BOKF-2013.03.31-10Q


 

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

FORM 10-Q
(Mark One) 
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

BOK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
Oklahoma
 
73-1373454
(State or other jurisdiction
of Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 
 
Bank of Oklahoma Tower
 
 
P.O. Box 2300
 
 
Tulsa, Oklahoma
 
74192
(Address of Principal Executive Offices)
 
(Zip Code)
 
(918) 588-6000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes  ý  No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes  ý  No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer  ý                               Accelerated filer  ¨                                   Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes  ¨  No  ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 68,687,718 shares of common stock ($.00006 par value) as of March 31, 2013.
 




BOK Financial Corporation
Form 10-Q
Quarter Ended March 31, 2013

Index

Part I.  Financial Information
 
Management’s Discussion and Analysis (Item 2)        
Market Risk (Item 3)                                                                                              
Controls and Procedures (Item 4)
Consolidated Financial Statements – Unaudited (Item 1)
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 $88.0 million or $1.28 per diluted share for the first quarter of 2013, compared to $83.6 million or $1.22 per diluted share for the first quarter of 2012 and $82.6 million or $1.21 per diluted share for the fourth quarter of 2012. 

Highlights of the first quarter of 2013 included:
•
Net interest revenue totaled $170.4 million for the first quarter of 2013, compared to $173.6 million for the first quarter of 2012 and $173.4 million for the fourth quarter of 2012. Net interest margin was 2.92% for the first quarter of 2013. Net interest margin was 3.19% for the first quarter of 2012 and 2.95% for the fourth quarter of 2012. 
•
Fees and commissions revenue totaled $158.1 million for the first quarter of 2013, compared to $144.6 million for the first quarter of 2012 and $165.8 million for the fourth quarter of 2012. Mortgage banking revenue increased $6.9 million over the first quarter of 2012 due primarily to an increase in loan production volume. Mortgage banking revenue decreased $6.4 million compared to the fourth quarter of 2012 due to lower volume and narrowed pricing of loan sold.
•
Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $204.0 million for the first quarter of 2013, up $14.7 million over the first quarter of 2012 and down $22.8 million compared to the previous quarter. Personnel costs increased $10.9 million over the first quarter of 2012 primarily due to incentive compensation and headcount. Personnel costs decreased $5.5 million compared to the fourth quarter of 2012 due primarily to decreased incentive compensation. Non-personnel expenses increased $3.8 million over the first quarter of 2012 and decreased $17.3 million compared to the prior quarter.  
•
An $8.0 million negative provision for credit losses was recorded in the first quarter of 2013 compared to no provision for credit losses in the first quarter of 2012 and a $14.0 million negative provision for credit losses in the fourth quarter of 2012. The negative provision was largely due to declining gross loss rates and a decrease in outstanding loan balances. Gross charge-offs were $8.9 million in the first quarter of 2013, $13.7 million in the first quarter of 2012 and $8.0 million in the fourth quarter of 2012. Recoveries increased to $6.6 million in the first quarter of 2013 compared to $5.2 million in the first quarter of 2012 and $3.7 million in the fourth quarter of 2012.
•
The combined allowance for credit losses totaled $207 million or 1.71% of outstanding loans at March 31, 2013 compared to $217 million or 1.77% of outstanding loans at December 31, 2012. Nonperforming assets that are not guaranteed by U.S. government agencies totaled $207 million or 1.73% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at March 31, 2013 and $215 million or 1.76% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at December 31, 2012.
•
Average outstanding loan balances for the first quarter totaled $12.2 billion, up $236 million over the fourth quarter of 2012. Average commercial real estate loans grew $139 million and average commercial loans grew $57 million. Period end outstanding loan balances were $12.1 billion at March 31, 2013, a decrease of $218 million from December 31, 2012. Commercial real estate loans increased $56 million. Commercial loan balances decreased by $224 million, residential mortgage loans decreased by $32 million and consumer loans decreased by $18 million.
•
Period end deposits totaled $19.9 billion at March 31, 2013 compared to $21.2 billion at December 31, 2012. As expected, demand deposit account balances decreased $1.1 billion during the first quarter as surge deposits received in the fourth quarter of 2012 were redeployed. Interest-bearing transaction accounts decreased $146 million and time deposits decreased $68 million.
•
The tangible common equity ratio was 9.70% at March 31, 2013 and 9.25% at December 31, 2012. The tangible common equity ratio is a non-GAAP measure of capital strength used by the Company and investors based on shareholders’ equity as defined by generally accepted accounting principles in the United States of America (“GAAP”) minus intangible assets and equity that does not benefit common shareholders.
•
The Company and its subsidiary bank continue to exceed the regulatory definition of well capitalized. The Company’s Tier 1 capital ratios as defined by banking regulations were 13.35% at March 31, 2013 and 12.78% at December 31, 2012.

- 1 -



•
The Company paid a regular quarterly cash dividend of $26 million or $0.38 per common share during the first quarter of 2013. The Company will pay a quarterly cash dividend of $0.38 per common share payable on or about May 31, 2013 to shareholders of record as of May 17, 2013.
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 $170.4 million for the first quarter of 2013 compared to $173.6 million for the first quarter of 2012 and $173.4 million for the fourth quarter of 2012. Net interest margin was 2.92% for the first quarter of 2013, 2.95% for the fourth quarter of 2012 and 3.19% for the first quarter of 2012. 

Net interest revenue decreased $3.2 million compared to the first quarter of 2012. Net interest revenue increased $9.4 million primarily due to the growth in average loan and securities balances. Net interest revenue decreased $12.0 million due to lower interest rates. Cash flows from the securities portfolio were reinvested at lower current market rates and loan yields decreased due to renewal of maturing fixed-rate loans at current lower rates and narrowing credit spreads. The decrease in yield on earning assets was partially offset by lower funding costs.

Net interest margin also declined compared to the the first quarter of 2012. The tax-equivalent yield on earning assets was 3.24% for the first quarter of 2013, down 40 basis points from the first quarter of 2012. The available for sale securities portfolio yield decreased 41 basis points to 2.09%. Cash flows received from payments on residential mortgage-backed securities are currently being reinvested in short-duration securities that yield less than 1.50%. Loan yields decreased 30 basis points. Credit spreads have narrowed due to market pricing pressure and improved credit quality in our loan portfolio. Funding costs were down 17 basis points from the first quarter of 2012. The cost of interest-bearing deposits decreased 9 basis points and the cost of other borrowed funds decreased 3 basis points. The average rate of interest paid on subordinated debentures decreased 310 basis points compared to the first quarter of 2012. The interest rate on $233 million of these subordinated debentures converted from a fixed rate of interest to a floating rate. Additionally, the benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 14 basis points in the first quarter of 2013 compared to 18 basis points in the first quarter of 2012.

Average earning assets for the first quarter of 2013 increased $2.1 billion or 9% over the first quarter of 2012. The average balance of available for sale securities, which consists largely of U.S. government agency issued residential mortgage-backed securities, increased $1.3 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 $827 million over the first quarter of 2012 due primarily to growth in average commercial loans.

Average deposits increased $1.4 billion over the first quarter of 2012, including a $1.2 billion increase in average demand deposit balances and a $516 million increase in average interest-bearing transaction accounts, partially offset by a $332 million decrease in average time deposits. Average borrowed funds increased $304 million over the first quarter of 2012 due primarily to increased borrowing from the Federal Home Loan Banks.

Net interest margin decreased 3 basis points compared to the fourth quarter of 2012.  The yield on average earning assets decreased 6 basis points. The loan portfolio yield decreased to 4.20% from 4.33% in the previous quarter primarily due to market pricing pressure and improved credit quality in our loan portfolio. The yield on the available for sale securities portfolio decreased 1 basis point to 2.09% primarily due to slower prepayment speeds on residential mortgage backed securities. Funding costs decreased 8 basis points to 0.46% due largely to lower deposit interest rates. Rates paid on time deposits decreased 18 basis points, primarily due to additional expense recognized in the fourth quarter on equity-indexed time deposits. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities decreased 5 basis points in the first quarter.

- 2 -



Average earning assets increased $28 million during the first quarter of 2013. Average outstanding loans increased $236 million. Average commercial real estate loan balances increased $139 million, commercial loan balances increased $57 million and residential mortgage loan balances increased $43 million. The average balance of the available for sale securities portfolio decreased $190 million compared to the fourth quarter of 2012.
Average deposits decreased $89 million compared to the previous quarter. Interest-bearing transaction account balances increased $493 million. Demand deposit balances decreased $503 million and time deposit account balances decreased $96 million. The average balance of borrowed funds increased $338 million over the fourth quarter of 2012.

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. Increases in net interest revenue have been based on growth in average earning assets.

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























- 3 -



Table 1 -- Volume/Rate Analysis
(In thousands)
 
 
Three Months Ended
March 31, 2013 / 2012
 
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield /
Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
Funds sold and resell agreements
 
$
—

 
$
2

 
$
(2
)
Trading securities
 
261

 
300

 
(39
)
Investment securities:
 
 
 
 
 
 
Taxable securities
 
(636
)
 
(671
)
 
35

Tax-exempt securities
 
(66
)
 
1,081

 
(1,147
)
Total investment securities
 
(702
)
 
410

 
(1,112
)
Available for sale securities:
 
 
 
 
 
 
Taxable securities
 
(4,637
)
 
5,937

 
(10,574
)
Tax-exempt securities
 
14

 
195

 
(181
)
Total available for sale securities
 
(4,623
)
 
6,132

 
(10,755
)
Fair value option securities
 
(2,322
)
 
(1,639
)
 
(683
)
Residential mortgage loans held for sale
 
24

 
301

 
(277
)
Loans
 
(1,322
)
 
7,932

 
(9,254
)
Total tax-equivalent interest revenue
 
(8,684
)
 
13,438

 
(22,122
)
Interest expense:
 
 
 
 
 
 
Transaction deposits
 
(680
)
 
172

 
(852
)
Savings deposits
 
(22
)
 
27

 
(49
)
Time deposits
 
(1,915
)
 
(1,405
)
 
(510
)
Funds purchased
 
52

 
(51
)
 
103

Repurchase agreements
 
(119
)
 
(60
)
 
(59
)
Other borrowings
 
32

 
5,914

 
(5,882
)
Subordinated debentures
 
(3,393
)
 
(522
)
 
(2,871
)
Total interest expense
 
(6,045
)
 
4,075

 
(10,120
)
Tax-equivalent net interest revenue
 
(2,639
)
 
9,363

 
(12,002
)
Change in tax-equivalent adjustment
 
525

 
 
 
 
Net interest revenue
 
$
(3,164
)
 
 
 
 
1 Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.
Other Operating Revenue

Other operating revenue was $159.1 million for the first quarter of 2013 compared to $137.3 million for the first quarter of 2012 and $162.6 million for the fourth quarter of 2012. Fees and commissions revenue increased $13.5 million over the first quarter of 2012. Net gains on securities, derivatives and other assets increased $4.8 million over the first quarter of 2012. Other-than-temporary impairment charges recognized in earnings in the first quarter of 2013 were $3.5 million less than charges recognized in the first quarter of 2012.

Other operating revenue decreased $3.6 million compared to the fourth quarter of 2012. Fees and commissions revenue decreased $7.7 million. Net gains on securities, derivatives and other assets increased $2.7 million. Other-than-temporary impairment charges recognized in earnings were $1.4 million less than charges recognized in the fourth quarter of 2012.


- 4 -



Table 2 – Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
Mar. 31,
 
 
 
 
 
Three Months Ended Three Months Ended
Dec. 31, 2012
 
 
 
 
 
 
2013
 
2012
 
Increase(Decrease)
 
% Increase(Decrease)
 
 
Increase(Decrease)
 
% Increase(Decrease)
Brokerage and trading revenue
 
$
31,751

 
$
31,111

 
$
640

 
2
 %
 
$
31,958

 
$
(207
)
 
(1
)%
Transaction card revenue
 
27,692

 
25,430

 
2,262

 
9
 %
 
28,009

 
(317
)
 
(1
)%
Trust fees and commissions
 
22,313

 
18,438

 
3,875

 
21
 %
 
22,030

 
283

 
1
 %
Deposit service charges and fees
 
22,966

 
24,379

 
(1,413
)
 
(6
)%
 
24,174

 
(1,208
)
 
(5
)%
Mortgage banking revenue
 
39,976

 
33,078

 
6,898

 
21
 %
 
46,410

 
(6,434
)
 
(14
)%
Bank-owned life insurance
 
3,226

 
2,871

 
355

 
12
 %
 
2,673

 
553

 
21
 %
Other revenue
 
10,187

 
9,264

 
923

 
10
 %
 
10,554

 
(367
)
 
(3
)%
Total fees and commissions revenue
 
158,111

 
144,571

 
13,540

 
9
 %
 
165,808

 
(7,697
)
 
(5
)%
Gain on other assets, net
 
467

 
(3,693
)
 
4,160

 
N/A

 
137

 
330

 
N/A

Gain on derivatives, net
 
(941
)
 
(2,473
)
 
1,532

 
N/A

 
(637
)
 
(304
)
 
N/A

Gain on fair value option securities, net
 
(3,171
)
 
(1,733
)
 
(1,438
)
 
N/A

 
(2,081
)
 
(1,090
)
 
N/A

Gain on available for sale securities
 
4,855

 
4,331

 
524

 
N/A

 
1,066

 
3,789

 
N/A

Total other-than-temporary impairment
 
—

 
(505
)
 
505

 
N/A

 
(504
)
 
504

 
N/A

Portion of loss recognized in (reclassified from) other comprehensive income
 
(247
)
 
(3,217
)
 
2,970

 
N/A

 
(1,163
)
 
916

 
N/A

Net impairment losses recognized in earnings
 
(247
)
 
(3,722
)
 
3,475

 
N/A

 
(1,667
)
 
1,420

 
N/A

Total other operating revenue
 
$
159,074

 
$
137,281

 
$
21,793

 
16
 %
 
$
162,626

 
$
(3,552
)
 
(2
)%
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 48% of total revenue for the first quarter of 2013, excluding provision for credit losses and gains and losses on asset sales, securities and derivatives. We believe that a variety of fee revenue sources provide an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. As an example of this strength, many of the economic factors that are causing net interest revenue compression are also driving strong growth in our mortgage banking revenue. We expect continued growth in other operating revenue through offering new products and services and by further development of our presence in markets outside of Oklahoma. However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

Brokerage and trading revenue, which includes revenues from securities trading, retail brokerage, customer hedging and investment banking increased $640 thousand or 2% over the first quarter of 2012. 

Securities trading revenue totaled $17.1 million for the first quarter of 2013, up $1.1 million over the first quarter of 2012. 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 $2.8 million for the first quarter of 2013 compared to $4.6 million for the first quarter of 2012.


- 5 -



Revenue earned from retail brokerage transactions increased $619 thousand or 8% over the first quarter of 2012 to $8.2 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 $3.7 million for the first quarter of 2013, a $690 thousand or 23% increase over the first quarter of 2012 related to the timing and volume of completed transactions. The increased volume of transactions is primarily the result of the Company's expansion of its municipal financial advisory service capacity, particularly in the Texas market.

Brokerage and trading revenue decreased $207 thousand compared to the fourth quarter of 2012. Securities trading revenue decreased $614 thousand compared to the fourth quarter of 2012. Increased revenue from energy derivative contracts was offset by a decrease in revenue related to interest rate derivative contracts. Retail brokerage fees were up $772 thousand and investment banking fees were down $364 thousand.

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

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

Transaction card revenue depends largely on the volume and amount of transactions processed, the number of TransFund automated teller machine (“ATM”) locations and the number of merchants served. Transaction card revenue for the first quarter of 2013 increased $2.3 million or 9% over the first quarter of 2012. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $14.9 million, up $1.6 million or 12% over the first quarter of 2012, due primarily to increased transaction volumes. Merchant services fees totaled $8.7 million, up $750 thousand or 9% over the prior year. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company totaled $4.1 million for the first quarter of 2013 compared to $4.2 million for the first quarter of 2012.

Transaction card revenue decreased $317 thousand compared to the fourth quarter of 2012. Decreased revenues from processing transactions on behalf of members of our TransFund EFT network and interchange fees from debit cards issued by the Company, were partially offset by increased merchant services fees.

Trust fees and commissions increased $3.9 million or 21% over the first quarter of 2012 and were up $283 thousand over the fourth quarter of 2012. The acquisition of the Milestone Group by BOK Financial in third quarter of 2012 added $1.4 billion of fiduciary assets as of March 31, 2013 and resulted in a $2.4 million increase in trust fees and commissions over the first quarter of 2012. The remaining increase was primarily due to the growth in the fair value of fiduciary assets administered by the Company. Fiduciary assets are assets for which the Company possesses investment discretion on behalf of another or any other similar capacity. The fair value of fiduciary assets administered by the Company totaled $27.6 billion at March 31, 2013, $23.8 billion at March 31, 2012 and $25.8 billion at December 31, 2012. 

In addition to trust fees and commissions where we served as a fiduciary, we also earn fees as administrator to and investment adviser for the Cavanal Hill Funds, a diversified, open-ended investment company established as a business trust under the Investment Company Act of 1940. The Bank is custodian and BOSC, Inc. is distributor for the Cavanal Hill Funds. Products of the Cavanal Hill Funds are offered to customers, employee benefit plans, trusts and the general public in the ordinary course of business. We have voluntarily waived administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds in the current low short-term interest rate environment. Waived fees totaled $1.8 million for the first quarter of 2013 compared to $2.6 million for the first quarter of 2012 and $1.7 million for the fourth quarter of 2012.


- 6 -



Deposit service charges and fees decreased $1.4 million or 6% compared to the first quarter of 2012. Overdraft fees totaled $11.8 million for the first quarter of 2013, a decrease of $1.7 million or 12% compared to the first quarter of 2012. Consumers are generally maintaining higher average balances and better managing their accounts to reduce overdraft fees. Commercial account service charge revenue totaled $9.0 million, down $144 thousand or 2% compared to the prior year. Service charges on deposit accounts with a standard monthly fee were $2.0 million, up $424 thousand or 26% over the first quarter of 2012. Deposit service charges and fees decreased $1.2 million compared to the prior quarter.

Mortgage banking revenue increased $6.9 million over the first quarter of 2012. Revenue from originating and marketing mortgage loans totaled $29.9 million, up $6.8 million or 30% over the first quarter of 2012. Mortgage loans funded for sale totaled $956 million in the first quarter of 2013 compared to $747 million in the first quarter of 2012. In addition to growth in loans funded, outstanding commitments to originate mortgage loans were up $164 million or 54% over March 31, 2012. Mortgage servicing revenue increased $69 thousand or 1% over the first quarter of 2012. The outstanding principal balance of mortgage loans serviced for others totaled $12.3 billion, up $894 million over March 31, 2012.

Mortgage banking revenue decreased $6.4 million compared to the fourth quarter of 2012 primarily due to lower volume and narrowed pricing of loans sold. Residential mortgage loans funded for sale decreased $117 million compared to the previous quarter. Outstanding commitments to originate mortgage loans were up $110 million or 28% over December 31, 2012. Mortgage servicing revenue decreased $355 thousand compared to the prior quarter. The outstanding balance of mortgage loans serviced for others was up $291 million over December 31, 2012.

Table 3 – Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
Mar. 31,
 
 
 
%
 
Three Months Ended
Dec. 31, 2012
 
 
 
%
 
 
2013
 
2012
 
Increase
(Decrease)
 
Increase
(Decrease)
 
 
Increase
(Decrease)
 
Increase
(Decrease)
Originating and marketing revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages loan held for sale
 
$
30,235

 
$
17,092

 
$
13,143

 
77
 %
 
$
35,337

 
$
(5,102
)
 
(14
)%
Residential mortgage loan commitments
 
610

 
2,310

 
$
(1,700
)
 
(74
)%
 
(9,586
)
 
10,196

 
(106
)%
Forward sales contracts
 
(935
)
 
3,679

 
$
(4,614
)
 
(125
)%
 
10,238

 
(11,173
)
 
(109
)%
Total originating and marketing revenue
 
29,910

 
23,081

 
6,829

 
30
 %
 
35,989

 
(6,079
)
 
(17
)%
Servicing revenue
 
10,066

 
9,997

 
69

 
1
 %
 
10,421

 
(355
)
 
(3
)%
Total mortgage revenue
 
$
39,976

 
$
33,078

 
$
6,898

 
21
 %
 
$
46,410

 
$
(6,434
)
 
(14
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
956,315

 
$
747,436

 
$
208,879

 
28
 %
 
$
1,073,541

 
$
(117,226
)
 
(11
)%
Mortgage loan refinances to total funded
 
62
%
 
67
%
 
 

 
 

 
62
%
 
 

 
 



 
 
March 31,
 
 
 
 
 
 
 
 
 
 
 
 
2013
 
2012
 
Increase
 
% Increase
 
December 31,
2012
 
Increase
 
% Increase
Outstanding principal balance of mortgage loans serviced for others
 
$
12,272,691

 
$
11,378,806

 
$
893,885

 
8
%
 
$
11,981,624

 
$
291,067

 
2
%

- 7 -



Net gains on securities, derivatives and other assets

In the first quarter of 2013, we recognized a $4.9 million gain from sales of $728 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 $4.3 million of gains on sales of $992 million of available for sale securities in the first quarter of 2012 and $1.1 million of gain on sales of $84 million in the fourth quarter of 2012.

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.

Table 4 -- Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
March 31,
2013
 
December 31,
2012
 
March 31,
2012
Loss on mortgage hedge derivative contracts, net
 
$
(1,654
)
 
$
(707
)
 
$
(2,445
)
Loss on fair value option securities, net
 
(3,232
)
 
(2,177
)
 
(2,393
)
Loss on economic hedge of mortgage servicing rights
 
(4,886
)
 
(2,884
)
 
(4,838
)
Gain on change in fair value of mortgage servicing rights
 
2,658

 
4,689

 
7,127

Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges
 
$
(2,228
)
 
$
1,805

 
$
2,289

 
 
 
 
 
 
 
Net interest revenue on fair value option securities
 
$
828

 
$
748

 
$
3,165

 
 
 
 
 
 
 
Average primary residential mortgage interest rate
 
3.50
%
 
3.36
%
 
3.92
%
Average secondary residential mortgage interest rate
 
2.54
%
 
2.19
%
 
2.87
%

Primary rates disclosed in Table 4 above represent rates generally available to borrowers on 30 year conforming mortgage loans and affect the value of our mortgage servicing rights. Secondary rates represent rates generally paid on 30 year residential mortgage-backed securities guaranteed by U.S. government agencies and affect the value of securities and derivative contracts used as an economic hedge of our mortgage servicing rights. The difference between average primary and secondary rates for the first quarter of 2013 was 96 basis points compared to 117 basis points for the fourth quarter of 2012 and 105 basis points for the first quarter of 2012.

As more fully discussed in Note 2 to the Consolidated Financial Statements, we recognized $247 thousand of other-than-temporary impairment losses in earnings during the first quarter of 2013 on certain private-label residential mortgage-backed securities we do not intend to sell . We recognized other-than-temporary impairment losses in earnings of $3.7 million in the first quarter of 2012 and $1.7 million in the fourth quarter of 2012.

- 8 -



Other Operating Expense

Other operating expense for the first quarter of 2013 totaled $201.3 million, up $19.2 million or 11% over the first quarter of 2012. Changes in the fair value of mortgage servicing rights increased operating expense $2.7 million in the first quarter of 2013 and $7.1 million in the first quarter of 2012. Excluding changes in the fair value of mortgage servicing rights, operating expenses were up $14.7 million or 8% over the first quarter of 2012. Personnel expenses increase $10.9 million or 9%. Non-personnel expenses increase $3.8 million or 5%.

Excluding changes in the fair value of mortgage servicing rights, operating expenses were down $22.8 million over the previous quarter. Personnel expenses decreased $5.5 million and non-personnel expenses decreased $17.3 million.

Table 5 -- Other Operating Expense
(In thousands)
 
 
 
Three Months Ended
Mar. 31,
 
Increase
 
%
Increase
 
Three Months Ended
Dec. 31, 2012
 
Increase
 
%
Increase
 
 
2013
 
2012
 
(Decrease)
 
(Decrease)
 
 
(Decrease)
 
(Decrease)
Regular compensation
 
$
67,858

 
$
63,132

 
$
4,726

 
7
 %
 
$
67,678

 
$
180

 
—
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
27,045

 
26,241

 
804

 
3
 %
 
31,771

 
(4,726
)
 
(15
)%
Stock-based
 
10,700

 
6,625

 
4,075

 
62
 %
 
11,982

 
(1,282
)
 
(11
)%
Total incentive compensation
 
37,745

 
32,866

 
4,879

 
15
 %
 
43,753

 
(6,008
)
 
(14
)%
Employee benefits
 
20,051

 
18,771

 
1,280

 
7
 %
 
19,761

 
290

 
1
 %
Total personnel expense
 
125,654

 
114,769

 
10,885

 
9
 %
 
131,192

 
(5,538
)
 
(4
)%
Business promotion
 
5,453

 
4,388

 
1,065

 
24
 %
 
6,150

 
(697
)
 
(11
)%
Charitable contribution to BOKF Foundation
 
—

 
—

 
—

 
—
 %
 
2,062

 
(2,062
)
 
(100
)%
Professional fees and services
 
6,985

 
7,599

 
(614
)
 
(8
)%
 
10,082

 
(3,097
)
 
(31
)%
Net occupancy and equipment
 
16,481

 
16,023

 
458

 
3
 %
 
16,883

 
(402
)
 
(2
)%
Insurance
 
3,745

 
3,866

 
(121
)
 
(3
)%
 
3,789

 
(44
)
 
(1
)%
Data processing & communications
 
25,450

 
22,144

 
3,306

 
15
 %
 
25,010

 
440

 
2
 %
Printing, postage and supplies
 
3,674

 
3,311

 
363

 
11
 %
 
3,403

 
271

 
8
 %
Net losses & operating expenses of repossessed assets
 
1,246

 
2,245

 
(999
)
 
(44
)%
 
6,665

 
(5,419
)
 
(81
)%
Amortization of intangible assets
 
876

 
575

 
301

 
52
 %
 
1,065

 
(189
)
 
(18
)%
Mortgage banking costs
 
7,354

 
8,439

 
(1,085
)
 
(13
)%
 
10,542

 
(3,188
)
 
(30
)%
Change in fair value of mortgage servicing rights
 
(2,658
)
 
(7,127
)
 
4,469

 
(63
)%
 
(4,689
)
 
2,031

 
(43
)%
Other expense
 
7,064

 
5,905

 
1,159

 
20
 %
 
9,931

 
(2,867
)
 
(29
)%
Total other operating expense
 
$
201,324

 
$
182,137

 
$
19,187

 
11
 %
 
$
222,085

 
$
(20,761
)
 
(9
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of employees (full-time equivalent)
 
4,697

 
4,630

 
67

 
1
 %
 
4,704

 
(7
)
 
—
 %

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 7% over the first quarter of 2012 primarily due to increases in headcount and standard annual merit increases which were effective for the majority of our staff March 1.


- 9 -



Incentive compensation increased $4.9 million or 15% over the first quarter of 2012. Cash-based incentive compensation plans are either intended to provide current rewards to employees who generate long-term business opportunities for the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions. Total cash-based incentive compensation increased $804 thousand or 3% over the first quarter of 2012. 

The Company also provides stock-based incentive compensation plans. Stock-based compensation plans include both equity and liability awards. Compensation expense for equity awards decreased $2.7 million compared to the first quarter of 2012 primarily due to the reversal of compensation costs for awards that did not vest because the performance criteria were not met. Expense for equity awards is based on the grant-date fair value of the awards and is unaffected by subsequent changes in fair value. Stock-based compensation expense also included deferred compensation that will ultimately be settled in cash indexed to the investment performance or changes in earnings per share. Certain executive officers are permitted to defer recognition of taxable income from their stock-based compensation. Deferred compensation may also be diversified into investments other than BOK Financial common stock. Compensation expense reflects changes in the market value of BOK Financial common stock and other investments. Expense based on changes in the fair value of BOK Financial common stock and other investments increased $259 thousand compared to the the first quarter of 2012. In addition, $9.5 million was accrued in first quarter of 2013 and $3.0 million was accrued in the first quarter of 2012 for the BOK Financial Corp. 2011 True-Up Plan. Approved by shareholders on April 26, 2011, the True-Up Plan is designed to adjust annual and long-term performance-based incentive compensation for certain senior executives either upward or downward based on the earnings per share performance and compensation of comparable senior executives at peer banks for 2006 through 2013. Based on currently available information, amounts estimated to be payable under the 2011 True-Up Plans are approximately $70 million. The final amount due under the 2011 True-Up Plan will be determined as of December 31, 2013 and distributed in 2014. Performance measurement through 2013 may result in future upward or downward adjustments to compensation expense.  

Employee benefit expense increased $1.3 million or 7% over the first quarter of 2012 primarily due to increased employee medical insurance costs and payroll taxes. The Company self-insures a portion of its employee health care coverage and these costs may be volatile.
Personnel costs decreased $5.5 million from the fourth quarter of 2012 due largely to incentive compensation. Incentive compensation expense decreased $6.0 million. Cash-based incentive compensation, which rewards employees as they generate business opportunities for the Company by growing loans, deposits, customer relationships or other measurable metrics, decreased $4.7 million. Stock-based incentive compensation expense decreased $1.3 million primarily due to the reversal of costs related to performance shares that did not vest.


Non-personnel operating expenses

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, increased $3.8 million compared over the first quarter of 2012. Data processing and communications expense increased $3.3 million primarily due to transaction card activity. In addition, the first quarter of 2012 included $2.0 million expense reduction from the favorable resolution of a dispute with a service provider. Net losses and operating expenses of repossessed assets were down $999 thousand compared to the first quarter of 2012 primarily due to decreased losses from regularly scheduled appraisal updates. All other expenses were up $1.5 million over the first quarter of 2012.

Excluding changes in the fair value of mortgage servicing rights, non-personnel operating expenses decreased $17.3 million compared to the fourth quarter of 2012. Net losses and operating expenses of repossessed assets decreased $5.4 million. Mortgage banking costs decreased $3.2 million primarily due to decreased provision related to mortgage loans sold subject to repurchase. Loss trends related to these loans have stabilized. Professional fees and services were down $3.1 million compared to the prior quarter. During the fourth quarter of 2012, the Company made a $2.1 million discretionary contribution to the BOKF Foundation. The BOKF Foundation partners with various charitable organizations to support needs within our communities. All other non-personnel expenses were down $3.5 million compared to the previous quarter.

- 10 -



Income Taxes

Income tax expense was $47.1 million or 35% of book taxable income for the first quarter of 2013 compared to $45.5 million or 35% of book taxable income for the first quarter of 2012 and $44.3 million or 35% of book taxable income for the fourth quarter of 2012.

BOK Financial operates in numerous jurisdictions, which requires judgment regarding the allocation of income, expense and earnings under various laws and regulations of each of these taxing jurisdictions. Each jurisdiction may audit our tax returns and may take different positions with respect to these allocations. The reserve for uncertain tax positions was $13 million at March 31, 2013, $12 million at December 31, 2012 and $13 million at March 31, 2012. The Internal Revenue Service completed its audit of the Company's 2008 refund claim during the first quarter of 2013 with no adjustments.

- 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 $6.1 million or 11% over the first quarter of 2012. The increase in net income attributed to our lines of business was due primarily to decreased net loans charged off and growth in nearly all of our diversified revenue categories over the prior year, partially offset by increased operating expenses.

Table 6 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
Commercial Banking
 
$
38,506

 
$
32,984

Consumer Banking
 
20,418

 
20,141

Wealth Management
 
4,198

 
3,920

Subtotal
 
63,122

 
57,045

Funds Management and other
 
24,842

 
26,570

Total
 
$
87,964

 
$
83,615



- 12 -



Commercial Banking

Commercial Banking contributed $38.5 million to consolidated net income in the first quarter of 2013, up $5.5 million or 17% over the first quarter of 2012. 

Table 7 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
 
March 31,
 
Increase
 
 
2013
 
2012
 
(Decrease)
Net interest revenue from external sources
 
$
90,818

 
$
89,492

 
$
1,326

Net interest expense from internal sources
 
(9,128
)
 
(12,049
)
 
2,921

Total net interest revenue
 
81,690

 
77,443

 
4,247

Net loans charged off
 
1,021

 
6,392

 
(5,371
)
Net interest revenue after net loans charged off
 
80,669

 
71,051

 
9,618

 
 
 
 
 
 
 
Fees and commissions revenue
 
41,432

 
38,748

 
2,684

Gain on financial instruments and other assets, net
 
—

 
44

 
(44
)
Other operating revenue
 
41,432

 
38,792

 
2,640

 
 
 
 
 
 
 
Personnel expense
 
25,480

 
24,843

 
637

Net losses and expenses of repossessed assets
 
1,170

 
667

 
503

Other non-personnel expense
 
19,983

 
17,725

 
2,258

Corporate allocations
 
12,447

 
12,625

 
(178
)
Total other operating expense
 
59,080

 
55,860

 
3,220

 
 
 
 
 
 
 
Income before taxes
 
63,021

 
53,983

 
9,038

Federal and state income tax
 
24,515

 
20,999

 
3,516

 
 
 
 
 
 
 
Net income
 
$
38,506

 
$
32,984

 
$
5,522

 
 
 
 
 
 
 
Average assets
 
$
10,629,339

 
$
10,013,866

 
$
615,473

Average loans
 
9,575,332

 
8,860,991

 
714,341

Average deposits
 
9,245,663

 
8,354,749

 
890,914

Average invested capital
 
890,844

 
896,552

 
(5,708
)
Return on average assets
 
1.47
%
 
1.32
%
 
15

Return on invested capital
 
17.53
%
 
14.80
%
 
273

Efficiency ratio
 
47.98
%
 
48.08
%
 
(10
)
Net charge-offs (annualized) to average loans
 
0.04
%
 
0.29
%
 
(25
)

Net interest revenue increased $4.2 million or 5% over the first quarter of 2012. Growth in net interest revenue was due to a $714 million increase in average loan balances and a $891 million increase in average deposits over the first quarter of 2012, partially offset by reduced yields on loans and deposits sold to our Funds Management unit.

Fees and commissions revenue increased $2.7 million or 7% over the first quarter of 2012 primarily due to a $2.1 million increase in transaction card revenues. Commercial deposit service charges and fees decreased $211 thousand compared to the prior year.

Operating expenses increased $3.2 million or 6% over the first quarter of 2012. Personnel costs increased $637 thousand or 3% primarily due to standard annual merit increases and headcount. Net losses and operating expenses on repossessed assets increased $503 thousand over the first quarter of 2012, primarily due to write-downs as the result of a regularly scheduled

- 13 -



appraisal update. Other non-personnel expenses increased $2.3 million over the first quarter of 2012 primarily due to increased data processing expenses related to increased transaction card volumes. Corporate expense allocations were largely unchanged compared to the prior year.

The average outstanding balance of loans attributed to Commercial Banking increased $714 million to $9.6 billion for the first quarter of 2013. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans which are primarily attributed to the Commercial Banking segment. Net Commercial Banking loans charged off decreased $5.4 million compared to the first quarter of 2012 to $1.0 million or 0.04% of average loans attributed to this line of business on an annualized basis. 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 $9.2 billion for the first quarter of 2013, up $891 million or 11% over the first quarter of 2012. Average balances attributed to our energy customers increased $384 million or 31%, commercial & industrial loan customers increased $177 million or 6% and small business customers increased $90 million or 5%. Average balances held by treasury services customers were down $10 million compared to the first quarter of 2012. Commercial customers continue to maintain high account balances due to continued economic uncertainty and persistently low yields available on high quality investments.



- 14 -



Consumer Banking

Consumer Banking services are provided through five primary distribution channels:  traditional branches, supermarket branches, the 24-hour ExpressBank call center, Internet banking and mobile banking. Consumer Banking also conducts mortgage banking activities through offices located outside of our consumer banking markets and through correspondent loan originators.

Consumer Banking contributed $20.4 million to consolidated net income for the first quarter of 2013, up $277 thousand over the first quarter of 2012 primarily due to growth in mortgage banking revenue. Changes in fair value of our mortgage servicing rights, net of economic hedge, decreased net income attributed to consumer banking by $1.4 million in the first quarter of 2013 compared to increasing net income attributed to Consumer Banking by $1.4 million in the first quarter of 2012.

Table 8 -- Consumer Banking
(In thousands)
 
 
Three Months Ended
 
 
 
 
 
March 31,
 
Increase
 
 
 
2013
 
2012
 
(Decrease)
 
Net interest revenue from external sources
 
$
24,095

 
$
26,587

 
$
(2,492
)
 
Net interest revenue from internal sources
 
5,483

 
4,879

 
604

 
Total net interest revenue
 
29,578

 
31,466

 
(1,888
)
 
Net loans charged off
 
930

 
1,432

 
(502
)
 
Net interest revenue after net loans charged off
 
28,648

 
30,034

 
(1,386
)
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
63,204

 
55,935

 
7,269

 
Gain on financial instruments and other assets, net
 
(6,063
)
 
(5,695
)
 
(368
)
 
Other operating revenue
 
57,141

 
50,240

 
6,901

 
 
 
 
 
 
 
 
 
Personnel expense
 
22,526

 
21,123

 
1,403

 
Net (gains) losses and expenses of repossessed assets
 
(250
)
 
215

 
(465
)
 
Change in fair value of mortgage servicing rights
 
(2,658
)
 
(7,127
)
 
4,469

 
Other non-personnel expense
 
22,732

 
22,364

 
368

 
Corporate allocations
 
10,021

 
10,735

 
(714
)
 
Total other operating expense
 
52,371

 
47,310

 
5,061

 
 
 
 
 
 
 
 
 
Income before taxes
 
33,418

 
32,964

 
454

 
Federal and state income tax
 
13,000

 
12,823

 
177

 
 
 
 
 
 
 
 
 
Net income
 
$
20,418

 
$
20,141

 
$
277

 
 
 
 
 
 
 
 
 
Average assets
 
$
5,723,958

 
$
5,784,654

 
$
(60,696
)
 
Average loans
 
2,354,479

 
2,401,939

 
(47,460
)
 
Average deposits
 
5,642,594

 
5,615,055

 
27,539

 
Average invested capital
 
297,074

 
283,496

 
13,578

 
Return on average assets
 
1.45
%
 
1.40
%
 
5

bp
Return on invested capital
 
27.87
%
 
28.57
%
 
(70
)
bp
Efficiency ratio
 
59.31
%
 
62.28
%
 
(297
)
bp
Net charge-offs (annualized) to average loans
 
0.16
%
 
0.24
%
 
(8
)
bp
Residential mortgage loans funded for sale
 
$
956,315

 
$
747,436

 
$
208,879

 


- 15 -



 
 
March 31,
2013
 
March 31,
2012
 
Increase
(Decrease)
Banking locations
 
220

 
212

 
8

Residential mortgage loans servicing portfolio1
 
$
13,365,991

 
$
12,442,937

 
$
923,054

1 
Includes outstanding principal for loans serviced for affiliates

Net interest revenue from consumer banking activities decreased $1.9 million compared to the first quarter of 2012. Interest earned on residential mortgage-backed securities held as an economic hedge of mortgage servicing rights declined by $2.3 million due to a $36 million reduction in the average balance of this portfolio. Average loan balances were down $47 million or 2% compared to the first quarter of 2012 primarily due to decreased balances of indirect automobile loans. Net interest earned on deposits sold to our Funds Management unit decreased $1.3 million primarily due to lower yields on funds invested.

Net loans charged off by the Consumer Banking unit decreased $502 thousand compared to the first quarter of 2012. Net consumer banking charge-offs also includes indirect automobile loans, overdrawn deposit accounts and other direct consumer loans.

Fees and commissions revenue increased $7.3 million or 13% over the first quarter of 2012. Mortgage banking revenue was up $7.4 million or 22% over the prior year primarily due to increased residential mortgage loan originations and commitments. Deposit service charges and fees decreased $1.2 million compared to the prior year primarily due to lower overdraft fees.

Excluding the change in the fair value of mortgage servicing rights, operating expenses increased $592 thousand over the first quarter of 2012. Personnel expenses were up $1.4 million or 7% 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 $368 thousand or 2%. Corporate expense allocations were down $714 thousand compared to the first quarter of 2012. Net losses and operating expenses of repossessed assets were down $465 thousand compared to the prior year.

Average consumer deposits were largely unchanged compared to the first quarter of 2012. Average interest-bearing transaction accounts increased $126 million or 5% and average demand deposits increased $51 million or 8%. Average time deposit balances were down $199 million or 10% 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 $1.0 billion of residential mortgage loans in the first quarter of 2013 and $811 million in the first quarter of 2012. Mortgage loan fundings included $956 million of mortgage loans funded for sale in the secondary market and $46 million funded for retention within the consolidated group. Approximately 27% of our mortgage loans funded were in the Oklahoma market, 15% in the New Mexico market, 14% in the Texas market and 11% in the Colorado market. In addition, 20% 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 March 31, 2013, the Consumer Banking division serviced $12.3 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 $72 million or 0.58% of loans serviced for others at March 31, 2013 compared to $84 million or 0.70% of loans serviced for others at December 31, 2012. Mortgage servicing revenue, including revenue on loans serviced for the consolidated group, totaled $10.6 million, largely unchanged compared to the first quarter of 2012.


- 16 -



Wealth Management

Wealth Management contributed $4.2 million to consolidated net income in first quarter of 2013, up $278 thousand or 7% over the first quarter of 2012.

Table 9 -- Wealth Management
(Dollars in thousands)
 
Three Months Ended
 
 
 
March 31,
 
Increase
 
2013
 
2012
 
(Decrease)
Net interest revenue from external sources
$
6,516

 
$
7,140

 
$
(624
)
Net interest revenue from internal sources
5,278

 
4,857

 
421

Total net interest revenue
11,794

 
11,997

 
(203
)
Net loans charged off
519

 
650

 
(131
)
Net interest revenue after net loans charged off
11,275

 
11,347

 
(72
)
 
 
 
 
 
 
Fees and commissions revenue
52,095

 
46,445

 
5,650

Gain (loss) on financial instruments and other assets, net
508

 
(52
)
 
560

Other operating revenue
52,603

 
46,393

 
6,210

 
 
 
 
 
 
Personnel expense
38,464

 
35,165

 
3,299

Net losses and expenses of repossessed assets
31

 
4

 
27

Other non-personnel expense
8,653

 
6,913

 
1,740

Corporate allocations
9,859

 
9,242

 
617

Other operating expense
57,007

 
51,324

 
5,683

 
 
 
 
 
 
Income before taxes
6,871

 
6,416

 
455

Federal and state income tax
2,673

 
2,496

 
177

 
 
 
 
 
 
Net income
$
4,198

 
$
3,920

 
$
278

 
 
 
 
 
 
Average assets
$
4,686,952

 
$
4,168,398

 
$
518,554

Average loans
931,790

 
927,538

 
4,252

Average deposits
4,613,056

 
4,106,236

 
506,820

Average invested capital
202,310

 
173,853

 
28,457

Return on average assets
0.36
%
 
0.38
%
 
(2
)
Return on invested capital
8.35
%
 
9.14
%
 
(79
)
Efficiency ratio
89.23
%
 
87.82
%
 
141

Net charge-offs (annualized) to average loans
0.22
%
 
0.28
%
 
(6
)

 
 
March 31,
2013
 
March 31,
2012
 
Increase
(Decrease)
Fiduciary assets in custody for which BOKF has sole or joint discretionary authority
 
$
11,608,502

 
$
10,351,742

 
$
1,256,760

Fiduciary assets not in custody for which BOKF has sole or joint discretionary authority
 
1,955,313

 
227,987

 
1,727,326

Non-managed trust assets in custody
 
14,042,365

 
13,195,059

 
847,306

Total fiduciary assets
 
27,606,180

 
23,774,788

 
3,831,392

Assets held in safekeeping
 
21,562,010

 
19,902,629

 
1,659,381

Brokerage accounts under BOKF administration
 
4,528,168

 
4,318,795

 
209,373

Assets under management or in custody
 
$
53,696,358

 
$
47,996,212

 
$
5,700,146



- 17 -



Net interest revenue for the first quarter of 2013 was down $203 thousand or 2% over the first quarter of 2012. Growth in average assets was largely due to funds sold to the Funds Management unit and was offset by lower yields. Average deposit balances were up $507 million or 12% over the prior year. Average time deposit balances decreased $29 million. These higher costing time deposits were replaced by growth in interest-bearing transaction account balances of $422 million and non-interest bearing demand deposits of $112 million. Average loan balances were largely unchanged compared to the prior year. Net loans charged off decreased $131 thousand from the first quarter of 2012 to $519 thousand or 0.22% of average loans on an annualized basis. 

Fees and commissions revenue was up $5.7 million or 12% over the first quarter of 2012. Trust fees and commissions were up $3.9 million or 21% due primarily to the acquisition of The Milestone Group, a Denver based investment adviser to high net worth clients, in the third quarter of 2012. The Milestone Group added $1.5 billion of fiduciary assets as of March 31, 2013 and $2.4 million of revenue in the first quarter of 2013. Brokerage and trading revenue increased $1.8 million or 7% primarily due to increased gains on securities and derivative contracts sold to our mortgage banking customers and growth in investment banking revenue.

Other operating revenue includes fees earned from state and municipal bond underwriting and financial advisory services, primarily in the Oklahoma and Texas markets. In the first quarter of 2013, the Wealth Management division participated in 86 underwritings that totaled $1.2 billion. As a participant, the Wealth Management division was responsible for facilitating the sale of approximately $519 million of these underwritings. In the first quarter of 2012, the Wealth Management division participated in 90 underwritings that totaled approximately $1.4 billion. Our interest in these underwritings totaled approximately $549 million.

Operating expenses increased $5.7 million or 11% over the first quarter of 2012 primarily due to The Milestone Group acquisition. Personnel expenses increased $3.3 million including a $2.2 million increase in regular compensation and $498 thousand increase in incentive compensation. Non-personnel expenses increased $1.7 million and corporate expense allocations increased $617 thousand.
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. Mortgage origination and marketing revenue is attributed to the geography where the mortgage was originated. Mortgage origination and marketing revenue related to correspondent banking is attributed to the Bank of Oklahoma. All interest revenue on mortgage loans retained by BOKF and servicing revenue for mortgage loans sold in the secondary market and serviced for others is also attributed to the Bank of Oklahoma.

Table 10 -- Net Income (Loss) by Geographic Region
(In thousands)
 
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
Bank of Oklahoma
 
$
31,467

 
$
33,733

Bank of Texas
 
12,310

 
12,852

Bank of Albuquerque
 
6,317

 
4,479

Bank of Arkansas
 
2,353

 
2,170

Colorado State Bank & Trust
 
5,621

 
2,346

Bank of Arizona
 
979

 
(1,835
)
Bank of Kansas City
 
2,358

 
2,362

Subtotal
 
61,405

 
56,107

Funds Management and other
 
26,559

 
27,508

Total
 
$
87,964

 
$
83,615



- 18 -



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 46% of our average loans, 54% of our average deposits and 36% of our consolidated net income in the first quarter of 2013. In addition, all of our mortgage servicing activity, TransFund EFT network and 64% of our fiduciary assets are attributed to the Oklahoma market.

Net income generated by the Bank of Oklahoma in the first quarter of 2013 decreased $2.3 million or 7% compared to the first quarter of 2012. Changes in fair value of our mortgage servicing rights, net of economic hedge, decreased net income attributed to the Bank of Oklahoma by $1.4 million in the first quarter of 2013 compared to increasing net income attributed to the Bank of Oklahoma by $1.4 million in the first quarter of 2012.


Table 11 -- Bank of Oklahoma
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
 
March 31,
 
Increase
 
 
2013
 
2012
 
(Decrease)
Net interest revenue
 
$
56,940

 
$
59,653

 
$
(2,713
)
Net loans charged off
 
(258
)
 
1,654

 
(1,912
)
Net interest revenue after net loans charged off
 
57,198

 
57,999

 
(801
)
 
 
 
 
 
 
 
Fees and commissions revenue
 
78,433

 
77,360

 
1,073

Loss on financial instruments and other assets, net
 
(5,865
)
 
(5,747
)
 
(118
)
Other operating revenue
 
72,568

 
71,613

 
955

 
 
 
 
 
 
 
Personnel expense
 
37,719

 
36,455

 
1,264

Net (gains) losses and expenses of repossessed assets
 
(75
)
 
417

 
(492
)
Change in fair value of mortgage servicing rights
 
(2,658
)
 
(7,127
)
 
4,469

Other non-personnel expense
 
37,055

 
34,494

 
2,561

Corporate allocations
 
6,224

 
10,163

 
(3,939
)
Total other operating expense
 
78,265

 
74,402

 
3,863

 
 
 
 
 
 
 
Income before taxes
 
51,501

 
55,210

 
(3,709
)
Federal and state income tax
 
20,034

 
21,477

 
(1,443
)
 
 
 
 
 
 
 
Net income
 
$
31,467

 
$
33,733

 
$
(2,266
)
 
 
 
 
 
 
 
Average assets
 
$
11,635,864

 
$
11,551,365

 
$
84,499

Average loans
 
5,620,496

 
5,636,172

 
(15,676
)
Average deposits
 
10,729,560

 
10,342,518

 
387,042

Average invested capital
 
552,402

 
551,166

 
1,236

Return on average assets
 
1.10
 %
 
1.17
%
 
(7
)
Return on invested capital
 
23.10
 %
 
24.62
%
 
(152
)
Efficiency ratio
 
59.78
 %
 
59.50
%
 
28

Net charge-offs (annualized) to average loans
 
(0.02
)%
 
0.12
%
 
(14
)
Residential mortgage loans funded for sale
 
$
454,919

 
$
346,265

 
$
108,654


Net interest revenue decreased $2.7 million or 5% compared to the first quarter of 2012. Average loan balances were largely unchanged and loan yields were down. Net interest earned on residential mortgage-backed securities held as an economic hedge of mortgage servicing rights declined by $2.3 million due to a $36 million reduction in the average balance of this

- 19 -



portfolio. Decreased funding costs and the favorable net interest impact of the $387 million increase in average deposit balances was partially offset by lower yield on funds sold to the Funds Management unit.

Fees and commission revenue was largely unchanged compared to the first quarter of 2012. Transaction card revenue was up $1.3 million on increased transaction volumes and trust fees and commissions increased $772 thousand. Mortgage banking revenue decreased $695 thousand compared to the first quarter of 2012 primarily due to decreased mortgage loan origination and gains on sales of residential mortgage loans in the secondary market. Deposit service charges and fees decreased $898 thousand over the first quarter of 2012 primarily due to a decrease in overdraft charges. Brokerage and trading revenue was down $492 thousand.

Change in the fair value of the mortgage servicing rights, net of economic hedge, decreased net income by $2.2 million for the first quarter of 2013 and increased net income by $2.3 million in the first quarter of 2012. 

Excluding the change in the fair value of mortgage servicing rights, other operating expenses were largely unchanged compared to the prior year. Personnel expenses were up $1.3 million or 3%. Increased regular compensation expense due to annual merit increases was partially offset by decreased incentive compensation expense. Non-personnel expenses were up $2.6 million or 7% due primarily to increased data processing expenses related to increased transaction card activity. Corporate expense allocations were down $3.9 million compared to the prior year. Net losses and operating expenses of repossessed assets were down $492 thousand compared to the first quarter of 2012.

The Bank of Oklahoma had net recovery of $258 thousand for first quarter of 2013 compared to net loans charged off of $1.7 million or 0.12% of average loans on an annualized basis for the first quarter of 2012.

Average deposits attributed to the Bank of Oklahoma for the first quarter of 2013 increased $387 million over the first quarter of 2012. Commercial Banking deposit balances increased $248 million or 5% over the prior year. Decreased deposits related to commercial and industrial customers was partially offset by increased average balances related to treasury services and energy customers. Consumer deposits also increased $103 million over the first quarter of 2012. Wealth Management deposits increased $36 million compared to the first quarter of 2012 primarily due to decreased trust deposits.

- 20 -



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 34% of our average loans, 25% of our average deposits and 14% of our consolidated net income in the first quarter of 2013.

Table 12 -- Bank of Texas
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
 
March 31,
 
Increase
 
 
2013
 
2012
 
(Decrease)
Net interest revenue
 
$
37,425

 
$
34,946

 
$
2,479

Net loans charged off
 
2,674

 
284

 
2,390

Net interest revenue after net loans charged off
 
34,751

 
34,662

 
89

 
 
 
 
 
 
 
Fees and commissions revenue
 
22,940

 
19,267

 
3,673

Gain on financial instruments and other assets, net
 
—

 
44

 
(44
)
Other operating revenue
 
22,940

 
19,311

 
3,629

 
 
 
 
 
 
 
Personnel expense
 
20,622

 
19,656

 
966

Net (gains) losses and expenses of repossessed assets
 
252

 
(577
)
 
829

Other non-personnel expense
 
6,373

 
5,824

 
549

Corporate allocations
 
11,209

 
8,988

 
2,221

Total other operating expense
 
38,456

 
33,891

 
4,565

 
 
 
 
 
 
 
Income before taxes
 
19,235

 
20,082

 
(847
)
Federal and state income tax
 
6,925

 
7,230

 
(305
)
 
 
 
 
 
 
 
Net income
 
$
12,310

 
$
12,852

 
$
(542
)
 
 
 
 
 
 
 
Average assets
 
$
5,433,498

 
$
5,023,969

 
$
409,529

Average loans
 
4,154,176

 
3,782,795

 
371,381

Average deposits
 
4,934,384

 
4,482,885

 
451,499

Average invested capital
 
491,252

 
486,414

 
4,838

Return on average assets
 
0.92
%
 
1.03
%
 
(11
)
Return on invested capital
 
10.16
%
 
10.63
%
 
(47
)
Efficiency ratio
 
63.71
%
 
62.51
%
 
120

Net charge-offs (annualized) to average loans
 
0.26
%
 
0.03
%
 
23

Residential mortgage loans funded for sale
 
$
121,342

 
$
97,534

 
$
23,808


Net income for the Bank of Texas decreased $542 thousand or 4% compared to the first quarter of 2012. Growth in fees and commissions and net interest revenue was largely offset by increased net loans charged off and operating expenses.

Net interest revenue increased $2.5 million or 7% over the first quarter of 2012 primarily due to decreased deposit costs and growth of the loan portfolio and average deposit balances. Average outstanding loans grew by $371 million or 10% over the first quarter of 2012 and average deposits increased by $451 million or 10%.

Fees and commissions revenue increased $3.7 million or 19% over the first quarter of 2012. Mortgage banking revenue was up $1.6 million or 40% over the prior year on increased mortgage loan originations. Brokerage and trading revenue grew by $1.6 million or 41% primarily due to increased investment banking and customer derivative revenues. Trust fees and commission and transaction card revenue all increased over the prior year, partially offset by a decrease in overdraft fees.


- 21 -



Operating expenses increased $4.6 million or 13% over the first quarter of 2012. Personnel costs were up $966 thousand or 5% primarily due to increased head count in mortgage lending and annual merit increases. Net losses and operating expense of repossessed assets increased $829 thousand over the first quarter of 2012 due primarily to write-downs related to regularly scheduled appraisal updates. Non-personnel expenses increased $549 thousand and corporate expense allocations were up $2.2 million on increased customer transaction activity.

Net loans charged off totaled $2.7 million or 0.26% of average loans for the first quarter of 2013 on an annualized basis, compared to $284 thousand or 0.03% of average loans for the first quarter of 2012 on an annualized basis. Net charge-offs were primarily comprised of a $3.6 net charge-offs related to a single relationship secured by an office building and industrial properties attributed to the Texas market.

- 22 -



Bank of Albuquerque

Net income attributable to the Bank of Albuquerque totaled $6.3 million or 7% of consolidated net income, a $1.8 million or 41% increase over the first quarter of 2012. Net interest income was up $477 thousand over the first quarter of 2012. Average loan balances grew by $53 million over the prior year, primarily due to commercial loan growth. Average deposit balances were up $60 million or 5% over the prior year. Net loans charged off totaled $395 thousand or 0.21% of average loans on annualized basis in the first quarter of 2013 compared to net loans charged off of $886 thousand or 0.50% of average loans on an annualized basis in the first quarter of 2012. 

Fees and commission revenue increased $2.7 million or 26% over the prior year primarily due to a $3.0 million increase in mortgage banking revenue. Other operating expense increased $681 thousand or 6%. Personnel expenses were up $445 thousand primarily due to increased incentive compensation. Net losses and operating expenses of repossessed assets was $35 thousand compared to a net gain of $191 thousand in the prior year. Corporate allocation expenses and non-personnel expenses were largely unchanged compared to the prior year.

Table 13 -- Bank of Albuquerque
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
 
March 31,
 
Increase
 
 
2013
 
2012
 
(Decrease)
Net interest revenue
 
$
8,908

 
$
8,431

 
$
477

Net loans charged off
 
395

 
886

 
(491
)
Net interest revenue after net loans charged off
 
8,513

 
7,545

 
968

 
 
 
 
 
 
 
Other operating revenue – fees and commission
 
13,135

 
10,414

 
2,721

 
 
 
 
 
 
 
Personnel expense
 
5,355

 
4,910

 
445

Net losses (gains) and expenses of repossessed assets
 
35

 
(191
)
 
226

Other non-personnel expense
 
2,015

 
1,981

 
34

Corporate allocations
 
3,904

 
3,928

 
(24
)
Total other operating expense
 
11,309

 
10,628

 
681

 
 
 
 
 
 
 
Income before taxes
 
10,339

 
7,331

 
3,008

Federal and state income tax
 
4,022

 
2,852

 
1,170

 
 
 
 
 
 
 
Net income
 
$
6,317

 
$
4,479

 
$
1,838

 
 
 
 
 
 
 
Average assets
 
$
1,402,805

 
$
1,360,588

 
$
42,217

Average loans
 
762,180

 
708,803

 
53,377

Average deposits
 
1,287,281

 
1,227,265

 
60,016

Average invested capital
 
80,209

 
80,920

 
(711
)
Return on average assets
 
1.83
%
 
1.32
%
 
51

Return on invested capital
 
31.94
%
 
22.26
%
 
968

Efficiency ratio
 
51.30
%
 
56.40
%
 
(510
)
Net charge-offs to average loans (annualized)
 
0.21
%
 
0.50
%
 
(29
)
Residential mortgage loans funded for sale
 
$
149,175

 
$
120,223

 
$
28,952



- 23 -



Bank of Arkansas

Net income attributable to the Bank of Arkansas increased $183 thousand over the first quarter of 2012. Net interest revenue decreased $498 thousand primarily due to a decrease in average loans balances attributed to the Arkansas market. Multifamily residential sector loans decreased and indirect automobile loans continue to runoff. Average loans also decreased compared to the first quarter of 2012 due to the payoff of a significant nonaccruing wholesale/retail sector loan in the second quarter of 2012. Average deposits attributed to the Bank of Arkansas were largely unchanged compared to the prior year. Bank of Arkansas had a net recovery of $71 thousand for the first quarter of 2013 compared to a net charge-off of $63 thousand or 0.10% of average loans on an annualized basis in the first quarter of 2012.

Fees and commissions revenue was up $1.0 million over the prior year primarily due to increased securities trading revenue at our Little Rock office and increased mortgage banking revenue. Other operating expenses were up $316 thousand primarily due to increased incentive compensation costs related to trading activity. 

Table 14 -- Bank of Arkansas
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
 
March 31,
 
Increase
 
 
2013
 
2012
 
(Decrease)
Net interest revenue
 
$
1,469

 
$
1,967

 
$
(498
)
Net loans charged off (recovered)
 
(71
)
 
63

 
(134
)
Net interest revenue after net loans charged off (recovered)
 
1,540

 
1,904

 
(364
)
 
 
 
 
 
 
 
Other operating revenue – fees and commissions
 
12,228

 
11,249

 
979

 
 
 
 
 
 
 
Personnel expense
 
5,866

 
5,485

 
381

Net losses and expenses of repossessed assets
 
23

 
6

 
17

Other non-personnel expense
 
1,075

 
1,356

 
(281
)
Corporate allocations
 
2,953

 
2,754

 
199

Total other operating expense
 
9,917

 
9,601

 
316

 
 
 
 
 
 
 
Income before taxes
 
3,851

 
3,552

 
299

Federal and state income tax
 
1,498

 
1,382

 
116

 
 
 
 
 
 
 
Net income
 
$
2,353

 
$
2,170

 
$
183

 
 
 
 
 
 
 
Average assets
 
$
198,043

 
$
275,644

 
$
(77,601
)
Average loans
 
172,806

 
259,587

 
(86,781
)
Average deposits
 
222,001

 
221,254

 
747

Average invested capital
 
17,724

 
22,210

 
(4,486
)
Return on average assets
 
4.82
 %
 
3.17
%
 
165

Return on invested capital
 
53.84
 %
 
39.30
%
 
1,454

Efficiency ratio
 
72.40
 %
 
72.65
%
 
(25
)
Net charge-offs (recoveries) to average loans (annualized)
 
(0.17
)%
 
0.10
%
 
(27
)
Residential mortgage loans funded for sale
 
$
26,080

 
$
24,519

 
$
1,561


- 24 -



Colorado State Bank & Trust

Net income attributed to Colorado State Bank & Trust increased $3.3 million over the first quarter of 2012 to $5.6 million. Colorado State Bank & Trust experienced a net recovery of $466 thousand compared to net loans charged off of $1.9 million or 0.92% of average loans on an annualized basis in first quarter of 2012. Net interest revenue increased $1.3 million due primarily to a $233 million or 28% increase in average loans outstanding and lower deposit costs, partially offset by decreased yield on funds sold to the Funds Management unit. Average deposits grew $84 million or 6% over the first quarter of 2012. Interest-bearing transaction deposits grew by $107 million and demand deposits were up $16 million, partially offset by a $43 million decrease in time deposits.

Fees and commissions revenue was up $4.4 million over the first quarter of 2012 primarily related to a $2.6 million increase in trust fees and commissions due to the acquisition of the Milestone Group during the third quarter of 2012 and a $1.2 million increase in mortgage banking revenue. 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 $2.7 million over the prior year primarily due to the Milestone Group acquisition. Personnel expenses were up $1.5 million, corporate expense allocations increased $263 thousand and non-personnel expenses were up $878 thousand.

Table 15 -- Colorado State Bank & Trust
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
 
March 31,
 
Increase
 
 
2013
 
2012
 
(Decrease)
Net interest revenue
 
$
9,831

 
$
8,544

 
$
1,287

Net loans charged off (recovered)
 
(466
)
 
1,888

 
(2,354
)
Net interest revenue after net loans charged off (recovered)
 
10,297

 
6,656

 
3,641

 
 
 
 
 
 
 
Other operating revenue – fees and commissions revenue
 
12,118

 
7,724

 
4,394

 
 
 
 
 
 
 
Personnel expense
 
7,304

 
5,776

 
1,528

Net losses (gains) and expenses of repossessed assets
 
(12
)
 
(18
)
 
6

Other non-personnel expense
 
2,218

 
1,340

 
878

Corporate allocations
 
3,705

 
3,442

 
263

Total other operating expense
 
13,215

 
10,540

 
2,675

 
 
 
 
 
 
 
Income before taxes
 
9,200

 
3,840

 
5,360

Federal and state income tax
 
3,579

 
1,494

 
2,085

 
 
 
 
 
 
 
Net income
 
$
5,621

 
$
2,346

 
$
3,275

 
 
 
 
 
 
 
Average assets
 
$
1,431,720

 
$
1,324,847

 
$
106,873

Average loans
 
1,059,515

 
826,268

 
233,247

Average deposits
 
1,399,794

 
1,316,079

 
83,715

Average invested capital
 
148,257

 
119,020

 
29,237

Return on average assets
 
1.59
 %
 
0.71
%
 
88

Return on invested capital
 
15.38
 %
 
7.93
%
 
745

Efficiency ratio
 
60.21
 %
 
64.79
%
 
(458
)
Net charge-offs (recoveries) to average loans (annualized)
 
(0.18
)%
 
0.92
%
 
(110
)
Residential mortgage loans funded for sale
 
$
104,767

 
$
90,266

 
$
14,501


- 25 -



Bank of Arizona

Bank of Arizona had net income of $979 thousand for the first quarter of 2013 compared to a net loss of $1.8 million for the first quarter of 2012. Bank of Arizona experienced a net recovery of $50 thousand for the first quarter of 2013 compared to net loans charged off of $3.6 million or 2.63% of average loans on an annualized basis for the first quarter of 2012. Net losses and operating expenses on repossessed assets totaled $724 thousand in the first quarter of 2013 compared to $1.2 million in the first quarter of 2012. Write-downs of repossessed assets increased compared to the prior year primarily due to regularly scheduled appraisal updates.

Net interest revenue increased $359 thousand or 8% over the first quarter of 2012. Average loan balances were up $28 million or 5% compared to the first quarter of 2012. Average deposits were up $312 million or 126% over the first quarter of 2012. Interest-bearing transaction account balances increased $274 million and demand deposit balances increased $40 million both primarily due to growth in commercial deposits.

Fees and commissions revenue was up $1.2 million primarily due to increased mortgage banking revenue. Other operating expense increased $975 thousand or 18% over the first quarter of 2012. Personnel expenses increased due to increased incentive compensation and annual merit increases. Corporate allocations increased due to increased customer transaction activity.

Table 16 -- Bank of Arizona
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
 
March 31,
 
Increase
 
 
2013
 
2012
 
(Decrease)
Net interest revenue
 
$
4,627

 
$
4,268

 
$
359

Net loans charged off (recovered)
 
(50
)
 
3,623

 
(3,673
)
Net interest revenue after net loans charged off (recovered)
 
4,677

 
645

 
4,032

 
 
 
 
 
 
 
Fees and commissions revenue
 
3,084

 
1,845

 
1,239

Gain on financial instruments and other assets, net
 
310

 
—

 
310

Other operating revenue
 
3,394

 
1,845

 
1,549

 
 
 
 
 
 
 
Personnel expense
 
3,151

 
2,354

 
797

Net losses and expenses of repossessed assets
 
724

 
1,231

 
(507
)
Other non-personnel expense
 
915

 
761

 
154

Corporate allocations
 
1,678

 
1,147

 
531

Total other operating expense
 
6,468

 
5,493

 
975

 
 
 
 
 
 
 
Income (loss) before taxes
 
1,603

 
(3,003
)
 
4,606

Federal and state income tax
 
624

 
(1,168
)
 
1,792

 
 
 
 
 
 
 
Net income (loss)
 
$
979

 
$
(1,835
)
 
$
2,814

 
 
 
 
 
 
 
Average assets
 
$
635,020

 
$
609,510

 
$
25,510

Average loans
 
582,897

 
554,666

 
28,231

Average deposits
 
559,025

 
247,313

 
311,712

Average invested capital
 
61,878

 
61,409

 
469

Return on average assets
 
0.63
 %
 
(1.21
)%
 
184

Return on invested capital
 
6.42
 %
 
(12.02
)%
 
1,844

Efficiency ratio
 
83.88
 %
 
89.86
 %
 
(598
)
Net charge-offs (recoveries) to average loans (annualized)
 
(0.03
)%
 
2.63
 %
 
(266
)
Residential mortgage loans funded for sale
 
$
35,201

 
$
15,172

 
$
20,029


- 26 -



Bank of Kansas City

Net income attributed to the Bank of Kansas City was largely unchanged compared to the first quarter of 2012. Net interest revenue increased $738 thousand or 24%. Average loan balances increased $87 million or 21% and average deposits balances were up $131 million or 55%. Demand deposit balances grew $200 million due primarily to commercial account balances. Interest-bearing transaction account balances were down $61 million and higher costing time deposit balances decreased by $8.3 million. Net loans charged off totaled $128 thousand or 0.10% on an annualized basis for the first quarter of 2013 compared to $87 thousand or 0.08% on an annualized basis for the first quarter of 2012.

Fees and commissions revenue increased $372 thousand or 4% over the prior year primarily due to increased mortgage banking revenue, partially offset by a decrease in brokerage and trading revenue. Personnel costs were up $212 thousand primarily due to increased incentive compensation and merit increase. Non-personnel expense increased $466 thousand and corporate expense allocations increased by $411 thousand on higher customer transaction volume.

Table 17 -- Bank of Kansas City
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
 
March 31,
 
Increase
 
 
2013
 
2012
 
(Decrease)
Net interest revenue
 
$
3,851

 
$
3,113

 
$
738

Net loans charged off (recovered)
 
128

 
87

 
41

Net interest revenue after net loans charged off (recovered)
 
3,723

 
3,026

 
697

 
 
 
 
 
 
 
Other operating revenue – fees and commission
 
9,164

 
8,792

 
372

 
 
 
 
 
 
 
Personnel expense
 
5,012

 
4,800

 
212

Net losses and expenses of repossessed assets
 
4

 
19

 
(15
)
Other non-personnel expense
 
1,457

 
991

 
466

Corporate allocations
 
2,554

 
2,143

 
411

Total other operating expense
 
9,027

 
7,953

 
1,074

 
 
 
 
 
 
 
Income before taxes
 
3,860

 
3,865

 
(5
)
Federal and state income tax
 
1,502

 
1,503

 
(1
)
 
 
 
 
 
 
 
Net income
 
$
2,358

 
$
2,362

 
$
(4
)
 
 
 
 
 
 
 
Average assets
 
$
529,025

 
$
439,302

 
$
89,723

Average loans
 
509,531

 
422,176

 
87,355

Average deposits
 
369,269

 
238,726

 
130,543

Average invested capital
 
37,498

 
32,139

 
5,359

Return on average assets
 
1.81
%
 
2.16
%
 
(35
)
Return on invested capital
 
25.50
%
 
29.56
%
 
(406
)
Efficiency ratio
 
69.36
%
 
66.80
%
 
256

Net charge-offs (annualized) to average loans
 
0.10
%
 
0.08
%
 
2

Residential mortgage loans funded for sale
 
$
64,831

 
$
53,457

 
$
11,374


- 27 -



Financial Condition
Securities

We maintain a securities portfolio to enhance profitability, support customer transactions, manage interest rate risk, provide liquidity and comply with regulatory requirements. Securities are classified as trading, held for investment, or available for sale. See Note 2 to the consolidated financial statements for the composition of the securities portfolio as of March 31, 2013, December 31, 2012 and March 31, 2012.

At March 31, 2013, the carrying value of investment (held-to-maturity) securities was $589 million and the fair value was $615 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 $84 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 $10.8 billion at March 31, 2013, a decrease of $202 million from December 31, 2012. The decrease was primarily in U.S. government agency residential mortgage-backed securities partially offset by an increase in U.S. government agency backed commercial mortgage-backed securities. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans. At March 31, 2013, residential mortgage-backed securities represented 86% 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 March 31, 2013 is 2.6 years. Management estimates the duration extends to 3.7 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 2.4 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 March 31, 2013, approximately $9.0 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 $9.2 billion at March 31, 2013.

We also hold amortized cost of $307 million in residential mortgage-backed securities privately issued by publicly-owned financial institutions, a decrease of $15 million from December 31, 2012 primarily due to cash received. Other-than-temporary impairment losses charged against earnings related to privately issued mortgage-backed securities totaled $247 thousand during the first quarter of 2013. The fair value of our portfolio of privately issued residential mortgage-backed securities totaled $316 million at March 31, 2013.

The amortized cost of our portfolio of privately issued residential mortgage-backed securities included $188 million of Jumbo-A residential mortgage loans and $119 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 has been fully absorbed as of March 31, 2013. The Jumbo-A residential mortgage-backed securities had original credit enhancement of 9.4% and the current level is 3.9%. 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.

- 28 -




The aggregate gross amount of unrealized losses on available for sale securities totaled $8.7 million at March 31, 2013, up $2.1 million from December 31, 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 $247 thousand were recognized in earnings in the first quarter of 2013 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 $278 million of bank-owned life insurance at March 31, 2013. This investment is expected to provide a long-term source of earnings to support existing employee benefit programs. Approximately $247 million is held in separate accounts. Our separate account holdings are invested in diversified portfolios of investment-grade fixed income securities and cash equivalents, including U.S. Treasury and Agency securities, residential mortgage-backed securities, corporate debt, asset-backed and commercial mortgage-backed securities. The portfolios are managed by unaffiliated professional managers within parameters established in the portfolio’s investment guidelines. The cash surrender value of certain life insurance policies is further supported by a stable value wrap, which protects against changes in the fair value of the investments. At March 31, 2013, the cash surrender value represented by the underlying fair value of investments held in separate accounts was approximately $267 million. As the underlying fair value of the investments held in a separate account at March 31, 2013 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.


- 29 -



Loans

The aggregate loan portfolio before allowance for loan losses totaled $12.1 billion at March 31, 2013, a decrease of $218 million compared to December 31, 2012.

Table 18 -- Loans
(In thousands)
 
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,349,432

 
$
2,460,659

 
$
2,416,877

 
$
2,268,852

 
$
2,152,301

Services
 
2,114,799

 
2,164,186

 
1,967,568

 
1,988,330

 
1,951,021

Wholesale/retail
 
1,085,000

 
1,106,439

 
1,060,061

 
946,684

 
997,174

Manufacturing
 
399,818

 
348,484

 
343,360

 
347,086

 
341,706

Healthcare
 
1,081,636

 
1,081,406

 
1,022,851

 
984,340

 
983,161

Integrated food services
 
173,800

 
191,106

 
200,453

 
206,269

 
204,101

Other commercial and industrial
 
213,820

 
289,632

 
255,737

 
293,974

 
314,121

Total commercial
 
7,418,305

 
7,641,912

 
7,266,907

 
7,035,535

 
6,943,585

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
237,829

 
253,093

 
293,733

 
292,097

 
315,541

Retail
 
584,279

 
522,786

 
535,456

 
506,146

 
477,975

Office
 
420,644

 
427,872

 
414,246

 
395,339

 
380,176

Multifamily
 
460,474

 
402,896

 
393,129

 
358,416

 
432,970

Industrial
 
237,049

 
245,994

 
183,846

 
228,725

 
286,919

Other real estate
 
344,885

 
376,358

 
356,862

 
369,007

 
358,718

Total commercial real estate
 
2,285,160

 
2,228,999

 
2,177,272

 
2,149,730

 
2,252,299

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,091,575

 
1,123,965

 
1,138,960

 
1,144,839

 
1,138,439

Permanent mortgages guaranteed by U.S. government agencies
 
162,419

 
160,444

 
162,271

 
162,240

 
180,862

Home equity
 
758,456

 
760,631

 
715,072

 
695,806

 
649,625

Total residential mortgage
 
2,012,450

 
2,045,040

 
2,016,303

 
2,002,885

 
1,968,926

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
24,368

 
34,735

 
47,281

 
62,938

 
81,524

Other consumer
 
353,281

 
360,770

 
324,604

 
325,343

 
331,110

Total consumer
 
377,649

 
395,505

 
371,885

 
388,281

 
412,634

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
12,093,564

 
$
12,311,456

 
$
11,832,367

 
$
11,576,431

 
$
11,577,444


Outstanding commercial loan balances decreased $224 million compared to December 31, 2012 due primarily to a $236 million decrease in commercial loan balances attributed to the Oklahoma market. Commercial real estate loans grew by $56 million during the first quarter of 2013 primarily in the Texas and Arizona markets. Residential mortgage loans were down $32 million compared to December 31, 2012. Consumer loans decreased $18 million from December 31, 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.





- 30 -



Table 19 -- Loans by Principal Market
(In thousands)
 
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
Bank of Oklahoma:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
2,853,608

 
$
3,089,686

 
$
3,015,621

 
$
3,012,458

 
$
3,042,389

Commercial real estate
 
568,500

 
580,694

 
598,667

 
614,541

 
605,528

Residential mortgage
 
1,468,434

 
1,488,486

 
1,466,590

 
1,452,269

 
1,420,961

Consumer
 
207,662

 
220,096

 
197,457

 
201,926

 
212,576

Total Bank of Oklahoma
 
5,098,204

 
5,378,962

 
5,278,335

 
5,281,194

 
5,281,454

 
 
 
 
 
 
 
 
 
 
 
Bank of Texas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
2,718,050

 
2,726,925

 
2,572,928

 
2,443,946

 
2,365,343

Commercial real estate
 
800,577

 
771,796

 
712,899

 
678,882

 
802,235

Residential mortgage
 
272,406

 
275,408

 
268,250

 
269,704

 
263,905

Consumer
 
110,060

 
116,252

 
108,854

 
115,203

 
124,491

Total Bank of Texas
 
3,901,093

 
3,890,381

 
3,662,931

 
3,507,735

 
3,555,974

 
 
 
 
 
 
 
 
 
 
 
Bank of Albuquerque:
 
 

 
 

 
 

 
 

 
 

Commercial
 
271,075

 
265,830

 
267,467

 
262,493

 
273,535

Commercial real estate
 
332,928

 
326,135

 
316,040

 
308,060

 
304,709

Residential mortgage
 
129,727

 
130,337

 
120,606

 
115,599

 
109,626

Consumer
 
14,403

 
15,456

 
15,883

 
15,534

 
18,127

Total Bank of Albuquerque
 
748,133

 
737,758

 
719,996

 
701,686

 
705,997

 
 
 
 
 
 
 
 
 
 
 
Bank of Arkansas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
54,191

 
62,049

 
48,097

 
49,344

 
72,425

Commercial real estate
 
88,264

 
90,821

 
119,306

 
119,919

 
131,857

Residential mortgage
 
11,285

 
13,046

 
12,939

 
13,083

 
15,145

Consumer
 
13,943

 
15,421

 
19,720

 
24,246

 
28,765

Total Bank of Arkansas
 
167,683

 
181,337

 
200,062

 
206,592

 
248,192

 
 
 
 
 
 
 
 
 
 
 
Colorado State Bank & Trust:
 
 

 
 

 
 

 
 

 
 

Commercial
 
822,942

 
776,610

 
708,223

 
662,583

 
580,257

Commercial real estate
 
171,251

 
173,327

 
158,387

 
163,175

 
158,400

Residential mortgage
 
56,052

 
59,363

 
59,395

 
62,313

 
62,738

Consumer
 
20,990

 
19,333

 
19,029

 
20,570

 
19,741

Total Colorado State Bank & Trust
 
1,071,235

 
1,028,633

 
945,034

 
908,641

 
821,136

 
 
 
 
 
 
 
 
 
 
 
Bank of Arizona:
 
 

 
 

 
 

 
 

 
 

Commercial
 
326,266

 
313,296

 
300,544

 
278,184

 
269,116

Commercial real estate
 
229,020

 
201,760

 
204,164

 
199,252

 
198,882

Residential mortgage
 
54,285

 
57,803

 
65,513

 
67,767

 
76,257

Consumer
 
5,664

 
4,686

 
6,150

 
6,220

 
5,365

Total Bank of Arizona
 
615,235

 
577,545

 
576,371

 
551,423

 
549,620

 
 
 
 
 
 
 
 
 
 
 
Bank of Kansas City:
 
 

 
 

 
 

 
 

 
 

Commercial
 
372,173

 
407,516

 
354,027

 
326,527

 
340,520

Commercial real estate
 
94,620

 
84,466

 
67,809

 
65,901

 
50,688

Residential mortgage
 
20,261

 
20,597

 
23,010

 
22,150

 
20,294

Consumer
 
4,927

 
4,261

 
4,792

 
4,582

 
3,569

Total Bank of Kansas City
 
491,981

 
516,840

 
449,638

 
419,160

 
415,071

 
 
 
 
 
 
 
 
 
 
 
Total BOK Financial loans
 
$
12,093,564

 
$
12,311,456

 
$
11,832,367

 
$
11,576,431

 
$
11,577,444



- 31 -



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 decreased $224 million during the first quarter of 2013. Economic uncertainty over taxes and health care costs has influenced commercial customers to remain conservative in the expansion of their businesses. Energy sector loans decreased $111 million compared to December 31, 2012, primarily in the Oklahoma market. In conjunction with a standard evaluation of credit risk and related pricing, certain relationships were reduced during the quarter. Other commercial and industrial sector loans decreased $76 million primarily in the Oklahoma and Kansas City Markets. Service sector loans decreased $49 million. Service sector loans attributed to the Texas market decreased $73 million, partially offset by growth in the Arizona, Kansas City and Oklahoma markets. Wholesale/retail sector loans decreased $21 million. Decreased loan balances attributed to the Oklahoma and Kansas City markets were partially offset by growth in the Texas market. Manufacturing sector loans grew by $51 million during the first quarter primarily in the Oklahoma and Texas markets.

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

Table 20 -- Commercial Loans by Principal Market
(In thousands)
 
 
Bank of Oklahoma
 
Bank of Texas
 
Bank of Albuquerque
 
Bank of Arkansas
 
Colorado State Bank & Trust
 
Bank of Arizona
 
Bank of Kansas City
 
Total
Energy
 
$
956,942

 
$
909,682

 
$
5,168

 
$
212

 
$
477,428

 
$
—

 
$
—

 
$
2,349,432

Services
 
660,340

 
777,785

 
169,978

 
11,803

 
224,993

 
177,662

 
92,238

 
2,114,799

Wholesale/retail
 
371,920

 
490,270

 
41,651

 
35,466

 
14,943

 
71,419

 
59,331

 
1,085,000

Healthcare
 
594,959

 
309,204

 
37,009

 
4,083

 
80,675

 
32,963

 
22,743

 
1,081,636

Manufacturing
 
182,642

 
135,007

 
6,167

 
2,404

 
15,318

 
42,945

 
15,335

 
399,818

Integrated food services
 
2,971

 
5,843

 
—

 
—

 
6,876

 
—

 
158,110

 
173,800

Other commercial and industrial
 
83,834

 
90,259

 
11,102

 
223

 
2,709

 
1,277

 
24,416

 
213,820

Total commercial loans
 
$
2,853,608

 
$
2,718,050

 
$
271,075

 
$
54,191

 
$
822,942

 
$
326,266

 
$
372,173

 
$
7,418,305

 
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.

Outstanding energy loans totaled $2.3 billion or 19% of total loans at March 31, 2013. Unfunded energy loan commitments increased by $5.5 million to $2.4 billion at March 31, 2013. Approximately $2.1 billion of energy loans were to oil and gas producers, down $87 million compared to December 31, 2012. Approximately 58% of the committed production loans are secured by properties primarily producing oil and 42% of the committed production loans are secured by properties primarily producing natural gas. Loans to borrowers that manufacture equipment primarily for the energy industry decreased $13 million during the first quarter of 2013 to $36 million. Loans to borrowers engaged in wholesale or retail energy sales decreased $9.3

- 32 -



million to $119 million and loans to borrowers that provide services to the energy industry decreased $5.2 million to $64 million.

The services sector of the loan portfolio totaled $2.1 billion or 17% of total loans and consists of a large number of loans to a variety of businesses, including gaming, public finance, educational, insurance and communications. Service sector loans decreased $49 million from December 31, 2012. Approximately $1.2 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. 

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 March 31, 2013, the outstanding principal balance of these loans totaled $2.3 billion. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 14% 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 $2.3 billion or 19% of the loan portfolio at March 31, 2013. The outstanding balance of commercial real estate loans increased $56 million over the fourth quarter of 2012. Loans secured by retail facilities grew by $61 million primarily in the Texas, Oklahoma and Colorado markets and multifamily residential properties grew by $58 million in the Texas and Arizona markets. Other commercial real estate loans were down $31 million from December 31, 2012 primarily in the Oklahoma and Texas markets. The commercial real estate loan balance as a percentage of our total loan portfolio has ranged from 18% to 22% 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)
 
 
Bank of Oklahoma
 
Bank of Texas
 
Bank of Albuquerque
 
Bank of Arkansas
 
Colorado State Bank & Trust
 
Bank of Arizona
 
Bank of Kansas City
 
Total
Construction and land development
 
$
76,619

 
$
41,388

 
$
48,403

 
$
16,735

 
$
38,150

 
$
8,733

 
$
7,801

 
$
237,829

Retail
 
147,934

 
226,429

 
72,592

 
12,409

 
22,676

 
84,295

 
17,944

 
584,279

Office
 
74,570

 
190,554

 
92,817

 
9,347

 
20,614

 
31,253

 
1,489

 
420,644

Multifamily
 
126,933

 
152,890

 
33,124

 
19,798

 
28,591

 
53,856

 
45,282

 
460,474

Industrial
 
47,184

 
118,208

 
37,471

 
450

 
6,570

 
18,966

 
8,200

 
237,049

Other real estate
 
95,260

 
71,108

 
48,521

 
29,525

 
54,650

 
31,917

 
13,904

 
344,885

Total commercial real estate loans
 
$
568,500

 
$
800,577

 
$
332,928

 
$
88,264

 
$
171,251

 
$
229,020

 
$
94,620

 
$
2,285,160

 
Construction and land development loans, which consist primarily of residential construction properties and developed building lots, decreased $15 million from December 31, 2012 to $238 million at March 31, 2013 primarily due to payments. We had a net recovery of $274 thousand for construction and land development loans and no transfers to other real estate owned for the first quarter of 2013. 

- 33 -



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, a decrease of $32 million from December 31, 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 $1.0 billion. 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 $67 million or 6% 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 $70 million at December 31, 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 March 31, 2013, $162 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 residential mortgage loans previously sold into GNMA mortgage pools that the Company may repurchase 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. Permanent residential mortgage loans guaranteed by U.S. government agencies increased $2.0 million over December 31, 2012.

Home equity loans totaled $758 million at March 31, 2013, a $2.2 million decrease from December 31, 2012. Our home equity loan portfolio is primarily composed of 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. Revolving loans have a 5 year revolving period followed by 15 year term of amortizing repayment. Interest-only home equity loans may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term subject to an update of certain credit information. A summary of our home equity loan portfolio at March 31, 2013 by lien position and amortizing status follows in Table 22.

Table 22 -- Home Equity Loans
(In thousands)
 
 
Revolving
 
Amortizing
 
Total
First lien
 
$
37,174

 
$
486,356

 
$
523,530

Junior lien
 
52,808

 
182,118

 
234,926

Total home equity
 
$
89,982

 
$
668,474

 
$
758,456



- 34 -



Indirect automobile loans decreased $10 million from December 31, 2012, primarily due to the previously-disclosed decision by the Company to exit the business in the first quarter of 2009. Approximately $24 million of indirect automobile loans remain outstanding at March 31, 2013. Other consumer loans decreased $7.5 million during the first quarter of 2013.

The composition of residential mortgage and consumer loans at March 31, 2013 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)
 
 
Bank of Oklahoma
 
Bank of Texas
 
Bank of Albuquerque
 
Bank of Arkansas
 
Colorado State Bank & Trust
 
Bank of Arizona
 
Bank of Kansas City
 
Total
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
$
854,130

 
$
137,349

 
$
10,147

 
$
6,087

 
$
29,189

 
$
42,583

 
$
12,090

 
$
1,091,575

Permanent mortgages guaranteed by U.S. government agencies
 
162,419

 
—

 
—

 
—

 
—

 
—

 
—

 
162,419

Home equity
 
451,885

 
135,057

 
119,580

 
5,198

 
26,863

 
11,702

 
8,171

 
758,456

Total residential mortgage
 
$
1,468,434

 
$
272,406

 
$
129,727

 
$
11,285

 
$
56,052

 
$
54,285

 
$
20,261

 
$
2,012,450

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
$
11,801

 
$
4,843

 
$
—

 
$
7,724

 
$
—

 
$
—

 
$
—

 
$
24,368

Other consumer
 
195,861

 
105,217

 
14,403

 
6,219

 
20,990

 
5,664

 
4,927

 
353,281

Total consumer
 
$
207,662

 
$
110,060

 
$
14,403

 
$
13,943

 
$
20,990

 
$
5,664

 
$
4,927

 
$
377,649

Loan Commitments

We enter into certain off-balance sheet arrangements in the normal course of business. These arrangements included unfunded loan commitments which totaled $6.9 billion and standby letters of credit which totaled $491 million at March 31, 2013. 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 $629 thousand of the outstanding standby letters of credit were issued on behalf of customers whose loans are nonperforming at March 31, 2013.

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 March 31, 2013, the principal balance of residential mortgage loans sold subject to recourse obligations totaled $220 million, down from $227 million at December 31, 2012. Substantially all of these loans are to borrowers in our primary markets including $154 million to borrowers in Oklahoma, $23 million to borrowers in Arkansas, $15 million to borrowers in New Mexico and $12 million to borrowers in the Kansas/Missouri.

We also have an off-balance sheet obligation to repurchase residential mortgage loans sold to government sponsored entities through our mortgage banking activities due to standard representations and warranties made under contractual agreements as described further in Note 6 to the Consolidated Financial Statements. For the period from 2010 through the first quarter of 2013 combined, approximately 12% of repurchase requests have currently resulted in actual repurchases or indemnification by the Company. The accrual for credit losses related to potential loan repurchases under representations and warranties totaled $5.9 million at March 31, 2013 and $5.3 million at December 31, 2012.

- 35 -



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 market risk due to 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 cash margin or other collateral in conjunction with our credit agreements 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 March 31, 2013, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $322 million compared to $334 million at December 31, 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 $38 million, interest rate swaps sold to loan customers with fair values of $66 million, energy contracts with fair values of $27 million and foreign exchange contracts with fair values of $177 million. The aggregate net fair values of derivative contracts, before consideration of cash margin, held under these programs reported as liabilities totaled $319 million at March 31, 2013 and $332 million at December 31, 2012.

At March 31, 2013, total derivative assets were reduced by $1.6 million of cash collateral received from counterparties and total derivative liabilities were reduced by $67 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 March 31, 2013 follows in Table 24.


Table 24 -- Fair Value of Derivative Contracts
(In thousands)
Customers
 
$
211,321

Banks and other financial institutions
 
98,619

Exchanges
 
7,633

Energy companies
 
2,718

Fair value of customer risk management program asset derivative contracts, net
 
$
320,291

 

- 36 -



The largest exposure to a single counterparty was to a loan customer for an interest rate swap which totaled $12 million at March 31, 2013 used to convert their variable rate loan to a fixed rate. We have no direct exposure to European sovereign debt and our aggregate gross exposure to European financial institutions totaled $6.5 million at March 31, 2013. In addition, we have an aggregate gross exposure to internationally active domestic financial institutions of approximately $200 million at March 31, 2013.

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 $29.59 per barrel of oil would increase the fair value of derivative assets by $25 million. An increase in prices equivalent to $163.93 per barrel of oil would increase the fair value of derivative assets by $478 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 $34 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 March 31, 2013, 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 $207 million or 1.71% of outstanding loans and 156% of nonaccruing loans at March 31, 2013. The allowance for loans losses was $206 million and the accrual for off-balance sheet credit losses was $1.1 million. At December 31, 2012, the combined allowance for credit losses was $217 million or 1.77% of outstanding loans and 162% of nonaccruing loans at December 31, 2012. The allowance for loan losses was $216 million and the accrual for off-balance sheet credit losses was $1.9 million. 

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. After evaluating all credit factors, the Company determined that an $8.0 million negative provision for credit losses was necessary during the first quarter of 2013. Continued low charge-off levels and a decrease in outstanding loan balances during the quarter resulted in a lower combined allowance for credit losses as of March 31, 2013. A $14.0 million negative provision for credit losses was recorded in the fourth quarter of 2012 and no provision for credit losses was recorded in the first quarter of 2012.


- 37 -



Table 25 -- Summary of Loan Loss Experience
(In thousands)
 
 
Three Months Ended
 
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
215,507

 
$
233,756

 
$
231,669

 
$
244,209

 
$
253,481

Loans charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
(298
)
 
(1,501
)
 
(812
)
 
(4,094
)
 
(2,934
)
Commercial real estate
 
(4,800
)
 
(1,094
)
 
(2,607
)
 
(1,216
)
 
(6,725
)
Residential mortgage
 
(1,779
)
 
(2,600
)
 
(1,600
)
 
(4,061
)
 
(1,786
)
Consumer
 
(2,032
)
 
(2,805
)
 
(3,902
)
 
(2,172
)
 
(2,229
)
Total
 
(8,909
)
 
(8,000
)
 
(8,921
)
 
(11,543
)
 
(13,674
)
Recoveries of loans previously charged off:
 
 
 
 
 
 
 
 
 
 

Commercial
 
3,393

 
947

 
(890
)
1 
4,125

 
1,946

Commercial real estate
 
1,124

 
1,166

 
2,684

 
544

 
1,312

Residential mortgage
 
572

 
469

 
298

 
750

 
411

Consumer
 
1,468

 
1,141

 
1,112

 
1,283

 
1,520

Total
 
6,557

 
3,723

 
3,204

 
6,702

 
5,189

Net loans charged off
 
(2,352
)
 
(4,277
)
 
(5,717
)
 
(4,841
)
 
(8,485
)
Provision for loan losses
 
(7,190
)
 
(13,972
)
 
7,804

 
(7,699
)
 
(787
)
Ending balance
 
$
205,965

 
$
215,507

 
$
233,756

 
$
231,669

 
$
244,209

Accrual for off-balance sheet credit losses:
 
 
 
 
 
 
 
 
 
 

Beginning balance
 
$
1,915

 
$
1,943

 
$
9,747

 
$
10,048

 
$
9,261

Provision for off-balance sheet credit losses
 
(810
)
 
(28
)
 
(7,804
)
 
(301
)
 
787

Ending balance
 
$
1,105

 
$
1,915

 
$
1,943

 
$
9,747

 
$
10,048

Total combined provision for credit losses
 
$
(8,000
)
 
$
(14,000
)
 
$
—

 
$
(8,000
)
 
$
—

Allowance for loan losses to loans outstanding at period-end
 
1.70
 %
 
1.75
 %
 
1.98
%
 
2.00
 %
 
2.11
%
Net charge-offs (annualized) to average loans
 
0.08
 %
 
0.14
 %
 
0.19
%
1 
0.17
 %
 
0.30
%
Total provision for credit losses (annualized) to average loans
 
(0.26
)%
 
(0.47
)%
 
—
%
 
(0.28
)%
 
—
%
Recoveries to gross charge-offs
 
73.60
 %
 
46.54
 %
 
35.92
%
 
58.06
 %
 
37.95
%
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments
 
0.02
 %
 
0.03
 %
 
0.03
%
 
0.15
 %
 
0.15
%
Combined allowance for credit losses to loans outstanding at period-end
 
1.71
 %
 
1.77
 %
 
1.99
%
 
2.09
 %
 
2.20
%
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 conditions, concentration in loans with large balances and other relevant factors.

Loans are considered to be impaired when it is probable that we will not collect all amounts due according to the contractual terms of the loan agreement. This includes all nonaccruing loans, all loans modified in troubled debt restructurings and all government guaranteed loans repurchased from GNMA pools. At March 31, 2013, impaired loans totaled $295 million, including $3.1 million with specific allowances of $1.0 million and $292 million with no specific allowances because the loans

- 38 -



balances represent the amounts we expect to recover. At December 31, 2012, impaired loans totaled $294 million, including $11 million of impaired loans with specific allowances of $4.2 million and $283 million with no specific allowances.

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 $162 million at March 31, 2013 compared to $167 million at December 31, 2012. Estimated loss rates continue to decline due to lower charge-offs and loan balances decreased from December 31, 2012. The decrease in the general allowance was due primarily to a $3.5 million decrease in general allowance related to commercial real estate loans. Charge-offs related to residential construction and land development loans are the lowest they have been since the third quarter of 2007. This low charge-off level coupled with decreased loan balances for the portfolio segment resulted in the decrease.

Nonspecific allowances are maintained for risks beyond factors specific to a particular portfolio segment 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 $43 million at March 31, 2013, largely unchanged from December 31, 2012 as these risks were largely unchanged compared to the prior quarter. The nonspecific allowance at both March 31, 2013 and December 31, 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 $111 million at March 31, 2013. The current composition of potential problem loans by primary industry included services - $31 million, construction and land development - $19 million, wholesale/retail - $11 million, manufacturing - $11 million and other commercial real estate - $10 million. Potential problem loans totaled $141 million at December 31, 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. 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 60 days and 180 days past due, depending on loan class. In addition, non-risk graded loans are are generally charged-down to collateral value within 60 days of being notified of a borrower's bankruptcy filing, regardless of payment status.

Net loans charged off during the first quarter of 2013 totaled $2.4 million compared to $4.3 million in the fourth quarter of 2012 and $8.5 million in the first quarter of 2012. The ratio of net loans charged off to average loans on an annualized basis was 0.08% for the first quarter of 2013 compared with 0.14% for the fourth quarter of 2012 and 0.30% for the first quarter of 2012. Net loans charged off in the first quarter of 2013 decreased $1.9 million compared to the previous quarter.

Net loans charged off (recovered) by portfolio segment category and principal market area during the first quarter of 2013 follow in Table 26.







- 39 -



Table 26 -- Net Loans Charged Off (Recovered)
(In thousands)
 
 
Oklahoma
 
Texas
 
Colorado
 
Arkansas
 
New
Mexico
 
Arizona
 
Kansas/
Missouri
 
Total
Commercial
 
$
(299
)
 
$
(2,807
)
 
$
25

 
$
(11
)
 
$
(84
)
 
$
69

 
$
12

 
$
(3,095
)
Commercial real estate
 
(315
)
 
4,700

 
(475
)
 
—

 
(29
)
 
(205
)
 
—

 
3,676

Residential mortgage
 
387

 
549

 
20

 
—

 
120

 
81

 
50

 
1,207

Consumer
 
(31
)
 
232

 
(36
)
 
(60
)
 
388

 
5

 
66

 
564

Total net loans charged off (recovered)
 
$
(258
)
 
$
2,674

 
$
(466
)
 
$
(71
)
 
$
395

 
$
(50
)
 
$
128

 
$
2,352


Net commercial loans charged off (recovered) during the first quarter of 2013 decreased $3.6 million and was comprised primarily of a $2.4 million recovery from a single healthcare sector customer in the Texas market.

Net charge-offs of commercial real estate loans increased $3.7 million over the fourth quarter of 2012 and were primarily comprised of a $3.9 net charge-off related to a single relationship secured by office buildings and industrial properties attributed to the Texas market.

Residential mortgage net charge-offs were down $924 thousand compared to the previous quarter and consumer loan net charge-offs, which include indirect auto loan and deposit account overdraft losses, decreased $1.1 million.  All residential mortgage net charge-offs related to loans serviced by our mortgage company across our geographical footprint are attributed to the Oklahoma market.

- 40 -



Nonperforming Assets

Table 27 -- Nonperforming Assets
(In thousands)
 
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
Nonaccruing loans:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
19,861

 
$
24,467

 
$
21,762

 
$
34,529

 
$
61,750

Commercial real estate
 
65,175

 
60,626

 
75,761

 
80,214

 
86,475

Residential mortgage
 
45,426

 
46,608

 
29,267

 
22,727

 
27,462

Consumer
 
2,171

 
2,709

 
5,109

 
7,012

 
7,672

Total nonaccruing loans
 
132,633

 
134,410

 
131,899

 
144,482

 
183,359

Accruing renegotiated loans:
 
 
 
 
 
 
 
 
 
 
Guaranteed by U.S. government agencies
 
47,942

 
38,515

 
24,590

 
24,760

 
32,770

Other
 
—

 
—

 
3,402

 
3,655

 
3,994

Total accruing renegotiated loans
 
47,942

 
38,515

 
27,992

 
28,415

 
36,764

Total nonperforming loans
 
180,575

 
172,925

 
159,891

 
172,897

 
220,123

Real estate and other repossessed assets:
 
 
 
 
 
 
 
 
 
 
Guaranteed by U.S. government agencies
 
27,864

 
22,365

 
22,819

 
21,405

 
20,021

Other
 
74,837

 
81,426

 
81,309

 
84,303

 
95,769

Real estate and other repossessed assets
 
102,701

 
103,791

 
104,128

 
105,708

 
115,790

Total nonperforming assets
 
$
283,276

 
$
276,716

 
$
264,019

 
$
278,605

 
$
335,913

Total nonperforming assets excluding those guaranteed by U.S. government agencies
 
$
207,256

 
$
215,347

 
$
216,610

 
$
232,440

 
$
283,122

 
 
 
 
 
 
 
 
 
 
 
Nonaccruing loans by principal market:
 
 
 
 
 
 
 
 

 
 

Bank of Oklahoma
 
$
54,392

 
$
56,424

 
$
41,599

 
$
49,931

 
$
64,097

Bank of Texas
 
37,571

 
31,623

 
28,046

 
24,553

 
29,745

Bank of Albuquerque
 
12,479

 
13,401

 
13,233

 
13,535

 
15,029

Bank of Arkansas
 
1,008

 
1,132

 
5,958

 
6,865

 
18,066

Colorado State Bank & Trust
 
11,771

 
14,364

 
22,878

 
28,239

 
28,990

Bank of Arizona
 
15,392

 
17,407

 
20,145

 
21,326

 
27,397

Bank of Kansas City
 
20

 
59

 
40

 
33

 
35

Total nonaccruing loans
 
$
132,633

 
$
134,410

 
$
131,899

 
$
144,482

 
$
183,359

 
 
 
 
 
 
 
 
 
 
 
Nonaccruing loans by loan portfolio segment and class:
 
 
 
 
 
 

 
 

Commercial:
 
 
 
 
 
 
 
 

 
 

Energy
 
$
2,377

 
$
2,460

 
$
3,063

 
$
3,087

 
$
336

Manufacturing
 
1,848

 
2,007

 
2,283

 
12,230

 
23,402

Wholesale / retail
 
2,239

 
3,077

 
2,007

 
4,175

 
15,388

Integrated food services
 
—

 
684

 
—

 
—

 
—

Services
 
9,474

 
12,090

 
10,099

 
10,123

 
12,890

Healthcare
 
2,962

 
3,166

 
3,305

 
3,310

 
7,946

Other
 
961

 
983

 
1,005

 
1,604

 
1,788

Total commercial
 
19,861

 
24,467

 
21,762

 
34,529

 
61,750

 
 
 
 
 
 
 
 
 
 
 

- 41 -



 
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
Commercial real estate:
 
 
 
 
 
 
 
 

 
 

Land development and construction
 
23,462

 
26,131

 
38,143

 
46,050

 
52,416

Retail
 
8,921

 
8,117

 
6,692

 
7,908

 
6,193

Office
 
12,851

 
6,829

 
9,833

 
10,589

 
10,733

Multifamily
 
4,501

 
2,706

 
3,145

 
3,219

 
3,414

Industrial
 
2,198

 
3,968

 
4,064

 
—

 
—

Other commercial real estate
 
13,242

 
12,875

 
13,884

 
12,448

 
13,719

Total commercial real estate
 
65,175

 
60,626

 
75,761

 
80,214

 
86,475

Residential mortgage:
 
 
 
 
 
 
 
 

 
 

Permanent mortgage
 
38,153

 
39,863

 
23,717

 
18,136

 
22,822

Permanent mortgage guaranteed by U.S. government agencies
 
214

 
489

 
—

 
—

 
—

Home equity
 
7,059

 
6,256

 
5,550

 
4,591

 
4,640

Total residential mortgage
 
45,426

 
46,608

 
29,267

 
22,727

 
27,462

Consumer
 
2,171

 
2,709

 
5,109

 
7,012

 
7,672

Total nonaccrual loans
 
$
132,633

 
$
134,410

 
$
131,899

 
$
144,482

 
$
183,359

 
 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
 
 

 
 

Allowance for loan losses to nonaccruing loans
 
155.29
%
 
160.34
%
 
177.22
%
 
160.34
%
 
133.19
%
Nonaccruing loans to period-end loans
 
1.10
%
 
1.09
%
 
1.11
%
 
1.25
%
 
1.58
%
Accruing loans 90 days or more past due1
 
$
4,229

 
$
3,925

 
$
1,181

 
$
691

 
$
6,140

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

 
 


Nonperforming assets totaled $283 million or 2.32% of outstanding loans and repossessed assets at March 31, 2013. Nonaccruing loans totaled $133 million, accruing renegotiated residential mortgage loans totaled $48 million and real estate and other repossessed assets totaled $103 million. All accruing renegotiated residential mortgage loans, $214 thousand of nonaccruing loans and $28 million of real estate and other repossessed assets are guaranteed by U.S. government agencies. Nonperforming assets decreased $8.1 million during the first quarter, excluding assets guaranteed by U.S. government agencies. The Company generally retains nonperforming assets to maximize potential recovery which may cause future nonperforming assets to decrease more slowly.

Loans are generally 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 restructurings. Modifications may include extension of payment terms and rate concessions. We do not forgive principal or accrued but unpaid interest. All loans modified in troubled debt restructurings, except for residential mortgage loans guaranteed by U.S. government agencies, are classified as nonaccruing. We may also renew matured nonaccruing loans. All 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. All 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. Consumer loans modified at the direction of bankruptcy court orders are identified as troubled debt restructurings and classified as nonaccruing.

At March 31, 2013, renegotiated loans consist solely of accruing residential mortgage loans guaranteed by U.S. government agencies that have been 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. Modified loans guaranteed by U.S. government agencies under residential mortgage loan programs may be sold once they become eligible according to U.S. government agency guidelines.


- 42 -



A rollforward of nonperforming assets for the first quarter of 2013 follows in Table 28.

Table 28 -- Rollforward of Nonperforming Assets
(In thousands)
 
 
Three Months Ended
 
 
March 31, 2013
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, Dec. 31, 2012
 
$
134,410

 
$
38,515

 
$
103,791

 
$
276,716

Additions
 
42,143

 
14,300

 
—

 
56,443

Payments
 
(13,765
)
 
(582
)
 
—

 
(14,347
)
Charge-offs
 
(8,909
)
 
—

 
—

 
(8,909
)
Net write-downs and losses
 
—

 
—

 
273

 
273

Foreclosure of nonperforming loans
 
(5,645
)
 
—

 
5,645

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
(16,654
)
 
—

 
16,654

 
—

Proceeds from sales
 
—

 
(4,933
)
 
(12,498
)
 
(17,431
)
Conveyance to U.S. government agencies
 
—

 
—

 
(11,155
)
 
(11,155
)
Net transfers to nonaccruing loans
 
348

 
(348
)
 
—

 
—

Return to accrual status
 
(129
)
 
—

 
—

 
(129
)
Other, net
 
834

 
990

 
(9
)
 
1,815

Balance, March 31, 2013
 
$
132,633

 
$
47,942

 
$
102,701

 
$
283,276


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 first quarter of 2013, $17 million of properties guaranteed by U.S. government agencies were foreclosed on and $11 million of properties were conveyed to the applicable U.S. government agencies.

Nonaccruing loans totaled $133 million or 1.10% of outstanding loans at March 31, 2013 and $134 million or 1.09% of outstanding loans at December 31, 2012. Nonaccruing loans decreased $1.8 million from December 31, 2012 due primarily to $14 million of payments, $8.9 million of charge-offs and $22 million of foreclosures. Newly identified nonaccruing loans totaled $42 million for the first quarter of 2013.

The distribution of nonaccruing loans among our various markets follows in Table 29.

Table 29 -- Nonaccruing Loans by Principal Market
(Dollars In thousands)
 
 
March 31, 2013
 
December 31, 2012
 
Change
 
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
Bank of Oklahoma
 
$
54,392

 
1.07
%
 
$
56,424

 
1.05
%
 
$
(2,032
)
 
2

bp
Bank of Texas
 
37,571

 
0.96
%
 
31,623

 
0.81
%
 
5,948

 
15

 
Bank of Albuquerque
 
12,479

 
1.67
%
 
13,401

 
1.82
%
 
(922
)
 
(15
)
 
Bank of Arkansas
 
1,008

 
0.60
%
 
1,132

 
0.62
%
 
(124
)
 
(2
)
 
Colorado State Bank & Trust
 
11,771

 
1.10
%
 
14,364

 
1.40
%
 
(2,593
)
 
(30
)
 
Bank of Arizona
 
15,392

 
2.50
%
 
17,407

 
3.01
%
 
(2,015
)
 
(51
)
 
Bank of Kansas City
 
20

 
—
%
 
59

 
0.01
%
 
(39
)
 
(1
)
 
Total
 
$
132,633

 
1.10
%
 
$
134,410

 
1.09
%
 
$
(1,777
)
 
1

bp


- 43 -



Nonaccruing loans attributed to the Bank of Oklahoma are primarily composed of $33 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 $23 million of commercial real estate loans and $8.5 million of residential mortgage loans. Nonaccruing loans attributed to the Bank of Arizona and Colorado State Bank & Trust both consisted primarily of commercial real estate loans.
Commercial

Nonaccruing commercial loans totaled $20 million or 0.27% of total commercial loans at March 31, 2013, down from $24 million or 0.32% of total commercial loans at December 31, 2012. Nonaccruing commercial loans at March 31, 2013 were primarily composed of $9.5 million or 0.45% of total services sector loans primarily attributed to the Bank of Arizona, the Bank of Oklahoma and Bank of Texas. Nonaccruing commercial loans decreased $4.6 million in the first quarter of 2013 primarily due to $3.3 million in payments. Newly identified nonaccruing commercial loans of $416 thousand were partially offset by $298 thousand of charge-offs during the first quarter.
 
The distribution of nonaccruing commercial loans among our various markets was as follows in Table 30.

Table 30 -- Nonaccruing Commercial Loans by Principal Market
(Dollars in thousands)
 
 
March 31, 2013
 
December 31, 2012
 
Change
 
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
Bank of Oklahoma
 
$
6,816

 
0.24
%
 
$
8,984

 
0.29
%
 
$
(2,168
)
 
(5
)
bp
Bank of Texas
 
5,880

 
0.22
%
 
6,561

 
0.24
%
 
(681
)
 
(2
)
 
Bank of Albuquerque
 
1,367

 
0.50
%
 
1,919

 
0.72
%
 
(552
)
 
(22
)
 
Bank of Arkansas
 
313

 
0.58
%
 
344

 
0.55
%
 
(31
)
 
3

 
Colorado State Bank & Trust
 
674

 
0.08
%
 
1,075

 
0.14
%
 
(401
)
 
(6
)
 
Bank of Arizona
 
4,811

 
1.47
%
 
5,584

 
1.78
%
 
(773
)
 
(31
)
 
Bank of Kansas City
 
—

 
—
%
 
—

 
—
%
 
—

 
—

 
Total commercial
 
$
19,861

 
0.27
%
 
$
24,467

 
0.32
%
 
$
(4,606
)
 
(5
)
bp

Commercial Real Estate

Nonaccruing commercial real estate loans totaled $65 million or 2.85% of outstanding commercial real estate loans at March 31, 2013 compared to $61 million or 2.72% of outstanding commercial real estate loans at December 31, 2012. Nonaccruing commercial real estate loans continue to be largely concentrated in land development and residential construction loans. Nonaccruing commercial real estate loans were up $4.5 million over the prior quarter. Newly identified nonaccruing commercial real estate loans totaled $18 million, offset by $8.8 million of cash payments received, $4.8 million of charge-offs and $711 thousand of foreclosures. The distribution of our nonaccruing commercial real estate loans among our geographic markets follows in Table 31.


- 44 -



Table 31 -- Nonaccruing Commercial Real Estate Loans by Principal Market
(Dollars in thousands)
 
 
March 31, 2013
 
December 31, 2012
 
Change
 
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
Bank of Oklahoma
 
$
13,563

 
2.39
%
 
$
11,782

 
2.03
%
 
$
1,781

 
36

bp
Bank of Texas
 
22,726

 
2.84
%
 
15,483

 
2.01
%
 
7,243

 
83

 
Bank of Albuquerque
 
9,198

 
2.76
%
 
9,862

 
3.02
%
 
(664
)
 
(26
)
 
Bank of Arkansas
 
—

 
—
%
 
—

 
—
%
 
—

 
—

 
Colorado State Bank & Trust
 
10,501

 
6.13
%
 
12,811

 
7.39
%
 
(2,310
)
 
(126
)
 
Bank of Arizona
 
9,187

 
4.01
%
 
10,688

 
5.30
%
 
(1,501
)
 
(129
)
 
Bank of Kansas City
 
—

 
—
%
 
—

 
—
%
 
—

 
—

 
Total commercial real estate
 
$
65,175

 
2.85
%
 
$
60,626

 
2.72
%
 
$
4,549

 
13

bp

Nonaccruing land development and residential construction loans totaled $23 million at March 31, 2013, primarily concentrated in the New Mexico, Texas and Colorado markets. Other nonaccruing commercial real estate loans totaled $13 million primarily concentrated in the Arizona and Colorado markets. Nonaccruing loans secured by office buildings totaled $13 million primarily concentrated in the Texas market.

Residential Mortgage and Consumer

Nonaccruing residential mortgage loans totaled $45 million or 2.26% of outstanding residential mortgage loans at March 31, 2013 compared to $47 million or 2.28% of outstanding residential mortgage loans at December 31, 2012. Newly identified nonaccruing residential mortgage loans totaled $20 million, partially offset by $19 million of foreclosures, $1.8 million of loans charged off and $1.5 million of payments during the quarter. Nonaccruing residential mortgage loans primarily consist of non-guaranteed permanent residential mortgage loans which totaled $38 million or 3.50% of outstanding non-guaranteed permanent residential mortgage loans at March 31, 2013. Nonaccruing home equity loans totaled $7.1 million or 0.93% 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. Substantially all non-guaranteed residential loans past due 90 days or more are nonaccruing. Residential mortgage loans 30 to 89 days past due decreased $2.2 million to $8.4 million at March 31, 2013. Consumer loans past due 30 to 89 days decreased $406 thousand from December 31, 2012.

Table 32 -- Residential Mortgage and Consumer Loans Past Due
(In thousands)
 
 
March 31, 2013
 
December 31, 2012
 
 
90 Days or More
 
30 to 89 Days
 
90 Days or More
 
30 to 89 Days
Residential mortgage:
 
 
 
 
 
 
 
 
   Permanent mortgage1
 
$
—

 
$
5,774

 
$
49

 
$
8,366

Home equity
 
—

 
2,638

 
—

 
2,275

Total residential mortgage
 
$
—

 
$
8,412

 
49

 
$
10,641

Consumer:
 
 

 
 

 
 

 
 

Indirect automobile
 
$
—

 
$
685

 
$
15

 
$
1,273

Other consumer
 
314

 
1,509

 
4

 
1,327

Total consumer
 
$
314

 
$
2,194

 
$
19

 
$
2,600

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


- 45 -



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 $103 million at March 31, 2013, a $1.1 million decrease from December 31, 2012. The distribution of real estate and other repossessed assets attributed by geographical market is included in Table 33 following.

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
 
$
2,021

 
$
5,012

 
$
2,172

 
$
1,111

 
$
3,477

 
$
7,816

 
$
1,309

 
$
—

 
$
22,918

1-4 family residential properties guaranteed by U.S. government agencies
 
6,177

 
1,271

 
912

 
506

 
16,230

 
416

 
1,557

 
795

 
27,864

1-4 family residential properties
 
6,172

 
1,158

 
590

 
1,348

 
2,148

 
7,235

 
483

 
327

 
19,461

Undeveloped land
 
999

 
4,356

 
4,046

 
89

 
200

 
6,300

 
1,294

 
—

 
17,284

Residential land development properties
 
447

 
2,203

 
2,685

 
2,341

 
1,360

 
5,682

 
166

 
—

 
14,884

Oil and gas properties
 
—

 
233

 
—

 
—

 
—

 
—

 
—

 
—

 
233

Multifamily residential properties
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Vehicles
 
4

 
13

 
—

 
7

 
—

 
—

 
—

 
—

 
24

Construction equipment
 
—

 
—

 
—

 
—

 
—

 
—

 
25

 
—

 
25

Other
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
8

 
8

Total real estate and other repossessed assets
 
$
15,820

 
$
14,246

 
$
10,405

 
$
5,402

 
$
23,415

 
$
27,449

 
$
4,834

 
$
1,130

 
$
102,701


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

- 46 -



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 first quarter of 2013, approximately 73% 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 first quarter of 2013 totaled $20.0 billion and represented approximately 73% of total liabilities and capital compared with $20.1 billion and 73% of total liabilities and capital for the fourth quarter of 2012. Average deposits decreased $89 million from the fourth quarter of 2012. As expected, average demand deposits decreased $503 million as significant deposit growth in the fourth quarter due to sales of businesses or assets by customers was redeployed by these customers in the first quarter of 2013. Demand deposit balances also decreased due to the expiration of the temporary unlimited deposit insurance coverage. Average interest-bearing transaction deposit accounts increased $493 million and average time deposits decreased $96 million. 

Average Commercial Banking deposit balances decreased $635 million compared to the fourth quarter of 2012. Balances related to our energy customers decreased $338 million. Commercial real estate balances were down $191 million, commercial and industrial customer balances decreased $100 million and balances related to small business customers decreased $92 million. Balances attributed to our treasury services customers grew by $164 million during the first 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 grew by $29 million. Demand deposit balances grew by $23 million and interest-bearing transaction deposits grew by $30 million, partially offset by a $52 million decrease in time deposits. Average Wealth Management deposits decreased $386 million compared to the fourth quarter of 2012. Interest-bearing transaction deposit account balances decreased $272 million and demand deposits decreased by $97 million. Wealth Management time deposits decreased $16 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 expired December 31, 2012. The total of all deposit account balances held by an individual depositor at the Bank are now insured up to $250,000.

Brokered deposits included in time deposits averaged $191 million for the first quarter of 2013, up $4.3 million over the fourth quarter of 2012. Average interest-bearing transaction accounts for the first quarter include $457 million of brokered deposits, a decrease of $12 million from the fourth quarter of 2012.

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


- 47 -



Table 34 -- Period End Deposits by Principal Market Area
(In thousands)
 
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
Bank of Oklahoma:
 
 
 
 
 
 
 
 
 
 
Demand
 
$
3,602,581

 
$
4,223,923

 
$
3,734,900

 
$
3,499,834

 
$
3,445,424

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
6,140,899

 
6,031,541

 
5,496,724

 
5,412,002

 
5,889,625

Savings
 
185,363

 
163,512

 
155,277

 
150,353

 
148,556

Time
 
1,264,415

 
1,267,904

 
1,274,336

 
1,354,148

 
1,370,868

Total interest-bearing
 
7,590,677

 
7,462,957

 
6,926,337

 
6,916,503

 
7,409,049

Total Bank of Oklahoma
 
11,193,258

 
11,686,880

 
10,661,237

 
10,416,337

 
10,854,473

 
 
 
 
 
 
 
 
 
 
 
Bank of Texas:
 
 
 
 
 
 
 
 
 
 
Demand
 
2,098,891

 
2,606,176

 
1,983,678

 
1,966,465

 
1,876,133

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
1,979,318

 
2,129,084

 
1,782,296

 
1,813,209

 
1,734,655

Savings
 
63,218

 
58,429

 
52,561

 
51,114

 
50,331

Time
 
717,974

 
762,233

 
789,725

 
772,809

 
789,860

Total interest-bearing
 
2,760,510

 
2,949,746

 
2,624,582

 
2,637,132

 
2,574,846

Total Bank of Texas
 
4,859,401

 
5,555,922

 
4,608,260

 
4,603,597

 
4,450,979

 
 
 
 
 
 
 
 
 
 
 
Bank of Albuquerque:
 
 
 
 
 
 
 
 
 
 
Demand
 
446,841

 
427,510

 
416,796

 
357,367

 
333,707

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
513,611

 
511,593

 
526,029

 
506,165

 
503,015

Savings
 
35,560

 
31,926

 
31,940

 
31,215

 
32,688

Time
 
354,303

 
364,928

 
375,611

 
383,350

 
392,234

Total interest-bearing
 
903,474

 
908,447

 
933,580

 
920,730

 
927,937

Total Bank of Albuquerque
 
1,350,315

 
1,335,957

 
1,350,376

 
1,278,097

 
1,261,644

 
 
 
 
 
 
 
 
 
 
 
Bank of Arkansas:
 
 
 
 
 
 
 
 
 
 
Demand
 
31,957

 
38,935

 
29,254

 
16,921

 
22,843

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
155,571

 
101,366

 
168,827

 
172,829

 
151,708

Savings
 
2,642

 
2,239

 
2,246

 
2,220

 
2,358

Time
 
41,613

 
42,573

 
45,719

 
48,517

 
54,157

Total interest-bearing
 
199,826

 
146,178

 
216,792

 
223,566

 
208,223

Total Bank of Arkansas
 
231,783

 
185,113

 
246,046

 
240,487

 
231,066

 
 
 
 
 
 
 
 
 
 
 
Colorado State Bank & Trust:
 
 
 
 
 
 
 
 
 
 
Demand
 
295,067

 
331,157

 
330,641

 
301,646

 
311,057

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
528,056

 
676,140

 
627,015

 
465,276

 
476,718

Savings
 
27,187

 
25,889

 
24,689

 
24,202

 
23,409

Time
 
461,496

 
472,305

 
476,564

 
491,280

 
498,124

Total interest-bearing
 
1,016,739

 
1,174,334

 
1,128,268

 
980,758

 
998,251

Total Colorado State Bank & Trust
 
1,311,806

 
1,505,491

 
1,458,909

 
1,282,404

 
1,309,308

 
 
 
 
 
 
 
 
 
 
 

- 48 -



 
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
Bank of Arizona:
 
 
 
 
 
 
 
 
 
 
Demand
 
157,754

 
161,094

 
151,738

 
137,313

 
131,539

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
378,421

 
360,275

 
298,048

 
113,310

 
95,010

Savings
 
2,122

 
1,978

 
2,201

 
2,313

 
1,772

Time
 
34,690

 
31,371

 
33,169

 
31,539

 
34,199

Total interest-bearing
 
415,233

 
393,624

 
333,418

 
147,162

 
130,981

Total Bank of Arizona
 
572,987

 
554,718

 
485,156

 
284,475

 
262,520

 
 
 
 
 
 
 
 
 
 
 
Bank of Kansas City:
 
 
 
 
 
 
 
 
 
 
Demand
 
267,769

 
249,491

 
201,393

 
160,829

 
68,469

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
46,426

 
78,039

 
103,628

 
69,083

 
57,666

Savings
 
983

 
771

 
660

 
581

 
505

Time
 
25,563

 
26,678

 
27,202

 
26,307

 
26,657

Total interest-bearing
 
72,972

 
105,488

 
131,490

 
95,971

 
84,828

Total Bank of Kansas City
 
340,741

 
354,979

 
332,883

 
256,800

 
153,297

Total BOK Financial deposits
 
$
19,860,291

 
$
21,179,060

 
$
19,142,867

 
$
18,362,197

 
$
18,523,287


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 $299 million at March 31, 2013. 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 $827 million during the quarter, up from $327 million for the fourth quarter of 2012.

At March 31, 2013, the estimated unused credit available to the subsidiary bank from collateralized sources was approximately $7.9 billion.

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


- 49 -



Table 35 -- Borrowed Funds
(In thousands)
 
 
 
 
Three Months Ended
 
 
 
Three Months Ended
 
 
 
 
March 31, 2013
 
 
 
December 31, 2012
 
 
March 31, 2013
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
December 31, 2012
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent Company and Other Non-Bank Subsidiaries:
Other borrowings - Other
 
$
—

 
$
1,321

 
1.34
%
 
$
—

 
$
10,500

 
$
1,292

 
1.35
%
 
$
10,500

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subsidiary Bank:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds purchased
 
853,843

 
1,155,983

 
0.13
%
 
853,843

 
1,167,416

 
1,295,442

 
0.15
%
 
1,568,595

Repurchase agreements
 
806,526

 
878,679

 
0.07
%
 
881,033

 
887,030

 
900,131

 
0.09
%
 
909,245

Other borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank advances
 
1,705,297

 
826,743

 
0.24
%
 
1,705,297

 
604,897

 
327,364

 
0.31
%
 
604,897

GNMA repurchase liability
 
11,347

 
18,928

 
5.41
%
 
21,055

 
20,046

 
19,422

 
5.41
%
 
20,046

Other
 
16,403

 
16,368

 
3.01
%
 
16,404

 
16,332

 
16,347

 
2.91
%
 
16,359

Total other borrowings
 
1,733,047

 
862,039

 
0.41
%
 


 
641,275

 
363,133

 
0.72
%
 


Subordinated debentures
 
347,674

 
347,654

 
2.52
%
 
347,674

 
347,633

 
347,613

 
2.56
%
 
347,633

Total Subsidiary Bank
 
3,741,090

 
3,244,355

 
0.45
%
 
 
 
3,043,354

 
2,906,319

 
0.51
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Borrowed Funds
 
$
3,741,090

 
$
3,245,676

 
0.45
%
 
 
 
$
3,053,854

 
$
2,907,611

 
0.51
%
 
 
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 March 31, 2013, $227 million of this subordinated debt remains outstanding.
In 2005, the Bank issued $150 million of 10-year, fixed rate subordinated debt. The cost of this subordinated debt, including issuance discounts and hedge loss is 5.56%. The proceeds of this debt were used to repay $95 million of BOK Financial's unsecured revolving line of credit and to provide additional capital to support assets growth. At March 31, 2013, $122 million of this subordinated debt remains outstanding.
The Bank also has a liability related to the repurchase of certain delinquent residential mortgage loans previously sold in GNMA mortgage pools. Interest is payable monthly at rates contractually due to investors.
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 March 31, 2013, based on the most restrictive limitations as well as management’s internal capital policy, the subsidiary bank could declare up to $161 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

- 50 -



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 March 31, 2013 and the Company met all of the covenants.

Our equity capital at March 31, 2013 was $3.0 billion, up $54 million over December 31, 2012. Net income less cash dividends paid increased equity $62 million during the first quarter of 2013. 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 March 31, 2013, the Company has repurchased 39,496 shares for $2.1 million under this program. No shares were repurchased in the first quarter of 2013.

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
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
Average total equity to average assets
 
—

 
10.90
%
 
10.81
%
 
11.08
%
 
11.23
%
 
11.11
%
Tangible common equity ratio
 
—

 
9.70
%
 
9.25
%
 
9.67
%
 
10.07
%
 
9.75
%
Tier 1 common equity ratio
 
—

 
13.16
%
 
12.59
%
 
13.01
%
 
13.41
%
 
12.83
%
Risk-based capital:
 
 

 
 
 
 
 
 
 
 

 
 

Tier 1 capital
 
6.00
%
 
13.35
%
 
12.78
%
 
13.21
%
 
13.62
%
 
13.03
%
Total capital
 
10.00
%
 
15.68
%
 
15.13
%
 
15.71
%
 
16.19
%
 
16.16
%
Leverage
 
5.00
%
 
9.28
%
 
9.01
%
 
9.34
%
 
9.64
%
 
9.35
%
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 13.16% as of March 31, 2013. Our estimated Tier 1 common equity ratio under a fully phased in Basel III framework is approximately 12.70%, nearly 570 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

- 51 -



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. The requirements for annual capital stress tests will become effective for the Company in the fourth quarter of 2013 with public disclosure of specified results to occur in June of 2014. 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.

Table 37 -- Non-GAAP Measures
(Dollars in thousands)
 
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
Tangible common equity ratio:
 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
$
3,011,958

 
$
2,957,860

 
$
2,975,657

 
$
2,885,934

 
$
2,834,419

Less: Goodwill and intangible assets, net
 
386,876

 
390,171

 
392,158

 
344,699

 
345,246

Tangible common equity
 
2,625,082

 
2,567,689

 
2,583,499

 
2,541,235

 
2,489,173

Total assets
 
27,447,158

 
28,148,631

 
27,117,641

 
25,576,046

 
25,884,173

Less: Goodwill and intangible assets, net
 
386,876

 
390,171

 
392,158

 
344,699

 
345,246

Tangible assets
 
$
27,060,282

 
$
27,758,460

 
$
26,725,483

 
$
25,231,347

 
$
25,538,927

Tangible common equity ratio
 
9.70
%
 
9.25
%
 
9.67
%
 
10.07
%
 
9.75
%
Tier 1 common equity ratio:
 
 
 
 
 
 
 
 

 
 

Tier 1 capital
 
$
2,503,892

 
$
2,430,671

 
$
2,436,791

 
$
2,418,985

 
$
2,344,779

Less: Non-controlling interest
 
35,934

 
35,821

 
36,818

 
36,787

 
35,982

Tier 1 common equity
 
2,467,958

 
2,394,850

 
2,399,973

 
2,382,198

 
2,308,797

Risk weighted assets
 
$
18,756,648

 
$
19,016,673

 
$
18,448,854

 
$
17,758,118

 
$
17,993,379

Tier 1 common equity ratio
 
13.16
%
 
12.59
%
 
13.01
%

13.41
%
 
12.83
%

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.

- 52 -



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 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
 
 
2013
 
2012
 
2013
 
2012
Anticipated impact over the next twelve months on net interest revenue
 
$
(528
)
 
$
23,635

 
$
(17,420
)
 
$
(24,418
)
 
 
(0.08
)%
 
3.46
%
 
(2.50
)%
 
3.57
%
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

- 53 -



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 months ended March 31, 2013 and 2012. At March 31, 2013, 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 months ended March 31, 2013 and 2012 are as follows in Table 39.

Table 39 -- Value at Risk (VAR)
(In thousands)
 
Three Months Ended
 
March 31, 2013
 
March 31, 2012
Average
$
3,569

 
$
2,333

High
5,453

 
3,761

Low
2,525

 
1,075

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.


- 54 -



Consolidated Statements of Earnings (Unaudited)
(In thousands, except share and per share data)
 
Three Months Ended
 
 
March 31,
Interest revenue
 
2013
 
2012
Loans
 
$
125,113

 
$
126,983

Residential mortgage loans held for sale
 
1,792

 
1,768

Trading securities
 
478

 
300

Taxable securities
 
3,798

 
4,434

Tax-exempt securities
 
1,028

 
977

Total investment securities
 
4,826

 
5,411

Taxable securities
 
55,019

 
59,656

Tax-exempt securities
 
604

 
601

Total available for sale securities
 
55,623

 
60,257

Fair value option securities
 
1,165

 
3,487

Funds sold and resell agreements
 
2

 
2

Total interest revenue
 
188,999

 
198,208

Interest expense
 
 

 
 

Deposits
 
14,881

 
17,498

Borrowed funds
 
1,554

 
1,589

Subordinated debentures
 
2,159

 
5,552

Total interest expense
 
18,594

 
24,639

Net interest revenue
 
170,405

 
173,569

Provision for credit losses
 
(8,000
)
 
—

Net interest revenue after provision for credit losses
 
178,405

 
173,569

Other operating revenue
 
 

 
 

Brokerage and trading revenue
 
31,751

 
31,111

Transaction card revenue
 
27,692

 
25,430

Trust fees and commissions
 
22,313

 
18,438

Deposit service charges and fees
 
22,966

 
24,379

Mortgage banking revenue
 
39,976

 
33,078

Bank-owned life insurance
 
3,226

 
2,871

Other revenue
 
10,187

 
9,264

Total fees and commissions
 
158,111

 
144,571

Gain (loss) on assets, net
 
467

 
(3,693
)
Loss on derivatives, net
 
(941
)
 
(2,473
)
Loss on fair value option securities, net
 
(3,171
)
 
(1,733
)
Gain on available for sale securities, net
 
4,855

 
4,331

Total other-than-temporary impairment losses
 
—

 
(505
)
Portion of loss reclassified from other comprehensive income
 
(247
)
 
(3,217
)
Net impairment losses recognized in earnings
 
(247
)
 
(3,722
)
Total other operating revenue
 
159,074

 
137,281

Other operating expense
 
 

 
 

Personnel
 
125,654

 
114,769

Business promotion
 
5,453

 
4,388

Professional fees and services
 
6,985

 
7,599

Net occupancy and equipment
 
16,481

 
16,023

Insurance
 
3,745

 
3,866

Data processing and communications
 
25,450

 
22,144

Printing, postage and supplies
 
3,674

 
3,311

Net losses and expenses of repossessed assets
 
1,246

 
2,245

Amortization of intangible assets
 
876

 
575

Mortgage banking costs
 
7,354

 
8,439

Change in fair value of mortgage servicing rights
 
(2,658
)
 
(7,127
)
Other expense
 
7,064

 
5,905

Total other operating expense
 
201,324

 
182,137

Income before taxes
 
136,155

 
128,713

Federal and state income tax
 
47,096

 
45,520

Net income
 
89,059

 
83,193

Net income (loss) attributable to non-controlling interest
 
1,095

 
(422
)
Net income attributable to BOK Financial Corporation shareholders
 
$
87,964

 
$
83,615

Earnings per share:
 
 

 
 

Basic
 
$
1.28

 
$
1.22

Diluted
 
$
1.28

 
$
1.22

Average shares used in computation:
 
 
 
 
Basic
 
67,814,550

 
67,665,300

Diluted
 
68,040,180

 
67,941,895

Dividends declared per share
 
$
0.38

 
$
0.33

 See accompanying notes to consolidated financial statements.

- 55 -



.
Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands, except share and per share data)
 
 
 
 
 
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
Net income
 
$
89,059

 
$
83,193

Other comprehensive income before income taxes:
 
 
 
 
Net change in unrealized gain (loss)
 
(21,359
)
 
55,435

Reclassification adjustments included in earnings:
 
 
 
 
Interest revenue, Investments securities, Taxable securities
 
(1,148
)
 
(1,788
)
Interest expense, Subordinated debentures
 
52

 
52

Net impairment losses recognized in earnings
 
247

 
3,722

Gain on available for sale securities, net
 
(4,855
)
 
(4,331
)
Other comprehensive income (loss) before income taxes
 
(27,063
)
 
53,090

Income tax benefit (expense)
 
10,526

 
(20,651
)
Other comprehensive income (loss), net of income taxes
 
(16,537
)
 
32,439

Comprehensive income
 
72,522

 
115,632

Comprehensive income (loss) attributable to non-controlling interests
 
1,095

 
(422
)
Comprehensive income attributed to BOK Financial Corp. shareholders
 
$
71,427

 
$
116,054


See accompanying notes to consolidated financial statements.

- 56 -



Consolidated Balance Sheets
(In thousands, except share data)
 
 
 
 
 
 
 
 
March 31,
2013
 
Dec 31,
2012
 
March 31,
2012
 
 
(Unaudited)
 
(Footnote 1)
 
(Unaudited)
Assets
 
 
 
 
 
 
Cash and due from banks
 
$
928,035

 
$
1,266,834

 
$
691,697

Funds sold and resell agreements
 
17,582

 
19,405

 
14,609

Trading securities
 
206,598

 
214,102

 
128,376

Investment securities (fair value:  March 31, 2013 – $615,194; December 31, 2012 – $528,458; March 31, 2012 – $451,443)
 
589,271

 
499,534

 
427,259

Available for sale securities
 
11,059,145

 
11,287,221

 
10,186,597

Fair value option securities
 
210,192

 
284,296

 
347,952

Residential mortgage loans held for sale
 
286,211

 
293,762

 
247,039

Loans
 
12,093,564

 
12,311,456

 
11,577,444

Allowance for loan losses
 
(205,965
)
 
(215,507
)
 
(244,209
)
Loans, net of allowance
 
11,887,599

 
12,095,949

 
11,333,235

Premises and equipment, net
 
270,130

 
265,920

 
263,579

Receivables
 
116,028

 
114,185

 
138,325

Goodwill
 
359,759

 
361,979

 
335,601

Intangible assets, net
 
27,117

 
28,192

 
9,645

Mortgage servicing rights, net
 
109,840

 
100,812

 
98,138

Real estate and other repossessed assets, net of allowance (March 31, 2013 – $36,004; December 31, 2012 – $36,873; March 31, 2012 – $30,408)
 
102,701

 
103,791

 
115,790

Bankers’ acceptances
 
1,762

 
605

 
3,493

Derivative contracts
 
320,473

 
338,106

 
384,996

Cash surrender value of bank-owned life insurance
 
277,776

 
274,531

 
266,227

Receivable on unsettled securities trades
 
190,688

 
211,052

 
511,288

Other assets
 
486,251

 
388,355

 
380,327

Total assets
 
$
27,447,158

 
$
28,148,631

 
$
25,884,173

 
 
 
 
 
 
 
Noninterest-bearing demand deposits
 
$
6,900,860

 
$
8,038,286

 
$
6,189,172

Interest-bearing deposits:
 
 

 
 

 
 

Transaction
 
9,742,302

 
9,888,038

 
8,908,397

Savings
 
317,075

 
284,744

 
259,619

  Time
 
2,900,054

 
2,967,992

 
3,166,099

Total deposits
 
19,860,291

 
21,179,060

 
18,523,287

Funds purchased
 
853,843

 
1,167,416

 
1,784,940

Repurchase agreements
 
806,526

 
887,030

 
1,162,546

Other borrowings
 
1,733,047

 
651,775

 
209,230

Subordinated debentures
 
347,674

 
347,633

 
394,760

Accrued interest, taxes and expense
 
192,358

 
176,678

 
180,840

Bankers’ acceptances
 
1,762

 
605

 
3,493

Derivative contracts
 
251,836

 
283,589

 
305,290

Due on unsettled securities trades
 
158,984

 
297,453

 
305,166

Other liabilities
 
192,945

 
163,711

 
144,220

Total liabilities
 
24,399,266

 
25,154,950

 
23,013,772

Shareholders' equity:
 
 

 
 

 
 

Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: March 31, 2013 – 72,945,798; December 31, 2012 – 72,415,346; March 31, 2012 – 71,902,099)
 
4

 
4

 
4

Capital surplus
 
876,368

 
859,278

 
829,991

Retained earnings
 
2,199,722

 
2,137,541

 
2,014,599

Treasury stock (shares at cost:  March 31, 2013 – 4,258,080; December 31, 2012 – 4,087,995;  March 31, 2012 – 3,785,206)
 
(197,519
)
 
(188,883
)
 
(171,593
)
Accumulated other comprehensive income
 
133,383

 
149,920

 
161,418

Total shareholders’ equity
 
3,011,958

 
2,957,860

 
2,834,419

Non-controlling interest
 
35,934

 
35,821

 
35,982

Total equity
 
3,047,892

 
2,993,681

 
2,870,401

Total liabilities and equity
 
$
27,447,158

 
$
28,148,631

 
$
25,884,173


See accompanying notes to consolidated financial statements.

- 57 -



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, 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 (loss)
 
—

 
—

 
—

 
—

 
83,615

 
—

 
—

 
83,615

 
(422
)
 
83,193

Other comprehensive income
 
—

 
—

 
32,439

 
—

 
—

 
—

 
—

 
32,439

 
—

 
32,439

Treasury stock purchases
 
—

 
—

 
—

 
—

 
—

 
345

 
(18,432
)
 
(18,432
)
 
—

 
(18,432
)
Exercise of stock options
 
369

 
—

 
—

 
9,598

 
—

 
60

 
(2,497
)
 
7,101

 
—

 
7,101

Tax benefit on exercise of stock options
 
—

 
—

 
—

 
(428
)
 
—

 
—

 
—

 
(428
)
 
—

 
(428
)
Stock-based compensation
 
—

 
—

 
—

 
2,004

 
—

 
—

 
—

 
2,004

 
—

 
2,004

Cash dividends on common stock
 
—

 
—

 
—

 
—

 
(22,348
)
 
—

 
—

 
(22,348
)
 
—

 
(22,348
)
Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
220

 
220

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2012
 
71,902

 
$
4

 
$
161,418

 
$
829,991

 
$
2,014,599

 
3,785

 
$
(171,593
)
 
$
2,834,419

 
$
35,982

 
$
2,870,401

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2012
 
72,415

 
$
4

 
$
149,920

 
$
859,278

 
$
2,137,541

 
4,088

 
$
(188,883
)
 
$
2,957,860

 
$
35,821

 
$
2,993,681

Net income
 
—

 
—

 
—

 
—

 
87,964

 
—

 
—

 
87,964

 
1,095

 
89,059

Other comprehensive loss
 
—

 
—

 
(16,537
)
 
—

 
—

 
—

 
—

 
(16,537
)
 
—

 
(16,537
)
Treasury stock purchases
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Exercise of stock options
 
531

 
—

 
—

 
18,178

 
—

 
170

 
(8,636
)
 
9,542

 
—

 
9,542

Tax benefit on exercise of stock options
 
—

 
—

 
—

 
(337
)
 
—

 
—

 
—

 
(337
)
 
—

 
(337
)
Stock-based compensation
 
—

 
—

 
—

 
(751
)
 
—

 
—

 
—

 
(751
)
 
—

 
(751
)
Cash dividends on common stock
 
—

 
—

 
—

 
—

 
(25,783
)
 
—

 
—

 
(25,783
)
 
—

 
(25,783
)
Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(982
)
 
(982
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2013
 
72,946

 
$
4

 
$
133,383

 
$
876,368

 
$
2,199,722

 
4,258

 
$
(197,519
)
 
$
3,011,958

 
$
35,934

 
$
3,047,892


See accompanying notes to consolidated financial statements.

- 58 -



Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
89,059

 
$
83,193

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

 
 

Provision for credit losses
 
(8,000
)
 
—

Change in fair value of mortgage servicing rights
 
(2,658
)
 
(7,127
)
Unrealized (gains) losses from derivatives
 
9,334

 
(4,874
)
Tax benefit on exercise of stock options
 
337

 
428

Change in bank-owned life insurance
 
(3,226
)
 
(2,871
)
Stock-based compensation
 
(751
)
 
2,004

Depreciation and amortization
 
13,392

 
12,326

Net amortization of securities discounts and premiums
 
16,507

 
23,850

Net realized gains on financial instruments and other assets
 
(35,671
)
 
(18,313
)
Mortgage loans originated for resale
 
(956,315
)
 
(747,435
)
Proceeds from sale of mortgage loans held for resale
 
993,776

 
711,602

Capitalized mortgage servicing rights
 
(11,433
)
 
(8,372
)
Change in trading and fair value option securities
 
81,022

 
250,562

Change in receivables
 
(2,554
)
 
(18,487
)
Change in other assets
 
7,376

 
(1,720
)
Change in accrued interest, taxes and expense
 
15,680

 
31,332

Change in other liabilities
 
33,543

 
10,787

Net cash provided by operating activities
 
239,418

 
316,885

Cash Flows From Investing Activities:
 
 

 
 

Proceeds from maturities or redemptions of investment securities
 
20,485

 
12,083

Proceeds from maturities or redemptions of available for sale securities
 
991,514

 
1,374,819

Purchases of investment securities
 
(110,957
)
 
(146
)
Purchases of available for sale securities
 
(1,529,068
)
 
(2,346,849
)
Proceeds from sales of available for sale securities
 
728,424

 
991,941

Change in amount receivable on unsettled securities transactions
 
20,364

 
(436,137
)
Loans originated net of principal collected
 
221,433

 
(319,043
)
Net proceeds from (payments on) derivative asset contracts
 
17,454

 
(116,683
)
Proceeds from disposition of assets
 
26,870

 
38,761

Purchases of assets
 
(73,612
)
 
(31,799
)
Net cash provided by (used in) investing activities
 
312,907

 
(833,053
)
Cash Flows From Financing Activities:
 
 

 
 

Net change in demand deposits, transaction deposits and savings accounts
 
(1,250,831
)
 
(23,410
)
Net change in time deposits
 
(67,938
)
 
(215,883
)
Net change in other borrowed funds
 
659,003

 
762,665

Net payments or proceeds on derivative liability contracts
 
(20,893
)
 
110,679

Net change in derivative margin accounts
 
(57,241
)
 
(15,630
)
Change in amount due on unsettled security transactions
 
(138,469
)
 
(348,205
)
Issuance of common and treasury stock, net
 
9,542

 
7,101

Tax benefit on exercise of stock options
 
(337
)
 
(428
)
Repurchase of common stock
 
—

 
(18,432
)
Dividends paid
 
(25,783
)
 
(22,348
)
Net cash provided by (used in) financing activities
 
(892,947
)
 
236,109

Net decrease in cash and cash equivalents
 
(340,622
)
 
(280,059
)
Cash and cash equivalents at beginning of period
 
1,286,239

 
986,365

Cash and cash equivalents at end of period
 
$
945,617

 
$
706,306

 
 
 
 
 
Cash paid for interest
 
$
16,390

 
$
17,817

Cash paid for taxes
 
$
5,953

 
$
3,765

Net loans transferred to repossessed real estate and other assets
 
$
22,299

 
$
26,041

Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period
 
$
28,192

 
$
23,184

Conveyance of other real estate owned guaranteed by U.S. government agencies
 
$
11,155

 
$
18,425


See accompanying notes to consolidated financial statements.

- 59 -



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., The Milestone Group, 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 2012 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. Amounts presented as of December 31, 2012 have been derived from the audited financial statements included in BOK Financial’s 2012 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 period ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board (“FASB”)

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 were effective for the Company for interim and annual reporting period beginning January 1, 2013.

FASB Accounting Standards Update No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (ASU 2013-01)

On January 31, 2013, FASB issued ASU 2013-01 which clarified the scope of ASU 2011-11 applied for derivative contracts accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. ASU 2013-01 was effective for the Company on January 1, 2013.

FASB Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02")

On February 7, 2013 the FASB issued ASU 2013-02 which sets the requirements for presentation significant reclassifications out of accumulated other comprehensive income for both items reclassified in their entirety and the respective line items in Statement of Earnings they are being reclassified into and for other amounts that are not reclassified in their entirety to net income during the reporting period, such as items being reclassified to a balance sheet accounts. ASU 2013-02 was effective for the Company on January 1, 2013 and is to be applied prospectively.

- 60 -



(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities is as follows (in thousands):
 
 
 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair
Value
 
Net Unrealized Gain (Loss)
U.S. Government agency debentures
 
$
55,358

 
$
48

 
$
16,545

 
$
(57
)
 
$
27,430

 
$
2

U.S. agency residential mortgage-backed securities
 
33,106

 
160

 
86,361

 
447

 
35,111

 
57

Municipal and other tax-exempt securities
 
90,710

 
(10
)
 
90,326

 
(226
)
 
60,230

 
158

Other trading securities
 
27,424

 
41

 
20,870

 
(13
)
 
5,605

 
—

Total
 
$
206,598

 
$
239

 
$
214,102

 
$
151

 
$
128,376

 
$
217

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

 
 
March 31, 2013
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized2
 
 
Cost
 
Value1
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
339,003

 
$
339,003

 
$
341,940

 
$
3,518

 
$
(581
)
U.S. agency residential mortgage-backed securities – Other
 
69,075

 
72,968

 
76,851

 
3,883

 
—

Other debt securities
 
177,300

 
177,300

 
196,403

 
19,153

 
(50
)
Total
 
$
585,378

 
$
589,271

 
$
615,194

 
$
26,554

 
$
(631
)
1 
Carrying value includes $3.9 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.
 
 
December 31, 2012
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized2
 
 
Cost
 
Value1
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
232,700

 
$
232,700

 
$
235,940

 
$
3,723

 
$
(483
)
U.S. agency residential mortgage-backed securities – Other
 
77,726

 
82,767

 
85,943

 
3,176

 
—

Other debt securities
 
184,067

 
184,067

 
206,575

 
22,528

 
(20
)
Total
 
$
494,493

 
$
499,534

 
$
528,458

 
$
29,427

 
$
(503
)
1 
Carrying value includes $5.0 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.

- 61 -



 
 
March 31, 2012
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized2
 
 
Cost
 
Value1
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
130,919

 
$
130,919

 
$
135,314

 
$
4,402

 
$
(7
)
U.S. agency residential mortgage-backed securities – Other
 
103,055

 
112,909

 
113,958

 
1,587

 
(538
)
Other debt securities
 
183,431

 
183,431

 
202,171

 
18,740

 
—

Total
 
$
417,405

 
$
427,259

 
$
451,443

 
$
24,729

 
$
(545
)
1 
Carrying value includes $9.9 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.

The amortized cost and fair values of investment securities at March 31, 2013, 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
 
$
26,682

 
$
201,547

 
$
108,631

 
$
2,143

 
$
339,003

 
3.94

Fair value
 
26,814

 
203,487

 
109,333

 
2,306

 
341,940

 
 
Nominal yield¹
 
4.25

 
1.71

 
2.09

 
6.50

 
2.06

 
 
Other debt securities:
 
 

 
 

 
 

 
 

 
 

 
 
Carrying value
 
9,688

 
31,978

 
35,164

 
100,470

 
177,300

 
9.26

Fair value
 
9,768

 
33,041

 
37,922

 
115,672

 
196,403

 
 
Nominal yield
 
4.21

 
5.16

 
5.57

 
6.29

 
5.83

 
 
Total fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 
Carrying value
 
$
36,370

 
$
233,525

 
$
143,795

 
$
102,613

 
$
516,303

 
5.77

Fair value
 
36,582

 
236,528

 
147,255

 
117,978

 
538,343

 
 

Nominal yield
 
4.24

 
2.18

 
2.94

 
6.30

 
3.36

 
 

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Carrying value
 
 

 
 

 
 

 
 

 
$
72,968

 
³

Fair value
 
 

 
 

 
 

 
 

 
76,851

 
 

Nominal yield4
 
 

 
 

 
 

 
 

 
2.71

 
 

Total investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

Carrying value
 
 

 
 

 
 

 
 

 
$
589,271

 
 

Fair value
 
 

 
 

 
 

 
 

 
615,194

 
 

Nominal yield
 
 

 
 

 
 

 
 

 
3.28

 
 

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 3.6 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.

- 62 -



Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
 
 
March 31, 2013
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,000

 
$
1,000

 
$
—

 
$
—

 
$
—

Municipal and other tax-exempt
 
84,831

 
85,447

 
2,377

 
(1,263
)
 
(498
)
Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
5,036,888

 
5,161,971

 
127,362

 
(2,279
)
 
—

FHLMC
 
2,747,896

 
2,809,286

 
61,390

 
—

 
—

GNMA
 
1,044,086

 
1,060,870

 
16,784

 
—

 
—

Other
 
128,519

 
133,085

 
4,566

 
—

 
—

Total U.S. government agencies
 
8,957,389

 
9,165,212

 
210,102

 
(2,279
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
119,373

 
124,164

 
5,198

 
—

 
(407
)
Jumbo-A loans
 
188,065

 
192,044

 
6,032

 
(139
)
 
(1,914
)
Total private issue
 
307,438

 
316,208

 
11,230

 
(139
)
 
(2,321
)
Total residential mortgage-backed securities
 
9,264,827

 
9,481,420

 
221,332

 
(2,418
)
 
(2,321
)
Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
1,402,594

 
1,405,346

 
4,693

 
(1,941
)
 
—

Other debt securities
 
35,650

 
36,079

 
635

 
(206
)
 
—

Perpetual preferred stock
 
22,171

 
26,832

 
4,661

 
—

 
—

Equity securities and mutual funds
 
19,452

 
23,021

 
3,574

 
(5
)
 
—

Total
 
$
10,830,525

 
$
11,059,145

 
$
237,272

 
$
(5,833
)
 
$
(2,819
)
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.

- 63 -



 
 
December 31, 2012
 
 
Amortized
 
Fair
 
Gross Unrealized¹
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,000

 
$
1,002

 
$
2

 
$
—

 
$
—

Municipal and other tax-exempt
 
84,892

 
87,142

 
2,414

 
(164
)
 
—

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
5,308,463

 
5,453,549

 
146,247

 
(1,161
)
 
—

FHLMC
 
2,978,608

 
3,045,564

 
66,956

 
—

 
—

GNMA
 
1,215,554

 
1,237,041

 
21,487

 
—

 
—

Other
 
148,025

 
153,667

 
5,642

 
—

 
—

Total U.S. government agencies
 
9,650,650

 
9,889,821

 
240,332

 
(1,161
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
124,314

 
123,174

 
1,440

 
—

 
(2,580
)
Jumbo-A loans
 
198,588

 
201,989

 
5,138

 
(134
)
 
(1,603
)
Total private issue
 
322,902

 
325,163

 
6,578

 
(134
)
 
(4,183
)
Total residential mortgage-backed securities
 
9,973,552

 
10,214,984

 
246,910

 
(1,295
)
 
(4,183
)
Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
890,746

 
895,075

 
5,006

 
(677
)
 
—

Other debt securities
 
35,680

 
36,389

 
709

 
—

 
—

Perpetual preferred stock
 
22,171

 
25,072

 
2,901

 
—

 
—

Equity securities and mutual funds
 
24,593

 
27,557

 
3,242

 
(278
)
 
—

Total
 
$
11,032,634

 
$
11,287,221

 
$
261,184

 
$
(2,414
)
 
$
(4,183
)
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.

 
 
March 31, 2012
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,001

 
$
1,004

 
$
3

 
$
—

 
$
—

Municipal and other tax-exempt
 
70,286

 
72,234

 
2,426

 
(206
)
 
(272
)
Residential mortgage-backed securities:
 


 


 


 


 


U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
5,352,645

 
5,521,695

 
171,892

 
(2,842
)
 
—

FHLMC
 
3,038,083

 
3,128,573

 
91,304

 
(814
)
 
—

GNMA
 
780,001

 
812,484

 
32,893

 
(410
)
 
—

Other
 
207,849

 
214,850

 
7,001

 
—

 
—

Total U.S. government agencies
 
9,378,578

 
9,677,602

 
303,090

 
(4,066
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
140,142

 
120,187

 
—

 
—

 
(19,955
)
Jumbo-A loans
 
230,903

 
206,326

 
—

 
(1,132
)
 
(23,445
)
Total private issue
 
371,045

 
326,513

 
—

 
(1,132
)
 
(43,400
)
Total residential mortgage-backed securities
 
9,749,623

 
10,004,115

 
303,090

 
(5,198
)
 
(43,400
)
Other debt securities
 
36,269

 
36,777

 
508

 
—

 
—

Perpetual preferred stock
 
19,171

 
21,024

 
1,862

 
(9
)
 
—

Equity securities and mutual funds
 
32,970

 
51,443

 
18,801

 
(328
)
 
—

Total
 
$
9,909,320

 
$
10,186,597

 
$
326,690

 
$
(5,741
)
 
$
(43,672
)
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.


- 64 -



The amortized cost and fair values of available for sale securities at March 31, 2013, 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
Maturity5
U.S. Treasuries:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$
1,000

 
$
—

 
$
—

 
$
—

 
$
1,000

 
0.08

Fair value
1,000

 
—

 
—

 
—

 
1,000

 
 
Nominal yield
0.55

 
—

 
—

 
—

 
0.55

 
 
Municipal and other tax-exempt:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
1,667

 
32,230

 
7,652

 
43,282

 
84,831

 
14.32

Fair value
1,701

 
33,915

 
8,118

 
41,713

 
85,447

 
 
Nominal yield¹
—

 
0.94

 
0.77

 
2.85

6 
1.88

 
 
Commercial mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
—

 
313,008

 
1,026,298

 
63,288

 
1,402,594

 
7.68

Fair value
—

 
313,845

 
1,027,348

 
64,153

 
1,405,346

 
 
Nominal yield
—

 
1.09

 
1.38

 
1.55

 
1.32

 
 
Other debt securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
—

 
30,250

 
—

 
5,400

 
35,650

 
6.22

Fair value
—

 
30,886

 
—

 
5,193

 
36,079

 
 
Nominal yield
—

 
1.80

 
—

 
1.29

6 
1.74

 
 
Total fixed maturity securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
2,667

 
$
375,488

 
$
1,033,950

 
$
111,970

 
$
1,524,075

 
8.01

Fair value
2,701

 
378,646

 
1,035,466

 
111,059

 
1,527,872

 
 
Nominal yield
0.21

 
1.13

 
1.38

 
2.04

 
1.36

 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
 

 
 

 
 

 
 

 
9,264,827

 
2 

Fair value
 

 
 

 
 

 
 

 
9,481,420

 
 
Nominal yield4
 

 
 

 
 

 
 

 
2.17

 
 
Equity securities and mutual funds:
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 

 
 

 
 

 
 

 
41,623

 
³

Fair value
 

 
 

 
 

 
 

 
49,853

 
 

Nominal yield
 

 
 

 
 

 
 

 
1.32

 
 

Total available-for-sale securities:
 

 
 

 
 

 
 

 
 
 
 

Amortized cost
 

 
 

 
 

 
 

 
$
10,830,525

 
 

Fair value
 

 
 

 
 

 
 

 
11,059,145

 
 

Nominal yield
 

 
 

 
 

 
 

 
2.05

 
 

1 
Calculated on a taxable equivalent basis using a 39% effective tax rate.
2 
The average expected lives of mortgage-backed securities were 2.8 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.


- 65 -



Sales of available for sale securities resulted in gains and losses as follows (in thousands):
 
Three Months Ended
 
March 31,
 
2013
 
2012
Proceeds
$
728,424

 
$
991,941

Gross realized gains
5,792

 
11,685

Gross realized losses
(936
)
 
(7,354
)
Related federal and state income tax expense
1,889

 
1,685


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):
 
March 31,
2013
 
December 31,
2012
 
March 31,
2012
Investment:
 
 
 
 
 
Carrying value
$
112,990

 
$
117,346

 
$
188,519

Fair value
118,054

 
121,647

 
192,844

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
Amortized cost
4,415,455

 
4,070,250

 
3,796,475

Fair value
4,524,553

 
4,186,390

 
3,952,018


The secured parties do not have the right to sell or re-pledge these securities. At December 31, 2012, municipal trading securities with a fair value of $13 million were pledged as collateral on a line of credit for the trading activities of BOSC, Inc. Under the terms of the credit agreement, the creditor has the right to sell or repledge the collateral.


- 66 -



Temporarily Impaired Securities as of March 31, 2013
(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
 
63

 
$
141,778

 
$
581

 
$
—

 
$
—

 
$
141,778

 
$
581

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

 
—

 
—

 
—

 
—

 
—

 
—

Other debt securities
 
14

 
852

 
50

 
—

 
—

 
852

 
50

Total investment
 
77

 
$
142,630

 
$
631

 
$
—

 
$
—

 
$
142,630

 
$
631

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Municipal and other tax-exempt1
 
53

 
$
10,390

 
$
397

 
$
29,724

 
$
1,364

 
$
40,114

 
$
1,761

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

 


 


U. S. agencies:
 
 
 
 

 
 

 
 

 
 

 


 


FNMA
 
26

 
875,087

 
2,279

 
—

 
—

 
875,087

 
2,279

FHLMC
 
—

 
—

 
—

 
—

 
—

 
—

 
—

GNMA
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total U.S. agencies
 
26

 
875,087

 
2,279

 
—

 
—

 
875,087

 
2,279

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
1

 
—

 
—

 
3,500

 
407

 
3,500

 
407

Jumbo-A loans
 
11

 
39,462

 
1,327

 
26,440

 
726

 
65,902

 
2,053

Total private issue
 
12

 
39,462

 
1,327

 
29,940

 
1,133

 
69,402

 
2,460

Total residential mortgage-backed securities
 
38

 
914,549

 
3,606

 
29,940

 
1,133

 
944,489

 
4,739

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
49

 
604,290

 
1,941

 
—

 
—

 
604,290

 
1,941

Other debt securities
 
4

 
4,712

 
187

 
481

 
19

 
5,193

 
206

Perpetual preferred stocks
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equity securities and mutual   funds
 
3

 
598

 
5

 
—

 
—

 
598

 
5

Total available for sale
 
147

 
$
1,534,539

 
$
6,136

 
$
60,145

 
$
2,516

 
$
1,594,684

 
$
8,652

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

 
$
7,424

 
$
310

 
$
4,462

 
$
188

 
$
11,886

 
$
498

Alt-A loans
 
1

 
—

 
—

 
3,500

 
407

 
3,500

 
407

Jumbo-A loans
 
10

 
39,462

 
1,327

 
13,248

 
587

 
52,710

 
1,914


- 67 -




Temporarily Impaired Securities as of December 31, 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
 
53

 
$
92,768

 
$
483

 
$
—

 
$
—

 
$
92,768

 
$
483

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

 
—

 
—

 
—

 
—

 
—

 
—

Other debt securities
 
14

 
881

 
20

 
—

 
—

 
881

 
20

Total investment
 
67

 
$
93,649

 
$
503

 
$
—

 
$
—

 
$
93,649

 
$
503

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 

 
 

 
 

 
 

 
 

 


 


Municipal and other tax-exempt
 
38

 
$
6,150

 
$
11

 
$
26,108

 
$
153

 
$
32,258

 
$
164

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
12

 
161,828

 
1,161

 
—

 
—

 
161,828

 
1,161

FHLMC
 
—

 
—

 
—

 
—

 
—

 
—

 
—

GNMA
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total U.S. agencies
 
12

 
161,828

 
1,161

 
—

 
—

 
161,828

 
1,161

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
12

 
—

 
—

 
87,907

 
2,580

 
87,907

 
2,580

Jumbo-A loans
 
11

 
—

 
—

 
43,252

 
1,737

 
43,252

 
1,737

Total private issue
 
23

 
—

 
—

 
131,159

 
4,317

 
131,159

 
4,317

Total residential mortgage-backed securities
 
35

 
161,828

 
1,161

 
131,159

 
4,317

 
292,987

 
5,478

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

 
275,065

 
677

 
—

 
—

 
275,065

 
677

Other debt securities
 
3

 
4,899

 
—

 
—

 
—

 
4,899

 
—

Perpetual preferred stocks
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equity securities and mutual funds
 
22

 
202

 
1

 
2,161

 
277

 
2,363

 
278

Total available for sale
 
106

 
$
448,144

 
$
1,850

 
$
159,428

 
$
4,747

 
$
607,572

 
$
6,597

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
 
12

 
$
—

 
$
—

 
$
87,907

 
$
2,580

 
$
87,907

 
$
2,580

Jumbo-A loans
 
10

 
—

 
—

 
29,128

 
1,602

 
29,128

 
1,602



- 68 -



Temporarily Impaired Securities as of March 31, 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
 
2

 
$
619

 
$
7

 
$
—

 
$
—

 
$
619

 
$
7

U.S. Agency residential mortgage-backed securities – Other
 
2

 
45,668

 
538

 
—

 
—

 
45,668

 
538

Other debt securities
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total investment
 
4

 
$
46,287

 
$
545

 
$
—

 
$
—

 
$
46,287

 
$
545

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 

 
 

 
 

 
 

 
 

 


 


Municipal and other tax-exempt1
 
60

 
$
25,284

 
$
395

 
$
19,970

 
$
83

 
$
45,254

 
$
478

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
10

 
453,557

 
2,842

 
—

 
—

 
453,557

 
2,842

FHLMC
 
17

 
518,483

 
814

 
—

 
—

 
518,483

 
814

GNMA
 
8

 
175,409

 
410

 
—

 
—

 
175,409

 
410

Total U.S. agencies
 
35

 
1,147,449

 
4,066

 
—

 
—

 
1,147,449

 
4,066

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
16

 
—

 
—

 
120,187

 
19,955

 
120,187

 
19,955

Jumbo-A loans
 
33

 
3,050

 
94

 
203,276

 
24,483

 
206,326

 
24,577

Total private issue
 
49

 
3,050

 
94

 
323,463

 
44,438

 
326,513

 
44,532

Total residential mortgage-backed securities
 
84

 
1,150,499

 
4,160

 
323,463

 
44,438

 
1,473,962

 
48,598

Perpetual preferred stocks
 
1

 
1,941

 
9

 
—

 
—

 
1,941

 
9

Equity securities and mutual funds
 
3

 
2,642

 
328

 
—

 
—

 
2,642

 
328

Total available for sale
 
148

 
$
1,180,366

 
$
4,892

 
$
343,433

 
$
44,521

 
$
1,523,799

 
$
49,413

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:
Municipal and other tax-exempt
 
21

 
12,754

 
272

 
—

 
—

 
12,754

 
272

Alt-A loans
 
16

 
—

 
—

 
120,187

 
19,955

 
120,187

 
19,955

Jumbo-A loans
 
29

 
3,050

 
94

 
182,766

 
23,351

 
185,816

 
23,445


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 March 31, 2013, 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 March 31, 2013.


- 69 -



At March 31, 2013, 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
 
$
—

 
$
—

 
$
260,791

 
$
261,492

 
$
25,360

 
$
25,887

 
$
—

 
$
—

 
$
52,852

 
$
54,561

 
$
339,003

 
$
341,940

Mortgage-backed securities -- other
 
72,968

 
76,851

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
72,968

 
76,851

Other debt securities
 
—

 
—

 
167,463

 
186,460

 
600

 
600

 
—

 
—

 
9,237

 
9,343

 
177,300

 
196,403

Total investment securities
 
$
72,968

 
$
76,851

 
$
428,254

 
$
447,952

 
$
25,960

 
$
26,487

 
$
—

 
$
—

 
$
62,089

 
$
63,904

 
$
589,271

 
$
615,194

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
$
1,000

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,000

 
$
1,000

Municipal and other tax-exempt
 
—

 
—

 
50,341

 
52,023

 
20,743

 
20,091

 
12,384

 
11,887

 
1,363

 
1,446

 
84,831

 
85,447

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
5,036,888

 
5,161,971

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5,036,888

 
5,161,971

FHLMC
 
2,747,896

 
2,809,286

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,747,896

 
2,809,286

GNMA
 
1,044,086

 
1,060,870

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,044,086

 
1,060,870

Other
 
128,519

 
133,085

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
128,519

 
133,085

Total U.S. government agencies
 
8,957,389

 
9,165,212

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
8,957,389

 
9,165,212

Private issue:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
—

 
—

 
—

 
—

 
—

 
—

 
119,373

 
124,164

 
—

 
—

 
119,373

 
124,164

Jumbo-A loans
 
—

 
—

 
—

 
—

 
—

 
—

 
188,065

 
192,044

 
—

 
—

 
188,065

 
192,044

Total private issue
 
—

 
—

 
—

 
—

 
—

 
—

 
307,438

 
316,208

 
—

 
—

 
307,438

 
316,208

Total residential mortgage-backed securities
 
8,957,389

 
9,165,212

 
—

 
—

 
—

 
—

 
307,438

 
316,208

 
—

 
—

 
9,264,827

 
9,481,420

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
1,402,594

 
1,405,346

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,402,594

 
1,405,346

Other debt securities
 
—

 
—

 
5,400

 
5,193

 
30,250

 
30,886

 
—

 
—

 
—

 
—

 
35,650

 
36,079

Perpetual preferred stock
 
—

 
—

 
—

 
—

 
22,171

 
26,832

 
—

 
—

 
—

 
—

 
22,171

 
26,832

Equity securities and mutual funds
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
19,452

 
23,021

 
19,452

 
23,021

Total available for sale securities
 
$
10,360,983

 
$
10,571,558

 
$
55,741

 
$
57,216

 
$
73,164

 
$
77,809

 
$
319,822

 
$
328,095

 
$
20,815

 
$
24,467

 
$
10,830,525

 
$
11,059,145

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.

- 70 -




At March 31, 2013, the entire portfolio of privately issued residential mortgage-backed securities was rated below investment grade. The gross unrealized loss on these securities totaled $2.5 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 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:

 
March 31,
2013
 
December 31,
2012
 
March 31,
2012
 
 
 
 
 
 
Unemployment rate
Increasing to 8% over the next 12 months and remain at 8% thereafter
 
Increasing to 8.5% over the next 12 months, dropping to 8% over the following 21 months and holding at 8% thereafter.
 
Increasing to 9.5% over the next 12 months, dropping to 8% over the following 21 months and holding at 8% thereafter.
Housing price appreciation/depreciation
Starting with current depreciated housing prices based on information from derived from the FHFA1, increasing 2% over the next 12 months, then flat for the following 12 months and then growing at 2% per year thereafter.
 
Starting with current depreciated housing prices based on information from derived from the FHFA1, decreasing 2% over the next 12 months, then flat for the following 12 months and then growing at 2% per year thereafter.
 
Starting with current depreciated housing prices based on information from derived from the FHFA1, decreasing 6% over the next 12 months and then growing at 2% per year thereafter.
Estimated liquidation costs
Reflect actual historical liquidations costs observed on Jumbo and Alt-A residential mortgage loans in securities owned by the Company.
 
Reflect actual historical liquidations costs observed on Jumbo and Alt-A residential mortgage loans in securities owned by the Company.
 
Reflect actual historical liquidations costs observed on Jumbo and Alt-A residential mortgage loans in 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.
 
Estimated cash flows were discounted at rates that range from 2.00% to 6.25% based on our current expected yields.
 
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 increased 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 is 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 $247 thousand of additional credit loss impairments in earnings during the three months ended March 31, 2013.

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):

- 71 -



 
 
 
 
 
 
 
 
Credit Losses Recognized
 
 
 
 
 
 
 
 
Three months ended
 
 
 
 
 
 
 
 
 
 
March 31, 2013
 
Life-to-date
 
 
Number of Securities
 
Amortized Cost
 
Fair Value
 
Number of
Securities
 
Amount
 
Number of Securities
 
Amount
Alt-A
 
16

 
$
119,373

 
$
124,164

 
3

 
$
247

 
16

 
$
48,436

Jumbo-A
 
33

 
188,065

 
192,044

 
—

 
—

 
31

 
23,452

Total
 
49

 
$
307,438

 
$
316,208

 
3

 
$
247

 
47

 
$
71,888


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 March 31, 2013.

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
 
 
March 31,
 
 
2013
 
2012
Balance of credit-related OTTI recognized on available for sale debt, beginning of period
 
$
75,228

 
$
76,131

Additions for credit-related OTTI not previously recognized
 
—

 
113

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
 
247

 
3,609

Sales
 
—

 
(7,796
)
Balance of credit-related OTTI recognized on available for sale debt securities, end of period
 
$
75,475

 
$
72,057

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):
 
 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
 
 
Fair Value
 
Net Unrealized Gain
 
Fair Value
 
Net Unrealized Gain
 
Fair
Value
 
Net Unrealized Gain
U.S. agency residential mortgage-backed securities
 
$
208,900

 
$
726

 
$
257,040

 
$
3,314

 
$
322,180

 
$
1,593

Corporate debt securities
 
—

 
—

 
26,486

 
1,409

 
25,772

 
678

Other securities
 
1,292

 
46

 
770

 
47

 
—

 
—

Total
 
$
210,192

 
$
772

 
$
284,296

 
$
4,770

 
$
347,952

 
$
2,271


- 72 -



(3) Derivatives
 
Derivative instruments may be used by the Company as part of its interest rate risk management programs or may be offered to customers. All derivative instruments are carried at fair value and changes in fair value are reported in earnings as they occur. Credit risk is also considered in determining fair value.

When bilateral netting agreements or similar arrangements 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 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. In addition, derivative contacts executed with customers under Customer Risk Management Programs may be secured by non-cash collateral in conjunction with a credit agreement with that customer. Access to collateral, in the event of default is reasonably assured. As of March 31, 2013, a decrease in BOK Financial's credit rating to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $34 million.
 
None of these derivative contracts have been designated as hedging instruments.

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, and foreign exchange rates, or to take positions in derivative contracts. Customers may also manage interest rate risk through interest rates swaps used by borrowers to modify interest rate terms of their loans or to be announced securities used by mortgage banking customers to hedge their loan production. 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. As of March 31, 2013, BOK Financial had interest rate swaps with a notional value of $47 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.



- 73 -



The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at March 31, 2013 (in thousands):
 
 
Assets
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
12,428,736

 
$
59,599

 
$
(21,727
)
 
$
37,872

 
$
—

 
$
37,872

Interest rate swaps
 
1,380,439

 
65,654

 
—

 
65,654

 
—

 
65,654

Energy contracts
 
1,415,266

 
62,426

 
(35,440
)
 
26,986

 
(1,622
)
 
25,364

Agricultural contracts
 
167,652

 
4,174

 
(3,444
)
 
730

 
—

 
730

Foreign exchange contracts
 
176,617

 
176,617

 
—

 
176,617

 
—

 
176,617

Equity option contracts
 
212,147

 
14,054

 
—

 
14,054

 
—

 
14,054

Total customer risk management programs
 
15,780,857

 
382,524

 
(60,611
)
 
321,913

 
(1,622
)
 
320,291

Interest rate risk management programs
 
22,000

 
182

 
—

 
182

 
—

 
182

Total derivative contracts
 
$
15,802,857

 
$
382,706

 
$
(60,611
)
 
$
322,095

 
$
(1,622
)
 
$
320,473

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional¹
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
12,827,390

 
$
56,565

 
$
(21,727
)
 
$
34,838

 
$
(21,657
)
 
$
13,181

Interest rate swaps
 
1,380,439

 
66,149

 
—

 
66,149

 
(35,127
)
 
31,022

Energy contracts
 
1,388,495

 
62,185

 
(35,440
)
 
26,745

 
(10,433
)
 
16,312

Agricultural contracts
 
167,642

 
4,157

 
(3,444
)
 
713

 
—

 
713

Foreign exchange contracts
 
176,170

 
176,170

 
—

 
176,170

 
—

 
176,170

Equity option contracts
 
212,147

 
14,054

 
—

 
14,054

 
—

 
14,054

Total customer risk management programs
 
16,152,283

 
379,280

 
(60,611
)
 
318,669

 
(67,217
)
 
251,452

Interest rate risk management programs
 
25,000

 
384

 
—

 
384

 
—

 
384

Total derivative contracts
 
$
16,177,283

 
$
379,664

 
$
(60,611
)
 
$
319,053

 
$
(67,217
)
 
$
251,836

1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.



- 74 -



The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at December 31, 2012 (in thousands):

 
 
Assets
 
 
Notional
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
12,850,805

 
$
46,113

 
$
(15,656
)
 
$
30,457

 
$
—

 
$
30,457

Interest rate swaps
 
1,319,827

 
72,201

 
—

 
72,201

 
—

 
72,201

Energy contracts
 
1,346,780

 
82,349

 
(44,485
)
 
37,864

 
(3,464
)
 
34,400

Agricultural contracts
 
212,434

 
3,638

 
(3,164
)
 
474

 
—

 
474

Foreign exchange contracts
 
180,318

 
180,318

 
—

 
180,318

 
—

 
180,318

Equity option contracts
 
211,941

 
12,593

 
—

 
12,593

 
—

 
12,593

Total customer risk management programs
 
16,122,105

 
397,212

 
(63,305
)
 
333,907

 
(3,464
)
 
330,443

Interest rate risk management programs
 
66,000

 
7,663

 
—

 
7,663

 
—

 
7,663

Total derivative contracts
 
$
16,188,105

 
$
404,875

 
$
(63,305
)
 
$
341,570

 
$
(3,464
)
 
$
338,106

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
13,239,078

 
$
43,064

 
$
(15,656
)
 
$
27,408

 
$
(15,467
)
 
$
11,941

Interest rate swaps
 
1,319,827

 
72,724

 
—

 
72,724

 
(31,945
)
 
40,779

Energy contracts
 
1,334,349

 
83,654

 
(44,485
)
 
39,169

 
(1,769
)
 
37,400

Agricultural contracts
 
212,135

 
3,571

 
(3,164
)
 
407

 
(188
)
 
219

Foreign exchange contracts
 
179,852

 
179,852

 
—

 
179,852

 
—

 
179,852

Equity option contracts
 
211,941

 
12,593

 
—

 
12,593

 
—

 
12,593

Total customer risk management programs
 
16,497,182

 
395,458

 
(63,305
)
 
332,153

 
(49,369
)
 
282,784

Interest rate risk management programs
 
50,000

 
805

 
—

 
805

 
—

 
805

Total derivative contracts
 
$
16,547,182

 
$
396,263

 
$
(63,305
)
 
$
332,958

 
$
(49,369
)
 
$
283,589

1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.





- 75 -



The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at March 31, 2012 (in thousands):
 
 
Assets
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
11,186,193

 
$
44,182

 
$
(27,470
)
 
$
16,712

 
$
(3,282
)
 
$
13,430

Interest rate swaps
 
1,246,861

 
73,451

 
—

 
73,451

 
—

 
73,451

Energy contracts
 
1,846,932

 
180,548

 
(89,185
)
 
91,363

 
(8,578
)
 
82,785

Agricultural contracts
 
116,575

 
5,664

 
(4,604
)
 
1,060

 
—

 
1,060

Foreign exchange contracts
 
190,306

 
190,306

 
—

 
190,306

 
—

 
190,306

Equity option contracts
 
217,169

 
18,244

 
—

 
18,244

 
—

 
18,244

Total customer risk management programs
 
14,804,036

 
512,395

 
(121,259
)
 
391,136

 
(11,860
)
 
379,276

Interest rate risk management programs
 
69,000

 
5,720

 
—

 
5,720

 
—

 
5,720

Total derivative contracts
 
$
14,873,036

 
$
518,115

 
$
(121,259
)
 
$
396,856

 
$
(11,860
)
 
$
384,996

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
10,895,737

 
$
41,082

 
$
(27,470
)
 
$
13,612

 
$
—

 
$
13,612

Interest rate swaps
 
1,246,861

 
74,036

 
—

 
74,036

 
(33,070
)
 
40,966

Energy contracts
 
1,899,205

 
187,991

 
(89,185
)
 
98,806

 
(58,292
)
 
40,514

Agricultural contracts
 
122,979

 
5,597

 
(4,604
)
 
993

 
—

 
993

Foreign exchange contracts
 
189,926

 
189,926

 
—

 
189,926

 
—

 
189,926

Equity option contracts
 
217,169

 
18,244

 
—

 
18,244

 
—

 
18,244

Total customer risk management programs
 
14,571,877

 
516,876

 
(121,259
)
 
395,617

 
(91,362
)
 
304,255

Interest rate risk management programs
 
72,000

 
1,035

 
—

 
1,035

 
—

 
1,035

Total derivative contracts
 
$
14,643,877

 
$
517,911

 
$
(121,259
)
 
$
396,652

 
$
(91,362
)
 
$
305,290

1 
Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.







- 76 -



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
 
 
March 31, 2013
 
March 31, 2012
 
 
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
 
$
(15
)
 
$
—

 
$
1,122

 
$
—

Interest rate swaps
 
767

 
—

 
912

 
—

Energy contracts
 
1,783

 
—

 
2,310

 
—

Agricultural contracts
 
108

 
—

 
91

 
—

Foreign exchange contracts
 
188

 
—

 
206

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
2,831

 
—

 
4,641

 
—

Interest Rate Risk Management Programs
 
—

 
6,118

 
—

 
(2,473
)
Total Derivative Contracts
 
$
2,831

 
$
6,118

 
$
4,641

 
$
(2,473
)

Net interest revenue was not significantly impacted by the settlement of amounts receivable or payable on interest rate swaps for the three months ended March 31, 2013 and 2012, respectively. 
(4) Loans and Allowances for Credit Losses

Loans

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. Accounting policies for all loans, excluding residential mortgage loans guaranteed by U.S. government agencies, are as follows.

Interest is accrued at the applicable interest rate on the principal amount outstanding. Loans are placed on nonaccruing status when, in the opinion of management, full collection of principal or interest is uncertain. Internally risk graded loans are individually evaluated for nonaccruing status quarterly. Non-risk graded loans are generally placed on nonaccruing status when more than 90 days past due or within 60 days of being notified of the borrower bankruptcy filing. Interest previously accrued but not collected is charged against interest income when the loan is placed on nonaccruing status. Payments on nonaccruing loans are applied to principal or recognized 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.

Loans to borrowers experiencing financial difficulties may be modified in troubled debt restructurings ("TDRs"). All TDRs are classified as nonaccruing. Modifications generally consist of extension of payment terms or interest rate concessions and may result either voluntarily through negotiations with the borrower or involuntarily through court order. Generally, principal and accrued but unpaid interest is not voluntarily forgiven.

Performing loans may be renewed under then current collateral value, debt service ratio and other underwriting standards. Nonaccruing loans may be renewed and will remain classified as nonaccruing. 

All loans are charged off when the loan balance or a portion of the loan balance is no longer supported by the paying capacity of the borrower or when the required cash flow is reduced in a TDR. The charge-off amount is determined through an

- 77 -



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 evaluated quarterly and charge-offs are taken in the quarter in which the loss is identified. Non-risk graded loans that are past due between 60 and 180 days, based on the loan product type, are charged off. Loans to borrowers whose personal obligation has been discharged through Chapter 7 bankruptcy proceedings are charged off within 60 days of notice of the bankruptcy filing, regardless of payment status.

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.

Qualifying residential mortgage loans guaranteed by U.S. government agencies have been sold into GNMA pools. Under certain performance conditions specified in government programs, the Company may have the right, but not the obligation to repurchase loans from GNMA pools. These loans no longer qualify for sale accounting and are recognized in the Consolidated Balance Sheet. Guaranteed loans are considered impaired because we do not expect to receive all principal and interest based on the loan's contractual terms. The principal balance continues to be guaranteed; however, interest accrues at a curtailed rate as specified in the programs. The carrying value of these loans is reduced based on an estimate of the expected cash flows discounted at the original note rate plus a liquidity spread. Guaranteed loans may be modified in TDRs in accordance with U.S. government agency guidelines. Interest continues to accrue based on the modified rate. Guaranteed loans may either be resold into GNMA pools after a performance period specified by the programs or foreclosed and conveyed to the guarantors.

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 monitoring and assessing credit risk. 

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

 
 
March 31, 2013
 
December 31, 2012
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
4,104,169

 
$
3,294,275

 
$
19,861

 
$
7,418,305

 
$
4,158,548

 
$
3,458,897

 
$
24,467

 
$
7,641,912

Commercial real estate
 
889,397

 
1,330,588

 
65,175

 
2,285,160

 
845,023

 
1,323,350

 
60,626

 
2,228,999

Residential mortgage
 
1,732,058

 
234,966

 
45,426

 
2,012,450

 
1,747,038

 
251,394

 
46,608

 
2,045,040

Consumer
 
154,079

 
221,399

 
2,171

 
377,649

 
175,412

 
217,384

 
2,709

 
395,505

Total
 
$
6,879,703

 
$
5,081,228

 
$
132,633

 
$
12,093,564

 
$
6,926,021

 
$
5,251,025

 
$
134,410

 
$
12,311,456

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
4,229

 
 

 
 

 
 

 
$
3,925

 
 
March 31, 2012
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
3,491,029

 
$
3,390,806

 
$
61,750

 
$
6,943,585

Commercial real estate
 
857,059

 
1,308,765

 
86,475

 
2,252,299

Residential mortgage
 
1,662,585

 
278,879

 
27,462

 
1,968,926

Consumer
 
213,796

 
191,166

 
7,672

 
412,634

Total
 
$
6,224,469

 
$
5,169,616

 
$
183,359

 
$
11,577,444

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
6,140

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

At March 31, 2013, $5.1 billion or 42% of the total loan portfolio is to businesses and individuals attributed to the Oklahoma market and $3.9 billion or 32% of our total loan portfolio is to businesses and individuals attributed to the Texas market. These geographic concentrations subject the loan portfolio to the general economic conditions within these areas.


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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 March 31, 2013, commercial loans attributed to the Oklahoma market totaled $2.9 billion or 38% of the commercial loan portfolio segment and commercial loans attributed to the Texas market totaled $2.7 billion or 37% 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 19% of total loans at March 31, 2013, including $2.1 billion of outstanding loans to energy producers. Approximately 58% of committed production loans are secured by properties primarily producing oil and 42% are secured by properties producing natural gas. The services loan class totaled $2.1 billion at March 31, 2013. Approximately $1.2 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.

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 March 31, 2013, 35% of commercial real estate loans are secured by properties primarily located in the Dallas and Houston areas of Texas. An additional 25% 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 March 31, 2013, residential mortgage loans included $162 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.


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Home equity loans totaled $758 million at March 31, 2013. Approximately, 31% of the home equity portfolio is comprised of junior lien loans and 69% of the home equity loan portfolio is comprised of first lien loans. Junior lien loans are distributed 78% to amortizing term loans and 22% 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. Revolving loans have a 5 year revolving period followed by a 15 year term of amortizing repayments. Interest-only home equity loans may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term, subject to an update of certain credit information.

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 March 31, 2013, outstanding commitments totaled $6.9 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 March 31, 2013, outstanding standby letters of credit totaled $491 million. Commercial letters of credit are used to facilitate customer trade transactions with the drafts being drawn when the underlying transaction is consummated. At March 31, 2013, outstanding commercial letters of credit totaled $8 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 for 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 (collectively "allowance for 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 months ended March 31, 2013.

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. 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. Non-risk graded loans are identified as impaired based on performance status. Generally, non-risk graded loans 90 days or more past due or modified in a TDR or in bankruptcy are considered to be impaired.

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 generally not adjusted by the Company. Updated appraisals are obtained at least annually or more frequently if market conditions indicate collateral values have declined.

- 80 -



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. Historical statistics may be used as a practical way to estimate impairment in limited situations, such as when a collateral dependent loan is identified as impaired at the end of a reporting period, 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 may be volatile.

General allowances for unimpaired loans are based on estimated loss rates by loan class. The gross loss rate for each loan class is determined by the greater of the current gross loss rate based on the most recent twelve months or a ten-year gross loss rate. Recoveries are not directly considered in the estimation of loss rates. Recoveries generally do not follow predictable patterns and are not received until well after the charge-off date as a result of protracted legal actions. For risk graded loans, 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 credit risk in each loan class is increasing or decreasing. Loss rates are adjusted upward or downward in proportion to changes in average risk grading. General allowances for unimpaired loans also consider inherent risks identified for each loan class. Inherent risks consider loss rates that most appropriately represent the current credit cycle and other factors attributable to specific loan classes which have not yet been represented in the gross loss rates or risk grading. These factors include changes in commodity prices or engineering imprecision, which may affect 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 loans products.

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

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.

A provision for credit losses is charged against or credited to earnings in amounts necessary to maintain an appropriate allowance for credit losses. Recoveries of loans previously charged off are added to the allowance when received.

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 March 31, 2013 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Consumer
 
Nonspecific allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
65,280

 
$
54,884

 
$
41,703

 
$
9,453

 
$
44,187

 
$
215,507

Provision for loan losses
 
(1,956
)
 
(2,680
)
 
(274
)
 
(905
)
 
(1,375
)
 
(7,190
)
Loans charged off
 
(298
)
 
(4,800
)
 
(1,779
)
 
(2,032
)
 
—

 
(8,909
)
Recoveries
 
3,393

 
1,124

 
572

 
1,468

 
—

 
6,557

Ending balance
 
$
66,419

 
$
48,528

 
$
40,222

 
$
7,984

 
$
42,812

 
$
205,965

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
475

 
$
1,353

 
$
78

 
$
9

 
$
—

 
$
1,915

Provision for off-balance sheet credit losses
 
(70
)
 
(735
)
 
(6
)
 
1

 
—

 
(810
)
Ending balance
 
$
405

 
$
618

 
$
72

 
$
10

 
$
—

 
$
1,105

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
(2,026
)
 
$
(3,415
)
 
$
(280
)
 
$
(904
)
 
$
(1,375
)
 
$
(8,000
)





- 81 -



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 March 31, 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

 
$
39,207

 
$
17,447

 
$
46,350

 
$
253,481

Provision for loan losses
 
3,517

 
1,121

 
(3,119
)
 
(306
)
 
(2,000
)
 
(787
)
Loans charged off
 
(2,934
)
 
(6,725
)
 
(1,786
)
 
(2,229
)
 
—

 
(13,674
)
Recoveries
 
1,946

 
1,312

 
411

 
1,520

 
—

 
5,189

Ending balance
 
$
85,972

 
$
62,742

 
$
34,713

 
$
16,432

 
$
44,350

 
$
244,209

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
7,906

 
$
1,250

 
$
91

 
$
14

 
$
—

 
$
9,261

Provision for off-balance sheet credit losses
 
456

 
325

 
(9
)
 
15

 
—

 
787

Ending balance
 
$
8,362

 
$
1,575

 
$
82

 
$
29

 
$
—

 
$
10,048

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
3,973

 
$
1,446

 
$
(3,128
)
 
$
(291
)
 
$
(2,000
)
 
$
—



The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at March 31, 2013 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
 
$
7,398,444

 
$
66,071

 
$
19,861

 
$
348

 
$
7,418,305

 
$
66,419

Commercial real estate
 
2,219,985

 
48,270

 
65,175

 
258

 
2,285,160

 
48,528

Residential mortgage
 
1,967,238

 
39,923

 
45,212

 
299

 
2,012,450

 
40,222

Consumer
 
375,477

 
7,862

 
2,172

 
122

 
377,649

 
7,984

Total
 
11,961,144

 
162,126

 
132,420

 
1,027

 
12,093,564

 
163,153

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
42,812

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11,961,144

 
$
162,126

 
$
132,420

 
$
1,027

 
$
12,093,564

 
$
205,965




- 82 -



The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at December 31, 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
 
$
7,617,445

 
$
65,050

 
$
24,467

 
$
230

 
$
7,641,912

 
$
65,280

Commercial real estate
 
2,168,373

 
51,775

 
60,626

 
3,109

 
2,228,999

 
54,884

Residential mortgage
 
1,998,432

 
40,934

 
46,608

 
769

 
2,045,040

 
41,703

Consumer
 
392,796

 
9,328

 
2,709

 
125

 
395,505

 
9,453

Total
 
12,177,046

 
167,087

 
134,410

 
4,233

 
12,311,456

 
171,320

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
44,187

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
12,177,046

 
$
167,087

 
$
134,410

 
$
4,233

 
$
12,311,456

 
$
215,507



The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at March 31, 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
 
$
6,881,908

 
$
85,508

 
$
61,677

 
$
464

 
$
6,943,585

 
$
85,972

Commercial real estate
 
2,165,824

 
61,098

 
86,475

 
1,644

 
2,252,299

 
62,742

Residential mortgage
 
1,961,414

 
34,484

 
7,512

 
229

 
1,968,926

 
34,713

Consumer
 
407,863

 
16,432

 
4,771

 
—

 
412,634

 
16,432

Total
 
11,417,009

 
197,522

 
160,435

 
2,337

 
11,577,444

 
199,859

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
44,350

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11,417,009

 
$
197,522

 
$
160,435

 
$
2,337

 
$
11,577,444

 
$
244,209


- 83 -



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 March 31, 2013 is as follows (in thousands):

 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
7,400,848

 
$
65,320

 
$
17,457

 
$
1,099

 
$
7,418,305

 
$
66,419

Commercial real estate
 
2,285,160

 
48,528

 
—

 
—

 
2,285,160

 
48,528

Residential mortgage
 
247,814

 
4,600

 
1,764,636

 
35,622

 
2,012,450

 
40,222

Consumer
 
237,152

 
3,163

 
140,497

 
4,821

 
377,649

 
7,984

Total
 
10,170,974

 
121,611

 
1,922,590

 
41,542

 
12,093,564

 
163,153

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
42,812

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,170,974

 
$
121,611

 
$
1,922,590

 
$
41,542

 
$
12,093,564

 
$
205,965

 
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, 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
 
$
7,624,442

 
$
64,181

 
$
17,470

 
$
1,099

 
$
7,641,912

 
$
65,280

Commercial real estate
 
2,228,999

 
54,884

 
—

 
—

 
2,228,999

 
54,884

Residential mortgage
 
265,503

 
5,270

 
1,779,537

 
36,433

 
2,045,040

 
41,703

Consumer
 
231,376

 
2,987

 
164,129

 
6,466

 
395,505

 
9,453

Total
 
10,350,320

 
127,322

 
1,961,136

 
43,998

 
12,311,456

 
171,320

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
44,187

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,350,320

 
$
127,322

 
$
1,961,136

 
$
43,998

 
$
12,311,456

 
$
215,507



- 84 -



The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at March 31, 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
 
$
6,926,003

 
$
84,853

 
$
17,582

 
$
1,119

 
$
6,943,585

 
$
85,972

Commercial real estate
 
2,252,299

 
62,742

 
—

 
—

 
2,252,299

 
62,742

Residential mortgage
 
298,139

 
7,482

 
1,670,787

 
34,146

 
1,968,926

 
41,628

Consumer
 
209,699

 
2,676

 
202,935

 
6,841

 
412,634

 
9,517

Total
 
9,686,140

 
157,753

 
1,891,304

 
42,106

 
11,577,444

 
199,859

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
44,350

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
9,686,140

 
$
157,753

 
$
1,891,304

 
$
42,106

 
$
11,577,444

 
$
244,209


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 nonaccruing status. Known information does, however, cause concern as to the borrowers’ continued compliance with current repayment terms. Nonaccruing 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.


- 85 -



The following table summarizes the Company’s loan portfolio at March 31, 2013 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
Potential Problem
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,342,500

 
$
4,555

 
$
2,377

 
$
—

 
$
—

 
$
2,349,432

Services
 
2,074,198

 
31,127

 
9,474

 
—

 
—

 
2,114,799

Wholesale/retail
 
1,071,954

 
10,807

 
2,239

 
—

 
—

 
1,085,000

Manufacturing
 
387,346

 
10,624

 
1,848

 
—

 
—

 
399,818

Healthcare
 
1,078,550

 
124

 
2,962

 
—

 
—

 
1,081,636

Integrated food services
 
173,800

 
—

 
—

 
—

 
—

 
173,800

Other commercial and industrial
 
190,758

 
4,716

 
889

 
17,385

 
72

 
213,820

Total commercial
 
7,319,106

 
61,953

 
19,789

 
17,385

 
72

 
7,418,305

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
194,944

 
19,423

 
23,462

 
—

 
—

 
237,829

Retail
 
572,761

 
2,597

 
8,921

 
—

 
—

 
584,279

Office
 
401,070

 
6,723

 
12,851

 
—

 
—

 
420,644

Multifamily
 
453,822

 
2,151

 
4,501

 
—

 
—

 
460,474

Industrial
 
234,590

 
261

 
2,198

 
—

 
—

 
237,049

Other commercial real estate
 
321,304

 
10,339

 
13,242

 
—

 
—

 
344,885

Total commercial real estate
 
2,178,491

 
41,494

 
65,175

 
—

 
—

 
2,285,160

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
230,595

 
6,555

 
10,664

 
816,272

 
27,489

 
1,091,575

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
162,205

 
214

 
162,419

Home equity
 
—

 
—

 
—

 
751,397

 
7,059

 
758,456

Total residential mortgage
 
230,595

 
6,555

 
10,664

 
1,729,874

 
34,762

 
2,012,450

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
23,049

 
1,319

 
24,368

Other consumer
 
235,495

 
1,249

 
408

 
115,685

 
444

 
353,281

Total consumer
 
235,495

 
1,249

 
408

 
138,734

 
1,763

 
377,649

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
9,963,687

 
$
111,251

 
$
96,036

 
$
1,885,993

 
$
36,597

 
$
12,093,564



- 86 -



The following table summarizes the Company’s loan portfolio at December 31, 2012 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
Potential Problem
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,448,954

 
$
9,245

 
$
2,460

 
$
—

 
$
—

 
$
2,460,659

Services
 
2,119,734

 
32,362

 
12,090

 
—

 
—

 
2,164,186

Wholesale/retail
 
1,093,413

 
9,949

 
3,077

 
—

 
—

 
1,106,439

Manufacturing
 
337,132

 
9,345

 
2,007

 
—

 
—

 
348,484

Healthcare
 
1,077,773

 
467

 
3,166

 
—

 
—

 
1,081,406

Integrated food services
 
190,422

 
—

 
684

 
—

 
—

 
191,106

Other commercial and industrial
 
266,329

 
4,914

 
919

 
17,406

 
64

 
289,632

Total commercial
 
7,533,757

 
66,282

 
24,403

 
17,406

 
64

 
7,641,912

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
204,010

 
22,952

 
26,131

 
—

 
—

 
253,093

Retail
 
508,342

 
6,327

 
8,117

 
—

 
—

 
522,786

Office
 
405,763

 
15,280

 
6,829

 
—

 
—

 
427,872

Multifamily
 
393,566

 
6,624

 
2,706

 
—

 
—

 
402,896

Industrial
 
241,761

 
265

 
3,968

 
—

 
—

 
245,994

Other commercial real estate
 
351,663

 
11,820

 
12,875

 
—

 
—

 
376,358

Total commercial real estate
 
2,105,105

 
63,268

 
60,626

 
—

 
—

 
2,228,999

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
242,823

 
10,271

 
12,409

 
831,008

 
27,454

 
1,123,965

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
159,955

 
489

 
160,444

Home equity
 
—

 
—

 
—

 
754,375

 
6,256

 
760,631

Total residential mortgage
 
242,823

 
10,271

 
12,409

 
1,745,338

 
34,199

 
2,045,040

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
33,157

 
1,578

 
34,735

Other consumer
 
229,570

 
1,091

 
715

 
128,978

 
416

 
360,770

Total consumer
 
229,570

 
1,091

 
715

 
162,135

 
1,994

 
395,505

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,111,255

 
$
140,912

 
$
98,153

 
$
1,924,879

 
$
36,257

 
$
12,311,456


- 87 -



The following table summarizes the Company’s loan portfolio at March 31, 2012 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
Potential Problem
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,142,978

 
$
8,987

 
$
336

 
$
—

 
$
—

 
$
2,152,301

Services
 
1,899,082

 
39,049

 
12,890

 
—

 
—

 
1,951,021

Wholesale/retail
 
958,682

 
23,104

 
15,388

 
—

 
—

 
997,174

Manufacturing
 
308,187

 
10,117

 
23,402

 
—

 
—

 
341,706

Healthcare
 
974,209

 
1,006

 
7,946

 
—

 
—

 
983,161

Integrated food services
 
203,351

 
750

 
—

 
—

 
—

 
204,101

Other commercial and industrial
 
294,818

 
6

 
1,715

 
17,509

 
73

 
314,121

Total commercial
 
6,781,307

 
83,019

 
61,677

 
17,509

 
73

 
6,943,585

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
234,687

 
28,438

 
52,416

 
—

 
—

 
315,541

Retail
 
463,143

 
8,639

 
6,193

 
—

 
—

 
477,975

Office
 
357,006

 
12,437

 
10,733

 
—

 
—

 
380,176

Multifamily
 
420,156

 
9,400

 
3,414

 
—

 
—

 
432,970

Industrial
 
286,642

 
277

 
—

 
—

 
—

 
286,919

Other commercial real estate
 
331,028

 
13,971

 
13,719

 
—

 
—

 
358,718

Total commercial real estate
 
2,092,662

 
73,162

 
86,475

 
—

 
—

 
2,252,299

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
276,892

 
13,735

 
7,512

 
824,990

 
15,310

 
1,138,439

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
180,862

 
—

 
180,862

Home equity
 
—

 
—

 
—

 
644,985

 
4,640

 
649,625

Total residential mortgage
 
276,892

 
13,735

 
7,512

 
1,650,837

 
19,950

 
1,968,926

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
78,916

 
2,608

 
81,524

Other consumer
 
202,292

 
2,636

 
4,771

 
121,118

 
293

 
331,110

Total consumer
 
202,292

 
2,636

 
4,771

 
200,034

 
2,901

 
412,634

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
9,353,153

 
$
172,552

 
$
160,435

 
$
1,868,380

 
$
22,924

 
$
11,577,444




- 88 -



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. This includes all nonaccruing loans, all loans modified in a TDR and all loans repurchased from GNMA pools.

A summary of impaired loans follows (in thousands):
 
As of
 
For the
 
March 31, 2013
 
Three Months Ended
 
 
 
Recorded Investment
 
 
 
March 31, 2013
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
 
Average Recorded
Investment
 
Interest Income Recognized
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
2,377

 
$
2,377

 
$
2,377

 
$
—

 
$
—

 
$
2,419

 
$
—

Services
12,592

 
9,474

 
8,502

 
972

 
292

 
10,782

 
—

Wholesale/retail
2,545

 
2,239

 
2,187

 
52

 
13

 
2,658

 
—

Manufacturing
2,140

 
1,848

 
1,848

 
—

 
—

 
1,928

 
—

Healthcare
3,649

 
2,962

 
2,919

 
43

 
43

 
3,064

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
342

 
—

Other commercial and industrial
8,461

 
961

 
961

 
—

 
—

 
972

 
—

Total commercial
31,764

 
19,861

 
18,794

 
1,067

 
348

 
22,165

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
28,913

 
23,462

 
22,967

 
495

 
155

 
24,797

 
—

Retail
11,375

 
8,921

 
8,921

 
—

 
—

 
8,519

 
—

Office
16,169

 
12,851

 
12,617

 
234

 
30

 
9,840

 
—

Multifamily
4,501

 
4,501

 
4,501

 
—

 
—

 
3,604

 
—

Industrial
3,875

 
2,198

 
2,198

 
—

 
—

 
3,083

 
—

Other real estate loans
15,546

 
13,242

 
12,642

 
600

 
73

 
13,059

 
—

Total commercial real estate
80,379

 
65,175

 
63,846

 
1,329

 
258

 
62,902

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 

 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
48,613

 
38,153

 
37,605

 
548

 
299

 
39,008

 
318

Permanent mortgage guaranteed by U.S. government agencies1
171,887

 
162,419

 
162,419

 
—

 
—

 
161,432

 
1,276

Home equity
7,059

 
7,059

 
7,059

 
—

 
—

 
6,658

 
—

Total residential mortgage
227,559

 
207,631

 
207,083

 
548

 
299

 
207,098

 
1,594

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 

 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
1,319

 
1,319

 
1,319

 
—

 
—

 
1,449

 
—

Other consumer
918

 
852

 
730

 
122

 
122

 
992

 
—

Total consumer
2,237

 
2,171

 
2,049

 
122

 
122

 
2,441

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
341,939

 
$
294,838

 
$
291,772

 
$
3,066

 
$
1,027

 
$
294,606

 
$
1,594

1 
All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At March 31, 2013, $214 thousand of these loans were nonaccruing and $162 million were accruing based on the guarantee by U.S. government agencies.

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


- 89 -



A summary of impaired loans at December 31, 2012 follows (in thousands): 
 
 
 
 
Recorded Investment
 
 
 
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,460

 
$
2,460

 
$
2,460

 
$
—

 
$
—

Services
 
15,715

 
12,090

 
11,940

 
150

 
149

Wholesale/retail
 
9,186

 
3,077

 
3,016

 
61

 
15

Manufacturing
 
2,447

 
2,007

 
2,007

 
—

 
—

Healthcare
 
4,256

 
3,166

 
2,050

 
1,116

 
66

Integrated food services
 
684

 
684

 
684

 
—

 
—

Other commercial and industrial
 
8,482

 
983

 
983

 
—

 
—

Total commercial
 
43,230

 
24,467

 
23,140

 
1,327

 
230

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
44,721

 
26,131

 
25,575

 
556

 
155

Retail
 
9,797

 
8,117

 
8,117

 
—

 
—

Office
 
8,949

 
6,829

 
6,604

 
225

 
21

Multifamily
 
3,189

 
2,706

 
2,706

 
—

 
—

Industrial
 
3,968

 
3,968

 
—

 
3,968

 
2,290

Other real estate loans
 
15,377

 
12,875

 
10,049

 
2,826

 
643

Total commercial real estate
 
86,001

 
60,626

 
53,051

 
7,575

 
3,109

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
51,153

 
39,863

 
37,564

 
2,299

 
769

Permanent mortgage guaranteed by U.S. government agencies1
 
170,740

 
160,444

 
160,444

 
—

 
—

Home equity
 
6,256

 
6,256

 
6,256

 
—

 
—

Total residential mortgage
 
228,149

 
206,563

 
204,264

 
2,299

 
769

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
1,578

 
1,578

 
1,578

 
—

 
—

Other consumer
 
1,300

 
1,131

 
1,006

 
125

 
125

Total consumer
 
2,878

 
2,709

 
2,584

 
125

 
125

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
360,258

 
$
294,365

 
$
283,039

 
$
11,326

 
$
4,233

1 
All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At December 31, 2012, $489 thousand of these loans were nonaccruing and $160 million were accruing based on the guarantee by U.S. government agencies.


- 90 -



A summary of impaired loans at March 31, 2012 follows (in thousands): 
 
As of
 
For the
 
As of March 31, 2012
 
Three Months Ended
 
 
 
Recorded Investment
 
 
 
March 31, 2012
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
 
Average Recorded
Investment
 
Interest Income Recognized
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
336

 
$
336

 
$
336

 
$
—

 
$
—

 
$
336

 
$
—

Services
22,318

 
12,890

 
12,237

 
653

 
307

 
14,929

 
—

Wholesale/retail
19,085

 
15,388

 
15,300

 
88

 
22

 
18,284

 
—

Manufacturing
26,536

 
23,402

 
23,402

 
—

 
—

 
23,227

 
—

Healthcare
9,529

 
7,946

 
6,671

 
1,275

 
135

 
6,716

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
9,287

 
1,788

 
1,788

 
—

 
—

 
1,789

 
—

Total commercial
87,091

 
61,750

 
59,734

 
2,016

 
464

 
65,281

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 

Construction and land development
86,435

 
52,416

 
51,615

 
801

 
206

 
57,145

 
—

Retail
7,680

 
6,193

 
3,761

 
2,432

 
1,062

 
6,528

 
—

Office
13,888

 
10,733

 
10,508

 
225

 
21

 
11,095

 
—

Multifamily
3,414

 
3,414

 
3,414

 
—

 
—

 
3,464

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
16,273

 
13,719

 
11,104

 
2,615

 
355

 
14,603

 
—

Total commercial real estate
127,690

 
86,475

 
80,402

 
6,073

 
1,644

 
92,835

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 

Permanent mortgage
24,131

 
22,822

 
22,142

 
680

 
229

 
24,094

 
132

Permanent mortgage guaranteed by U.S. government agencies1
184,510

 
180,862

 
180,862

 
—

 
—

 
194,385

 
1,532

Home equity
4,640

 
4,640

 
4,640

 
—

 
—

 
4,521

 
—

Total residential mortgage
213,281

 
208,324

 
207,644

 
680

 
229

 
223,000

 
1,664

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 

Indirect automobile
2,608

 
2,608

 
2,608

 
—

 
—

 
2,401

 
—

Other consumer
5,695

 
5,064

 
5,064

 
—

 
—

 
3,193

 
—

Total consumer
8,303

 
7,672

 
7,672

 
—

 
—

 
5,594

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
436,365

 
$
364,221

 
$
355,452

 
$
8,769

 
$
2,337

 
$
386,710

 
$
1,664

1 
All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At March 31, 2012, all of these loans were accruing based on the guarantee by U.S. government agencies.

- 91 -



Troubled Debt Restructurings

A summary of troubled debt restructurings ("TDRs") by accruing status as of March 31, 2013 were as follows (in thousands):

 
 
As of March 31, 2013
 
Amounts Charged Off During the Three Months Ended March 31, 2013
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
 
2,441

 
1,195

 
1,246

 
292

 
—

Wholesale/retail
 
1,481

 
1,015

 
466

 
13

 
—

Manufacturing
 
—

 
—

 
—

 
—

 
—

Healthcare
 
—

 
—

 
—

 
—

 
—

Integrated food services
 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
856

 
163

 
693

 
—

 
—

Total commercial
 
4,778

 
2,373

 
2,405

 
305

 
—

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
12,770

 
2,479

 
10,291

 
76

 
—

Retail
 
6,139

 
2,359

 
3,780

 
—

 
627

Office
 
2,966

 
1,883

 
1,083

 
—

 
—

Multifamily
 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

Other real estate loans
 
4,889

 
3,281

 
1,608

 
—

 
—

Total commercial real estate
 
26,764

 
10,002

 
16,762

 
76

 
627

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
19,230

 
12,670

 
6,560

 
54

 
370

Home equity
 
1,976

 
1,844

 
132

 
—

 
—

Total residential mortgage
 
21,206

 
14,514

 
6,692

 
54

 
370

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
390

 
372

 
18

 
—

 
—

Other consumer
 
533

 
387

 
146

 
80

 
—

Total consumer
 
923

 
759

 
164

 
80

 
—

 
 
 
 
 
 
 
 
 
 
 
Total nonaccruing TDRs
 
$
53,671

 
$
27,648

 
$
26,023

 
$
515

 
$
997

 
 
 
 
 
 
 
 
 
 
 

- 92 -



 
 
As of March 31, 2013
 
Amounts Charged Off During the Three Months Ended March 31, 2013
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Accruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
—

 
—

 
—

 
—

 
—

Permanent mortgages guaranteed by U.S. government agencies
 
47,942

 
13,184

 
34,758

 
—

 
—

Total residential mortgage
 
47,942

 
13,184

 
34,758

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Total accruing TDRs
 
47,942

 
13,184

 
34,758

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Total TDRs
 
$
101,613

 
$
40,832

 
$
60,781

 
$
515

 
$
997



- 93 -



A summary of troubled debt restructurings by accruing status as of December 31, 2012 were as follows (in thousands):

 
 
As of
 
 
December 31, 2012
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
Energy
 
$
—

 
$
—

 
$
—

 
$
—

Services
 
2,492

 
2,099

 
393

 
45

Wholesale/retail
 
2,290

 
1,362

 
928

 
15

Manufacturing
 
—

 
—

 
—

 
—

Healthcare
 
64

 
64

 
—

 
—

Integrated food services
 
—

 
—

 
—

 
—

Other commercial and industrial
 
675

 
—

 
675

 
—

Total commercial
 
5,521

 
3,525

 
1,996

 
60

 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

Construction and land development
 
14,898

 
9,989

 
4,909

 
76

Retail
 
6,785

 
5,735

 
1,050

 
—

Office
 
3,899

 
1,920

 
1,979

 
—

Multifamily
 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

Other real estate loans
 
5,017

 
3,399

 
1,618

 
—

Total commercial real estate
 
30,599

 
21,043

 
9,556

 
76

 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

Permanent mortgage
 
20,490

 
12,214

 
8,276

 
54

Home equity
 
—

 
—

 
—

 
—

Total residential mortgage
 
20,490

 
12,214

 
8,276

 
54

 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

Indirect automobile
 
532

 
492

 
40

 
—

Other consumer
 
2,328

 
2,097

 
231

 
83

Total consumer
 
2,860

 
2,589

 
271

 
83

 
 
 
 
 
 
 
 
 
Total nonaccuring TDRs
 
$
59,470

 
$
39,371

 
$
20,099

 
$
273


- 94 -



 
 
As of
 
 
December 31, 2012
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
Permanent mortgage
 
—

 
—

 
—

 
—

Permanent mortgages guaranteed by U.S. government agencies
 
38,515

 
8,755

 
29,760

 
—

Total residential mortgage
 
38,515

 
8,755

 
29,760

 
—

 
 
 
 
 
 
 
 
 
Total accruing TDRs
 
38,515

 
8,755

 
29,760

 
—

 
 
 
 
 
 
 
 
 
Total TDRs
 
$
97,985

 
$
48,126

 
$
49,859

 
$
273



- 95 -



A summary of troubled debt restructurings by accruing status as of March 31, 2012 were as follows (in thousands):
 
 
As of March 31, 2012
 
Amounts Charged Off During the Three Months Ended March 31, 2012
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
 
3,199

 
992

 
2,207

 
—

 
—

Wholesale/retail
 
1,676

 
1,480

 
196

 
22

 
—

Manufacturing
 
—

 
—

 
—

 
—

 
—

Healthcare
 
82

 
82

 
—

 
—

 
—

Integrated food services
 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
957

 
—

 
957

 
—

 
—

Total commercial
 
5,914

 
2,554

 
3,360

 
22

 
—

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
21,834

 
10,413

 
11,421

 
76

 
2,692

Retail
 
3,635

 
1,200

 
2,435

 
—

 
—

Office
 
3,419

 
1,133

 
2,286

 
—

 
269

Multifamily
 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

Other real estate loans
 
7,483

 
2,039

 
5,444

 
259

 
2,205

Total commercial real estate
 
36,371

 
14,785

 
21,586

 
335

 
5,166

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
7,027

 
4,575

 
2,452

 
79

 
57

Home equity
 
—

 
—

 
—

 
—

 
—

Total residential mortgage
 
7,027

 
4,575

 
2,452

 
79

 
57

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
—

 
—

Other consumer
 
3,553

 
3,545

 
8

 
—

 
—

Total consumer
 
3,553

 
3,545

 
8

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Total nonaccruing TDRs
 
$
52,865

 
$
25,459

 
$
27,406

 
$
436

 
$
5,223


- 96 -



 
 
As of March 31, 2012
 
Amounts Charged Off During the Three Months Ended March 31, 2012
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
3,993

 
2,706

 
1,287

 
—

 
48

Permanent mortgages guaranteed by U.S. government agencies
 
32,770

 
17,570

 
15,200

 
—

 
—

Total residential mortgage
 
36,763

 
20,276

 
16,487

 
—

 
48

 
 
 
 
 
 
 
 
 
 
 
Total accruing TDRs
 
36,763

 
20,276

 
16,487

 
—

 
48

 
 
 
 
 
 
 
 
 
 
 
Total TDRs
 
$
89,628

 
$
45,735

 
$
43,893

 
$
436

 
$
5,271


- 97 -



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 March 31, 2013 by class that were restructured during the three months ended March 31, 2013 by primary type of concession (in thousands):

 
Three Months Ended
Mar. 31, 2013
 
Accruing
 
Nonaccrual
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Interest Rate
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
—

 
56

 
—

 
56

 
56

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
151

 
—

 
—

 
151

 
151

Total commercial
—

 
—

 
—

 
151

 
56

 
—

 
207

 
207

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 

 

Construction and land development
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
—

 
—

 
—

 
62

 
509

 
571

 
571

Permanent mortgage guaranteed by U.S. government agencies
5,431

 
3,241

 
8,672

 
—

 
—

 
—

 
—

 
8,672

Home equity
—

 
—

 
—

 
—

 
—

 
339

 
339

 
339

Total residential mortgage
5,431

 
3,241

 
8,672

 
—

 
62

 
848

 
910

 
9,582

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indirect automobile
—

 
—

 
—

 
—

 
—

 
13

 
13

 
13

Other consumer
—

 
—

 
—

 
93

 
—

 
44

 
137

 
137

Total consumer
—

 
—

 
—

 
93

 
—

 
57

 
150

 
150

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
5,431

 
$
3,241

 
$
8,672

 
$
244

 
$
118

 
$
905

 
$
1,267

 
$
9,939


- 98 -



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 months ended March 31, 2012 by primary type of concession (in thousands):

 
Three Months Ended
Mar. 31, 2012
 
Accruing
 
Nonaccrual
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Interest Rate
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
82

 
82

 
82

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
—

 
—

 
82

 
82

 
82

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
—

 
—

 
—

 
105

 
—

 
—

 
105

 
105

Retail
—

 
—

 
—

 
2,435

 
—

 
—

 
2,435

 
2,435

Office
—

 
—

 
—

 
1,403

 
—

 
—

 
1,403

 
1,403

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
1,668

 
—

 
1,668

 
1,668

Total commercial real estate
—

 
—

 
—

 
3,943

 
1,668

 
—

 
5,611

 
5,611

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
151

 
151

 
—

 
—

 
872

 
872

 
1,023

Permanent mortgage guaranteed by U.S. government agencies
—

 
5,169

 
5,169

 
—

 
—

 
—

 
—

 
5,169

Home equity
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
—

 
5,320

 
5,320

 
—

 
—

 
872

 
872

 
6,192

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indirect automobile
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other consumer
—

 
—

 
—

 
381

 
—

 
3,026

 
3,407

 
3,407

Total consumer
—

 
—

 
—

 
381

 
—

 
3,026

 
3,407

 
3,407

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
—

 
$
5,320

 
$
5,320

 
$
4,324

 
$
1,668

 
$
3,980

 
$
9,972

 
$
15,292


- 99 -




The following table summarizes, by loan class, the recorded investment at March 31, 2013 of loans modified as TDRs within the previous 12 months and for which there was a payment default during the three months ended March 31, 2013 (in thousands):

 
Three Months Ended
Mar. 31, 2013
 
Accruing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

Services
—

 
875

 
875

Wholesale/retail
—

 
—

 
—

Manufacturing
—

 
—

 
—

Healthcare
—

 
—

 
—

Integrated food services
—

 
—

 
—

Other commercial and industrial
—

 
38

 
38

Total commercial
—

 
913

 
913

 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
Construction and land development
—

 
8,065

 
8,065

Retail
—

 
—

 
—

Office
—

 
—

 
—

Multifamily
—

 
—

 
—

Industrial
—

 
—

 
—

Other real estate loans
—

 
—

 
—

Total commercial real estate
—

 
8,065

 
8,065

 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
Permanent mortgage
—

 
2,773

 
2,773

Permanent mortgage guaranteed by U.S. government agencies
18,575

 
—

 
18,575

Home equity
—

 
—

 
—

Total residential mortgage
18,575

 
2,773

 
21,348

 
 
 
 
 
 
Consumer:
 
 
 
 
 
Indirect automobile
—

 
27

 
27

Other consumer
—

 
—

 
—

Total consumer
—

 
27

 
27

 
 
 
 
 
 
Total
$
18,575

 
$
11,778

 
$
30,353


A payment default is defined as being 30 days or more past due. Loans that experienced a payment default during the three months ended March 31, 2013 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.



- 100 -



The following table summarizes, by loan class, the recorded investment at March 31, 2012 of loans modified as TDRs within the previous 12 months and for which there was a payment default during the three months ended March 31, 2012 (in thousands):
 
Three Months Ended
Mar. 31, 2012
 
Accruing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

Services
—

 
768

 
768

Wholesale/retail
—

 
—

 
—

Manufacturing
—

 
—

 
—

Healthcare
—

 
—

 
—

Integrated food services
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

Total commercial
—

 
768

 
768

 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
Construction and land development
—

 
2,379

 
2,379

Retail
—

 
2,435

 
2,435

Office
—

 
1,403

 
1,403

Multifamily
—

 
—

 
—

Industrial
—

 
—

 
—

Other real estate loans
—

 
1,949

 
1,949

Total commercial real estate
—

 
8,166

 
8,166

 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
Permanent mortgage
269

 
379

 
648

Permanent mortgage guaranteed by U.S. government agencies
6,528

 
—

 
6,528

Home equity
—

 
—

 
—

Total residential mortgage
6,797

 
379

 
7,176

 
 
 
 
 
 
Consumer:
 
 
 
 
 
Indirect automobile
—

 
—

 
—

Other consumer
—

 
8

 
8

Total consumer
—

 
8

 
8

 
 
 
 
 
 
Total
$
6,797

 
$
9,321

 
$
16,118


- 101 -



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 March 31, 2013 is as follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 89
Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,346,530

 
$
525

 
$
—

 
$
2,377

 
$
2,349,432

Services
 
2,103,111

 
1,697

 
517

 
9,474

 
2,114,799

Wholesale/retail
 
1,082,491

 
270

 
—

 
2,239

 
1,085,000

Manufacturing
 
397,746

 
224

 
—

 
1,848

 
399,818

Healthcare
 
1,073,804

 
4,806

 
64

 
2,962

 
1,081,636

Integrated food services
 
173,800

 
—

 
—

 
—

 
173,800

Other commercial and industrial
 
212,777

 
82

 
—

 
961

 
213,820

Total commercial
 
7,390,259

 
7,604

 
581

 
19,861

 
7,418,305

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
214,367

 
—

 
—

 
23,462

 
237,829

Retail
 
575,239

 
119

 
—

 
8,921

 
584,279

Office
 
404,401

 
436

 
2,956

 
12,851

 
420,644

Multifamily
 
455,973

 
—

 
—

 
4,501

 
460,474

Industrial
 
234,851

 
—

 
—

 
2,198

 
237,049

Other real estate loans
 
329,517

 
1,748

 
378

 
13,242

 
344,885

Total commercial real estate
 
2,214,348

 
2,303

 
3,334

 
65,175

 
2,285,160

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,047,648

 
5,774

 
—

 
38,153

 
1,091,575

Permanent mortgages guaranteed by U.S. government agencies
 
25,915

 
17,669

 
118,621

 
214

 
162,419

Home equity
 
748,759

 
2,638

 
—

 
7,059

 
758,456

Total residential mortgage
 
1,822,322

 
26,081

 
118,621

 
45,426

 
2,012,450

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
22,364

 
685

 
—

 
1,319

 
24,368

Other consumer
 
350,606

 
1,509

 
314

 
852

 
353,281

Total consumer
 
372,970

 
2,194

 
314

 
2,171

 
377,649

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11,799,899

 
$
38,182

 
$
122,850

 
$
132,633

 
$
12,093,564



- 102 -



A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of December 31, 2012 is as follows (in thousands):

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 89
Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,454,928

 
$
3,071

 
$
200

 
$
2,460

 
$
2,460,659

Services
 
2,150,386

 
1,710

 
—

 
12,090

 
2,164,186

Wholesale/retail
 
1,103,307

 
5

 
50

 
3,077

 
1,106,439

Manufacturing
 
346,442

 
35

 
—

 
2,007

 
348,484

Healthcare
 
1,077,022

 
1,040

 
178

 
3,166

 
1,081,406

Integrated food services
 
190,416

 
6

 
—

 
684

 
191,106

Other commercial and industrial
 
288,522

 
127

 
—

 
983

 
289,632

Total commercial
 
7,611,023

 
5,994

 
428

 
24,467

 
7,641,912

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
226,962

 
—

 
—

 
26,131

 
253,093

Retail
 
514,252

 
349

 
68

 
8,117

 
522,786

Office
 
417,866

 
3,177

 
—

 
6,829

 
427,872

Multifamily
 
400,151

 
39

 
—

 
2,706

 
402,896

Industrial
 
242,026

 
—

 
—

 
3,968

 
245,994

Other real estate loans
 
358,030

 
2,092

 
3,361

 
12,875

 
376,358

Total commercial real estate
 
2,159,287

 
5,657

 
3,429

 
60,626

 
2,228,999

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,075,687

 
8,366

 
49

 
39,863

 
1,123,965

Permanent mortgages guaranteed by U.S. government agencies
 
26,560

 
13,046

 
120,349

 
489

 
160,444

Home equity
 
752,100

 
2,275

 
—

 
6,256

 
760,631

Total residential mortgage
 
1,854,347

 
23,687

 
120,398

 
46,608

 
2,045,040

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
31,869

 
1,273

 
15

 
1,578

 
34,735

Other consumer
 
358,308

 
1,327

 
4

 
1,131

 
360,770

Total consumer
 
390,177

 
2,600

 
19

 
2,709

 
395,505

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
12,014,834

 
$
37,938

 
$
124,274

 
$
134,410

 
$
12,311,456


- 103 -



A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of March 31, 2012 is as follows (in thousands):

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 89
Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,151,887

 
$
78

 
$
—

 
$
336

 
$
2,152,301

Services
 
1,924,702

 
11,646

 
1,783

 
12,890

 
1,951,021

Wholesale/retail
 
979,188

 
897

 
1,701

 
15,388

 
997,174

Manufacturing
 
317,577

 
—

 
727

 
23,402

 
341,706

Healthcare
 
974,336

 
730

 
149

 
7,946

 
983,161

Integrated food services
 
204,101

 
—

 
—

 
—

 
204,101

Other commercial and industrial
 
311,795

 
538

 
—

 
1,788

 
314,121

Total commercial
 
6,863,586

 
13,889

 
4,360

 
61,750

 
6,943,585

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
259,840

 
3,285

 
—

 
52,416

 
315,541

Retail
 
469,910

 
340

 
1,532

 
6,193

 
477,975

Office
 
368,265

 
1,178

 
—

 
10,733

 
380,176

Multifamily
 
429,020

 
500

 
36

 
3,414

 
432,970

Industrial
 
286,919

 
—

 
—

 
—

 
286,919

Other real estate loans
 
343,102

 
1,781

 
116

 
13,719

 
358,718

Total commercial real estate
 
2,157,056

 
7,084

 
1,684

 
86,475

 
2,252,299

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,102,858

 
12,705

 
54

 
22,822

 
1,138,439

Permanent mortgages guaranteed by U.S. government agencies
 
28,750

 
13,281

 
138,831

 
—

 
180,862

Home equity
 
642,898

 
2,087

 
—

 
4,640

 
649,625

Total residential mortgage
 
1,774,506

 
28,073

 
138,885

 
27,462

 
1,968,926

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
76,685

 
2,231

 
—

 
2,608

 
81,524

Other consumer
 
324,537

 
1,467

 
42

 
5,064

 
331,110

Total consumer
 
401,222

 
3,698

 
42

 
7,672

 
412,634

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11,196,370

 
$
52,744

 
$
144,971

 
$
183,359

 
$
11,577,444

(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.

The purchase price for these acquisitions totaled $37 million, including $24 million paid in cash and $13 million of contingent consideration. The final purchase price allocation included $21 million of identifiable intangible assets and $29 million of goodwill. The pro-forma impact of these transactions was not material to the Company's consolidated financial statements.

- 104 -



(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):
 
 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
 
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid
Principal
 Balance/
Notional
 
Fair Value
Residential mortgage loans held for sale
 
$
264,608

 
$
274,710

 
$
269,718

 
$
281,935

 
$
230,241

 
$
237,741

Residential mortgage loan commitments
 
466,571

 
13,343

 
356,634

 
12,733

 
302,303

 
8,907

Forward sales contracts
 
712,144

 
(1,842
)
 
598,442

 
(906
)
 
520,165

 
391

 
 
 

 
$
286,211

 
 

 
$
293,762

 
 

 
$
247,039


No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of March 31, 2013, December 31, 2012 or March 31, 2012. No credit losses were recognized on residential mortgage loans held for sale for the three month periods ended March 31, 2013 and 2012.

Mortgage banking revenue was as follows (in thousands):
 
 
Three Months Ended
 
 
March 31,
2013
 
March 31,
2012
Originating and marketing revenue:
 
 
 
 
Residential mortgages loan held for sale
 
$
30,235

 
$
17,092

Residential mortgage loan commitments
 
610

 
2,310

Forward sales contracts
 
(935
)
 
3,679

Total originating and marketing revenue
 
29,910

 
23,081

Servicing revenue
 
10,066

 
9,997

Total mortgage banking revenue
 
$
39,976

 
$
33,078


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.


- 105 -



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):
 
 
March 31,
2013
 
December 31,
2012
 
March 31,
2012
Number of residential mortgage loans serviced for others
 
99,438

 
98,246

 
95,944

Outstanding principal balance of residential mortgage loans serviced for others
 
$
12,272,691

 
$
11,981,624

 
$
11,378,806

Weighted average interest rate
 
4.59
%
 
4.71
%
 
5.09
%
Remaining term (in months)
 
290

 
289

 
289


Activity in capitalized mortgage servicing rights during the three months ended March 31, 2013 is as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, December 31, 2012
 
$
12,976

 
$
87,836

 
$
100,812

Additions, net
 
—

 
11,433

 
11,433

Change in fair value due to loan runoff
 
(871
)
 
(4,192
)
 
(5,063
)
Change in fair value due to market changes
 
1,098

 
1,560

 
2,658

Balance, March 31, 2013
 
$
13,203

 
$
96,637

 
$
109,840


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

 
$
67,880

 
$
86,783

Additions, net
 
—

 
8,372

 
8,372

Change in fair value due to loan runoff
 
(1,010
)
 
(3,134
)
 
(4,144
)
Change in fair value due to market changes
 
3,311

 
3,816

 
7,127

Balance, March 31, 2012
 
$
21,204

 
$
76,934

 
$
98,138

 
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:

 
 
March 31,
2013
 
December 31,
2012
 
March 31,
2012
Discount rate – risk-free rate plus a market premium
 
10.27%
 
10.29%
 
10.33%
Prepayment rate – based upon loan interest rate, original term and loan type
 
8.10% - 41.21%
 
8.38% - 43.94%
 
10.01% - 45.98%
Loan servicing costs – annually per loan based upon loan type:
 
 
 
 
 
 
    Performing loans
 
$55 - $105
 
$55 - $105
 
$55 - $105
    Delinquent loans
 
$135 - $500
 
$135 - $500
 
$50 - $250
    Loans in foreclosure
 
$875 - $4,250
 
$875 - $4,250
 
$500 - $3,000
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life
 
0.97%
 
0.87%
 
1.28%

- 106 -




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 March 31, 2013 follows (in thousands):
 
 
< 4.00%
 
4.00% - 4.99%

 
5.00% - 5.99%

 
> 5.99%
 
Total
Fair value
 
$
42,981

 
$
38,471

 
$
22,991

 
$
5,397

 
$
109,840

Outstanding principal of loans serviced for others
 
$
4,139,279

 
$
3,844,365

 
$
2,790,646

 
$
1,498,401

 
$
12,272,691

Weighted average prepayment rate1
 
8.10
%
 
10.60
%
 
19.67
%
 
41.21
%
 
15.55
%
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 March 31, 2013, 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 $2.4 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 $2.0 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.

The aging status of our mortgage loans serviced for others by investor at March 31, 2013 follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89
Days
 
90 Days or More
 
Total
FHLMC
 
$
4,583,387

 
$
33,374

 
$
8,253

 
$
37,211

 
$
4,662,225

FNMA
 
2,959,423

 
19,375

 
4,064

 
17,945

 
3,000,807

GNMA
 
4,219,579

 
112,968

 
20,962

 
11,391

 
4,364,900

Other
 
237,717

 
1,431

 
567

 
5,044

 
244,759

Total
 
$
12,000,106

 
$
167,148

 
$
33,846

 
$
71,591

 
$
12,272,691


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 $220 million at March 31, 2013, $227 million at December 31, 2012 and $248 million at March 31, 2012. A separate accrual for these off-balance sheet commitments is included in Other liabilities in the Consolidated Balance Sheets totaling $10 million at March 31, 2013, $11 million at December 31, 2012 and $19 million at March 31, 2012. At March 31, 2013, approximately 5% of the loans sold with recourse with an outstanding principal balance of $11 million were either delinquent more than 90 days, in bankruptcy or in foreclosure and 5% with an outstanding balance of $11 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.


- 107 -



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
 
 
March 31,
 
 
2013
 
2012
Beginning balance
 
$
11,359

 
$
18,683

Provision for recourse losses
 
(761
)
 
1,672

Loans charged off, net
 
(523
)
 
(1,704
)
Ending balance
 
$
10,075

 
$
18,651


The Company also has off-balance sheet obligation to repurchase or provide indemnification for residential mortgage loans sold to government sponsored entities due to standard representations and warranties made under contractual agreements.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. The level of repurchases and indemnifications related to standard representations and warranties has remained low. The Company repurchased 9 loans from the agencies for $1.0 million during the first quarter of 2013 and recognized $158 thousand of related losses. In addition, the Company has paid indemnification for 5 loans and recognized $409 thousand of related losses during first quarter of 2013. 

A summary of unresolved deficiency requests from the agencies and related accrual for credit losses follows (in thousands):
 
March 31,
2013
 
December 31,
2012
Number of unresolved deficiency requests
430

 
389

Aggregate outstanding principal balance subject to unresolved deficiency requests
$
50,861

 
$
44,831

Unpaid principal balance subject to indemnification by the Company
1,414

 
1,233

Accrual for credit losses related to potential loan repurchases under representations and warranties
5,877

 
5,291

(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 $500 thousand and $965 thousand for the three months ended March 31, 2013 and 2012, respectively. The Company made no Pension Plan contributions during the three months ended March 31, 2013 and 2012.

Management has been advised that the maximum allowable contribution for 2013 is $23 million. No minimum contribution is required for 2013.


- 108 -



(8)  Commitments and Contingent Liabilities

Litigation Contingencies

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.

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 $7.2 million at March 31, 2013. 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 investment entities represent the Company's interest in entities earning federal new market tax credits related to qualifying loans. 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 primarily 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.


- 109 -



A summary of consolidated and unconsolidated alternative investments as of March 31, 2013, December 31, 2012 and March 31, 2012 is as follows (in thousands):

 
 
March 31, 2013
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interest
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
29,216

 
$
—

 
$
—

 
$
24,182

Tax credit entities
 
10,000

 
13,836

 
—

 
10,964

 
10,000

Other
 
—

 
8,838

 
—

 
—

 
1,752

Total consolidated
 
$
10,000

 
$
51,890

 
$
—

 
$
10,964

 
$
35,934

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
28,100

 
$
80,788

 
$
40,400

 
$
—

 
$
—

Other
 
—

 
9,293

 
1,775

 
—

 
—

Total unconsolidated
 
$
28,100

 
$
90,081

 
$
42,175

 
$
—

 
$
—


 
 
December 31, 2012
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interest
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
28,169

 
$
—

 
$
—

 
$
23,691

Tax credit entities
 
10,000

 
13,965

 
—

 
10,964

 
10,000

Other
 
—

 
8,952

 
—

 
—

 
2,130

Total consolidated
 
$
10,000

 
$
51,086

 
$
—

 
$
10,964

 
$
35,821

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
22,354

 
$
78,109

 
$
43,052

 
$
—

 
$
—

Other
 
—

 
9,113

 
1,802

 
—

 
—

Total unconsolidated
 
$
22,354

 
$
87,222

 
$
44,854

 
$
—

 
$
—


 
 
March 31, 2012
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interest
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
30,993

 
$
—

 
$
—

 
$
25,842

Tax credit entities
 
10,000

 
14,353

 
—

 
10,964

 
10,000

Other
 
—

 
7,029

 
—

 
—

 
140

Total consolidated
 
$
10,000

 
$
52,375

 
$
—

 
$
10,964

 
$
35,982

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
11,626

 
$
51,737

 
$
29,093

 
$
—

 
$
—

Other
 
—

 
10,201

 
2,075

 
—

 
—

Total unconsolidated
 
$
11,626

 
$
61,938

 
$
31,168

 
$
—

 
$
—




- 110 -



Other Commitments and Contingencies

At March 31, 2013, Cavanal Hill Funds’ assets included $774 million of U.S. Treasury, $1.0 billion of cash management and $385 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 March 31, 2013. 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 2013 or 2012.

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 of Tulsa 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 $13.5 million at March 31, 2013. 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 of Tulsa 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.

The Company has agreed to purchase approximately $113 million of Oklahoma income tax credits from certain operators of zero emission power facilities from 2013 to 2022. Tax credits are generated based on power sold to unrelated third parties and are transferable for a period of ten years following the year of creation. Tax credits will be sold to qualifying taxpayers as BOK Financial is limited by statute on the amount of credits that may be utilized. The agreements may be terminated in the event of changes in federal law or Oklahoma statutes invalidating the tax credits or their transferability.
(9) Shareholders' Equity

The Company will pay a quarterly cash dividend of $0.38 per common share on or about May 31, 2013 to shareholders of record as of May 17, 2013.

Dividends declared during the three months ended March 31, 2013 and March 31, 2012 were $0.38 and $0.33 per share, respectively.

Accumulated Other Comprehensive Income (Loss)

AOCI includes unrealized gains and losses on available for sale ("AFS") securities and 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 are being 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 are being reclassified into income over the ten-year life of the debt. Gains and losses in AOCI are net of deferred income taxes.


- 111 -



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, 2011
 
$
135,740

 
$
6,673

 
$
(12,742
)
 
$
(692
)
 
$
128,979

Net change in unrealized gain (loss)
 
55,726

 
—

 
(291
)
 
—

 
55,435

Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
 
 
Interest revenue, Investment securities, Taxable securities
 
—

 
(1,788
)
 
—

 
—

 
(1,788
)
Interest expense, Subordinated debentures
 
—

 
—

 
—

 
52

 
52

Net impairment losses recognized in earnings
 
3,722

 
—

 
—

 
—

 
3,722

Gain on available for sale securities, net
 
(4,331
)
 
—

 
—

 
—

 
(4,331
)
Other comprehensive income (loss), before income taxes
 
55,117

 
(1,788
)
 
(291
)
 
52

 
53,090

Income tax expense (benefit)1
 
(21,441
)
 
697

 
113

 
(20
)
 
(20,651
)
Other comprehensive income (loss), net of income taxes
 
33,676

 
(1,091
)
 
(178
)
 
32

 
32,439

Balance, March 31, 2012
 
$
169,416

 
$
5,582

 
$
(12,920
)
 
$
(660
)
 
$
161,418

 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2012
 
$
155,553

 
$
3,078

 
$
(8,296
)
 
$
(415
)
 
$
149,920

Net change in unrealized gains (losses)
 
(21,359
)
 
—

 
—

 
—

 
(21,359
)
Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
 
 
Interest revenue, Investment securities, Taxable securities
 
—

 
(1,148
)
 
—

 
—

 
(1,148
)
Interest expense, Subordinated debentures
 
—

 
—

 
—

 
52

 
52

Net impairment losses recognized in earnings
 
247

 
—

 
—

 
—

 
247

Gain on available for sale securities, net
 
(4,855
)
 
—

 
—

 
—

 
(4,855
)
Other comprehensive income (loss), before income taxes
 
(25,967
)
 
(1,148
)
 
—

 
52

 
(27,063
)
Income tax benefit (expense)1
 
10,100

 
446

 
—

 
(20
)
 
10,526

Other comprehensive income (loss), net of income taxes
 
(15,867
)
 
(702
)
 
—

 
32

 
(16,537
)
Balance, March 31, 2013
 
$
139,686

 
$
2,376

 
$
(8,296
)
 
$
(383
)
 
$
133,383

1 
Calculated using a 39% effective tax rate.


- 112 -



(10)  Earnings Per Share
 
(In thousands, except share and per share amounts)
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
Numerator:
 
 
 
 
Net income attributable to BOK Financial Corp.
 
$
87,964

 
$
83,615

Earnings allocated to participating securities
 
(971
)
 
(740
)
Numerator for basic earnings per share – income available to common shareholders
 
86,993

 
82,875

Effect of reallocating undistributed earnings of participating securities
 
5

 
2

Numerator for diluted earnings per share – income available to common shareholders
 
$
86,998

 
$
82,877

 
 
 
 
 
Denominator:
 
 

 
 

Weighted average shares outstanding
 
68,569,475

 
68,268,458

Less:  Participating securities included in weighted average shares outstanding
 
(754,925
)
 
(603,158
)
Denominator for basic earnings per common share
 
67,814,550

 
67,665,300

Dilutive effect of employee stock compensation plans1
 
225,630

 
276,595

Denominator for diluted earnings per common share
 
68,040,180

 
67,941,895

 
 
 
 
 
Basic earnings per share
 
$
1.28

 
$
1.22

Diluted earnings per share
 
$
1.28

 
$
1.22

1  Excludes employee stock options with exercise prices greater than current market price.
 
87,377

 
356,708



(11)  Reportable Segments

Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended March 31, 2013 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
90,818

 
$
24,095

 
$
6,516

 
$
48,976

 
$
170,405

Net interest revenue (expense) from internal sources
 
(9,128
)
 
5,483

 
$
5,278

 
(1,633
)
 
—

Net interest revenue
 
81,690

 
29,578

 
11,794

 
47,343

 
170,405

Provision for credit losses
 
1,021

 
930

 
519

 
(10,470
)
 
(8,000
)
Net interest revenue after provision for credit losses
 
80,669

 
28,648

 
11,275

 
57,813

 
178,405

Other operating revenue
 
41,432

 
57,141

 
52,603

 
7,898

 
159,074

Other operating expense
 
59,080

 
52,371

 
57,007

 
32,866

 
201,324

Income before taxes
 
63,021

 
33,418

 
6,871

 
32,845

 
136,155

Federal and state income tax
 
24,515

 
13,000

 
2,673

 
6,908

 
47,096

Net income
 
38,506

 
20,418

 
4,198

 
25,937

 
89,059

Net income attributable to non-controlling interest
 
—

 
—

 
—

 
1,095

 
1,095

Net income attributable to BOK Financial Corp.
 
$
38,506

 
$
20,418

 
$
4,198

 
$
24,842

 
$
87,964

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
10,629,339

 
$
5,723,958

 
$
4,686,952

 
$
6,473,182

 
$
27,513,431

Average invested capital
 
890,844

 
297,074

 
202,310

 
1,607,611

 
2,997,839

 
 
 
 
 
 
 
 
 
 
 
Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.47
%
 
1.45
%
 
0.36
%
 


 
1.30
%
Return on average invested capital
 
17.53
%
 
27.87
%
 
8.35
%
 


 
11.90
%
Efficiency ratio
 
47.98
%
 
59.31
%
 
89.23
%
 


 
61.04
%

- 113 -






Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended March 31, 2012 is as follows (in thousands):

 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
89,492

 
$
26,587

 
$
7,140

 
$
50,350

 
$
173,569

Net interest revenue (expense) from internal sources
 
(12,049
)
 
4,879

 
4,857

 
2,313

 
—

Net interest revenue
 
77,443

 
31,466

 
11,997

 
52,663

 
173,569

Provision for credit losses
 
6,392

 
1,432

 
650

 
(8,474
)
 
—

Net interest revenue after provision for credit losses
 
71,051

 
30,034

 
11,347

 
61,137

 
173,569

Other operating revenue
 
38,792

 
50,240

 
46,393

 
1,856

 
137,281

Other operating expense
 
55,860

 
47,310

 
51,324

 
27,643

 
182,137

Income before taxes
 
53,983

 
32,964

 
6,416

 
35,350

 
128,713

Federal and state income tax
 
20,999

 
12,823

 
2,496

 
9,202

 
45,520

Net income
 
32,984

 
20,141

 
3,920

 
26,148

 
83,193

Net loss attributable to non-controlling interest
 
—

 
—

 
—

 
(422
)
 
(422
)
Net income attributable to BOK Financial Corp.
 
$
32,984

 
$
20,141

 
$
3,920

 
$
26,570

 
$
83,615

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
10,013,866

 
$
5,784,654

 
$
4,168,398

 
$
5,549,665

 
$
25,516,583

Average invested capital
 
896,552

 
283,496

 
173,853

 
1,481,332

 
2,835,233

 
 
 
 
 
 
 
 
 
 
 
Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.32
%
 
1.40
%
 
0.38
%
 


 
1.32
%
Return on average invested capital
 
14.80
%
 
28.57
%
 
9.14
%
 


 
11.86
%
Efficiency ratio
 
48.08
%
 
62.28
%
 
87.82
%
 


 
58.76
%

- 114 -



(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 three months ended March 31, 2013 and 2012, 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 March 31, 2013, December 31, 2012 or March 31, 2012.


- 115 -



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 March 31, 2013 (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
 
$
55,358

 
$
—

 
$
55,358

 
$
—

U.S. agency residential mortgage-backed securities
 
33,106

 
—

 
33,106

 
—

Municipal and other tax-exempt securities
 
90,710

 
—

 
90,710

 
—

Other trading securities
 
27,424

 
—

 
27,424

 
—

Total trading securities
 
206,598

 
—

 
206,598

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,000

 
1,000

 
—

 
—

Municipal and other tax-exempt
 
85,447

 
—

 
46,440

 
39,007

U.S. agency residential mortgage-backed securities
 
9,165,212

 
—

 
9,165,212

 
—

Privately issued residential mortgage-backed securities
 
316,208

 
—

 
316,208

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
1,405,346

 
—

 
1,405,346

 
—

Other debt securities
 
36,079

 
—

 
30,886

 
5,193

Perpetual preferred stock
 
26,832

 
—

 
26,832

 
—

Equity securities and mutual funds
 
23,021

 
4,571

 
15,978

 
2,472

Total available for sale securities
 
11,059,145

 
5,571

 
11,006,902

 
46,672

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
208,900

 
—

 
208,900

 
—

     Other securities
 
1,292

 
—

 
1,292

 
—

Total fair value option securities
 
210,192

 
—

 
210,192

 
—

Residential mortgage loans held for sale
 
286,211

 
—

 
286,211

 
—

Mortgage servicing rights1
 
109,840

 
—

 
—

 
109,840

Derivative contracts, net of cash margin2
 
320,473

 
457

3 
320,016

 
—

Other assets – private equity funds
 
29,216

 
—

 
—

 
29,216

Liabilities:
 
 

 
 

 
 

 
 

Derivative contracts, net of cash margin2
 
251,836

 
—

3 
251,836

 
—

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. Exchange-traded derivative energy contracts a net liability at March 31, 2013, fully offset by cash margin.

- 116 -



The fair value of financial assets and liabilities that are measured on a recurring basis are as follows as of December 31, 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
 
$
16,545

 
$
—

 
$
16,545

 
$
—

U.S. agency residential mortgage-backed securities
 
86,361

 
—

 
86,361

 
—

Municipal and other tax-exempt securities
 
90,326

 
—

 
90,326

 
—

Other trading securities
 
20,870

 
—

 
20,870

 
—

Total trading securities
 
214,102

 
—

 
214,102

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,002

 
1,002

 
—

 
—

Municipal and other tax-exempt
 
87,142

 
—

 
46,440

 
40,702

U.S. agency residential mortgage-backed securities
 
9,889,821

 
—

 
9,889,821

 
—

Privately issued residential mortgage-backed securities
 
325,163

 
—

 
325,163

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
895,075

 
—

 
895,075

 
—

Other debt securities
 
36,389

 
—

 
30,990

 
5,399

Perpetual preferred stock
 
25,072

 
—

 
25,072

 
—

Equity securities and mutual funds
 
27,557

 
4,165

 
21,231

 
2,161

Total available for sale securities
 
11,287,221

 
5,167

 
11,233,792

 
48,262

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
257,040

 
—

 
257,040

 
—

Corporate debt securities
 
26,486

 
—

 
26,486

 
—

     Other securities
 
770

 
—

 
770

 
—

Total fair value option securities
 
284,296

 
—

 
284,296

 
—

Residential mortgage loans held for sale
 
293,762

 
—

 
293,762

 
—

Mortgage servicing rights1
 
100,812

 
—

 
—

 
100,812

Derivative contracts, net of cash margin 2
 
338,106

 
11,597

3 
326,509

 
—

Other assets – private equity funds
 
28,169

 
—

 
—

 
28,169

Liabilities:
 
 

 
 

 
 

 
 

Derivative contracts, net of cash margin 2
 
283,589

 
—

3 
283,589

 
—

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. Exchange-traded derivative agricultural contracts a net liability at December 31, 2012, fully offset by cash margin.


- 117 -



The fair value of financial assets and liabilities that are measured on a recurring basis are as follows as of March 31, 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
 
$
27,430

 
$
—

 
$
27,430

 
$
—

U.S. agency residential mortgage-backed securities
 
35,111

 
—

 
35,111

 
—

Municipal and other tax-exempt securities
 
60,230

 
—

 
60,230

 
—

Other trading securities
 
5,605

 
—

 
5,481

 
124

Total trading securities
 
128,376

 
—

 
128,252

 
124

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,004

 
1,004

 
—

 
—

Municipal and other tax-exempt
 
72,234

 
—

 
30,257

 
41,977

U.S. agency residential mortgage-backed securities
 
9,677,602

 
—

 
9,677,602

 
—

Privately issued residential mortgage-backed securities
 
326,513

 
—

 
326,513

 
—

Other debt securities
 
36,777

 
—

 
30,877

 
5,900

Perpetual preferred stock
 
21,024

 
—

 
21,024

 
—

Equity securities and mutual funds
 
51,443

 
25,278

 
26,165

 
—

Total available for sale securities
 
10,186,597

 
26,282

 
10,112,438

 
47,877

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
322,180

 
—

 
322,180

 
—

Corporate debt securities
 
25,772

 
—

 
25,772

 
—

Total fair value option securities
 
347,952

 
—

 
347,952

 
—

Residential mortgage loans held for sale
 
247,039

 
—

 
247,039

 
—

Mortgage servicing rights1
 
98,138

 
—

 
—

 
98,138

Derivative contracts, net of cash margin 2
 
384,996

 
—

3 
384,996

 
—

Other assets – private equity funds
 
30,993

 
—

 
—

 
30,993

Liabilities:
 
 

 
 

 
 

 
 

Derivative contracts, net of cash margin 2
 
305,290

 
—

3 
305,290

 
—

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, net of cash margin.

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

- 118 -



securities follows. A management committee composed of senior members from the Company's Capital Markets, Risk 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.

The following represents the changes for the three months ended March 31, 2013 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
 
Equity securities and mutual funds
 
Other assets – private equity funds
Balance, Dec. 31, 2012
 
$
40,702

 
$
5,399

 
$
2,161

 
$
28,169

Purchases and capital calls
 
—

 
—

 
—

 
492

Redemptions and distributions
 
(98
)
 
—

 
—

 
(830
)
Gain (loss) recognized in earnings:
 
 

 
 

 
 
 
 

Gain on other assets, net
 
—

 
—

 
—

 
1,385

Gain on available for sale securities, net
 
—

 
—

 
—

 
—

Other-than-temporary impairment losses
 
—

 
—

 
—

 
—

Other comprehensive gain (loss)
 
(1,597
)
 
(206
)
 
311

 
—

Balance, March 31, 2013
 
$
39,007

 
$
5,193

 
$
2,472

 
$
29,216



- 119 -



The following represents the changes for the three months ended March 31, 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, Dec. 31, 2011
 
$
42,353

 
$
5,900

 
$
30,902

Purchases, and capital calls
 
—

 
—

 
1,089

Redemptions and distributions
 
(100
)
 
—

 
(607
)
Gain (loss) recognized in earnings
 
 

 
 

 
 

Gain (loss) on other assets, net
 
—

 
—

 
(391
)
Gain on available for sale securities, net
 
1

 
—

 
—

Other-than-temporary impairment losses
 
—

 
—

 
—

Other comprehensive (loss)
 
(277
)
 
—

 
—

Balance, March 31, 2012
 
$
41,977

 
$
5,900

 
$
30,993


A summary of quantitative information about assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of March 31, 2013 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
 
$
28,470

 
$
28,374

 
$
27,120

 
Discounted cash flows
1 
Interest rate spread
 
5.00%-5.50% (5.25%)
2 
95.01%-95.59% (95.26%)
3 
Below investment grade
 
17,000

 
12,384

 
11,887

 
Discounted cash flows
1 
Interest rate spread
 
8.80%-11.20% (9.54%)
4 
69.86%-70.04% (69.92%)
3 
Total municipal and other tax-exempt securities
 
45,470

 
40,758

 
39,007

 
 
 
 
 
 
 
Other debt securities
 
5,400

 
5,400

 
5,193

 
Discounted cash flows
1 
Interest rate spread
 
5.44%-5.71% (5.68%)
5 
96.16% (96.16%)
3 
Equity securities and mutual funds
 
N/A
 
2,420

 
2,472

 
Tangible book value per share of publicly traded financial institutions of similar size, less liquidity discount.
 
Peer group tangible book per share and liquidity discount.
 
N/A
7 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets - private equity funds
 
N/A
 
N/A
 
29,216

 
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 458 to 519 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.
7 
Fair value of shares of a smaller privately-held financial institution were valued using the tangible book value per share of similarly sized financial institutions within the immediate geographical market with a discount of 20% due to the liquidity of the shares.


The fair value of these securities measured at fair value using significant unobservable inputs are sensitive primarily to changes in interest rate spreads. At March 31, 2013, for tax-exempt securities rated investment grade by all nationally-recognized rating

- 120 -



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 $262 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 $50 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 $343 thousand.


A summary of quantitative information about Recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of December 31, 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
 
$
28,570

 
$
28,473

 
$
28,318

 
Discounted cash flows
1 
Interest rate spread
 
1.00%-1.50% (1.25%)
2 
98.83%-99.43% (99.12%)
3 
Below investment grade
 
17,000

 
12,384

 
12,384

 
Discounted cash flows
1 
Interest rate spread
 
7.21%-9.83% (7.82%)
4 
72.79%-73.00% (72.85%)
3 
Total municipal and other tax-exempt securities
 
45,570

 
40,857

 
40,702

 
 
 
 
 
 
 
Other debt securities
 
5,400

 
5,400

 
5,399

 
Discounted cash flows
1 
Interest rate spread
 
1.65%-1.71% (1.70%)
5 
100% (100%)
3 
Equity securities and mutual funds
 
N/A
 
2,161

 
2,161

 
Tangible book value per share of publicly traded financial institutions of similar size, less liquidity discount.
 
Peer group tangible book per share and liquidity discount.
 
N/A
7 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets - private equity funds
 
N/A
 
N/A
 
28,169

 
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.
7 
Fair value of share of a smaller privately-held financial institution were valued using the tangible book value per share of similarly sized financial institutions within the immediate geographical market with a discount of 20% due to the liquidity of the shares.



- 121 -



A summary of quantitative information about Recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of March 31, 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

 
$
28,997

 
$
28,853

 
Discounted cash flows
1 
Interest rate spread
 
1.00%-1.50% (1.25%)
2 
98.88%-99.49% (99.14%)
3 
Below investment grade
 
17,000

 
13,396

 
13,124

 
Discounted cash flows
1 
Interest rate spread
 
6.18%-9.37% (6.95%)
4 
74.96%-75.19% (75.03%)
3 
Total municipal and other tax-exempt securities
 
46,100

 
42,393

 
41,977

 
 
 
 
 
 
 
Other debt securities
 
5,900

 
5,900

 
5,900

 
Discounted cash flows
1 
Interest rate spread
 
1.47%-1.74% (1.72%)
5 
99% (99%)
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets - private equity funds
 
N/A
 
N/A
 
30,993

 
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.


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 March 31, 2013 for which the fair value was adjusted during the three months ended March 31, 2013:
 
Carrying Value at March 31, 2013
 
Fair Value Adjustments for the
three months ended March 31, 2013 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
 
Net losses and expenses of repossessed assets, net
Impaired loans
$
—

 
$
14,448

 
$
2,197

 
$
7,485

 
$
—

Real estate and other repossessed assets
—

 
5,166

 
607

 
—

 
661

 

- 122 -



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 March 31, 2012 for which the fair value was adjusted during the three months ended March 31, 2012:
 
Carrying Value at March 31, 2012
 
Fair Value Adjustments for the
three months ended March 31, 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
 
Net losses and expenses of repossessed assets, net
Impaired loans
$
—

 
$
21,147

 
$
1,982

 
$
8,483

 
$
—

Real estate and other repossessed assets
—

 
15,155

 
3,948

 
—

 
2,406


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.

A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of March 31, 2013 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
 
$
2,197

 
Appraised value, as adjusted
 
Broker quotes and management's knowledge of industry and collateral.
 
N/A
Real estate and other repossessed assets
 
607

 
Listing value, less cost to sell
 
Marketability adjustments off appraised value
 
73%-85% (77%)


A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of March 31, 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
 
$
1,982

 
Appraised value, as adjusted
 
Broker quotes and management's knowledge of industry and collateral.
 
N/A
Real estate and other repossessed assets
 
3,948

 
Listing value, less cost to sell
 
Marketability adjustments off appraised value
 
64%-85% (77%)1
1 
Marketability adjustments include consideration of estimated costs to sell which is approximately 15% of fair value. In addition, $743 thousand of real estate and other repossessed assets at March 31, 2012 are based on expert opinions or management's knowledge of the collateral or industry and do not have and independently appraised value.

- 123 -



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 March 31, 2013 (dollars in thousands):
 
 
Carrying
Value
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
 
Estimated
Fair
Value
Cash and cash equivalents
 
$
945,617

 
 
 
 
 
 
 
$
945,617

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
55,358

 
 
 
 
 
 
 
55,358

U.S. agency residential mortgage-backed securities
 
33,106

 
 
 
 
 
 
 
33,106

Municipal and other tax-exempt securities
 
90,710

 
 
 
 
 
 
 
90,710

Other trading securities
 
27,424

 
 
 
 
 
 
 
27,424

Total trading securities
 
206,598

 
 
 
 
 
 
 
206,598

Investment securities:
 
 

 
 
 
 
 
 
 
 

Municipal and other tax-exempt
 
339,003

 
 
 
 
 
 
 
341,940

U.S. agency residential mortgage-backed securities
 
72,968

 
 
 
 
 
 
 
76,851

Other debt securities
 
177,300

 
 
 
 
 
 
 
196,403

Total investment securities
 
589,271

 
 
 
 
 
 
 
615,194

Available for sale securities:
 
 

 
 
 
 
 
 
 
 

U.S. Treasury
 
1,000

 
 
 
 
 
 
 
1,000

Municipal and other tax-exempt
 
85,447

 
 
 
 
 
 
 
85,447

U.S. agency residential mortgage-backed securities
 
9,165,212

 
 
 
 
 
 
 
9,165,212

Privately issued residential mortgage-backed securities
 
316,208

 
 
 
 
 
 
 
316,208

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
1,405,346

 
 
 
 
 
 
 
1,405,346

Other debt securities
 
36,079

 
 
 
 
 
 
 
36,079

Perpetual preferred stock
 
26,832

 
 
 
 
 
 
 
26,832

Equity securities and mutual funds
 
23,021

 
 
 
 
 
 
 
23,021

Total available for sale securities
 
11,059,145

 
 
 
 
 
 
 
11,059,145

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
208,900

 
 
 
 
 
 
 
208,900

      Other securities
 
1,292

 
 
 
 
 
 
 
1,292

Total fair value option securities
 
210,192

 
 
 
 
 
 
 
210,192

Residential mortgage loans held for sale
 
286,211

 
 
 
 
 
 
 
286,211

Loans:
 
 

 
 
 
 
 
 
 
 

Commercial
 
7,418,305

 
0.25 - 30.00
 
0.66

 
0.55 - 3.69

 
7,372,375

Commercial real estate
 
2,285,160

 
0.38 - 18.00
 
0.84

 
1.19 - 3.21

 
2,266,433

Residential mortgage
 
2,012,450

 
0.38 - 18.00
 
3.53

 
0.74 - 3.29

 
2,062,801

Consumer
 
377,649

 
0.38 - 21.00
 
0.31

 
1.28 - 3.53

 
371,771

Total loans
 
12,093,564

 
 
 
 

 
 

 
12,073,380

Allowance for loan losses
 
(205,965
)
 
 
 
 

 
 

 
—

Net loans
 
11,887,599

 
 
 
 

 
 

 
12,073,380

Mortgage servicing rights
 
109,840

 
 
 
 

 
 

 
109,840

Derivative instruments with positive fair value, net of cash margin
 
320,473

 
 
 
 

 
 

 
320,473

Other assets – private equity funds
 
29,216

 
 
 
 

 
 

 
29,216

Deposits with no stated maturity
 
16,960,237

 
 
 
 

 
 

 
16,960,237

Time deposits
 
2,900,054

 
0.03 - 9.64
 
2.14

 
0.78 - 1.15

 
2,958,570

Other borrowed funds
 
3,393,416

 
0.13 - 5.25
 
—

 
0.13 - 2.67

 
3,398,902

Subordinated debentures
 
347,674

 
0.98 - 5.00
 
3.33

 
2.22
%
 
345,527

Derivative instruments with negative fair value, net of cash margin
 
251,836

 
 
 
 

 
 

 
251,836


- 124 -



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, 2012 (dollars in thousands):
 
 
Carrying
Value
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
 
Estimated
Fair
Value
Cash and cash equivalents
 
$
1,286,239

 
 
 
 
 
 
 
$
1,286,239

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
16,545

 
 
 
 
 
 
 
16,545

U.S. agency residential mortgage-backed securities
 
86,361

 
 
 
 
 
 
 
86,361

Municipal and other tax-exempt securities
 
90,326

 
 
 
 
 
 
 
90,326

Other trading securities
 
20,870

 
 
 
 
 
 
 
20,870

Total trading securities
 
214,102

 
 
 
 
 
 
 
214,102

Investment securities:
 
 

 
 
 
 
 
 
 
 

Municipal and other tax-exempt
 
232,700

 
 
 
 
 
 
 
235,940

U.S. agency residential mortgage-backed securities
 
82,767

 
 
 
 
 
 
 
85,943

Other debt securities
 
184,067

 
 
 
 
 
 
 
206,575

Total investment securities
 
499,534

 
 
 
 
 
 
 
528,458

Available for sale securities:
 
 

 
 
 
 
 
 
 
 

U.S. Treasury
 
1,002

 
 
 
 
 
 
 
1,002

Municipal and other tax-exempt
 
87,142

 
 
 
 
 
 
 
87,142

U.S. agency residential mortgage-backed securities
 
9,889,821

 
 
 
 
 
 
 
9,889,821

Privately issued residential mortgage-backed securities
 
325,163

 
 
 
 
 
 
 
325,163

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
895,075

 
 
 
 
 
 
 
895,075

Other debt securities
 
36,389

 
 
 
 
 
 
 
36,389

Perpetual preferred stock
 
25,072

 
 
 
 
 
 
 
25,072

Equity securities and mutual funds
 
27,557

 
 
 
 
 
 
 
27,557

Total available for sale securities
 
11,287,221

 
 
 
 
 
 
 
11,287,221

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
257,040

 
 
 
 
 
 
 
257,040

Corporate debt securities
 
26,486

 
 
 
 
 
 
 
26,486

      Other securities
 
770

 
 
 
 
 
 
 
770

Total fair value option securities
 
284,296

 
 
 
 
 
 
 
284,296

Residential mortgage loans held for sale
 
293,762

 
 
 
 
 
 
 
293,762

Loans:
 
 

 
 
 
 

 
 

 
 

Commercial
 
7,641,912

 
0.21 - 30.00
 
0.69

 
0.51 - 3.59

 
7,606,505

Commercial real estate
 
2,228,999

 
0.21 - 18.00
 
0.92

 
1.26 - 3.18

 
2,208,217

Residential mortgage
 
2,045,040

 
0.38 - 18.00
 
3.34

 
0.86 - 3.09

 
2,110,773

Consumer
 
395,505

 
0.38 - 21.00
 
0.32

 
1.37 - 3.60

 
388,748

Total loans
 
12,311,456

 
 
 
 

 
 

 
12,314,243

Allowance for loan losses
 
(215,507
)
 
 
 
 

 
 

 
—

Net loans
 
12,095,949

 
 
 
 

 
 

 
12,314,243

Mortgage servicing rights
 
100,812

 
 
 
 

 
 

 
100,812

Derivative instruments with positive fair value, net of cash margin
 
338,106

 
 
 
 

 
 

 
338,106

Other assets – private equity funds
 
28,169

 
 
 
 

 
 

 
28,169

Deposits with no stated maturity
 
18,211,068

 
 
 
 

 
 

 
18,211,068

Time deposits
 
2,967,992

 
0.01 - 9.64
 
2.15

 
0.80 - 1.15

 
3,037,708

Other borrowed funds
 
2,706,221

 
0.09 - 5.25
 
—

 
0.09 - 2.67

 
2,696,574

Subordinated debentures
 
347,633

 
1.00 - 5.00
 
3.56

 
2.40
%
 
345,675

Derivative instruments with negative fair value, net of cash margin
 
283,589

 
 
 
 

 
 

 
283,589

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 March 31, 2012 (dollars in thousands):

- 125 -



 
 
Carrying
Value
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
 
Estimated
Fair
Value
Cash and cash equivalents
 
$
706,306

 
 
 
 
 
 
 
$
706,306

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
27,430

 
 
 
 
 
 
 
27,430

U.S. agency residential mortgage-backed securities
 
35,111

 
 
 
 
 
 
 
35,111

Municipal and other tax-exempt securities
 
60,230

 
 
 
 
 
 
 
60,230

Other trading securities
 
5,605

 
 
 
 
 
 
 
5,605

Total trading securities
 
128,376

 
 
 
 
 
 
 
128,376

Investment securities:
 
 

 
 
 
 
 
 
 
 

Municipal and other tax-exempt
 
130,919

 
 
 
 
 
 
 
135,314

U.S. agency residential mortgage-backed securities
 
112,909

 
 
 
 
 
 
 
113,958

Other debt securities
 
183,431

 
 
 
 
 
 
 
202,171

Total investment securities
 
427,259

 
 
 
 
 
 
 
451,443

Available for sale securities:
 
 

 
 
 
 
 
 
 
 

U.S. Treasury
 
1,004

 
 
 
 
 
 
 
1,004

Municipal and other tax-exempt
 
72,234

 
 
 
 
 
 
 
72,234

U.S. agency residential mortgage-backed securities
 
9,677,602

 
 
 
 
 
 
 
9,677,602

Privately issued residential mortgage-backed securities
 
326,513

 
 
 
 
 
 
 
326,513

Other debt securities
 
36,777

 
 
 
 
 
 
 
36,777

Perpetual preferred stock
 
21,024

 
 
 
 
 
 
 
21,024

Equity securities and mutual funds
 
51,443

 
 
 
 
 
 
 
51,443

Total available for sale securities
 
10,186,597

 
 
 
 
 
 
 
10,186,597

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
322,180

 
 
 
 
 
 
 
322,180

Corporate debt securities
 
25,772

 
 
 
 
 
 
 
25,772

Total fair value option securities
 
347,952

 
 
 
 
 
 
 
347,952

Residential mortgage loans held for sale
 
247,039

 
 
 
 
 
 
 
247,039

Loans:
 
 

 
 
 
 
 
 
 
 

Commercial
 
6,943,585

 
0.25 - 30.00
 
0.52

 
0.58 - 3.92

 
6,879,803

Commercial real estate
 
2,252,299

 
0.38 - 18.00
 
1.30

 
0.29 - 3.45

 
2,254,289

Residential mortgage
 
1,968,926

 
0.38 - 18.00
 
3.52

 
1.06 - 3.86

 
2,002,946

Consumer
 
412,634

 
0.38 - 21.00
 
0.38

 
1.73 - 3.78

 
398,149

Total loans
 
11,577,444

 
 
 
 

 
 

 
11,535,187

Allowance for loan losses
 
(244,209
)
 
 
 
 

 
 

 
—

Net loans
 
11,333,235

 
 
 
 

 
 

 
11,535,187

Mortgage servicing rights
 
98,138

 
 
 
 

 
 

 
98,138

Derivative instruments with positive fair value, net of cash margin
 
384,996

 
 
 
 

 
 

 
384,996

Other assets – private equity funds
 
30,993

 
 
 
 

 
 

 
30,993

Deposits with no stated maturity
 
15,357,188

 
 
 
 

 
 

 
15,357,188

Time deposits
 
3,166,099

 
0.01 - 9.64
 
2.24

 
0.94 - 1.44

 
3,221,842

Other borrowed funds
 
3,156,717

 
0.25 - 5.25
 
—

 
0.09 - 2.70

 
3,153,280

Subordinated debentures
 
394,760

 
5.19 - 5.82
 
1.22

 
2.99
%
 
405,589

Derivative instruments with negative fair value, net of cash margin
 
305,290

 
 
 
 

 
 

 
305,290


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
 

- 126 -



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 $163 million at March 31, 2013, $171 million at December 31, 2012 and $200 million at March 31, 2012.
 
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 March 31, 2013, December 31, 2012 or March 31, 2012.

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.

- 127 -



(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
 
 
March 31,
 
 
2013
 
2012
Amount:
 
 
 
 
Federal statutory tax
 
$
47,654

 
$
45,050

Tax exempt revenue
 
(1,742
)
 
(1,264
)
Effect of state income taxes, net of federal benefit
 
3,378

 
2,998

Utilization of tax credits
 
(1,722
)
 
(1,097
)
Bank-owned life insurance
 
(885
)
 
(979
)
Other, net
 
413

 
812

Total
 
$
47,096

 
$
45,520


 
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
Percent of pretax income:
 
 
 
 
Federal statutory tax
 
35
 %
 
35
 %
Tax exempt revenue
 
(1
)
 
(1
)
Effect of state income taxes, net of federal benefit
 
3

 
2

Utilization of tax credits
 
(1
)
 
(1
)
Bank-owned life insurance
 
(1
)
 
(1
)
Other, net
 
—

 
1

Total
 
35
 %
 
35
 %
(14) Subsequent Events

The Company evaluated events from the date of the consolidated financial statements on March 31, 2013 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.


- 128 -



Quarterly Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Three Months Ended
 
 
March 31, 2013
 
December 31, 2012
 
 
Average
Balance
 
Revenue/
Expense1
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense1
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Funds sold and resell agreements
 
$
25,418

 
$
2

 
0.03
%
 
$
19,553

 
$
3

 
0.06
%
Trading securities
 
162,353

 
707

 
1.77
%
 
165,109

 
441

 
1.06
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable3
 
258,196

 
3,798

 
5.97
%
 
271,957

 
4,008

 
5.86
%
Tax-exempt3
 
276,576

 
1,483

 
2.42
%
 
202,128

 
1,379

 
2.93
%
Total investment securities
 
534,772

 
5,281

 
4.22
%
 
474,085

 
5,387

 
4.67
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable3
 
11,205,566

 
55,019

 
2.07
%
 
11,394,797

 
56,514

 
2.08
%
Tax-exempt3
 
86,615

 
907

 
4.25
%
 
87,415

 
836

 
3.80
%
Total available for sale securities3
 
11,292,181

 
55,926

 
2.09
%
 
11,482,212

 
57,350

 
2.10
%
Fair value option securities
 
251,725

 
1,165

 
2.05
%
 
292,490

 
772

 
1.58
%
Residential mortgage loans held for sale
 
216,816

 
1,792

 
3.35
%
 
272,581

 
2,323

 
3.39
%
Loans2
 
12,224,960

 
126,745

 
4.20
%
 
11,989,319

 
130,510

 
4.33
%
Less allowance for loan losses
 
214,017

 
 
 
 
 
229,095

 
 
 
 
Loans, net of allowance
 
12,010,943

 
126,745

 
4.28
%
 
11,760,224

 
130,510

 
4.41
%
Total earning assets3
 
24,494,208

 
191,618

 
3.24
%
 
24,466,254

 
196,786

 
3.30
%
Cash and other assets
 
3,019,223

 
 
 
 
 
3,030,522

 
 
 
 
Total assets
 
$
27,513,431

 
 
 
 
 
$
27,496,776

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
9,836,204

 
$
3,146

 
0.13
%
 
$
9,343,421

 
$
3,496

 
0.15
%
Savings
 
296,319

 
120

 
0.16
%
 
278,714

 
124

 
0.18
%
Time
 
2,913,999

 
11,615

 
1.62
%
 
3,010,367

 
13,588

 
1.80
%
Total interest-bearing deposits
 
13,046,522

 
14,881

 
0.46
%
 
12,632,502

 
17,208

 
0.54
%
Funds purchased
 
1,155,983

 
364

 
0.13
%
 
1,295,442

 
477

 
0.15
%
Repurchase agreements
 
878,679

 
146

 
0.07
%
 
900,131

 
197

 
0.09
%
Other borrowings
 
863,360

 
1,044

 
0.49
%
 
364,425

 
824

 
0.90
%
Subordinated debentures
 
347,654

 
2,159

 
2.52
%
 
347,613

 
2,239

 
2.56
%
Total interest-bearing liabilities
 
16,292,198

 
18,594

 
0.46
%
 
15,540,113

 
20,945

 
0.54
%
Non-interest bearing demand deposits
 
7,002,046

 
 
 
 
 
7,505,074

 
 
 
 
Other liabilities
 
1,221,348

 
 
 
 
 
1,480,102

 
 
 
 
Total equity
 
2,997,839

 
 
 
 
 
2,971,487

 
 
 
 
Total liabilities and equity
 
$
27,513,431

 
 
 
 
 
$
27,496,776

 
 
 
 
Tax-equivalent Net Interest Revenue3
 
 
 
$
173,024

 
2.78
%
 
 
 
$
175,841

 
2.76
%
Tax-equivalent Net Interest Revenue to Earning Assets3
 
 
 
 
 
2.92
%
 
 
 
 
 
2.95
%
Less tax-equivalent adjustment1
 
 
 
2,619

 
 
 
 
 
2,472

 
 
Net Interest Revenue
 
 
 
170,405

 
 
 
 
 
173,369

 
 
Reduction of allowance for credit losses
 
 
 
(8,000
)
 
 
 
 
 
(14,000
)
 
 
Other operating revenue
 
 
 
159,074

 
 
 
 
 
162,626

 
 
Other operating expense
 
 
 
201,324

 
 
 
 
 
222,085

 
 
Income before taxes
 
 
 
136,155

 
 
 
 
 
127,910

 
 
Federal and state income tax
 
 
 
47,096

 
 
 
 
 
44,293

 
 
Net income before non-controlling interest
 
 
 
89,059

 
 
 
 
 
83,617

 
 
Net income (loss) attributable to non-controlling interest
 
 
 
1,095

 
 
 
 
 
1,051

 
 
Net income attributable to BOK Financial Corp.
 
 
 
$
87,964

 
 
 
 
 
$
82,566

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Net income:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
1.28

 
 

 
 

 
$
1.21

 
 

Diluted
 
 

 
$
1.28

 
 

 
 

 
$
1.21

 
 

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.

- 129 -



Three Months Ended
September 30, 2012
 
June 30, 2012
 
March 31, 2012
Average Balance
 
Revenue /Expense1
 
Yield / Rate
 
Average Balance
 
Revenue / Expense1
 
Yield / Rate
 
Average Balance
 
Revenue / Expense1
 
Yield / Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
17,837

 
$
3

 
0.07
%
 
$
19,187

 
$
4

 
0.08
%
 
$
11,385

 
$
2

 
0.07
%
132,213

 
703

 
2.12
%
 
143,770

 
548

 
1.53
%
 
95,293

 
446

 
1.88
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
281,347

 
4,124

 
5.83
%
 
290,557

 
4,282

 
5.93
%
 
302,861

 
4,434

 
5.89
%
127,299

 
1,212

 
4.12
%
 
125,727

 
1,461

 
4.90
%
 
128,029

 
1,549

 
4.87
%
408,646

 
5,336

 
5.33
%
 
416,284

 
5,743

 
5.63
%
 
430,890

 
5,983

 
5.59
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10,969,610

 
59,482

 
2.36
%
 
10,007,368

 
61,583

 
2.52
%
 
9,876,508

 
59,656

 
2.48
%
88,445

 
1,044

 
4.70
%
 
83,911

 
943

 
4.69
%
 
70,719

 
893

 
5.17
%
11,058,055

 
60,526

 
2.38
%
 
10,091,279

 
62,526

 
2.54
%
 
9,947,227

 
60,549

 
2.50
%
336,160

 
1,886

 
2.27
%
 
335,965

 
2,311

 
2.62
%
 
555,233

 
3,487

 
2.79
%
264,024

 
2,310

 
3.48
%
 
191,311

 
1,784

 
3.75
%
 
182,372

 
1,768

 
3.90
%
11,739,662

 
127,816

 
4.33
%
 
11,614,722

 
132,391

 
4.58
%
 
11,436,811

 
128,067

 
4.50
%
231,177

 
 
 
 
 
242,605

 
 
 
 
 
252,538

 
 
 
 
11,508,485

 
127,816

 
4.42
%
 
11,372,117

 
132,391

 
4.68
%
 
11,184,273

 
128,067

 
4.61
%
23,725,420

 
198,580

 
3.47
%
 
22,569,913

 
205,307

 
3.69
%
 
22,406,673

 
200,302

 
3.64
%
2,862,752

 
 
 
 
 
2,968,604

 
 
 
 
 
3,109,910

 
 
 
 
$
26,588,172

 
 
 
 
 
$
25,538,517

 
 
 
 
 
$
25,516,583

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
8,719,648

 
$
3,406

 
0.16
%
 
$
8,779,659

 
$
3,572

 
0.16
%
 
$
9,319,978

 
$
3,826

 
0.17
%
267,498

 
127

 
0.19
%
 
259,386

 
147

 
0.23
%
 
241,442

 
142

 
0.24
%
3,068,870

 
12,384

 
1.61
%
 
3,132,220

 
12,671

 
1.63
%
 
3,246,362

 
13,530

 
1.68
%
12,056,016

 
15,917

 
0.53
%
 
12,171,265

 
16,390

 
0.54
%
 
12,807,782

 
17,498

 
0.55
%
1,678,006

 
632

 
0.15
%
 
1,740,354

 
674

 
0.16
%
 
1,337,614

 
312

 
0.09
%
1,112,847

 
281

 
0.10
%
 
1,095,298

 
265

 
0.10
%
 
1,183,778

 
265

 
0.09
%
97,003

 
739

 
3.03
%
 
86,667

 
853

 
3.96
%
 
72,911

 
1,012

 
5.58
%
352,432

 
2,475

 
2.79
%
 
357,609

 
3,512

 
3.95
%
 
397,440

 
5,552

 
5.62
%
15,296,304

 
20,044

 
0.52
%
 
15,451,193

 
21,694

 
0.56
%
 
15,799,525

 
24,639

 
0.63
%
6,718,572

 
 
 
 
 
6,278,342

 
 
 
 
 
5,847,682

 
 
 
 
1,626,643

 
 
 
 
 
940,249

 
 
 
 
 
1,034,143

 
 
 
 
2,946,653

 
 
 
 
 
2,868,733

 
 
 
 
 
2,835,233

 
 
 
 
$
26,588,172

 
 
 
 
 
$
25,538,517

 
 
 
 
 
$
25,516,583

 
 
 
 
 
 
$
178,536

 
2.95
%
 
 
 
$
183,613

 
3.13
%
 
 
 
$
175,663

 
3.01
%
 
 
 
 
3.12
%
 
 
 
 
 
3.30
%
 
 
 
 
 
3.19
%
 
 
2,509

 
 
 
 
 
2,252

 
 
 
 
 
2,094

 
 
 
 
176,027

 
 
 
 
 
181,361

 
 
 
 
 
173,569

 
 
 
 
—

 
 
 
 
 
(8,000
)
 
 
 
 
 
—

 
 
 
 
179,944

 
 
 
 
 
186,260

 
 
 
 
 
137,281

 
 
 
 
222,340

 
 
 
 
 
223,011

 
 
 
 
 
182,137

 
 
 
 
133,631

 
 
 
 
 
152,610

 
 
 
 
 
128,713

 
 
 
 
45,778

 
 
 
 
 
53,149

 
 
 
 
 
45,520

 
 
 
 
87,853

 
 
 
 
 
99,461

 
 
 
 
 
83,193

 
 
 
 
471

 
 
 
 
 
1,833

 
 
 
 
 
(422
)
 
 
 
 
$
87,382

 
 
 
 
 
$
97,628

 
 
 
 
 
$
83,615

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
$
1.28

 
 

 
 

 
$
1.43

 
 

 
 

 
$
1.22

 
 

 

 
$
1.27

 
 

 
 

 
$
1.43

 
 

 
 

 
$
1.22

 
 





- 130 -



Quarterly Earnings Trends – Unaudited
(In thousands, except share and per share data)
 
 
Three Months Ended
 
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
 
June 30,
2012
 
March 31,
2012
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
188,999

 
$
194,314

 
$
196,071

 
$
203,055

 
$
198,208

Interest expense
 
18,594

 
20,945

 
20,044

 
21,694

 
24,639

Net interest revenue
 
170,405

 
173,369

 
176,027

 
181,361

 
173,569

Reduction of allowance for credit losses
 
(8,000
)
 
(14,000
)
 
—

 
(8,000
)
 
—

Net interest revenue after provision for credit losses
 
178,405

 
187,369

 
176,027

 
189,361

 
173,569

Other operating revenue
 
 

 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
31,751

 
31,958

 
31,261

 
32,600

 
31,111

Transaction card revenue
 
27,692

 
28,009

 
27,788

 
26,758

 
25,430

Trust fees and commissions
 
22,313

 
22,030

 
19,654

 
19,931

 
18,438

Deposit service charges and fees
 
22,966

 
24,174

 
25,148

 
25,216

 
24,379

Mortgage banking revenue
 
39,976

 
46,410

 
50,266

 
39,548

 
33,078

Bank-owned life insurance
 
3,226

 
2,673

 
2,707

 
2,838

 
2,871

Other revenue
 
10,187

 
10,554

 
9,149

 
8,860

 
9,264

Total fees and commissions
 
158,111

 
165,808

 
165,973

 
155,751

 
144,571

Gain (loss) on other  assets, net
 
467

 
137

 
452

 
1,689

 
(3,693
)
Gain (loss) on derivatives, net
 
(941
)
 
(637
)
 
464

 
2,345

 
(2,473
)
Gain (loss) on fair value option securities, net
 
(3,171
)
 
(2,081
)
 
6,192

 
6,852

 
(1,733
)
Gain on available for sale securities, net
 
4,855

 
1,066

 
7,967

 
20,481

 
4,331

Total other-than-temporary impairment losses
 
—

 
(504
)
 
—

 
(135
)
 
(505
)
Portion of loss reclassified from other comprehensive income
 
(247
)
 
(1,163
)
 
(1,104
)
 
(723
)
 
(3,217
)
Net impairment losses recognized in earnings
 
(247
)
 
(1,667
)
 
(1,104
)
 
(858
)
 
(3,722
)
Total other operating revenue
 
159,074

 
162,626

 
179,944

 
186,260

 
137,281

Other operating expense
 
 

 
 

 
 

 
 

 
 

Personnel
 
125,654

 
131,192

 
122,775

 
122,297

 
114,769

Business promotion
 
5,453

 
6,150

 
6,054

 
6,746

 
4,388

Contribution to BOKF Charitable Foundation
 
—

 
2,062

 
—

 
—

 
—

Professional fees and services
 
6,985

 
10,082

 
7,991

 
8,343

 
7,599

Net occupancy and equipment
 
16,481

 
16,883

 
16,914

 
16,906

 
16,023

Insurance
 
3,745

 
3,789

 
3,690

 
4,011

 
3,866

Data processing and communications
 
25,450

 
25,010

 
26,486

 
25,264

 
22,144

Printing, postage and supplies
 
3,674

 
3,403

 
3,611

 
3,903

 
3,311

Net losses and operating expenses of repossessed assets
 
1,246

 
6,665

 
5,706

 
5,912

 
2,245

Amortization of intangible assets
 
876

 
1,065

 
742

 
545

 
575

Mortgage banking costs
 
7,354

 
10,542

 
13,036

 
12,315

 
8,439

Change in fair value of mortgage servicing rights
 
(2,658
)
 
(4,689
)
 
9,576

 
11,450

 
(7,127
)
Other expense
 
7,064

 
9,931

 
5,759

 
5,319

 
5,905

Total other operating expense
 
201,324

 
222,085

 
222,340

 
223,011

 
182,137

Income before taxes
 
136,155

 
127,910

 
133,631

 
152,610

 
128,713

Federal and state income tax
 
47,096

 
44,293

 
45,778

 
53,149

 
45,520

Net income before non-controlling interest
 
89,059

 
83,617

 
87,853

 
99,461

 
83,193

Net income (loss) attributable to non-controlling interest
 
1,095

 
1,051

 
471

 
1,833

 
(422
)
Net income attributable to BOK Financial Corporation
 
$
87,964

 
$
82,566

 
$
87,382

 
$
97,628

 
$
83,615

 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$1.28

$1.21

$1.28

$1.43

$1.22
Diluted
 
$1.28

$1.21

$1.27

$1.43

$1.22
Average shares used in computation:
 
 
 
 
 
 
 
 
 
 
Basic
 
67,814,550

 
67,622,777

 
67,966,700

 
67,472,665

 
67,665,300

Diluted
 
68,040,180

 
67,914,717

 
68,334,989

 
67,744,828

 
67,941,895



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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 March 31, 2013.
 
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
January 1 to January 31, 2013
 
52,556

 
$
56.09

 
—

 
1,960,504

February 1 to February 28, 2013
 
5,262

 
$
57.52

 
—

 
1,960,504

March 1 to March 31, 2013
 
112,267

 
$
62.31

 
—

 
1,960,504

Total
 
170,085

 
 

 
—

 
 

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 March 31, 2013, 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

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

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.



- 132 -



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:        May 3, 2013                                                                  



/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

- 133 -