of 2012 related to derivative contract losses incurred in 2008, customer hedging revenue increased $673 thousand. Revenue from energy derivative contracts were up $2.2 million as a result of growth in contract volumes, partially offset by a $1.5 million decrease in revenue related to interest rate derivative contracts. Net gains from securities and derivative contracts sold to our mortgage banking customers were up $703 thousand over the second quarter of 2012. Retail brokerage fees were down $1.4 million and investment banking fees were down $577 thousand.

We continue to monitor the on-going development of rules to implement the Volcker Rule in Title VI of the Dodd-Frank Act which 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, as our trading activities are all done for the benefit of the customers and securities traded are mostly exempted under the proposed rules. 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. Final regulations will likely impose additional operating and compliance costs as presently proposed.

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. Title VII, among other things, imposes registration, recordkeeping, reporting, capital and margin, as well as business conduction requirements on major swap dealers and major swap participants. The CFTC and SEC delayed the effective dates of a large portion of the proposed regulations under Title VII until December 31, 2012. On April 18, 2012, the CFTC and SEC both approved interim final rules on the definition of swaps dealers. Under these rules, entities transacting, as a dealer, less than $8 billion in notional value of swaps over any 12 month period during the first three years after the rules are effective will be exempt from the definition of swaps dealer; after that three year period, the $8 billion amount may become $3 billion, subject to the results of studies the commissions intend to undertake once the derivatives rules are effective. For purposes of the foregoing test, certain derivatives transactions entered into by a customer in connection with a loan from the Company are not considered dealing activity.  The “swap dealer” definitional rules are scheduled to go into effect in October 2012. The Company currently estimates that its volume of swap activities (excluding transactions entered into in connection with a loan from the Company to its customers) are unlikely to require it to register as a “swap dealer”, at least at any time prior to October 2015 (the minimum period for which the $8 billion notional value threshold will be in effect).  Although the ultimate impact of Title VII remains uncertain, we currently believe its full implementation is likely not to impose significantly higher compliance costs on the Company.

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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 third quarter of 2012 decreased $3.5 million or 11% compared to the third quarter of 2011. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $14.5 million, up $1.6 million or 12% over the third quarter of 2011, due primarily to increased transaction volumes. Merchant services fees paid by customers for account management and electronic processing of card transactions and revenue from interchange fees from debit cards issued by the Company were both down primarily due to the impact of interchange fee regulations, commonly referred to as the Durbin Amendment, which became effective on October 1, 2011. Merchant services fees totaled $8.9 million, down $255 thousand or 3% compared to the prior year. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company totaled $4.4 million for the third quarter of 2012 compared to $9.3 million for the third quarter of 2011.

Transaction card revenue increased $1.0 million over the second quarter of 2012 due primarily to increased revenue from processing transactions on behalf of members of our TransFund EFT network. Merchant services fees for account management and electronic processing of card transactions and revenue from interchange fees paid by merchant banks for transactions processed from debit cards issued by the Company were largely unchanged compared to the previous quarter.

Trust fees and commissions increased $1.8 million or 10% over the third quarter of 2011 primarily due to the growth in the fair value of assets administered by the Company. The fair value of trust assets administered by the Company totaled $37.7 billion at September 30, 2012, $32.0 billion at September 30, 2011 and $35.7 billion at June 30, 2012. Trust fees and commissions decreased $277 thousand compared to the second quarter of 2012. We continue to voluntarily waive 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 third quarter of 2012 compared to $2.1 million for the third quarter of 2011 and $2.2 million for the second quarter of 2012.

Deposit service charges and fees increased $534 thousand or 2% over the third quarter of 2011. Overdraft fees totaled $14.3 million for the third quarter of 2012, down $950 thousand or 6% compared to the third quarter of 2011. Commercial account service charge revenue totaled $8.7 million, up $780 thousand or 10% over the prior year. The average earnings credit, a non-cash method for commercial customers to avoid incurring charges for deposit services based on account balances, decreased 23 basis points compared to the prior year to better align with market interest rates. Service charges on deposit accounts with a standard monthly fee were $2.1 million, up $701 thousand or 49% over the third quarter of 2011. Deposit service charges and fees were largely unchanged compared to the prior quarter.

Mortgage banking revenue increased $20.8 million over the third quarter of 2011. Continued low interest rates have resulted in a record level of mortgage originations. The current high demand for mortgage origination industry-wide has resulted in improved pricing on sales of mortgage loans in the secondary market. Revenue from originating and marketing mortgage loans totaled $40.4 million, up $20.7 million or 105% over the third quarter of 2011. Mortgage loans funded for sale totaled $1.0 billion in the third quarter of 2012 and $637 million in the third quarter of 2011. In addition to growth in loans funded, outstanding commitments to originate mortgage loans were up $139 million or 44% over September 30, 2011. Mortgage servicing revenue increased $118 thousand or 1% over the third quarter of 2011. The outstanding principal balance of mortgage loans serviced for others totaled $11.8 billion, up $507 million over September 30, 2011.

Mortgage banking revenue increased $10.7 million over the second quarter of 2012 primarily due to an increase in revenue from originating and marketing residential mortgage loans. Residential mortgage loans funded for sale increased $205 million over the previous quarter. Outstanding commitments to originate mortgage loans were up $60 million or 15% over June 30, 2012. Mortgage servicing revenue was largely unchanged compared to the prior quarter. The outstanding balance of mortgage loans serviced for others was up $192 million over June 30, 2012.


- 7 -



Table 3 – Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
 
 
%
 
Three Months Ended
 
 
 
%
 
 
2012
 
2011
 
Increase
(Decrease)
 
Increase
(Decrease)
 
June 30,
2012
 
Increase
(Decrease)
 
Increase
(Decrease)
Originating and marketing revenue
 
$
40,358

 
$
19,703

 
$
20,655

 
105
%
 
$
29,689

 
$
10,669

 
36
%
Servicing revenue
 
9,908

 
9,790

 
118

 
1
%
 
9,859

 
49

 
—
%
Total mortgage revenue
 
$
50,266

 
$
29,493

 
$
20,773

 
70
%
 
$
39,548

 
$
10,718

 
27
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
1,046,608

 
$
637,127

 
$
409,481

 
64
%
 
$
841,959

 
$
204,649

 
24
%
Mortgage loan refinances to total funded
 
61
%
 
54
%
 
 

 
 

 
51
%
 
 

 
 



 
 
June 30,
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
Increase
 
% Increase
 
June 30,
2012
 
Increase
 
% Increase
Outstanding principal balance of mortgage loans serviced for others
 
$
11,756,350

 
$
11,249,503

 
$
506,847

 
5
%
 
$
11,564,643

 
$
191,707

 
2
%
Net gains on securities, derivatives and other assets

In the third quarter of 2012, we recognized an $8.0 million gain from sales of $209 million of available for sale securities. Securities were sold either because they had reached their expected maximum potential return or to mitigate exposure to prepayment risk. We recognized $16.7 million of gains on sales of $654 million of available for sale securities in the third quarter of 2011. 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 in gains on sales of $433 million of residential mortgage-backed securities guaranteed by U.S. government agencies.

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 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.



- 8 -



Table 4 – Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
September 30,
2012
 
June 30,
2012
 
September 30,
2011
Gain (loss) on mortgage hedge derivative contracts, net
 
$
645

 
$
2,623

 
$
4,048

Gain (loss) on fair value option securities, net
 
5,455

 
6,908

 
17,788

Gain (loss) on economic hedge of mortgage servicing rights
 
6,100

 
9,531

 
21,836

Gain (loss) on change in fair value of mortgage servicing rights
 
(9,576
)
 
(11,450
)
 
(24,822
)
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges
 
$
(3,476
)
 
$
(1,919
)
 
$
(2,986
)
 
 
 
 
 
 
 
Net interest revenue on fair value option securities
 
$
1,750

 
$
2,148

 
$
5,036

 
 
 
 
 
 
 
Average primary residential mortgage interest rate
 
3.55
%
 
3.79
%
 
4.29
%
Average secondary residential mortgage interest rate
 
2.28
%
 
2.74
%
 
3.44
%

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 represents 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 third quarter of 2012 was 127 basis points compared to 105 basis points for the second quarter of 2012 and 85 basis points for the third quarter of 2011.

As more fully discussed in Note 2 to the Consolidated Financial Statements, we recognized other-than-temporary impairment losses on certain private-label residential mortgage-backed securities of $1.1 million in earnings during the third quarter of 2012. These losses primarily related to additional declines in projected cash flows of private-label mortgage-backed securities as a result of increased home price depreciation on privately issued residential mortgage-backed securities that we do not intend to sell. We recognized other-than-temporary impairment losses in earnings of $11.3 million in the third quarter of 2011 and $858 thousand in the second quarter of 2012.
Other Operating Expense

Other operating expense for the third quarter of 2012 totaled $222.3 million, up $1.8 million or 1% over the third quarter of 2011. Changes in the fair value of mortgage servicing rights increased operating expense $9.6 million in the third quarter of 2012 and $24.8 million in the third quarter of 2011. Excluding changes in the fair value of mortgage servicing rights, operating expenses were up $17.1 million or 9% over the third quarter of 2011. Personnel expenses increased $19.5 million or 19%. Non-personnel expenses decreased $2.5 million or 3%.

Excluding changes in the fair value of mortgage servicing rights, operating expenses were up $1.2 million over the previous quarter. Personnel expenses increased $478 thousand and non-personnel expenses increased $725 thousand.

- 9 -



Table 5 – Other Operating Expense
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
Increase
 
%
Increase
 
Three Months Ended
June 30,
 
Increase
 
%
Increase
 
 
2012
 
2011
 
(Decrease)
 
(Decrease)
 
2012
 
(Decrease)
 
(Decrease)
Regular compensation
 
$
66,708

 
$
62,002

 
$
4,706

 
8
 %
 
$
65,218

 
$
1,490

 
2
 %
Incentive compensation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash-based
 
30,756

 
26,257

 
4,499

 
17
 %
 
27,950

 
2,806

 
10
 %
Stock-based
 
7,214

 
(595
)
 
7,809

 
(1,312
)%
 
11,349

 
(4,135
)
 
(36
)%
Total incentive compensation
 
37,970

 
25,662

 
12,308

 
48
 %
 
39,299

 
(1,329
)
 
(3
)%
Employee benefits
 
18,097

 
15,596

 
2,501

 
16
 %
 
17,780

 
317

 
2
 %
Total personnel expense
 
122,775

 
103,260

 
19,515

 
19
 %
 
122,297

 
478

 
—
 %
Business promotion
 
6,054

 
5,280

 
774

 
15
 %
 
6,746

 
(692
)
 
(10
)%
Charitable contribution to BOKF Foundation
 
—

 
4,000

 
(4,000
)
 
(100
)%
 
—

 
—

 
—
 %
Professional fees and services
 
7,991

 
7,418

 
573

 
8
 %
 
8,343

 
(352
)
 
(4
)%
Net occupancy and equipment
 
16,914

 
16,627

 
287

 
2
 %
 
16,906

 
8

 
—
 %
Insurance
 
3,690

 
2,206

 
1,484

 
67
 %
 
4,011

 
(321
)
 
(8
)%
Data processing & communications
 
26,486

 
24,446

 
2,040

 
8
 %
 
25,264

 
1,222

 
5
 %
Printing, postage and supplies
 
3,611

 
3,780

 
(169
)
 
(4
)%
 
3,903

 
(292
)
 
(7
)%
Net losses & operating expenses of repossessed assets
 
5,706

 
5,939

 
(233
)
 
(4
)%
 
5,912

 
(206
)
 
(3
)%
Amortization of intangible assets
 
742

 
896

 
(154
)
 
(17
)%
 
545

 
197

 
36
 %
Mortgage banking costs
 
11,566

 
9,349

 
2,217

 
24
 %
 
11,173

 
393

 
4
 %
Change in fair value of mortgage servicing rights
 
9,576

 
24,822

 
(15,246
)
 
(61
)%
 
11,450

 
(1,874
)
 
(16
)%
Other expense
 
7,229

 
12,512

 
(5,283
)
 
(42
)%
 
6,461

 
768

 
12
 %
Total other operating expense
 
$
222,340

 
$
220,535

 
$
1,805

 
1
 %
 
$
223,011

 
$
(671
)
 
—
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of employees (full-time equivalent)
 
4,627

 
4,454

 
173

 
4
 %
 
4,585

 
42

 
1
 %

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 $4.7 million or 8% over the third quarter of 2011 primarily due to increases in headcount and standard annual merit increases which were fully effective in the second quarter of 2012. The Company generally awards annual merit increases during the first quarter for a majority of its staff.

Incentive compensation increased $12.3 million or 48% over the third quarter of 2011. 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 $4.5 million or 17% over the third quarter of 2011. Cash-based incentive compensation related to brokerage and trading revenue was up $975 thousand over the third quarter of 2011 and all other cash-based incentive compensation was up $3.5 million over the prior year.

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 $694 thousand compared to the third quarter of 2011. Expense for equity awards is based on the grant-date fair value of the awards and is unaffected by subsequent changes in fair value. Compensation expense related to liability awards increased $8.5 million over the third quarter of 2011. Expense

- 10 -



based on changes in the fair value of BOK Financial common stock and other investments increased $4.0 million over the prior year. In addition, $4.5 million was accrued in third quarter of 2012 related to 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.   

Employee benefit expense was up $2.5 million or 16% over the third quarter of 2011 primarily due to increased employee medical insurance costs. The Company self-insures a portion of its employee health care coverage and these costs may be volatile.

Personnel expenses were unchanged compared to the second quarter of 2012. Regular compensation expense increased $1.5 million over the second quarter of 2012 due primarily to headcount increases. Incentive compensation decreased $1.3 million compared to the second quarter of 2012. Stock-based compensation decreased $4.1 million due to the timing of accruals and cash-based incentive compensation increased $2.8 million. Employee benefit expenses increased $317 thousand over the second quarter of 2012 due to higher employee medical costs partially offset by a seasonal decrease in payroll tax expense.

Non-personnel operating expenses

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, decreased $2.5 million compared to the third quarter of 2011. During the third quarter of 2011, the company accrued $5.0 million for exposure to overdraft litigation which was ultimately settled in the second quarter of 2012 and made a $4.0 million discretionary contribution to the BOKF Charitable Foundation. The BOKF Charitable Foundation partners with charitable organizations supporting needs within our communities. Mortgage banking costs increased $2.2 million due primarily to an increase in the provision for potential losses on loans sold to government sponsored entities under standard representation and warranties. While the number of actual repurchases has remained low, the loss severity has continued to trend higher. The accrual for potential losses totaled $4.8 million at September 30, 2012. Data processing and communication expense increased $2.0 million primarily due to the impairment of two discontinued software projects during the third quarter. Insurance expense increased $1.5 million due to the increase in asset balances. Net losses and operating expenses of repossessed assets were down $233 thousand compared to the third quarter of 2011. Losses on sales of write-downs primarily due to the timing of regularly scheduled appraisal updates were offset by decreased operating expenses of repossessed assets.

Excluding changes in the fair value of mortgage servicing rights, non-personnel operating expenses increased $725 thousand over the second quarter of 2012. Data processing and communication expense increased $1.2 million primarily due to the impairment of two discontinued software projects during the third quarter. Net losses and operating expenses on repossessed properties were down $206 thousand compared to the second quarter of 2012. Increased losses due to write-downs of repossessed assets due to the timing of regularly scheduled appraisal updates were offset by decreased losses on sales of repossessed assets and decreased operating expenses of repossessed assets.
Income Taxes

Income tax expense was $45.8 million or 34% of book taxable income for the third quarter of 2012 compared to $43.0 million or 33% of book taxable income for the third quarter of 2011 and $53.1 million or 35% of book taxable income for the second quarter of 2012. The statute of limitations expired on uncertain income tax positions and the Company adjusted its current income tax liability to amounts on filed tax returns for 2011 during the third quarter of 2012. These adjustments reduced income tax expense by $1.0 million in the third quarter of 2012 and $1.8 million in the third quarter of 2011. Excluding these adjustments, income tax expense would have been 35% of book taxable income for the third quarters of 2012 and 2011.

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 September 30, 2012, $13 million at June 30, 2012 and $12 million at September 30, 2011.

- 11 -



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 increased $7.9 million over the third quarter of 2011. The increase in net income attributed to our lines of business was due primarily to growth in mortgage banking revenue and decreased net loans charged off, partially offset by increased personnel expense.

Table 6 – Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
Commercial Banking
 
$
33,505

 
$
33,136

 
$
110,149

 
$
93,314

Consumer Banking
 
21,226

 
14,707

 
55,421

 
28,322

Wealth Management
 
5,132

 
4,080

 
15,427

 
12,273

Subtotal
 
59,863

 
51,923

 
180,997

 
133,909

Funds Management and other
 
27,519

 
33,178

 
87,629

 
84,973

Total
 
$
87,382

 
$
85,101

 
$
268,626

 
$
218,882



- 12 -



Commercial Banking

Commercial Banking contributed $33.5 million to consolidated net income in the third quarter of 2012, up $369 thousand or 1% over the third quarter of 2011. 

Table 7 – Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
Increase
 
September 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue from external sources
 
$
91,378

 
$
85,560

 
$
5,818

 
$
274,411

 
$
254,143

 
$
20,268

 
Net interest expense from internal sources
 
(10,747
)
 
(6,702
)
 
(4,045
)
 
(33,667
)
 
(23,420
)
 
(10,247
)
 
Total net interest revenue
 
80,631

 
78,858

 
1,773

 
240,744

 
230,723

 
10,021

 
Net loans charged off
 
3,253

 
5,041

 
(1,788
)
 
10,393

 
16,646

 
(6,253
)
 
Net interest revenue after net loans charged off
 
77,378

 
73,817

 
3,561

 
230,351

 
214,077

 
16,274

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
40,091

 
37,924

 
2,167

 
116,635

 
109,345

 
7,290

 
Gain on financial instruments and other assets, net
 
—

 
—

 
—

 
14,407

 
9

 
14,398

 
Other operating revenue
 
40,091

 
37,924

 
2,167

 
131,042

 
109,354

 
21,688

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
25,655

 
23,701

 
1,954

 
76,003

 
70,796

 
5,207

 
Net losses and expenses of repossessed assets
 
4,908

 
3,081

 
1,827

 
10,577

 
12,271

 
(1,694
)
 
Other non-personnel expense
 
19,571

 
19,633

 
(62
)
 
56,131

 
55,738

 
393

 
Corporate allocations
 
12,499

 
11,094

 
1,405

 
38,406

 
31,903

 
6,503

 
Total other operating expense
 
62,633

 
57,509

 
5,124

 
181,117

 
170,708

 
10,409

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
54,836

 
54,232

 
604

 
180,276

 
152,723

 
27,553

 
Federal and state income tax
 
21,331

 
21,096

 
235

 
70,127

 
59,409

 
10,718

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
33,505

 
$
33,136

 
$
369

 
$
110,149

 
$
93,314

 
$
16,835

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
10,134,288

 
$
9,526,993

 
$
607,295

 
$
10,050,873

 
$
9,222,883

 
$
827,990

 
Average loans
 
9,117,046

 
8,338,344

 
778,702

 
9,001,100

 
8,195,347

 
805,753

 
Average deposits
 
8,446,680

 
7,834,992

 
611,688

 
8,338,034

 
7,640,843

 
697,191

 
Average invested capital
 
865,157

 
886,538

 
(21,381
)
 
866,346

 
874,259

 
(7,913
)
 
Return on average assets
 
1.32
%
 
1.38
%
 
(6
)
bp
1.46
%
 
1.35
%
 
11

bp
Return on invested capital
 
15.41
%
 
14.83
%
 
58

bp
16.98
%
 
14.27
%
 
271

bp
Efficiency ratio
 
51.88
%
 
49.24
%
 
264

bp
50.68
%
 
50.20
%
 
48

bp
Net charge-offs (annualized) to average loans
 
0.14
%
 
0.24
%
 
(10
)
bp
0.15
%
 
0.27
%
 
(12
)
bp

Net interest revenue increased $1.8 million or 2% over the third quarter of 2011. Growth in net interest revenue was due to a $779 million increase in average loan balances and a $612 million increase in average deposits over the third quarter of 2011 balances was partially offset by low yields on deposits sold to our Funds Management unit.

Fees and commissions revenue increased $2.2 million or 6% over the third quarter of 2011. Transaction card revenue increased $1.0 million due to increased customer transactions and commercial deposit service charges and fees increased $828 thousand. The average earnings credit, a non-cash method for commercial customers to avoid incurring charges for deposit services based

- 13 -



on account balances, decreased 23 basis points compared to the prior year to better align with market interest rates.

Operating expenses increased $5.1 million or 9% over the third quarter of 2011. Personnel costs increased $2.0 million or 8% primarily due to increased headcount, standard annual merit increases and increased incentive compensation. Net losses and operating expenses on repossessed assets increased $1.8 million over the third quarter of 2011, primarily due to the write-down of a single commercial real estate project in the Arizona market as the result of a regularly scheduled appraisal update. Other non-personnel expenses were flat compared to the third quarter of 2011. Corporate expense allocations increased $1.4 million primarily due to increased customer loan and deposit activity.

The average outstanding balance of loans attributed to Commercial Banking increased $779 million to $9.1 billion for the third quarter of 2012. 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. Net Commercial Banking loans charged off decreased $1.8 million compared to the third quarter of 2011 to $3.3 million or 0.14% of average loans attributed to this line of business on an annualized basis. Net charge-offs for the third quarter included the return of a $7.1 million loan settlement received in 2008 as discussed in greater detail in in Management's Discussion & Analysis of Financial Condition – Summary of Loan Loss Experience following. Excluding the impact of this item, the decrease in net loans charged off was primarily due to a decrease in losses on commercial real estate loans.
 
Average deposits attributed to Commercial Banking were $8.4 billion for the third quarter of 2012, up $612 million or 8% over the third quarter of 2011. Average balances attributed to our commercial & industrial loan customers increased $584 million or 21% and average balances attributed to our energy customers increased $310 million or 33% . Average balances held by treasury services customers were down $339 million compared to the third quarter of 2011. 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 contributed $21.2 million to consolidated net income for the third quarter of 2012, up $6.5 million primarily due to growth in mortgage banking revenue. Revenue from mortgage loan production was up $20.6 million over the third quarter of 2011. Changes in fair value of our mortgage servicing rights, net of economic hedge, decreased net income attributed to consumer banking by $2.1 million in the third quarter of 2012 and $1.8 million in the third quarter of 2011.


- 14 -



Table 8 – Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
Increase
 
September 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue from external sources
 
$
22,195

 
$
24,553

 
$
(2,358
)
 
$
69,154

 
$
64,574

 
$
4,580

 
Net interest revenue from internal sources
 
6,457

 
8,108

 
(1,651
)
 
18,462

 
25,188

 
(6,726
)
 
Total net interest revenue
 
28,652

 
32,661

 
(4,009
)
 
87,616

 
89,762

 
(2,146
)
 
Net loans charged off
 
485

 
3,837

 
(3,352
)
 
6,137

 
9,568

 
(3,431
)
 
Net interest revenue after net loans charged off
 
28,167

 
28,824

 
(657
)
 
81,479

 
80,194

 
1,285

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
75,942

 
58,601

 
17,341

 
196,163

 
148,318

 
47,845

 
Gain on financial instruments and other assets, net
 
4,698

 
21,165

 
(16,467
)
 
9,237

 
25,923

 
(16,686
)
 
Other operating revenue
 
80,640

 
79,766

 
874

 
205,400

 
174,241

 
31,159

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
23,270

 
22,166

 
1,104

 
67,481

 
64,101

 
3,380

 
Net losses and expenses of repossessed assets
 
379

 
519

 
(140
)
 
775

 
2,177

 
(1,402
)
 
Change in fair value of mortgage servicing rights
 
9,576

 
24,822

 
(15,246
)
 
13,899

 
35,186

 
(21,287
)
 
Other non-personnel expense
 
29,604

 
24,324

 
5,280

 
81,378

 
68,291

 
13,087

 
Corporate allocations
 
11,238

 
12,689

 
(1,451
)
 
32,641

 
38,327

 
(5,686
)
 
Total other operating expense
 
74,067

 
84,520

 
(10,453
)
 
196,174

 
208,082

 
(11,908
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
34,740

 
24,070

 
10,670

 
90,705

 
46,353

 
44,352

 
Federal and state income tax
 
13,514

 
9,363

 
4,151

 
35,284

 
18,031

 
17,253

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
21,226

 
$
14,707

 
$
6,519

 
$
55,421

 
$
28,322

 
$
27,099

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
5,705,781

 
$
5,914,337

 
$
(208,556
)
 
$
5,739,833

 
$
5,965,955

 
$
(226,122
)
 
Average loans
 
2,129,179

 
2,086,135

 
43,044

 
2,129,965

 
2,040,375

 
89,590

 
Average deposits
 
5,586,485

 
5,706,676

 
(120,191
)
 
5,592,910

 
5,761,204

 
(168,294
)
 
Average invested capital
 
292,281

 
273,143

 
19,138

 
289,337

 
272,167

 
17,170

 
Return on average assets
 
1.48
%
 
0.99
%
 
49

bp
1.29
%
 
0.63
%
 
66

bp
Return on invested capital
 
28.89
%
 
21.36
%
 
753

bp
25.61
%
 
13.91
%
 
1,170

bp
Efficiency ratio
 
61.66
%
 
65.41
%
 
(375
)
bp
64.23
%
 
72.62
%
 
(839
)
bp
Net charge-offs (annualized) to average loans
 
0.09
%
 
0.73
%
 
(64
)
bp
0.38
%
 
0.63
%
 
(25
)
bp
Residential mortgage loans funded for sale
 
$
1,046,608

483,808,000

$
637,127

 
$
409,481

 
$
2,634,808

 
$
1,540,619

 
$
1,094,189

 

 
 
September 30,
2012
 
September 30,
2011
 
Increase
(Decrease)
Banking locations
 
214

 
209

 
5

Residential mortgage loans servicing portfolio1
 
$
12,853,987

 
$
12,281,346

 
$
572,641

1 
Includes outstanding principal for loans serviced for affiliates


- 15 -



Net interest revenue from consumer banking activities decreased $4.0 million compared to the third quarter of 2011. Net interest earned on residential mortgage-backed securities held as an economic hedge of mortgage servicing rights declined by $3.8 million due to a $323 million reduction in the average balance of this portfolio. The yield on loans was lower compared to the third quarter of 2011, partially offset by an increase in average loan balances of $43 million or 2% over the third quarter of 2011. The average balance of residential mortgage loans increased over the prior year. Other consumer loans also increased, offset by decreased balances of indirect automobile loans due to pay-downs. The Company previously disclosed its decision to exit the indirect automobile loan business in the first quarter of 2009. Net interest earned on deposits sold to our Funds Management unit decreased $1.4 million primarily due to lower yields on funds invested.

Net loans charged off by the Consumer Banking unit decreased $3.4 million compared to the third quarter of 2011. Net consumer banking charge-offs also includes indirect automobile loans, overdrawn deposit accounts and other direct consumer loans.

Fees and commissions revenue increased $17.3 million or 30% over the third quarter of 2011. Mortgage banking revenue was up $21.2 million or 72% over the prior year primarily due to increased residential mortgage loan originations and commitments and improved pricing of loans sold. Transaction card revenues were down $4.6 million or 45% from the prior year primarily due to the impact of interchange fee regulations which became effective on October 1, 2011.

Excluding the change in the fair value of mortgage servicing rights, operating expenses increased $4.8 million over the third quarter of 2011. Personnel expenses were up $1.1 million or 5% primarily due to expansion of our mortgage banking division, which positioned us to benefit from increased demand as the result of continued low mortgage interest rates. Non-personnel expense increased $5.3 million or 22%. Mortgage banking expenses were up $2.2 million due to increased costs of servicing residential mortgage loans sold to U.S. government agencies and decreases in our mortgage servicing rights due to refinancing activity as a result of the low interest rate environment. Corporate expense allocations were down $1.5 million compared to the third quarter of 2011. Net losses and operating expenses of repossessed assets were down $140 thousand compared to the prior year.

Average consumer deposits decreased $120 million or 2% compared to the third quarter of 2011.  Average interest-bearing transaction accounts increased $117 million or 4% and average demand deposits increased $70 million or 11%. Average time deposit balances were down $354 million or 16% compared to the prior year.

Our Consumer Banking division originates, markets and services conventional and government-sponsored residential mortgage loans for all of our geographical markets. We funded $1.1 billion of residential mortgage loans in the third quarter of 2012 and $533 million in the third quarter of 2011. Mortgage loan fundings included $1.0 billion of mortgage loans funded for sale in the secondary market and $64 million funded for retention within the consolidated group. Approximately 33% of our mortgage loans funded were in the Oklahoma market, 14% in the New Mexico market, 13% in the Texas market and 13% in the Colorado market. In addition, 8% of our mortgage loan fundings came from correspondent lenders. Expansion of our mortgage banking division in the Texas, Colorado and Kansas/Missouri markets positioned us to benefit from increased demand as the result of continued low mortgage interest rates.

At September 30, 2012, the Consumer Banking division serviced $11.8 billion of mortgage loans for others and $1.1 billion of loans retained within the consolidated group. Approximately 97% of the mortgage loans serviced by the Consumer Banking division were to borrowers in our primary geographical market areas. Loans past due 90 days or more totaled $135 million or 1.15% of loans serviced for others at September 30, 2012 compared to $109 million or 0.94% of loans serviced for others at June 30, 2012. Mortgage servicing revenue, including revenue on loans serviced for the consolidated group, increased $568 thousand or 6% over the third quarter of 2011 to $10.4 million.


- 16 -



Wealth Management

Wealth Management contributed $5.1 million to consolidated net income in third quarter of 2012, up $1.1 million or 26% over the third quarter of 2011.

Table 9 – Wealth Management
(Dollars in thousands)
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
 
September 30,
 
Increase
 
September 30,
 
Increase
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue from external sources
$
7,064

 
$
7,113

 
$
(49
)
 
$
21,340

 
$
23,263

 
$
(1,923
)
 
Net interest revenue from internal sources
5,554

 
4,682

 
872

 
15,834

 
11,348

 
4,486

 
Total net interest revenue
12,618

 
11,795

 
823

 
37,174

 
34,611

 
2,563

 
Net loans charged off
509

 
1,247

 
(738
)
 
1,680

 
2,308

 
(628
)
 
Net interest revenue after net loans charged off
12,109

 
10,548

 
1,561

 
35,494

 
32,303

 
3,191

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
49,979

 
46,002

 
3,977

 
147,653

 
128,193

 
19,460

 
Gain on financial instruments and other assets, net
178

 
110

 
68

 
452

 
675

 
(223
)
 
Other operating revenue
50,157

 
46,112

 
4,045

 
148,105

 
128,868

 
19,237

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
37,053

 
34,020

 
3,033

 
108,986

 
94,295

 
14,691

 
Net losses (gains) and expenses of repossessed assets
19

 
—

 
19

 
39

 
(4
)
 
43

 
Other non-personnel expense
7,833

 
7,107

 
726

 
22,159

 
21,194

 
965

 
Corporate allocations
8,962

 
8,855

 
107

 
27,167

 
25,599

 
1,568

 
Other operating expense
53,867

 
49,982

 
3,885

 
158,351

 
141,084

 
17,267

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
8,399

 
6,678

 
1,721

 
25,248

 
20,087

 
5,161

 
Federal and state income tax
3,267

 
2,598

 
669

 
9,821

 
7,814

 
2,007

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
5,132

 
$
4,080

 
$
1,052

 
$
15,427

 
$
12,273

 
$
3,154

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
$
4,301,283

 
$
4,254,954

 
$
46,329

 
$
4,230,874

 
$
3,995,054

 
$
235,820

 
Average loans
926,197

 
1,008,318

 
(82,121
)
 
927,016

 
1,026,176

 
(99,160
)
 
Average deposits
4,193,744

 
4,153,548

 
40,196

 
4,129,188

 
3,894,598

 
234,590

 
Average invested capital
188,638

 
175,478

 
13,160

 
180,234

 
175,478

 
4,756

 
Return on average assets
0.47
%
 
0.38
%
 
9

bp
0.49
%
 
0.41
%
 
8

bp
Return on invested capital
10.82
%
 
9.22
%
 
160

bp
11.43
%
 
9.35
%
 
208

bp
Efficiency ratio
86.05
%
 
86.48
%
 
(43
)
bp
85.68
%
 
86.66
%
 
(98
)
bp
Net charge-offs (annualized) to average loans
0.22
%
 
0.49
%
 
(27
)
bp
0.24
%
 
0.30
%
 
(6
)
bp


- 17 -



 
 
September 30,
2012
 
September 30,
2011
 
Increase
(Decrease)
Trust assets in custody for which BOKF has sole or joint discretionary authority
 
$
10,946,350

 
$
9,167,946

 
$
1,778,404

Trust assets not in custody for which BOKF has sole or joint discretionary authority
 
1,588,625

 
216,458

 
1,372,167

Non-managed trust assets in custody
 
12,673,301

 
11,757,170

 
916,131

Trusts assets held in safekeeping
 
12,513,504

 
10,825,520

 
1,687,984

Trust assets
 
37,721,780

 
31,967,094

 
5,754,686

Other assets held in safekeeping
 
8,376,674

 
7,055,305

 
1,321,369

Brokerage accounts under BOKF administration
 
4,329,872

 
3,284,154

 
1,045,718

Assets under management or in custody
 
$
50,428,326

 
$
42,306,553

 
$
8,121,773


Net interest revenue for the third quarter of 2012 was up $823 thousand or 7% over the third quarter of 2011. Growth in average assets was largely due to funds sold to the Funds Management unit. Average deposit balances were up $40 million or 1% over the prior year. Average time deposit balances decreased $98 million and average interest-bearing transaction account balances decreased $92 million. These higher costing deposits were replaced by growth of $228 million in non-interest bearing demand deposits resulting in an increase in the yield on deposits sold to the Funds Management unit. Average loan balances were down $82 million. The decrease is primarily due to loans previously originated by our Private Bank and retained by the Wealth Management segment being refinanced, including refinancings performed by the mortgage division of our Consumer Banking segment. Net loans charged off decreased $738 thousand from the third quarter of 2011 to $509 thousand or 0.22% of average loans on an annualized basis. 

Fees and commissions revenue was up $4.0 million or 9% over the third quarter of 2011, primarily due to a $2.3 million or 9% increase in brokerage and trading revenues and a $1.8 million or 10% increase in trust fees primarily due to timing of fees.

Other operating revenue includes fees earned from state and municipal bond underwriting and financial advisory services, primarily in the Oklahoma and Texas markets. In the third quarter of 2012, the Wealth Management division participated in 132 underwritings that totaled $1.8 billion. As a participant, the Wealth Management division was responsible for facilitating the sale of approximately $542 million of these underwritings. In the third quarter of 2011, the Wealth Management division participated in 97 underwritings that totaled approximately $1.1 billion. Our interest in these underwritings totaled approximately $448 million.

Operating expenses increased $3.9 million or 8% over the third quarter of 2011. Personnel expenses increased $3.0 million. Regular compensation costs increased $1.7 million primarily due to increased headcount and annual merit increases. Incentive compensation increased $898 thousand over the prior year. Non-personnel expenses increased $726 thousand or 10% due primarily to additional expenses incurred related to expansion of the Wealth Management business line and increased customer transaction activity.


- 18 -



Geographical Market Distribution

The Company secondarily evaluates performance by primary geographical market. Loans are generally attributed to geographical markets based on the location of the customer and may not reflect the location of the underlying collateral. Brokered deposits and other wholesale funds are not attributed to a geographical market. Funds Management and other also includes insignificant results of operations in locations outside our primary geographic regions.

Table 10 – Net Income by Geographic Region
(In thousands)

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
Bank of Oklahoma
 
$
26,941

 
$
32,435

 
$
96,968

 
$
85,299

Bank of Texas
 
12,842

 
10,630

 
37,768

 
30,961

Bank of Albuquerque
 
6,697

 
3,519

 
15,182

 
9,285

Bank of Arkansas
 
2,014

 
2,643

 
9,636

 
3,494

Colorado State Bank & Trust
 
6,441

 
2,549

 
13,480

 
6,417

Bank of Arizona
 
(40
)
 
(2,109
)
 
(2,735
)
 
(6,078
)
Bank of Kansas City
 
2,723

 
1,467

 
7,216

 
3,394

Subtotal
 
57,618

 
51,134

 
177,515

 
132,772

Funds Management and other
 
29,763

 
33,967

 
91,111

 
86,110

Total
 
$
87,381

 
$
85,101

 
$
268,626

 
$
218,882



- 19 -



Bank of Oklahoma

Our Oklahoma offices are located primarily in the Tulsa and Oklahoma City metropolitan areas. Oklahoma is a significant market to the Company, representing 47% of our average loans, 55% of our average deposits and 31% of our consolidated net income in the third quarter of 2012. In addition, all of our mortgage servicing activity, TransFund EFT network and 66% of our trust assets are attributed to the Oklahoma market.

Table 11 – Bank of Oklahoma
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
Increase
 
September 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue
 
$
58,395

 
$
62,658

 
$
(4,263
)
 
$
174,569

 
$
176,961

 
$
(2,392
)
 
Net loans charged off
 
6,486

 
6,446

 
40

 
11,566

 
14,691

 
(3,125
)
 
Net interest revenue after net loans charged off
 
51,909

 
56,212

 
(4,303
)
 
163,003

 
162,270

 
733

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
85,818

 
85,701

 
117

 
246,500

 
234,087

 
12,413

 
Gain on financial instruments and other assets, net
 
4,876

 
21,274

 
(16,398
)
 
26,297

 
27,178

 
(881
)
 
Other operating revenue
 
90,694

 
106,975

 
(16,281
)
 
272,797

 
261,265

 
11,532

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
37,465

 
37,765

 
(300
)
 
112,704

 
108,964

 
3,740

 
Net losses and expenses of repossessed assets
 
257

 
48

 
209

 
2,251

 
2,966

 
(715
)
 
Change in fair value of mortgage servicing rights
 
9,577

 
24,821

 
(15,244
)
 
13,899

 
35,186

 
(21,287
)
 
Other non-personnel expense
 
43,455

 
37,723

 
5,732

 
122,758

 
107,055

 
15,703

 
Corporate allocations
 
7,755

 
9,745

 
(1,990
)
 
25,484

 
29,759

 
(4,275
)
 
Total other operating expense
 
98,509

 
110,102

 
(11,593
)
 
277,096

 
283,930

 
(6,834
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
44,094

 
53,085

 
(8,991
)
 
158,704

 
139,605

 
19,099

 
Federal and state income tax
 
17,153

 
20,650

 
(3,497
)
 
61,736

 
54,306

 
7,430

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
26,941

 
$
32,435

 
$
(5,494
)
 
$
96,968

 
$
85,299

 
$
11,669

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
11,349,724

 
$
11,236,934

 
$
112,790

 
$
11,426,032

 
$
10,793,211

 
$
632,821

 
Average loans
 
5,472,371

 
5,261,183

 
211,188

 
5,465,454

 
5,202,248

 
263,206

 
Average deposits
 
10,241,369

 
10,078,755

 
162,614

 
10,256,872

 
9,710,938

 
545,934

 
Average invested capital
 
548,058

 
543,632

 
4,426

 
545,831

 
537,512

 
8,319

 
Return on average assets
 
0.94
%
 
1.15
%
 
(21
)
bp
1.13
%
 
1.06
%
 
7

bp
Return on invested capital
 
19.56
%
 
23.67
%
 
(411
)
bp
23.73
%
 
21.22
%
 
251

bp
Efficiency ratio
 
61.67
%
 
57.48
%
 
419

bp
62.51
%
 
60.51
%
 
200

bp
Net charge-offs (annualized) to average loans
 
0.47
%
 
0.49
%
 
(2
)
bp
0.28
%
 
0.38
%
 
(10
)
bp
Residential mortgage loans funded for sale
 
$
459,368

 
$
310,004

 
$
149,364

 
$
1,189,223

 
$
751,089

 
$
438,134

 

Net income generated by the Bank of Oklahoma in the third quarter of 2012 decreased $5.5 million or 17% compared to the third quarter of 2011. Net interest revenue decreased and operating expenses, excluding changes in the fair value of mortgage servicing rights were up. 


- 20 -



Net interest revenue decreased $4.3 million or 7% compared to the third quarter of 2011. Lower funding costs were offset by decreased yield on residential mortgage-backed securities held as an economic hedge of mortgage servicing rights. The average balance of these securities decreased $286 million compared to the third quarter of 2011. Average loan balances were up $211 million and loan yields were down. The favorable net interest impact of the $163 million increase in average deposit balances was offset by lower yield on funds sold to the Funds Management unit.

Fees and commission revenue was largely unchanged compared to the third quarter of 2011. Mortgage banking revenue was up $1.5 million over the third quarter of 2011 primarily due to increased mortgage loan origination and commitment volumes and increased gains on sales of residential mortgage loans in the secondary market. Brokerage and trading revenue was up $508 thousand primarily due to increased customer hedging revenue and securities trading revenue. Retail brokerage fees were also up, mostly offset by decreased investment banking revenue. Deposit service charges and fees increased $352 thousand over the third quarter of 2011. Deposits accounts with a standard monthly fee and commercial account service charges were up over the prior year, partially offset by decreased overdraft charges. Transaction card revenue was down $2.0 million primarily due to changes in interchange fee regulations which were effective October 1, 2011.

Change in the fair value of the mortgage servicing rights, net of economic hedge, decreased net income by $2.1 million for the third quarter of 2012 and decreased net income by $1.8 million in the third quarter of 2011. 

Excluding the change in the fair value of mortgage servicing rights, other operating expenses increased $3.7 million or 4% over the prior year. Personnel expenses were down $300 thousand or 1% compared to the prior year primarily due to decreased incentive compensation, partially offset by increased regular compensation expense due to annual merit increases. Non-personnel expenses were up $5.7 million or 15% due primarily to increased mortgage banking costs and impairment charges on two discontinued software projects. Corporate expense allocations were down $2.0 million compared to the prior year. Net losses and operating expenses of repossessed assets were up $209 thousand over the third quarter of 2011 primarily due to write-downs related to regularly scheduled appraisal updates.

Net loans charged off totaled $6.5 million or 0.47% of average loans on an annualized basis for third quarter of 2012, largely unchanged from the prior year. Net charge-offs for the third quarter included the return of $7.1 million received from the City of Tulsa in 2008 to settle claims related to a defaulted loan. The settlement agreement between BOK Financial and the City of Tulsa was invalidated by the Oklahoma Supreme Court in 2011 as discussed further in Note 8 to the Consolidated Financial Statements. Excluding this item, Bank of Oklahoma had a net recovery of $614 thousand for the third quarter of 2012. Net charge-offs totaled $6.4 million or 0.49% of average loans on an annualized basis for the third quarter of 2011.

Average deposits attributed to the Bank of Oklahoma for the third quarter of 2012 increased $163 million over the third quarter of 2011. Commercial Banking deposit balances increased $207 million or 4% over the prior year. Deposits related to commercial and industrial customers and energy customers increased over the prior year, partially offset by decreased average balances related to treasury services customers. Consumer deposits also increased $108 million over the third quarter of 2011. Wealth Management deposits decreased $153 million compared to the third quarter of 2011primarily due to decreased trust deposits.

- 21 -



Bank of Texas

Our Texas offices are located primarily in the Dallas, Fort Worth and Houston metropolitan areas. Texas is our second largest market with 33% of our average loans, 24% of our average deposits and 15% of our consolidated net income in the third quarter of 2012.

Table 12 – Bank of Texas
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
Increase
 
September 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue
 
$
35,717

 
$
34,633

 
$
1,084

 
$
107,042

 
$
101,573

 
$
5,469

 
Net loans charged off
 
1,780

 
1,195

 
585

 
4,911

 
2,838

 
2,073

 
Net interest revenue after net loans charged off
 
33,937

 
33,438

 
499

 
102,131

 
98,735

 
3,396

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
23,033

 
17,389

 
5,644

 
64,303

 
49,880

 
14,423

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

 
—

 
—

 
188

 
(70
)
 
258

 
Other operating revenue
 
23,033

 
17,389

 
5,644

 
64,491

 
49,810

 
14,681

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
20,003

 
17,749

 
2,254

 
59,068

 
52,002

 
7,066

 
Net losses and expenses of repossessed assets
 
1,124

 
602

 
522

 
1,542

 
1,877

 
(335
)
 
Other non-personnel expense
 
6,024

 
6,217

 
(193
)
 
17,983

 
17,727

 
256

 
Corporate allocations
 
9,753

 
9,649

 
104

 
29,017

 
28,563

 
454

 
Total other operating expense
 
36,904

 
34,217

 
2,687

 
107,610

 
100,169

 
7,441

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
20,066

 
16,610

 
3,456

 
59,012

 
48,376

 
10,636

 
Federal and state income tax
 
7,224

 
5,980

 
1,244

 
21,244

 
17,415

 
3,829

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
12,842

 
$
10,630

 
$
2,212

 
$
37,768

 
$
30,961

 
$
6,807

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
5,102,452

 
$
4,924,959

 
$
177,493

 
$
5,058,204

 
$
4,870,261

 
$
187,943

 
Average loans
 
3,827,175

 
3,466,036

 
361,139

 
3,786,717

 
3,372,419

 
414,298

 
Average deposits
 
4,538,400

 
4,349,738

 
188,662

 
4,500,972

 
4,305,556

 
195,416

 
Average invested capital
 
476,027

 
472,392

 
3,635

 
477,502

 
468,800

 
8,702

 
Return on average assets
 
1.00
%
 
0.86
%
 
14

bp
1.00
%
 
0.85
%
 
15

bp
Return on invested capital
 
10.73
%
 
8.93
%
 
180

bp
10.57
%
 
8.83
%
 
174

bp
Efficiency ratio
 
62.82
%
 
65.77
%
 
(295
)
bp
62.80
%
 
66.14
%
 
(334
)
bp
Net charge-offs (annualized) to average loans
 
0.19
%
 
0.14
%
 
5

bp
0.17
%
 
0.11
%
 
6

bp
Residential mortgage loans funded for sale
 
$
145,638

 
$
57,671

 
$
87,967

 
$
358,144

 
$
143,852

 
$
214,292

 

Net income for the Bank of Texas increased $2.2 million or 21% over the third quarter of 2011 primarily due to increased mortgage banking revenue partially offset by increased personnel expenses.

Net interest revenue increased $1.1 million or 3% over the third quarter of 2011 primarily due to decreased deposit costs and growth of the loan portfolio. Average outstanding loans grew by $361 million or 10% over the third quarter of 2011 and average deposits increased by $189 million or 4%.

Fees and commissions revenue increased $5.6 million or 32% over the third quarter of 2011 primarily due to increased mortgage banking revenue. Transaction card revenue was down compared to the prior year primarily due to debit card

- 22 -



interchange fee regulations which became effective in the third quarter of 2011, mostly offset by increased trust fees and commissions. Brokerage and trading revenue and deposit service charges and fees were largely unchanged compared to the prior year.

Operating expenses increased $2.7 million or 8% over the third quarter of 2011. Personnel costs were up $2.3 million or 13% primarily due to incentive compensation expense and increased head count related to higher residential mortgage loan origination activity. Net losses and operating expense of repossessed assets increased $522 thousand over the third quarter of 2011 due primarily to write-downs related to regularly scheduled appraisal updates. Decreased non-personnel expenses were offset by increased corporate expense allocations.

Net loans charged off totaled $1.8 million or 0.19% of average loans for the third quarter of 2012 on an annualized basis, compared to $1.2 million or 0.14% of average loans for the third quarter of 2011 on an annualized basis.

- 23 -



Bank of Albuquerque

Net income attributable to the Bank of Albuquerque totaled $6.7 million or 8% of consolidated net income, a $3.2 million or 90% increase over the third quarter of 2011. Net interest income was up $503 thousand over the third quarter of 2011. Average loan balances were unchanged compared to the prior year. Average deposit balances were up $59 million or 5% over the prior year. Net loans charged off totaled $232 thousand or 0.13% of average loans on annualized basis in the third quarter of 2012 compared to net loans charged off of $707 thousand or 0.39% of average loans on an annualized basis in the third quarter of 2011. 

Fees and commission revenue increased $4.9 million or 55% over the prior year primarily due to a $5.5 million increase in mortgage banking revenue, partially offset by decreased transaction card revenue due to debit card interchange fee regulations. Other operating expense increased $646 thousand or 6%. Personnel expenses were up $700 thousand primarily due to increased incentive compensation. Increased corporate allocation expenses were offset by lower non-personnel expenses.

Table 13 – Bank of Albuquerque
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
Increase
 
September 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue
 
$
8,928

 
$
8,425

 
$
503

 
$
25,917

 
$
25,081

 
$
836

 
Net loans charged off
 
232

 
707

 
(475
)
 
2,529

 
1,707

 
822

 
Net interest revenue after net loans charged off
 
8,696

 
7,718

 
978

 
23,388

 
23,374

 
14

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other operating revenue – fees and commission
 
13,685

 
8,816

 
4,869

 
34,793

 
24,225

 
10,568

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
5,207

 
4,507

 
700

 
14,883

 
12,909

 
1,974

 
Net losses (gains) and expenses of repossessed assets
 
22

 
61

 
(39
)
 
(112
)
 
1,424

 
(1,536
)
 
Other non-personnel expense
 
1,985

 
2,120

 
(135
)
 
6,055

 
6,577

 
(522
)
 
Corporate allocations
 
4,206

 
4,086

 
120

 
12,507

 
11,492

 
1,015

 
Total other operating expense
 
11,420

 
10,774

 
646

 
33,333

 
32,402

 
931

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
10,961

 
5,760

 
5,201

 
24,848

 
15,197

 
9,651

 
Federal and state income tax
 
4,264

 
2,241

 
2,023

 
9,666

 
5,912

 
3,754

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
6,697

 
$
3,519

 
$
3,178

 
$
15,182

 
$
9,285

 
$
5,897

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
1,431,251

 
$
1,401,640

 
$
29,611

 
$
1,392,713

 
$
1,386,561

 
$
6,152

 
Average loans
 
708,760

 
711,735

 
(2,975
)
 
707,809

 
706,764

 
1,045

 
Average deposits
 
1,295,201

 
1,236,172

 
59,029

 
1,251,766

 
1,243,415

 
8,351

 
Average invested capital
 
78,457

 
82,159

 
(3,702
)
 
78,887

 
81,967

 
(3,080
)
 
Return on average assets
 
1.86
%
 
1.00
%
 
86

bp
1.46
%
 
0.90
%
 
56

bp
Return on invested capital
 
33.96
%
 
16.99
%
 
1,697

bp
25.71
%
 
15.15
%
 
1,056

bp
Efficiency ratio
 
50.50
%
 
62.49
%
 
(1,199
)
bp
54.91
%
 
65.72
%
 
(1,081
)
bp
Net charge-offs to average loans (annualized)
 
0.13
%
 
0.39
%
 
(26
)
bp
0.48
%
 
0.32
%
 
16

bp
Residential mortgage loans funded for sale
 
$
153,460

 
$
95,624

 
$
57,836

 
$
394,701

 
$
236,469

 
$
158,232

 


- 24 -



Bank of Arkansas

Net income attributable to the Bank of Arkansas decreased $629 thousand compared to the third quarter of 2011. Net interest revenue decreased $209 thousand as loans in the Arkansas market continued to decrease primarily due to the run-off of indirect automobile loans. Average deposits attributed to the Bank of Arkansas were down $6.1 million or 3% compared to the third quarter of 2011. Higher costing time deposits decreased $19 million compared to the prior year, partially offset by a $9.3 million increase in interest-bearing transaction deposits and a $2.8 million increase in demand deposit balances. Net loans charged off totaled $934 thousand or 1.82% of average loans on an annualized basis in the third quarter of 2012 compared to $159 thousand or 0.24% of average loans on an annualized basis in the third quarter of 2011.

Fees and commissions revenue was up $1.4 million over the prior year primarily due to increased mortgage banking revenue and increased securities trading revenue at our Little Rock office. Other operating expenses were up $1.4 million primarily due to increased incentive compensation costs related to trading activity. 

Table 14 – Bank of Arkansas
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
Increase
 
September 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue
 
$
1,758

 
$
1,967

 
$
(209
)
 
$
8,267

 
$
6,191

 
$
2,076

 
Net loans charged off (recovered)
 
934

 
159

 
775

 
(1,168
)
 
2,648

 
(3,816
)
 
Net interest revenue after net loans charged off (recovered)
 
824

 
1,808

 
(984
)
 
9,435

 
3,543

 
5,892

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other operating revenue – fees and commissions
 
12,681

 
11,308

 
1,373

 
36,432

 
28,269

 
8,163

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
6,100

 
4,819

 
1,281

 
17,731

 
14,119

 
3,612

 
Net losses and expenses of repossessed assets
 
86

 
(16
)
 
102

 
162

 
478

 
(316
)
 
Other non-personnel expense
 
1,125

 
1,234

 
(109
)
 
3,709

 
3,446

 
263

 
Corporate allocations
 
2,898

 
2,753

 
145

 
8,494

 
8,051

 
443

 
Total other operating expense
 
10,209

 
8,790

 
1,419

 
30,096

 
26,094

 
4,002

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
3,296

 
4,326

 
(1,030
)
 
15,771

 
5,718

 
10,053

 
Federal and state income tax
 
1,282

 
1,683

 
(401
)
 
6,135

 
2,224

 
3,911

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
2,014

 
$
2,643

 
$
(629
)
 
$
9,636

 
$
3,494

 
$
6,142

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
226,875

 
$
286,337

 
$
(59,462
)
 
$
249,103

 
$
292,164

 
$
(43,061
)
 
Average loans
 
204,278

 
265,536

 
(61,258
)
 
229,222

 
274,645

 
(45,423
)
 
Average deposits
 
208,229

 
214,330

 
(6,101
)
 
210,193

 
208,190

 
2,003

 
Average invested capital
 
18,306

 
24,374

 
(6,068
)
 
19,678

 
23,473

 
(3,795
)
 
Return on average assets
 
3.53
%
 
3.66
%
 
(13
)
bp
5.17
 %
 
1.60
%
 
357

bp
Return on invested capital
 
43.77
%
 
43.02
%
 
75

bp
65.41
 %
 
19.90
%
 
4,551

bp
Efficiency ratio
 
70.70
%
 
66.21
%
 
449

bp
67.33
 %
 
75.72
%
 
(839
)
bp
Net charge-offs (recoveries) to average loans (annualized)
 
1.82
%
 
0.24
%
 
158

bp
(0.68
)%
 
1.29
%
 
(197
)
bp
Residential mortgage loans funded for sale
 
$
28,789

 
$
18,645

 
$
10,144

 
$
79,542

 
$
49,573

 
$
29,969

 

- 25 -



Colorado State Bank & Trust

Net income attributed to Colorado State Bank & Trust increased $3.9 million over the third quarter of 2011 to $6.4 million. Colorado State Bank & Trust experienced a net recovery of $2.4 million compared to net loans charged off of $372 thousand or 0.19% of average loans on an annualized basis in third quarter of 2011. Net interest revenue increased $942 thousand due primarily to a $172 million or 22% increase in average loans outstanding and lower deposit costs, partially offset by decreased yield on funds sold to the Funds Management unit. Average deposits attributable to Colorado State Bank & Trust were largely unchanged compared to the third quarter of 2011. Demand deposits grew by $77 million during the second quarter due primarily to increased commercial account balances, offset by a $75 million decrease in time deposits and a $3.7 million decrease in interest-bearing transaction deposit account balances.

Fees and commissions revenue was up $5.9 million over the third quarter of 2011 primarily related to a $4.5 million increase in mortgage banking revenue and a $1.2 million increase in trust fees and commissions due to the acquisition of the Milestone Group during the third quarter of 2012. The Milestone Group is a Denver-based registered investment adviser which provides wealth management services to high net worth clients in Colorado and Nebraska. Operating expenses were up $3.2 million over the prior year primarily due to the Milestone Group acquisition. Personnel expenses were up $1.2 million, corporate expense allocations increased $921 thousand and non-personnel expenses were up $448 thousand. Net losses and operating expenses of repossessed assets totaled $144 thousand during the third quarter of 2012 compared to a net gain of $448 thousand in the third quarter of 2011.


- 26 -



Table 15 – Colorado State Bank & Trust
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
Increase
 
September 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue
 
$
9,382

 
$
8,440

 
$
942

 
$
27,335

 
$
24,839

 
$
2,496

 
Net loans charged off (recovered)
 
(2,367
)
 
372

 
(2,739
)
 
(1,711
)
 
2,026

 
(3,737
)
 
Net interest revenue after net loans charged off (recovered)
 
11,749

 
8,068

 
3,681

 
29,046

 
22,813

 
6,233

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other operating revenue – fees and commissions revenue
 
12,277

 
6,380

 
5,897

 
28,846

 
18,053

 
10,793

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
7,085

 
5,838

 
1,247

 
19,123

 
16,186

 
2,937

 
Net losses (gains) and expenses of repossessed assets
 
144

 
(448
)
 
592

 
216

 
(170
)
 
386

 
Other non-personnel expense
 
2,046

 
1,598

 
448

 
4,823

 
4,572

 
251

 
Corporate allocations
 
4,209

 
3,288

 
921

 
11,667

 
9,775

 
1,892

 
Total other operating expense
 
13,484

 
10,276

 
3,208

 
35,829

 
30,363

 
5,466

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
10,542

 
4,172

 
6,370

 
22,063

 
10,503

 
11,560

 
Federal and state income tax
 
4,101

 
1,623

 
2,478

 
8,583

 
4,086

 
4,497

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
6,441

 
$
2,549

 
$
3,892

 
$
13,480

 
$
6,417

 
$
7,063

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
1,350,521

 
$
1,346,750

 
$
3,771

 
$
1,356,250

 
$
1,332,971

 
$
23,279

 
Average loans
 
958,842

 
786,846

 
171,996

 
890,021

 
775,110

 
114,911

 
Average deposits
 
1,276,068

 
1,274,667

 
1,401

 
1,288,010

 
1,264,000

 
24,010

 
Average invested capital
 
130,633

 
118,486

 
12,147

 
121,362

 
117,865

 
3,497

 
Return on average assets
 
1.90
 %
 
0.75
%
 
115

bp
1.33
 %
 
0.64
%
 
69

bp
Return on invested capital
 
19.62
 %
 
8.54
%
 
1,108

bp
14.84
 %
 
7.28
%
 
756

bp
Efficiency ratio
 
62.26
 %
 
69.34
%
 
(708
)
bp
63.77
 %
 
70.79
%
 
(702
)
bp
Net charge-offs (recoveries) to average loans (annualized)
 
(0.98
)%
 
0.19
%
 
(117
)
bp
(0.26
)%
 
0.35
%
 
(61
)
bp
Residential mortgage loans funded for sale
 
$
145,306

 
$
91,009

 
$
54,297

 
$
338,121

 
$
199,226

 
$
138,895

 

- 27 -



Bank of Arizona

Bank of Arizona had a net loss of $40 thousand for the third quarter of 2012 compared to a net loss of $2.1 million for the third quarter of 2011. Bank of Arizona experienced a net recovery of $1.4 million for the third quarter of 2012 compared to net loans charged off of $1.2 million or 0.83% of average loans on an annualized basis for the third quarter of 2011. Net losses and operating expenses on repossessed assets remain elevated totaling $3.6 million in the third quarter of 2012 compared to $3.4 million in the third quarter of 2011. Write-downs of repossessed assets increased compared to the prior year primarily due to regularly scheduled appraisal updates.

Net interest revenue increased $35 thousand or 1% over the third quarter of 2011. Average loan balances were down $23 million or 4% compared to the third quarter of 2011. Average deposits were up $95 million or 37% over the third quarter of 2011. Interest-bearing transaction account balances increased $77 million and demand deposit balances increased $27 million both primarily due to growth in commercial deposits. Higher costing time deposits balances were down $10 million compared to the prior year.

Fees and commissions revenue was up $1.1 million primarily due to increased mortgage banking revenue. Other operating expense increased $348 thousand or 4% over the third quarter of 2011.

We continue to focus on growth in commercial and small business lending in the Arizona market and have significantly scaled back commercial real estate lending activities which were not contemplated in our initial expansion into this market. Loan and repossessed asset losses have been largely due to commercial real estate lending. Growth is primarily related to commercial loans and deposits. Assets attributable to the Bank of Arizona included $16 million of goodwill that may be impaired in future periods if our commercial and small business lending growth plans are unsuccessful.


- 28 -



Table 16 – Bank of Arizona
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
Increase
 
September 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue
 
$
4,330

 
$
4,295

 
$
35

 
$
12,691

 
$
12,003

 
$
688

 
Net loans charged off (recovered)
 
(1,391
)
 
1,229

 
(2,620
)
 
3,029

 
4,613

 
(1,584
)
 
Net interest revenue after net loans charged off (recovered)
 
5,721

 
3,066

 
2,655

 
9,662

 
7,390

 
2,272

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other operating revenue – fees and commissions
 
2,596

 
1,518

 
1,078

 
6,949

 
5,039

 
1,910

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
2,639

 
2,617

 
22

 
7,634

 
8,207

 
(573
)
 
Net losses and expenses of repossessed assets
 
3,617

 
3,354

 
263

 
7,284

 
7,736

 
(452
)
 
Other non-personnel expense
 
860

 
805

 
55

 
2,484

 
2,805

 
(321
)
 
Corporate allocations
 
1,267

 
1,259

 
8

 
3,686

 
3,628

 
58

 
Total other operating expense
 
8,383

 
8,035

 
348

 
21,088

 
22,376

 
(1,288
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss before taxes
 
(66
)
 
(3,451
)
 
3,385

 
(4,477
)
 
(9,947
)
 
5,470

 
Federal and state income tax
 
(26
)
 
(1,342
)
 
1,316

 
(1,742
)
 
(3,869
)
 
2,127

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(40
)
 
$
(2,109
)
 
$
2,069

 
$
(2,735
)
 
$
(6,078
)
 
$
3,343

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
625,593

 
$
656,604

 
$
(31,011
)
 
$
609,922

 
$
642,239

 
$
(32,317
)
 
Average loans
 
567,198

 
590,615

 
(23,417
)
 
553,260

 
574,902

 
(21,642
)
 
Average deposits
 
354,865

 
259,613

 
95,252

 
288,533

 
256,444

 
32,089

 
Average invested capital
 
60,261

 
65,628

 
(5,367
)
 
59,417

 
65,158

 
(5,741
)
 
Return on average assets
 
(0.03
)%
 
(1.27
)%
 
124

bp
(0.60
)%
 
(1.27
)%
 
67

bp
Return on invested capital
 
(0.26
)%
 
(12.75
)%
 
1,249

bp
(6.15
)%
 
(12.47
)%
 
632

bp
Efficiency ratio
 
121.04
 %
 
138.22
 %
 
(1,718
)
bp
107.37
 %
 
131.30
 %
 
(2,393
)
bp
Net charge-offs (recoveries) to average loans (annualized)
 
(0.98
)%
 
0.83
 %
 
(181
)
bp
0.73
 %
 
1.07
 %
 
(34
)
bp
Residential mortgage loans funded for sale
 
$
29,340

 
$
23,307

 
$
6,033

 
$
70,260

 
$
69,377

 
$
883

 

- 29 -



Bank of Kansas City

Net income attributed to the Bank of Kansas City increased by $1.3 million or 86% over the third quarter of 2011. Net interest revenue increased $498 thousand or 17%. Average loan balances increased $83 million or 24% and average deposits balances were up $31 million or 11%. Demand deposit balances grew $121 million due primarily to commercial account balances. Interest-bearing transaction account balances were down $79 million and higher costing time deposit balances decreased by $12 million. Net charge-offs remained low, totaling $43 thousand or 0.04% of average loans on an annualized basis for the third quarter of 2012 compared to $6 thousand or 0.01% on an annualized basis for the third quarter of 2011.

Fees and commissions revenue increased $3.0 million or 39% over the prior year primarily due to increased mortgage banking revenue. Trust fees and commissions and deposit service charges and fees were also up over the prior year, partially offset by a decrease in brokerage and trading revenue. Personnel costs were up $394 thousand primarily due to increased headcount and incentive compensation. Corporate expense allocations increased by $823 thousand on higher customer transaction volume and non-personnel expense increased $110 thousand.

Table 17 – Bank of Kansas City
(Dollars in thousands)

 
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
Increase
 
September 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue
 
$
3,401

 
$
2,903

 
$
498

 
$
9,751

 
$
8,483

 
$
1,268

 
Net loans charged off
 
43

 
6

 
37

 
(113
)
 
237

 
(350
)
 
Net interest revenue after net loans charged off
 
3,358

 
2,897

 
461

 
9,864

 
8,246

 
1,618

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other operating revenue – fees and commission
 
10,679

 
7,700

 
2,979

 
28,418

 
17,817

 
10,601

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
5,462

 
5,068

 
394

 
15,018

 
12,387

 
2,631

 
Net losses and expenses of repossessed assets
 
58

 
1

 
57

 
49

 
132

 
(83
)
 
Other non-personnel expense
 
1,202

 
1,092

 
110

 
3,286

 
2,919

 
367

 
Corporate allocations
 
2,858

 
2,035

 
823

 
8,119

 
5,070

 
3,049

 
Total other operating expense
 
9,580

 
8,196

 
1,384

 
26,472

 
20,508

 
5,964

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
4,457

 
2,401

 
2,056

 
11,810

 
5,555

 
6,255

 
Federal and state income tax
 
1,734

 
934

 
800

 
4,594

 
2,161

 
2,433

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
2,723

 
$
1,467

 
$
1,256

 
$
7,216

 
$
3,394

 
$
3,822

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
460,744

 
$
363,633

 
$
97,111

 
$
446,770

 
$
366,310

 
$
80,460

 
Average loans
 
433,798

 
350,847

 
82,951

 
425,597

 
355,806

 
69,791

 
Average deposits
 
312,775

 
281,939

 
30,836

 
263,785

 
308,102

 
(44,317
)
 
Average invested capital
 
33,460

 
27,892

 
5,568

 
32,467

 
26,607

 
5,860

 
Return on average assets
 
2.35
%
 
1.60
%
 
75

bp
2.16
 %
 
1.24
%
 
92

bp
Return on invested capital
 
32.38
%
 
20.87
%
 
1,151

bp
29.69
 %
 
17.05
%
 
1,264

bp
Efficiency ratio
 
68.04
%
 
77.30
%
 
(926
)
bp
69.35
 %
 
77.98
%
 
(863
)
bp
Net charge-offs (annualized) to average loans
 
0.04
%
 
0.01
%
 
3

bp
(0.04
)%
 
0.09
%
 
(13
)
bp
Residential mortgage loans funded for sale
 
$
84,707

 
$
40,867

 
$
43,840

 
$
204,817

 
$
91,033

 
$
113,784

 



- 30 -



Financial Condition
Securities

We maintain a securities portfolio to enhance profitability, support customer transactions, manage interest rate risk, provide liquidity and comply with regulatory requirements. Securities are classified as trading, held for investment, or available for sale. See Note 2 to the consolidated financial statements for the composition of the securities portfolio as of September 30, 2012, December 31, 2011 and September 30, 2011.

At September 30, 2012, the carrying value of investment (held-to-maturity) securities was $432 million and the fair value was $460 million. Investment securities consist primarily of long-term, fixed rate Oklahoma municipal bonds, taxable Texas school construction bonds and residential mortgage-backed securities issued by U.S. government agencies. The investment security portfolio is diversified among issuers. The largest obligation of any single issuer is $30 million. Substantially all of these bonds are general obligations of the issuers. Approximately $89 million of the Texas school construction bonds are also guaranteed by the Texas Permanent School Fund Guarantee Program supervised by the State Board of Education for the State of Texas.

Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, net of deferred taxes, are recorded as accumulated other comprehensive income in shareholders’ equity. The amortized cost of available for sale securities totaled $11.2 billion at September 30, 2012, an increase of $1.1 billion over June 30, 2012. The increase was primarily in short-duration U.S. government agency residential mortgage-backed securities and U.S. government agency backed commercial mortgage-backed securities. At September 30, 2012, residential mortgage-backed securities represented 95% of total available for sale securities.

A primary risk of holding residential mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. We evaluate this risk through extensive modeling of risk both before making an investment and throughout the life of the security. Current interest rates are historically low and prices for residential mortgage-backed securities are historically high resulting in low effective durations. Our best estimate of the duration of the residential mortgage-backed securities portfolio at September 30, 2012 is 1.9 years. Management estimates the duration extends to 3.6 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 1.4 years assuming a 50 basis point decline in the current low rate environment. Net unamortized premiums are less than 1% of the available for sale securities portfolio amortized cost.

Residential mortgage-backed securities also have credit risk from delinquency or default of the underlying loans. We mitigate this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest payments on the underlying loans are fully guaranteed. At September 30, 2012, approximately $10.4 billion of the amortized cost of the Company’s residential mortgage-backed securities were issued by U.S. government agencies. The fair value of these residential mortgage-backed securities totaled $10.7 billion at September 30, 2012.

We also hold amortized cost of $337 million in residential mortgage-backed securities privately issued by publicly-owned financial institutions, a decrease of $17 million from June 30, 2012. The decline was primarily due to $16 million of cash received and $1.1 million of other-than-temporary impairment losses charged against earnings during the third quarter of 2012. The fair value of our portfolio of privately issued residential mortgage-backed securities totaled $332 million at September 30, 2012.

The amortized cost of our portfolio of privately issued residential mortgage-backed securities included $209 million of Jumbo-A residential mortgage loans and $128 million of Alt-A residential mortgage loans. Jumbo-A residential mortgage loans generally meet government underwriting standards, but have loan balances that exceed agency maximums. Alt-A mortgage loans generally do not have sufficient documentation to meet government agency underwriting standards. Credit risk on residential mortgage-backed securities originated by private issuers is mitigated by investment in senior tranches with additional collateral support. All of our Alt-A residential mortgage-backed securities were issued with credit support from additional layers of loss-absorbing subordinated tranches, including all Alt-A residential mortgage-backed securities held that were originated in 2007 and 2006. The weighted average original credit enhancement of the Alt-A residential mortgage-backed securities was 10.2% and currently stands at 0.4%. The Jumbo-A residential mortgage-backed securities had original credit enhancement of 9.4% and the current level is 5.4%. Approximately 79% of our Alt-A mortgage-backed securities represent pools of fixed rate residential mortgage loans. None of the adjustable rate mortgages are payment option adjustable rate mortgages (“ARMs”). Approximately 24% of our Jumbo-A residential mortgage-backed securities represent pools of fixed rate residential mortgage loans and none of the adjustable rate mortgages are payment option ARMs.


- 31 -



The aggregate gross amount of unrealized losses on available for sale securities totaled $13 million at September 30, 2012, down $39 million from June 30, 2012. On a quarterly basis, we perform separate evaluations on debt and equity securities to determine if the unrealized losses are temporary as more fully described in Note 2 of the Consolidated Financial Statements. Other-than-temporary impairment charges of $1.1 million were recognized in earnings in the third quarter of 2012 related to certain privately issued residential mortgage-backed securities that we do not intend to sell.

Certain residential mortgage-backed securities issued by U.S. government agencies and included in fair value option securities on the Consolidated Balance Sheets, have been segregated and designated as economic hedges of changes in the fair value of our mortgage servicing rights. We have elected to carry these securities at fair value with changes in fair value recognized in current period income. These securities are held with the intent that gains or losses will offset changes in the fair value of mortgage servicing rights and related derivative contracts.
Bank-Owned Life Insurance

We have approximately $272 million of bank-owned life insurance at September 30, 2012. This investment is expected to provide a long-term source of earnings to support existing employee benefit programs. Approximately $241 million is held in separate accounts. Our separate account holdings are invested in diversified portfolios of investment-grade fixed income securities and cash equivalents, including U.S. Treasury and Agency securities, residential mortgage-backed securities, corporate debt, asset-backed and commercial mortgage-backed securities. The portfolios are managed by unaffiliated professional managers within parameters established in the portfolio’s investment guidelines. The cash surrender value of certain life insurance policies is further supported by a stable value wrap, which protects against changes in the fair value of the investments. At September 30, 2012, the cash surrender value represented by the underlying fair value of investments held in separate accounts was approximately $265 million. As the underlying fair value of the investments held in a separate account at September 30, 2012 exceeded the net book value of the investments, no cash surrender value was supported by the stable value wrap. The stable value wrap is provided by a domestic financial institution. The remaining cash surrender value of $31 million primarily represents the cash surrender value of policies held in general accounts and other amounts due from various insurance companies.


- 32 -



Loans

The aggregate loan portfolio before allowance for loan losses totaled $11.8 billion at September 30, 2012, up $256 million over June 30, 2012.
Table 18 – Loans
(In thousands)
 
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,433,473

 
$
2,278,336

 
$
2,166,406

 
$
2,005,041

 
$
1,749,203

Services
 
1,891,728

 
1,931,520

 
1,912,537

 
1,761,538

 
1,872,947

Wholesale/retail
 
1,079,267

 
960,184

 
1,027,170

 
967,426

 
1,021,070

Manufacturing
 
363,092

 
362,877

 
352,297

 
336,733

 
373,074

Healthcare
 
1,037,288

 
1,009,128

 
1,000,854

 
978,160

 
914,346

Integrated food services
 
213,832

 
216,978

 
211,288

 
204,311

 
192,200

Other commercial and industrial
 
254,537

 
293,521

 
288,540

 
301,861

 
298,762

Total commercial
 
7,273,217

 
7,052,544

 
6,959,092

 
6,555,070

 
6,421,602

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
289,544

 
287,059

 
318,539

 
342,054

 
370,465

Retail
 
525,051

 
492,377

 
466,444

 
509,402

 
457,176

Office
 
406,007

 
384,392

 
369,179

 
405,923

 
422,284

Multifamily
 
398,513

 
362,165

 
435,946

 
369,028

 
388,304

Industrial
 
187,166

 
231,033

 
288,650

 
278,186

 
224,222

Other real estate
 
359,245

 
369,188

 
354,925

 
386,710

 
410,382

Total commercial real estate
 
2,165,526

 
2,126,214

 
2,233,683

 
2,291,303

 
2,272,833

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,134,519

 
1,141,371

 
1,134,934

 
1,153,644

 
1,180,310

Permanent mortgages guaranteed by U.S. government agencies
 
169,393

 
168,059

 
186,119

 
188,462

 
173,540

Home equity
 
715,068

 
695,667

 
647,319

 
632,421

 
596,051

Total residential mortgage
 
2,018,980

 
2,005,097

 
1,968,372

 
1,974,527

 
1,949,901

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
47,281

 
62,924

 
81,792

 
105,149

 
130,296

Other consumer
 
327,363

 
329,652

 
334,505

 
343,694

 
349,937

Total consumer
 
374,644

 
392,576

 
416,297

 
448,843

 
480,233

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11,832,367

 
$
11,576,431

 
$
11,577,444

 
$
11,269,743

 
$
11,124,569


Outstanding commercial loan balances increased $221 million over June 30, 2012 or 13% on an annualized basis, growing in all of our geographical markets. Commercial loan growth in our Oklahoma and Texas markets was particularly strong. Commercial real estate loans also increased by $39 million during the third quarter of 2012 primarily in our Texas market. Residential mortgage loans were up $14 million over June 30, 2012. Consumer loans decreased $18 million from June 30, 2012 primarily related to the continued runoff of indirect automobile loans related to the previously announced decision to curtail that business. 

A breakdown by geographical market follows on Table 19 with discussion of changes in the balance by portfolio and geography. This breakdown may not always represent the location of the borrower or the collateral. The previous periods have been reclassified to conform to the current period loan classification and market attribution.


- 33 -



Table 19 – Loans by Principal Market
(In thousands)
 
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
Bank of Oklahoma:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
3,141,217

 
$
3,098,651

 
$
3,107,726

 
$
2,826,649

 
$
2,865,740

Commercial real estate
 
639,156

 
644,761

 
631,891

 
607,030

 
615,848

Residential mortgage
 
1,477,583

 
1,460,173

 
1,426,827

 
1,411,560

 
1,378,519

Consumer
 
200,217

 
205,436

 
215,693

 
235,909

 
250,048

Total Bank of Oklahoma
 
5,458,173

 
5,409,021

 
5,382,137

 
5,081,148

 
5,110,155

 
 
 
 
 
 
 
 
 
 
 
Bank of Texas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
2,529,473

 
2,414,824

 
2,354,593

 
2,249,888

 
2,116,377

Commercial real estate
 
712,895

 
678,745

 
802,979

 
830,642

 
759,574

Residential mortgage
 
266,791

 
268,639

 
262,556

 
268,053

 
276,721

Consumer
 
108,854

 
115,602

 
124,692

 
126,570

 
133,454

Total Bank of Texas
 
3,618,013

 
3,477,810

 
3,544,820

 
3,475,153

 
3,286,126

 
 
 
 
 
 
 
 
 
 
 
Bank of Albuquerque:
 
 

 
 

 
 

 
 

 
 

Commercial
 
267,469

 
262,144

 
273,284

 
258,668

 
279,319

Commercial real estate
 
294,731

 
285,871

 
282,834

 
303,500

 
302,980

Residential mortgage
 
117,783

 
113,987

 
106,754

 
104,695

 
99,191

Consumer
 
15,883

 
15,828

 
18,378

 
19,369

 
19,393

Total Bank of Albuquerque
 
695,866

 
677,830

 
681,250

 
686,232

 
700,883

 
 
 
 
 
 
 
 
 
 
 
Bank of Arkansas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
48,097

 
49,305

 
64,595

 
76,199

 
80,304

Commercial real estate
 
119,305

 
119,895

 
139,670

 
136,170

 
134,028

Residential mortgage
 
12,408

 
12,513

 
14,557

 
15,772

 
15,793

Consumer
 
19,720

 
24,270

 
28,783

 
35,911

 
44,445

Total Bank of Arkansas
 
199,530

 
205,983

 
247,605

 
264,052

 
274,570

 
 
 
 
 
 
 
 
 
 
 
Colorado State Bank & Trust:
 
 

 
 

 
 

 
 

 
 

Commercial
 
616,321

 
610,384

 
541,280

 
544,020

 
495,429

Commercial real estate
 
145,077

 
149,541

 
144,757

 
156,013

 
189,948

Residential mortgage
 
57,637

 
60,893

 
61,329

 
64,627

 
66,491

Consumer
 
19,028

 
20,612

 
19,790

 
21,598

 
22,183

Total Colorado State Bank & Trust
 
838,063

 
841,430

 
767,156

 
786,258

 
774,051

 
 
 
 
 
 
 
 
 
 
 
Bank of Arizona:
 
 

 
 

 
 

 
 

 
 

Commercial
 
300,557

 
278,119

 
269,099

 
271,914

 
269,381

Commercial real estate
 
186,553

 
181,513

 
180,830

 
198,160

 
227,085

Residential mortgage
 
65,234

 
67,822

 
76,699

 
89,315

 
92,293

Consumer
 
6,150

 
6,227

 
5,381

 
5,633

 
6,670

Total Bank of Arizona
 
558,494

 
533,681

 
532,009

 
565,022

 
595,429

 
 
 
 
 
 
 
 
 
 
 
Bank of Kansas City:
 
 

 
 

 
 

 
 

 
 

Commercial
 
370,083

 
339,117

 
348,515

 
327,732

 
315,052

Commercial real estate
 
67,809

 
65,888

 
50,722

 
59,788

 
43,370

Residential mortgage
 
21,544

 
21,070

 
19,650

 
20,505

 
20,893

Consumer
 
4,792

 
4,601

 
3,580

 
3,853

 
4,040

Total Bank of Kansas City
 
464,228

 
430,676

 
422,467

 
411,878

 
383,355

 
 
 
 
 
 
 
 
 
 
 
Total BOK Financial loans
 
$
11,832,367

 
$
11,576,431

 
$
11,577,444

 
$
11,269,743

 
$
11,124,569



- 34 -



Commercial

Commercial loans represent loans for working capital, facilities acquisition or expansion, purchases of equipment and other needs of commercial customers primarily located within our geographical footprint. Commercial loans are underwritten individually and represent on-going relationships based on a thorough knowledge of the customer, the customer’s industry and market. While commercial loans are generally secured by the customer’s assets including real property, inventory, accounts receivable, operating equipment, interests in mineral rights and other property and may also include personal guarantees of the owners and related parties, the primary source of repayment of the loans is the on-going cash flow from operations of the customer’s business. Inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with commercial lending policies.

The commercial loan portfolio grew by $221 million during the third quarter of 2012. Energy sector loans increased $155 million over June 30, 2012, growing primarily in the Texas and Colorado markets. Wholesale/retail sector loans were up $119 million primarily due to growth in the Oklahoma and Texas markets. Healthcare sector loans were up $28 million over June 30, 2012 growing in primarily in the Kansas City and Oklahoma markets, partially offset by a decrease in the Colorado market. Service sector loans decreased $40 million. Service sector loans in the Texas market grew by $31 million offset by a $36 million decrease in service sector loans in the Oklahoma market and a $24 million decrease in service sector loans in the Colorado market. Other commercial and industrial loans were down $39 million primarily in the Texas market. Growth in manufacturing sector loans in the Arizona market were offset by a decrease in manufacturing sector loans in the Oklahoma market.

The commercial sector of our loan portfolio is distributed as follows in Table 20.

Table 20 – Commercial Loans by Principal Market
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/
Missouri
 
Total
Energy
 
$
1,068,773

 
$
964,697

 
$
4,783

 
$
229

 
$
394,546

 
$
—

 
$
445

 
$
2,433,473

Services
 
652,855

 
718,188

 
172,924

 
10,411

 
138,444

 
143,230

 
55,676

 
1,891,728

Wholesale/retail
 
490,247

 
390,143

 
48,682

 
31,760

 
17,105

 
65,349

 
35,981

 
1,079,267

Healthcare
 
632,661

 
256,567

 
25,447

 
4,345

 
52,146

 
43,374

 
22,748

 
1,037,288

Manufacturing
 
171,201

 
110,673

 
5,824

 
1,166

 
8,363

 
47,246

 
18,619

 
363,092

Integrated food services
 
3,574

 
6,735

 
—

 
—

 
2,865

 
—

 
200,658

 
213,832

Other commercial and industrial
 
121,906

 
82,470

 
9,809

 
186

 
2,852

 
1,358

 
35,956

 
254,537

Total commercial loans
 
$
3,141,217

 
$
2,529,473

 
$
267,469

 
$
48,097

 
$
616,321

 
$
300,557

 
$
370,083

 
$
7,273,217

 
Supporting the energy industry with loans to producers and other energy-related entities has been a hallmark of the Company since its founding and represents a large portion of our commercial loan portfolio. In addition, energy production and related industries have a significant impact on the economy in our primary markets. Loans collateralized by oil and gas properties are subject to a semi-annual engineering review by our internal staff of petroleum engineers. This review is utilized as the basis for developing the expected cash flows supporting the loan amount. The projected cash flows are discounted according to risk characteristics of the underlying oil and gas properties. Loans are evaluated to demonstrate with reasonable certainty that crude oil, natural gas and natural gas liquids can be recovered from known oil and gas reservoirs under existing economic and operating conditions at current pricing levels and with existing conventional equipment and operating methods and costs. As part of our evaluation of credit quality, we analyze rigorous stress tests over a range of commodity prices and take proactive steps to mitigate risk when appropriate.

Energy loans totaled $2.4 billion or 21% of total loans at September 30, 2012. Outstanding energy loans increased $155 million during the third quarter of 2012. Unfunded energy loan commitments increased by $76 million to $2.2 billion at September 30, 2012. Approximately $2.2 billion of energy loans were to oil and gas producers, up $170 million over June 30, 2012. Approximately 55% of the committed production loans are secured by properties primarily producing oil and 45% of the committed production loans are secured by properties primarily producing natural gas. Loans to borrowers engaged in wholesale or retail energy sales increased $2.8 million to $140 million. Loans to borrowers that provide services to the energy industry increased $10 million during the third quarter of 2012 to $76 million and loans to borrowers that manufacture

- 35 -



equipment primarily for the energy industry increased $1.0 million during the third quarter of 2012 to $35 million.

The services sector of the loan portfolio totaled $1.9 billion or 16% of total loans and consists of a large number of loans to a variety of businesses, including community foundations, gaming, public finance, insurance and heavy equipment dealers. Service sector loans decreased $40 million over June 30, 2012. Approximately $1.1 billion of the services category is made up of loans with individual balances of less than $10 million. Service sector loans are generally secured by the assets of the borrower with repayment coming from the cash flows of ongoing operations of the customer’s business. Loans in this sector may also be secured by personal guarantees of the owners or related parties.

We participate in shared national credits when appropriate to obtain or maintain business relationships with local customers. Shared national credits are defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants. At September 30, 2012, the outstanding principal balance of these loans totaled $2.5 billion. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 19% of our shared national credits, based on dollars committed. We hold shared credits to the same standard of analysis and perform the same level of review as internally originated credits. Our lending policies generally avoid loans in which we do not have the opportunity to maintain or achieve other business relationships with the customer. In addition to management’s quarterly assessment of credit risk, grading of shared national credits is provided annually by banking regulators.

Commercial Real Estate

Commercial real estate represents loans for the construction of buildings or other improvements to real estate and property held by borrowers for investment purposes generally within our geographical footprint. We require collateral values in excess of the loan amounts, demonstrated cash flows in excess of expected debt service requirements, equity investment in the project and a portion of the project already sold, leased or permanent financing already secured. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. As with commercial loans, inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with applicable lending policies.

Commercial real estate loans totaled $2.2 billion or 18% of the loan portfolio at September 30, 2012. The outstanding balance of commercial real estate loans increased $39 million over the second quarter of 2012 primarily due to growth in multifamily residential properties in the Texas market. The commercial real estate loan balance as a percentage of our total loan portfolio is currently below its historical range of 20% to 23% over the past five years. The commercial real estate sector of our loan portfolio is distributed as follows in Table 21.


 Table 21 – Commercial Real Estate Loans by Principal Market
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/
Missouri
 
Total
Construction and land development
 
$
94,549

 
$
58,038

 
$
56,813

 
$
17,695

 
$
43,173

 
$
11,782

 
$
7,494

 
$
289,544

Retail
 
162,397

 
191,352

 
60,902

 
12,203

 
16,893

 
63,017

 
18,287

 
525,051

Office
 
105,053

 
177,782

 
70,878

 
11,632

 
12,581

 
28,023

 
58

 
406,007

Multifamily
 
128,890

 
127,441

 
22,174

 
45,117

 
25,175

 
28,021

 
21,695

 
398,513

Industrial
 
46,248

 
67,692

 
35,140

 
1,674

 
6,613

 
19,037

 
10,762

 
187,166

Other real estate
 
102,019

 
90,590

 
48,824

 
30,984

 
40,642

 
36,673

 
9,513

 
359,245

Total commercial real estate loans
 
$
639,156

 
$
712,895

 
$
294,731

 
$
119,305

 
$
145,077

 
$
186,553

 
$
67,809

 
$
2,165,526

 
Construction and land development loans, which consist primarily of residential construction properties and developed building lots, increased $2.5 million over June 30, 2012 to $290 million at September 30, 2012. Charge-offs of construction and land development loans totaled $1.4 million for the third quarter of 2012 and $3.9 million were transferred to other real estate owned. 

Loans secured by multifamily residential properties increased $36 million primarily in the Texas market, partially offset by a decrease in the Oklahoma market. Loans secured by retail facilities grew by $33 million primarily in the Oklahoma market.

- 36 -



Loans secured by offices increased $22 million during the third quarter of 2012, primarily in the Oklahoma and Texas markets.
Loans secured by and loans secured by industrial properties decreased $44 million from June 30, 2012, primarily in the Texas and Oklahoma market. 
Residential Mortgage and Consumer

Residential mortgage loans provide funds for our customers to purchase or refinance their primary residence or to borrow against the equity in their home. Residential mortgage loans are secured by a first or second-mortgage on the customer’s primary residence. Consumer loans include direct loans secured by and for the purchase of automobiles, recreational and marine equipment as well as other unsecured loans. Consumer loans also include indirect automobile loans made through primary dealers. Residential mortgage and consumer loans are made in accordance with underwriting policies we believe to be conservative and are fully documented. Credit scoring is assessed based on significant credit characteristics including credit history, residential and employment stability.

Residential mortgage loans totaled $2.0 billion, up $14 million over June 30, 2012. In general, we sell the majority of our conforming fixed rate loan originations in the secondary market and retain the majority of our non-conforming and adjustable-rate mortgage loans. We have no concentration in sub-prime residential mortgage loans. Our mortgage loan portfolio does not include payment option adjustable rate mortgage loans or adjustable rate mortgage loans with initial rates that are below market.

The majority of our permanent mortgage loan portfolio is primarily composed of various non-conforming mortgage programs to support customer relationships including jumbo mortgage loans, non-builder construction loans and special loan programs for high net worth individuals or certain professionals. The aggregate outstanding balance of loans in these programs is $984 million. Jumbo loans may be fixed or variable rate and are fully amortizing. The size of jumbo loans exceed maximums set under government sponsored entity standards, but otherwise generally conform to those standards. These loans generally require a minimum FICO score of 720 and a maximum debt-to-income ratio (“DTI”) of 38%. Loan-to-value ratios (“LTV”) are tiered from 60% to 100%, depending on the market. Special mortgage programs include fixed and variable rate fully amortizing loans tailored to the needs of certain healthcare professionals. Variable rate loans are fully indexed at origination and may have fixed rates for three to ten years, then adjust annually thereafter.

Approximately $74 million or 7% of the non-guaranteed portion of the permanent mortgage loans consist of first lien, fixed-rate residential mortgage loans originated under various community development programs. The outstanding balance of these loans is down from $78 million at June 30, 2012. These loans were underwritten to standards approved by various U.S. government agencies under these programs and include full documentation. However, these loans do have a higher risk of delinquency and losses in the event of default than traditional residential mortgage loans. The initial maximum LTV of loans in these programs was 103%.

At September 30, 2012, $169 million of permanent residential mortgage loans are guaranteed by U.S. government agencies. We have minimal credit exposure on loans guaranteed by the agencies. This amount includes $20 million of residential mortgage loans previously sold into GNMA mortgage pools. The Company may repurchase these loans when certain defined delinquency criteria are met. Because of this repurchase right, the Company is deemed to have regained effective control over these loans and must include them on the Consolidated Balance Sheet. The remaining amount represents loans that the Company has repurchased from GNMA mortgage pools. Permanent residential mortgage loans guaranteed by U.S. government agencies increased $1.3 million over June 30, 2012.

Home equity loans totaled $715 million at September 30, 2012, a $19 million increase over June 30, 2012. Growth was primarily in first-lien, fully amortizing home equity loans. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 40%. The maximum loan amount available for our home equity loan products is generally $400 thousand. A summary of our home equity loan portfolio at September 30, 2012 by lien position and amortizing status follows in Table 23.


- 37 -



Table 22 – Home Equity Loans
(In thousands)
 
 
Revolving
 
Amortizing
 
Total
First lien
 
$
35,696

 
$
433,171

 
$
468,867

Junior lien
 
53,940

 
192,261

 
246,201

Total home equity
 
$
89,636

 
$
625,432

 
$
715,068


Indirect automobile loans decreased $16 million from June 30, 2012, primarily due to the previously-disclosed decision by the Company to exit the business in the first quarter of 2009. Approximately $47 million of indirect automobile loans remain outstanding at September 30, 2012. Other consumer loans decreased $2.3 million during the third quarter of 2012.

The composition of residential mortgage and consumer loans at September 30, 2012 is as follows in Table 23. All permanent residential mortgage loans originated and serviced by our mortgage banking unit are attributed to the Oklahoma market. Other permanent residential mortgage loans originated by the Bank are attributed to their respective principal market.

Table 23 – Residential Mortgage and Consumer Loans by Principal Market
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/
Missouri
 
Total
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
$
875,726

 
$
144,273

 
$
10,529

 
$
6,674

 
$
31,359

 
$
52,592

 
$
13,366

 
$
1,134,519

Permanent mortgages guaranteed by U.S. government agencies
 
169,393

 
—

 
—

 
—

 
—

 
—

 
—

 
169,393

Home equity
 
432,464

 
122,518

 
107,254

 
5,734

 
26,278

 
12,642

 
8,178

 
715,068

Total residential mortgage
 
$
1,477,583

 
$
266,791

 
$
117,783

 
$
12,408

 
$
57,637

 
$
65,234

 
$
21,544

 
$
2,018,980

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
$
23,972

 
$
8,879

 
$
—

 
$
14,430

 
$
—

 
$
—

 
$
—

 
$
47,281

Other consumer
 
176,245

 
99,975

 
15,883

 
5,290

 
19,028

 
6,150

 
4,792

 
327,363

Total consumer
 
$
200,217

 
$
108,854

 
$
15,883

 
$
19,720

 
$
19,028

 
$
6,150

 
$
4,792

 
$
374,644

Loan Commitments

We enter into certain off-balance sheet arrangements in the normal course of business. These arrangements included unfunded loan commitments which totaled $6.4 billion and standby letters of credit which totaled $448 million at September 30, 2012. Loan commitments may be unconditional obligations to provide financing or conditional obligations that depend on the borrower’s financial condition, collateral value or other factors. Standby letters of credit are unconditional commitments to guarantee the performance of our customer to a third party. Since some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Approximately $739 thousand of the outstanding standby letters of credit were issued on behalf of customers whose loans are nonperforming at September 30, 2012.

As more fully described in Note 6 to the Consolidated Financial Statements, we have off-balance sheet commitments related to certain residential mortgage loans originated under community development loan programs that were sold to a U.S. government agency with full recourse. These mortgage loans were underwritten to standards approved by the agencies, including full documentation and originated under programs available only for owner-occupied properties. The Company no longer sells residential mortgage loans with recourse other than obligations under standard representations and warranties. We are obligated to repurchase these loans for the life of these loans in the event of foreclosure for the unpaid principal and interest at the time of foreclosure. At September 30, 2012, the principal balance of residential mortgage loans sold subject to recourse obligations totaled $238 million, down from $241 million at June 30, 2012. Substantially all of these loans are to borrowers in our primary markets including $167 million to borrowers in Oklahoma, $24 million to borrowers in Arkansas, $15 million to borrowers in New Mexico, $13 million to borrowers in the Kansas/Missouri area and $11 million to borrowers in Texas.

Under certain conditions, we also have an off-balance sheet obligation to repurchase residential mortgage loans sold to

- 38 -



government sponsored entities through our mortgage banking activities due to standard representations and warranties made under contractual agreements. At September 30, 2012, we have unresolved deficiency requests from the agencies on 344 loans with an aggregate outstanding balance of $42 million. At June 30, 2012, we had unresolved deficiency requests from the agencies on 303 loans with an aggregate outstanding balance of $40 million. For all of 2012, 2011 and 2010 combined, approximately 12% of repurchase requests have currently resulted in actual repurchases or indemnification by the Company. We repurchased 11 loans from the agencies during the third quarter of 2012 with an unpaid principal balance of $1.4 million at September 30, 2012 and recognized losses of $166 thousand. Our accrual for credit losses related to potential loan repurchases under representations and warranties totaled $4.8 million at September 30, 2012 and $5.0 million at June 30, 2012.
Customer Derivative Programs
 
We offer programs that permit our customers to hedge various risks, including fluctuations in energy, cattle and other agricultural product prices, interest rates and foreign exchange rates, or to take positions in derivative contracts. Each of these programs work essentially the same way. Derivative contracts are executed between the customers and the Company. Offsetting contracts are executed between the Company and selected counterparties to minimize the risk to us of changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or a fee paid to us as compensation for administrative costs, credit risk and profit.

The customer derivative programs create credit risk for potential amounts due to the Company from our customers and from the counterparties. Customer credit risk is monitored through existing credit policies and procedures. The effects of changes in commodity prices, interest rates or foreign exchange rates are evaluated across a range of possible options to determine the maximum exposure we are willing to have individually to any customer. Customers may also be required to provide margin collateral to further limit our credit risk.

Counterparty credit risk is evaluated through existing policies and procedures. This evaluation considers the total relationship between BOK Financial and each of the counterparties. Individual limits are established by management, approved by Credit Administration and reviewed by the Asset / Liability Committee. Margin collateral is required if the exposure between the Company and any counterparty exceeds established limits. Based on declines in the counterparties’ credit ratings, these limits may be reduced and additional margin collateral may be required.

A deterioration of the credit standing of one or more of the customers or counterparties to these contracts may result in BOK Financial recognizing a loss as the fair value of the affected contracts may no longer move in tandem with the offsetting contracts. This occurs if the credit standing of the customer or counterparty deteriorated such that either the fair value of underlying collateral no longer supported the contract or the customer or counterparty’s ability to provide margin collateral was impaired. Credit losses on customer derivatives reduce brokerage and trading revenue in the Consolidated Statement of Earnings.

Derivative contracts are carried at fair value. At September 30, 2012, the net fair values of derivative contracts reported as assets under these programs totaled $427 million, compared to $409 million at June 30, 2012. Derivative contracts carried as assets included to-be-announced residential mortgage-backed securities sold to our mortgage banking customers considered interest rate derivative contracts with fair values of $155 million, interest rate swaps sold to loan customers with fair values of $79 million, energy contracts with fair values of $39 million and foreign exchange contracts with fair values of $150 million. The aggregate net fair values of derivative contracts held under these programs reported as liabilities totaled $254 million.

At September 30, 2012, total derivative assets were reduced by $11 million of cash collateral received from counterparties and total derivative liabilities were reduced by $185 million of cash collateral paid to counterparties related to instruments executed with the same counterparty under a master netting agreement.

A table showing the notional and fair value of derivative assets and liabilities on both a gross and net basis is presented in Note 3 to the Consolidated Financial Statements.

The fair value of derivative contracts reported as assets under these programs, net of cash margin held by the Company, by category of debtor at September 30, 2012 follows in Table 24.



- 39 -



Table 24 – Fair Value of Derivative Contracts
(In thousands)
Customers
 
$
265,548

Banks and other financial institutions
 
148,272

Exchanges
 
45,432

Energy companies
 
5,254

Fair value of customer hedge asset derivative contracts, net
 
$
464,506

 
The largest exposure to a single counterparty was to a loan customer for an interest rate swap which totaled $13 million at September 30, 2012 used to convert their variable rate loan to a fixed rate.

Our aggregate gross exposure to all European banks totaled $7.8 million at September 30, 2012. In addition, MF Global filed for bankruptcy protection on October 31, 2011. After partial distributions from the bankruptcy trustee, $8.5 million was owed to us by MF Global. This remaining amount due was written down in the fourth quarter of 2011 to $6.8 million based on our evaluation of the amount we expect to recover. During the third quarter of 2012, we received a $2.0 million partial payment on our claim.

Our customer derivative program also introduces liquidity and capital risk. We are required to provide cash margin to certain counterparties when the net negative fair value of the contracts exceeds established limits. Also, changes in commodity prices affect the amount of regulatory capital we are required to hold as support for the fair value of our derivative assets. These risks are modeled as part of the management of these programs. Based on current prices, a decrease in market prices equivalent to $25.74 per barrel of oil would increase the fair value of derivative assets by $39 million. An increase in prices equivalent to $160.08 per barrel of oil would increase the fair value of derivative assets by $375 million as current prices move away from the fixed prices embedded in our existing contracts. Liquidity requirements of this program are also affected by our credit rating. A decrease in credit rating to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $35 million. The fair value of our to-be-announced residential mortgage-backed securities and interest rate swap derivative contracts is affected by changes in interest rates. Based on our assessment as of September 30, 2012, changes in interest rate would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program.
Summary of Loan Loss Experience

We maintain an allowance for loan losses and an accrual for off-balance sheet credit risk. The combined allowance for loan losses and off-balance sheet credit losses totaled $236 million or 1.99% of outstanding loans and 179% of nonaccruing loans at September 30, 2012. The allowance for loans losses was $234 million and the accrual for off-balance sheet credit losses was $1.9 million. At June 30, 2012, the combined allowance for credit losses was $241 million or 2.09% of outstanding loans and 167% of nonaccruing loans at June 30, 2012. The allowance for loan losses was $232 million and the accrual for off-balance sheet credit losses was $9.7 million. The accruals for off-balance sheet credit losses decreased $7.8 million during the third quarter of 2012 primarily due to $7.1 million refunded to the City of Tulsa in the third quarter of 2012 that was received in 2008 to settle claims related to a defaulted loan. The settlement agreement was invalidated by the Oklahoma Supreme Court in 2011 and the expected payment was accrued in 2011 in the accrual for off-balance sheet credit risk as the related loan had been charged off. The refund was reflected in net charge-offs in the third quarter.

The provision for credit losses is the amount necessary to maintain the allowance for loan losses and an accrual for off-balance sheet credit risk at an amount determined by management to be appropriate based on its evaluation. The provision includes the combined charge to expense for both the allowance for loan losses and the accrual for off-balance sheet credit risk. All losses incurred from lending activities will ultimately be reflected in charge-offs against the allowance for loan losses following funds advanced against outstanding commitments and after exhaustion of collection efforts. No provision for credit losses was recorded in the third quarter of 2012 based on a continued trend of declining charge-offs, reduced nonaccruing loans and improvements in other credit quality factors. An $8.0 million negative provision for credit losses was recorded in the second quarter of 2012 and no provision for credit losses was recorded in the third quarter of 2011. The previously noted recovery refund was expected and had been fully accrued in prior periods. Net recoveries recorded during the third quarter quarter offset an increase in required reserves due to loan portfolio growth. Credit quality indicators and most economic factors are stable or improving in our primary markets.



- 40 -



Table 25 – Summary of Loan Loss Experience
(In thousands)
 
 
Three Months Ended
 
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
231,669

 
$
244,209

 
$
253,481

 
$
271,456

 
$
286,611

Loans charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
(812
)
 
(4,094
)
 
(2,934
)
 
(4,099
)
 
(5,083
)
Commercial real estate
 
(2,607
)
 
(1,216
)
 
(6,725
)
 
(3,365
)
 
(2,335
)
Residential mortgage
 
(1,600
)
 
(4,061
)
 
(1,786
)
 
(4,375
)
 
(3,403
)
Consumer
 
(3,902
)
 
(2,172
)
 
(2,229
)
 
(2,932
)
 
(3,202
)
Total
 
(8,921
)
 
(11,543
)
 
(13,674
)
 
(14,771
)
 
(14,023
)
Recoveries of loans previously charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
(890
)
1 
4,125

 
1,946

 
2,316

 
1,404

Commercial real estate
 
2,684

 
544

 
1,312

 
1,220

 
911

Residential mortgage
 
298

 
750

 
411

 
715

 
283

Consumer
 
1,112

 
1,283

 
1,520

 
1,060

 
1,271

Total
 
3,204

 
6,702

 
5,189

 
5,311

 
3,869

Net loans charged off
 
(5,717
)
 
(4,841
)
 
(8,485
)
 
(9,460
)
 
(10,154
)
Provision for loan losses
 
7,804

 
(7,699
)
 
(787
)
 
(8,515
)
 
(5,001
)
Ending balance
 
$
233,756

 
$
231,669

 
$
244,209

 
$
253,481

 
$
271,456

Accrual for off-balance sheet credit losses:
 
 
 
 
 
 
 
 
 
 

Beginning balance
 
$
9,747

 
$
10,048

 
$
9,261

 
$
15,746

 
$
10,745

Provision for off-balance sheet credit losses
 
(7,804
)
 
(301
)
 
787

 
(6,485
)
 
5,001

Ending balance
 
$
1,943

 
$
9,747

 
$
10,048

 
$
9,261

 
$
15,746

Total combined provision for credit losses
 
$
—

 
$
(8,000
)
 
$
—

 
$
(15,000
)
 
$
—

Allowance for loan losses to loans outstanding at period-end
 
1.98
%
 
2.00
 %
 
2.11
%
 
2.25
 %
 
2.44
%
Net charge-offs (annualized) to average loans
 
0.19
%
1 
0.17
 %
 
0.30
%
 
0.34
 %
 
0.37
%
Total provision for credit losses (annualized) to average loans
 
—
%
 
(0.28
)%
 
—
%
 
(0.54
)%
 
—
%
Recoveries to gross charge-offs
 
35.92
%
 
58.06
 %
 
37.95
%
 
35.96
 %
 
27.59
%
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments
 
0.03
%
 
0.15
 %
 
0.15
%
 
0.14
 %
 
0.25
%
Combined allowance for credit losses to loans outstanding at period-end
 
1.99
%
 
2.09
 %
 
2.20
%
 
2.33
 %
 
2.58
%
1 
Includes $7.1 million of negative recovery related to a refund of a settlement between BOK Financial and the City of Tulsa invalidated by the Oklahoma Supreme Court. Excluding this refund, BOK Financial had net charge-offs (recoveries) to average loans of (0.05%) on an annualized basis.
Allowance for Loan Losses

The appropriateness of the allowance for loan losses is assessed by management based on an ongoing quarterly evaluation of the probable estimated losses inherent in the portfolio. The allowance consists of specific allowances attributed to certain impaired loans, general allowances based on expected loss rates by loan class and non-specific allowances based on general economic, risk concentration and related factors.

At September 30, 2012, risk graded impaired loans totaled $110 million, including $9.1 million with specific allowances of $3.7 million and $101 million with no specific allowances because the loans balances represent the amounts we expect to recover. At June 30, 2012, risk graded impaired loans totaled $126 million, including $6.2 million of impaired loans with specific allowances of $1.8 million and $120 million with no specific allowances. The increase in specific allowances over June 30, 2012 is due primarily to a single industrial sector commercial real estate loan customer attributed to the Bank of Texas.

- 41 -




General allowances for unimpaired loans are based on an estimated loss rate by loan class. Estimated loss rates for risk-graded loans are either increased or decreased based on changes in risk grading for each loan class. Estimated loss rates for both risk-graded and non-risk graded loans may be further adjusted for inherent risk identified for the given loan class which have not yet been captured in the loss rate.

The aggregate amount of general allowances for all unimpaired loans totaled $189 million at September 30, 2012, largely unchanged from June 30, 2012. Net charge-offs continue to decrease, resulting in decreased estimated loss rates. The general allowance for the commercial segment decreased by $1.6 million primarily due to lower estimated loss rates and improved risk grading, partially offset by growth in the portfolio balance. The general allowance for commercial real estate loans increased $3.1 million over June 30, 2012 primarily due to an increase in the balance of the multifamily loan class and an increase in estimated loss rates for the construction and land development. The general allowance for residential mortgage decreased $1.7 million from June 30, 2012 primarily due to lower estimated loss rates.

Nonspecific allowances are maintained for risks beyond factors specific to a particular loan or loan class. These factors include trends in the economy in our primary lending areas, concentrations in loans with large balances and other relevant factors. Nonspecific allowances totaled $41 million at September 30, 2012, largely unchanged from June 30, 2012 as these risks were largely unchanged compared to the prior quarter. The nonspecific allowance at both September 30, 2012 and June 30, 2012 includes consideration of the bankruptcy filing by a major employer in the Tulsa, Dallas/Ft. Worth and Kansas City markets. Although, we have no direct exposure, the secondary effect on employees, retirees, vendors, suppliers and other business partners could be significant. The nonspecific allowance also considers the possible impact of the European debt crisis and similar economic factors on our loan portfolio. As demonstrated by continued domestic and European accommodative monetary policies, these factors remain a continued significant risk.

An allocation of the allowance for loan losses by loan category is included in Note 4 to the Consolidated Financial Statements.

Our loan monitoring process also identified loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrower or the value of the collateral. Because the borrowers are still performing in accordance with the original terms of the loans agreements, and no loss of principal or interest is anticipated, these loans were not included in nonperforming assets. Known information does, however, cause management concern as to the borrowers’ ability to comply with current repayment terms. The potential problem loans totaled $150 million at September 30, 2012. The current composition of potential problem loans by primary industry included services - $34 million, construction and land development - $26 million, other commercial real estate - $13 million, commercial real estate secured by office buildings - $13 million, residential mortgage - $12 million, manufacturing - $10 million and energy - $10 million. Potential problem loans totaled $159 million at June 30, 2012.
Net Loans Charged Off

Loans are charged off against the allowance for loan losses when the loan balance or a portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value. Commercial and commercial real estate loans are evaluated quarterly and charge-offs are taken in the quarter in which the loss is identified. Residential mortgage and consumer loans are generally charged off when payments are between 90 days and 180 days past due, depending on loan class. In addition, residential mortgage loans are generally charged-down to collateral value within 60 days of being notified of a borrower's bankruptcy filing.

Net loans charged off during the third quarter of 2012 totaled $5.7 million, including the return of $7.1 million received from the City of Tulsa to settle claims related to a defaulted loan that was recorded as a recovery in 2008. The settlement agreement between BOK Financial and the City of Tulsa was invalidated by the Oklahoma Supreme Court in 2011. The return of this settlement was recorded as a negative recovery in the third quarter of 2012 when the funds were returned to the City of Tulsa. Excluding this item, BOK Financial had a net recovery of $1.4 million for the third quarter of 2012. Net charge-offs totaled $4.8 million in the previous quarter and $10.2 million in the third quarter of 2011. Excluding the impact of the return of the invalidated settlement, the ratio of net loans charged off (recovered) to average outstanding loans on an annualized basis was (0.05%) for the third quarter of 2012 compared with 0.17% for the second quarter of 2012 and 0.37% for the third quarter of 2011. Excluding the impact of the invalidated settlement, net loans charged off in the third quarter of 2012 decreased $6.2 million compared to the previous quarter.

Net loans charged off (recovered) by category and principal market area during the third quarter of 2012 follow in Table 26.


- 42 -



Table 26 – Net Loans Charged Off (Recovered)
(In thousands)
 
 
Oklahoma
 
Texas
 
Colorado
 
Arkansas
 
New
Mexico
 
Arizona
 
Kansas/
Missouri
 
Total
Commercial
 
$
4,824

 
$
113

 
$
(3,168
)
 
$
(8
)
 
$
(23
)
 
$
(35
)
 
$
(1
)
 
$
1,702

Commercial real estate
 
253

 
—

 
859

 
858

 
(1
)
 
(2,046
)
 
—

 
(77
)
Residential mortgage
 
687

 
(82
)
 
(78
)
 
10

 
54

 
685

 
26

 
1,302

Consumer
 
722

 
1,749

 
20

 
74

 
202

 
5

 
18

 
2,790

Total net loans charged off (recovered)
 
$
6,486

 
$
1,780

 
$
(2,367
)
 
$
934

 
$
232

 
$
(1,391
)
 
$
43

 
$
5,717


Excluding the impact of the return of the invalidated settlement attributed to the Oklahoma market, net commercial loans charged off during the third quarter of 2012 decreased $5.4 million compared to the prior quarter and were comprised primarily of a $3.2 million recovery from a single service sector customer in the Colorado market and a $1.8 million recovery from a single manufacturing sector customer in the Oklahoma market.

Net charge-offs of commercial real estate loans decreased $749 thousand from the second quarter of 2012 and were primarily comprised of net charge-offs of land and residential construction sector loans in the Colorado and Arkansas markets. The Arizona market had a net recovery for the third quarter of 2012 due primarily due to a recovery from a single land and residential construction sector customer.

Residential mortgage net charge-offs were down $2.0 million over the previous quarter and consumer loan net charge-offs, which include indirect auto loan and deposit account overdraft losses, increased $1.9 million over the previous quarter.  All residential mortgage net charge-offs related to loans serviced by our mortgage company across our geographical footprint are attributed to the Oklahoma market.

During the third quarter of 2012, the Office of the Comptroller of the Currency issued interpretive guidance regarding accounting for and classification of retail loans to borrowers who have filed for Chapter 7 bankruptcy. This guidance states that these loans should be charged-down to collateral value and classified as nonaccruing and troubled debt restructurings, regardless of current payment status. Generally, we have been complying with this guidance by charging down such loans to collateral value within 60 days of being notified of the borrower's bankruptcy filing. Based on available information we do not expect implementation to significantly affect charge-offs or provision for credit losses. We estimate that nonaccruing loans and troubled debt restructuring may increase by $10 million to $15 million. At September 30, 2012, payments on approximately 89% of loans that may be classified as nonaccruing are current. We expect to implement this guidance in the fourth quarter.


- 43 -



Nonperforming Assets

Table 27 – Nonperforming Assets
(In thousands)
 
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
Nonaccruing loans:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
21,762

 
$
34,529

 
$
61,750

 
$
68,811

 
$
83,736

Commercial real estate
 
75,761

 
80,214

 
86,475

 
99,193

 
110,048

Residential mortgage
 
29,267

 
22,727

 
27,462

 
29,767

 
31,731

Consumer
 
5,109

 
7,012

 
7,672

 
3,515

 
3,960

Total nonaccruing loans
 
131,899

 
144,482

 
183,359

 
201,286

 
229,475

Renegotiated loans2
 
27,992

 
28,415

 
36,764

 
32,893

 
30,477

Total nonperforming loans
 
159,891

 
172,897

 
220,123

 
234,179

 
259,952

Real estate and other repossessed assets
 
104,128

 
105,708

 
115,790

 
122,753

 
127,943

Total nonperforming assets
 
$
264,019

 
$
278,605

 
$
335,913

 
$
356,932

 
$
387,895

 
 
 
 
 
 
 
 
 
 
 
Nonaccruing loans by principal market:
 
 
 
 
 
 
 
 

 
 

Bank of Oklahoma
 
$
41,599

 
$
49,931

 
$
64,097

 
$
65,261

 
$
73,794

Bank of Texas
 
28,046

 
24,553

 
29,745

 
28,083

 
29,783

Bank of Albuquerque
 
13,233

 
13,535

 
15,029

 
15,297

 
17,242

Bank of Arkansas
 
5,958

 
6,865

 
18,066

 
23,450

 
26,831

Colorado State Bank & Trust
 
22,878

 
28,239

 
28,990

 
33,522

 
36,854

Bank of Arizona
 
20,145

 
21,326

 
27,397

 
35,673

 
44,929

Bank of Kansas City
 
40

 
33

 
35

 
—

 
42

Total nonaccruing loans
 
$
131,899

 
$
144,482

 
$
183,359

 
$
201,286

 
$
229,475

 
 
 
 
 
 
 
 
 
 
 
Nonaccruing loans by loan portfolio sector:
 
 
 
 
 
 
 
 

 
 

Commercial:
 
 
 
 
 
 
 
 

 
 

Energy
 
$
3,063

 
$
3,087

 
$
336

 
$
336

 
$
3,900

Manufacturing
 
2,283

 
12,230

 
23,402

 
23,051

 
27,691

Wholesale / retail
 
2,007

 
4,175

 
15,388

 
21,180

 
27,088

Integrated food services
 
—

 
—

 
—

 
—

 
—

Services
 
10,099

 
10,123

 
12,890

 
16,968

 
18,181

Healthcare
 
3,305

 
3,310

 
7,946

 
5,486

 
5,715

Other
 
1,005

 
1,604

 
1,788

 
1,790

 
1,161

Total commercial
 
21,762

 
34,529

 
61,750

 
68,811

 
83,736

Commercial real estate:
 
 
 
 
 
 
 
 

 
 

Land development and construction
 
38,143

 
46,050

 
52,416

 
61,874

 
72,207

Retail
 
6,692

 
7,908

 
6,193

 
6,863

 
6,492

Office
 
9,833

 
10,589

 
10,733

 
11,457

 
11,967

Multifamily
 
3,145

 
3,219

 
3,414

 
3,513

 
4,036

Industrial
 
4,064

 
—

 
—

 
—

 
—

Other commercial real estate
 
13,884

 
12,448

 
13,719

 
15,486

 
15,346

Total commercial real estate
 
75,761

 
80,214

 
86,475

 
99,193

 
110,048


- 44 -



Table 27 – Nonperforming Assets
(In thousands)
 
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
Residential mortgage:
 
 
 
 
 
 
 
 

 
 

Permanent mortgage
 
23,717

 
18,136

 
22,822

 
25,366

 
27,486

Home equity
 
5,550

 
4,591

 
4,640

 
4,401

 
4,245

Total residential mortgage
 
29,267

 
22,727

 
27,462

 
29,767

 
31,731

Consumer
 
5,109

 
7,012

 
7,672

 
3,515

 
3,960

Total nonaccrual loans
 
$
131,899

 
$
144,482

 
$
183,359

 
$
201,286

 
$
229,475

 
 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
 
 

 
 

Allowance for loan losses to nonaccruing loans
 
177.22
%
 
160.34
%
 
133.19
%
 
125.93
%
 
118.29
%
Nonaccruing loans to period-end loans
 
1.11
%
 
1.25
%
 
1.58
%
 
1.79
%
 
2.06
%
Accruing loans 90 days or more past due1
 
$
1,181

 
$
691

 
$
6,140

 
$
2,496

 
$
1,401

 
 
 
 
 
 
 
 
 
 
 
1Excludes residential mortgages guaranteed by agencies of the U.S. Government.
 
 
 
 
 
 
 
 

 
 

2Includes residential mortgages guaranteed by agencies of the U.S. Government.  These loans have been modified to extend payment terms and/or reduce interest rates.
 
$
24,590

 
$
24,760

 
$
32,770

 
$
28,974

 
$
26,670


Nonperforming assets decreased $15 million during the third quarter of 2012 to $264 million or 2.21% of outstanding loans and repossessed assets at September 30, 2012. Nonaccruing loans totaled $132 million, accruing renegotiated residential mortgage loans totaled $28 million (composed primarily of $25 million of residential mortgage loans guaranteed by U.S. government agencies) and real estate and other repossessed assets totaled $104 million. The Company generally retains nonperforming assets to maximize potential recovery which may cause future nonperforming assets to decrease more slowly.

Loans are classified as nonaccruing when it becomes probable that we will not collect the full contractual principal and interest. As more fully discussed in Note 4 to the Consolidated Financial Statements, we may modify nonaccruing commercial and commercial real estate loans in troubled debt restructuring. Modifications may include extension of payment terms and rate concessions. We do not forgive principal or accrued but unpaid interest. We may also renew matured nonaccruing loans. Nonaccuring loans, including those renewed or modified in troubled debt restructurings, are charged off when the loan balance is no longer covered by the paying capacity of the borrower based on a quarterly evaluation of available cash resources and collateral value. Nonaccruing loans generally remain on nonaccrual status until full collection of principal and interest in accordance with the original terms, including principal previously charged off, is probable.

We generally do not voluntarily modify consumer loans to troubled borrowers.

Renegotiated loans consist primarily of accruing residential mortgage loans modified in troubled debt restructurings. See Note 4 to the Consolidated Financial Statement for additional discussion of troubled debt restructurings. Generally, we modify residential mortgage loans primarily by reducing interest rates and extending the number of payments in accordance with U.S. government agency guidelines. No unpaid principal or interest is forgiven. Interest continues to accrue based on the modified terms of the loan. If it becomes probable that we will not be able to collect all amounts due according to the modified loan terms, the loan is placed on nonaccrual status and included in nonaccrual loans. Modified loans guaranteed by U.S. government agencies under residential mortgage loan programs may be sold once they become eligible according to U.S. agency guidelines.

A rollforward of nonperforming assets for the third quarter of 2012 follows in Table 28.


- 45 -



Table 28 – Rollforward of Nonperforming Assets
(In thousands)
 
 
Three Months Ended
 
 
September 30, 2012
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, June 30, 2012
 
$
144,482

 
$
28,415

 
$
105,708

 
$
278,605

Additions
 
19,699

 
3,560

 
—

 
23,259

Payments
 
(18,356
)
 
(91
)
 
—

 
(18,447
)
Charge-offs
 
(8,921
)
 
—

 
—

 
(8,921
)
Net write-downs and losses
 
—

 
—

 
(3,572
)
 
(3,572
)
Foreclosure of nonperforming loans
 
(6,959
)
 
(1,851
)
 
8,810

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
—

 
—

 
32,511

 
32,511

Proceeds from sales
 
—

 
(1,864
)
 
(8,441
)
 
(10,305
)
Conveyance to U.S. government agencies
 
—

 
—

 
(31,097
)
 
(31,097
)
Net transfers to nonaccruing loans
 
222

 
(222
)
 
—

 
—

Return to accrual status
 
(1,105
)
 
—

 
—

 
(1,105
)
Other, net
 
2,837

 
45

 
209

 
3,091

Balance, September 30, 2012
 
$
131,899

 
$
27,992

 
$
104,128

 
$
264,019


 
 
Nine Months Ended
 
 
September 30, 2012
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, December 31, 2011
 
$
201,286

 
$
32,893

 
$
122,753

 
$
356,932

Additions
 
58,959

 
12,662

 
—

 
71,621

Payments
 
(75,902
)
 
(577
)
 
—

 
(76,479
)
Charge-offs
 
(34,138
)
 
—

 
—

 
(34,138
)
Net writedowns and losses
 
—

 
—

 
(7,334
)
 
(7,334
)
Foreclosure of nonperforming loans
 
(20,115
)
 
(5,816
)
 
25,931

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
—

 
—

 
71,211

 
71,211

Proceeds from sales
 
—

 
(8,184
)
 
(44,341
)
 
(52,525
)
Conveyance to U.S. government agencies
 
—

 
—

 
(65,344
)
 
(65,344
)
Net transfers to nonaccruing loans
 
454

 
(454
)
 
—

 
—

Return to accrual status
 
(2,055
)
 
—

 
—

 
(2,055
)
Other, net
 
3,410

 
(2,532
)
 
1,252

 
2,130

Balance, September 30, 2012
 
$
131,899

 
$
27,992

 
$
104,128


$
264,019


We foreclose on loans guaranteed by U.S. government agencies in accordance with agency guidelines. Generally these loans are not eligible for modification programs or have failed to comply with modified loan terms. Principal is guaranteed by agencies of the U.S. government, subject to limitations and credit risk is minimal. These properties will be conveyed to the agencies once applicable criteria have been met. During the third quarter of 2012, $33 million of properties guaranteed by U.S. government agencies were foreclosed on and $31 million of properties were conveyed to the applicable U.S. government agencies during the third quarter of 2012. For the nine months ended September 30, 2012, $71 million of properties guaranteed by U.S. government agencies were foreclosed and $65 million of properties conveyed.


- 46 -



Nonaccruing loans totaled $132 million or 1.11% of outstanding loans at September 30, 2012 and $144 million or 1.25% of outstanding loans at June 30, 2012. Nonaccruing loans decreased $13 million from June 30, 2012 due primarily to $18 million of payments, $8.9 million of charge-offs and $7.0 million of foreclosures. Newly identified nonaccruing loans totaled $20 million for the third quarter of 2012.

The distribution of nonaccruing loans among our various markets follows in Table 29.
Table 29 – Nonaccruing Loans by Principal Market
(Dollars In thousands)
 
 
September 30, 2012
 
June 30, 2012
 
Change
 
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
Bank of Oklahoma
 
$
41,599

 
0.76
%
 
$
49,931

 
0.92
%
 
$
(8,332
)
 
(16
)
bp
Bank of Texas
 
28,046

 
0.78
%
 
24,553

 
0.71
%
 
3,493

 
7

 
Bank of Albuquerque
 
13,233

 
1.90
%
 
13,535

 
2.00
%
 
(302
)
 
(10
)
 
Bank of Arkansas
 
5,958

 
2.99
%
 
6,865

 
3.33
%
 
(907
)
 
(34
)
 
Colorado State Bank & Trust
 
22,878

 
2.73
%
 
28,239

 
3.36
%
 
(5,361
)
 
(63
)
 
Bank of Arizona
 
20,145

 
3.61
%
 
21,326

 
4.00
%
 
(1,181
)
 
(39
)
 
Bank of Kansas City
 
40

 
0.01
%
 
33

 
0.01
%
 
7

 
—

 
Total
 
$
131,899

 
1.11
%
 
$
144,482

 
1.25
%
 
$
(12,583
)
 
(14
)
bp

Nonaccruing loans attributed to the Bank of Oklahoma are primarily composed of $20 million of residential mortgage loans and $14 million of commercial real estate loans. All residential mortgage loans retained by the Company that were originated across our geographical footprint and serviced by our mortgage company are attributed to the Bank of Oklahoma. Nonaccruing loans attributed to the Bank of Texas included $12.4 million of commercial real estate loans, $7.0 million of commercial loans and $6.3 million of residential mortgage loans. Nonaccruing loans attributed to Colorado State Bank & Trust consisted primarily of commercial real estate loans. Nonaccruing loans attributed to the Bank of Arizona consisted of $13 million of commercial real estate loans and $5.8 million of commercial loans.
Commercial

Nonaccruing commercial loans totaled $22 million or 0.30% of total commercial loans at September 30, 2012, down from $35 million or 0.49% of total commercial loans at June 30, 2012. Nonaccruing commercial loans at September 30, 2012 were primarily composed of $10 million or 0.53% of total services sector loans primarily attributed to the Bank of Arizona. Nonaccruing manufacturing sector loans decreased $11 million from June 30, 2012. Nonaccruing manufacturing loans were primarily composed of a single customer attributed to the Bank of Oklahoma totaling $9.5 million at June 30, 2012 that was paid off during the third quarter in addition to a $1.8 million partial recovery of amounts previously charged off.

Nonaccruing commercial loans decreased $13 million in the third quarter of 2012 primarily due to $12 million in payments. Newly identified nonaccruing commercial loans of $1.5 million were partially offset by $812 thousand of charge-offs during the third quarter.
 
The distribution of nonaccruing commercial loans among our various markets was as follows in Table 30.


- 47 -



Table 30 – Nonaccruing Commercial Loans by Principal Market
(Dollars in thousands)
 
 
September 30, 2012
 
June 30, 2012
 
Change
 
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
Bank of Oklahoma
 
$
6,445

 
0.21
%
 
$
17,320

 
0.56
%
 
$
(10,875
)
 
(35
)
bp
Bank of Texas
 
7,035

 
0.28
%
 
7,682

 
0.32
%
 
(647
)
 
(4
)
 
Bank of Albuquerque
 
1,148

 
0.43
%
 
2,137

 
0.82
%
 
(989
)
 
(39
)
 
Bank of Arkansas
 
341

 
0.71
%
 
358

 
0.73
%
 
(17
)
 
(2
)
 
Colorado State Bank & Trust
 
990

 
0.16
%
 
2,008

 
0.33
%
 
(1,018
)
 
(17
)
 
Bank of Arizona
 
5,803

 
1.93
%
 
5,024

 
1.81
%
 
779

 
12

 
Bank of Kansas City
 
—

 
—
%
 
—

 
—
%
 
—

 
—

 
Total commercial
 
$
21,762

 
0.30
%
 
$
34,529

 
0.49
%
 
$
(12,767
)
 
(19
)
bp

Commercial Real Estate

Nonaccruing commercial real estate loans totaled $76 million or 3.50% of outstanding commercial real estate loans at September 30, 2012 compared to $80 million or 3.77% of outstanding commercial real estate loans at June 30, 2012. Nonaccruing commercial real estate loans continue to be largely concentrated in land development and residential construction loans. Nonaccruing commercial real estate loans were down $4.5 million compared to the prior quarter. Newly identified nonaccruing commercial real estate loans totaled $5.7 million, offset by $5.8 million of cash payments received, $2.6 million of charge-offs and $4.2 million of foreclosures. The distribution of our nonaccruing commercial real estate loans among our geographic markets follows in Table 31.

Table 31 – Nonaccruing Commercial Real Estate Loans by Principal Market
(Dollars in thousands)
 
 
September 30, 2012
 
June 30, 2012
 
Change
 
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
Bank of Oklahoma
 
$
13,573

 
2.12
%
 
$
15,180

 
2.35
%
 
$
(1,607
)
 
(23
)
bp
Bank of Texas
 
12,360

 
1.73
%
 
8,955

 
1.32
%
 
3,405

 
41

 
Bank of Albuquerque
 
10,722

 
3.64
%
 
9,843

 
3.44
%
 
879

 
20

 
Bank of Arkansas
 
4,730

 
3.96
%
 
5,588

 
4.66
%
 
(858
)
 
(70
)
 
Colorado State Bank & Trust
 
21,697

 
14.96
%
 
26,064

 
17.43
%
 
(4,367
)
 
(247
)
 
Bank of Arizona
 
12,679

 
6.80
%
 
14,584

 
8.03
%
 
(1,905
)
 
(123
)
 
Bank of Kansas City
 
—

 
—
%
 
—

 
—
%
 
—

 
—

 
Total commercial real estate
 
$
75,761

 
3.50
%
 
$
80,214

 
3.77
%
 
$
(4,453
)
 
(27
)
bp

Nonaccruing commercial real estate loans are primarily concentrated in the Colorado, Oklahoma, Arizona and Texas markets. Nonaccruing commercial real estate loans attributed to Colorado State Bank & Trust consist primarily of nonaccruing residential construction and land development loans. Nonaccruing commercial real estate loans attributed to the Bank of Oklahoma consisted primarily of residential construction and land development loans, loans secured by multifamily residential properties, other commercial real estate loans and loans secured by retail facilities. Nonaccruing commercial real estate loans attributed to the Arizona market primarily consist of other commercial real estate loans, loans secured by office buildings and residential construction and land development loans. Nonaccruing loans attributed to the Bank of Texas were primarily composed of residential construction and land development loans and other commercial real estate loans.


- 48 -



Residential Mortgage and Consumer

Nonaccruing residential mortgage loans totaled $29 million or 1.45% of outstanding residential mortgage loans at September 30, 2012 compared to $23 million or 1.13% of outstanding residential mortgage loans at June 30, 2012. Newly identified nonaccrual residential mortgage loans totaled $9.8 million were partially offset by $1.6 million of loans charged off and $1.2 million of foreclosures during the quarter. Nonaccruing residential mortgage loans primarily consist of non-guaranteed permanent residential mortgage loans which totaled $23 million or 2.05% of outstanding non-guaranteed permanent residential mortgage loans at September 30, 2012. Nonaccruing home equity loans totaled $5.6 million or 0.78% of total home equity loans.

Payments of accruing residential mortgage loans and consumer loans may be delinquent. The composition of residential mortgage loans and consumer loans past due but still accruing is included in the following Table 32. Principally all non-guaranteed residential loans past due 90 days or more are nonaccruing. Residential mortgage loans 30 to 89 days past due increased $3.6 million to $21 million at September 30, 2012. Consumer loans past due 30 to 89 days increased $1.1 million from June 30, 2012.

Table 32 – Residential Mortgage and Consumer Loans Past Due
(In thousands)
 
 
September 30, 2012
 
June 30, 2012
 
 
90 Days or More
 
30 to 89 Days
 
90 Days or More
 
30 to 89 Days
Residential mortgage:
 
 
 
 
 
 
 
 
   Permanent mortgage1
 
$
250

 
$
17,953

 
$
495

 
$
15,130

Home equity
 
—

 
2,961

 
44

 
2,211

Total residential mortgage
 
$
250

 
$
20,914

 
539

 
$
17,341

Consumer:
 
 

 
 

 
 

 
 

Indirect automobile
 
$
32

 
$
1,729

 
$
1

 
$
1,771

Other consumer
 
—

 
1,878

 
14

 
718

Total consumer
 
$
32

 
$
3,607

 
$
15

 
$
2,489

1 
Excludes past due residential mortgage loans guaranteed by agencies of the U.S. government.

Real Estate and Other Repossessed Assets

Real estate and other repossessed assets are assets acquired in partial or total forgiveness of loans. The assets are carried at the lower of cost as determined by fair value at date of foreclosure or current fair value, less estimated selling costs.

Real estate and other repossessed assets totaled $104 million at September 30, 2012, a $1.6 million decrease from June 30, 2012. The distribution of real estate and other repossessed assets attributed by geographical market is included in Table 33 following.


- 49 -



Table 33 – Real Estate and Other Repossessed Assets by Principal Market
(In thousands)
 
 
Oklahoma
 
Texas
 
Colorado
 
Arkansas
 
New
Mexico
 
Arizona
 
Kansas/
Missouri
 
Other
 
Total
Developed commercial real estate properties
 
$
2,015

 
$
6,989

 
$
2,172

 
$
1,111

 
$
3,103

 
$
12,329

 
$
1,309

 
$
—

 
$
29,028

1-4 family residential properties guaranteed by U.S. government agencies
 
4,500

 
1,220

 
114

 
729

 
13,340

 
403

 
1,731

 
782

 
22,819

1-4 family residential properties
 
6,101

 
3,283

 
1,510

 
1,873

 
1,788

 
2,010

 
633

 
451

 
17,649

Undeveloped land
 
361

 
4,417

 
2,826

 
123

 
200

 
9,864

 
3,678

 
—

 
21,469

Residential land development properties
 
517

 
2,850

 
2,114

 
46

 
1,360

 
4,664

 
153

 
—

 
11,704

Oil and gas properties
 
—

 
677

 
—

 
—

 
—

 
—

 
—

 
—

 
677

Multifamily residential properties
 
—

 
—

 
—

 
323

 
—

 
—

 
—

 
—

 
323

Vehicles
 
127

 
28

 
—

 
30

 
—

 
—

 
—

 
135

 
320

Construction equipment
 
—

 
—

 
—

 
—

 
—

 
—

 
119

 
—

 
119

Other
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
20

 
20

Total real estate and other repossessed assets
 
$
13,621

 
$
19,464

 
$
8,736

 
$
4,235

 
$
19,791

 
$
29,270

 
$
7,623

 
$
1,388

 
$
104,128


Undeveloped land is primarily zoned for commercial development. Developed commercial real estate properties are primarily completed with no additional construction necessary for sale.


- 50 -



Liquidity and Capital
Subsidiary Bank

Deposits and borrowed funds are the primary sources of liquidity for the subsidiary bank. Based on the average balances for the third quarter of 2012, approximately 71% of our funding was provided by deposit accounts, 11% from borrowed funds, 1% from long-term subordinated debt and 11% from equity. Our funding sources, which primarily include deposits and borrowings from the Federal Home Loan Banks and other banks, provide adequate liquidity to meet our operating needs.

Deposit accounts represent our largest funding source. We compete for retail and commercial deposits by offering a broad range of products and services and focusing on customer convenience. Retail deposit growth is supported through our Perfect Banking sales and customer service program, free checking, online bill paying services, mobile banking services, an extensive network of branch locations and ATMs and a 24-hour Express Bank call center. Commercial deposit growth is supported by offering treasury management and lockbox services. We also acquire brokered deposits when the cost of funds is advantageous to other funding sources.

Average deposits for the third quarter of 2012 totaled $18.8 billion and represented approximately 71% of total liabilities and capital compared with $18.4 billion and 72% of total liabilities and capital for the second quarter of 2012. Average deposits increased $325 million compared to the second quarter of 2012. Average demand deposits increased $440 million. Average interest-bearing transaction deposit accounts decreased $60 million and average time deposits decreased $63 million. 

Average Commercial Banking deposit balances were up $235 million over the second quarter of 2012. Average demand deposits grew by $367 million during the third quarter, partially offset by a $132 million decrease in time deposit balances and a $126 million decrease in interest-bearing transaction deposit account balances. Average balances related to our commercial and industrial customers increased $316 million partially offset by a $181 million decrease in balances attributed to our treasury services customers. Balances related to Small Business, Energy and Commercial Real Estate customers all increased over the prior quarter. Commercial customers continue to retain large cash reserves primarily due to continued economic uncertainty and low yields available on other high quality investment alternatives. Average Consumer Banking deposit balances were largely unchanged compared to the second quarter of 2012. Demand deposit balances grew by $39 million primarily offset by a $33 million decrease in time deposits. Average Wealth Management deposits were up $107 million over the second quarter of 2012. Interest-bearing transaction deposit account balances grew by $70 million and demand deposits grew by $35 million.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”) provided temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts at all FDIC-insured depository institutions effective December 31, 2010. This temporary program is set to expire on December 31, 2012 although an extension of this program is currently under consideration. Upon expiration, noninterest-bearing transaction accounts will be insured only up to $250,000. Demand deposits represent 36% of total average deposits for the third quarter of 2012. The impact of the expiration of this temporary program is uncertain, but could result in a decrease in average demand deposits held by customers.

Brokered deposits included in time deposits averaged $170 million for the third quarter of 2012, down $17 million compared to the second quarter of 2012. Average interest-bearing transaction accounts for the third quarter include $247 million of brokered deposits, an increase of $50 million over the second quarter.

The distribution of our period end deposit account balances among principal markets follows in Table 34.

- 51 -



Table 34 – Period End Deposits by Principal Market Area
(In thousands)
 
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
Bank of Oklahoma:
 
 
 
 
 
 
 
 
 
 
Demand
 
$
3,734,900

 
$
3,499,834

 
$
3,445,424

 
$
3,223,201

 
$
2,953,410

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
5,496,724

 
5,412,002

 
5,889,625

 
6,050,986

 
6,038,770

Savings
 
155,277

 
150,353

 
148,556

 
126,763

 
122,829

Time
 
1,274,336

 
1,354,148

 
1,370,868

 
1,450,571

 
1,489,486

Total interest-bearing
 
6,926,337

 
6,916,503

 
7,409,049

 
7,628,320

 
7,651,085

Total Bank of Oklahoma
 
10,661,237

 
10,416,337

 
10,854,473

 
10,851,521

 
10,604,495

 
 
 
 
 
 
 
 
 
 
 
Bank of Texas:
 
 
 
 
 
 
 
 
 
 
Demand
 
1,983,678

 
1,966,465

 
1,876,133

 
1,808,491

 
1,710,315

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
1,782,296

 
1,813,209

 
1,734,655

 
1,940,819

 
1,820,116

Savings
 
52,561

 
51,114

 
50,331

 
45,872

 
42,272

Time
 
789,725

 
772,809

 
789,860

 
867,664

 
938,200

Total interest-bearing
 
2,624,582

 
2,637,132

 
2,574,846

 
2,854,355

 
2,800,588

Total Bank of Texas
 
4,608,260

 
4,603,597

 
4,450,979

 
4,662,846

 
4,510,903

 
 
 
 
 
 
 
 
 
 
 
Bank of Albuquerque:
 
 
 
 
 
 
 
 
 
 
Demand
 
416,796

 
357,367

 
333,707

 
319,269

 
325,612

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
526,029

 
506,165

 
503,015

 
491,068

 
480,816

Savings
 
31,940

 
31,215

 
32,688

 
27,487

 
26,127

Time
 
375,611

 
383,350

 
392,234

 
410,722

 
431,436

Total interest-bearing
 
933,580

 
920,730

 
927,937

 
929,277

 
938,379

Total Bank of Albuquerque
 
1,350,376

 
1,278,097

 
1,261,644

 
1,248,546

 
1,263,991

 
 
 
 
 
 
 
 
 
 
 
Bank of Arkansas:
 
 
 
 
 
 
 
 
 
 
Demand
 
29,254

 
16,921

 
22,843

 
18,513

 
21,809

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
168,827

 
172,829

 
151,708

 
131,181

 
181,486

Savings
 
2,246

 
2,220

 
2,358

 
1,727

 
1,735

Time
 
45,719

 
48,517

 
54,157

 
61,329

 
74,163

Total interest-bearing
 
216,792

 
223,566

 
208,223

 
194,237

 
257,384

Total Bank of Arkansas
 
246,046

 
240,487

 
231,066

 
212,750

 
279,193

 
 
 
 
 
 
 
 
 
 
 
Colorado State Bank & Trust:
 
 
 
 
 
 
 
 
 
 
Demand
 
330,641

 
301,646

 
311,057

 
272,565

 
217,394

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
627,015

 
465,276

 
476,718

 
511,993

 
520,743

Savings
 
24,689

 
24,202

 
23,409

 
22,771

 
22,599

Time
 
476,564

 
491,280

 
498,124

 
523,969

 
547,481

Total interest-bearing
 
1,128,268

 
980,758

 
998,251

 
1,058,733

 
1,090,823

Total Colorado State Bank & Trust
 
1,458,909

 
1,282,404

 
1,309,308

 
1,331,298

 
1,308,217

 
 
 
 
 
 
 
 
 
 
 

- 52 -



Table 34 – Period-end Deposits by Principal Market Area
(In thousands)
 
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
Bank of Arizona:
 
 
 
 
 
 
 
 
 
 
Demand
 
151,738

 
137,313

 
131,539

 
106,741

 
138,971

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
298,048

 
113,310

 
95,010

 
104,961

 
101,933

Savings
 
2,201

 
2,313

 
1,772

 
1,192

 
1,366

Time
 
33,169

 
31,539

 
34,199

 
37,641

 
40,007

Total interest-bearing
 
333,418

 
147,162

 
130,981

 
143,794

 
143,306

Total Bank of Arizona
 
485,156

 
284,475

 
262,520

 
250,535

 
282,277

 
 
 
 
 
 
 
 
 
 
 
Bank of Kansas City:
 
 
 
 
 
 
 
 
 
 
Demand
 
201,393

 
160,829

 
68,469

 
51,004

 
46,773

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
103,628

 
69,083

 
57,666

 
123,449

 
108,973

Savings
 
660

 
581

 
505

 
545

 
503

Time
 
27,202

 
26,307

 
26,657

 
30,086

 
33,697

Total interest-bearing
 
131,490

 
95,971

 
84,828

 
154,080

 
143,173

Total Bank of Kansas City
 
332,883

 
256,800

 
153,297

 
205,084

 
189,946

Total BOK Financial deposits
 
$
19,142,867

 
$
18,362,197

 
$
18,523,287

 
$
18,762,580

 
$
18,439,022


In addition to deposits, subsidiary bank liquidity is provided primarily by federal funds purchased, securities repurchase agreements and Federal Home Loan Bank borrowings. Federal funds purchased consist primarily of unsecured, overnight funds acquired from other financial institutions. Funds are primarily purchased from bankers’ banks and Federal Home Loan banks from across the country. The largest single source of federal funds purchased totaled $330 million at September 30, 2012. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale securities. Federal Home Loan Bank borrowings are generally short term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and mortgage-backed securities, 1-4 family residential mortgage loans, multifamily and other qualifying commercial real estate loans). Amounts borrowed from the Federal Home Loan Bank of Topeka averaged $50 million during the quarter.

At September 30, 2012, the estimated unused credit available to the subsidiary bank from collateralized sources was approximately $9.3 billion.

A summary of other borrowing by the subsidiary bank follows in Table 35.

- 53 -



Table 35 – Other Borrowings
(In thousands)
 
 
 
 
Three Months Ended
 
 
 
Three Months Ended
 
 
 
 
September 30, 2012
 
 
 
June 30, 2012
 
 
September 30, 2012
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
June 30, 2012
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
Parent Company and Other Non-Bank Subsidiaries - Other debt
 
$
—

 
$
—

 
—
%
 
$
—

 
$
—

 
$
279

 
—
%
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subsidiary Bank:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds purchased
 
1,680,626

 
1,678,006

 
0.15
%
 
1,810,793

 
1,453,750

 
1,740,354

 
0.16
%
 
1,675,049

Repurchase agreements
 
1,109,696

 
1,112,847

 
0.10
%
 
1,123,284

 
1,136,948

 
1,095,298

 
0.10
%
 
1,136,948

Federal Home Loan Bank advances
 
602,197

 
50,001

 
0.25
%
 
602,197

 
3,947

 
32,198

 
0.39
%
 
253,647

Subordinated debentures
 
347,592

 
352,432

 
2.79
%
 
353,396

 
353,378

 
357,609

 
3.95
%
 
355,452

GNMA repurchase liability
 
20,747

 
30,321

 
5.63
%
 
33,881

 
37,397

 
37,513

 
5.98
%
 
37,864

Other
 
16,310

 
16,681

 
5.02
%
 
16,762

 
16,712

 
16,677

 
4.58
%
 
16,713

Total Subsidiary Bank
 
3,777,168

 
3,240,288

 
0.51
%
 
 
 
3,002,132

 
3,279,649

 
0.65
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Other Borrowings
 
$
3,777,168

 
$
3,240,288

 
0.51
%
 
 
 
$
3,002,132

 
$
3,279,928

 
0.65
%
 
 
In 2007, the Company issued $250 million of subordinated debt due May 15, 2017 to fund the Worth National Bank and First United Bank acquisitions and fund continued asset growth. Interest on this debt was based on a fixed rate of 5.75% through May 14, 2012 which then converted to a floating rate of three-month LIBOR plus 0.69%. At September 30, 2012, $227 million of this subordinated debt remains outstanding.
Parent Company

The primary sources of liquidity for BOK Financial are cash on hand and dividends from the subsidiary bank. Dividends from the subsidiary bank are limited by various banking regulations to net profits, as defined, for the year plus retained profits for the two preceding years. Dividends are further restricted by minimum capital requirements. At September 30, 2012, based on the most restrictive limitations as well as management’s internal capital policy, the subsidiary bank could declare up to $242 million of dividends without regulatory approval. Future losses or increases in required regulatory capital at the subsidiary bank could affect its ability to pay dividends to the parent company.

The Company has a $100 million senior unsecured 364 day revolving credit facility with Wells Fargo Bank, National Association, administrative agent and other commercial banks (“the Credit Facility”). Interest on amounts outstanding under the Credit Facility is to be paid at a defined base rate minus 1.25% or LIBOR plus 1.25% based upon the Company’s option. Interest on amounts borrowed for certain acquisitions converted to a term loan at the Company's option is to be paid at a defined base rate minus 1.25% or LIBOR plus 1.50%. A commitment fee equal to 0.20% shall be paid quarterly on the unused portion of the credit commitment under the Credit Facility and there are no prepayment penalties. Any amounts outstanding at the end of the Credit Facility term shall be converted into a term loan which, except for amounts borrowed for certain acquisitions, shall be payable June 7, 2013. The Credit Agreement contains customary representations and warranties, as well as affirmative and negative covenants including limits on the Company’s ability to borrow additional funds, make investments and sell assets. These covenants also require BOKF to maintain minimum capital levels. No amounts were outstanding under the Credit Facility at September 30, 2012 and the Company met all of the covenants.

Our equity capital at September 30, 2012 was $3.0 billion, up $90 million over June 30, 2012. Net income less cash dividends

- 54 -



paid increased equity $62 million during the third quarter of 2012. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings, asset growth and acquisition strategies, and regulatory and debt covenant requirements. Capital management may include subordinated debt issuance, share repurchase and stock and cash dividends.

On April 24, 2012, the Board of Directors authorized the Company to purchase up to two million shares of our common stock. The specific timing and amount of shares repurchased will vary based on market conditions, regulatory limitations and other factors. Repurchases may be made over time in open market or privately negotiated transactions. The repurchase program may be suspended or discontinued at any time without prior notice. As of September 30, 2012, the Company has repurchased 39,496 shares for $2.1 million under this program. No shares were repurchased in the third quarter of 2012.

BOK Financial and subsidiary bank are subject to various capital requirements administered by federal agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that could have a material impact on operations. These capital requirements include quantitative measures of assets, liabilities and off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulators.

For a banking institution to qualify as well capitalized, its Tier 1, Total and Leverage capital ratios must be at least 6%, 10% and 5%, respectively. The Company’s banking subsidiary exceeded the regulatory definitions of well capitalized. The capital ratios for BOK Financial on a consolidated basis are presented in Table 36.

Table 36 – Capital Ratios
 
 
Well Capitalized
Minimums
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
Average total equity to average assets
 
—

 
11.08
%
 
11.23
%
 
11.11
%
 
10.81
%
 
11.12
%
Tangible common equity ratio
 
—

 
9.67
%
 
10.07
%
 
9.75
%
 
9.56
%
 
9.65
%
Tier 1 common equity ratio
 
—

 
13.01
%
 
13.41
%
 
12.83
%
 
13.06
%
 
12.93
%
Risk-based capital:
 
 

 
 
 
 
 
 
 
 

 
 

Tier 1 capital
 
6.00
%
 
13.21
%
 
13.62
%
 
13.03
%
 
13.27
%
 
13.14
%
Total capital
 
10.00
%
 
15.71
%
 
16.19
%
 
16.16
%
 
16.49
%
 
16.55
%
Leverage
 
5.00
%
 
9.34
%
 
9.64
%
 
9.35
%
 
9.15
%
 
9.37
%
In June, banking regulators issued a Notice of Proposed Rulemaking that will incorporate Basel III capital changes for substantially all U.S. banking organizations. If adopted as proposed, these changes will establish a 7% threshold for the Tier 1 common equity ratio consisting of a minimum level plus capital conservation buffer. BOK Financial's Tier 1 common equity ratio based on the existing Basel I standards was 13.01% as of September 30, 2012. Our estimated Tier 1 common equity ratio under a fully phased in Basel III framework is approximately 12.35%, nearly 535 basis points above the 7% regulatory threshold. This estimate is subject to interpretation of rules that are not yet final. Additionally, the proposed definition of Tier 1 common equity includes unrealized gains and losses on available for sale securities which are subject to changes from market conditions and inherently volatile.

Capital resources of financial institutions are also regularly measured by the tangible common shareholders’ equity ratio. Tangible common shareholders’ equity is shareholders’ equity as defined by generally accepted accounting principles in the United States of America (“GAAP”) less intangible assets and equity which does not benefit common shareholders. Equity that does not benefit common shareholders includes preferred equity. Tier 1 common equity is tier 1 equity as defined by banking regulations, adjusted for other comprehensive income (loss) and equity which does not benefit common shareholders. These non-GAAP measures are valuable indicators of a financial institution’s capital strength since it eliminates intangible assets from shareholders’ equity and retains the effect of unrealized losses on securities and other components of accumulated other comprehensive income in shareholders’ equity.

In accordance with the Dodd-Frank Act, the Federal Reserve must publish regulations that require bank holding companies with $10 billion to $50 billion in assets to perform annual capital stress tests. We expect to be subject to such regulations when they are finalized and effective. The resulting capital stress test process may place constraints on capital distributions or increases in required regulatory capital under certain circumstances.

Table 37 following provides a reconciliation of the non-GAAP measures with financial measures defined by GAAP.


- 55 -



Table 37 – Non-GAAP Measures
(Dollars in thousands)
 
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
Tangible common equity ratio:
 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
$
2,975,657

 
$
2,885,934

 
$
2,834,419

 
$
2,750,468

 
$
2,732,592

Less: Goodwill and intangible assets, net
 
392,158

 
344,699

 
345,246

 
345,820

 
346,716

Tangible common equity
 
2,583,499

 
2,541,235

 
2,489,173

 
2,404,648

 
2,385,876

Total assets
 
27,117,641

 
25,576,046

 
25,884,173

 
25,493,946

 
25,066,265

Less: Goodwill and intangible assets, net
 
392,158

 
344,699

 
345,246

 
345,820

 
346,716

Tangible assets
 
$
26,725,483

 
$
25,231,347

 
$
25,538,927

 
$
25,148,126

 
$
24,719,549

Tangible common equity ratio
 
9.67
%
 
10.07
%
 
9.75
%
 
9.56
%
 
9.65
%
Tier 1 common equity ratio:
 
 
 
 
 
 
 
 

 
 

Tier 1 capital
 
$
2,436,791

 
$
2,418,985

 
$
2,344,779

 
$
2,295,061

 
$
2,247,576

Less: Non-controlling interest
 
36,818

 
36,787

 
35,982

 
36,184

 
34,958

Tier 1 common equity
 
2,399,973

 
2,382,198

 
2,308,797

 
2,258,877

 
2,212,618

Risk weighted assets
 
$
18,448,854

 
$
17,758,118

 
$
17,993,379

 
$
17,291,105

 
$
17,106,533

Tier 1 common equity ratio
 
13.01
%
 
13.41
%
 
12.83
%

13.06
%
 
12.93
%

Off-Balance Sheet Arrangements

See Note 8 to the Consolidated Financial Statements for a discussion of the Company’s significant off-balance sheet commitments.
Market Risk

Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading. Market risk excludes changes in fair value due to credit of the individual issuers of financial instruments.

BOK Financial is subject to market risk primarily through the effect of changes in interest rates on both its assets held for purposes other than trading and trading assets. The effects of other changes, such as foreign exchange rates, commodity prices or equity prices do not pose significant market risk to BOK Financial. BOK Financial has no material investments in assets that are affected by changes in foreign exchange rates or equity prices. Energy and agricultural product derivative contracts, which are affected by changes in commodity prices, are matched against offsetting contracts as previously discussed.

The Asset / Liability Committee is responsible for managing market risk in accordance with policy guidelines established by the Board of Directors. The Committee monitors projected variation in net interest revenue, net interest income and economic value of equity due to specified changes in interest rates. The internal policy limit for net interest revenue variation is a maximum decline of 5% to an up or down 200 basis point change over twelve months. These guidelines also set maximum levels for short-term borrowings, short-term assets, public funds and brokered deposits and establish minimum levels for unpledged assets, among other things. Compliance with these internal guidelines is reviewed monthly.
Interest Rate Risk – Other than Trading
 
As previously noted in the Net Interest Revenue section of this report, management has implemented strategies to manage the Company’s balance sheet to have relatively limited exposure to changes in interest rates over a twelve-month period. The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model. BOK Financial performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions, on net interest revenue, net income and economic value of equity. A simulation model is used to estimate the effect of changes in interest rates over the next 12 months and longer time periods based on multiple interest rate scenarios. Two specified interest rate scenarios are used to evaluate interest rate risk against policy guidelines. The first assumes a sustained parallel 200 basis point increase and the second assumes a sustained parallel 50 basis point decrease in

- 56 -



interest rates. Management historically evaluated interest rate sensitivity for a sustained 200 basis point decrease in interest rates. However, the results of a 200 basis point decrease in interest rates in the current low-rate environment are not meaningful.

The Company’s primary interest rate exposures included the Federal Funds rate, which affects short-term borrowings, and the prime lending rate and LIBOR, which are the basis for much of the variable rate loan pricing. Additionally, residential mortgage rates directly affect the prepayment speeds for residential mortgage-backed securities and mortgage servicing rights. Derivative financial instruments and other financial instruments used for purposes other than trading are included in this simulation. The model incorporates assumptions regarding the effects of changes in interest rates and account balances on indeterminable maturity deposits based on a combination of historical analysis and expected behavior. The impact of planned growth and new business activities is factored into the simulation model. The effects of changes in interest rates on the value of mortgage servicing rights are excluded from Table 38 due to the extreme volatility over such a large rate range and our active risk management approach for that asset. The effects of interest rate changes on the value of mortgage servicing rights and financial instruments identified as economic hedges are presented in Note 6 to the Consolidated Financial Statements.

The simulations used to manage market risk are based on numerous assumptions regarding the effects of changes in interest rates on the timing and extent of re-pricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest revenue, net income or economic value of equity or precisely predict the impact of higher or lower interest rates on net interest revenue, net income or economic value of equity. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, market conditions and management strategies, among other factors.
 
Table 38 – Interest Rate Sensitivity
(Dollars in thousands)
 
 
200 bp Increase
 
50 bp Decrease
 
 
2012
 
2011
 
2012
 
2011
Anticipated impact over the next twelve months on net interest revenue
 
$
31,403

 
$
48,492

 
$
(15,663
)
 
$
(15,715
)
 
 
4.76
%
 
7.34
%
 
(2.38
)%
 
(2.38
)%
Trading Activities

BOK Financial enters into trading activities both as an intermediary for customers and for its own account. As an intermediary, BOK Financial will take positions in securities, generally residential mortgage-backed securities, government agency securities and municipal bonds. These securities are purchased for resale to customers, which include individuals, corporations, foundations and financial institutions. On a limited basis, BOK Financial may also take trading positions in U.S. Treasury securities, residential mortgage-backed securities, municipal bonds and derivative contracts to enhance returns on its securities portfolios. Both of these activities involve interest rate risk. BOKF Financial has an insignificant exposure to foreign exchange risk and does not take positions in commodity derivatives.

A variety of methods are used to manage the interest rate risk of trading activities. These methods include daily marking of all positions to market value, independent verification of inventory pricing, and position limits for each trading activity. Hedges in either the futures or cash markets may be used to reduce the risk associated with some trading programs.

Management uses a Value at Risk (“VAR”) methodology to measure the market risk due to changes in interest rates inherent in its trading activities. VAR is calculated based upon historical simulations over the past five years using a variance / covariance matrix of interest rate changes, a 10 business day holding period and a 99% confidence interval. It represents an amount of market loss that is likely to be exceeded in only one out of every 100 two-week periods. Trading positions are managed within guidelines approved by the Board of Directors. These guidelines limit the VAR to $7.3 million. There were no instances of VAR being exceeded during the three and nine months ended September 30, 2012 and 2011. At September 30, 2012, there were no trading positions for the purposes of enhancing returns on the Company's securities portfolio.

The average, high and low VAR amounts for the three and nine months ended September 30, 2012 and 2011 are as follows in Table 39.


- 57 -



Table 39 – Value at Risk (VAR)
(in thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
Average
$
3,072

 
$
2,597

 
$
2,776

 
$
2,366

High
5,193

 
3,683

 
5,193

 
5,507

Low
1,707

 
1,326

 
1,088

 
1,326

Controls and Procedures
 
As required by Rule 13a-15(b), BOK Financial’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by their report, of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13a-15(d), BOK Financial’s management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal controls over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.
Forward-Looking Statements

This report contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates, and projections about BOK Financial, the financial services industry and the economy in general. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “plans,” “projects,” variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the provision and allowance for loan losses involve judgments as to expected events and are inherently forward-looking statements. Assessments that BOK Financial’s acquisitions and other growth endeavors will be profitable are necessary statements of belief as to the outcome of future events, based in part on information provided by others that BOK Financial has not independently verified. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied, or forecasted in such forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to: (1) the ability to fully realize expected cost savings from mergers within the expected time frames, (2) the ability of other companies on which BOK Financial relies to provide goods and services in a timely and accurate manner, (3) changes in interest rates and interest rate relationships, (4) demand for products and services, (5) the degree of competition by traditional and nontraditional competitors, (6) changes in banking regulations, tax laws, prices, levies, and assessments, (7) the impact of technological advances and (8) trends in customer behavior as well as their ability to repay loans. BOK Financial and its affiliates undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events or otherwise.


- 58 -



Consolidated Statements of Earnings (Unaudited)
(In thousands, except share and per share data)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Interest revenue
 
2012
 
2011
 
2012
 
2011
Loans
 
$
126,248

 
$
127,914

 
$
384,406

 
$
375,484

Residential mortgage loans held for sale
 
2,310

 
1,616

 
5,862

 
4,460

Trading securities
 
555

 
471

 
1,219

 
1,319

Taxable securities
 
4,124

 
2,759

 
12,840

 
7,904

Tax-exempt securities
 
764

 
1,061

 
2,662

 
3,781

Total investment securities
 
4,888

 
3,820

 
15,502

 
11,685

Taxable securities
 
59,482

 
66,040

 
180,721

 
205,032

Tax-exempt securities
 
699

 
584

 
1,931

 
1,791

Total available for sale securities
 
60,181

 
66,624

 
182,652

 
206,823

Fair value option securities
 
1,886

 
5,299

 
7,684

 
13,772

Funds sold and resell agreements
 
3

 
5

 
9

 
12

Total interest revenue
 
196,071

 
205,749

 
597,334

 
613,555

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
15,917

 
22,407

 
49,805

 
69,609

Borrowed funds
 
1,652

 
2,331

 
5,033

 
7,177

Subordinated debentures
 
2,475

 
5,627

 
11,539

 
16,745

Total interest expense
 
20,044

 
30,365

 
66,377

 
93,531

Net interest revenue
 
176,027

 
175,384

 
530,957

 
520,024

Provision for credit losses
 
—

 
—

 
(8,000
)
 
8,950

Net interest revenue after provision for credit losses
 
176,027

 
175,384

 
538,957

 
511,074

Other operating revenue
 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
31,261

 
29,451

 
94,972

 
78,552

Transaction card revenue
 
27,788

 
31,328

 
79,976

 
90,797

Trust fees and commissions
 
19,654

 
17,853

 
58,023

 
55,425

Deposit service charges and fees
 
25,148

 
24,614

 
74,743

 
70,951

Mortgage banking revenue
 
50,266

 
29,493

 
122,892

 
66,205

Bank-owned life insurance
 
2,707

 
2,761

 
8,416

 
8,496

Other revenue
 
9,476

 
10,535

 
26,062

 
26,709

Total fees and commissions
 
166,300

 
146,035

 
465,084

 
397,135

Gain (loss) on assets, net
 
125

 
351

 
(341
)
 
2,474

Gain on derivatives, net
 
464

 
4,048

 
336

 
2,860

Gain on fair value option securities, net
 
6,192

 
17,788

 
11,311

 
24,191

Gain on available for sale securities, net
 
7,967

 
16,694

 
32,779

 
27,064

Total other-than-temporary impairment losses
 
—

 
(9,467
)
 
(640
)
 
(9,541
)
Portion of loss reclassified from other comprehensive income
 
(1,104
)
 
(1,833
)
 
(5,044
)
 
(11,182
)
Net impairment losses recognized in earnings
 
(1,104
)
 
(11,300
)
 
(5,684
)
 
(20,723
)
Total other operating revenue
 
179,944

 
173,616

 
503,485

 
433,001

Other operating expense
 
 

 
 

 
 

 
 

Personnel
 
122,775

 
103,260

 
359,841

 
308,857

Business promotion
 
6,054

 
5,280

 
17,188

 
14,681

Contribution to BOKF Charitable Foundation
 
—

 
4,000

 
—

 
4,000

Professional fees and services
 
7,991

 
7,418

 
23,933

 
21,134

Net occupancy and equipment
 
16,914

 
16,627

 
49,843

 
47,785

Insurance
 
3,690

 
2,206

 
11,567

 
13,163

Data processing and communications
 
26,486

 
24,446

 
73,894

 
71,377

Printing, postage and supplies
 
3,611

 
3,780

 
10,825

 
10,448

Net losses and expenses of repossessed assets
 
5,706

 
5,939

 
13,863

 
17,813

Amortization of intangible assets
 
742

 
896

 
1,862

 
2,688

Mortgage banking costs
 
11,566

 
9,349

 
30,312

 
24,788

Change in fair value of mortgage servicing rights
 
9,576

 
24,822

 
13,899

 
35,186

Other expense
 
7,229

 
12,512

 
20,460

 
29,120

Total other operating expense
 
222,340

 
220,535

 
627,487

 
601,040

Income before taxes
 
133,631

 
128,465

 
414,955

 
343,035

Federal and state income tax
 
45,778

 
43,006

 
144,447

 
121,115

Net income
 
87,853

 
85,459

 
270,508

 
221,920

Net income attributable to non-controlling interest
 
471

 
358

 
1,882

 
3,038

Net income attributable to BOK Financial Corp. shareholders
 
$
87,382

 
$
85,101

 
$
268,626

 
$
218,882

Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
1.28

 
$
1.24

 
$
3.94

 
$
3.20

Diluted
 
$
1.27

 
$
1.24

 
$
3.92

 
$
3.19

Average shares used in computation:
 
 

 
 

 
 

 
 

Basic
 
67,966,700

 
67,827,591

 
67,704,343

 
67,875,875

Diluted
 
68,334,989

 
68,037,419

 
67,981,558

 
68,127,754

Dividends declared per share
 
$
0.38

 
$
0.275

 
$
1.09

 
$
0.800

 See accompanying notes to consolidated financial statements.

- 59 -



.
Consolidated Statements of Comprehensive Income (Unaudited)
 
 
 
 
(In thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
Net income
 
$
87,853

 
$
85,459

 
$
270,508

 
$
221,920

Other comprehensive income before income taxes:
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
46,064

 
33,810

 
86,098

 
97,753

Other–than–temporary impairment losses recognized in earnings
 
1,104

 
11,300

 
5,684

 
20,723

Reclassification adjustment for net gains realized and included in earnings
 
(7,899
)
 
(16,620
)
 
(32,380
)
 
(26,834
)
Amortization of unrealized gain on investment securities transferred from available for sale
 
(2,009
)
 
—

 
(5,430
)
 
—

Other comprehensive income before income taxes
 
37,260

 
28,490

 
53,972

 
91,642

Income tax expense
 
(14,057
)
 
(11,174
)
 
(20,558
)
 
(35,910
)
Other comprehensive income, net of income taxes
 
23,203

 
17,316

 
33,414

 
55,732

Comprehensive income
 
111,056

 
102,775

 
303,922

 
277,652

Comprehensive income attributable to non-controlling interests
 
471

 
358

 
1,882

 
3,038

Comprehensive income attributed to BOK Financial Corp. shareholders
 
110,585

 
102,417

 
302,040

 
274,614


See accompanying notes to consolidated financial statements.

- 60 -



Consolidated Balance Sheets
(In thousands, except share data)
 
 
 
 
 
 
 
 
September 30,
2012
 
Dec 31,
2011
 
September 30,
2011
 
 
(Unaudited)
 
(Footnote 1)
 
(Unaudited)
Assets
 
 
 
 
 
 
Cash and due from banks
 
$
596,590

 
$
976,191

 
$
953,688

Funds sold and resell agreements
 
18,904

 
10,174

 
19,193

Trading securities
 
204,242

 
76,800

 
109,659

Investment securities (fair value:  Sept. 30, 2012 – $460,358; December 31, 2011 - $462,657; Sept. 30, 2011 – $483,234)
 
432,114

 
439,236

 
452,652

Available for sale securities
 
11,506,434

 
10,179,365

 
9,619,631

Fair value option securities
 
331,887

 
651,226

 
672,191

Residential mortgage loans held for sale
 
325,102

 
188,125

 
256,397

Loans
 
11,832,367

 
11,269,743

 
11,124,569

Less allowance for loan losses
 
(233,756
)
 
(253,481
)
 
(271,456
)
Loans, net of allowance
 
11,598,611

 
11,016,262

 
10,853,113

Premises and equipment, net
 
259,195

 
262,735

 
264,325

Receivables
 
116,243

 
123,257

 
111,427

Goodwill
 
358,962

 
335,601

 
335,601

Intangible assets, net
 
33,196

 
10,219

 
11,115

Mortgage servicing rights, net
 
89,653

 
86,783

 
87,948

Real estate and other repossessed assets
 
104,128

 
122,753

 
127,943

Bankers’ acceptances
 
1,605

 
1,881

 
211

Derivative contracts
 
435,653

 
293,859

 
370,616

Cash surrender value of bank-owned life insurance
 
271,830

 
263,318

 
260,506

Receivable on unsettled securities trades
 
32,480

 
75,151

 
172,641

Other assets
 
400,812

 
381,010

 
387,408

Total assets
 
$
27,117,641

 
$
25,493,946

 
$
25,066,265

 
 
 
 
 
 
 
Noninterest-bearing demand deposits
 
$
6,848,401

 
$
5,799,785

 
$
5,414,284

Interest-bearing deposits:
 
 

 
 

 
 

Transaction
 
9,002,567

 
9,354,456

 
9,252,837

Savings
 
269,573

 
226,357

 
217,431

  Time
 
3,022,326

 
3,381,982

 
3,554,470

Total deposits
 
19,142,867

 
18,762,580

 
18,439,022

Funds purchased
 
1,680,626

 
1,063,318

 
1,318,668

Repurchase agreements
 
1,109,696

 
1,233,064

 
1,206,793

Other borrowings
 
639,254

 
74,485

 
80,276

Subordinated debentures
 
347,592

 
398,881

 
398,834

Accrued interest, taxes and expense
 
182,410

 
149,508

 
155,188

Bankers’ acceptances
 
1,605

 
1,881

 
211

Derivative contracts
 
254,422

 
653,371

 
341,822

Due on unsettled securities trades
 
556,998

 
236,522

 
218,097

Other liabilities
 
189,696

 
133,684

 
139,804

Total liabilities
 
24,105,166

 
22,707,294

 
22,298,715

Shareholders' equity:
 
 

 
 

 
 

Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: Sept. 30, 2012 – 72,223,473; December 31, 2011 – 71,533,354; Sept. 30, 2011 – 71,154,137)
 
4

 
4

 
4

Capital surplus
 
849,390

 
818,817

 
799,272

Retained earnings
 
2,148,292

 
1,953,332

 
1,908,574

Treasury stock (shares at cost:  Sept. 30, 2012 – 4,008,119; December 31, 2011 – 3,380,310;  Sept. 30, 2011 – 3,147,747)
 
(184,422
)
 
(150,664
)
 
(138,829
)
Accumulated other comprehensive income
 
162,393

 
128,979

 
163,571

Total shareholders’ equity
 
2,975,657

 
2,750,468

 
2,732,592

Non-controlling interest
 
36,818

 
36,184

 
34,958

Total equity
 
3,012,475

 
2,786,652

 
2,767,550

Total liabilities and equity
 
$
27,117,641

 
$
25,493,946

 
$
25,066,265


See accompanying notes to consolidated financial statements.

- 61 -



Consolidated Statements of Changes in Equity (Unaudited)
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Accumulated
Other
Comprehensive
Income(Loss)
 
Capital
Surplus
 
Retained
Earnings
 
Treasury Stock
 
Total
Shareholders’
Equity
 
Non-
Controlling
Interest
 
Total
 
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2010
 
70,816

 
$
4

 
$
107,839

 
$
782,805

 
$
1,743,880

 
2,608

 
$
(112,802
)
 
$
2,521,726

 
$
22,152

 
$
2,543,878

Net income
 
—

 
—

 
—

 
—

 
218,882

 
—

 
—

 
218,882

 
3,038

 
221,920

Other comprehensive income
 
—

 
—

 
55,732

 
—

 
—

 
—

 
—

 
55,732

 
—

 
55,732

Treasury stock purchases
 
—

 
—

 
—

 
—

 
—

 
492

 
(22,866
)
 
(22,866
)
 
—

 
(22,866
)
Exercise of stock options
 
338

 
—

 
—

 
8,842

 
—

 
48

 
(3,161
)
 
5,681

 
—

 
5,681

Tax benefit on exercise of stock options
 
—

 
—

 
—

 
494

 
—

 
—

 
—

 
494

 
—

 
494

Stock-based compensation
 
—

 
—

 
—

 
7,131

 
—

 
—

 
—

 
7,131

 
—

 
7,131

Cash dividends on common stock
 
—

 
—

 
—

 
—

 
(54,188
)
 
—

 
—

 
(54,188
)
 
—

 
(54,188
)
Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
9,768

 
9,768

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2011
 
71,154

 
$
4

 
$
163,571

 
$
799,272

 
$
1,908,574

 
3,148

 
$
(138,829
)
 
$
2,732,592

 
$
34,958

 
$
2,767,550

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2011
 
71,533

 
$
4

 
$
128,979

 
$
818,817

 
$
1,953,332

 
3,380

 
$
(150,664
)
 
$
2,750,468

 
$
36,184

 
$
2,786,652

Net income
 
—

 
—

 
—

 
—

 
268,626

 
—

 
—

 
268,626

 
1,882

 
270,508

Other comprehensive income
 
—

 
—

 
33,414

 
—

 
—

 
—

 
—

 
33,414

 
—

 
33,414

Treasury stock purchases
 
—

 
—

 
—

 
—

 
—

 
384

 
(20,558
)
 
(20,558
)
 
—

 
(20,558
)
Exercise of stock options
 
690

 
—

 
—

 
24,726

 
—

 
244

 
(13,200
)
 
11,526

 
—

 
11,526

Tax benefit on exercise of stock options
 
—

 
—

 
—

 
(487
)
 
—

 
—

 
—

 
(487
)
 
—

 
(487
)
Stock-based compensation
 
—

 
—

 
—

 
6,334

 
—

 
—

 
—

 
6,334

 
—

 
6,334

Cash dividends on common stock
 
—

 
—

 
—

 
—

 
(73,666
)
 
—

 
—

 
(73,666
)
 
—

 
(73,666
)
Acquisition of minority interest
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,645

 
1,645

Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,893
)
 
(2,893
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2012
 
72,223

 
$
4

 
$
162,393

 
$
849,390

 
$
2,148,292

 
4,008

 
$
(184,422
)
 
$
2,975,657

 
$
36,818

 
$
3,012,475


See accompanying notes to consolidated financial statements.

- 62 -



Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Nine Months Ended
 
 
September 30,
 
 
2012
 
2011
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
270,508

 
$
221,920

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Provision for credit losses
 
(8,000
)
 
8,950

Change in fair value of mortgage servicing rights
 
13,899

 
35,186

Unrealized (gains) losses from derivatives
 
(2,665
)
 
(3,898
)
Tax benefit on exercise of stock options
 
487

 
(494
)
Change in bank-owned life insurance
 
(8,416
)
 
(8,496
)
Stock-based compensation
 
6,334

 
7,131

Depreciation and amortization
 
37,452

 
36,877

Net amortization of securities discounts and premiums
 
68,579

 
76,839

Net realized gains on financial instruments and other assets
 
(104,893
)
 
(6,992
)
Mortgage loans originated for resale
 
(2,634,809
)
 
(1,540,735
)
Proceeds from sale of mortgage loans held for resale
 
2,590,960

 
1,555,075

Capitalized mortgage servicing rights
 
(29,754
)
 
(17,966
)
Change in trading and fair value option securities
 
189,182

 
(298,334
)
Change in receivables
 
7,328

 
37,513

Change in other assets
 
(5,747
)
 
33,880

Change in accrued interest, taxes and expense
 
29,220

 
69,507

Change in other liabilities
 
28,980

 
(53,478
)
Net cash provided by operating activities
 
448,645

 
152,485

Cash Flows From Investing Activities:
 
 

 
 

Proceeds from maturities or redemptions of investment securities
 
67,571

 
54,639

Proceeds from maturities or redemptions of available for sale securities
 
3,444,670

 
2,698,067

Purchases of investment securities
 
(60,542
)
 
(37,085
)
Purchases of available for sale securities
 
(6,412,356
)
 
(5,238,649
)
Proceeds from sales of available for sale securities
 
1,660,876

 
2,058,661

Change in amount receivable on unsettled securities transactions
 
42,671

 
(37,582
)
Loans originated net of principal collected
 
(594,261
)
 
(457,430
)
Net proceeds from (payments on) derivative asset contracts
 
(108,296
)
 
(45,449
)
Acquisitions, net of cash acquired
 
(28,671
)
 
—

Proceeds from disposition of assets
 
135,760

 
91,410

Purchases of assets
 
(77,032
)
 
(52,857
)
Net cash used in investing activities
 
(1,929,610
)
 
(966,275
)
Cash Flows From Financing Activities:
 
 

 
 

Net change in demand deposits, transaction deposits and savings accounts
 
739,943

 
1,214,659

Net change in time deposits
 
(359,656
)
 
45,462

Net change in other borrowings
 
974,189

 
(670,791
)
Repayment of subordinated debt
 
(53,787
)
 
—

Net payments or proceeds on derivative liability contracts
 
90,646

 
42,849

Net change in derivative margin accounts
 
(101,683
)
 
(101,705
)
Change in amount due on unsettled security transactions
 
(96,373
)
 
57,672

Issuance of common and treasury stock, net
 
11,526

 
5,681

Tax benefit on exercise of stock options
 
(487
)
 
494

Repurchase of common stock
 
(20,558
)
 
(22,866
)
Dividends paid
 
(73,666
)
 
(54,188
)
Net cash provided by (used in) financing activities
 
1,110,094

 
517,267

Net decrease in cash and cash equivalents
 
(370,871
)
 
(296,523
)
Cash and cash equivalents at beginning of period
 
986,365

 
1,269,404

Cash and cash equivalents at end of period
 
$
615,494

 
$
972,881

 
 
 
 
 
Cash paid for interest
 
$
66,819

 
$
87,638

Cash paid for taxes
 
$
113,663

 
$
115,518

Net loans and bank premises transferred to repossessed real estate and other assets
 
$
97,142

 
$
57,651

Increase in U.S. government guaranteed loans eligible for repurchase
 
$
84,520

 
$
110,744

Increase in receivables from conveyance of other real estate owned guaranteed by U.S. government agencies
 
$
65,344

 
$
—


See accompanying notes to consolidated financial statements.

- 63 -



Notes to Consolidated Financial Statements (Unaudited)

(1) Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of BOK Financial Corporation (“BOK Financial” or “the Company”) have been prepared in accordance with accounting principles for interim financial information generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The unaudited consolidated financial statements include accounts of BOK Financial and its subsidiaries, principally BOKF, NA (“the Bank”), BOSC, Inc., and Cavanal Hill Investment Management Inc. Operating divisions of the Bank include Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust, Bank of Kansas City and the TransFund electronic funds network.

Certain reclassifications have been made to conform to the current period presentation.

The financial information should be read in conjunction with BOK Financial’s 2011 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. Amounts presented as of December 31, 2011 have been derived from the audited financial statements included in BOK Financial’s 2011 Form 10-K but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  Operating results for the three-month and six-month periods ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board (“FASB”)

FASB Accounting Standards Update No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements (“ASU 2011-03”)

On April 29, 2011, the FASB issued ASU 2011-03 that eliminates the collateral maintenance requirement under GAAP for entities to consider in determining whether a transfer of financial assets subject to a repurchase agreement is accounted for as a sale or as a secured borrowing. ASU 2011-03 was effective for the Company January 1, 2012 and did not have a material impact on the Company’s consolidated financial statements.

FASB Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820):  Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04")

On May 12, 2011, the FASB issued ASU 2011-04 to provide clarified and converged guidance on fair value measurement and expand disclosures concerning fair value measurements. ASU 2011-04 is largely consistent with the existing fair value measurement principles contained in ASC 820, Fair Value Measurement. ASU 2011-04 was effective for the Company January 1, 2012.

FASB Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220):  Presentation of Comprehensive Income (“ASU 2011-05”)

On June 16, 2011 the FASB issued ASU 2011-05 which revises the manner in which entities present comprehensive income in their financial statements by removing the presentation option in ASC 220, Comprehensive Income, and requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. ASU 2011-05 was effective for the Company January 1, 2012.


- 64 -



FASB Accounting Standards Update No. 2011-11, Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”)

On December 16, 2011, the FASB issued ASU 2011-11 which contains new disclosure requirements regarding the nature of an entity right of setoff and related arrangements associated with its financial instruments and derivative instruments. The new disclosures are anticipated to facilitate comparison between financial statements prepared under generally accepted accounting principles in the United States of America and financial statements prepared under International Financial Reporting Standards by providing information about gross and net exposures. The new disclosure requirements are effective for interim and annual reporting periods beginning on or after January 1, 2013.

FASB Accounting Standards Update No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards No. 2011-05 (“ASU 2011-12”)

On December 23, 2011, FASB issued ASU 2011-12, which defers the requirement in ASU 2011-05 for presentation of reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) in both net income and other comprehensive income on the face of the financial statements. This deferral will enable FASB to address certain concerns raised with regards to presentation requirements for reclassification adjustments. The amendment is effective at the same time as ASU 2011-05 which was effective for the Company on January 1, 2012.
(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities is as follows (in thousands):
 
 
 
September 30, 2012
 
December 31, 2011
 
September 30, 2011
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair
Value
 
Net Unrealized Gain (Loss)
U.S. Government agency obligations
 
$
3,100

 
$
1

 
$
22,203

 
$
63

 
$
1,839

 
$
(43
)
U.S. agency residential mortgage-backed securities
 
119,835

 
566

 
12,379

 
59

 
49,501

 
(97
)
Municipal and other tax-exempt securities
 
58,150

 
118

 
39,345

 
652

 
57,431

 
(100
)
Other trading securities
 
23,157

 
(1
)
 
2,873

 
9

 
888

 
(1
)
Total
 
$
204,242

 
$
684

 
$
76,800

 
$
783

 
$
109,659

 
$
(241
)
Investment Securities
 
The amortized cost and fair values of investment securities are as follows (in thousands):

 
 
September 30, 2012
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized2
 
 
Cost
 
Value1
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
155,144

 
$
155,144

 
$
159,464

 
$
4,329

 
$
(9
)
U.S. agency residential mortgage-backed securities – Other
 
85,699

 
91,911

 
95,128

 
3,356

 
(139
)
Other debt securities
 
185,059

 
185,059

 
205,766

 
20,737

 
(30
)
Total
 
$
425,902

 
$
432,114

 
$
460,358

 
$
28,422

 
$
(178
)
1 
Carrying value includes $6.2 million of net unrealized gain which remains in Accumulated other comprehensive income (“AOCI”) related to certain securities transferred from the Available for Sale securities portfolio to the Investment securities portfolio as discussed in greater detail following.
2 
Gross unrealized gains and losses are not recognized in AOCI in the Consolidated Balance Sheets.

- 65 -



 
 
December 31, 2011
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized2
 
 
Cost
 
Value1
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
128,697

 
$
128,697

 
$
133,670

 
$
4,975

 
$
(2
)
U.S. agency residential mortgage-backed securities – Other
 
110,062

 
121,704

 
120,536

 
602

 
(1,770
)
Other debt securities
 
188,835

 
188,835

 
208,451

 
19,616

 
—

Total
 
$
427,594

 
$
439,236

 
$
462,657

 
$
25,193

 
$
(1,772
)
1 
Carrying value includes $12 million of net unrealized gain which remains in Accumulated other comprehensive income (“AOCI”) in the Consolidated Balance Sheets related to certain securities transferred from the Available for Sale securities portfolio to the Investment securities portfolio as discussed in greater detail following.
2 
Gross unrealized gains and losses are not recognized in AOCI in the Consolidated Balance Sheets.
 
 
September 30, 2011
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized2
 
 
Cost
 
Value1
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
133,394

 
$
133,394

 
$
138,461

 
$
5,067

 
$
—

U.S. agency residential mortgage-backed securities – Other
 
117,669

 
130,668

 
130,614

 
165

 
(219
)
Other debt securities
 
188,590

 
188,590

 
214,159

 
25,569

 
—

Total
 
$
439,653

 
$
452,652

 
$
483,234

 
$
30,801

 
$
(219
)
1 
Carrying value includes $13 million of net unrealized gain which remains in Accumulated other comprehensive income (“AOCI”) in the Consolidated Balance Sheets related to certain securities transferred from the Available for Sale securities portfolio to the Investment securities portfolio as discussed in greater detail following.
2 
Gross unrealized gains and losses are not recognized in AOCI in the Consolidated Balance Sheets.

During the three months ended September 30, 2011, the Company transferred certain U.S. government agency residential mortgage-backed securities from the available for sale portfolio to the investment securities (held-to-maturity) portfolio as the Company has the positive intent and ability to hold these securities to maturity. No gains or losses were recognized in the Consolidated Statement of Earnings at the time of the transfer. Transfers of debt securities into the investment securities portfolio (held-to-maturity) are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in accumulated other comprehensive income and in the carrying value of the investment securities portfolio.  Such amounts are amortized over the estimated remaining life of the security as an adjustment to yield, offsetting the related amortization of the premium or accretion of the discount on the transferred securities. At the time of transfer, the fair value totaled $131 million, amortized cost totaled $118 million and the pretax unrealized gain totaled $13 million.


- 66 -



The amortized cost and fair values of investment securities at September 30, 2012, by contractual maturity, are as shown in the following table (dollars in thousands):
 
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 
Total
 
Weighted
Average
Maturity²
Municipal and other tax-exempt:
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value
 
$
30,564

 
$
80,138

 
$
41,105

 
$
3,337

 
$
155,144

 
3.50

Fair value
 
30,915

 
82,285

 
42,683

 
3,581

 
159,464

 
 
Nominal yield¹
 
4.20

 
3.15

 
2.59

 
6.43

 
3.28

 
 
Other debt securities:
 
 

 
 

 
 

 
 

 
 

 
 
Carrying value
 
10,185

 
31,025

 
35,131

 
108,718

 
185,059

 
9.44

Fair value
 
10,221

 
32,017

 
37,813

 
125,715

 
205,766

 
 
Nominal yield
 
4.05

 
5.22

 
5.57

 
6.24

 
5.82

 
 
Total fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 
Carrying value
 
$
40,749

 
$
111,163

 
$
76,236

 
$
112,055

 
$
340,203

 
6.73

Fair value
 
41,136

 
114,302

 
80,496

 
129,296

 
365,230

 
 

Nominal yield
 
4.16

 
3.73

 
3.96

 
6.25

 
4.66

 
 

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Carrying value
 
 

 
 

 
 

 
 

 
$
91,911

 
³

Fair value
 
 

 
 

 
 

 
 

 
95,128

 
 

Nominal yield4
 
 

 
 

 
 

 
 

 
2.71

 
 

Total investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

Carrying value
 
 

 
 

 
 

 
 

 
$
432,114

 
 

Fair value
 
 

 
 

 
 

 
 

 
460,358

 
 

Nominal yield
 
 

 
 

 
 

 
 

 
4.25

 
 

1. 
Calculated on a taxable equivalent basis using a 39% effective tax rate.
2. 
Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.
3. 
The average expected lives of residential mortgage-backed securities were 3.2 years based upon current prepayment assumptions.
4. 
The nominal yield on residential mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. See Quarterly Financial Summary - Unaudited for current yields on the investment securities portfolio.

- 67 -



Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
 
 
September 30, 2012
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,000

 
$
1,002

 
$
2

 
$
—

 
$
—

Municipal and other tax-exempt
 
86,326

 
87,969

 
2,760

 
(152
)
 
(965
)
Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
5,740,232

 
5,900,174

 
161,314

 
(1,372
)
 
—

FHLMC
 
3,322,692

 
3,400,215

 
77,523

 
—

 
—

GNMA
 
1,151,058

 
1,181,134

 
30,076

 
—

 
—

Other
 
167,262

 
173,298

 
6,036

 
—

 
—

Total U.S. government agencies
 
10,381,244

 
10,654,821

 
274,949

 
(1,372
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
128,090

 
123,583

 
663

 
—

 
(5,170
)
Jumbo-A loans
 
208,900

 
208,139

 
3,617

 
(152
)
 
(4,226
)
Total private issue
 
336,990

 
331,722

 
4,280

 
(152
)
 
(9,396
)
Total residential mortgage-backed securities
 
10,718,234

 
10,986,543

 
279,229

 
(1,524
)
 
(9,396
)
Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
336,130

 
339,095

 
3,271

 
(306
)
 
—

Other debt securities
 
35,710

 
36,456

 
746

 
—

 
—

Perpetual preferred stock
 
22,170

 
25,288

 
3,118

 
—

 
—

Equity securities and mutual funds
 
25,409

 
30,081

 
4,998

 
(326
)
 
—

Total
 
$
11,224,979

 
$
11,506,434

 
$
294,124

 
$
(2,308
)
 
$
(10,361
)
1 Gross unrealized gain/ loss recognized in AOCI in the consolidated balance sheet.
2 Amounts represent unrealized loss that remains in AOCI after an other-than-temporary credit loss has been recognized in income.

- 68 -



 
 
December 31, 2011
 
 
Amortized
 
Fair
 
Gross Unrealized¹
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,001

 
$
1,006

 
$
5

 
$
—

 
$
—

Municipal and other tax-exempt
 
66,435

 
68,837

 
2,543

 
(141
)
 
—

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
5,823,972

 
5,987,287

 
163,319

 
(4
)
 
—

FHLMC
 
2,756,180

 
2,846,215

 
90,035

 
—

 
—

GNMA
 
647,569

 
678,924

 
31,358

 
(3
)
 
—

Other
 
69,668

 
75,751

 
6,083

 
—

 
—

Total U.S. government agencies
 
9,297,389

 
9,588,177

 
290,795

 
(7
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
168,461

 
132,242

 
—

 
—

 
(36,219
)
Jumbo-A loans
 
334,607

 
286,924

 
—

 
(11,096
)
 
(36,587
)
Total private issue
 
503,068

 
419,166

 
—

 
(11,096
)
 
(72,806
)
Total residential mortgage-backed securities
 
9,800,457

 
10,007,343

 
290,795

 
(11,103
)
 
(72,806
)
Other debt securities
 
36,298

 
36,495

 
197

 
—

 
—

Perpetual preferred stock
 
19,171

 
18,446

 
1,030

 
(1,755
)
 
—

Equity securities and mutual funds
 
33,843

 
47,238

 
13,727

 
(332
)
 
—

Total
 
$
9,957,205

 
$
10,179,365

 
$
308,297

 
$
(13,331
)
 
$
(72,806
)
1 Gross unrealized gain/loss recognized in AOCI in the consolidated balance sheet
2 Amounts represent unrealized loss that remains in AOCI after an other-than-temporary credit loss has been recognized in income.

 
 
September 30, 2011
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,001

 
$
1,006

 
$
5

 
$
—

 
$
—

Municipal and other tax-exempt
 
67,844

 
70,195

 
2,463

 
(112
)
 
—

Residential mortgage-backed securities:
 


 


 


 


 


U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
5,146,533

 
5,323,160

 
176,995

 
(368
)
 
—

FHLMC
 
2,773,674

 
2,884,641

 
110,967

 
—

 
—

GNMA
 
686,725

 
726,320

 
39,634

 
(39
)
 
—

Other
 
75,949

 
82,756

 
6,807

 
—

 
—

Total U.S. government agencies
 
8,682,881

 
9,016,877

 
334,403

 
(407
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
174,383

 
147,949

 
—

 
—

 
(26,434
)
Jumbo-A loans
 
350,293

 
309,383

 
249

 
(9,721
)
 
(31,438
)
Total private issue
 
524,676

 
457,332

 
249

 
(9,721
)
 
(57,872
)
Total residential mortgage-backed securities
 
9,207,557

 
9,474,209

 
334,652

 
(10,128
)
 
(57,872
)
Other debt securities
 
5,900

 
5,900

 
—

 
—

 
—

Perpetual preferred stock
 
19,224

 
19,080

 
884

 
(1,028
)
 
—

Equity securities and mutual funds
 
39,489

 
49,241

 
9,825

 
(73
)
 
—

Total
 
$
9,341,015

 
$
9,619,631

 
$
347,829

 
$
(11,341
)
 
$
(57,872
)
1 
Gross unrealized gain/loss recognized in AOCI in the consolidated balance sheet
2 
Amounts represent unrealized loss that remains in AOCI after an other-than-temporary credit loss has been recognized in income.


- 69 -



The amortized cost and fair values of available for sale securities at September 30, 2012, by contractual maturity, are as shown in the following table (dollars in thousands):
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years6
 
Total
 
Weighted
Average
Maturity5
U.S. Treasuries:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$
1,000

 
$
—

 
$
—

 
$
—

 
$
1,000

 
0.60

Fair value
1,002

 
—

 
—

 
—

 
1,002

 
 
Nominal yield
0.63

 
—

 
—

 
—

 
0.63

 
 
Municipal and other tax-exempt:
 

 
 

 
 

 
 

 
 

 
 
Amortized cost
786

 
27,992

 
12,632

 
44,916

 
86,326

 
15.04

Fair value
810

 
29,576

 
13,531

 
44,052

 
87,969

 
 
Nominal yield¹
—

 
0.94

 
0.81

 
2.82

 
1.89

 
 
Other debt securities:
 

 
 

 
 

 
 

 
 

 
 
Amortized cost
—

 
30,310

 
—

 
5,400

 
35,710

 
6.71

Fair value
—

 
31,056

 
—

 
5,400

 
36,456

 
 
Nominal yield
—

 
1.75

 
—

 
1.71

 
1.74

 
 
Total fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 
Amortized cost
$
1,786

 
$
58,302

 
$
12,632

 
$
50,316

 
$
123,036

 
12.50

Fair value
1,812

 
60,632

 
13,531

 
49,452

 
125,427

 
 
Nominal yield
0.35

 
1.36

 
0.81

 
2.70

 
1.84

 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 
Amortized cost
 

 
 

 
 

 
 

 
10,718,234

 
 
Fair value
 

 
 

 
 

 
 

 
10,986,543

 
 
Nominal yield4
 

 
 

 
 

 
 

 
2.94

 
 
Commercial mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
 
 
 
 
 
 
 
336,130

 
7.04

Fair value
 
 
 
 
 
 
 
 
339,095

 
 
Nominal yield
 
 
 
 
 
 
 
 
1.51

 
 
Equity securities and mutual funds:
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 

 
 

 
 

 
 

 
47,579

 
³

Fair value
 

 
 

 
 

 
 

 
55,369

 
 

Nominal yield
 

 
 

 
 

 
 

 
1.10

 
 

Total available-for-sale securities:
 

 
 

 
 

 
 

 
 
 
 

Amortized cost
 

 
 

 
 

 
 

 
$
11,224,979

 
 

Fair value
 

 
 

 
 

 
 

 
11,506,434

 
 

Nominal yield
 

 
 

 
 

 
 

 
2.88

 
 

1 
Calculated on a taxable equivalent basis using a 39% effective tax rate.
2 
The average expected lives of mortgage-backed securities were 2.3 years based upon current prepayment assumptions.
3 
Primarily common stock and preferred stock of corporate issuers with no stated maturity.
4 
The nominal yield on mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. See Quarterly Financial Summary –– Unaudited following for current yields on available for sale securities portfolio.
5 
Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.
6 
Nominal yield on municipal and other tax-exempt securities and other debt securities with contractual maturity dates over ten years are based on variable rates which generally are reset within 35 days.



- 70 -



Sales of available for sale securities resulted in gains and losses as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Proceeds
$
209,325

 
$
611,588

 
$
1,660,876

 
$
2,058,661

Gross realized gains
7,967

 
16,798

 
40,133

 
34,968

Gross realized losses
—

 
(104
)
 
(7,354
)
 
(7,904
)
Related federal and state income tax expense
3,099

 
6,494

 
12,751

 
10,528



A summary of investment and available for sale securities that have been pledged as collateral for repurchase agreements, public trust funds on deposit and for other purposes, as required by law was as follows (in thousands):
 
September 30,
2012
 
December 31,
2011
 
September 30,
2011
Investment:
 
 
 
 
 
Carrying value
$
153,224

 
$
197,192

 
$
201,966

Fair value
158,899

 
200,006

 
205,864

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
Amortized cost
3,634,955

 
4,188,075

 
3,676,803

Fair value
3,763,664

 
4,334,553

 
3,844,805


The secured parties do not have the right to sell or re-pledge these securities.


- 71 -



Temporarily Impaired Securities as of September 30, 2012
(in thousands):

 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
6

 
$
7,548

 
$
9

 
$
—

 
$
—

 
$
7,548

 
$
9

U.S. Agency residential mortgage-backed securities – Other
 
1

 
—

 
—

 
19,066

 
139

 
19,066

 
139

Other debt securities
 
14

 
871

 
30

 
—

 
—

 
871

 
30

Total investment
 
21

 
$
8,419

 
$
39

 
$
19,066

 
$
139

 
$
27,485

 
$
178

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Municipal and other tax-exempt1
 
51

 
$
13,492

 
$
970

 
$
27,485

 
$
147

 
$
40,977

 
$
1,117

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

 


 


U. S. agencies:
 
 
 
 

 
 

 
 

 
 

 


 


FNMA
 
12

 
483,258

 
1,372

 
—

 
—

 
483,258

 
1,372

FHLMC
 
—

 
—

 
—

 
—

 
—

 
—

 
—

GNMA
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total U.S. agencies
 
12

 
483,258

 
1,372

 
—

 
—

 
483,258

 
1,372

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
13

 
—

 
—

 
105,862

 
5,170

 
105,862

 
5,170

Jumbo-A loans
 
15

 
—

 
—

 
121,746

 
4,378

 
121,746

 
4,378

Total private issue
 
28

 
—

 
—

 
227,608

 
9,548

 
227,608

 
9,548

Total residential mortgage-backed securities
 
40

 
483,258

 
1,372

 
227,608

 
9,548

 
710,866

 
10,920

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
8

 
42,445

 
306

 
—

 
—

 
42,445

 
306

Other debt securities
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Perpetual preferred stocks
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equity securities and mutual   funds
 
2

 
2,551

 
326

 
—

 
—

 
2,551

 
326

Total available for sale
 
101

 
$
541,746

 
$
2,974

 
$
255,093

 
$
9,695

 
$
796,839

 
$
12,669

1Includes the following securities for which an unrealized loss remains in AOCI after an other-than-temporary credit loss has been recognized in income:
Municipal and other tax-exempt
 
21

 
$
12,431

 
$
(965
)
 
$
—

 
$
—

 
$
12,431

 
$
(965
)
Alt-A loans
 
13

 
—

 
—

 
105,862

 
(5,170
)
 
105,862

 
(5,170
)
Jumbo-A loans
 
14

 
—

 
—

 
107,071

 
(4,226
)
 
107,071

 
(4,226
)

- 72 -




Temporarily Impaired Securities as of December 31, 2011
(In thousands)

 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax- exempt
 
1

 
$
479

 
$
2

 
$
—

 
$
—

 
$
479

 
$
2

U.S. Agency residential mortgage-backed securities – Other
 
5

 
92,571

 
1,770

 
—

 
—

 
92,571

 
1,770

Other debt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investment
 
6

 
$
93,050

 
$
1,772

 
$
—

 
$
—

 
$
93,050

 
$
1,772

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 

 
 

 
 

 
 

 
 

 


 


Municipal and other tax-exempt1
 
26

 
$
5,008

 
$
7

 
$
21,659

 
$
134

 
$
26,667

 
$
141

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
2

 
68,657

 
4

 
—

 
—

 
68,657

 
4

FHLMC
 
—

 
—

 
—

 
—

 
—

 
—

 
—

GNMA
 
1

 
2,072

 
3

 
—

 
—

 
2,072

 
3

Total U.S. agencies
 
3

 
70,729

 
7

 
—

 
—

 
70,729

 
7

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
19

 
—

 
—

 
132,242

 
36,219

 
132,242

 
36,219

Jumbo-A loans
 
48

 
8,142

 
842

 
278,781

 
46,841

 
286,923

 
47,683

Total private issue
 
67

 
8,142

 
842

 
411,023

 
83,060

 
419,165

 
83,902

Total residential mortgage-backed securities
 
70

 
78,871

 
849

 
411,023

 
83,060

 
489,894

 
83,909

Perpetual preferred stocks
 
6

 
11,147

 
1,755

 
—

 
—

 
11,147

 
1,755

Equity securities and mutual funds
 
7

 
221

 
5

 
2,551

 
327

 
2,772

 
332

Total available for sale
 
109

 
$
95,247

 
$
2,616

 
$
435,233

 
$
83,521

 
$
530,480

 
$
86,137

1 
Includes the following securities for which an unrealized loss remains in AOCI after an other-than-temporary credit loss has been recognized in income:
Alt-A loans
 
19

 
$
—

 
$
—

 
$
132,242

 
$
36,219

 
$
132,242

 
$
36,219

Jumbo-A loans
 
36

 
3,809

 
256

 
202,874

 
36,331

 
206,683

 
36,587



- 73 -



Temporarily Impaired Securities as of September 30, 2011
(In thousands)

 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax- exempt
 
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

U.S. Agency residential mortgage-backed securities – Other
 
4

 
86,566

 
219

 
—

 
—

 
86,566

 
219

Other debt securities
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total investment
 
4

 
$
86,566

 
$
219

 
$
—

 
$
—

 
$
86,566

 
$
219

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 

 
 

 
 

 
 

 
 

 


 


Municipal and other tax-exempt1
 
27

 
$
12,317

 
$
38

 
$
15,750

 
$
74

 
$
28,067

 
$
112

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
2

 
71,816

 
368

 
—

 
—

 
71,816

 
368

FHLMC
 
1

 
267

 
—

 
—

 
—

 
267

 
—

GNMA
 
5

 
9,405

 
39

 
—

 
—

 
9,405

 
39

Total U.S. agencies
 
8

 
81,488

 
407

 
—

 
—

 
81,488

 
407

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
19

 
27,024

 
7,828

 
120,925

 
18,606

 
147,949

 
26,434

Jumbo-A loans
 
43

 
29,897

 
2,022

 
268,632

 
39,137

 
298,529

 
41,159

Total private issue
 
62

 
56,921

 
9,850

 
389,557

 
57,743

 
446,478

 
67,593

Total residential mortgage-backed securities
 
70

 
138,409

 
10,257

 
389,557

 
57,743

 
527,966

 
68,000

Perpetual preferred stocks
 
6

 
11,927

 
1,028

 
—

 
—

 
11,927

 
1,028

Equity securities and mutual funds
 
1

 
37

 
73

 
—

 
—

 
37

 
73

Total available for sale
 
104

 
$
162,690

 
$
11,396

 
$
405,307

 
$
57,817

 
$
567,997

 
$
69,213

1 
Includes the following securities for which an unrealized loss remains in AOCI after an other-than-temporary credit loss has been recognized in income:
Alt-A loans
 
19

 
27,024

 
7,828

 
120,925

 
18,606

 
147,949

 
26,434

Jumbo-A loans
 
32

 
19,740

 
976

 
199,339

 
30,462

 
219,079

 
31,438


On a quarterly basis, the Company performs separate evaluations of impaired debt and equity investment and available for sale securities to determine if the unrealized losses are temporary.
 
For debt securities, management determines whether it intends to sell or if it is more-likely-than-not that it will be required to sell impaired securities. This determination considers current and forecasted liquidity requirements, regulatory and capital requirements and securities portfolio management. Based on this evaluation as of September 30, 2012, we do not intend to sell any impaired available for sale securities before fair value recovers to our current amortized cost and it is more-likely-than-not that we will not be required to sell impaired securities before fair value recovers, which may be maturity.

Impairment of debt securities rated investment grade by all nationally-recognized rating agencies are considered temporary unless specific contrary information is identified. None of the debt securities rated investment grade were considered to be other-than-temporarily impaired at September 30, 2012.


- 74 -



At September 30, 2012, the composition of the Company’s investment and available for sale securities portfolios by the lowest current credit rating assigned by any of the three nationally-recognized rating agencies is as follows (in thousands):
 
 
 
U.S. Govt / GSE 1
 

AAA - AA
 
 
A - BBB
 
 
Below Investment Grade
 
 
Not Rated
 
 
Total
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
$
—

 
$
—

 
$
59,189

 
$
60,686

 
$
24,131

 
$
24,772

 
$
—

 
$
—

 
$
71,824

 
$
74,006

 
$
155,144

 
$
159,464

Mortgage-backed securities -- other
 
91,911

 
95,128

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
91,911

 
95,128

Other debt securities
 
—

 
—

 
174,573

 
195,140

 
600

 
600

 
—

 
—

 
9,886

 
10,026

 
185,059

 
205,766

Total investment securities
 
$
91,911

 
$
95,128

 
$
233,762

 
$
255,826

 
$
24,731

 
$
25,372

 
$
—

 
$
—

 
$
81,710

 
$
84,032

 
$
432,114

 
$
460,358

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Govt / GSE 1
 
AAA - AA
 
 
A - BBB
 
Below Investment Grade
 
Not Rated
 
Total
 
 
Amortized Cost
 
Fair
Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair
Value
Available for Sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
 
$
1,000

 
$
1,002

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,000

 
$
1,002

Municipal and other tax-exempt
 
—

 
—

 
59,868

 
62,223

 
11,638

 
11,752

 
13,396

 
12,431

 
1,424

 
1,563

 
86,326

 
87,969

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
5,740,232

 
5,900,174

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5,740,232

 
5,900,174

FHLMC
 
3,322,692

 
3,400,215

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3,322,692

 
3,400,215

GNMA
 
1,151,058

 
1,181,134

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,151,058

 
1,181,134

Other
 
167,262

 
173,298

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
167,262

 
173,298

Total U.S. government agencies
 
10,381,244

 
10,654,821

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
10,381,244

 
10,654,821

Private issue:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
—

 
—

 
—

 
—

 
—

 
—

 
128,090

 
123,583

 
—

 
—

 
128,090

 
123,583

Jumbo-A loans
 
—

 
—

 
—

 
—

 
—

 
—

 
208,900

 
208,139

 
—

 
—

 
208,900

 
208,139

Total private issue
 
—

 
—

 
—

 
—

 
—

 
—

 
336,990

 
331,722

 
—

 
—

 
336,990

 
331,722

Total residential mortgage-backed securities
 
10,381,244

 
10,654,821

 
—

 
—

 
—

 
—

 
336,990

 
331,722

 
—

 
—

 
10,718,234

 
10,986,543

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
336,130

 
339,095

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
336,130

 
339,095

Other debt securities
 
—

 
—

 
5,400

 
5,400

 
30,310

 
31,056

 
—

 
—

 
—

 
—

 
35,710

 
36,456

Perpetual preferred stock
 
—

 
—

 
—

 
—

 
22,170

 
25,288

 
—

 
—

 
—

 
—

 
22,170

 
25,288

Equity securities and mutual funds
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
25,409

 
30,081

 
25,409

 
30,081

Total available for sale securities
 
$
10,718,374

 
$
10,994,918

 
$
65,268

 
$
67,623

 
$
64,118

 
$
68,096

 
$
350,386

 
$
344,153

 
$
26,833

 
$
31,644

 
$
11,224,979

 
$
11,506,434

1 
U.S. government and government sponsored enterprises are not rated by the nationally-recognized rating agencies as these securities are guaranteed by agencies of the U.S. government or government-sponsored enterprises.

- 75 -




At September 30, 2012, the entire $337 million portfolio of privately issued residential mortgage-backed securities (based on amortized cost after impairment charges) was rated below investment grade by at least one of the nationally-recognized rating agencies. The net unrealized loss on these securities totaled $5.3 million. Ratings by the nationally-recognized rating agencies are subjective in nature and accordingly ratings can vary significantly amongst the agencies. Limitations generally expressed by the rating agencies include statements that ratings do not predict the specific percentage default likelihood over any given period of time and that ratings do not opine on expected loss severity of an obligation should the issuer default. As such, the impairment of securities rated below investment grade by at least one of the nationally-recognized rating agencies was evaluated to determine if we expect not to recover the entire amortized cost basis of the security. This evaluation was based on projections of estimated cash flows based on individual loans underlying each security using current and anticipated increases in unemployment and default rates, decreases in housing prices and estimated liquidation costs at foreclosure.

The primary assumptions used in this evaluation were:

•
Unemployment rates – increasing to 8.5% over the next 12 months, dropping to 8% over the following 21 months, and holding at 8% thereafter. At December 31, 2011 and September 30, 2011, we assumed that unemployment rates would increase to 9.5% over the next 12 months, dropping to 8% over the following 21 months, and holding at 8% thereafter.
•
Housing price depreciation – starting with current depreciated housing prices based on information derived from the Federal Housing Finance Agency (“FHFA”) data, decreasing by an additional 2% over the next twelve months and then growing at 2% per year thereafter. At December 31, 2011 and September 30, 2011, we assumed that housing prices would decrease an additional 8% over the next twelve months and then grow at 2% per year thereafter.
•
Estimated Liquidation Costs – reflect actual historical liquidation costs observed on Jumbo and Alt-A residential mortgage loans in the securities owned by the Company.
•
Discount rates – estimated cash flows were discounted at rates that range from 2.00% to 6.25% based on our current expected yields.

We also consider the current loan-to-value ratio and remaining credit enhancement as part of the assessment of the cash flows available to recover the amortized cost of the debt securities. Each factor is considered in the evaluation.

The Company calculates the current loan-to-value ratio for each mortgage-backed security using loan-level data. Current loan-to-value ratio is the current outstanding loan amount divided by an estimate of the current home value. The current home value is derived from FHFA data. FHFA provides historical information on home price depreciation at both the Metropolitan Statistical Area and state level.  This information is matched to each loan to estimate the home price depreciation. Data is accumulated from the loan level to determine the current loan-to-value ratio for the security as a whole.

Remaining credit enhancement is the amount of credit enhancement available to absorb current projected losses within the pool of loans that support the security. The Company acquires the benefit of credit enhancement by investing in super-senior tranches for many of our residential mortgage-backed securities. Subordinated tranches held by other investors are specifically designed to absorb losses before the super-senior tranches which effectively doubled the typical credit support for these types of bonds. Current projected losses consider depreciation of home prices based on FHFA data, estimated costs and additional losses to liquidate collateral and delinquency status of the individual loans underlying the security.

Credit loss impairment is recorded as a charge to earnings. Additional impairment based on the difference between the total unrealized loss and the estimated credit loss on these securities was charged against other comprehensive income, net of deferred taxes.

Based upon projected declines in expected cash flows from certain private-label residential mortgage-backed securities, the Company recognized $1.1 million of additional credit loss impairments in earnings during the three months ended September 30, 2012.


- 76 -



A distribution of the amortized cost (after recognition of the other-than-temporary impairment), fair value and credit loss impairments recognized on our privately issued residential mortgage-backed securities is as follows (in thousands, except for number of securities):
 
 
 
 
 
 
 
 
Credit Losses Recognized
 
 
 
 
 
 
 
 
Three months ended
 
 
 
 
 
 
 
 
 
 
September 30, 2012
 
Life-to-date
 
 
Number of Securities
 
Amortized Cost
 
Fair Value
 
Number of
Securities
 
Amount
 
Number of Securities
 
Amount
Alt-A
 
17

 
$
128,090

 
$
123,583

 
1

 
$
245

 
16

 
$
48,042

Jumbo-A
 
38

 
208,900

 
208,139

 
4

 
859

 
31

 
23,400

Total
 
55

 
$
336,990

 
$
331,722

 
5

 
$
1,104

 
47

 
$
71,442


Impaired equity securities, including perpetual preferred stocks, are evaluated based on management's ability and intent to hold the securities until fair value recovers over periods not to exceed three years. The assessment of the ability and intent to hold these securities focuses on the liquidity needs, asset/liability management objectives and securities portfolio objectives. Factors considered when assessing recovery include forecasts of general economic conditions and specific performance of the issuer, analyst ratings and credit spreads for preferred stocks which have debt-like characteristics. The Company has evaluated the near-term prospects of the investments in relation to the severity and duration of the impairment and based on that evaluation has the ability and intent to hold these investments until a recovery in fair value. Accordingly, all impairment of equity securities was considered temporary at September 30, 2012.

The following is a tabular roll forward of the amount of credit-related OTTI recognized on available for sale debt securities in earnings (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
Balance of credit-related OTTI recognized on available for sale debt, beginning of period
 
$
72,915

 
$
62,047

 
$
76,131

 
$
52,624

Additions for credit-related OTTI not previously recognized
 
—

 
2,294

 
248

 
2,331

Additions for increases in credit-related OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost
 
1,104

 
9,006

 
5,436

 
18,392

Sales
 
—

 
—

 
(7,796
)
 
—

Balance of credit-related OTTI recognized on available for sale debt securities, end of period
 
$
74,019

 
$
73,347

 
$
74,019

 
$
73,347

Fair Value Option Securities
 
Fair value option securities represent securities which the Company has elected to carry at fair value and separately identified on the Consolidated Balance Sheets with changes in the fair value recognized in earnings as they occur. Certain residential mortgage-backed securities issued by U.S. government agencies and derivative contracts are held as an economic hedge of the mortgage servicing rights. In addition, certain corporate debt securities are economically hedged by derivative contracts to manage interest rate risk. Derivative contracts that have not been designated as hedging instruments effectively modify these fixed rate securities into variable rate securities.

The fair value and net unrealized gain (loss) included in Fair value option securities is as follows (in thousands):
 
 
September 30, 2012
 
December 31, 2011
 
September 30, 2011
 
 
Fair Value
 
Net Unrealized Gain
 
Fair Value
 
Net Unrealized Gain
 
Fair
Value
 
Net Unrealized Gain
U.S. agency residential mortgage-backed securities
 
$
305,445

 
$
13,827

 
$
626,109

 
$
19,233

 
$
672,191

 
$
18,875

Corporate debt securities
 
26,442

 
1,359

 
25,117

 
18

 
—

 
—

Total
 
$
331,887

 
$
15,186

 
$
651,226

 
$
19,251

 
$
672,191

 
$
18,875


- 77 -



(3) Derivatives
 
The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at September 30, 2012 (in thousands):
 
 
Gross Basis
 
Net Basis²
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
 
Notional¹
 
Fair Value
 
Notional¹
 
Fair Value
 
Fair Value
 
Fair Value
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts3
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced mortgage-backed securities
 
$
14,858,520

 
$
276,678

 
$
14,738,232

 
$
274,195

 
$
155,105

 
$
152,622

Interest rate swaps
 
1,301,109

 
79,350

 
1,301,109

 
79,937

 
79,350

 
79,937

Energy contracts
 
1,556,164

 
105,588

 
1,596,791

 
107,556

 
38,558

 
40,526

Agricultural contracts
 
198,735

 
6,835

 
195,068

 
6,750

 
824

 
739

Foreign exchange contracts
 
150,232

 
150,232

 
149,977

 
149,977

 
150,232

 
149,977

Equity option contracts
 
217,283

 
14,460

 
217,283

 
14,460

 
14,460

 
14,460

Total customer derivative before cash collateral
 
18,282,043

 
633,143

 
18,198,460

 
632,875

 
438,529

 
438,261

Less: cash collateral
 


 
—

 
—

 
—

 
(11,153
)
 
(184,622
)
Total customer derivatives
 
18,282,043

 
633,143

 
18,198,460

 
632,875

 
427,376

 
253,639

Interest rate risk management programs
 
66,000

 
8,277

 
25,000

 
783

 
8,277

 
783

Total derivative contracts
 
$
18,348,043

 
$
641,420

 
$
18,223,460

 
$
633,658

 
$
435,653

 
$
254,422

1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.
2 
Derivative contracts are recorded on a net basis in the balance sheet in recognition of master netting agreements that enable the Company to settle all derivative positions with a given counterparty in total and to offset the net derivative position with the related cash collateral.
3 
Includes interest rate swaps used by borrowers to modify interest rate terms of their loans and to be announced securities used by mortgage banking customers to hedge their loan production.
 
When bilateral netting agreements exist between the Company and its counterparties that create a single legal claim or obligation to pay or receive the net amount in settlement of the individual derivative contracts, the Company reports derivative assets and liabilities on a net by counterparty basis.

Derivative contracts may also require the Company to provide or receive cash margin as collateral for derivative assets and liabilities. Derivative assets and liabilities are reported net of cash margin when certain conditions are met. As of September 30, 2012, a decrease in credit rating to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $35 million.
 

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The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at December 31, 2011 (in thousands):
 
 
Gross Basis
 
Net Basis²
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
 
Notional¹
 
Fair Value
 
Notional¹
 
Fair Value
 
Fair Value
 
Fair Value
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts3
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
9,118,627

 
$
101,189

 
$
9,051,627

 
$
99,211

 
$
68,519

 
$
66,541

Interest rate swaps
 
1,272,617

 
81,261

 
1,272,617

 
81,891

 
81,261

 
81,891

Energy contracts
 
1,554,400

 
158,625

 
1,799,367

 
171,050

 
62,945

 
75,370

Agricultural contracts
 
146,252

 
4,761

 
148,924

 
4,680

 
782

 
701

Foreign exchange contracts
 
73,153

 
73,153

 
72,928

 
72,928

 
73,153

 
72,928

Equity option contracts
 
208,647

 
12,508

 
208,647

 
12,508

 
12,508

 
12,508

Total customer derivative before cash collateral
 
12,373,696

 
431,497

 
12,554,110

 
442,268

 
299,168

 
309,939

Less: cash collateral
 
—

 
—

 
—

 
—

 
(11,690
)
 
(73,712
)
Total customer derivatives
 
12,373,696

 
431,497

 
12,554,110

 
442,268

 
287,478

 
236,227

Interest rate risk management programs
 
44,000

 
6,381

 
25,000

 
295

 
6,381

 
295

Total derivative contracts
 
$
12,417,696

 
$
437,878

 
$
12,579,110

 
$
442,563

 
$
293,859

 
$
236,522

1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.
2 
Derivative contracts are recorded on a net basis in the balance sheet in recognition of master netting agreements that enable the Company to settle all derivative positions with a given counterparty in total and to offset the net derivative position with the related cash collateral.
3 
Includes interest rate swaps used by borrowers to modify interest rate terms of their loans and to be announced securities used by mortgage banking customers to hedge their loan production.


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at September 30, 2011 (in thousands):
 
 
Gross Basis
 
Net Basis2
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
 
Notional¹
 
Fair Value
 
Notional¹
 
Fair Value
 
Fair Value
 
Fair Value
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts3
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
12,189,827

 
$
195,580

 
$
12,054,557

 
$
192,333

 
$
134,052

 
$
130,805

Interest rate swaps
 
1,386,449

 
85,899

 
1,386,449

 
86,603

 
85,899

 
86,603

Energy contracts
 
1,726,402

 
200,142

 
1,965,233

 
198,725

 
102,938

 
101,521

Agricultural contracts
 
190,100

 
8,100

 
190,700

 
8,012

 
2,373

 
2,285

Foreign exchange contracts
 
65,747

 
65,747

 
65,787

 
65,787

 
65,747

 
65,787

Equity option contracts
 
198,518

 
10,645

 
186,192

 
10,645

 
10,645

 
10,645

Total customer derivative before cash collateral
 
15,757,043

 
566,113

 
15,848,918

 
562,105

 
401,654

 
397,646

Less: cash collateral
 
—

 
—

 
—

 
—

 
(37,298
)
 
(55,824
)
Total customer derivatives
 
15,757,043

 
566,113

 
15,848,918

 
562,105

 
364,356

 
341,822

Interest rate risk management programs
 
44,000

 
6,260

 
—

 
—

 
6,260

 
—

Total derivative contracts
 
$
15,801,043

 
$
572,373

 
$
15,848,918

 
$
562,105

 
$
370,616

 
$
341,822

1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.
2 
Derivative contracts are recorded on a net basis in the balance sheet in recognition of master netting agreements that enable the Company to settle all derivative positions with a given counterparty in total and to offset the net derivative position with the related cash collateral.
3 
Includes interest rate swaps used by borrowers to modify interest rate terms of their loans and to be announced securities used by mortgage banking customers to hedge their loan production.

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The following summarizes the pre-tax net gains (losses) on derivative instruments and where they are recorded in the income statement (in thousands):
 
 
Three Months Ended
 
Three Months Ended
 
 
September 30, 2012
 
September 30, 2011
 
 
Brokerage
and Trading Revenue
 
Gain (Loss)
on Derivatives, Net
 
Brokerage
and Trading
Revenue
 
Gain (Loss)
on Derivatives,
Net
Customer Risk Management Programs:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
(803
)
 
$
—

 
$
1,225

 
$
—

Interest rate swaps
 
706

 
—

 
484

 


Energy contracts
 
1,856

 
—

 
1,360

 
—

Agricultural contracts
 
115

 
—

 
103

 
—

Foreign exchange contracts
 
124

 
—

 
155

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total Customer Derivatives
 
1,998

 
—

 
3,327

 
—

Interest Rate Risk Management Programs
 
—

 
464

 
—

 
4,048

Total Derivative Contracts
 
$
1,998

 
$
464

 
$
3,327

 
$
4,048


 
 
Nine Months Ended
 
Nine Months Ended
 
 
September 30, 2012
 
September 30, 2011
 
 
Brokerage
and Trading Revenue
 
Gain (Loss)
on Derivatives, Net
 
Brokerage
and Trading
Revenue
 
Gain (Loss)
on Derivatives,
Net
Customer Risk Management Programs:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
504

 
$
—

 
$
(2,829
)
 
$
—

Interest rate swaps
 
2,850

 
—

 
2,026

 


Energy contracts
 
6,754

 
—

 
5,759

 
—

Agricultural contracts
 
298

 
—

 
263

 
—

Foreign exchange contracts
 
455

 
—

 
381

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total Customer Derivatives
 
10,861

 
—

 
5,600

 
—

Interest Rate Risk Management Programs
 
—

 
336

 
—

 
2,700

Total Derivative Contracts
 
$
10,861

 
$
336

 
$
5,600

 
$
2,700


Customer Risk Management Programs
 
BOK Financial offers programs to permit its customers to manage various risks, including fluctuations in energy, cattle and other agricultural products, interest rates and foreign exchange rates, or to take positions in derivative contracts. Derivative contracts are executed between the customers and BOK Financial. Offsetting contracts are executed between BOK Financial and other selected counterparties to minimize its risk of changes in commodity prices, interest rates or foreign exchange rates.  The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to BOK Financial as profit and compensation for administrative costs and credit risk which is recognized over the life of the contracts and included in other operating revenue – brokerage and trading revenue in the Consolidated Statements of Earnings.
 
Interest Rate Risk Management Programs
 
BOK Financial may use interest rate swaps in managing its interest rate sensitivity and as part of its economic hedge of the change in the fair value of mortgage servicing rights. Interest rate swaps are generally used to reduce overall asset sensitivity by converting specific fixed-rate liabilities to floating-rate based on LIBOR. Net interest revenue was not significantly impacted by the settlement of amounts receivable or payable on interest rate swaps for the three and nine months ended September 30,

- 80 -



2012 and 2011, respectively. As of September 30, 2012, BOK Financial had interest rate swaps with a notional value of $66 million used as part of the economic hedge of the change in the fair value of the mortgage servicing rights.

As discussed in Note 6, certain derivative contracts not designated as hedging instruments related to mortgage loan commitments and forward sales contracts are included in Residential mortgage loans held for sale on the Consolidated Balance Sheets. See Note 6 for additional discussion of notional, fair value and impact on earnings of these contracts. Forward sales contracts are not considered swaps under the Commodity and Futures Trading Commission final rules.

None of these derivative contracts have been designated as hedging instruments.
(4) Loans and Allowances for Credit Losses

Loans are either secured or unsecured based on the type of loan and the financial condition of the borrower. Repayment is generally expected from cash flow or proceeds from the sale of selected assets of the borrower. BOK Financial is exposed to risk of loss on loans due to the borrower’s difficulties, which may arise from any number of factors, including problems within the respective industry or local economic conditions. Access to collateral, in the event of borrower default, is reasonably assured through adherence to applicable lending laws and through sound lending standards and credit review procedures.

Performing loans may be renewed under then current collateral value, debt service ratio and other underwriting standards. Nonperforming loans may be renewed and will remain on nonaccrual status. Nonperforming loans renewed will be evaluated and may be charged off if the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value.

Interest is accrued at the applicable interest rate on the principal amount outstanding. Loans are placed on nonaccrual status when, in the opinion of management, full collection of principal or interest is uncertain. Internally risk graded loans are individually evaluated for nonaccrual status quarterly. Non-risk graded loans are generally placed on nonaccrual status when more than 90 days past due. Interest previously accrued but not collected is charged against interest income when the loan is placed on nonaccrual status. Payments on nonaccrual loans are applied to principal or reported as interest income, according to management’s judgment as to the collectability of principal. Loans may be returned to accruing status when, in the opinion of management, full collection of principal and interest, including principal previously charged off, is probable based on improvements in the borrower’s financial condition or a sustained period of performance.

All distressed commercial and commercial real estate loans are placed on nonaccrual status. Modifications of nonaccruing loans to distressed borrowers generally consist of extension of payment terms, renewal of matured nonaccruing loans or interest rate concession. Principal and accrued but unpaid interest is not forgiven. Renewed or modified nonaccruing loans are charged off when the loan balance is no longer covered by the paying capacity of the borrower based on a quarterly evaluation of cash resources and collateral value. Renewed or modified nonperforming loans generally remain on nonaccrual status until full collection of principal and interest in accordance with original terms, including principal previously charged off, is probable. Consumer loans to troubled borrowers are not voluntarily modified.

Residential mortgage loans are modified in accordance with U.S. government agency guidelines by reducing interest rates and extending the number of payments. No unpaid principal or interest is forgiven. Interest guaranteed by U.S. government agencies under residential mortgage loan programs continues to accrue based on the modified terms of the loan. Modified residential mortgage loans are considered to be impaired. Impairment is measured based on cash flows expected to be received under the modified terms of the loans. Renegotiated loans may be sold after a period of satisfactory performance as defined by the agencies. If it becomes probable that all amounts due according to the modified loan terms will not be collected, the loan is placed on nonaccrual status and included in nonaccrual loans.

Loan origination and commitment fees and direct loan acquisition and origination costs are deferred and amortized as an adjustment to yield over the life of the loan or over the commitment period, as applicable.

Certain residential mortgage loans originated by the Company are held for sale and are carried at fair value based on sales commitments or market quotes and reported separately in the Consolidated Balance Sheets. Changes in fair value are recorded in other operating revenue – mortgage banking revenue in the Consolidated Statements of Earnings.

Loans are disaggregated into portfolio segments and further disaggregated into classes. The portfolio segment is the level at which the Company develops and documents a systematic method for determining its allowance for credit losses. Classes are a further disaggregation of portfolio segments based on the risk characteristics of the loans and the Company’s method for

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monitoring and assessing credit risk. 

Portfolio segments of the loan portfolio are as follows (in thousands):

 
 
September 30, 2012
 
December 31, 2011
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
3,829,409

 
$
3,422,046

 
$
21,762

 
$
7,273,217

 
$
3,261,344

 
$
3,224,915

 
$
68,811

 
$
6,555,070

Commercial real estate
 
871,211

 
1,218,554

 
75,761

 
2,165,526

 
896,820

 
1,295,290

 
99,193

 
2,291,303

Residential mortgage
 
1,728,537

 
261,176

 
29,267

 
2,018,980

 
1,646,554

 
298,206

 
29,767

 
1,974,527

Consumer
 
181,923

 
187,612

 
5,109

 
374,644

 
245,711

 
199,617

 
3,515

 
448,843

Total
 
$
6,611,080

 
$
5,089,388

 
$
131,899

 
$
11,832,367

 
$
6,050,429

 
$
5,018,028

 
$
201,286

 
$
11,269,743

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
1,181

 
 

 
 

 
 

 
$
2,496

 
 
September 30, 2011
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
3,052,708

 
$
3,285,158

 
$
83,736

 
$
6,421,602

Commercial real estate
 
854,800

 
1,307,985

 
110,048

 
2,272,833

Residential mortgage
 
1,606,799

 
311,371

 
31,731

 
1,949,901

Consumer
 
270,402

 
205,871

 
3,960

 
480,233

Total
 
$
5,784,709

 
$
5,110,385

 
$
229,475

 
$
11,124,569

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
1,401

1 
Excludes residential mortgage loans guaranteed by agencies of the U.S. government

At September 30, 2012, $5.5 billion or 46% of the total loan portfolio is to businesses and individuals in Oklahoma and $3.6 billion or 31% of our total loan portfolio is to businesses and individuals in Texas. These geographic concentrations subject the loan portfolio to the general economic conditions within these areas.

Commercial

Commercial loans represent loans for working capital, facilities acquisition or expansion, purchases of equipment and other needs of commercial customers primarily located within our geographical footprint. Commercial loans are underwritten individually and represent on-going relationships based on a thorough knowledge of the customer, the customer’s industry and market. While commercial loans are generally secured by the customer’s assets including real property, inventory, accounts receivable, operating equipment, interest in mineral rights and other property and may also include personal guarantees of the owners and related parties, the primary source of repayment of the loans is the on-going cash flow from operations of the customer’s business. Inherent lending risk is centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with commercial lending policies.

At September 30, 2012, commercial loans to businesses in Oklahoma totaled $3.1 billion or 43% of the commercial loan portfolio segment and loans to businesses in Texas totaled $2.4 billion or 35% of the commercial loan portfolio segment. The commercial loan portfolio segment is further divided into loan classes. The energy loan class totaled $2.3 billion or 21% of total loans at September 30, 2012, including $2.2 billion of outstanding loans to energy producers. Approximately 55% of committed production loans are secured by properties primarily producing oil and 45% are secured by properties producing natural gas. The services loan class totaled $1.9 billion at September 30, 2012. Approximately $1.0 billion of loans in the services category consist of loans with individual balances of less than $10 million.  Businesses included in the services class include community foundations, gaming, public finance, insurance and heavy equipment dealers..


- 82 -



Commercial Real Estate

Commercial real estate loans are for the construction of buildings or other improvements to real estate and property held by borrowers for investment purposes primarily within our geographical footprint. We require collateral values in excess of the loan amounts, demonstrated cash flows in excess of expected debt service requirements, equity investment in the project and a portion of the project already sold, leased or permanent financing already secured. The expected cash flows from all significant new or renewed income producing property commitments are stress tested to reflect the risks in varying interest rates, vacancy rates and rental rates. As with commercial loans, inherent lending risks are centrally monitored on a continuous basis from underwriting throughout the life of the loan for compliance with applicable lending policies.

At September 30, 2012, 33% of commercial real estate loans are secured by properties primarily located in the Dallas and Houston areas of Texas. An additional 30% of commercial real estate loans are secured by properties located primarily in the Tulsa and Oklahoma City metropolitan areas of Oklahoma. 

Residential Mortgage and Consumer

Residential mortgage loans provide funds for our customers to purchase or refinance their primary residence or to borrow against the equity in their home. Residential mortgage loans are secured by a first or second mortgage on the customer’s primary residence. Consumer loans include direct loans secured by and for the purchase of automobiles, recreational and marine equipment as well as other unsecured loans. Consumer loans also include indirect automobile loans made through primary dealers. Residential mortgage and consumer loans are made in accordance with underwriting policies we believe to be conservative and are fully documented. Credit scoring is assessed based on significant credit characteristics including credit history, residential and employment stability. Residential mortgage loans retained in the Company’s portfolio are primarily composed of various mortgage programs to support customer relationships including jumbo mortgage loans, non-builder construction loans and special loan programs for high net worth individuals and certain professionals. Jumbo loans may be fixed or variable rate and are fully amortizing. Jumbo loans generally conform to government sponsored entity standards, except that the loan size exceeds maximums required under these standards. These loans generally require a minimum FICO score of 720 and a maximum debt-to-income ratio (“DTI”) of 38%.  Loan-to-value (“LTV”) ratios are tiered from 60% to 100%, depending on the market.  Special mortgage programs include fixed and variable fully amortizing loans tailored to the needs of certain healthcare professionals.  Variable rate loans are fully indexed at origination and may have fixed rates for three to ten years, then adjust annually thereafter. 

At September 30, 2012, residential mortgage loans included $169 million of loans guaranteed by U.S. government agencies previously sold into GNMA mortgage pools. These loans either have been repurchased or are eligible to be repurchased by the Company when certain defined delinquency criteria are met. Although payments on these loans generally are past due more than 90 days, interest continues to accrue based on the government guarantee.

Home equity loans totaled $715 million at September 30, 2012. Approximately, 36% of the home equity portfolio is comprised of junior lien loans and 64% of the home equity loan portfolio is comprised of first lien loans. Junior lien loans are distributed 79% to amortizing term loans and 21% to revolving lines of credit. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 40%. The maximum loan amount available for our home equity loan products is generally $400 thousand.

Credit Commitments
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At September 30, 2012, outstanding commitments totaled $6.4 billion. Because some commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. BOK Financial uses the same credit policies in making commitments as it does loans.

The amount of collateral obtained, if deemed necessary, is based upon management’s credit evaluation of the borrower.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Because the credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan commitments, BOK Financial uses the same credit policies in evaluating the creditworthiness of the customer. Additionally, BOK Financial uses the same evaluation process in obtaining collateral on standby letters of credit as it does for loan commitments. The term of these standby letters of credit is defined in each commitment and typically corresponds with the underlying loan commitment. At September 30, 2012, outstanding standby letters of credit totaled $448 million. Commercial

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letters of credit are used to facilitate customer trade transactions with the drafts being drawn when the underlying transaction is consummated. At September 30, 2012, outstanding commercial letters of credit totaled $6 million.

Allowances for Credit Losses

BOK Financial maintains an allowance for loan losses and an accrual for off-balance sheet credit risk. The accrual for off-balance sheet credit risk is maintained at a level that is appropriate to cover estimated losses associated with credit instruments that are not currently recognized as assets such as loan commitments, standby letters of credit or guarantees. As discussed in greater detail in Note 6, the Company also has separate accruals related to off-balance sheet credit risk related to residential mortgage loans previously sold with full or partial recourse and for residential mortgage loans sold to government sponsored agencies under standard representations and warranties.

The appropriateness of the allowance for loan losses and accrual for off-balance sheet credit losses is assessed by management based on an on-going quarterly evaluation of the probable estimated losses inherent in the portfolio, including probable losses on both outstanding loans and unused commitments.

The allowance for loan losses consists of specific allowances attributed to impaired loans that have not yet been charged down to amounts we expect to recover, general allowances for unimpaired loans based on estimated loss rates by loan class and nonspecific allowances based on general economic conditions, risk concentration and related factors. There have been no material changes in the approach or techniques utilized in developing the allowance for loan losses and the accrual for off-balance sheet credit losses for the three and nine months ended September 30, 2012.

Internally risk graded loans are evaluated individually for impairment. Substantially all commercial and commercial real estate loans and certain residential mortgage and consumer loans are risk graded based on evaluation of the borrowers' ability to repay. Certain commercial loans and most residential mortgage and consumer loans are small balance, homogeneous pools of loans that are not risk graded.

Loans are considered to be impaired when it becomes probable that BOK Financial will be unable to collect all amounts due according to the contractual terms of the loan agreements. This is substantially the same criteria used to determine when a loan should be placed on nonaccrual status. All commercial and commercial real estate loans that have been modified in a troubled debt restructuring are considered to be impaired and remain classified as nonaccrual. Specific allowances for impaired loans are measured by an evaluation of estimated future cash flows discounted at the loans’ initial effective interest rate or the fair value of collateral for certain collateral dependent loans. Collateral value of real property is generally based on third party appraisals that conform to Uniform Standards of Professional Appraisal Practice, less estimated selling costs. Appraised values are on an "as-is" basis and are not adjusted by the Company. Collateral value of mineral rights is generally determined by our internal staff of engineers based on projected cash flows under current market conditions. Collateral values and available cash resources that support impaired loans are evaluated quarterly. Updated appraisals are obtained at least annually or more frequently if market conditions indicate collateral values have declined. Historical statistics may be used in limited situations to assist in estimating future cash flows or collateral values, such as when an impaired collateral dependent loan is identified at the end of a reporting period. Historical statistics are a practical way to estimate impairment until an updated appraisal of collateral value is received or a full assessment of future cash flows is completed. Estimates of future cash flows and collateral values require significant judgments and are subject to volatility.

General allowances for unimpaired loans are based on estimated loss rates by loan class. The appropriate historical gross loss rate for each loan class is determined by the greater of the current loss rate based on the most recent twelve months or a ten-year gross loss rate. For risk graded loans, historical gross loss rates are adjusted for changes in risk grading. For each loan class, the current weighted average risk grade is compared to the long-term average risk grade. This comparison determines whether risk in each loan class is increasing or decreasing. Historical loss rates are adjusted upward or downward in proportion to changes in average risk grading. Recoveries are not considered in the estimation of historical loss rates. Recoveries are recognized as increases in the allowance for loans losses when realized. General allowances for unimpaired loans also consider inherent risks identified for a given loan class. Inherent risks include consideration of the loss rates that most appropriately represent the current credit cycle. Inherent risks also consider factors attributable to specific loan class which have not yet been represented in the historical gross loss rates or risk grading. Examples include changes in commodity prices or engineering imprecision which may affected the value of reserves that secure our energy loan portfolio, construction risk that may affect commercial real estate loans, changes in regulations and public policy that may disproportionately impact health care loans and changes in products or underwriting standards.

Nonspecific allowances are maintained for risks beyond factors specific to a particular loan or loan class. These factors include trends in the economy in our primary lending areas, concentrations in loans with large balances and other relevant factors.

- 84 -



An accrual for off-balance sheet credit losses is included in Other liabilities in the Consolidated Balance Sheets. The appropriateness of this accrual is determined in the same manner as the allowance for loan losses. Changes in the accrual for off-balance sheet credit losses are recognized through the provision for credit losses in the Consolidated Statements of Earnings.

The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended September 30, 2012 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Consumer
 
Nonspecific allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
83,477

 
$
55,806

 
$
42,688

 
$
8,840

 
$
40,858

 
$
231,669

Provision for loan losses
 
4

 
4,821

 
(370
)
 
3,293

 
56

 
7,804

Loans charged off
 
(812
)
 
(2,607
)
 
(1,600
)
 
(3,902
)
 
—

 
(8,921
)
Recoveries
 
(890
)
1 
2,684

 
298

 
1,112

 
—

 
3,204

Ending balance
 
$
81,779

 
$
60,704

 
$
41,016

 
$
9,343

 
$
40,914

 
$
233,756

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
8,224

 
$
1,425

 
$
80

 
$
18

 
$
—

 
$
9,747

Provision for off-balance sheet credit losses
 
(7,823
)
 
18

 
(4
)
 
5

 
—

 
(7,804
)
Ending balance
 
$
401

 
$
1,443

 
$
76

 
$
23

 
$
—

 
$
1,943

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
(7,819
)
 
$
4,839

 
$
(374
)
 
$
3,298

 
$
56

 
$
—

1 
Includes $7.1 million of negative recovery related to a refund of a settlement between BOK Financial and the City of Tulsa invalidated by the Oklahoma Supreme Court. Excluding this refund, BOK Financial had net charge-offs (recoveries) to average loans of (0.05%) on an annualized basis.

The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the nine months ended September 30, 2012 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Consumer
 
Nonspecific allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
83,443

 
$
67,034

 
$
46,476

 
$
10,178

 
$
46,350

 
$
253,481

Provision for loan losses
 
995

 
(322
)
 
528

 
3,553

 
(5,436
)
 
(682
)
Loans charged off
 
(7,840
)
 
(10,548
)
 
(7,447
)
 
(8,303
)
 
—

 
(34,138
)
Recoveries
 
5,181

1 
4,540

 
1,459

 
3,915

 
—

 
15,095

Ending balance
 
$
81,779

 
$
60,704

 
$
41,016

 
$
9,343

 
$
40,914

 
$
233,756

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
7,906

 
$
1,250

 
$
91

 
$
14

 
$
—

 
$
9,261

Provision for off-balance sheet credit losses
 
(7,505
)
 
193

 
(15
)
 
9

 
—

 
(7,318
)
Ending balance
 
$
401

 
$
1,443

 
$
76

 
$
23

 
$
—

 
$
1,943

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
(6,510
)
 
$
(129
)
 
$
513

 
$
3,562

 
$
(5,436
)
 
$
(8,000
)
1 
Includes $7.1 million of negative recovery related to a refund of a settlement between BOK Financial and the City of Tulsa invalidated by the Oklahoma Supreme Court. Excluding this refund, BOK Financial had net charge-offs (recoveries) to average loans of (0.05%) on an annualized basis.


- 85 -



The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended September 30, 2011 is summarized as follows (in thousands):

 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Consumer
 
Nonspecific allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
113,571

 
$
91,750

 
$
45,243

 
$
8,922

 
$
27,125

 
$
286,611

Provision for loan losses
 
(348
)
 
1,386

 
(1,835
)
 
1,304

 
(5,508
)
 
(5,001
)
Loans charged off
 
(5,083
)
 
(2,335
)
 
(3,403
)
 
(3,202
)
 
—

 
(14,023
)
Recoveries
 
1,404

 
911

 
283

 
1,271

 
—

 
3,869

Ending balance
 
$
109,544

 
$
91,712

 
$
40,288

 
$
8,295

 
$
21,617

 
$
271,456

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
9,236

 
$
1,020

 
$
180

 
$
309

 
$
—

 
$
10,745

Provision for off-balance sheet credit losses
 
4,882

 
134

 
(30
)
 
15

 
—

 
5,001

Ending balance
 
$
14,118

 
$
1,154

 
$
150

 
$
324

 
$
—

 
$
15,746

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
4,534

 
$
1,520

 
$
(1,865
)
 
$
1,319

 
$
(5,508
)
 
$
—


The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the nine months ended September 30, 2011 is summarized as follows (in thousands):

 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Consumer
 
Nonspecific allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
104,631

 
$
98,709

 
$
50,281

 
$
12,614

 
$
26,736

 
$
292,971

Provision for loan losses
 
10,488

 
4,051

 
(1,880
)
 
(65
)
 
(5,119
)
 
7,475

Loans charged off
 
(10,737
)
 
(12,608
)
 
(9,732
)
 
(8,952
)
 
—

 
(42,029
)
Recoveries
 
5,162

 
1,560

 
1,619

 
4,698

 
—

 
13,039

Ending balance
 
$
109,544

 
$
91,712

 
$
40,288

 
$
8,295

 
$
21,617

 
$
271,456

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
13,456

 
$
443

 
$
131

 
$
241

 
$
—

 
$
14,271

Provision for off-balance sheet credit losses
 
662

 
711

 
19

 
83

 
—

 
1,475

Ending balance
 
$
14,118

 
$
1,154

 
$
150

 
$
324

 
$
—

 
$
15,746

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
11,150

 
$
4,762

 
$
(1,861
)
 
$
18

 
$
(5,119
)
 
$
8,950


A provision for credit losses is charged against earnings in amounts necessary to maintain an appropriate allowance for loan and accrual for off-balance sheet credit losses. All loans are charged off when the loan balance or a portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value. Internally risk graded loans are evaluated quarterly and charge-offs are taken in the quarter in which the loss is identified. Non-risk graded loans are generally charged off when payments are between 90 days and 180 days past due, depending on loan class. Recoveries of loans previously charged off are added to the allowance.


- 86 -



The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at September 30, 2012 is as follows (in thousands):

 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
7,251,528

 
$
81,575

 
$
21,689

 
$
204

 
$
7,273,217

 
$
81,779

Commercial real estate
 
2,089,802

 
57,587

 
75,724

 
3,117

 
2,165,526

 
60,704

Residential mortgage
 
2,009,125

 
40,799

 
9,855

 
217

 
2,018,980

 
41,016

Consumer
 
371,829

 
9,214

 
2,815

 
129

 
374,644

 
9,343

Total
 
11,722,284

 
189,175

 
110,083

 
3,667

 
11,832,367

 
192,842

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
40,914

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11,722,284

 
$
189,175

 
$
110,083

 
$
3,667

 
$
11,832,367

 
$
233,756



The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at December 31, 2011 is as follows (in thousands):

 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
6,486,311

 
$
81,907

 
$
68,759

 
$
1,536

 
$
6,555,070

 
$
83,443

Commercial real estate
 
2,192,110

 
63,092

 
99,193

 
3,942

 
2,291,303

 
67,034

Residential mortgage
 
1,967,086

 
46,178

 
7,441

 
298

 
1,974,527

 
46,476

Consumer
 
447,747

 
10,178

 
1,096

 
—

 
448,843

 
10,178

Total
 
11,093,254

 
201,355

 
176,489

 
5,776

 
11,269,743

 
207,131

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
46,350

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11,093,254

 
$
201,355

 
$
176,489

 
$
5,776

 
$
11,269,743

 
$
253,481



The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at September 30, 2011 is as follows (in thousands):

 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
6,338,063

 
$
107,745

 
$
83,539

 
$
1,799

 
$
6,421,602

 
$
109,544

Commercial real estate
 
2,162,785

 
87,513

 
110,048

 
4,199

 
2,272,833

 
91,712

Residential mortgage
 
1,940,998

 
39,653

 
8,903

 
635

 
1,949,901

 
40,288

Consumer
 
478,844

 
8,228

 
1,389

 
67

 
480,233

 
8,295

Total
 
10,920,690

 
243,139

 
203,879

 
6,700

 
11,124,569

 
249,839

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
21,617

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,920,690

 
$
243,139

 
$
203,879

 
$
6,700

 
$
11,124,569

 
$
271,456


- 87 -



Credit Quality Indicators

The Company utilizes loan class and risk grading as primary credit quality indicators. Substantially all commercial and commercial real estate loans and certain residential mortgage and consumer loans are risk graded based on a quarterly evaluation of the borrowers’ ability to repay the loans. Certain commercial loans and most residential mortgage and consumer loans are small, homogeneous pools that are not risk graded. 

The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at September 30, 2012 is as follows (in thousands):

 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
7,255,739

 
$
80,676

 
$
17,478

 
$
1,103

 
$
7,273,217

 
$
81,779

Commercial real estate
 
2,165,489

 
60,704

 
37

 
—

 
2,165,526

 
60,704

Residential mortgage
 
271,049

 
6,416

 
1,747,931

 
34,600

 
2,018,980

 
41,016

Consumer
 
205,656

 
2,711

 
168,988

 
6,632

 
374,644

 
9,343

Total
 
9,897,933

 
150,507

 
1,934,434

 
42,335

 
11,832,367

 
192,842

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
40,914

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
9,897,933

 
$
150,507

 
$
1,934,434

 
$
42,335

 
$
11,832,367

 
$
233,756

 
The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at December 31, 2011 is as follows (in thousands):

 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
6,536,602

 
$
82,263

 
$
18,468

 
$
1,180

 
$
6,555,070

 
$
83,443

Commercial real estate
 
2,291,303

 
67,034

 
—

 
—

 
2,291,303

 
67,034

Residential mortgage
 
317,798

 
8,262

 
1,656,729

 
38,214

 
1,974,527

 
46,476

Consumer
 
217,195

 
2,527

 
231,648

 
7,651

 
448,843

 
10,178

Total
 
9,362,898

 
160,086

 
1,906,845

 
47,045

 
11,269,743

 
207,131

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
46,350

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
9,362,898

 
$
160,086

 
$
1,906,845

 
$
47,045

 
$
11,269,743

 
$
253,481



- 88 -



The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at September 30, 2011 is as follows (in thousands):

 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
6,402,534

 
$
105,695

 
$
19,068

 
$
3,849

 
$
6,421,602

 
$
109,544

Commercial real estate
 
2,272,833

 
91,712

 
—

 
—

 
2,272,833

 
91,712

Residential mortgage
 
368,466

 
7,356

 
1,581,435

 
32,932

 
1,949,901

 
40,288

Consumer
 
220,351

 
1,851

 
259,882

 
6,444

 
480,233

 
8,295

Total
 
9,264,184

 
206,614

 
1,860,385

 
43,225

 
11,124,569

 
249,839

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
21,617

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
9,264,184

 
$
206,614

 
$
1,860,385

 
$
43,225

 
$
11,124,569

 
$
271,456


Loans are considered to be performing if they are in compliance with the original terms of the agreement which is consistent with the regulatory guideline of “pass.” Performing also includes loans considered to be “other loans especially mentioned” by regulatory guideline. Other loans especially mentioned are in compliance with the original terms of the agreement but may have a weakness that deserves management’s close attention. Performing loans also include past due residential mortgages that are guaranteed by agencies of the U.S. government.

The risk grading process identified certain criticized loans as potential problem loans. These loans have a well-defined weakness (e.g. inadequate debt service coverage or liquidity or marginal capitalization; repayment may depend on collateral or other risk mitigation) that may jeopardize liquidation of the debt and represent a greater risk due to deterioration in the financial condition of the borrower. This is consistent with the regulatory guideline for “substandard.” Because the borrowers are still performing in accordance with the original terms of the loan agreements, these loans were not placed in nonaccrual status. Known information does, however, cause concern as to the borrowers’ continued compliance with current repayment terms. Nonaccrual loans represent loans for which full collection of principal and interest is uncertain. This is substantially the same criteria used to determine whether a loan is impaired and includes certain loans considered “substandard” and all loans considered “doubtful” by regulatory guidelines.


- 89 -



The following table summarizes the Company’s loan portfolio at September 30, 2012 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
Potential Problem
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,419,960

 
$
10,450

 
$
3,063

 
$
—

 
$
—

 
$
2,433,473

Services
 
1,847,177

 
34,452

 
10,099

 
—

 
—

 
1,891,728

Wholesale/retail
 
1,073,019

 
4,241

 
2,007

 
—

 
—

 
1,079,267

Manufacturing
 
350,340

 
10,469

 
2,283

 
—

 
—

 
363,092

Healthcare
 
1,033,799

 
184

 
3,305

 
—

 
—

 
1,037,288

Integrated food services
 
213,148

 
684

 
—

 
—

 
—

 
213,832

Other commercial and industrial
 
230,690

 
5,437

 
932

 
17,405

 
73

 
254,537

Total commercial
 
7,168,133

 
65,917

 
21,689

 
17,405

 
73

 
7,273,217

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
225,833

 
25,568

 
38,143

 
—

 
—

 
289,544

Retail
 
510,163

 
8,196

 
6,692

 
—

 
—

 
525,051

Office
 
383,620

 
12,554

 
9,833

 
—

 
—

 
406,007

Multifamily
 
388,701

 
6,667

 
3,145

 
—

 
—

 
398,513

Industrial
 
178,659

 
4,443

 
4,064

 
—

 
—

 
187,166

Other commercial real estate
 
332,042

 
13,319

 
13,847

 
—

 
37

 
359,245

Total commercial real estate
 
2,019,018

 
70,747

 
75,724

 
—

 
37

 
2,165,526

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
249,418

 
11,776

 
9,855

 
850,118

 
13,352

 
1,134,519

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
168,883

 
510

 
169,393

Home equity
 
—

 
—

 
—

 
709,518

 
5,550

 
715,068

Total residential mortgage
 
249,418

 
11,776

 
9,855

 
1,728,519

 
19,412

 
2,018,980

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
45,349

 
1,932

 
47,281

Other consumer
 
201,178

 
1,663

 
2,815

 
121,345

 
362

 
327,363

Total consumer
 
201,178

 
1,663

 
2,815

 
166,694

 
2,294

 
374,644

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
9,637,747

 
$
150,103

 
$
110,083

 
$
1,912,618

 
$
21,816

 
$
11,832,367



- 90 -



The following table summarizes the Company’s loan portfolio at December 31, 2011 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
Potential Problem
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,003,288

 
$
1,417

 
$
336

 
$
—

 
$
—

 
$
2,005,041

Services
 
1,713,232

 
31,338

 
16,968

 
—

 
—

 
1,761,538

Wholesale/retail
 
912,090

 
34,156

 
21,180

 
—

 
—

 
967,426

Manufacturing
 
311,292

 
2,390

 
23,051

 
—

 
—

 
336,733

Healthcare
 
969,260

 
3,414

 
5,486

 
—

 
—

 
978,160

Integrated food services
 
203,555

 
756

 
—

 
—

 
—

 
204,311

Other commercial and industrial
 
281,645

 
10

 
1,738

 
18,416

 
52

 
301,861

Total commercial
 
6,394,362

 
73,481

 
68,759

 
18,416

 
52

 
6,555,070

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
252,936

 
27,244

 
61,874

 
—

 
—

 
342,054

Retail
 
499,295

 
3,244

 
6,863

 
—

 
—

 
509,402

Office
 
381,918

 
12,548

 
11,457

 
—

 
—

 
405,923

Multifamily
 
357,436

 
8,079

 
3,513

 
—

 
—

 
369,028

Industrial
 
277,906

 
280

 
—

 
—

 
—

 
278,186

Other commercial real estate
 
355,381

 
15,843

 
15,486

 
—

 
—

 
386,710

Total commercial real estate
 
2,124,872

 
67,238

 
99,193

 
—

 
—

 
2,291,303

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
294,478

 
15,879

 
7,441

 
817,921

 
17,925

 
1,153,644

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
188,462

 
—

 
188,462

Home equity
 
—

 
—

 
—

 
628,020

 
4,401

 
632,421

Total residential mortgage
 
294,478

 
15,879

 
7,441

 
1,634,403

 
22,326

 
1,974,527

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
102,955

 
2,194

 
105,149

Other consumer
 
212,150

 
3,949

 
1,096

 
126,274

 
225

 
343,694

Total consumer
 
212,150

 
3,949

 
1,096

 
229,229

 
2,419

 
448,843

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
9,025,862

 
$
160,547

 
$
176,489

 
$
1,882,048

 
$
24,797

 
$
11,269,743


- 91 -



The following table summarizes the Company’s loan portfolio at September 30, 2011 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
Potential Problem
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
1,744,314

 
$
989

 
$
3,900

 
$
—

 
$
—

 
$
1,749,203

Services
 
1,820,569

 
34,197

 
18,181

 
—

 
—

 
1,872,947

Wholesale/retail
 
956,701

 
37,281

 
27,088

 
—

 
—

 
1,021,070

Manufacturing
 
342,878

 
2,505

 
27,691

 
—

 
—

 
373,074

Healthcare
 
905,129

 
3,502

 
5,715

 
—

 
—

 
914,346

Integrated food services
 
190,958

 
1,242

 
—

 
—

 
—

 
192,200

Other commercial and industrial
 
278,717

 
13

 
964

 
18,871

 
197

 
298,762

Total commercial
 
6,239,266

 
79,729

 
83,539

 
18,871

 
197

 
6,421,602

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
268,125

 
30,133

 
72,207

 
—

 
—

 
370,465

Retail
 
448,076

 
2,608

 
6,492

 
—

 
—

 
457,176

Office
 
395,891

 
14,426

 
11,967

 
—

 
—

 
422,284

Multifamily
 
375,253

 
9,015

 
4,036

 
—

 
—

 
388,304

Industrial
 
223,938

 
284

 
—

 
—

 
—

 
224,222

Other commercial real estate
 
377,688

 
17,348

 
15,346

 
—

 
—

 
410,382

Total commercial real estate
 
2,088,971

 
73,814

 
110,048

 
—

 
—

 
2,272,833

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
344,210

 
15,353

 
8,903

 
793,261

 
18,583

 
1,180,310

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
173,540

 
—

 
173,540

Home equity
 
—

 
—

 
—

 
591,806

 
4,245

 
596,051

Total residential mortgage
 
344,210

 
15,353

 
8,903

 
1,558,607

 
22,828

 
1,949,901

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
127,878

 
2,418

 
130,296

Other consumer
 
215,643

 
3,319

 
1,389

 
129,433

 
153

 
349,937

Total consumer
 
215,643

 
3,319

 
1,389

 
257,311

 
2,571

 
480,233

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
8,888,090

 
$
172,215

 
$
203,879

 
$
1,834,789

 
$
25,596

 
$
11,124,569




- 92 -



Impaired Loans

Loans are considered to be impaired when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement.
 
A summary of risk-graded impaired loans follows (in thousands):

 
As of
 
For the
 
For the
 
September 30, 2012
 
Three Months Ended
 
Nine Months Ended
 
 
 
Recorded Investment
 
 
 
September 30, 2012
 
September 30, 2012
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
 
Average Recorded
Investment
 
Interest Income Recognized
 
Average Recorded
Investment
 
Interest Income Recognized
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
3,273

 
$
3,063

 
$
3,063

 
$
—

 
$
—

 
$
3,075

 
$
—

 
$
1,700

 
$
—

Services
13,135

 
10,099

 
9,978

 
121

 
120

 
10,111

 
—

 
13,534

 
—

Wholesale/retail
8,039

 
2,007

 
1,937

 
70

 
18

 
3,091

 
—

 
11,594

 
—

Manufacturing
6,548

 
2,283

 
2,283

 
—

 
—

 
7,257

 
—

 
12,667

 
—

Healthcare
4,395

 
3,305

 
2,159

 
1,146

 
66

 
3,308

 
—

 
4,396

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
8,431

 
932

 
932

 
—

 
—

 
1,218

 
—

 
1,335

 
—

Total commercial
43,821

 
21,689

 
20,352

 
1,337

 
204

 
28,060

 
—

 
45,226

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
67,087

 
38,143

 
37,579

 
564

 
155

 
42,097

 
—

 
50,009

 
—

Retail
8,372

 
6,692

 
6,692

 
—

 
—

 
7,300

 
—

 
6,778

 
—

Office
13,736

 
9,833

 
9,608

 
225

 
21

 
10,211

 
—

 
10,645

 
—

Multifamily
3,259

 
3,145

 
3,145

 
—

 
—

 
3,182

 
—

 
3,329

 
—

Industrial
4,064

 
4,064

 
—

 
4,064

 
2,290

 
2,032

 
—

 
2,032

 
—

Other real estate loans
16,436

 
13,847

 
11,417

 
2,430

 
651

 
13,145

 
—

 
14,667

 
—

Total commercial real estate
112,954

 
75,724

 
68,441

 
7,283

 
3,117

 
77,967

 
—

 
87,460

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
10,721

 
9,855

 
9,554

 
301

 
217

 
8,533

 
—

 
8,648

 
—

Home equity
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
10,721

 
9,855

 
9,554

 
301

 
217

 
8,533

 
—

 
8,648

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other consumer
4,857

 
2,815

 
2,686

 
129

 
129

 
3,643

 
—

 
1,956

 
—

Total consumer
4,857

 
2,815

 
2,686

 
129

 
129

 
3,643

 
—

 
1,956

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
172,353

 
$
110,083

 
$
101,033

 
$
9,050

 
$
3,667

 
$
118,203

 
$
—

 
$
143,290

 
$
—


Generally, no interest income is recognized on impaired loans until all principal balances, including amounts charged-off, have been recovered.


- 93 -



A summary of risk graded impaired loans at December 31, 2011 follows (in thousands): 
 
 
 
 
Recorded Investment
 
 
 
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
336

 
$
336

 
$
336

 
$
—

 
$
—

Services
 
26,916

 
16,968

 
16,200

 
768

 
360

Wholesale/retail
 
24,432

 
21,180

 
19,702

 
1,478

 
1,102

Manufacturing
 
26,186

 
23,051

 
23,051

 
—

 
—

Healthcare
 
6,825

 
5,486

 
5,412

 
74

 
74

Integrated food services
 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
9,237

 
1,738

 
1,738

 
—

 
—

Total commercial
 
93,932

 
68,759

 
66,439

 
2,320

 
1,536

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
98,053

 
61,874

 
56,740

 
5,134

 
1,777

Retail
 
8,645

 
6,863

 
4,373

 
2,490

 
1,062

Office
 
14,588

 
11,457

 
9,567

 
1,890

 
291

Multifamily
 
3,512

 
3,513

 
3,513

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

Other real estate loans
 
16,702

 
15,486

 
7,887

 
7,599

 
812

Total commercial real estate
 
141,500

 
99,193

 
82,080

 
17,113

 
3,942

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
8,697

 
7,441

 
4,980

 
2,461

 
298

Home equity
 
—

 
—

 
—

 
—

 
—

Total residential mortgage
 
8,697

 
7,441

 
4,980

 
2,461

 
298

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
—

 
—

Other consumer
 
1,727

 
1,096

 
1,096

 
—

 
—

Total consumer
 
1,727

 
1,096

 
1,096

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
245,856

 
$
176,489

 
$
154,595

 
$
21,894

 
$
5,776



- 94 -



A summary of risk-graded impaired loans follows (in thousands):

 
As of
 
For the
 
For the
 
September 30, 2011
 
Three Months Ended
 
Nine Months Ended
 
 
 
Recorded Investment
 
 
 
September 30, 2011
 
September 30, 2011
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
 
Average Recorded
Investment
 
Interest Income Recognized
 
Average Recorded
Investment
 
Interest Income Recognized
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
3,900

 
$
3,900

 
$
3,900

 
$
—

 
$
—

 
$
2,123

 
$
—

 
$
2,183

 
$
—

Services
29,749

 
18,181

 
17,358

 
823

 
353

 
17,218

 
—

 
18,722

 
—

Wholesale/retail
32,226

 
27,088

 
25,345

 
1,743

 
1,104

 
26,113

 
—

 
17,787

 
—

Manufacturing
29,442

 
27,691

 
26,719

 
972

 
264

 
16,029

 
—

 
14,904

 
—

Healthcare
7,052

 
5,715

 
5,637

 
78

 
78

 
5,839

 
—

 
4,625

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

 
—

 
7

 
—

Other commercial and industrial
8,462

 
964

 
964

 
—

 
—

 
1,031

 
—

 
2,705

 
—

Total commercial
110,831

 
83,539

 
79,923

 
3,616

 
1,799

 
68,353

 
—

 
60,933

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Construction and land development
110,052

 
72,207

 
62,056

 
10,151

 
1,978

 
74,236

 
—

 
85,893

 
—

Retail
8,161

 
6,492

 
3,631

 
2,861

 
1,122

 
5,567

 
—

 
5,735

 
—

Office
14,199

 
11,967

 
11,405

 
562

 
76

 
11,720

 
—

 
15,811

 
—

Multifamily
5,326

 
4,036

 
4,036

 
—

 
—

 
4,377

 
—

 
5,381

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,044

 
—

Other real estate loans
16,197

 
15,346

 
6,738

 
8,608

 
1,023

 
14,306

 
—

 
15,345

 
—

Total commercial real estate
153,935

 
110,048

 
87,866

 
22,182

 
4,199

 
110,206

 
—

 
130,209

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Permanent mortgage
10,156

 
8,903

 
4,626

 
4,277

 
635

 
9,894

 
—

 
10,484

 
—

Home equity
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
10,156

 
8,903

 
4,626

 
4,277

 
635

 
9,894

 
—

 
10,484

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Indirect automobile
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other consumer
1,917

 
1,389

 
1,261

 
128

 
67

 
1,655

 
—

 
1,570

 
—

Total consumer
1,917

 
1,389

 
1,261

 
128

 
67

 
1,655

 
—

 
1,570

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
276,839

 
$
203,879

 
$
173,676

 
$
30,203

 
$
6,700

 
$
190,108

 
$
—

 
$
203,196

 
$
—




- 95 -



Troubled Debt Restructurings

Loans to distressed borrowers may be modified in troubled debt restructurings ("TDRs"). All distressed commercial and commercial real estate loans are placed on nonaccrual status. Modifications of nonaccruing loans to distressed borrowers generally consist of extension of payment terms, renewal of matured nonaccruing loans or interest rate concession. Principal and accrued but unpaid interest is not forgiven. Renewed or modified nonaccruing loans are charged off when the loan balance is no longer covered by the paying capacity of the borrower based on a quarterly evaluation of cash resources and collateral value. Renewed or modified nonperforming loans generally remain on nonaccrual status until full collection of principal and interest in accordance with original terms, including principal previously charged off, is probable. In addition to TDRs classified as nonaccrual, certain residential mortgage loans may be modified, primarily in accordance with U.S. government agency guidelines. These loans continue to accrue interest in accordance with the modified loan terms based on the U.S. government agency guarantee. Consumer loans to troubled borrowers are not voluntarily modified.

The financial impact of troubled debt restructurings primarily consist of specific allowances for credit losses and principal amounts charged off. Internally risk graded loans that have been modified in troubled debt restructurings generally remain classified as nonaccruing. Other financial impacts, such as foregone interest, are not material to the financial statements.

A summary of troubled debt restructurings ("TDRs") by accruing status as of September 30, 2012 were as follows (in thousands):

 
 
As of
 
Amounts Charged-off
 
 
September 30, 2012
 
During:
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Three Months Ended
Sept. 30, 2012
 
Nine Months Ended
Sept. 30, 2012
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
 
2,594

 
2,109

 
485

 
—

 
—

 
—

Wholesale/retail
 
1,557

 
1,385

 
172

 
18

 
—

 
—

Manufacturing
 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
 
72

 
72

 
—

 
—

 
—

 
—

Integrated food services
 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
678

 
—

 
678

 
—

 
—

 
—

Total commercial
 
4,901

 
3,566

 
1,335

 
18

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
18,406

 
9,842

 
8,564

 
76

 
982

 
3,252

Retail
 
3,448

 
3,448

 
—

 
—

 
150

 
150

Office
 
3,376

 
1,368

 
2,008

 
—

 
—

 
269

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
 
5,310

 
3,574

 
1,736

 
55

 
87

 
2,269

Total commercial real estate
 
30,540

 
18,232

 
12,308

 
131

 
1,219

 
5,940


- 96 -



 
 
As of
 
Amounts Charged-off
 
 
September 30, 2012
 
During:
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Three Months Ended
Sept. 30, 2012
 
Nine Months Ended
Sept. 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
6,925

 
4,245

 
2,680

 
54

 
—

 
24

Home equity
 
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
 
6,925

 
4,245

 
2,680

 
54

 
—

 
24

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
—

 
—

 
—

Other consumer
 
2,213

 
443

 
1,770

 
88

 
1,345

 
1,345

Total consumer
 
2,213

 
443

 
1,770

 
88

 
1,345

 
1,345

 
 
 
 
 
 
 
 
 
 
 
 
 
Total nonaccruing TDRs
 
$
44,579

 
$
26,486

 
$
18,093

 
$
291

 
$
2,564

 
$
7,309

 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
3,402

 
2,225

 
1,177

 
—

 
—

 
83

Permanent mortgages guaranteed by U.S. government agencies
 
24,590

 
7,684

 
16,906

 
—

 
—

 
—

Total residential mortgage
 
27,992

 
9,909

 
18,083

 
—

 
—

 
83

 
 
 
 
 
 
 
 
 
 
 
 
 
Total accruing TDRs
 
27,992

 
9,909

 
18,083

 
—

 
—

 
83

 
 
 
 
 
 
 
 
 
 
 
 
 
Total TDRs
 
$
72,571

 
$
36,395

 
$
36,176

 
$
291

 
$
2,564

 
$
7,392



- 97 -



A summary of troubled debt restructurings by accruing status as of December 31, 2011 were as follows (in thousands):

 
 
As of
 
 
December 31, 2011
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
Energy
 
$
—

 
$
—

 
$
—

 
$
—

Services
 
3,529

 
1,907

 
1,622

 
—

Wholesale/retail
 
1,739

 
961

 
778

 
24

Manufacturing
 
—

 
—

 
—

 
—

Healthcare
 
—

 
—

 
—

 
—

Integrated food services
 
—

 
—

 
—

 
—

Other commercial and industrial
 
960

 
—

 
960

 
—

Total commercial
 
6,228

 
2,868

 
3,360

 
24

 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

Construction and land development
 
25,890

 
3,585

 
22,305

 
1,577

Retail
 
1,070

 
—

 
1,070

 
—

Office
 
2,496

 
1,134

 
1,362

 
215

Multifamily
 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

Other real estate loans
 
8,171

 
387

 
7,784

 
662

Total commercial real estate
 
37,627

 
5,106

 
32,521

 
2,454

 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

Permanent mortgage
 
6,283

 
1,396

 
4,887

 
282

Home equity
 
—

 
—

 
—

 
—

Total residential mortgage
 
6,283

 
1,396

 
4,887

 
282

 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
—

Other consumer
 
168

 
168

 
—

 
—

Total consumer
 
168

 
168

 
—

 
—

 
 
 
 
 
 
 
 
 
Total nonaccuring TDRs
 
$
50,306

 
$
9,538

 
$
40,768

 
$
2,760


- 98 -



 
 
As of
 
 
December 31, 2011
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
Permanent mortgage
 
3,917

 
2,445

 
1,472

 
—

Permanent mortgages guaranteed by U.S. government agencies
 
28,974

 
10,853

 
18,121

 
—

Total residential mortgage
 
32,891

 
13,298

 
19,593

 
—

 
 
 
 
 
 
 
 
 
Total accruing TDRs
 
32,891

 
13,298

 
19,593

 
—

 
 
 
 
 
 
 
 
 
Total TDRs
 
$
83,197

 
$
22,836

 
$
60,361

 
$
2,760



- 99 -



A summary of troubled debt restructurings by accruing status as of September 30, 2011 were as follows (in thousands):
 
 
As of
 
Amounts Charged-off
 
 
September 30, 2011
 
During:
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Three Months Ended
Sept. 30, 2011
 
Nine Months Ended
Sept. 30, 2011
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
 
3,747

 
2,010

 
1,737

 
—

 
—

 
301

Wholesale/retail
 
1,804

 
1,579

 
225

 
26

 
—

 
—

Manufacturing
 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
 
65

 
65

 
—

 
—

 
—

 
—

Integrated food services
 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
963

 
—

 
963

 
—

 
—

 
—

Total commercial
 
6,579

 
3,654

 
2,925

 
26

 
—

 
301

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
28,902

 
5,111

 
23,791

 
1,069

 
427

 
1,066

Retail
 
1,450

 
—

 
1,450

 
—

 
502

 
502

Office
 
3,085

 
1,421

 
1,664

 
—

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
 
8,209

 
2,317

 
5,892

 
726

 
—

 
—

Total commercial real estate
 
41,646

 
8,849

 
32,797

 
1,795

 
929

 
1,568

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
6,201

 
6,201

 
—

 
282

 
—

 
54

Home equity
 
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
 
6,201

 
6,201

 
—

 
282

 
—

 
54

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
—

 
—

 
—

Other consumer
 
38

 
12

 
26

 
—

 
—

 
—

Total consumer
 
38

 
12

 
26

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total nonaccruing TDRs
 
$
54,464

 
$
18,716

 
$
35,748

 
$
2,103

 
$
929

 
$
1,923


- 100 -



 
 
As of
 
Amounts Charged-off
 
 
September 30, 2011
 
During:
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Three Months Ended
Sept. 30, 2011
 
Nine Months Ended
Sept. 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
3,804

 
2,773

 
1,031

 
—

 
121

 
201

Permanent mortgages guaranteed by U.S. government agencies
 
26,670

 
10,873

 
15,797

 
—

 
—

 
—

Total residential mortgage
 
30,474

 
13,646

 
16,828

 
—

 
121

 
201

 
 
 
 
 
 
 
 
 
 
 
 
 
Total accruing TDRs
 
30,474

 
13,646

 
16,828

 
—

 
121

 
201

 
 
 
 
 
 
 
 
 
 
 
 
 
Total TDRs
 
$
84,938

 
$
32,362

 
$
52,576

 
$
2,103

 
$
1,050

 
$
2,124


- 101 -



Troubled debt restructurings generally consist of interest rates concessions, payment stream concessions or a combination of concessions to distressed borrowers. The following tables detail the recorded balance of loans at September 30, 2012 by class that were restructured during the three and nine months ended September 30, 2012 by primary type of concession (in thousands):

 
Three Months Ended
Sept. 30, 2012
 
Accruing
 
Nonaccrual
 
Total
 
Combination & Other
 
Interest Rate
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
875

 
—

 
—

 
875

 
875

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
875

 
—

 
—

 
875

 
875

 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 

 

Construction and land development
—

 
—

 
6,598

 
—

 
6,598

 
6,598

Retail
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
6,598

 
—

 
6,598

 
6,598

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
—

 
—

 
—

 
—

 
—

Permanent mortgage guaranteed by U.S. government agencies
961

 
—

 
—

 
—

 
—

 
961

Home equity
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
961

 
—

 
—

 
—

 
—

 
961

 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
Indirect automobile
—

 
—

 
—

 
—

 
—

 
—

Other consumer
—

 
87

 
—

 
—

 
87

 
87

Total consumer
—

 
87

 
—

 
—

 
87

 
87

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
961

 
$
962

 
$
6,598

 
$
—

 
$
7,560

 
$
8,521



- 102 -



 
Nine Months Ended
Sept. 30, 2012
 
Accruing
 
Nonaccrual
 
Total
 
Combination & Other
 
Interest Rate
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
875

 
70

 
—

 
945

 
945

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
72

 
72

 
72

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
875

 
70

 
72

 
1,017

 
1,017

 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 

 

Construction and land development
—

 
1,280

 
6,598

 
—

 
7,878

 
7,878

Retail
—

 
2,398

 
—

 
—

 
2,398

 
2,398

Office
—

 
1,368

 
—

 
—

 
1,368

 
1,368

Multifamily
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
1,605

 
—

 
1,605

 
1,605

Total commercial real estate
—

 
5,046

 
8,203

 
—

 
13,249

 
13,249

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
151

 
—

 
—

 
781

 
781

 
932

Permanent mortgage guaranteed by U.S. government agencies
4,465

 
—

 
—

 
—

 
—

 
4,465

Home equity
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
4,616

 
—

 
—

 
781

 
781

 
5,397

 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
Indirect automobile
—

 
—

 
—

 
—

 
—

 
—

Other consumer
—

 
452

 
—

 
1,630

 
2,082

 
2,082

Total consumer
—

 
452

 
—

 
1,630

 
2,082

 
2,082

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
4,616

 
$
6,373

 
$
8,273

 
$
2,483

 
$
17,129

 
$
21,745



- 103 -



Troubled debt restructurings generally consist of interest rates concessions, payment stream concessions or a combination of concessions to distressed borrowers. The following tables detail the recorded balance of loans by class that were restructured during the three and nine months ended September 30, 2011 by primary type of concession (in thousands):

 
Three Months Ended
Sept. 30, 2011
 
Accruing
 
Nonaccrual
 
Total
 
Combination & Other
 
Interest Rate
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
924

 
924

 
924

Wholesale/retail
—

 
—

 
—

 
525

 
525

 
525

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
65

 
65

 
65

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
1,514

 
1,514

 
1,514

 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
—

 
—

 
—

 
3,694

 
3,694

 
3,694

Retail
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
31

 
31

 
31

Multifamily
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
333

 
333

 
333

Total commercial real estate
—

 
—

 
—

 
4,058

 
4,058

 
3,725

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
431

 
—

 
—

 
2,203

 
2,203

 
2,634

Permanent mortgage guaranteed by U.S. government agencies
6,366

 
—

 
—

 
—

 
—

 
6,366

Home equity
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
6,797

 
—

 
—

 
2,203

 
2,203

 
9,000

 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
Indirect automobile
—

 
—

 
—

 
—

 
—

 
—

Other consumer
—

 
—

 
—

 
12

 
12

 
12

Total consumer
—

 
—

 
—

 
12

 
12

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
6,797

 
$
—

 
$
—

 
$
7,787

 
$
7,787

 
$
14,239


- 104 -



 
Nine Months Ended
Sept. 30, 2011
 
Accruing
 
Nonaccrual
 
Total
 
Combination & Other
 
Interest Rate
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
924

 
924

 
924

Wholesale/retail
—

 
—

 
—

 
525

 
525

 
525

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
65

 
65

 
65

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
1,514

 
1,514

 
1,514

 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
—

 
—

 
—

 
6,733

 
6,733

 
6,733

Retail
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
31

 
31

 
31

Multifamily
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
2,398

 
2,398

 
2,398

Total commercial real estate
—

 
—

 
—

 
9,162

 
9,162

 
9,162

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
500

 
—

 
—

 
3,910

 
3,910

 
4,410

Permanent mortgage guaranteed by U.S. government agencies
13,123

 
—

 
—

 
—

 
—

 
13,123

Home equity
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
13,623

 
—

 
—

 
3,910

 
3,910

 
17,533

 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
Indirect automobile
—

 
—

 
—

 
—

 
—

 
—

Other consumer
—

 
—

 
—

 
39

 
39

 
39

Total consumer
—

 
—

 
—

 
39

 
39

 
39

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
13,623

 
$
—

 
$
—

 
$
14,625

 
$
14,625

 
$
28,248


- 105 -



The following table summarizes, by loan class, the recorded investment at September 30, 2012 of loans modified as TDRs within the previous 12 months and for which there was a payment default during the three and nine months ended September 30, 2012 (in thousands):

 
Three Months Ended
Sept. 30, 2012
 
Nine Months Ended
Sept. 30, 2012
 
Accruing
 
Nonaccrual
 
Total
 
Accruing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
70

 
70

 
—

 
70

 
70

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
70

 
70

 
—

 
70

 
70

 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
—

 
1,183

 
1,183

 
—

 
1,183

 
1,183

Retail
—

 
—

 
—

 
—

 
2,398

 
2,398

Office
—

 
—

 
—

 
—

 
1,368

 
1,368

Multifamily
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
1,183

 
1,183

 
—

 
4,949

 
4,949

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
151

 
—

 
151

 
151

 
—

 
151

Permanent mortgage guaranteed by U.S. government agencies
3,946

 
—

 
3,946

 
4,635

 
—

 
4,635

Home equity
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
4,097

 
—

 
4,097

 
4,786

 
—

 
4,786

 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
Indirect automobile
—

 
—

 
—

 
—

 
—

 
—

Other consumer
—

 
1,770

 
1,770

 
—

 
1,770

 
1,770

Total consumer
—

 
1,770

 
1,770

 
—

 
1,770

 
1,770

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
4,097

 
$
3,023

 
$
7,120

 
$
4,786

 
$
6,789

 
$
11,575


A payment default is defined as being 30 days or more past due subsequent to the loan modification. Loans that experienced a payment default during the nine months ended September 30, 2012 above includes loans that were 30 days or more past due at any time during the period, but that are performing in accordance with the modified terms as of the balance sheet date.



- 106 -



The following table summarizes, by loan class, the recorded investment at September 30, 2011 of loans modified as TDRs within the previous 12 months and for which there was a payment default during the three and nine months ended September 30, 2011 (in thousands):

 
Three Months Ended
Sept. 30, 2011
 
Nine Months Ended
Sept. 30, 2011
 
Accruing
 
Nonaccrual
 
Total
 
Accruing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
—

 
2,888

 
2,888

 
—

 
3,120

 
3,120

Retail
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
258

 
258

 
—

 
258

 
258

Total commercial real estate
—

 
3,146

 
3,146

 
—

 
3,378

 
3,378

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
144

 
—

 
144

 
302

 
140

 
442

Permanent mortgage guaranteed by U.S. government agencies
4,907

 
—

 
4,907

 
7,856

 
—

 
7,856

Home equity
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
5,051

 
—

 
5,051

 
8,158

 
140

 
8,298

 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
Indirect automobile
—

 
—

 
—

 
—

 
—

 
—

Other consumer
—

 
26

 
26

 
—

 
26

 
26

Total consumer
—

 
26

 
26

 
—

 
26

 
26

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
5,051

 
$
3,172

 
$
8,223

 
$
8,158

 
$
3,544

 
$
11,702


- 107 -



Nonaccrual & Past Due Loans

Past due status for all loan classes is based on the actual number of days since the last payment was due according to the contractual terms of the loans.

A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of September 30, 2012 is as follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 89
Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,425,408

 
$
5,002

 
$
—

 
$
3,063

 
$
2,433,473

Services
 
1,880,350

 
741

 
538

 
10,099

 
1,891,728

Wholesale/retail
 
1,075,936

 
1,324

 
—

 
2,007

 
1,079,267

Manufacturing
 
359,975

 
834

 
—

 
2,283

 
363,092

Healthcare
 
1,029,208

 
4,775

 
—

 
3,305

 
1,037,288

Integrated food services
 
213,832

 
—

 
—

 
—

 
213,832

Other commercial and industrial
 
252,967

 
240

 
325

 
1,005

 
254,537

Total commercial
 
7,237,676

 
12,916

 
863

 
21,762

 
7,273,217

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
241,069

 
10,297

 
35

 
38,143

 
289,544

Retail
 
517,991

 
368

 
—

 
6,692

 
525,051

Office
 
394,984

 
1,190

 
—

 
9,833

 
406,007

Multifamily
 
395,333

 
35

 
—

 
3,145

 
398,513

Industrial
 
181,271

 
1,831

 
—

 
4,064

 
187,166

Other real estate loans
 
342,969

 
2,391

 
1

 
13,884

 
359,245

Total commercial real estate
 
2,073,617

 
16,112

 
36

 
75,761

 
2,165,526

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,093,109

 
17,953

 
250

 
23,207

 
1,134,519

Permanent mortgages guaranteed by U.S. government agencies
 
26,908

 
16,629

 
125,346

 
510

 
169,393

Home equity
 
706,557

 
2,961

 
—

 
5,550

 
715,068

Total residential mortgage
 
1,826,574

 
37,543

 
125,596

 
29,267

 
2,018,980

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
43,588

 
1,729

 
32

 
1,932

 
47,281

Other consumer
 
322,308

 
1,878

 
—

 
3,177

 
327,363

Total consumer
 
365,896

 
3,607

 
32

 
5,109

 
374,644

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11,503,763

 
$
70,178

 
$
126,527

 
$
131,899

 
$
11,832,367



- 108 -



A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of December 31, 2011 is as follows (in thousands):

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 89
Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,003,192

 
$
1,065

 
$
448

 
$
336

 
$
2,005,041

Services
 
1,729,775

 
13,608

 
1,187

 
16,968

 
1,761,538

Wholesale/retail
 
945,776

 
470

 
—

 
21,180

 
967,426

Manufacturing
 
313,028

 
654

 
—

 
23,051

 
336,733

Healthcare
 
971,265

 
1,362

 
47

 
5,486

 
978,160

Integrated food services
 
204,306

 
—

 
5

 
—

 
204,311

Other commercial and industrial
 
298,105

 
1,966

 
—

 
1,790

 
301,861

Total commercial
 
6,465,447

 
19,125

 
1,687

 
68,811

 
6,555,070

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
278,901

 
1,279

 
—

 
61,874

 
342,054

Retail
 
502,167

 
372

 
—

 
6,863

 
509,402

Office
 
394,227

 
239

 
—

 
11,457

 
405,923

Multifamily
 
365,477

 
38

 
—

 
3,513

 
369,028

Industrial
 
278,186

 
—

 
—

 
—

 
278,186

Other real estate loans
 
367,643

 
3,444

 
137

 
15,486

 
386,710

Total commercial real estate
 
2,186,601

 
5,372

 
137

 
99,193

 
2,291,303

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,110,418

 
17,259

 
601

 
25,366

 
1,153,644

Permanent mortgages guaranteed by U.S. government agencies
 
20,998

 
12,163

 
155,301

 
—

 
188,462

Home equity
 
624,942

 
3,036

 
42

 
4,401

 
632,421

Total residential mortgage
 
1,756,358

 
32,458

 
155,944

 
29,767

 
1,974,527

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
98,345

 
4,581

 
29

 
2,194

 
105,149

Other consumer
 
340,087

 
2,286

 
—

 
1,321

 
343,694

Total consumer
 
438,432

 
6,867

 
29

 
3,515

 
448,843

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,846,838

 
$
63,822

 
$
157,797

 
$
201,286

 
$
11,269,743


- 109 -



A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of September 30, 2011 is as follows (in thousands):

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 89
Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
1,744,256

 
$
599

 
$
448

 
$
3,900

 
$
1,749,203

Services
 
1,847,318

 
6,980

 
468

 
18,181

 
1,872,947

Wholesale/retail
 
980,829

 
12,880

 
273

 
27,088

 
1,021,070

Manufacturing
 
345,355

 
28

 
—

 
27,691

 
373,074

Healthcare
 
908,542

 
89

 
—

 
5,715

 
914,346

Integrated food services
 
192,179

 
21

 
—

 
—

 
192,200

Other commercial and industrial
 
297,016

 
585

 
—

 
1,161

 
298,762

Total commercial
 
6,315,495

 
21,182

 
1,189

 
83,736

 
6,421,602

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
297,573

 
685

 
—

 
72,207

 
370,465

Retail
 
447,820

 
2,864

 
—

 
6,492

 
457,176

Office
 
409,965

 
352

 
—

 
11,967

 
422,284

Multifamily
 
384,268

 
—

 
—

 
4,036

 
388,304

Industrial
 
224,222

 
—

 
—

 
—

 
224,222

Other real estate loans
 
387,848

 
7,188

 
—

 
15,346

 
410,382

Total commercial real estate
 
2,151,696

 
11,089

 
—

 
110,048

 
2,272,833

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,130,567

 
22,127

 
130

 
27,486

 
1,180,310

Permanent mortgages guaranteed by U.S. government agencies
 
25,234

 
8,414

 
139,892

 
—

 
173,540

Home equity
 
589,656

 
2,150

 
—

 
4,245

 
596,051

Total residential mortgage
 
1,745,457

 
32,691

 
140,022

 
31,731

 
1,949,901

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
123,160

 
4,718

 
—

 
2,418

 
130,296

Other consumer
 
347,362

 
951

 
82

 
1,542

 
349,937

Total consumer
 
470,522

 
5,669

 
82

 
3,960

 
480,233

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,683,170

 
$
70,631

 
$
141,293

 
$
229,475

 
$
11,124,569

(5) Acquisitions

On August 15, 2012, the Company acquired a majority voting interest in a Delaware limited liability corporation and its wholly-owned subsidiary, a Tulsa-based aircraft parts supplier and repair facility.

On August 19, 2012, the Company acquired The Milestone Group, Inc. ("Milestone"), a Denver-based Registered Investment Adviser that provides wealth management services to high net worth customers in Colorado and Nebraska. Milestone manages approximately $1.3 billion in equity and fixed income securities for customers.

The purchase price for these acquisitions totaled $41 million, including $29 million paid in cash and $12 million of contingent consideration. The preliminary purchase price allocation included $25 million of identifiable intangible assets and $23 million of goodwill. The pro-forma impact of these transactions was not material to the Company's consolidated financial statements.


- 110 -



(6) Mortgage Banking Activities

Residential Mortgage Loan Production

The Company originates, markets and services conventional and government-sponsored residential mortgage loans. Generally, conforming fixed rate residential mortgage loans are held for sale in the secondary market and non-conforming and adjustable-rate residential mortgage loans are held for investment. All residential mortgage loans originated for sale by the Company are carried at fair value based on sales commitments and market quotes. Changes in the fair value of mortgage loans held for sale are included in Other operating revenue – Mortgage banking revenue. Residential mortgage loans held for sale also includes the fair value of residential mortgage loan commitments and forward sale commitments which are considered derivative contracts that have not been designated as hedging instruments. The volume of mortgage loans originated for sale and secondary market prices are the primary drivers of originating and marketing revenue.

Residential mortgage loan commitments are generally outstanding for 60 to 90 days, which represents the typical period from commitment to originate a residential mortgage loan to when the closed loan is sold to an investor. Residential mortgage loan commitments are subject to both credit and interest rate risk. Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Exposure to interest rate fluctuations is partially managed through forward sales of residential mortgage-backed securities and forward sales contracts. These latter contracts set the price for loans that will be delivered in the next 60 to 90 days.

The unpaid principal balance of residential mortgage loans held for sale, notional amounts of derivative contracts related to residential mortgage loans commitments and forward contract sales and their related fair values included in Mortgage loans held for sale on the Consolidated Balance Sheets were (in thousands):

 
 
September 30, 2012
 
December 31, 2011
 
September 30, 2011
 
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid
Principal
 Balance/
Notional
 
Fair Value
Residential mortgage loans held for sale
 
$
294,794

 
$
313,927

 
$
177,319

 
$
184,816

 
$
239,439

 
$
250,527

Residential mortgage loan commitments
 
452,129

 
22,319

 
189,770

 
6,597

 
313,574

 
11,176

Forward sales contracts
 
722,043

 
(11,144
)
 
349,447

 
(3,288
)
 
541,764

 
(5,306
)
 
 
 

 
$
325,102

 
 

 
$
188,125

 
 

 
$
256,397


No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of September 30, 2012, December 31, 2011 or September 30, 2011. No credit losses were recognized on residential mortgage loans held for sale for the three and nine month periods ended September 30, 2012 and 2011.

Mortgage banking revenue was follows (in thousands):

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
2012
 
September 30,
2011
 
September 30,
2012
 
September 30,
2011
Originating and marketing revenue:
 
 
 
 
 
 
 
 
Residential mortgages loan held for sale
 
$
40,463

 
$
16,142

 
$
85,261

 
$
39,515

Residential mortgage loan commitments
 
6,512

 
8,383

 
15,722

 
8,925

Forward sales contracts
 
(6,618
)
 
(4,822
)
 
(7,856
)
 
(11,799
)
Total originating and marketing revenue
 
40,357

 
19,703

 
93,127

 
36,641

Servicing revenue
 
9,909

 
9,790

 
29,765

 
29,564

Total mortgage banking revenue
 
$
50,266

 
$
29,493

 
$
122,892

 
$
66,205


Originating and marketing revenue includes gain (loss) on residential mortgage loans held for sale and changes in the fair value of derivative contracts not designated as hedging instruments related to residential mortgage loan commitments and forward sales contracts. Servicing revenue includes servicing fee income and late charges on loans serviced for others.

- 111 -




Residential Mortgage Servicing

Mortgage servicing rights may be recognized when mortgage loans are originated pursuant to an existing plan for sale or, if no such plan exists, when the mortgage loans are sold. Mortgage servicing rights may also be purchased. Both originated or purchased mortgage servicing rights are initially recognized at fair value. The Company has elected to carry all mortgage servicing rights at fair value. Changes in the fair value are recognized in earnings as they occur. The unpaid principal balance of loans serviced for others is the primary driver of servicing revenue.

The following represents a summary of mortgage servicing rights (Dollars in thousands):

 
 
September 30,
2012
 
December 31,
2011
 
September 30,
2011
Number of residential mortgage loans serviced for others
 
97,465

 
95,841

 
95,831

Outstanding principal balance of residential mortgage loans serviced for others
 
$
11,756,350

 
$
11,300,986

 
$
11,249,503

Weighted average interest rate
 
4.85
%
 
5.19
%
 
5.29
%
Remaining term (in months)
 
289

 
290

 
286


Activity in capitalized mortgage servicing rights during the three months ended September 30, 2012 is as follows
(in thousands):
 
 
Purchased
 
Originated
 
Total
Balance at June 30, 2012
 
$
16,361

 
$
75,422

 
$
91,783

Additions, net
 
—

 
12,107

 
12,107

Change in fair value due to loan runoff
 
(998
)
 
(3,663
)
 
(4,661
)
Change in fair value due to market changes
 
(2,648
)
 
(6,928
)
 
(9,576
)
Balance, September 30, 2012
 
$
12,715

 
$
76,938

 
$
89,653


Activity in capitalized mortgage servicing rights during the nine months ended September 30, 2012 is as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, December 31, 2011
 
$
18,903

 
$
67,880

 
$
86,783

Additions, net
 
—

 
29,754

 
29,754

Change in fair value due to loan runoff
 
(2,958
)
 
(10,027
)
 
(12,985
)
Change in fair value due to market changes
 
(3,230
)
 
(10,669
)
 
(13,899
)
Balance, September 30, 2012
 
$
12,715

 
$
76,938

 
$
89,653


Activity in capitalized mortgage servicing rights during the three months ended September 30, 2011 is as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance at June 30, 2011
 
$
32,866

 
$
76,326

 
$
109,192

Additions, net
 
—

 
7,199

 
7,199

Change in fair value due to loan runoff
 
(1,034
)
 
(2,587
)
 
(3,621
)
Change in fair value due to market changes
 
(10,395
)
 
(14,427
)
 
(24,822
)
Balance, September 30, 2011
 
$
21,437

 
$
66,511

 
$
87,948



- 112 -



Activity in capitalized mortgage servicing rights during the nine months ended September 30, 2011 is as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, December 31, 2010
 
$
37,900

 
$
77,823

 
$
115,723

Additions, net
 
—

 
17,966

 
17,966

Change in fair value due to loan runoff
 
(3,585
)
 
(6,970
)
 
(10,555
)
Change in fair value due to market changes
 
(12,878
)
 
(22,308
)
 
(35,186
)
Balance, September 30, 2011
 
$
21,437

 
$
66,511

 
$
87,948

 
Changes in the fair value of mortgage servicing rights are included in Other operating expense in the Consolidated Statements of Earnings. Changes in fair value due to loan runoff are included in Mortgage banking costs. Changes in fair value due to market changes are reported separately. Changes in fair value due to market changes during the period relate to assets held at the reporting date.

There is no active market for trading in mortgage servicing rights after origination. Fair value is determined by discounting the projected net cash flows. Significant assumptions used to determine fair value considered to be significant unobservable input were as follows:

 
 
September 30,
2012
 
December 31,
2011
 
September 30,
2011
Discount rate – risk-free rate plus a market premium
 
10.32%
 
10.34%
 
10.3%
Prepayment rate – based upon loan interest rate, original term and loan type
 
9.14% - 46.42%
 
10.88% - 49.68%
 
11.33% - 47.70%
Loan servicing costs – annually per loan based upon loan type
 
$55 - $105
 
$55 - $105
 
$55 - $105
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life
 
0.77%
 
1.21%
 
1.26%

The Company is exposed to interest rate risk as benchmark residential mortgage interest rates directly affect the prepayment speeds used in valuing our mortgage servicing rights, which is partially managed through forward sales of residential mortgage-backed securities and forward sales contracts. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors. The prepayment model is updated daily for changes in market conditions and adjusted to better correlate with actual performance of BOK Financial’s servicing portfolio.

Stratification of the residential mortgage loan servicing portfolio and outstanding principal of loans serviced for others by interest rate at September 30, 2012 follows (in thousands):
 
 
< 4.00%
 
4.00% - 4.99%

 
5.00% - 5.99%

 
> 5.99%
 
Total
Fair value
 
$
22,949

 
$
40,754

 
$
20,473

 
$
5,477

 
$
89,653

Outstanding principal of loans serviced for others
 
$
2,418,398

 
$
4,250,803

 
$
3,329,014

 
$
1,758,135

 
$
11,756,350

Weighted average prepayment rate1
 
9.14
%
 
12.02
%
 
28.94
%
 
46.42
%
 
21.36
%
1 
Annual prepayment estimates based upon loan interest rate, original term and loan type. Weighted average prepayment rate is determined by weighting the prepayment speed for each loan by its unpaid principal balance.

The interest rate sensitivity of our mortgage servicing rights and securities and derivative contracts held as an economic hedge is modeled over a range of +/- 50 basis points. At September 30, 2012, a 50 basis point increase in mortgage interest rates is expected to increase the fair value of our mortgage servicing rights, net of economic hedge by $2.2 million. A 50 basis point decrease in mortgage interest rates is expected to decrease the fair value of our mortgage servicing rights, net of economic hedge by $3.9 million. In the model, changes in the value of servicing rights due to changes in interest rates assume stable relationships between residential mortgage rates and prepayment speeds. Changes in market conditions can cause variations from these assumptions. These factors and others may cause changes in the value of our mortgage servicing rights to differ from our expectations.


- 113 -



The aging status of our mortgage loans serviced for others by investor at September 30, 2012 follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89
Days
 
90 Days or More
 
Total
FHLMC
 
$
4,783,550

 
$
56,493

 
$
12,786

 
$
42,081

 
$
4,894,910

FNMA
 
2,301,369

 
26,034

 
6,524

 
20,044

 
2,353,971

GNMA
 
3,774,396

 
155,146

 
35,604

 
19,349

 
3,984,495

Other
 
457,172

 
9,839

 
2,611

 
53,352

 
522,974

Total
 
$
11,316,487

 
$
247,512

 
$
57,525

 
$
134,826

 
$
11,756,350


The Company has off-balance sheet credit risk related to residential mortgage loans sold to U.S. government agencies with recourse prior to 2008 under various community development programs. These loans consist of first lien, fixed-rate residential mortgage loans underwritten to standards approved by the agencies including full documentation and originated under programs available only for owner-occupied properties. However, these loans have a higher risk of delinquency and loss given default than traditional residential mortgage loans. The Company no longer sells residential mortgage loans with recourse other than obligations under standard representations and warranties. The recourse obligation relates to loan performance for the life of the loan and the Company is obligated to repurchase the loan at the time of foreclosure for the unpaid principal balance plus unpaid interest. The principal balance of residential mortgage loans sold subject to recourse obligations totaled $238 million at September 30, 2012, $259 million at December 31, 2011 and $262 million at September 30, 2011. A separate accrual for these off-balance sheet commitments is included in Other liabilities in the Consolidated Balance Sheets totaling $18 million at September 30, 2012, $19 million at December 31, 2011 and $19 million at September 30, 2011. At September 30, 2012, approximately 5% of the loans sold with recourse with an outstanding principal balance of $12 million were either delinquent more than 90 days, in bankruptcy or in foreclosure and 6% with an outstanding balance of $15 million were past due 30 to 89 days. The provision for credit losses on loans sold with recourse is included in Mortgage banking costs in the Consolidated Statements of Earnings.

The activity in the allowance for losses on loans sold with recourse included in Other liabilities in the Consolidated Balance Sheets is summarized as follows (in thousands):

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
Beginning balance
 
$
17,832

 
$
17,540

 
$
18,683

 
$
16,667

Provision for recourse losses
 
1,055

 
3,246

 
3,495

 
6,572

Loans charged off, net
 
(1,255
)
 
(2,264
)
 
(4,546
)
 
(4,717
)
Ending balance
 
$
17,632

 
$
18,522

 
$
17,632

 
$
18,522


The Company also has off-balance sheet credit risk for residential mortgage loans sold to government sponsored entities due to standard representations and warranties made under contractual agreements. At September 30, 2012, we have unresolved deficiency requests from the agencies on 344 loans with an aggregate outstanding principal balance of $42 million. At December 31, 2011, the Company had unresolved deficiency requests from the agencies on 247 loans with an aggregate principal balance of $37 million. For the nine months ended September 30, 2012, the Company has repurchased 41 loans for $4.7 million from the agencies and provided indemnification for 3 loans for $270 thousand. Losses incurred on these loans as of September 30, 2012 totaled $1.5 million. The Company has established an accrual for credit losses related to potential loan repurchases under representations and warranties that is included in Other liabilities in the Consolidated Balance Sheets and in Mortgage banking costs in the Consolidated Statements of Earnings. While the level of repurchases and indemnifications related to standard representations and warranties has remained low, the severity of the losses have trended higher. Accordingly, the Company increased its accrual for credit losses related to potential loan repurchases under representations and warranties to $4.8 million at September 30, 2012. The accrual was $2.2 million at December 31, 2011.

- 114 -



(7) Employee Benefits

BOK Financial has sponsored a defined benefit Pension Plan for all employees who satisfied certain age and service requirements.  Pension Plan benefits were curtailed as of April 1, 2006. The Company recognized periodic pension expense of $1.0 million for the three months ended September 30, 2012 and 2011, respectively, and $2.9 million for the nine months ended September 30, 2012 and 2011, respectively. The Company made no Pension Plan contributions during the nine months ended September 30, 2012 and 2011.

Management has been advised that the maximum allowable contribution for 2012 is $28 million. No minimum contribution is required for 2012.
(8)  Commitments and Contingent Liabilities

Litigation Contingencies

In 2010, the Bank was named as a defendant in three class actions alleging that the manner in which the bank posted charges to its consumer deposit accounts was improper. These actions were consolidated and settled on November 23, 2011 in Multi-District Litigation pending in the United States District Court for the Southern District of Florida. The settlement was approved by the Court on August 29, 2012. The settlement amount of $19 million was paid to the plaintiff class on May 4, 2012, with payment going out to the class in November 2012. The settlement was fully accrued for in 2011.

In an opinion dated October 11, 2011, the Oklahoma Supreme Court invalidated, pursuant to a petition brought by certain taxpayers, a $7.1 million settlement agreement between the Bank and the City of Tulsa (“the City”). The agreement settled claims asserted by the Bank against the City and against the Tulsa Airports Improvement Trust ("the Trust") related to a defaulted loan made by the Bank to a start-up airline. The Trust agreed to purchase the loan and its collateral from the Bank in the event of a default by the airline. The settlement amount was fully accrued for in 2011 in the accrual for off-balance sheet credit risk. On July 18, 2012, the Company paid the $7.1 million to the City and is pursuing its claims against the Trust. 

As a member of Visa, BOK Financial is obligated for a proportionate share of certain covered litigation losses incurred by Visa under a retrospective responsibility plan. A contingent liability was recognized for the Company’s share of Visa’s covered litigation liabilities. Visa funded an escrow account to cover litigation claims, including covered litigation losses under the retrospective responsibility plan, with proceeds from its initial public offering in 2008 and from available cash. 

BOK Financial currently owns 251,837 Visa Class B shares which are convertible into Visa Class A shares after the final settlement of all covered litigation. Class B shares may be diluted in the future if the escrow fund is not adequate to cover future covered litigation costs. Therefore, no value has been currently assigned to the Class B shares and no value may be assigned until the Class B shares are converted into a known number of Class A shares.

In July 2012, Visa announced it had reached an agreement in principle to resolve pending litigation and provide for settlement payments from the previously funded litigation escrow account. In conjunction with this agreement, Visa deposited an additional $150 million to the litigation escrow account which reduced the exchange rate to approximately 0.4206 Class A shares for each Class B share.

In the ordinary course of business, BOK Financial and its subsidiaries are subject to legal actions and complaints. Management believes, based upon the opinion of counsel, that the actions and liability or loss, if any, resulting from the final outcomes of the proceedings, will not have a material effect on the Company’s financial condition, results of operations or cash flows.

Alternative Investment Commitments

The Company sponsors two private equity funds and invests in several tax credit entities and other funds as permitted by banking regulations. Consolidation of these investments is based on the variable interest model determined by the nature of the entity. Variable interest entities are generally defined as entities that either do not have sufficient equity to finance their activities without support from other parties or whose equity investors lack a controlling financial interest. Variable interest entities are consolidated based on the determination that the Company is the primary beneficiary including the power to direct the activities that most significantly impact the variable interest's economic performance and the obligation to absorb losses of the variable interest or the right to receive benefits of the variable interest that could be significant to the variable interest.

- 115 -




BOKF Equity, LLC, an indirect wholly-owned subsidiary, is the general partner of two consolidated private equity funds (“the Funds”). The Funds provide alternative investment opportunities to certain customers, some of which are related parties, through unaffiliated limited partnerships. These unaffiliated limited partnerships generally invest in distressed assets, asset buy-outs or venture capital companies. As general partner, BOKF Equity, LLC has the power to direct activities that most significantly affect the Funds' performance and contingent obligations to make additional investments totaling $8.1 million at September 30, 2012. Substantially all of the obligations are offset by limited partner commitments. The Company does not accrue its contingent liability to fund investments. The Volcker Rule in Title VI of the Dodd-Frank Act limits both the amount and structure of these type of investments. As a result, the Company's private equity activity might be curtailed.

Consolidated tax credit entities represent the Company's interest in entities earning federal new market tax credits related to qualifying loans for which the Company has the power to direct the activities that most significantly impact the variable interest's economic performance of the entity including being the primary beneficiary of or the obligation to absorb losses of the variable interest that could be significant to the variable interest.

The Company also has interests in various unrelated alternative investments generally consisting of unconsolidated limited partnership interest in or loans to entities for which investment return is in the form of tax credits or that invest in distressed real estate loans and properties, energy development, venture capital and other activities. The Company is prohibited by banking regulations from controlling or actively managing the activities of these investments and the Company's maximum exposure to loss is restricted to its investment balance. The Company's obligation to fund alternative investments is included in Other liabilities in the Consolidated Balance Sheets.

A summary of consolidated and unconsolidated alternative investments as of September 30, 2012, December 31, 2011 and September 30, 2011 is as follows (in thousands):

 
 
September 30, 2012
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interest
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
28,792

 
$
—

 
$
—

 
$
24,777

Tax credit entities
 
10,000

 
14,094

 
—

 
10,964

 
10,000

Other
 
—

 
9,024

 
—

 
—

 
2,041

Total consolidated
 
$
10,000

 
$
51,910

 
$
—

 
$
10,964

 
$
36,818

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
17,486

 
$
69,717

 
$
36,433

 
$
—

 
$
—

Other
 
—

 
9,902

 
2,062

 
—

 
—

Total unconsolidated
 
$
—

 
$
79,619

 
$
38,495

 
$
—

 
$
—


 
 
December 31, 2011
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interest
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
30,902

 
$
—

 
$
—

 
$
26,042

Tax credit entities
 
10,000

 
14,483

 
—

 
10,964

 
10,000

Other
 
—

 
7,206

 
—

 
—

 
143

Total consolidated
 
$
10,000

 
$
52,591

 
$
—

 
$
10,964

 
$
36,185

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
10,575

 
$
37,890

 
$
16,084

 
$
—

 
$
—

Other
 
—

 
10,950

 
2,194

 
—

 
—

Total unconsolidated
 
$
—

 
$
48,840

 
$
18,278

 
$
—

 
$
—


- 116 -




 
 
September 30, 2011
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interest
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
29,113

 
$
—

 
$
—

 
$
24,761

Tax credit entities
 
10,000

 
14,612

 
—

 
10,964

 
10,000

Other
 
—

 
7,332

 
—

 
—

 
197

Total consolidated
 
$
10,000

 
$
51,057

 
$
—

 
$
10,964

 
$
34,958

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
7,746

 
$
38,121

 
$
18,481

 
$
—

 
$
—

Other
 
—

 
12,207

 
2,435

 
—

 
—

Total unconsolidated
 
$
—

 
$
50,328

 
$
20,916

 
$
—

 
$
—



Other Commitments and Contingencies

At September 30, 2012, Cavanal Hill Funds’ assets included $917 million of U.S. Treasury, $955 million of cash management and $379 million of tax-free money market funds. Assets of these funds consist of highly-rated, short-term obligations of the U.S. Treasury, corporate issuers and U.S. states and municipalities. The net asset value of units in these funds was $1.00 at September 30, 2012. An investment in these funds is not insured by the Federal Deposit Insurance Corporation or guaranteed by BOK Financial or any of its subsidiaries. BOK Financial may, but is not obligated to purchase assets from these funds to maintain the net asset value at $1.00. No assets were purchased from the funds in 2012 or 2011.

Cottonwood Valley Ventures, Inc. (“CVV, Inc.”), an indirectly wholly-owned subsidiary of BOK Financial, is being audited by the Oklahoma Tax Commission (“OTC”) for tax years 2007 through 2009. CVV, Inc. is a qualified venture capital company under the applicable Oklahoma statute. As authorized by the statute, CVV, Inc. guarantees transferable Oklahoma state income tax credits by providing direct debt financing to private companies which qualify as statutory business ventures.  Due to certain statutory limitations on utilization of such credits, CVV, Inc. must sell the majority of the credits to provide the economic incentives provided for by the statute. During the third quarter of 2012, CVV, Inc. and credit purchasers settled the assessment related to the 2008 tax credits disallowed with no material adverse impact to the consolidated financial statements. Management does not anticipate that the remaining issue under audit will have a material adverse impact to the consolidated financial statements.

The Company agreed to guarantee rents totaling $28.7 million through September of 2017 to the City as owner of a building immediately adjacent to the Bank’s main office for space currently rented by third-party tenants in the building. All rent payments are current. Remaining guaranteed rents totaled $15.0 million at September 30, 2012. Current leases expire or are subject to lessee termination options at various dates in 2013 and 2014. Our obligation under the agreement would be affected by lessee decisions to exercise these options. In return for this guarantee, the Company will receive 80% of net cash flow as defined in an agreement with the City through September 2017 from rental of space that was vacant at the inception of the agreement. The maximum amount that the Company may receive under this agreement is $4.5 million.
(9) Shareholders’ Equity

On October 30, 2012, the Board of Directors of BOK Financial approved a quarterly cash dividend of $0.38 per common share. The quarterly dividend will be payable on or about November 30, 2012 to shareholders of record as of November 16, 2012. In addition, on October 30, 2012, the Board of Directors approved a special cash dividend of $1.00 per common share payable on or about November 30, 2012 to shareholders of record as of November 16, 2012.

Dividends declared during the three and nine months ended September 30, 2012 were $0.38 per share and $1.09 per share, respectively. Dividends declared during the three and nine months ended September 30, 2011 were $0.275 per share and $0.800 per share, respectively.


- 117 -



Accumulated Other Comprehensive Income (Loss)

AOCI includes unrealized gains and losses on available for sale ("AFS") securities. Unrealized gain (loss) on AFS securities also includes non-credit related unrealized losses on AFS securities for which an other-than-temporary impairment has been recorded in earnings. AOCI also includes unrealized gains on AFS securities that were transferred from AFS to investment securities in the third quarter of 2011. Such amounts will be amortized over the estimated remaining life of the security as an adjustment to yield, offsetting the related accretion of discount on the transferred securities.  Unrealized losses on employee benefit plans will be reclassified into income as pension plan costs are recognized over the remaining service period of plan participants. Accumulated losses on the interest rate lock hedge of the 2005 subordinated debt issuance will be reclassified into income over the ten-year life of the debt. Gains and losses in AOCI are net of deferred income taxes.

A rollforward of the components of accumulated other comprehensive income (loss) is included as follows (in thousands):
 
 
Unrealized Gain (Loss) on
 
 
 
 
 
 
Available for Sale Securities
 
Investment Securities Transferred from AFS
 
Employee Benefit Plans
 
Loss on Effective Cash Flow Hedges
 
Total
Balance, December 31, 2010
 
$
122,494

 
$
—

 
$
(13,777
)
 
$
(878
)
 
$
107,839

Net change in unrealized gains (losses)
 
97,753

 
—

 
—

 
—

 
97,753

Other-than-temporary impairment losses recognized in earnings
 
20,723

 
—

 
—

 
—

 
20,723

Transfer of net unrealized gain from AFS to investment securities
 
(12,999
)
 
12,999

 
—

 
—

 
—

Reclassification adjustment for net (gains) losses realized and included in earnings
 
(27,064
)
 
—

 
—

 
230

 
(26,834
)
Income tax expense (benefit)
 
(30,764
)
 
(5,057
)
 
—

 
(89
)
 
(35,910
)
Balance, September 30, 2011
 
$
170,143

 
$
7,942

 
$
(13,777
)
 
$
(737
)
 
$
163,571

 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2011
 
$
135,740

 
$
6,673

 
$
(12,742
)
 
$
(692
)
 
$
128,979

Net change in unrealized gains (losses)
 
86,390

 
—

 
(292
)
 
—

 
86,098

Other-than-temporary impairment losses recognized in earnings
 
5,684

 
—

 
—

 
—

 
5,684

Amortization of unrealized gain on investments securities transferred from AFS
 
—

 
(5,430
)
 
—

 
—

 
(5,430
)
Reclassification adjustment for net(gains) losses realized and included in earnings
 
(32,779
)
 
—

 
—

 
399

 
(32,380
)
Income tax benefit (expense)
 
(23,066
)
 
2,550

 
113

 
(155
)
 
(20,558
)
Balance, September 30, 2012
 
$
171,969

 
$
3,793

 
$
(12,921
)
 
$
(448
)
 
$
162,393



- 118 -



(10)  Earnings Per Share
 
(In thousands, except share and per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to BOK Financial Corp.
 
$
87,382

 
$
85,101

 
$
268,626

 
$
218,882

Earnings allocated to participating securities
 
(278
)
 
(680
)
 
(1,994
)
 
(1,700
)
Numerator for basic earnings per share – income available to common shareholders
 
87,104

 
84,421

 
266,632

 
217,182

Effect of reallocating undistributed earnings of participating securities
 
1

 
2

 
6

 
5

Numerator for diluted earnings per share – income available to common shareholders
 
$
87,105

 
$
84,423

 
$
266,638

 
$
217,187

 
 
 
 
 
 
 
 
 
Denominator:
 
 

 
 

 
 

 
 

Weighted average shares outstanding
 
68,183,171

 
68,372,082

 
68,204,078

 
68,403,652

Less:  Participating securities included in weighted average shares outstanding
 
(216,471
)
 
(544,491
)
 
(499,735
)
 
(527,777
)
Denominator for basic earnings per common share
 
67,966,700

 
67,827,591

 
67,704,343

 
67,875,875

Dilutive effect of employee stock compensation plans1
 
368,289

 
209,828

 
277,215

 
251,879

Denominator for diluted earnings per common share
 
68,334,989

 
68,037,419

 
67,981,558

 
68,127,754

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
1.28

 
$
1.24

 
$
3.94

 
$
3.20

Diluted earnings per share
 
$
1.27

 
$
1.24

 
$
3.92

 
$
3.19

1  Excludes employee stock options with exercise prices greater than current market price.
 
87,749

 
773,080

 
270,288

 
771,922




- 119 -



(11)  Reportable Segments

Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended September 30, 2012 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
91,378

 
$
22,195

 
$
7,064

 
$
55,390

 
$
176,027

Net interest revenue (expense) from internal sources
 
(10,747
)
 
6,457

 
5,554

 
(1,264
)
 
—

Net interest revenue
 
80,631

 
28,652

 
12,618

 
54,126

 
176,027

Provision for (reduction of ) allowances for credit losses
 
3,253

 
485

 
509

 
(4,247
)
 
—

Net interest revenue after provision for (reduction of) allowances for credit losses
 
77,378

 
28,167

 
12,109

 
58,373

 
176,027

Other operating revenue
 
40,091

 
80,640

 
50,157

 
9,056

 
179,944

Other operating expense
 
62,633

 
74,067

 
53,867

 
31,773

 
222,340

Income before taxes
 
54,836

 
34,740

 
8,399

 
35,656

 
133,631

Federal and state income tax
 
21,331

 
13,514

 
3,267

 
7,666

 
45,778

Net income
 
33,505

 
21,226

 
5,132

 
27,990

 
87,853

Net income attributable to non-controlling interest
 
—

 
—

 
—

 
471

 
471

Net income attributable to BOK Financial Corp.
 
$
33,505

 
$
21,226

 
$
5,132

 
$
27,519

 
$
87,382

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
10,134,288

 
$
5,705,781

 
$
4,301,283

 
$
6,446,820

 
$
26,588,172

Average invested capital
 
865,157

 
292,281

 
188,638

 
1,600,577

 
2,946,653

 
 
 
 
 
 
 
 
 
 
 
Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.32
%
 
1.48
%
 
0.47
%
 


 
1.31
%
Return on average invested capital
 
15.41
%
 
28.89
%
 
10.82
%
 


 
11.80
%
Efficiency ratio
 
51.88
%
 
61.66
%
 
86.05
%
 


 
61.12
%


- 120 -



Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2012 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
274,411

 
$
69,154

 
$
21,340

 
$
166,052

 
$
530,957

Net interest revenue (expense) from internal sources
 
(33,667
)
 
18,462

 
15,834

 
(629
)
 
—

Net interest revenue
 
240,744

 
87,616

 
37,174

 
165,423

 
530,957

Provision for (reduction of) allowances for credit losses
 
10,393

 
6,137

 
1,680

 
(26,210
)
 
(8,000
)
Net interest revenue after provision for (reduction of) allowances for credit losses
 
230,351

 
81,479

 
35,494

 
191,633

 
538,957

Other operating revenue
 
131,042

 
205,400

 
148,105

 
18,938

 
503,485

Other operating expense
 
181,117

 
196,174

 
158,351

 
91,845

 
627,487

Income before taxes
 
180,276

 
90,705

 
25,248

 
118,726

 
414,955

Federal and state income tax
 
70,127

 
35,284

 
9,821

 
29,215

 
144,447

Net income
 
110,149

 
55,421

 
15,427

 
89,511

 
270,508

Net income attributable to non-controlling interest
 
—

 
—

 
—

 
1,882

 
1,882

Net income attributable to BOK Financial Corp.
 
$
110,149

 
$
55,421

 
$
15,427

 
$
87,629

 
$
268,626

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
10,050,873

 
$
5,739,833

 
$
4,230,874

 
$
5,862,092

 
$
25,883,672

Average invested capital
 
866,346

 
289,337

 
180,234

 
1,547,854

 
2,883,771

 
 
 
 
 
 
 
 
 
 
 
Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.46
%
 
1.29
%
 
0.49
%
 


 
1.39
%
Return on average invested capital
 
16.98
%
 
25.61
%
 
11.43
%
 


 
12.44
%
Efficiency ratio
 
50.68
%
 
64.23
%
 
85.68
%
 


 
60.75
%


- 121 -



Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended September 30, 2011 is as follows (in thousands):

 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
85,560

 
$
24,553

 
$
7,113

 
$
58,158

 
$
175,384

Net interest revenue (expense) from internal sources
 
(6,702
)
 
8,108

 
4,682

 
(6,088
)
 
—

Net interest revenue
 
78,858

 
32,661

 
11,795

 
52,070

 
175,384

Provision for (reduction of) allowances for credit losses
 
5,041

 
3,837

 
1,247

 
(10,125
)
 
—

Net interest revenue after provision for (reduction of) allowances for credit losses
 
73,817

 
28,824

 
10,548

 
62,195

 
175,384

Other operating revenue
 
37,924

 
79,766

 
46,112

 
9,814

 
173,616

Other operating expense
 
57,509

 
84,520

 
49,982

 
28,524

 
220,535

Income before taxes
 
54,232

 
24,070

 
6,678

 
43,485

 
128,465

Federal and state income tax
 
21,096

 
9,363

 
2,598

 
9,949

 
43,006

Net income
 
33,136

 
14,707

 
4,080

 
33,536

 
85,459

Net income attributable to non-controlling interest
 
—

 
—

 
—

 
358

 
358

Net income attributable to BOK Financial Corp.
 
$
33,136

 
$
14,707

 
$
4,080

 
$
33,178

 
$
85,101

Average assets
 
$
9,526,993

 
$
5,914,337

 
$
4,254,954

 
$
4,925,454

 
$
24,621,738

Average invested capital
 
886,538

 
273,143

 
175,478

 
1,403,247

 
2,738,406

Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.38
%
 
0.99
%
 
0.38
%
 


 
1.37
%
Return on average invested capital
 
14.83
%
 
21.36
%
 
9.22
%
 


 
12.33
%
Efficiency ratio
 
49.24
%
 
65.41
%
 
86.48
%
 


 
60.02
%


- 122 -



Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2011 is as follows (in thousands):

 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
254,143

 
$
64,574

 
$
23,263

 
$
178,044

 
$
520,024

Net interest revenue (expense) from internal sources
 
(23,420
)
 
25,188

 
11,348

 
(13,116
)
 
—

Net interest revenue
 
230,723

 
89,762

 
34,611

 
164,928

 
520,024

Provision for (reduction of) allowances for credit losses
 
16,646

 
9,568

 
2,308

 
(19,572
)
 
8,950

Net interest revenue after provision for (reduction of) allowances for credit losses
 
214,077

 
80,194

 
32,303

 
184,500

 
511,074

Other operating revenue
 
109,354

 
174,241

 
128,868

 
20,538

 
433,001

Other operating expense
 
170,708

 
208,082

 
141,084

 
81,166

 
601,040

Income before taxes
 
152,723

 
46,353

 
20,087

 
123,872

 
343,035

Federal and state income tax
 
59,409

 
18,031

 
7,814

 
35,861

 
121,115

Net income
 
93,314

 
28,322

 
12,273

 
88,011

 
221,920

Net income attributable to non-controlling interest
 
—

 
—

 
—

 
3,038

 
3,038

Net income attributable to BOK Financial Corp.
 
$
93,314

 
$
28,322

 
$
12,273

 
$
84,973

 
$
218,882

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
9,222,883

 
$
5,965,955

 
$
3,995,054

 
$
4,925,924

 
$
24,109,816

Average invested capital
 
874,259

 
272,167

 
175,478

 
1,330,097

 
2,652,001

 
 
 
 
 
 
 
 
 
 
 
Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.35
%
 
0.63
%
 
0.41
%
 


 
1.21
%
Return on average invested capital
 
14.27
%
 
13.91
%
 
9.35
%
 


 
11.03
%
Efficiency ratio
 
50.20
%
 
72.62
%
 
86.66
%
 


 
60.99
%


- 123 -



(12) Fair Value Measurements

Fair value is defined by applicable accounting guidance as the price to sell an asset or transfer a liability in an orderly transaction between market participants in the principal market for the given asset or liability at the measurement date based on market conditions at that date. Certain assets and liabilities are recorded in the Company’s financial statements at fair value. Some are recorded on a recurring basis and some on a non-recurring basis.

For some assets and liabilities, observable market transactions and market information might be available. For other assets and liabilities, observable market transactions and market information might not be available. A hierarchy for fair value has been established which categorizes into three levels the inputs to valuation techniques used to measure fair value. The three levels are as follows:

Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) - fair value is based on unadjusted quoted prices in active markets for identical assets or liabilities.

Significant Other Observable Inputs (Level 2) - Fair value is based on significant other observable inputs which are generally determined based on a single price for each financial instrument provided to us by an applicable third-party pricing service and is based on one or more of the following:

•
Quoted prices for similar, but not identical, assets or liabilities in active markets;
•
Quoted prices for identical or similar assets or liabilities in inactive markets;
•
Inputs other than quoted prices that are observable, such as interest rate and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates;
•
Other inputs derived from or corroborated by observable market inputs.

Significant Unobservable Inputs (Level 3) - Fair value is based upon model-based valuation techniques for which at least one significant assumption is not observable in the market.

Transfers between levels are recognized as of the end of the reporting period. There were no transfers in or out of quoted prices in active markets for identical instruments, significant other observable inputs or significant unobservable inputs during the nine months ended September 30, 2012 and 2011, respectively.

The underlying methods used by the third-party pricing services are considered in determining the primary inputs used to determine fair values. Management has evaluated the methodologies employed by the third-party pricing services by comparing the price provided by the pricing service with other sources, including brokers' quotes, sales or purchases of similar instruments and discounted cash flows to establish a basis for reliance on the pricing service values. Significant differences between the pricing service provided value and other sources are discussed with the pricing service to understand the basis for their values. Based on all observable inputs, management may adjust prices obtained from third-party pricing services to more appropriately reflect the prices that would be received to sell assets or paid to transfer liabilities in orderly transactions in the current market. No significant adjustments were made to price provided by third-party pricing services at September 30, 2012, December 31, 2011 or September 30, 2011.


- 124 -



Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of financial assets and liabilities that are measured on a recurring basis are as follows as of September 30, 2012 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
$
3,100

 
$
—

 
$
3,100

 
$
—

U.S. agency residential mortgage-backed securities
 
119,835

 
—

 
119,835

 
—

Municipal and other tax-exempt securities
 
58,150

 
—

 
58,150

 
—

Other trading securities
 
23,157

 
—

 
23,157

 
—

Total trading securities
 
204,242

 
—

 
204,242

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,002

 
1,002

 
—

 
—

Municipal and other tax-exempt
 
87,969

 
—

 
46,690

 
41,279

U.S. agency residential mortgage-backed securities
 
10,654,821

 
—

 
10,654,821

 
—

Privately issued residential mortgage-backed securities
 
331,722

 
—

 
331,722

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
339,095

 
—

 
339,095

 
—

Other debt securities
 
36,456

 
—

 
31,056

 
5,400

Perpetual preferred stock
 
25,288

 
—

 
25,288

 
—

Equity securities and mutual funds
 
30,081

 
7,837

 
22,244

 
—

Total available for sale securities
 
11,506,434

 
8,839

 
11,450,916

 
46,679

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
305,445

 
—

 
305,445

 
—

Corporate debt securities
 
26,442

 
—

 
26,442

 
—

Total fair value option securities
 
331,887

 
—

 
331,887

 
—

Residential mortgage loans held for sale
 
325,102

 
—

 
325,102

 
—

Mortgage servicing rights1
 
89,653

 
—

 
—

 
89,653

Derivative contracts, net of cash margin2
 
472,783

 
8,301

3 
464,482

 
—

Other assets – private equity funds
 
28,792

 
—

 
—

 
28,792

Liabilities:
 
 

 
 

 
 

 
 

Derivative contracts, net of cash margin2
 
435,497

 
—

 
435,497

 
—

1 
A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 6, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type.
3 
Represents exchange-traded energy derivative contracts.

- 125 -



The fair value of financial assets and liabilities that are measured on a recurring basis are as follows as of December 31, 2011 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
$
22,203

 
$
—

 
$
22,203

 
$
—

U.S. agency residential mortgage-backed securities
 
12,379

 
—

 
12,379

 
—

Municipal and other tax-exempt securities
 
39,345

 
—

 
39,345

 
—

Other trading securities
 
2,873

 
—

 
2,696

 
177

Total trading securities
 
76,800

 
—

 
76,623

 
177

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,006

 
1,006

 
—

 
—

Municipal and other tax-exempt
 
68,837

 
—

 
26,484

 
42,353

U.S. agency residential mortgage-backed securities
 
9,588,177

 
—

 
9,588,177

 
—

Privately issued residential mortgage-backed securities
 
419,166

 
—

 
419,166

 
—

Other debt securities
 
36,495

 
—

 
30,595

 
5,900

Perpetual preferred stock
 
18,446

 
—

 
18,446

 
—

Equity securities and mutual funds
 
47,238

 
23,596

 
23,642

 
—

Total available for sale securities
 
10,179,365

 
24,602

 
10,106,510

 
48,253

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
626,109

 
—

 
626,109

 
—

Corporate debt securities
 
25,117

 
—

 
25,117

 
—

Total fair value option securities
 
651,226

 
—

 
651,226

 
—

Residential mortgage loans held for sale
 
188,125

 
—

 
188,125

 
—

Mortgage servicing rights1
 
86,783

 
—

 
—

 
86,783

Derivative contracts, net of cash margin 2
 
293,859

 
457

3 
293,402

 
—

Other assets – private equity funds
 
30,902

 
—

 
—

 
30,902

Liabilities:
 
 

 
 

 
 

 
 

Derivative contracts, net of cash margin 2
 
236,522

 
—

 
236,522

 
—

1 
A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 6, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type.
3 
Represents exchange-traded agricultural derivative contracts.


- 126 -



The fair value of financial assets and liabilities that are measured on a recurring basis are as follows as of September 30, 2011 (in thousands):
 
 
Total
 
Quoted Prices in
Active Markets for Identical Instruments
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
$
1,839

 
$
—

 
$
1,839

 
$
—

U.S. agency residential mortgage-backed securities
 
49,501

 
—

 
49,501

 
—

Municipal and other tax-exempt securities
 
57,431

 
—

 
57,431

 
—

Other trading securities
 
888

 
888

 
—

 
—

Total trading securities
 
109,659

 
888

 
108,771

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,006

 
1,006

 
—

 
—

Municipal and other tax-exempt
 
70,195

 
—

 
26,483

 
43,712

U.S. agency residential mortgage-backed securities
 
9,016,877

 
—

 
9,016,877

 
—

Privately issued residential mortgage-backed securities
 
457,332

 
—

 
457,332

 
—

Other debt securities
 
5,900

 
—

 
—

 
5,900

Perpetual preferred stock
 
19,080

 
—

 
19,080

 
—

Equity securities and mutual funds
 
49,241

 
29,827

 
19,414

 
—

Total available for sale securities
 
9,619,631

 
30,833

 
9,539,186

 
49,612

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
672,191

 
—

 
672,191

 
—

Corporate debt securities
 
—

 
—

 
—

 
—

Total fair value option securities
 
672,191

 
—

 
672,191

 
—

Residential mortgage loans held for sale
 
256,397

 
—

 
256,397

 
—

Mortgage servicing rights1
 
87,948

 
—

 
—

 
87,948

Derivative contracts, net of cash margin 2
 
370,616

 
34,770

3 
335,846

 
—

Other assets – private equity funds
 
29,113

 
—

 
—

 
29,113

Liabilities:
 
 

 
 

 
 

 
 

Derivative contracts, net of cash margin 2
 
341,822

 
—

 
341,822

 
—

1 
A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 6, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type.
3 
Represents exchange-traded energy derivative contracts

Following is a description of the Company's valuation methodologies used for assets and liabilities measured on a recurring basis:
Securities
The fair values of trading, available for sale and fair value options securities are based on quoted prices for identical instruments in active markets, when available. If quoted prices for identical instruments are not available, fair values are based on significant other observable inputs such as quoted prices of comparable instruments or interest rates and credit spreads, yield curves, volatilities, prepayment speeds and loss severities.

The fair value of certain available for sale municipal and other debt securities may be based on significant unobservable inputs. These significant unobservable inputs include limited observed trades, projected cash flows, current credit rating of the issuers and, when applicable, the insurers of the debt and observed trades of similar debt. Discount rates are primarily based on reference to interest rate spreads on comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies adjusted for a lack of trading volume. Significant unobservable inputs are developed by investment securities professionals involved in the active trading of similar securities. A summary of significant inputs used to value these securities follows. A management committee composed of senior members from the Company's Capital Markets, Risk

- 127 -



Management and Finance departments assess the appropriateness of these inputs monthly.



Derivatives

All derivative instruments are carried on the balance sheet at fair value. Fair values for exchange-traded contracts are based on quoted prices. Fair values for over-the-counter interest rate, commodity and foreign exchange contracts are based on valuations provided either by third-party dealers in the contracts, quotes provided by independent pricing services, or a third-party provided pricing model that use significant other observable market inputs.

Credit risk is considered in determining the fair value of derivative instruments. Management determines fair value adjustments based on various risk factors including but not limited to counterparty credit rating or equivalent loan grading, derivative contract notional size, price volatility of the underlying commodity, duration of the derivative contracts and expected loss severity. Expected loss severity is based on historical losses for similarly risk graded commercial loan customers. Decreases in counterparty credit rating or grading and increases in price volatility and expected loss severity all tend to increase the credit quality adjustment which reduces the fair value of asset contracts. The reduction in fair value is recognized in earnings during the current period.

We also consider our own credit risk in determining the fair value of derivative contracts. Changes in our credit rating would affect the fair value of our derivative liabilities. In the event of a credit downgrade, the fair value of our derivative liabilities would increase. The change in the fair value would be recognized in earnings in the current period.
Residential Mortgage Loans Held for Sale
Residential mortgage loans held for sale are carried on the balance sheet at fair value. The fair values of residential mortgage loans held for sale are based upon quoted market prices of such loans sold in securitization transactions, including related unfunded loan commitments.

Other Assets - Private Equity Funds
The fair value of the portfolio investments of the Company's two private equity funds are based upon net asset value reported by the underlying funds, as adjusted by the general partner when necessary to represent the price that would be received to sell the assets. The Company's private equity funds provide customers alternative investment opportunities as limited partners of the funds. As fund of funds, the private equity funds invest in other limited partnerships or limited liability companies that invest substantially all of their assets in U.S. companies pursuing diversified investment strategies including early-stage venture capital, distressed securities and corporate or asset buy-outs. Private equity fund assets are long-term, illiquid investments. No secondary market exists for these assets. The private equity funds typically invest in funds that provide no redemption rights to investors. The fair value of the private equity investments may only be realized through cash distributions from the underlying funds.


- 128 -



A summary of quantitative information about assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of September 30, 2012 follows (in thousands):
Quantitative Information about Level 3 Recurring Fair Value Measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Par
Value
 
Amortized
Cost6
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
$
29,100

 
$
28,999

 
$
28,848

 
Discounted cash flows
1 
Interest rate spread
 
1.00%-1.50% (1.25%)
2 
98.85%-99.47% (99.13%)
3 
Below investment grade
 
17,000

 
13,396

 
12,431

 
Discounted cash flows
1 
Interest rate spread
 
7.20%-9.88% (7.77%)
4 
73.06%-73.30% (73.13%)
3 
Total municipal and other tax-exempt securities
 
46,100

 
42,395

 
41,279

 
 
 
 
 
 
 
Other debt securities
 
5,400

 
5,400

 
5,400

 
Discounted cash flows
1 
Interest rate spread
 
1.70%-1.73% (1.71%)
5 
100% (100%)
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets - private equity funds
 
N/A
 
N/A
 
28,792

 
Net asset value reported by underlying fund
 
Net asset value reported by underlying fund
 
N/A
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume
2 
Interest rate yields used to value investment grade tax-exempt securities represent a spread of 75 to 80 basis points over average yields for comparable tax-exempt securities.
3 
Represents fair value as a percentage of par value
4 
Interest rate yields determined using a spread of 700 basis points over comparable municipal securities of varying durations.
5 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding less than 1%.
6 
Amortized cost reduced by other-than-temporary impairments recorded in earnings. See Note 2 for additional discussion.

The fair value of these securities measured at fair value using significant unobservable inputs are sensitive primarily to changes in interest rate spreads. At September 30, 2012, for tax-exempt securities rated investment grade by all nationally-recognized rating agencies, a 100 basis point increase in the spreads over average yields for comparable securities would result in an additional decrease in the fair value of $285 thousand. For taxable securities rated investment grade by all nationally-recognized rating agencies, a 100 basis point increase in the spreads over average yield for comparable securities would result in an additional decrease in the fair value of $53 thousand. For municipal and other tax-exempt securities rated below investment grade by at least one of the nationally-recognized rating agencies, a 100 basis point increase in the spread over average yields for comparable securities would result in an additional decrease in the fair value of these securities of $363 thousand.

- 129 -




The following represents the changes for the three months ended September 30, 2012 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Other assets – private equity funds
Balance, June 30, 2012
 
$
41,662

 
$
5,388

 
$
31,492

Purchases and capital calls
 
—

 
—

 
476

Redemptions and distributions
 
1

 
—

 
(3,906
)
Gain (loss) recognized in earnings:
 
 

 
 

 
 

Gain on other assets, net
 
—

 
—

 
730

Gain on available for sale securities, net
 
—

 
—

 
—

Other-than-temporary impairment losses
 
—

 
—

 
—

Other comprehensive gain (loss)
 
(384
)
 
12

 
—

Balance, September 30, 2012
 
$
41,279

 
$
5,400

 
$
28,792


The following represents the changes for the nine months ended September 30, 2012 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Other assets – private equity funds
Balance, December 31, 2011
 
$
42,353

 
$
5,900

 
$
30,902

Purchases and capital calls
 
—

 
—

 
2,385

Redemptions and distributions
 
(462
)
 
(500
)
 
(7,072
)
Gain (loss) recognized in earnings:
 
 

 
 

 
 

Gain on other assets, net
 
—

 
—

 
2,577

Gain on available for sale securities, net
 
1

 
—

 
—

Other-than-temporary impairment losses
 
—

 
—

 
—

Other comprehensive (loss)
 
(613
)
 
—

 
—

Balance, September 30, 2012
 
$
41,279

 
$
5,400

 
$
28,792




- 130 -



A summary of quantitative information about Recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of December 31, 2011 follows (in thousands):
Quantitative Information about Level 3 Recurring Fair Value Measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Par
Value
 
Amortized
Cost6
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
$
29,200

 
$
29,466

 
$
29,327

 
Discounted cash flows1
 
Interest rate spread
 
1.00%-1.50% (1.33%)
2 
98.79%-99.60% (99.24%)
3 
Below investment grade
 
17,000

 
13,026

 
13,026

 
Discounted cash flows1
 
Interest rate spread
 
6.25%-9.58% (6.93%)
4 
76.45%-76.99% (76.62%)
3 
Total municipal and other tax-exempt securities
 
46,200

 
42,492

 
42,353

 
 
 
 
 
 
 
Other debt securities
 
5,900

 
5,900

 
5,900

 
Discounted cash flows1
 
Interest rate spread
 
1.60%-1.80% (1.76%)
5 
100% (100%)
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets - private equity funds
 
N/A
 
N/A
 
30,902

 
Net asset value reported by underlying fund
 
Net asset value reported by underlying fund
 
N/A
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume
2 
Interest rate yields used to value investment grade tax-exempt securities represent a spread of 75 to 80 basis points over average yields for comparable tax-exempt securities.
3 
Represents fair value as a percentage of par value
4 
Interest rate yields determined using a spread of 600 basis points over comparable municipal securities of varying durations.
5 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding less than 1%.
6 
Amortized cost reduced by other-than-temporary impairments recorded in earnings. See Note 2 for additional discussion.




- 131 -



A summary of quantitative information about Recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2011 follows (in thousands):

Quantitative Information about Level 3 Recurring Fair Value Measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Par
Value
 
Amortized
Cost6
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
$
29,750

 
$
29,643

 
$
29,532

 
Discounted cash flows1
 
Interest rate spread
 
1.00%-1.30% (1.21%)
2 
98.99%-98.48% (99.35%)
3 
Below investment grade
 
17,000

 
14,063

 
14,180

 
Discounted cash flows1
 
Interest rate spread
 
6.25%-9.55% (6.66%)
4 
83.35%-83.57% (83.41%)
3 
Total municipal and other tax-exempt securities
 
46,750

 
43,706

 
43,712

 
 
 
 
 
 
 
Other debt securities
 
5,900

 
5,900

 
5,900

 
Discounted cash flows1
 
Interest rate spread
 
1.60%-1.73% (1.70%)
5 
100% (100%)
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets - private equity funds
 
N/A
 
N/A
 
33,415

 
Net asset value reported by underlying fund
 
Net asset value reported by underlying fund
 
N/A
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume
2 
Interest rate yields used to value investment grade tax-exempt securities represent a spread of 75 to 80 basis points over average yields for comparable tax-exempt securities.
3 
Represents fair value as a percentage of par value
4 
Interest rate yields determined using a spread of 600 basis points over comparable municipal securities of varying durations.
5 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding less than 1%.
6 
Amortized cost reduced by other-than-temporary impairments recorded in earnings. See Note 2 for additional discussion.



The following represents the changes for the three months ended September 30, 2011 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Other assets – private equity funds
Balance, June 30, 2011
 
$
43,658

 
$
5,893

 
$
28,313

Purchases, and capital calls
 
—

 
—

 
813

Redemptions and distributions
 
(100
)
 
—

 
(714
)
Gain (loss) recognized in earnings
 
 

 
 

 
 

Brokerage and trading revenue
 
—

 
—

 
—

Gain (loss) on other assets, net
 
—

 
—

 
701

Gain on available for sale securities, net
 
1

 
—

 
—

Other-than-temporary impairment losses
 
—

 
—

 
—

Other comprehensive (loss)
 
153

 
7

 
—

Balance, September 30, 2011
 
$
43,712

 
$
5,900

 
$
29,113



- 132 -



The following represents the changes for the nine months ended September 30, 2011 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Other assets – private equity funds
Balance, December 31, 2010
 
$
47,093

 
$
6,400

 
$
25,436

Purchases and capital calls
 
7,520

 
—

 
2,465

Redemptions and distributions
 
(10,075
)
 
(500
)
 
(2,899
)
Gain (loss) recognized in earnings
 
 

 
 

 
 

Brokerage and trading revenue
 
(576
)
 
—

 
—

Gain (loss) on other assets, net
 
—

 
—

 
4,111

Gain on available for sale securities, net
 
19

 
—

 
—

Other-than-temporary impairment losses
 
(521
)
 
—

 
—

Other comprehensive (loss)
 
252

 
—

 
—

Balance, September 30, 2011
 
$
43,712

 
$
5,900

 
$
29,113



Fair Value of Assets and Liabilities Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis include pension plan assets, which are based on quoted prices in active markets for identical instruments, collateral for certain impaired loans and real property and other assets acquired to satisfy loans, which are based primarily on comparisons to completed sales of similar assets. In addition, goodwill impairment is evaluated based on the fair value of the Company's reporting units.

The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period.  The carrying value represents only those assets with a balance at June 30, 2012 for which the fair value was adjusted during the nine months ended September 30, 2012:
 
Carrying Value at September 30, 2012
 
Fair Value Adjustments for the
three months ended September 30, 2012 Recognized in:
 
Fair Value Adjustments for the nine months ended September 30, 2012 Recognized in:
 
Quoted Prices
in Active Markets for Identical Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Gross charge-offs against allowance for loan losses
 
Gross charge-offs against accrual for recourse loans
 
Net losses and expenses of repossessed assets, net
 
Gross charge-offs against allowance for loan losses
 
Gross charge-offs against accrual for recourse loans
 
Net losses and expenses of repossessed assets, net
Impaired loans
$
—

 
$
25,521

 
$
1,655

 
$
3,915

 
$
199

 
$
—

 
$
10,797

 
$
394

 
$
—

Goodwill
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate and other repossessed assets
—

 
38,386

 
6,617

 
—

 
—

 
4,398

 
—

 
—

 
11,068

 
The fair value of collateral-dependent impaired loans and real estate and other repossessed assets and the related fair value adjustments are generally based on unadjusted third-party appraisals. Our appraisal review policies require appraised values to be supported by observed inputs derived principally from or corroborated by observable market data.  Appraisals that are not based on observable inputs or that require significant adjustments or fair value measurements that are not based on third-party appraisals are considered to be based on significant unobservable inputs. Non-recurring fair value measurements of collateral-dependent impaired loans and real estate and other repossessed assets based on significant unobservable inputs are generally due to estimate of current fair values between appraisal dates. Significant unobservable inputs include listing prices for the same or comparable assets, uncorroborated expert opinions or management's knowledge of the collateral or industry. These inputs are developed by asset management and workout professional and approved by senior Credit Administration executives.


- 133 -



A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2012 follows (in thousands):
Quantitative Information about Level 3 Non-recurring Fair Value Measurements
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
1,655

 
Appraised value, as adjusted
 
Broker quotes and management's knowledge of industry and collateral.
 
N/A
Real estate and other repossessed assets
 
6,617

 
Listing value, less cost to sell
 
Marketability adjustments off appraised value
 
68%-100% (85%)1
1 
$796 thousand of real estate and other repossessed assets at September 30, 2012 are based on uncorroborated expert opinions or management's knowledge of the collateral or industry and do not have an independently appraised value.

The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period. The carrying value represents only those assets with a balance at September 30, 2011 for which the fair value was adjusted during the nine months ended September 30, 2011:
 
Carrying Value at September 30, 2011
 
Fair Value Adjustments for the Three Months Ended September 30, 2011 Recognized in:
 
Fair Value Adjustments for the Nine Months Ended September 30, 2011 Recognized in:
 
Quoted Prices
in Active Markets for Identical Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Gross charge-offs against allowance for loan losses
 
Gross charge-offs against accrual for recourse loans
 
Net losses and expenses of repossessed assets, net
 
Gross charge-offs against allowance for loan losses
 
Gross charge-offs against accrual for recourse loans
 
Net losses and expenses of repossessed assets, net
Impaired loans
$
—

 
$
13,605

 
$
2,086

 
$
3,734

 
$
305

 
$
—

 
$
4,090

 
$
305

 
$
—

Real estate and other repossessed assets
—

 
24,968

 
—

 
—

 
—

 
4,052

 
—

 
—

 
11,683



A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2011 follows (in thousands):
Quantitative Information about Level 3 Non-recurring Fair Value Measurements
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
2,086

 
Appraised value, as adjusted
 
Adjustments to appraised value
 
0%-41%(17%)


- 134 -



Fair Value of Financial Instruments

The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of September 30, 2012 (dollars in thousands):
 
 
Carrying
Value
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
 
Estimated
Fair
Value
Cash and cash equivalents
 
$
615,494

 
 
 
 
 
 
 
$
615,494

Trading securities:
 
 
 
 
 
 
 
 
 
 
Obligations of the U.S. government
 
3,100

 
 
 
 
 
 
 
3,100

U.S. agency residential mortgage-backed securities
 
119,835

 
 
 
 
 
 
 
119,835

Municipal and other tax-exempt securities
 
58,150

 
 
 
 
 
 
 
58,150

Other trading securities
 
23,157

 
 
 
 
 
 
 
23,157

Total trading securities
 
204,242

 
 
 
 
 
 
 
204,242

Investment securities:
 
 

 
 
 
 
 
 
 
 

Municipal and other tax-exempt
 
155,144

 
 
 
 
 
 
 
159,464

U.S. agency residential mortgage-backed securities
 
91,911

 
 
 
 
 
 
 
95,128

Other debt securities
 
185,059

 
 
 
 
 
 
 
205,766

Total investment securities
 
432,114

 
 
 
 
 
 
 
460,358

Available for sale securities:
 
 

 
 
 
 
 
 
 
 

U.S. Treasury
 
1,002

 
 
 
 
 
 
 
1,002

Municipal and other tax-exempt
 
87,969

 
 
 
 
 
 
 
87,969

U.S. agency residential mortgage-backed securities
 
10,654,821

 
 
 
 
 
 
 
10,654,821

Privately issued residential mortgage-backed securities
 
331,722

 
 
 
 
 
 
 
331,722

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
339,095

 
 
 
 
 
 
 
339,095

Other debt securities
 
36,456

 
 
 
 
 
 
 
36,456

Perpetual preferred stock
 
25,288

 
 
 
 
 
 
 
25,288

Equity securities and mutual funds
 
30,081

 
 
 
 
 
 
 
30,081

Total available for sale securities
 
11,506,434

 
 
 
 
 
 
 
11,506,434

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
305,445

 
 
 
 
 
 
 
305,445

Corporate debt securities
 
26,442

 
 
 
 
 
 
 
26,442

Total fair value option securities
 
331,887

 
 
 
 
 
 
 
331,887

Residential mortgage loans held for sale
 
325,102

 
 
 
 
 
 
 
325,102

Loans:
 
 

 
 
 
 
 
 
 
 

Commercial
 
7,273,217

 
0.25 - 30.00
 
0.64

 
0.58 - 3.50

 
7,232,761

Commercial real estate
 
2,165,526

 
0.38 - 18.00
 
0.93

 
1.30 - 3.17

 
2,142,239

Residential mortgage
 
2,018,980

 
0.38 - 18.00
 
3.31

 
0.99 - 3.17

 
2,084,251

Consumer
 
374,644

 
0.38 - 21.00
 
0.32

 
1.43 - 3.69

 
368,546

Total loans
 
11,832,367

 
 
 
 

 
 

 
11,827,797

Allowance for loan losses
 
(233,756
)
 
 
 
 

 
 

 
—

Net loans
 
11,598,611

 
 
 
 

 
 

 
11,827,797

Mortgage servicing rights
 
89,653

 
 
 
 

 
 

 
89,653

Derivative instruments with positive fair value, net of cash margin
 
472,783

 
 
 
 

 
 

 
472,783

Other assets – private equity funds
 
28,791

 
 
 
 

 
 

 
28,791

Deposits with no stated maturity
 
16,120,541

 
 
 
 

 
 

 
16,120,541

Time deposits
 
3,022,326

 
0.01 - 9.64
 
2.14

 
0.85 - 1.15

 
3,099,183

Other borrowings
 
3,429,575

 
0.09 - 5.25
 
—

 
0.09 - 2.67

 
3,420,135

Subordinated debentures
 
347,592

 
1.12 - 5.00
 
3.79

 
2.26
%
 
345,852

Derivative instruments with negative fair value, net of cash margin
 
435,497

 
 
 
 

 
 

 
435,497


- 135 -



The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of December 31, 2011 (dollars in thousands):
 
 
Carrying
Value
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
 
Estimated
Fair
Value
Cash and cash equivalents
 
$
986,365

 
 
 
 
 
 
 
$
986,365

Trading securities:
 
 
 
 
 
 
 
 
 
 
Obligations of the U.S. government
 
22,203

 
 
 
 
 
 
 
22,203

U.S. agency residential mortgage-backed securities
 
12,379

 
 
 
 
 
 
 
12,379

Municipal and other tax-exempt securities
 
39,345

 
 
 
 
 
 
 
39,345

Other trading securities
 
2,873

 
 
 
 
 
 
 
2,873

Total trading securities
 
76,800

 
 
 
 
 
 
 
76,800

Investment securities:
 
 

 
 
 
 
 
 
 
 

Municipal and other tax-exempt
 
128,697

 
 
 
 
 
 
 
133,670

U.S. agency residential mortgage-backed securities
 
121,704

 
 
 
 
 
 
 
120,536

Other debt securities
 
188,835

 
 
 
 
 
 
 
208,451

Total investment securities
 
439,236

 
 
 
 
 
 
 
462,657

Available for sale securities:
 
 

 
 
 
 
 
 
 
 

U.S. Treasury
 
1,006

 
 
 
 
 
 
 
1,006

Municipal and other tax-exempt
 
68,837

 
 
 
 
 
 
 
68,837

U.S. agency residential mortgage-backed securities
 
9,588,177

 
 
 
 
 
 
 
9,588,177

Privately issued residential mortgage-backed securities
 
419,166

 
 
 
 
 
 
 
419,166

Other debt securities
 
36,495

 
 
 
 
 
 
 
36,495

Perpetual preferred stock
 
18,446

 
 
 
 
 
 
 
18,446

Equity securities and mutual funds
 
47,238

 
 
 
 
 
 
 
47,238

Total available for sale securities
 
10,179,365

 
 
 
 
 
 
 
10,179,365

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
626,109

 
 
 
 
 
 
 
626,109

Corporate debt securities
 
25,117

 
 
 
 
 
 
 
25,117

Total fair value option securities
 
651,226

 
 
 
 
 
 
 
651,226

Residential mortgage loans held for sale
 
188,125

 
 
 
 
 
 
 
188,125

Loans:
 
 

 
 
 
 

 
 

 
 

Commercial
 
6,571,454

 
0.25 - 30.00%
 
0.57

 
0.63 - 3.85%

 
6,517,795

Commercial real estate
 
2,279,909

 
0.38 - 18.00%
 
1.26

 
0.28 - 3.51%

 
2,267,375

Residential mortgage
 
1,970,461

 
0.38 - 18.00%
 
3.26

 
1.14 - 3.70%

 
2,034,898

Consumer
 
447,919

 
0.38 - 21.00%
 
0.42

 
1.88 - 3.88%

 
436,490

Total loans
 
11,269,743

 
 
 
 

 
 

 
11,256,558

Allowance for loan losses
 
(253,481
)
 
 
 
 

 
 

 
—

Net loans
 
11,016,262

 
 
 
 

 
 

 
11,256,558

Mortgage servicing rights
 
86,783

 
 
 
 

 
 

 
86,783

Derivative instruments with positive fair value, net of cash margin
 
293,859

 
 
 
 

 
 

 
293,859

Other assets – private equity funds
 
30,902

 
 
 
 

 
 

 
30,902

Deposits with no stated maturity
 
15,380,598

 
 
 
 

 
 

 
15,380,598

Time deposits
 
3,381,982

 
0.01 - 9.64%
 
2.07

 
1.02 - 1.43%

 
3,441,610

Other borrowings
 
2,370,867

 
0.25 - 6.58%
 
—

 
0.04 - 2.76%

 
2,369,224

Subordinated debentures
 
398,881

 
5.19 - 5.82%
 
1.44

 
3.29
%
 
411,243

Derivative instruments with negative fair value, net of cash margin
 
236,522

 
 
 
 

 
 

 
236,522


- 136 -



The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of September 30, 2011 (dollars in thousands):
 
 
Carrying
Value
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
 
Estimated
Fair
Value
Cash and cash equivalents
 
$
972,881

 
 
 
 
 
 
 
$
972,881

Trading securities:
 
 
 
 
 
 
 
 
 
 
Obligations of the U.S. government
 
1,839

 
 
 
 
 
 
 
1,839

U.S. agency residential mortgage-backed securities
 
49,501

 
 
 
 
 
 
 
49,501

Municipal and other tax-exempt securities
 
57,431

 
 
 
 
 
 
 
57,431

Other trading securities
 
888

 
 
 
 
 
 
 
888

Total trading securities
 
109,659

 
 
 
 
 
 
 
109,659

Investment securities:
 
 

 
 
 
 
 
 
 
 

Municipal and other tax-exempt
 
133,394

 
 
 
 
 
 
 
138,461

U.S. agency residential mortgage-backed securities
 
130,668

 
 
 
 
 
 
 
130,614

Other debt securities
 
188,590

 
 
 
 
 
 
 
214,159

Total investment securities
 
452,652

 
 
 
 
 
 
 
483,234

Available for sale securities:
 
 

 
 
 
 
 
 
 
 

U.S. Treasury
 
1,006

 
 
 
 
 
 
 
1,006

Municipal and other tax-exempt
 
70,195

 
 
 
 
 
 
 
70,195

U.S. agency residential mortgage-backed securities
 
9,016,877

 
 
 
 
 
 
 
9,016,877

Privately issued residential mortgage-backed securities
 
457,332

 
 
 
 
 
 
 
457,332

Other debt securities
 
5,900

 
 
 
 
 
 
 
5,900

Perpetual preferred stock
 
19,080

 
 
 
 
 
 
 
19,080

Equity securities and mutual funds
 
49,241

 
 
 
 
 
 
 
49,241

Total available for sale securities
 
9,619,631

 
 
 
 
 
 
 
9,619,631

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
672,191

 
 
 
 
 
 
 
672,191

Corporate debt securities
 
—

 
 
 
 
 
 
 
—

Total fair value option securities
 
672,191

 
 
 
 
 
 
 
672,191

Residential mortgage loans held for sale
 
256,397

 
 
 
 
 
 
 
256,397

Loans:
 
 

 
 
 
 
 
 
 
 

Commercial
 
6,475,689

 
0.25 - 30.00%
 
0.56

 
0.64 - 3.81%

 
6,406,679

Commercial real estate
 
2,259,902

 
0.38 - 18.00%
 
1.23

 
0.28 - 3.39%

 
2,227,367

Residential mortgage
 
1,911,896

 
0.38 - 18.00%
 
3.24

 
0.88 - 3.78%

 
1,984,949

Consumer
 
477,082

 
0.38 - 21.00%
 
0.48

 
1.90 - 3.68%

 
477,058

Total loans
 
11,124,569

 
 
 
 

 
 

 
11,096,053

Allowance for loan losses
 
(271,456
)
 
 
 
 

 
 

 
—

Net loans
 
10,853,113

 
 
 
 

 
 

 
11,096,053

Mortgage servicing rights
 
87,948

 
 
 
 

 
 

 
87,948

Derivative instruments with positive fair value, net of cash margin
 
370,616

 
 
 
 

 
 

 
370,616

Other assets – private equity funds
 
29,113

 
 
 
 

 
 

 
29,113

Deposits with no stated maturity
 
14,884,552

 
 
 
 

 
 

 
14,884,552

Time deposits
 
3,554,470

 
0.01 - 9.64%
 
2.02

 
0.87 - 1.28%

 
3,620,327

Other borrowings
 
2,605,737

 
0.25 - 6.58%
 
—

 
0.06 - 2.70%

 
2,605,739

Subordinated debentures
 
398,834

 
5.19 - 5.82%
 
1.67

 
3.24
%
 
413,701

Derivative instruments with negative fair value, net of cash margin
 
341,822

 
 
 
 

 
 

 
341,822



- 137 -



Because no market exists for certain of these financial instruments and management does not intend to sell these financial instruments, the fair values shown in the tables above may not represent values at which the respective financial instruments could be sold individually or in the aggregate at the given reporting date.
 
The following methods and assumptions were used in estimating the fair value of these financial instruments:
 
Cash and Cash Equivalents
 
The book value reported in the consolidated balance sheet for cash and short-term instruments approximates those assets’ fair values.
 
Securities
 
The fair values of securities are generally based on Significant Other Observable Inputs such as quoted prices for comparable instruments or interest rates and credit spreads, yield curves, volatilities prepayment speeds and loss severities. 

Loans
 
The fair value of loans, excluding loans held for sale, are based on discounted cash flow analyses using interest rates and credit and liquidity spreads currently being offered for loans with similar remaining terms to maturity and risk, adjusted for the impact of interest rate floors and ceilings which are classified as Significant Unobservable Inputs. The fair values of loans were estimated to approximate their discounted cash flows less loan loss allowances allocated to these loans of $193 million at September 30, 2012, $207 million at December 31, 2011 and $250 million at September 30, 2011.
 
Deposits
 
The fair values of time deposits are based on discounted cash flow analyses using interest rates currently being offered on similar transactions which are considered Significant Unobservable Inputs. Estimated fair value of deposits with no stated maturity, which includes demand deposits, transaction deposits, money market deposits and savings accounts, is equal to the amount payable on demand. Although market premiums paid reflect an additional value for these low cost deposits, adjusting fair value for the expected benefit of these deposits is prohibited. Accordingly, the positive effect of such deposits is not included in the tables above.
 
Other Borrowings and Subordinated Debentures
 
The fair values of these instruments are based upon discounted cash flow analyses using interest rates currently being offered on similar instruments which are considered Significant Unobservable Inputs

Off-Balance Sheet Instruments
 
The fair values of commercial loan commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of these off-balance sheet instruments were not significant at September 30, 2012, December 31, 2011 or September 30, 2011.

Fair Value Election

As more fully disclosed in Note 2 and Note 6 to the Consolidated Financial Statements, the Company has elected to carry all residential mortgage-backed securities which have been designated as economic hedges against changes in the fair value of mortgage servicing rights, certain corporate debt securities economically hedged by derivative contracts to manage interest rate risk and all residential mortgage loans originated for sale at fair value. Changes in the fair value of these financial instruments are recognized in earnings.


- 138 -



(13) Federal and State Income Taxes

The reconciliations of income (loss) attributable to continuing operations at the U.S. federal statutory tax rate to income tax expense are as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
Amount:
 
 
 
 
 
 
 
 
Federal statutory tax
 
$
46,771

 
$
44,963

 
$
145,234

 
$
120,062

Tax exempt revenue
 
(1,398
)
 
(1,395
)
 
(3,996
)
 
(4,089
)
Effect of state income taxes, net of federal benefit
 
3,640

 
2,593

 
10,210

 
7,969

Utilization of tax credits
 
(718
)
 
(602
)
 
(3,282
)
 
(1,695
)
Bank-owned life insurance
 
(931
)
 
(950
)
 
(2,886
)
 
(2,914
)
Reduction of tax accrual
 
(950
)
 
(1,764
)
 
(950
)
 
(1,764
)
Other, net
 
(636
)
 
161

 
117

 
3,546

Total
 
$
45,778

 
$
43,006

 
$
144,447

 
$
121,115



 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
Percent of pretax income:
 
 
 
 
 
 
 
 
Federal statutory tax
 
35
 %
 
35
 %
 
35
 %
 
35
 %
Tax exempt revenue
 
(1
)
 
(1
)
 
(1
)
 
(1
)
Effect of state income taxes, net of federal benefit
 
3

 
2

 
2

 
2

Utilization of tax credits
 
(1
)
 
(1
)
 
(1
)
 
—

Bank-owned life insurance
 
(1
)
 
(1
)
 
(1
)
 
(1
)
Reduction of tax accrual
 
(1
)
 
(1
)
 
—

 
(1
)
Other, net
 
—

 
—

 
1

 
1

Total
 
34
 %
 
33
 %
 
35
 %
 
35
 %

During the first quarter of 2012, the Internal Revenue Service completed an audit of the Company's federal income tax return for the year ended December 31, 2008 with no adjustments.
(14) Subsequent Events

The Company evaluated events from the date of the consolidated financial statements on September 30, 2012 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q. No events were identified requiring recognition in and/or disclosure in the consolidated financial statements other than those previously discussed in Note 8.

- 139 -





Nine-Month Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share Data)
 
Nine Months Ended
 
 
September 30, 2012
 
September 30, 2011
 
 
Average
Balance
 
Revenue/
Expense1
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense1
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Funds sold and resell agreements
 
$
16,142

 
$
9

 
0.07
%
 
$
13,916

 
$
12

 
0.12
%
Trading securities
 
123,790

 
1,697

 
1.83
%
 
76,588

 
1,797

 
3.14
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable3
 
291,551

 
12,840

 
5.88
%
 
177,485

 
7,904

 
5.95
%
Tax-exempt3
 
127,019

 
4,222

 
4.64
%
 
164,670

 
5,997

 
4.88
%
Total investment securities
 
418,570

 
17,062

 
5.52
%
 
342,155

 
13,901

 
5.44
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable3
 
10,286,996

 
180,721

 
2.46
%
 
9,458,269

 
205,032

 
2.99
%
Tax-exempt3
 
81,052

 
2,880

 
4.83
%
 
68,339

 
2,670

 
5.22
%
Total available for sale securities3
 
10,368,048

 
183,601

 
2.47
%
 
9,526,608

 
207,702

 
3.01
%
Fair value option securities
 
408,853

 
7,684

 
2.59
%
 
503,988

 
13,772

 
3.94
%
Residential mortgage loans held for sale
 
212,757

 
5,862

 
3.68
%
 
139,142

 
4,460

 
4.29
%
Loans2
 
11,597,586

 
388,274

 
4.47
%
 
10,736,544

 
378,726

 
4.72
%
Less: allowance for loan losses
 
242,067

 
 
 
 
 
290,596

 
 
 
 
Loans, net of allowance
 
11,355,519

 
388,274

 
4.57
%
 
10,445,948

 
378,726

 
4.85
%
Total earning assets3
 
22,903,679

 
604,189

 
3.60
%
 
21,048,345

 
620,370

 
4.00
%
Cash and other assets
 
2,979,993

 
 
 
 
 
3,061,471

 
 
 
 
Total assets
 
$
25,883,672

 
 
 
 
 
$
24,109,816

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and equity
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction
 
$
8,938,958

 
$
10,804

 
0.16
%
 
$
9,374,413

 
$
19,202

 
0.27
%
Savings
 
256,151

 
416

 
0.22
%
 
209,816

 
573

 
0.37
%
Time
 
3,148,858

 
38,585

 
1.64
%
 
3,622,287

 
49,834

 
1.84
%
Total interest-bearing deposits
 
12,343,967

 
49,805

 
0.54
%
 
13,206,516

 
69,609

 
0.70
%
Funds purchased
 
1,585,663

 
1,618

 
0.14
%
 
995,213

 
731

 
0.10
%
Repurchase agreements
 
1,130,576

 
811

 
0.10
%
 
1,065,192

 
2,049

 
0.26
%
Other borrowings
 
85,569

 
2,604

 
4.06
%
 
153,511

 
4,397

 
3.83
%
Subordinated debentures
 
369,099

 
11,539

 
4.18
%
 
398,767

 
16,745

 
5.61
%
Total interest-bearing liabilities
 
15,514,874

 
66,377

 
0.57
%
 
15,819,199

 
93,531

 
0.79
%
Non-interest bearing demand deposits
 
6,283,126

 
 
 
 
 
4,638,405

 
 
 
 
Other liabilities
 
1,201,901

 
 
 
 
 
1,000,211

 
 
 
 
Total equity
 
2,883,771

 
 
 
 
 
2,652,001

 
 
 
 
Total liabilities and equity
 
$
25,883,672

 
 
 
 
 
$
24,109,816

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax-equivalent Net Interest Revenue3
 
 
 
$
537,812

 
3.03
%
 
 
 
$
526,839

 
3.21
%
Tax-equivalent Net Interest Revenue to Earning Assets3
 
 
 
 
 
3.20
%
 
 
 
 
 
3.40
%
Less tax-equivalent adjustment1
 
 
 
6,855

 
 
 
 
 
6,815

 
 
Net Interest Revenue
 
 
 
530,957

 
 
 
 
 
520,024

 
 
Provision for (reduction of) allowance for credit losses
 
 
 
(8,000
)
 
 
 
 
 
8,950

 
 
Other operating revenue
 
 
 
503,485

 
 
 
 
 
433,001

 
 
Other operating expense
 
 
 
627,487

 
 
 
 
 
601,040

 
 
Income before taxes
 
 
 
414,955

 
 
 
 
 
343,035

 
 
Federal and state income tax
 
 
 
144,447

 
 
 
 
 
121,115

 
 
Net income before non-controlling interest
 
 
 
270,508

 
 
 
 
 
221,920

 
 
Net income attributable to non-controlling interest
 
 
 
1,882

 
 
 
 
 
3,038

 
 
Net income attributable to BOK Financial Corp.
 
 
 
$
268,626

 
 
 
 
 
$
218,882

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Net income:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
3.94

 
 

 
 

 
$
3.20

 
 

Diluted
 
 

 
$
3.92

 
 

 
 

 
$
3.19

 
 

1. 
Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments shown are for comparative purposes.
2. 
The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned income.
3. 
Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income.

- 140 -




Quarterly Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Three Months Ended
 
 
September 30, 2012
 
June 30, 2012
 
 
Average
Balance
 
Revenue/
Expense1
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense1
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Funds sold and resell agreements
 
$
17,837

 
$
3

 
0.07
%
 
$
19,187

 
$
4

 
0.08
%
Trading securities
 
132,213

 
703

 
2.12
%
 
143,770

 
548

 
1.53
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable3
 
281,347

 
4,124

 
5.83
%
 
290,557

 
4,282

 
5.93
%
Tax-exempt3
 
127,299

 
1,212

 
4.12
%
 
125,727

 
1,461

 
4.90
%
Total investment securities
 
408,646

 
5,336

 
5.33
%
 
416,284

 
5,743

 
5.63
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable3
 
10,969,610

 
59,482

 
2.36
%
 
10,007,368

 
61,583

 
2.52
%
Tax-exempt3
 
88,445

 
1,044

 
4.70
%
 
83,911

 
943

 
4.69
%
Total available for sale securities3
 
11,058,055

 
60,526

 
2.38
%
 
10,091,279

 
62,526

 
2.54
%
Fair value option securities
 
336,160

 
1,886

 
2.27
%
 
335,965

 
2,311

 
2.62
%
Residential mortgage loans held for sale
 
264,024

 
2,310

 
3.48
%
 
191,311

 
1,784

 
3.75
%
Loans2
 
11,739,662

 
127,816

 
4.33
%
 
11,614,722

 
132,391

 
4.58
%
Less allowance for loan losses
 
231,177

 
 
 
 
 
242,605

 
 
 
 
Loans, net of allowance
 
11,508,485

 
127,816

 
4.42
%
 
11,372,117

 
132,391

 
4.68
%
Total earning assets3
 
23,725,420

 
198,580

 
3.47
%
 
22,569,913

 
205,307

 
3.69
%
Cash and other assets
 
2,862,752

 
 
 
 
 
2,968,604

 
 
 
 
Total assets
 
$
26,588,172

 
 
 
 
 
$
25,538,517

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
8,719,648

 
$
3,406

 
0.16
%
 
$
8,779,659

 
$
3,572

 
0.16
%
Savings
 
267,498

 
127

 
0.19
%
 
259,386

 
147

 
0.23
%
Time
 
3,068,870

 
12,384

 
1.61
%
 
3,132,220

 
12,671

 
1.63
%
Total interest-bearing deposits
 
12,056,016

 
15,917

 
0.53
%
 
12,171,265

 
16,390

 
0.54
%
Funds purchased
 
1,678,006

 
632

 
0.15
%
 
1,740,354

 
674

 
0.16
%
Repurchase agreements
 
1,112,847

 
281

 
0.10
%
 
1,095,298

 
265

 
0.10
%
Other borrowings
 
97,003

 
739

 
3.03
%
 
86,667

 
853

 
3.96
%
Subordinated debentures
 
352,432

 
2,475

 
2.79
%
 
357,609

 
3,512

 
3.95
%
Total interest-bearing liabilities
 
15,296,304

 
20,044

 
0.52
%
 
15,451,193

 
21,694

 
0.56
%
Non-interest bearing demand deposits
 
6,718,572

 
 
 
 
 
6,278,342

 
 
 
 
Other liabilities
 
1,626,643

 
 
 
 
 
940,249

 
 
 
 
Total equity
 
2,946,653

 
 
 
 
 
2,868,733

 
 
 
 
Total liabilities and equity
 
$
26,588,172

 
 
 
 
 
$
25,538,517

 
 
 
 
Tax-equivalent Net Interest Revenue3
 
 
 
$
178,536

 
2.95
%
 
 
 
$
183,613

 
3.13
%
Tax-equivalent Net Interest Revenue to Earning Assets3
 
 
 
 
 
3.12
%
 
 
 
 
 
3.30
%
Less tax-equivalent adjustment1
 
 
 
2,509

 
 
 
 
 
2,252

 
 
Net Interest Revenue
 
 
 
176,027

 
 
 
 
 
181,361

 
 
Provision for (reduction of ) allowance for credit losses
 
 
 
—

 
 
 
 
 
(8,000
)
 
 
Other operating revenue
 
 
 
179,944

 
 
 
 
 
187,035

 
 
Other operating expense
 
 
 
222,340

 
 
 
 
 
223,786

 
 
Income before taxes
 
 
 
133,631

 
 
 
 
 
152,610

 
 
Federal and state income tax
 
 
 
45,778

 
 
 
 
 
53,149

 
 
Net income before non-controlling interest
 
 
 
87,853

 
 
 
 
 
99,461

 
 
Net income (loss) attributable to non-controlling interest
 
 
 
471

 
 
 
 
 
1,833

 
 
Net income attributable to BOK Financial Corp.
 
 
 
$
87,382

 
 
 
 
 
$
97,628

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Net income:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
1.28

 
 

 
 

 
$
1.43

 
 

Diluted
 
 

 
$
1.27

 
 

 
 

 
$
1.43

 
 

1. 
Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments shown are for comparative purposes.
2. 
The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned income.
3. 
Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income.

- 141 -



Three Months Ended
March 31, 2012
 
December 31, 2011
 
September 30, 2011
Average Balance
 
Revenue /Expense1
 
Yield / Rate
 
Average Balance
 
Revenue / Expense1
 
Yield / Rate
 
Average Balance
 
Revenue / Expense1
 
Yield / Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
11,385

 
$
2

 
0.07
%
 
$
12,035

 
$
3

 
0.10
%
 
$
12,344

 
$
5

 
0.16
%
95,293

 
446

 
1.88
%
 
97,972

 
689

 
2.79
%
 
88,576

 
637

 
2.85
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
302,861

 
4,434

 
5.89
%
 
314,217

 
4,677

 
5.91
%
 
194,371

 
2,759

 
5.63
%
128,029

 
1,549

 
4.87
%
 
129,109

 
1,565

 
4.81
%
 
135,256

 
1,683

 
4.94
%
430,890

 
5,983

 
5.59
%
 
443,326

 
6,242

 
5.59
%
 
329,627

 
4,442

 
5.35
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9,876,508

 
59,656

 
2.48
%
 
9,845,351

 
54,839

 
2.37
%
 
9,586,411

 
66,040

 
2.82
%
70,719

 
893

 
5.17
%
 
69,172

 
896

 
5.14
%
 
70,181

 
870

 
4.92
%
9,947,227

 
60,549

 
2.50
%
 
9,914,523

 
55,735

 
2.39
%
 
9,656,592

 
66,910

 
2.83
%
555,233

 
3,487

 
2.79
%
 
660,025

 
4,877

 
2.98
%
 
594,629

 
5,299

 
3.66
%
182,372

 
1,768

 
3.90
%
 
201,242

 
2,032

 
4.01
%
 
156,621

 
1,616

 
4.09
%
11,436,811

 
128,067

 
4.50
%
 
11,152,315

 
130,736

 
4.65
%
 
10,872,805

 
129,073

 
4.71
%
252,538

 
 
 
 
 
266,473

 
 
 
 
 
285,570

 
 
 
 
11,184,273

 
128,067

 
4.61
%
 
10,885,842

 
130,736

 
4.76
%
 
10,587,235

 
129,073

 
4.84
%
22,406,673

 
200,302

 
3.64
%
 
22,214,965

 
200,314

 
3.69
%
 
21,425,624

 
207,982

 
3.91
%
3,109,910

 
 
 
 
 
3,422,475

 
 
 
 
 
3,196,114

 
 
 
 
$
25,516,583

 
 
 
 
 
$
25,637,440

 
 
 
 
 
$
24,621,738

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
9,319,978

 
$
3,826

 
0.17
%
 
$
9,276,608

 
$
4,213

 
0.18
%
 
$
9,310,046

 
$
5,488

 
0.23
%
241,442

 
142

 
0.24
%
 
220,236

 
146

 
0.26
%
 
214,979

 
183

 
0.34
%
3,246,362

 
13,530

 
1.68
%
 
3,485,059

 
14,922

 
1.70
%
 
3,617,731

 
16,736

 
1.84
%
12,807,782

 
17,498

 
0.55
%
 
12,981,903

 
19,281

 
0.59
%
 
13,142,756

 
22,407

 
0.68
%
1,337,614

 
312

 
0.09
%
 
1,197,154

 
186

 
0.06
%
 
994,099

 
135

 
0.05
%
1,183,778

 
265

 
0.09
%
 
1,189,861

 
404

 
0.13
%
 
1,128,275

 
495

 
0.17
%
72,911

 
1,012

 
5.58
%
 
88,489

 
1,059

 
4.75
%
 
128,288

 
1,701

 
5.26
%
397,440

 
5,552

 
5.62
%
 
398,858

 
5,640

 
5.61
%
 
398,812

 
5,627

 
5.60
%
15,799,525

 
24,639

 
0.63
%
 
15,856,265

 
26,570

 
0.66
%
 
15,792,230

 
30,365

 
0.76
%
5,847,682

 
 
 
 
 
5,588,596

 
 
 
 
 
5,086,538

 
 
 
 
1,034,143

 
 
 
 
 
1,422,092

 
 
 
 
 
1,004,564

 
 
 
 
2,835,233

 
 
 
 
 
2,770,487

 
 
 
 
 
2,738,406

 
 
 
 
$
25,516,583

 
 
 
 
 
$
25,637,440

 
 
 
 
 
$
24,621,738

 
 
 
 
 
 
$
175,663

 
3.01
%
 
 
 
$
173,744

 
3.03
%
 
 
 
$
177,617

 
3.15
%
 
 
 
 
3.19
%
 
 
 
 
 
3.20
%
 
 
 
 
 
3.34
%
 
 
2,094

 
 
 
 
 
2,274

 
 
 
 
 
2,233

 
 
 
 
173,569

 
 
 
 
 
171,470

 
 
 
 
 
175,384

 
 
 
 
—

 
 
 
 
 
(15,000
)
 
 
 
 
 
—

 
 
 
 
140,381

 
 
 
 
 
138,027

 
 
 
 
 
173,977

 
 
 
 
185,237

 
 
 
 
 
219,197

 
 
 
 
 
220,896

 
 
 
 
128,713

 
 
 
 
 
105,300

 
 
 
 
 
128,465

 
 
 
 
45,520

 
 
 
 
 
37,396

 
 
 
 
 
43,006

 
 
 
 
83,193

 
 
 
 
 
67,904

 
 
 
 
 
85,459

 
 
 
 
(422
)
 
 
 
 
 
911

 
 
 
 
 
358

 
 
 
 
$
83,615

 
 
 
 
 
$
66,993

 
 
 
 
 
$
85,101

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
$
1.22

 
 

 
 

 
$
0.98

 
 

 
 

 
$
1.24

 
 

 

 
$
1.22

 
 

 
 

 
$
0.98

 
 

 
 

 
$
1.24

 
 



- 142 -





Quarterly Earnings Trends – Unaudited
(In thousands, except share and per share data)
 
 
Three Months Ended
 
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
196,071

 
$
203,055

 
$
198,208

 
$
198,040

 
$
205,749

Interest expense
 
20,044

 
21,694

 
24,639

 
26,570

 
30,365

Net interest revenue
 
176,027

 
181,361

 
173,569

 
171,470

 
175,384

Provision for (reduction of) allowance for credit losses
 
—

 
(8,000
)
 
—

 
(15,000
)
 
—

Net interest revenue after provision for (reduction of) credit losses
 
176,027

 
189,361

 
173,569

 
186,470

 
175,384

Other operating revenue
 
 

 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
31,261

 
32,600

 
31,111

 
25,629

 
29,451

Transaction card revenue
 
27,788

 
26,758

 
25,430

 
25,960

 
31,328

Trust fees and commissions
 
19,654

 
19,931

 
18,438

 
17,865

 
17,853

Deposit service charges and fees
 
25,148

 
25,216

 
24,379

 
24,921

 
24,614

Mortgage banking revenue
 
50,266

 
39,548

 
33,078

 
25,438

 
29,493

Bank-owned life insurance
 
2,707

 
2,838

 
2,871

 
2,784

 
2,761

Other revenue
 
9,476

 
7,559

 
9,027

 
9,189

 
10,535

Total fees and commissions
 
166,300

 
154,450

 
144,334

 
131,786

 
146,035

Gain (loss) on other  assets, net
 
125

 
2,990

 
(3,456
)
 
1,682

 
351

Gain (loss) on derivatives, net
 
464

 
2,345

 
(2,473
)
 
(174
)
 
4,048

Gain (loss) on fair value option securities, net
 
6,192

 
6,852

 
(1,733
)
 
222

 
17,788

Gain on available for sale securities, net
 
7,967

 
20,481

 
4,331

 
7,080

 
16,694

Total other-than-temporary impairment losses
 
—

 
(135
)
 
(505
)
 
(1,037
)
 
(9,467
)
Portion of loss reclassified from other comprehensive income
 
(1,104
)
 
(723
)
 
(3,217
)
 
(1,747
)
 
(1,833
)
Net impairment losses recognized in earnings
 
(1,104
)
 
(858
)
 
(3,722
)
 
(2,784
)
 
(11,300
)
Total other operating revenue
 
179,944

 
186,260

 
137,281

 
137,812

 
173,616

Other operating expense
 
 

 
 

 
 

 
 

 
 

Personnel
 
122,775

 
122,297

 
114,769

 
121,129

 
103,260

Business promotion
 
6,054

 
6,746

 
4,388

 
5,868

 
5,280

Contribution to BOKF Charitable Foundation
 
—

 
—

 
—

 
—

 
4,000

Professional fees and services
 
7,991

 
8,343

 
7,599

 
7,664

 
7,418

Net occupancy and equipment
 
16,914

 
16,906

 
16,023

 
16,826

 
16,627

Insurance
 
3,690

 
4,011

 
3,866

 
3,636

 
2,206

Data processing and communications
 
26,486

 
25,264

 
22,144

 
26,599

 
24,446

Printing, postage and supplies
 
3,611

 
3,903

 
3,311

 
3,637

 
3,780

Net losses and operating expenses of repossessed assets
 
5,706

 
5,912

 
2,245

 
6,180

 
5,939

Amortization of intangible assets
 
742

 
545

 
575

 
895

 
896

Mortgage banking costs
 
11,566

 
11,173

 
7,573

 
10,154

 
9,349

Change in fair value of mortgage servicing rights
 
9,576

 
11,450

 
(7,127
)
 
5,261

 
24,822

Other expense
 
7,229

 
6,461

 
6,771

 
11,133

 
12,512

Total other operating expense
 
222,340

 
223,011

 
182,137

 
218,982

 
220,535

Income before taxes
 
133,631

 
152,610

 
128,713

 
105,300

 
128,465

Federal and state income tax
 
45,778

 
53,149

 
45,520

 
37,396

 
43,006

Net income before non-controlling interest
 
87,853

 
99,461

 
83,193

 
67,904

 
85,459

Net income (loss) attributable to non-controlling interest
 
471

 
1,833

 
(422
)
 
911

 
358

Net income attributable to BOK Financial Corp.
 
$
87,382

 
$
97,628

 
$
83,615

 
$
66,993

 
$
85,101

 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$1.28
 
$1.43
 
$1.22
 
$0.98
 
$1.24
Diluted
 
$1.27
 
$1.43
 
$1.22
 
$0.98
 
$1.24
Average shares used in computation:
 
 
 
 
 
 
 
 

 
 

Basic
 
67,966,700

 
67,472,665

 
67,665,300

 
67,526,009

 
67,827,591

Diluted
 
68,334,989

 
67,744,828

 
67,941,895

 
67,774,721

 
68,037,419



- 143 -



PART II. Other Information

Item 1. Legal Proceedings
 
See discussion of legal proceedings at Note 8 to the Consolidated Financial Statements.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended September 30, 2012.
 
 
Period
 
Total Number of Shares Purchased2
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans
July 1 to July 31, 2012
 
24,823

 
$
58.32

 
—

 
1,960,504

August 1 to August 31, 2012
 
5,901

 
$
58.78

 
—

 
1,960,504

September 1 to September 30, 2012
 
114,926

 
$
58.08

 
—

 
1,960,504

Total
 
145,650

 
 

 
—

 
 

1 
On April 24, 2012, the Company’s board of directors authorizing the Company to repurchase up to two million shares of the Company’s common stock. As of September 30, 2012, the Company had repurchased 39,496 shares under this plan.
2 
The Company routinely repurchases mature shares from employees to cover the exercise price and taxes in connection with employee stock option exercises.

Item 6. Exhibits

10.7.14
BOK Financial Corporation 2003 Executive Incentive Plan, as amended and restated, for the Chief Executive Officer and for Direct Reports to the Chief Executive Officer, incorporated by reference to the Schedule 14 A Definitive Proxy Statement filed on March 15, 2011.

10.7.15
BOK Financial Corporation 2011 True-Up Plan, for the Chief Executive Officer and his Direct Reports, incorporated by reference to the Schedule 14A Definitive Proxy Statement filed on March 15, 2011.

31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act   of 2002

31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99(a)
Credit Agreement dated June 9, 2011 between BOK Financial Corporation and participating lenders, filed herewith.
101*
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statement of Cash Flows and (v) the Notes to Consolidated Financial Statements


Items 1A, 3, 4 and 5 are not applicable and have been omitted.

* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

- 144 -



Signatures


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


BOK FINANCIAL CORPORATION
(Registrant)



Date:        November 6, 2012                                                                  



/s/ Steven E. Nell                                                                       
Steven E. Nell
Executive Vice President and
Chief Financial Officer
    


/s/ John C. Morrow                                                             
John C. Morrow
Senior Vice President and
Chief Accounting Officer

- 145 -