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BOK Financial
BOKF
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๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. BOK Financial
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2012 Q2

BOK Financial - 10-Q quarterly report FY2012 Q2


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

FORM 10-Q
(Mark One) 
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 68,144,159 shares of common stock ($.00006 par value) as of June 30, 2012.
 




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

Index

Part I.  Financial Information
 
Management’s Discussion and Analysis (Item 2)        
1
Market Risk (Item 3)                                                                                              
54
Controls and Procedures (Item 4)
55
Consolidated Financial Statements – Unaudited (Item 1)
56
Six Month Financial Summary – Unaudited (Item 2)
122
Quarterly Financial Summary – Unaudited (Item 2)
124
Quarterly Earnings Trend – Unaudited
125
 
 
Part II.  Other Information
 
Item 1.  Legal Proceedings
127
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
127
Item 6.  Exhibits
127
Signatures
128



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

Performance Summary

BOK Financial Corporation (“the Company”) reported net income of $97.6 million or $1.43 per diluted share for the second quarter of 2012, compared to $69.0 million or $1.00 per diluted share for the second quarter of 2011 and $83.6 million or $1.22 per diluted share for the first quarter of 2012. Net income for the six months ended June 30, 2012 totaled $181.2 million or $2.65 per diluted share compared with net income of $133.8 million or $1.95 per diluted share for the six months ended June 30, 2011.

Improvement in credit quality increased net income by more than $14 million or $0.21 per diluted share during the second quarter of 2012. The Company recognized a $14 million pretax gain on the sale of common stock received in settlement of a defaulted loan and recorded an $8 million negative provision for credit losses.

Highlights of the second quarter of 2012 included:
•
Net interest revenue totaled $181.4 million for the second quarter of 2012, compared to $174.0 million for the second quarter of 2011 and $173.6 million for the first quarter of 2012. Net interest margin was 3.30% for the second quarter of 2012. Net interest margin was 3.40% for the second quarter of 2011 and 3.19% for the first quarter of 2012. Net interest revenue in the second quarter of 2012 included $2.9 million from the full recovery of a nonaccruing commercial loan. Excluding this recovery, net interest margin was 3.25%. The increase in net interest revenue compared to the second quarter of 2011 was due primarily to lower funding costs. Interest expense decreased $10.0 million due primarily to lower rates paid on interest bearing deposits. Net interest earned from the increase in average loan and securities balances was offset by the reinvestment of cash flows from the securities portfolio at lower current market rates and decreased loan yield.
•
Fees and commissions revenue totaled $154.5 million for the second quarter of 2012 compared to $127.8 million for the second quarter of 2011 and $144.3 million for the first quarter of 2012. Mortgage banking revenue increased $20.2 million over the second quarter of 2011 and $6.5 million over the first quarter of 2012 due primarily to an increase in loan production volume and improved pricing of loans sold which resulted from continued low interest rates. Nearly all other fee-based revenue sources increased over the prior year and quarter.
•
Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $212.3 million, up $22.6 million over the second quarter of 2011 and up $20.0 million over the previous quarter. Personnel costs increased $16.7 million over the second quarter of 2011 and increased $7.5 million over the first quarter of 2012 due largely to incentive compensation. Non-personnel expenses increased $5.9 million over the second quarter of 2011 and increased $12.4 million over the prior quarter.  
•
An $8.0 million negative provision for credit losses was recorded in the second quarter of 2012. No provision for loan losses was recorded in the first quarter of 2012 and a $2.7 million provision for credit losses was recorded in the second quarter of 2011. Net loans charged off totaled $4.8 million or 0.17% of average loans on an annualized basis for the second quarter of 2012 compared to $8.5 million or 0.30% on an annualized basis in the first quarter of 2012 and $8.5 million or 0.32% of average loans on an annualized basis in the second quarter of 2011.
•
The combined allowance for credit losses totaled $241 million or 2.09% of outstanding loans at June 30, 2012, down from $254 million or 2.20% of outstanding loans at March 31, 2012. Nonperforming assets totaled $279 million or 2.38% of outstanding loans and repossessed assets at June 30, 2012 compared to $336 million or 2.87% of outstanding loans and repossessed assets at March 31, 2012.
•
Outstanding loan balances were $11.6 billion at June 30, 2012, flat compared to March 31, 2012. Commercial loan balances increased $93 million and residential mortgage loans were up $37 million over March 31, 2012. Commercial real estate loans decreased $107 million and consumer loans decreased $24 million.
•
Period-end deposits totaled $18.3 billion at June 30, 2012 compared to $18.5 billion at March 31, 2012. Demand deposit accounts increased $251 million, offset by a $357 million decrease in interest-bearing transaction accounts and a $58 million decrease in time deposits.
•
The tangible common equity ratio was 10.07% at June 30, 2012 and 9.75% at March 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

- 1 -



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 13.62% at June 30, 2012 and 13.03% at March 31, 2012.
•
The Company paid a cash dividend of $26 million or $0.38 per common share during the second quarter of 2012. On July 31, 2012 the board of directors approved a quarterly cash dividend of $0.38 per common share payable on or about August 31, 2012 to shareholders of record as of August 17, 2012.

Results of Operations



Net Interest Revenue and Net Interest Margin

Net interest revenue is the interest earned on debt securities, loans and other interest-earning assets less interest paid for interest-bearing deposits and other borrowings. The net interest margin is calculated by dividing net interest revenue by average interest-earning assets. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin is typically greater than net interest spread due to interest income earned on assets funded by non-interest bearing liabilities such as demand deposits and equity.

Net interest revenue totaled $181.4 million for the second quarter of 2012 compared to $174.0 million for the second quarter of 2011 and $173.6 million for the first quarter of 2012. Net interest margin was 3.30% for the second quarter of 2012, 3.19% for the first quarter of 2012 and 3.40% for the second quarter of 2011. Net interest revenue for the second quarter of 2012 included $2.9 million from a full recovery of a nonaccruing commercial loan. Excluding this recovery, net interest margin was 3.25% for the second quarter of 2012. Net interest revenue increased over the second quarter of 2011 primarily due to lower funding costs. Interest expense on deposit accounts decreased $6.8 million. Interest expense on other borrowed funds decreased $1.2 million and interest expense on subordinated debentures decreased $2.0 million. Net interest earned from the increase in average loan and securities balances was offset by the reinvestment of cash flows from the securities portfolio at lower rates and decreased loan yield.

Net interest margin declined compared to the the second quarter of 2011 due primarily to lower yields on our available for sale securities portfolio, partially offset by lower funding costs. The tax-equivalent yield on earning assets was 3.69% for the second quarter of 2012, down 32 basis points from the second quarter of 2011. Excluding the interest recovery, the tax equivalent yield on earning assets was 3.64% and loan yields decreased 21 basis points to 4.48%. Loan yields decreased due primarily to a combination of narrowing credit spreads and changes in market interest rates. The available for sale securities portfolio yield decreased 50 basis points to 2.54%. Cash flows from these securities were reinvested at current lower rates. Funding costs were down 25 basis points from the second quarter of 2011. The cost of interest-bearing deposits decreased 17 basis points and the cost of other borrowed funds decreased 26 basis points. The average rate of interest paid on subordinated debentures decreased 162 basis points compared to the second quarter of 2011. The interest rate on $233 million of these subordinated debentures converted from a fixed rate of interest of 5.75% to a floating interest rate based on LIBOR plus 0.69% as of May 15, 2012. The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 18 basis points in the second quarter of 2012 compared to 20 basis points in the second quarter of 2011.

Average earning assets for the second quarter of 2012 increased $1.5 billion or 7% over the second quarter of 2011. Average loans, net of allowance for loan losses, increased $983 million over the second quarter of 2011 due primarily to growth in average commercial and residential loans. The average balance of available for sale securities, which consist largely of U.S. government agency issued residential mortgage-backed securities, increased $548 million. We purchased these securities to supplement earnings, especially in a period of declining loan demand, and to manage interest rate risk. 

Average deposits increased $869 million over the second quarter of 2011, including a $1.7 billion increase in average demand deposit balances, partially offset by a $500 million decrease in average time deposits and a $404 million decrease in average interest-bearing transaction accounts. Average borrowed funds increased $562 million over the second quarter of 2011.

Net interest margin increased 11 basis points over the first quarter of 2012.  Excluding the impact of the interest recovery, net interest margin increased 6 basis points. The yield on average assets was flat compared to the prior quarter. The loan portfolio yield decreased 2 basis points. The yield on the available for sale securities portfolio increased 4 basis points primarily due to efforts to reduce our prepayment risk on our mortgage-backed securities portfolio. The cost of interest-bearing liabilities

- 2 -



decreased 7 basis points from the previous quarter, including a 167 basis point decrease in the average rate paid on subordinated debentures due to the change from a fixed to floating rate of interest.

Average earning assets for the second quarter of 2012 increased $163 million over the first quarter of 2012. Average outstanding loans, net of allowance for loan losses, increased $188 million largely due to growth in average commercial loan balances. The average balance of the available for sale securities portfolio increased $144 million and the average balance of the fair value option securities portfolio decreased $219 million. Fair value option securities include residential mortgage-backed securities guaranteed by U.S. government agencies that we have elected to carry at fair value held as an economic hedge on our mortgage servicing rights. The balance of these securities can fluctuate significantly. Average deposits decreased by $206 million during the second quarter of 2012, including a $431 million increase in demand deposits partially offset by a $540 million decrease in interest-bearing transaction accounts and a $114 million decrease in time deposits. The average balance of borrowed funds increased $328 million and the average balance of subordinated debentures decreased by $40 million.

Our overall objective is to manage the Company’s balance sheet to be relatively neutral to changes in interest rates as is further described in the Market Risk section of this report. Approximately two-thirds of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will re-price within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that re-price more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally re-price more quickly than liabilities. Among the strategies that we use to manage toward a relatively rate-neutral position, we purchase fixed-rate residential mortgage-backed securities issued primarily by U.S. government agencies and fund them with market rate sensitive liabilities. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also may use derivative instruments to manage our interest rate risk. 

The effectiveness of these strategies is reflected in the overall change in net interest revenue due to changes in interest rates as shown in Table 1 and in the interest rate sensitivity projections as shown in the Market Risk section of this report.


- 3 -



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

 
$
3

 
$
(2
)
 
$
(1
)
 
$
—

 
$
(1
)
Trading securities
 
(37
)
 
353

 
(390
)
 
(165
)
 
450

 
(615
)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
1,482

 
1,610

 
(128
)
 
3,571

 
3,273

 
298

Tax-exempt securities
 
(638
)
 
(665
)
 
27

 
(1,303
)
 
(1,237
)
 
(66
)
Total investment securities
 
844

 
945

 
(101
)
 
2,268

 
2,036

 
232

Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(8,395
)
 
3,651

 
(12,046
)
 
(17,753
)
 
6,495

 
(24,248
)
Tax-exempt securities
 
49

 
130

 
(81
)
 
35

 
129

 
(94
)
Total available for sale securities
 
(8,346
)
 
3,781

 
(12,127
)
 
(17,718
)
 
6,624

 
(24,342
)
Fair value option securities
 
(2,932
)
 
(1,064
)
 
(1,868
)
 
(2,675
)
 
(729
)
 
(1,946
)
Residential mortgage loans held for sale
 
279

 
576

 
(297
)
 
708

 
1,045

 
(337
)
Loans
 
7,528

 
10,615

 
(3,087
)
 
10,805

 
19,758

 
(8,953
)
Total tax-equivalent interest revenue
 
(2,663
)
 
15,209

 
(17,872
)
 
(6,778
)
 
29,184

 
(35,962
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
(2,558
)
 
(222
)
 
(2,336
)
 
(6,316
)
 
(145
)
 
(6,171
)
Savings deposits
 
(56
)
 
37

 
(93
)
 
(101
)
 
60

 
(161
)
Time deposits
 
(4,156
)
 
(2,189
)
 
(1,967
)
 
(6,897
)
 
(3,795
)
 
(3,102
)
Funds purchased
 
398

 
178

 
220

 
390

 
214

 
176

Repurchase agreements
 
(248
)
 
34

 
(282
)
 
(1,024
)
 
137

 
(1,161
)
Other borrowings
 
(1,373
)
 
(1,097
)
 
(276
)
 
(831
)
 
(2,026
)
 
1,195

Subordinated debentures
 
(2,029
)
 
(493
)
 
(1,536
)
 
(2,054
)
 
(538
)
 
(1,516
)
Total interest expense
 
(10,022
)
 
(3,752
)
 
(6,270
)
 
(16,833
)
 
(6,093
)
 
(10,740
)
Tax-equivalent net interest revenue
 
7,359

 
18,961

 
(11,602
)
 
10,055

 
35,277

 
(25,222
)
Change in tax-equivalent adjustment
 
(9
)
 
 
 
 
 
(236
)
 
 
 
 
Net interest revenue
 
$
7,368

 
 
 
 
 
$
10,291

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



- 4 -



Other Operating Revenue

Other operating revenue was $187.0 million for the second quarter of 2012 compared to $143.0 million for the second quarter of 2011 and $140.4 million for the first quarter of 2012. Fees and commissions revenue increased $26.6 million over the second quarter of 2011. Net gains on securities, derivatives and other assets increased $13.5 million due primarily to a $14.2 million gain from the sale of $26 million of stock received received in settlement of a defaulted loan. Other-than-temporary impairment charges recognized in earnings in the second quarter of 2012 were $4.0 million less than charges recognized in the second quarter of 2011.

Other operating revenue increased $46.7 million compared to the first quarter of 2012. Fees and commissions revenue increased $10.1 million. Net gains on securities, derivatives and other assets increased $33.7 million. Other-than-temporary impairment charges recognized in earnings were $2.9 million less than charges recognized in the first quarter of 2012.


Table 2 – Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
June 30,
 
 
 
 
 
Three Months Ended
 
 
 
 
 
 
2012
 
2011
 
Increase(Decrease)
 
% Increase(Decrease)
 
March 31, 2012
 
Increase(Decrease)
 
% Increase(Decrease)
Brokerage and trading revenue
 
$
32,600

 
$
23,725

 
$
8,875

 
37
 %
 
$
31,111

 
$
1,489

 
5
 %
Transaction card revenue
 
26,758

 
31,024

 
(4,266
)
 
(14
)%
 
25,430

 
1,328

 
5
 %
Trust fees and commissions
 
19,931

 
19,150

 
781

 
4
 %
 
18,438

 
1,493

 
8
 %
Deposit service charges and fees
 
25,216

 
23,857

 
1,359

 
6
 %
 
24,379

 
837

 
3
 %
Mortgage banking revenue
 
39,548

 
19,356

 
20,192

 
104
 %
 
33,078

 
6,470

 
20
 %
Bank-owned life insurance
 
2,838

 
2,872

 
(34
)
 
(1
)%
 
2,871

 
(33
)
 
(1
)%
Other revenue
 
7,559

 
7,842

 
(283
)
 
(4
)%
 
9,027

 
(1,468
)
 
(16
)%
Total fees and commissions revenue
 
154,450

 
127,826

 
26,624

 
21
 %
 
144,334

 
10,116

 
7
 %
Gain (loss) on other assets, net
 
3,765

 
3,344

 
421

 
N/A

 
(356
)
 
4,121

 
N/A

Gain (loss) on derivatives, net
 
2,345

 
1,225

 
1,120

 
N/A

 
(2,473
)
 
4,818

 
N/A

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

 
9,921

 
(3,069
)
 
N/A

 
(1,733
)
 
8,585

 
N/A

Gain on available for sale securities
 
20,481

 
5,468

 
15,013

 
N/A

 
4,331

 
16,150

 
N/A

Total other-than-temporary impairment
 
(135
)
 
(74
)
 
(61
)
 
N/A

 
(505
)
 
370

 
N/A

Portion of loss recognized in (reclassified from) other comprehensive income
 
(723
)
 
(4,750
)
 
4,027

 
N/A

 
(3,217
)
 
2,494

 
N/A

Net impairment losses recognized in earnings
 
(858
)
 
(4,824
)
 
3,966

 
N/A

 
(3,722
)
 
2,864

 
N/A

Total other operating revenue
 
$
187,035

 
$
142,960

 
$
44,075

 
31
 %
 
$
140,381

 
$
46,654

 
33
 %

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

Fees and commissions revenue

Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 46% of total revenue for the second quarter of 2012, excluding provision for credit losses and gains and losses on asset sales, securities and derivatives. We believe that a variety of fee revenue sources provide an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. 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.

- 5 -




Brokerage and trading revenue, which includes revenues from securities trading, retail brokerage, customer derivative and investment banking increased $8.9 million or 37% compared to the second quarter of 2011. Securities trading revenue totaled $16.1 million for the second quarter of 2012, up $2.8 million over the second quarter of 2011. Securities trading revenue represents net realized and unrealized gains primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers. We believe these activities will be permitted under the Volcker Rule of the Dodd-Frank Act.

Revenue earned from retail brokerage transactions increased $713 thousand or 10% over the second quarter of 2011 to $8.1 million. Retail brokerage revenue is primarily based on fees and commissions earned on sales of fixed income securities, annuities and mutual funds to retail customers. Revenue growth was primarily due to increased market volatility which increased customer demand.

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 $4.2 million for the second quarter of 2012, up $3.1 million over the second quarter of 2011. The Company received a $2.9 million recovery from the Lehman Brothers bankruptcy in the second quarter of 2012 related to derivative contract losses incurred in 2008. In addition, revenue from to be announced (“TBA”) residential mortgage backed securities which are classified as interest rate derivative contracts sold to our mortgage banking customers increased over the second quarter of 2011.

Investment banking includes fees earned upon completion of underwriting and financial advisory services totaled $4.2 million for the second quarter of 2012, a $2.3 million or 116% increase over the second quarter of 2011 related to the timing and volume of completed transactions. The increased volume of transactions is primarily the result of the Company's expansion of its municipal financial advisory service capacity, particularly in the Texas market.

Brokerage and trading revenue increased $1.5 million over the first quarter of 2012. Investment banking fees were up $1.2 million over the first quarter of 2012. Retail brokerage fees were up $512 thousand over the first quarter of 2012. Securities trading and customer hedging revenue were both flat compared to the prior quarter. The impact of the Lehman recovery was offset by a $1.2 million decrease in revenue from energy derivative contracts due to a decline in contract volumes. Revenue from interest rate derivative contracts decreased $616 thousand primarily due to changes in the fair value of TBA securities sold to our mortgage banking customers compared to the first quarter of 2012. 

We continue to monitor the on-going development of rules to implement the Volcker Rule in Title VI of the Dodd-Frank Act which prohibits banking entities from engaging in proprietary trading as defined by the Dodd-Frank Act and restricts sponsorship of, or investment in, private equity funds and hedge funds, subject to limited exceptions. Based on the proposed rules, we expect the Company's trading activity to be largely unaffected, as our trading activities are all done for the benefit of the customers and securities traded are mostly exempted under the proposed rules. The Company's private equity investment activity may be curtailed, but is not expected to result in a material impact to the Company's financial statements. Final regulations will likely impose additional operating and compliance costs as presently proposed.

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


- 6 -



Transaction card revenue depends largely on the volume and amount of transactions processed, the number of TransFund automated teller machine (“ATM”) locations and the number of merchants served. Transaction card revenue for the second quarter of 2012 decreased $4.3 million or 14% compared to the second quarter of 2011. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $13.5 million, up $1.0 million or 8% over the second quarter of 2011, due primarily to increased transaction volumes. Merchant services fees paid by customers for account management and electronic processing of card transactions and revenue from interchange fees from debit cards issued by the Company were both down primarily due to the impact of interchange fee regulations, commonly referred to as the Durbin Amendment, which became effective on October 1, 2011. Merchant services fees totaled $8.8 million, down $366 thousand or 4% compared to the prior year. Revenue from interchange fees paid by merchant banks for transactions processed from debit cards issued by the Company totaled $4.5 million for the second quarter of 2012 compared to $9.3 million for the second quarter of 2011.

Transaction card revenue increased $1.3 million over the first quarter of 2012. Merchant services fees for account management and electronic processing of card transactions increased $885 thousand, revenue from interchange fees paid by merchant banks for transactions processed from debit cards issued by the Company increased $253 thousand and revenue from processing transactions on behalf of members of our TransFund EFT network increased $190 thousand.

Trust fees and commissions increased $781 thousand or 4% compared to the second quarter of 2011. We continue to voluntarily waive administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds in the current low short-term interest rate environment. Waived fees totaled $2.2 million for the second quarter of 2012, $1.6 million for the second quarter of 2011 and $2.6 million for the first quarter of 2012. The fair value of trust assets administered by the Company totaled $35.3 billion at June 30, 2012, $33.1 billion at June 30, 2011 and $35.7 billion at March 31, 2012. Trust fees and commissions increased $1.5 million compared to the first quarter of 2012 primarily due to the timing of annual tax service fees.

Deposit service charges and fees increased $1.4 million or 6% over the second quarter of 2011. Overdraft fees totaled $14.3 million for the second quarter of 2012, down $384 thousand or 3% compared to the second quarter of 2011. Commercial account service charge revenue totaled $8.7 million, up $929 thousand or 12% over the prior year. The average earnings credit, a non-cash method for commercial customers to avoid incurring charges for deposit services based on account balances, decreased 23 basis points compared to the prior year to better align with market interest rates. Service charges on deposit accounts with a standard monthly fee also increased $810 thousand or 58% over the second quarter of 2011.

Deposit service charges and fees increased $837 thousand over the prior quarter. Overdraft fees increased $748 thousand and service charges on deposit accounts with a standard monthly fee increased $596 thousand, partially offset by a $457 thousand decrease in commercial account service charges.

Mortgage banking revenue increased $20.2 million over the second quarter of 2011 primarily due to increased mortgage loan production volume and improved pricing of loans sold which resulted from continued low interest rates. Revenue from originating and marketing mortgage loans totaled $29.7 million, up $20.3 million or 216% over the second quarter of 2011. Mortgage loans funded for sale totaled $842 million in the second quarter of 2012 and $484 million in the second quarter of 2011. Outstanding commitments to originate mortgage loans were up $236 million or 151% over June 30, 2011. Mortgage servicing revenue decreased $88 thousand or 1% compared to the second quarter of 2011. The outstanding principal balance of mortgage loans serviced for others totaled $11.6 billion, up $281 million over June 30, 2011.

Mortgage banking revenue increased $6.5 million compared to the first quarter of 2012 primarily due to a $6.6 million increase in revenue from originating and marketing residential mortgage loans. Residential mortgage loans funded for sale increased $96 million compared to the previous quarter. Outstanding commitments to originate mortgage loans were up $90 million or 30% over March 31, 2012. Mortgage servicing revenue was largely unchanged compared to the prior quarter. The outstanding balance of mortgage loans serviced for others was up $186 million over March 31, 2012 .


- 7 -



Table 3 – Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
June 30,
 
 
 
%
 
Three Months Ended
 
 
 
%
 
 
2012
 
2011
 
Increase
(Decrease)
 
Increase
(Decrease)
 
March 31,
2012
 
Increase
(Decrease)
 
Increase
(Decrease)
Originating and marketing revenue
 
$
29,689

 
$
9,409

 
$
20,280

 
216
 %
 
$
23,081

 
$
6,608

 
29
 %
Servicing revenue
 
9,859

 
9,947

 
(88
)
 
(1
)%
 
9,997

 
(138
)
 
(1
)%
Total mortgage revenue
 
$
39,548

 
$
19,356

 
$
20,192

 
104
 %
 
$
33,078

 
$
6,470

 
20
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
841,959

 
$
483,808

 
$
358,151

 
74
 %
 
$
746,241

 
$
95,718

 
13
 %
Mortgage loan refinances to total funded
 
51
%
 
36
%
 
 

 
 

 
67
%
 
 

 
 



 
 
June 30,
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
Increase
 
% Increase
 
March 31,
2012
 
Increase
 
% Increase
Outstanding principal balance of mortgage loans serviced for others
 
$
11,564,643

 
$
11,283,442

 
$
281,201

 
2
%
 
$
11,378,806

 
$
185,837

 
2
%
Net gains on securities, derivatives and other assets

In the second quarter of 2012, we recognized a $14.2 million gain on the sale of $26 million of common stock received in 2009 in partial satisfaction of a defaulted commercial loan. In addition, we recognized $6.1 million in gains on sales of $433 million of residential mortgage-backed securities guaranteed by U.S. government agencies. Securities were sold either because they had reached their expected maximum potential return or to mitigate exposure to prepayment risk. We recognized $5.5 million of gains on sales of $654 million of available for sale securities in the second quarter of 2011 and $11.7 million of net gains on sales of $892 million of U.S. government agency mortgage-backed securities held as available for sale in the first quarter of 2012.

We also sold $107 million of privately issued residential mortgage-backed securities at a $7.4 million loss in March 2012. The fair value of these securities increased nearly 10% between December 31, 2011 and February 29, 2012. In response to this increase in fair value, management evaluated all privately issued residential mortgage-backed securities to determine which securities we did not intend to sell based on their expected performance. All securities which we believed to have reached their expected maximum potential at that time were sold in March.

We also maintain a portfolio of residential mortgage backed securities issued by U.S. government agencies and interest rate derivative contracts designated as an economic hedge of the changes in the fair value of our mortgage servicing rights. The fair value of our mortgage servicing rights fluctuate due to changes in prepayment speeds and other assumptions as more fully described in Note 5 to the Consolidated Financial Statements. As benchmark mortgage rates increase, prepayment speeds slow and the value of our mortgage servicing rights increase. As benchmark mortgage rates fall, prepayment speeds increase and the value of our mortgage servicing rights decrease.

Changes in the fair value of mortgage servicing rights are highly dependent on changes in primary mortgage rates, rates offered to borrowers, and assumptions about servicing revenues, servicing costs and discount rates. Changes in the fair value of residential mortgage-backed securities and interest rate derivative contracts are highly dependent on changes in secondary mortgage rates, or rates required by investors. While primary and secondary mortgage rates generally move in the same direction, the spread between them may widen and narrow due to market conditions and government intervention. Changes in assumptions and the spread between the primary and secondary rates can cause significant quarterly earnings volatility.

Table 4 following shows the relationship between changes in the fair value of mortgage servicing rights and interest rate derivative contracts designated as an economic hedge.

- 8 -




Table 4 – Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
June 30,
2012
 
March 31,
2012
 
June 30,
2011
Gain (loss) on mortgage hedge derivative contracts, net
 
$
2,623

 
$
(2,445
)
 
$
1,224

Gain (loss) on fair value option securities, net
 
6,908

 
(2,393
)
 
9,921

Gain (loss) on economic hedge of mortgage servicing rights
 
9,531

 
(4,838
)
 
11,145

Gain (loss) on change in fair value of mortgage servicing rights
 
(11,450
)
 
7,127

 
(13,493
)
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges
 
$
(1,919
)
 
$
2,289

 
$
(2,348
)
 
 
 
 
 
 
 
Net interest revenue on fair value option securities
 
$
2,148

 
$
3,165

 
$
5,120


As more fully discussed in Note 2 to the Consolidated Financial Statements, we recognized other-than-temporary impairment losses on certain private-label residential mortgage-backed securities of $858 thousand in earnings during the second quarter of 2012. These losses primarily related to additional declines in projected cash flows of private-label mortgage backed securities as a result of increased home price depreciation on privately issued residential mortgage-backed securities that we do not intend to sell. We recognized other-than-temporary impairment losses in earnings of $4.8 million in the second quarter of 2011 and $3.7 million in the first quarter of 2012.



- 9 -



Other Operating Expense

Other operating expense for the second quarter of 2012 totaled $223.8 million, up $20.6 million or 10% over the second quarter of 2011. Changes in the fair value of mortgage servicing rights increased operating expense $11.5 million in the second quarter of 2012 and $13.5 million in the second quarter of 2011. Excluding changes in the fair value of mortgage servicing rights, operating expenses were up $22.6 million or 12% over the second quarter of 2011. Personnel expenses increased $16.7 million or 16%. Non-personnel expenses increased $5.9 million or 7%.

Excluding changes in the fair value of mortgage servicing rights, operating expenses were up $20.0 million over the previous quarter. Personnel expenses increased $7.5 million and non-personnel expenses increased $12.4 million.

Table 5 – Other Operating Expense
(In thousands)
 
 
Three Months Ended
June 30,
 
Increase
 
%
Increase
 
Three Months Ended
March 31,
 
Increase
 
%
Increase
 
 
2012
 
2011
 
(Decrease)
 
(Decrease)
 
2012
 
(Decrease)
 
(Decrease)
Regular compensation
 
$
65,218

 
$
61,380

 
$
3,838

 
6
 %
 
$
63,132

 
$
2,086

 
3
 %
Incentive compensation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash-based
 
27,950

 
23,530

 
4,420

 
19
 %
 
26,241

 
1,709

 
7
 %
Stock-based
 
11,349

 
3,122

 
8,227

 
264
 %
 
6,625

 
4,724

 
71
 %
Total incentive compensation
 
39,299

 
26,652

 
12,647

 
47
 %
 
32,866

 
6,433

 
20
 %
Employee benefits
 
17,780

 
17,571

 
209

 
1
 %
 
18,771

 
(991
)
 
(5
)%
Total personnel expense
 
122,297

 
105,603

 
16,694

 
16
 %
 
114,769

 
7,528

 
7
 %
Business promotion
 
6,746

 
4,777

 
1,969

 
41
 %
 
4,388

 
2,358

 
54
 %
Professional fees and services
 
8,343

 
6,258

 
2,085

 
33
 %
 
7,599

 
744

 
10
 %
Net occupancy and equipment
 
16,906

 
15,554

 
1,352

 
9
 %
 
16,023

 
883

 
6
 %
Insurance
 
4,011

 
4,771

 
(760
)
 
(16
)%
 
3,866

 
145

 
4
 %
Data processing & communications
 
25,264

 
24,428

 
836

 
3
 %
 
22,144

 
3,120

 
14
 %
Printing, postage and supplies
 
3,903

 
3,586

 
317

 
9
 %
 
3,311

 
592

 
18
 %
Net losses & operating expenses of repossessed assets
 
5,912

 
5,859

 
53

 
1
 %
 
2,245

 
3,667

 
163
 %
Amortization of intangible assets
 
545

 
896

 
(351
)
 
(39
)%
 
575

 
(30
)
 
(5
)%
Mortgage banking costs
 
11,173

 
8,968

 
2,205

 
25
 %
 
7,573

 
3,600

 
48
 %
Change in fair value of mortgage servicing rights
 
11,450

 
13,493

 
(2,043
)
 
(15
)%
 
(7,127
)
 
18,577

 
(261
)%
Other expense
 
7,236

 
9,016

 
(1,780
)
 
(20
)%
 
9,871

 
(2,635
)
 
(27
)%
Total other operating expense
 
$
223,786

 
$
203,209

 
$
20,577

 
10
 %
 
$
185,237

 
$
38,549

 
21
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of employees (full-time equivalent)
 
4,585

 
4,530

 
55

 
1
 %
 
4,630

 
(45
)
 
(1
)%

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

Personnel expense

Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs increased $3.8 million or 6% over the second quarter of 2011 primarily due to standard annual merit increases which were effective in the second quarter of 2012. The Company generally awards annual merit increases during the first quarter for a majority of its staff.

Incentive compensation increased $12.6 million or 47% over the second quarter of 2011. Cash-based incentive compensation plans are either intended to provide current rewards to employees who generate long-term business opportunities for the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions. Total cash-based incentive compensation increased $4.4 million or

- 10 -



19% over the second quarter of 2011. Cash-based incentive compensation related to brokerage and trading revenue was up $4.6 million over the second quarter of 2011 and all other cash-based incentive compensation was essentially flat compared to the prior year.

The Company also provides stock-based incentive compensation plans. Stock-based compensation plans include both equity and liability awards. Compensation expense for equity awards increased $712 thousand over the second quarter of 2011. Expense for equity awards is based on the grant-date fair value of the awards and is unaffected by subsequent changes in fair value. Compensation expense related to liability awards increased $7.5 million over the second quarter of 2011 primarily due to the timing of accruals related to the BOK Financial Corp. True-Up Plan. Approved by shareholders on April 26, 2011, the True-Up Plan is designed to adjust annual and long-term performance-based incentive compensation for certain senior executives either upward or downward based on the earnings per share performance and compensation of comparable senior executives at peer banks.   

Employee benefit expense was essentially flat compared to the second quarter of 2011. Increased expenses related to payroll tax were offset by lower employee medical insurance costs.

Personnel expense increased $7.5 million compared to the first quarter of 2012. Incentive compensation increased $6.4 million over the first quarter of 2012. Stock-based compensation increased $4.7 million due to the timing of accruals and cash-based incentive compensation increased $1.7 million. Regular compensation expense increased $2.1 million over the first quarter of 2012 due to standard annual merit increases which were fully effective in the second quarter of 2012.

Employee benefit expenses decreased $1.0 million compared to the first quarter of 2012 due to seasonal decreases in payroll tax expense and lower employee medical costs.

Non-personnel operating expenses

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, increased $5.9 million over the second quarter of 2011. Mortgage banking costs increased $2.2 million due primarily to a $3.7 million increase in the provision for potential losses on loans sold to government sponsored entities under standard representation and warranties. While the number of actual repurchases has remained low, the loss severity has trended higher. The accrual for potential losses totaled $5.0 million at June 30, 2012. Professional fees and services increased $2.1 million primarily due to increased loan volumes and business promotion expense increased $2.0 million due to the timing of marketing expenses. Net losses and operating expenses of repossessed assets were flat compared to the second quarter of 2011.

Excluding changes in the fair value of mortgage servicing rights, non-personnel operating expenses increased $12.4 million compared to the first quarter of 2012. Net losses and operating expenses on repossessed properties were up $3.7 million over the first quarter of 2012. Losses on sales and write-downs of repossessed assets increased by $2.7 million. Write-downs of repossessed assets were up primarily due to the timing of regularly scheduled appraisal updates, partially offset by decreased losses on sales of repossessed assets. Operating expenses of repossessed assets were up $945 thousand over the first quarter. Mortgage banking costs were up $3.6 million primarily due to increased provision for potential losses on loans sold to government sponsored entities under standard representations and warranties. Data processing and communication expense increased $3.1 million. Data processing and communications expense in the first quarter was lower due to the favorable resolution of a dispute with a service provider. Business promotion expense was up $2.4 million due primarily to timing of marketing expenses.

Income Taxes

Income tax expense was $53.1 million or 35% of book taxable income for the second quarter of 2012 compared to $39.4 million or 35% of book taxable income for the second quarter of 2011 and $45.5 million or 35% of book taxable income for the first 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 June 30, 2012, March 31, 2012 and June 30, 2011.



- 11 -



Lines of Business

We operate three principal lines of business: Commercial Banking, Consumer Banking and Wealth Management. Commercial Banking includes lending, treasury and cash management services and customer risk management products for small businesses, middle market and larger commercial customers. Commercial banking also includes the TransFund EFT network. Consumer Banking includes retail lending and deposit services and all mortgage banking activities. Wealth Management provides fiduciary services, brokerage and trading, private bank services and investment advisory services in all markets. Wealth Management also originates loans for high net worth clients.

In addition to our lines of business, we have a Funds Management unit. The primary purpose of this unit is to manage our overall liquidity needs and interest rate risk. Each line of business borrows funds from and provides funds to the funds management unit as needed to support their operations. Operating results for funds management and other include the effect of interest rate risk positions and risk management activities, securities gains and losses including impairment charges, the provision for credit losses in excess of net loans charged off, tax planning strategies and certain executive compensation costs that are not attributed to the lines of business.

We allocate resources and evaluate the performance of our lines of business after allocation of funds, certain indirect expenses, taxes based on statutory rates, actual net credit losses and capital costs. The cost of funds borrowed from the funds management unit by the operating lines of business is transfer priced at rates that approximate market rates for funds with similar duration. Market is 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 $21.8 million over the second quarter of 2011. The increase in net income attributed to our lines of business was due primarily to growth in mortgage banking revenue and a gain on the sale of stock received in partial satisfaction of a defaulted loan, along with a decrease in net loans charged off.

Table 6 – Net Income by Line of Business
(In thousands)

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
Commercial Banking
 
$
43,369

 
$
31,539

 
$
76,438

 
$
60,179

Consumer Banking
 
14,726

 
7,099

 
34,184

 
13,616

Wealth Management
 
6,274

 
3,904

 
10,295

 
8,194

Subtotal
 
64,369

 
42,542

 
120,917

 
81,989

Funds Management and other
 
33,259

 
26,465

 
60,326

 
51,792

Total
 
$
97,628

 
$
69,007

 
$
181,243

 
$
133,781



- 12 -



Commercial Banking

Commercial Banking contributed $43.4 million to consolidated net income in the second quarter of 2012, up $11.8 million or 38% over the second quarter of 2011. A gain on the sale of stock received in partial satisfaction of a defaulted loan and the full recovery of a nonaccruing commercial loan added $11.7 million to net income provided by Commercial Banking in the second quarter of 2012.

Table 7 – Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Increase
 
June 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue from external sources
 
$
93,360

 
$
85,325

 
$
8,035

 
$
182,698

 
$
168,583

 
$
14,115

 
Net interest expense from internal sources
 
(11,164
)
 
(7,444
)
 
(3,720
)
 
(22,920
)
 
(16,718
)
 
(6,202
)
 
Total net interest revenue
 
82,196

 
77,881

 
4,315

 
159,778

 
151,865

 
7,913

 
Net loans charged off
 
748

 
4,829

 
(4,081
)
 
7,140

 
11,605

 
(4,465
)
 
Net interest revenue after net loans charged off
 
81,448

 
73,052

 
8,396

 
152,638

 
140,260

 
12,378

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
37,795

 
36,005

 
1,790

 
76,543

 
71,421

 
5,122

 
Gain on financial instruments and other assets, net
 
14,363

 
9

 
14,354

 
14,407

 
9

 
14,398

 
Other operating revenue
 
52,158

 
36,014

 
16,144

 
90,950

 
71,430

 
19,520

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
25,504

 
23,918

 
1,586

 
50,348

 
47,095

 
3,253

 
Net losses and expenses of repossessed assets
 
5,002

 
4,490

 
512

 
5,669

 
9,190

 
(3,521
)
 
Other non-personnel expense
 
18,835

 
18,271

 
564

 
36,560

 
36,104

 
456

 
Corporate allocations
 
13,284

 
10,768

 
2,516

 
25,908

 
20,809

 
5,099

 
Total other operating expense
 
62,625

 
57,447

 
5,178

 
118,485

 
113,198

 
5,287

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
70,981

 
51,619

 
19,362

 
125,103

 
98,492

 
26,611

 
Federal and state income tax
 
27,612

 
20,080

 
7,532

 
48,665

 
38,313

 
10,352

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
43,369

 
$
31,539

 
$
11,830

 
$
76,438

 
$
60,179

 
$
16,259

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
9,934,469

 
$
9,174,216

 
$
760,253

 
$
10,008,708

 
$
9,068,308

 
$
940,400

 
Average loans
 
9,024,239

 
8,172,263

 
851,976

 
8,942,490

 
8,122,664

 
819,826

 
Average deposits
 
8,211,478

 
7,620,542

 
590,936

 
8,283,114

 
7,542,159

 
740,955

 
Average invested capital
 
862,816

 
867,491

 
(4,675
)
 
864,167

 
865,439

 
(1,272
)
 
Return on average assets
 
1.76
%
 
1.38
%
 
38

bp
1.54
%
 
1.34
%
 
20

bp
Return on invested capital
 
20.22
%
 
14.58
%
 
564

bp
17.79
%
 
14.02
%
 
377

bp
Efficiency ratio
 
52.19
%
 
50.44
%
 
175

bp
50.14
%
 
50.70
%
 
(56
)
bp
Net charge-offs (annualized) to average loans
 
0.03
%
 
0.24
%
 
(21
)
bp
0.16
%
 
0.29
%
 
(13
)
bp

Net interest revenue increased $4.3 million or 6% over the second quarter of 2011, including $2.9 million from the recovery of foregone interest and fees on a nonaccruing loan. The remaining increase in net interest revenue was primarily due to an $852 million increase in average loan balances, partially offset by a decrease in loan yield compared to the second quarter of 2011. Net interest earned on deposits sold to our funds management unit decreased $3.4 million primarily due to lower yields on funds invested, partially offset by a $591 million increase in the average balance of deposits attributed to Commercial Banking.

- 13 -




Fees and commissions revenue increased $1.8 million or 5% primarily due to increased commercial deposits service charges and fees as average earnings credit, a non-cash method for commercial customers to avoid incurring charges for deposit services based on account balances, decreased 23 basis points compared to the prior year to better align with market interest rates.

Operating expenses increased $5.2 million or 9% over the second quarter of 2011. Personnel costs increased $1.6 million or 7% primarily due to increased incentive compensation and standard annual merit increases.  Net losses and operating expenses on repossessed assets increased $512 thousand over the second quarter of 2011, primarily due to write-downs as the result of the timing of regularly scheduled appraisal updates. Other non-personnel expenses increased $564 thousand or 3% over the prior year. Corporate expense allocations increased $2.5 million primarily due to increased customer loan and deposit activity.

The average outstanding balance of loans attributed to Commercial Banking increased $852 million to $9.0 billion for the second quarter of 2012. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans which are primarily attributed to the Commercial Banking segment. Net Commercial Banking loans charged off decreased $4.1 million compared to the second quarter of 2011 to $748 thousand or 0.03% of average loans attributed to this line of business on an annualized basis. The decrease in net loans charged off was primarily due to full recovery of a nonaccruing commercial loan and a decrease in losses on commercial real estate loans.
 
Average deposits attributed to Commercial Banking were $8.2 billion for the second quarter of 2012, up $591 million or 8% over the second quarter of 2011. Average balances attributed to our energy customers increased $399 million or 49% and average balances attributed to our commercial & industrial loan customers increased $388 million or 14%. Average balances held by treasury services customers were down $264 million compared to the second quarter of 2011. Commercial customers continue to maintain high account balances due to continued economic uncertainty and persistently low yields available on high quality investments.


- 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 contributed $14.7 million to consolidated net income for the second quarter of 2012, up $7.6 million primarily due to growth in mortgage banking revenue. Revenue from mortgage loan production was up $20.3 million over the second quarter of 2011. Changes in fair value of our mortgage servicing rights, net of economic hedge, decreased net income attributed to consumer banking by $1.2 million in the second quarter of 2012 and $1.4 million in the second quarter of 2011.

Table 8 – Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Increase
 
June 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue from external sources
 
$
23,125

 
$
21,358

 
$
1,767

 
$
46,939

 
$
40,022

 
$
6,917

 
Net interest revenue from internal sources
 
5,885

 
7,675

 
(1,790
)
 
12,005

 
17,080

 
(5,075
)
 
Total net interest revenue
 
29,010

 
29,033

 
(23
)
 
58,944

 
57,102

 
1,842

 
Net loans charged off
 
4,221

 
3,049

 
1,172

 
5,653

 
5,731

 
(78
)
 
Net interest revenue after net loans charged off
 
24,789

 
25,984

 
(1,195
)
 
53,291

 
51,371

 
1,920

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
64,286

 
46,298

 
17,988

 
120,221

 
89,717

 
30,504

 
Gain on financial instruments and other assets, net
 
10,914

 
11,188

 
(274
)
 
6,076

 
5,251

 
825

 
Other operating revenue
 
75,200

 
57,486

 
17,714

 
126,297

 
94,968

 
31,329

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
23,088

 
20,890

 
2,198

 
44,212

 
41,936

 
2,276

 
Net losses and expenses of repossessed assets
 
179

 
1,086

 
(907
)
 
394

 
1,657

 
(1,263
)
 
Change in fair value of mortgage servicing rights
 
11,450

 
13,493

 
(2,043
)
 
4,323

 
10,364

 
(6,041
)
 
Other non-personnel expense
 
30,086

 
23,814

 
6,272

 
53,308

 
44,459

 
8,849

 
Corporate allocations
 
11,085

 
12,569

 
(1,484
)
 
21,403

 
25,638

 
(4,235
)
 
Total other operating expense
 
75,888

 
71,852

 
4,036

 
123,640

 
124,054

 
(414
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
24,101

 
11,618

 
12,483

 
55,948

 
22,285

 
33,663

 
Federal and state income tax
 
9,375

 
4,519

 
4,856

 
21,764

 
8,669

 
13,095

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
14,726

 
$
7,099

 
$
7,627

 
$
34,184

 
$
13,616

 
$
20,568

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
5,695,019

 
$
5,864,942

 
$
(169,923
)
 
$
5,757,046

 
$
5,992,191

 
$
(235,145
)
 
Average loans
 
2,129,408

 
2,038,866

 
90,542

 
2,130,362

 
2,017,115

 
113,247

 
Average deposits
 
5,577,262

 
5,640,794

 
(63,532
)
 
5,596,158

 
5,788,920

 
(192,762
)
 
Average invested capital
 
289,443

 
271,353

 
18,090

 
288,351

 
272,301

 
16,050

 
Return on average assets
 
1.04
%
 
0.49
%
 
55

bp
1.19
%
 
0.46
%
 
73

bp
Return on invested capital
 
20.46
%
 
10.49
%
 
997

bp
23.91
%
 
10.08
%
 
1,383

bp
Efficiency ratio
 
69.07
%
 
77.47
%
 
(840
)
bp
66.60
%
 
77.44
%
 
(1,084
)
bp
Net charge-offs (annualized) to average loans
 
0.80
%
 
0.60
%
 
20

bp
0.53
%
 
0.57
%
 
(4
)
bp
Residential mortgage loans funded for sale
 
$
841,959

483,808,000

$
483,808

 
$
358,151

 
$
1,588,200

 
$
903,492

 
$
684,708

 

- 15 -



 
 
June 30,
2012
 
June 30,
2011
 
Increase
(Decrease)
Banking locations
 
213

 
207

 
6

Residential mortgage loans servicing portfolio1
 
$
12,635,324

 
$
12,177,661

 
$
457,663

1 
Includes outstanding principal for loans serviced for affiliates

Net interest revenue from consumer banking activities was flat compared to the second quarter of 2011. Net interest earned on residential mortgage-backed securities held as an economic hedge of mortgage servicing rights declined by $3.2 million due to a $208 million reduction in the average balance of this portfolio. Average loan balances were up $91 million or 4% over the second quarter of 2011. Other consumer loans increased, partially offset by decreased balances of indirect automobile loans due to paydowns. The Company previously disclosed its decision to exit the indirect automobile loan business in the first quarter of 2009. Net interest earned on deposits sold to our funds management unit decreased $886 thousand primarily due to lower yields on funds invested.

Net loans charged off by the Consumer Banking unit increased $1.2 million compared to the second quarter of 2011 primarily due to increased residential mortgage loan charge-offs. Net consumer banking charge-offs also includes indirect automobile loans, overdrawn deposit accounts and other direct consumer loans.

Fees and commissions revenue increased $18.0 million or 39% over the second quarter of 2011. Mortgage banking revenue was up $20.7 million or 106% compared to the prior year primarily due to increased residential mortgage loan originations and commitments and improved pricing of loans sold. Transaction card revenues were down $4.5 million or 44% from the prior year primarily due to the impact of interchange fee regulations which became effective on October 1, 2011.

Excluding the change in the fair value of mortgage servicing rights, operating expenses increased $6.1 million over the second quarter of 2011. Personnel expenses were up $2.2 million or 11% 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 $6.3 million or 26% due primarily to increased mortgage banking activity and included a $2.2 million increase in mortgage banking costs primarily related to increasing our accrual for potential credit losses on loans sold to U.S. government agencies under standard representations and warranties. Our level of repurchases to date has remained low relative to the size of our servicing portfolio and we expect it to remain low; however, the loss severity of loans we have had to repurchase from the agencies has trended higher. See additional discussion of the repurchase level in Note 5 to the Consolidated Financial Statements. Corporate expense allocations were down $1.5 million compared to the second quarter of 2011. Net losses and operating expenses of repossessed assets were down $907 thousand compared to the prior year.

Average consumer deposits decreased $64 million or 1% compared to the second quarter of 2011.  Average interest-bearing transaction accounts increased $146 million or 5% and average demand deposits increased $92 million or 16%. Average time deposit balances were down $344 million or 16% compared to the prior year.

Our Consumer Banking division originates, markets and services conventional and government-sponsored residential mortgage loans for all of our geographical markets. We funded $918 million of residential mortgage loans in the second quarter of 2012 and $533 million in the second quarter of 2011. Mortgage loan fundings included $842 million of mortgage loans funded for sale in the secondary market and $76 million funded for retention within the consolidated group. Approximately 36% of our mortgage loans funded were in the Oklahoma market, 16% in the New Mexico market, 14% in the Texas market and 14% in the Colorado market. In addition, 6% of our mortgage loan fundings came from correspondent lenders. Expansion of our mortgage banking division in the Texas, Colorado and Kansas markets positioned us to benefit from increased demand as the result of continued low mortgage interest rates.

At June 30, 2012, the Consumer Banking division services $11.6 billion of mortgage loans serviced 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 $109 million or 0.94% of loans serviced for others at June 30, 2012 compared to $109 million or 0.96% of loans serviced for others at March 31, 2012. Mortgage servicing revenue, including revenue on loans serviced for the the consolidated group, increased $422 thousand or 4% over the second quarter of 2011 to $10.4 million.


- 16 -



Wealth Management

Wealth Management contributed $6.3 million to consolidated net income in second quarter of 2012, up $2.4 million or 61% over the second quarter of 2011.

Table 9 – Wealth Management
(Dollars in thousands)
 
Three Months Ended
 
 
 
Six Months Ended
 
 
 
 
June 30,
 
Increase
 
June 30,
 
Increase
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue from external sources
$
7,137

 
$
7,926

 
$
(789
)
 
$
14,277

 
$
16,150

 
$
(1,873
)
 
Net interest revenue from internal sources
5,306

 
3,696

 
1,610

 
10,279

 
6,667

 
3,612

 
Total net interest revenue
12,443

 
11,622

 
821

 
24,556

 
22,817

 
1,739

 
Net loans charged off
521

 
623

 
(102
)
 
1,171

 
1,061

 
110

 
Net interest revenue after net loans charged off
11,922

 
10,999

 
923

 
23,385

 
21,756

 
1,629

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
51,229

 
42,266

 
8,963

 
97,674

 
82,191

 
15,483

 
Gain on financial instruments and other assets, net
327

 
522

 
(195
)
 
275

 
565

 
(290
)
 
Other operating revenue
51,556

 
42,788

 
8,768

 
97,949

 
82,756

 
15,193

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
36,682

 
31,954

 
4,728

 
71,933

 
60,275

 
11,658

 
Net losses (gains) and expenses of repossessed assets
15

 
37

 
(22
)
 
20

 
(4
)
 
24

 
Other non-personnel expense
7,381

 
6,990

 
391

 
14,326

 
14,087

 
239

 
Corporate allocations
9,131

 
8,416

 
715

 
18,205

 
16,744

 
1,461

 
Other operating expense
53,209

 
47,397

 
5,812

 
104,484

 
91,102

 
13,382

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
10,269

 
6,390

 
3,879

 
16,850

 
13,410

 
3,440

 
Federal and state income tax
3,995

 
2,486

 
1,509

 
6,555

 
5,216

 
1,339

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
6,274

 
$
3,904

 
$
2,370

 
$
10,295

 
$
8,194

 
$
2,101

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
$
4,194,153

 
$
3,883,815

 
$
310,338

 
$
4,195,283

 
$
3,862,949

 
$
332,334

 
Average loans
927,321

 
1,016,942

 
(89,621
)
 
927,429

 
1,035,253

 
(107,824
)
 
Average deposits
4,086,874

 
3,784,131

 
302,743

 
4,096,555

 
3,762,978

 
333,577

 
Average invested capital
176,704

 
176,070

 
634

 
176,149

 
175,506

 
643

 
Return on average assets
0.60
%
 
0.40
%
 
20

bp
0.49
%
 
0.43
%
 
6

bp
Return on invested capital
14.28
%
 
8.89
%
 
539

bp
11.75
%
 
9.41
%
 
234

bp
Efficiency ratio
83.57
%
 
87.95
%
 
(438
)
bp
85.48
%
 
86.76
%
 
(128
)
bp
Net charge-offs (annualized) to average loans
0.23
%
 
0.25
%
 
(2
)
bp
0.25
%
 
0.21
%
 
4

bp


- 17 -



 
 
June 30,
2012
 
June 30,
2011
 
Increase
(Decrease)
Trust assets in custody for which BOKF has sole or joint discretionary authority
 
$
10,225,038

 
$
9,687,621

 
$
537,417

Trust assets not in custody for which BOKF has sole or joint discretionary authority
 
231,167

 
195,751

 
35,416

Non-managed trust assets in custody
 
12,680,420

 
12,450,949

 
229,471

Trusts assets held in safekeeping
 
12,612,094

 
10,936,886

 
1,675,208

Trust assets
 
35,748,719

 
33,271,207

 
2,477,512

Other assets held in safekeeping
 
8,325,723

 
6,771,439

 
1,554,284

Brokerage accounts under BOKF administration
 
4,109,662

 
3,392,134

 
717,528

Assets under management or in custody
 
$
48,184,104

 
$
43,434,780

 
$
4,749,324


Net interest revenue for the second quarter of 2012 was up $821 thousand or 7% over the second quarter of 2011. Average loan balances were down $90 million. Average deposit balances were up $303 million or 8% over the prior year. The impact of this increase on net interest revenue was partially offset by decreased yield on deposits sold to the fund management unit. Net loans charged off decreased $102 thousand from the second quarter of 2011 to $521 thousand or 0.23% of average loans on an annualized basis. 

Fees and commission revenue was up $9.0 million or 21% over the second quarter of 2011, primarily due to a $7.9 million or 36% increase in brokerage and trading revenues and a $780 thousand or 4% increase in trust fees primarily due to timing of fees.

Other operating revenue includes fees earned from state and municipal bond underwriting and financial advisory services, primarily in the Oklahoma and Texas markets. In the second quarter of 2012, the Wealth Management division participated in 137 underwritings that totaled $1.7 billion. As a participant, the Wealth Management division was responsible for facilitating the sale of approximately $719 million of these underwritings. In the second quarter of 2011, the Wealth Management division participated in 61 underwritings that totaled approximately $961 million. Our interest in these underwritings totaled approximately $286 million.

Operating expenses increased $5.8 million or 12% over the second quarter of 2011. Personnel expenses increased $4.7 million. Incentive compensation increased $3.3 million over the prior year. Regular compensation costs increased $1.2 million primarily due to increased headcount and annual merit increases. Non-personnel expenses increased $391 thousand or 6% due primarily to additional expenses incurred related to expansion of the Wealth Management business line.

Growth in average assets was largely due to funds sold to the funds management unit.  Average deposits attributed to the Wealth Management division were up $303 million or 8% over the second quarter of 2011 primarily due to a $302 million increase in average demand deposits accounts. Average interest-bearing transaction accounts increased $81 million offset by an $81 million decrease in average time deposit balances.


- 18 -



Geographical Market Distribution

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

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

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
Oklahoma
 
$
36,442

 
$
27,818

 
$
69,810

 
$
52,865

Texas
 
11,664

 
10,163

 
24,758

 
20,330

New Mexico
 
5,137

 
2,856

 
9,667

 
5,765

Arkansas
 
5,453

 
19

 
7,621

 
850

Colorado
 
3,507

 
1,457

 
5,996

 
3,869

Arizona
 
(910
)
 
(902
)
 
(2,702
)
 
(3,970
)
Kansas / Missouri
 
2,106

 
958

 
4,145

 
1,927

Subtotal
 
63,399

 
42,369

 
119,295

 
81,636

Funds management and other
 
34,229

 
26,638

 
61,948

 
52,145

Total
 
$
97,628

 
$
69,007

 
$
181,243

 
$
133,781



- 19 -



Oklahoma Market

Our Oklahoma offices are located primarily in the Tulsa and Oklahoma City metropolitan areas. Oklahoma is a significant market to the Company, representing 48% of our average loans, 55% of our average deposits and 37% of our consolidated net income in the second quarter of 2012. In addition, all of our mortgage servicing activity, TransFund EFT network and 67% of our trust assets are attributed to the Oklahoma market.

Table 11 – Oklahoma
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Increase
 
June 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue
 
$
58,065

 
$
59,295

 
$
(1,230
)
 
$
115,963

 
$
114,303

 
$
1,660

 
Net loans charged off
 
4,191

 
1,825

 
2,366

 
5,223

 
8,245

 
(3,022
)
 
Net interest revenue after net loans charged off
 
53,874

 
57,470

 
(3,596
)
 
110,740

 
106,058

 
4,682

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
83,226

 
76,607

 
6,619

 
160,681

 
148,387

 
12,294

 
Gain on financial instruments and other assets, net
 
25,460

 
11,799

 
13,661

 
20,570

 
5,903

 
14,667

 
Other operating revenue
 
108,686

 
88,406

 
20,280

 
181,251

 
154,290

 
26,961

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
38,697

 
37,559

 
1,138

 
75,239

 
71,198

 
4,041

 
Net losses and expenses of repossessed assets
 
1,578

 
2,334

 
(756
)
 
1,994

 
2,918

 
(924
)
 
Change in fair value of mortgage servicing rights
 
11,450

 
13,493

 
(2,043
)
 
4,323

 
10,364

 
(6,041
)
 
Other non-personnel expense
 
43,067

 
36,438

 
6,629

 
78,451

 
69,331

 
9,120

 
Corporate allocations
 
8,125

 
10,523

 
(2,398
)
 
17,729

 
20,015

 
(2,286
)
 
Total other operating expense
 
102,917

 
100,347

 
2,570

 
177,736

 
173,826

 
3,910

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
59,643

 
45,529

 
14,114

 
114,255

 
86,522

 
27,733

 
Federal and state income tax
 
23,201

 
17,711

 
5,490

 
44,445

 
33,657

 
10,788

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
36,442

 
$
27,818

 
$
8,624

 
$
69,810

 
$
52,865

 
$
16,945

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
11,375,404

 
$
10,691,211

 
$
684,193

 
$
11,464,605

 
$
10,567,673

 
$
896,932

 
Average loans
 
5,558,617

 
5,156,338

 
402,279

 
5,461,958

 
5,172,292

 
289,666

 
Average deposits
 
10,186,558

 
9,585,364

 
601,194

 
10,264,709

 
9,523,982

 
740,727

 
Average invested capital
 
546,064

 
534,579

 
11,485

 
544,440

 
533,747

 
10,693

 
Return on average assets
 
1.29
%
 
1.04
%
 
25

bp
1.22
%
 
1.01
%
 
21

bp
Return on invested capital
 
26.84
%
 
20.87
%
 
597

bp
25.79
%
 
19.97
%
 
582

bp
Efficiency ratio
 
64.74
%
 
63.91
%
 
83

bp
62.68
%
 
62.23
%
 
45

bp
Net charge-offs (annualized) to average loans
 
0.30
%
 
0.14
%
 
16

bp
0.19
%
 
0.32
%
 
(13
)
bp

Net income generated in the Oklahoma market in the second quarter of 2012 increased $8.6 million or 31% over the second quarter of 2011. Gains on financial instruments and other assets, net include a $14.2 million gain from the sale of common stock received in settlement of a defaulted loan. Increased fees and commission revenue was partially offset by increased operating expenses, excluding changes in the fair value of mortgage servicing rights. Net loans charged off increased $2.4 million to 0.30% of average loans on an annualized basis.


- 20 -



Net interest revenue decreased $1.2 million or 2% compared to the second quarter of 2011. Lower funding costs were offset by decreased yield on residential mortgage-backed securities held as an economic hedge of mortgage servicing rights. The average balance of these securities decreased $208 million compared to the second quarter of 2011. Average loan balances were up $402 million and loan yields were down. The favorable net interest impact of the $601 million increase in average deposit balances was offset by lower yield on funds sold to the funds management unit.

Fees and commission revenue increased $6.6 million compared to the second quarter of 2011. Mortgage banking revenue was up $7.1 million over the second quarter of 2011 primarily due to increased mortgage loan origination and commitment volumes and increased gains on sales of residential mortgage loans in the secondary market. Brokerage and trading revenue was up $2.1 million primarily due to increased retail brokerage fees. Securities trading revenue and investment banking revenue all increased over the prior year as well. Deposit service charges and fees increased $1.1 million over the second quarter of 2011. Deposits accounts with a standard monthly fee and commercial account service charges were up over the prior year. Transaction card revenue was down $2.8 million primarily due to changes in interchange fee regulations which were effective October 1, 2011.

Change in the fair value of the mortgage servicing rights, net of economic hedge, decreased net income by $1.2 million for the second quarter of 2012 and decreased net income by $1.4 million in the second quarter of 2011. 

Excluding the change in the fair value of mortgage servicing rights, other operating expenses increased $4.6 million or 5% over the prior year. Personnel expenses were up $1.1 million or 3% over the prior year primarily due to annual merit increases. Incentive compensation was down compared to the prior year, offset by increased employee benefit costs. Non-personnel expenses were up $6.6 million or 18% due primarily to increased mortgage banking costs, professional fees and services and business promotion expenses. Corporate expense allocations were down $2.4 million compared to the prior year. Net losses and operating expenses of repossessed assets were down $756 thousand or 32% compared to the second quarter of 2011.

Net loans charged off increased to $4.2 million or 0.30% of average loans on an annualized basis for second quarter of 2012 compared with $1.8 million or 0.14% of average loans on an annualized basis for the second quarter of 2011. Charge-offs of residential mortgage and commercial real estate loans increased over the prior quarter.

Average deposits in the Oklahoma market for the second quarter of 2012 increased $601 million over the second quarter of 2011. Commercial Banking deposit balances increased $282 million or 6% over the prior year. Deposits related to commercial and industrial customers and energy customers increased over the prior year, partially offset by decreased average balances related to treasury services customers. Wealth Management deposits increased $207 million over the prior year in the private banking division, broker/dealer division and in trust. Consumer deposits also increased $112 million over the second quarter of 2011.

- 21 -



Texas Market

Our Texas offices are located primarily in the Dallas, Fort Worth and Houston metropolitan areas. Texas is our second largest market with 32% of our average loans, 24% of our average deposits and 12% of our consolidated net income in the second quarter of 2012.

Table 12 – Texas
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Increase
 
June 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue
 
$
36,138

 
$
33,775

 
$
2,363

 
$
71,216

 
$
66,940

 
$
4,276

 
Net loans charged off
 
2,840

 
716

 
2,124

 
3,284

 
1,643

 
1,641

 
Net interest revenue after net loans charged off
 
33,298

 
33,059

 
239

 
67,932

 
65,297

 
2,635

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
22,003

 
16,452

 
5,551

 
41,270

 
32,490

 
8,780

 
Gain (loss) on financial instruments and other assets, net
 
143

 
(70
)
 
213

 
188

 
(70
)
 
258

 
Other operating revenue
 
22,146

 
16,382

 
5,764

 
41,458

 
32,420

 
9,038

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
19,987

 
17,451

 
2,536

 
39,066

 
34,254

 
4,812

 
Net losses and expenses of repossessed assets
 
994

 
1,130

 
(136
)
 
416

 
1,275

 
(859
)
 
Other non-personnel expense
 
6,242

 
5,756

 
486

 
11,959

 
11,509

 
450

 
Corporate allocations
 
9,996

 
9,224

 
772

 
19,265

 
18,914

 
351

 
Total other operating expense
 
37,219

 
33,561

 
3,658

 
70,706

 
65,952

 
4,754

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
18,225

 
15,880

 
2,345

 
38,684

 
31,765

 
6,919

 
Federal and state income tax
 
6,561

 
5,717

 
844

 
13,926

 
11,435

 
2,491

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
11,664

 
$
10,163

 
$
1,501

 
$
24,758

 
$
20,330

 
$
4,428

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
5,005,622

 
$
4,743,725

 
$
261,897

 
$
5,035,837

 
$
4,842,458

 
$
193,379

 
Average loans
 
3,749,737

 
3,386,030

 
363,707

 
3,766,266

 
3,324,835

 
441,431

 
Average deposits
 
4,481,221

 
4,210,294

 
270,927

 
4,482,053

 
4,283,098

 
198,955

 
Average invested capital
 
475,484

 
467,716

 
7,768

 
476,863

 
467,238

 
9,625

 
Return on average assets
 
0.94
%
 
0.86
%
 
8

bp
0.99
%
 
0.85
%
 
14

bp
Return on invested capital
 
9.87
%
 
8.72
%
 
115

bp
10.44
%
 
8.77
%
 
167

bp
Efficiency ratio
 
64.02
%
 
66.82
%
 
(280
)
bp
62.86
%
 
66.33
%
 
(347
)
bp
Net charge-offs (annualized) to average loans
 
0.30
%
 
0.08
%
 
22

bp
0.18
%
 
0.10
%
 
8

bp

Net income in the Texas market increased $1.5 million or 15% over the second quarter of 2011 primarily due to increased mortgage banking revenue partially offset by increased personnel expenses. Increased net interest revenue was offset by an increase in net loans charged off.

Net interest revenue increased $2.4 million or 7% over the second quarter of 2011. Average outstanding loans grew by $364 million or 11% over the second quarter of 2011 and average deposits increased by $271 million or 6%. Decreased deposit costs were mostly offset by lower yield on funds sold to the funds management unit.

Fees and commissions revenue increased $5.6 million or 34% over the second quarter of 2011 primarily due to increased mortgage banking revenue. Brokerage and trading revenue was up $1.4 million over the prior quarter primarily due to a $2.0 million increase in investment banking revenue as a result of expansion of our municipal financial advisory services in the

- 22 -



Texas market. This increase was partially offset by decreased securities trading revenue and retail brokerage fees. In addition, deposit service charge and trust fees and commissions all increased over the prior year. Transaction card revenue was down compared to the prior year primarily due to debit card interchange fee regulations which became effective in the third quarter of 2011.

Operating expenses increased $3.7 million or 11% over the second quarter of 2011. Personnel costs were up $2.5 million or 15% primarily due to incentive compensation expense and increased head count related to higher residential mortgage loan origination activity. Corporate expense allocations were up $772 thousand on increased customer transaction activity and non-personnel expenses increased $486 thousand. Net losses and operating expense of repossessed assets improved by $136 thousand compared to second quarter of 2011.

Net loans charged off totaled $2.8 million or 0.30% of average loans for the second quarter of 2012 on an annualized basis, compared to $716 thousand or 0.08% of average loans for the second quarter of 2011 on an annualized basis.

- 23 -



New Mexico

Net income attributable to our New Mexico market totaled $5.1 million or 5% of consolidated net income, a $2.3 million or 80% increase over the second quarter of 2011. Net interest income was flat compared to the second quarter of 2011. Average loan and deposit balances were essentially flat compared to the prior year. The New Mexico market had a net recovery of $545 thousand in the second quarter of 2012 compared to a net charge-off of $589 thousand or 0.33% of average loans on an annualized basis in the second quarter of 2011. 

Fees and commission revenue increased $2.9 million or 37% over the prior year primarily due to growth in mortgage banking revenue. Transaction card revenue was down due to debit card interchange fee regulations. Other operating expense increased $414 thousand or 4%. Net losses and operating expenses of repossessed assets were down $892 thousand. Corporate allocation expense increased $846 thousand. Personnel expenses were up $588 thousand primarily due to increased incentive compensation and non-personnel expenses were down $128 thousand.

Table 13 – New Mexico
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Increase
 
June 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue
 
$
8,484

 
$
8,334

 
$
150

 
$
16,968

 
$
16,654

 
$
314

 
Net loans charged off (recovered)
 
(545
)
 
589

 
(1,134
)
 
340

 
1,000

 
(660
)
 
Net interest revenue after net loans charged off (recovered)
 
9,029

 
7,745

 
1,284

 
16,628

 
15,654

 
974

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other operating revenue – fees and commission
 
10,694

 
7,830

 
2,864

 
21,108

 
15,409

 
5,699

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
4,791

 
4,203

 
588

 
9,676

 
8,402

 
1,274

 
Net losses (gains) and expenses of repossessed assets
 
57

 
949

 
(892
)
 
(134
)
 
1,363

 
(1,497
)
 
Other non-personnel expense
 
2,092

 
2,220

 
(128
)
 
4,070

 
4,457

 
(387
)
 
Corporate allocations
 
4,375

 
3,529

 
846

 
8,302

 
7,406

 
896

 
Total other operating expense
 
11,315

 
10,901

 
414

 
21,914

 
21,628

 
286

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
8,408

 
4,674

 
3,734

 
15,822

 
9,435

 
6,387

 
Federal and state income tax
 
3,271

 
1,818

 
1,453

 
6,155

 
3,670

 
2,485

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
5,137

 
$
2,856

 
$
2,281

 
$
9,667

 
$
5,765

 
$
3,902

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
1,370,603

 
$
1,381,021

 
$
(10,418
)
 
$
1,373,232

 
$
1,378,897

 
$
(5,665
)
 
Average loans
 
705,853

 
705,529

 
324

 
707,328

 
704,238

 
3,090

 
Average deposits
 
1,232,354

 
1,238,514

 
(6,160
)
 
1,229,809

 
1,247,096

 
(17,287
)
 
Average invested capital
 
77,793

 
81,281

 
(3,488
)
 
78,664

 
81,535

 
(2,871
)
 
Return on average assets
 
1.51
 %
 
0.83
%
 
68

bp
1.42
%
 
0.84
%
 
58

bp
Return on invested capital
 
26.56
 %
 
14.09
%
 
1,247

bp
24.71
%
 
14.26
%
 
1,045

bp
Efficiency ratio
 
59.00
 %
 
67.44
%
 
(844
)
bp
57.55
%
 
67.45
%
 
(990
)
bp
Net charge-offs (recoveries) to average loans (annualized)
 
(0.31
)%
 
0.33
%
 
(64
)
bp
0.10
%
 
0.29
%
 
(19
)
bp


- 24 -



Arkansas Market

Net income attributable to our Arkansas market increased $5.4 million over the prior year. Net interest revenue increased $2.6 million due primarily to a $2.9 million full recovery of a nonaccruing commercial loan. Loans in the Arkansas market continued to decrease primarily due to the run-off of indirect automobile loans. Average deposits in our Arkansas market were up $19 million or 10% over the second quarter of 2011. Interest-bearing transaction deposits increased $34 million and demand deposits increased $8.1 million, partially offset by a $24 million decrease in higher costing time deposits. The net recovery of $2.2 million in the second quarter of 2012 was due primarily to the full recovery of an amount charged off in the second quarter of 2011.

Fees and commissions revenue was up $4.0 million over the prior year primarily due to increased securities trading revenue at our Little Rock office and higher mortgage banking revenue. Other operating expenses were up $2.0 million primarily due to increased incentive compensation costs related to trading activity. Net losses and operating expenses on repossessed assets were $407 thousand less than in the prior year. Corporate expense allocations increased $329 thousand and non-personnel expenses were flat compared to the prior year.

Table 14 – Arkansas
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Increase
 
June 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue
 
$
4,541

 
$
1,928

 
$
2,613

 
$
6,508

 
$
4,224

 
$
2,284

 
Net loans charged off (recovered)
 
(2,165
)
 
2,153

 
(4,318
)
 
(2,101
)
 
2,490

 
(4,591
)
 
Net interest revenue after net loans charged off (recovered)
 
6,706

 
(225
)
 
6,931

 
8,609

 
1,734

 
6,875

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other operating revenue – fees and commissions
 
12,502

 
8,523

 
3,979

 
23,751

 
16,961

 
6,790

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
6,146

 
4,074

 
2,072

 
11,631

 
9,300

 
2,331

 
Net losses and expenses of repossessed assets
 
68

 
475

 
(407
)
 
76

 
494

 
(418
)
 
Other non-personnel expense
 
1,228

 
1,205

 
23

 
2,584

 
2,212

 
372

 
Corporate allocations
 
2,842

 
2,513

 
329

 
5,596

 
5,298

 
298

 
Total other operating expense
 
10,284

 
8,267

 
2,017

 
19,887

 
17,304

 
2,583

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
8,924

 
31

 
8,893

 
12,473

 
1,391

 
11,082

 
Federal and state income tax
 
3,471

 
12

 
3,459

 
4,852

 
541

 
4,311

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
5,453

 
$
19

 
$
5,434

 
$
7,621

 
$
850

 
$
6,771

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
245,034

 
$
286,998

 
$
(41,964
)
 
$
260,339

 
$
295,126

 
$
(34,787
)
 
Average loans
 
224,074

 
270,832

 
(46,758
)
 
241,830

 
279,276

 
(37,446
)
 
Average deposits
 
201,116

 
182,166

 
18,950

 
211,185

 
205,069

 
6,116

 
Average invested capital
 
19,387

 
23,081

 
(3,694
)
 
20,128

 
23,068

 
(2,940
)
 
Return on average assets
 
8.95
 %
 
0.03
%
 
892

bp
5.89
 %
 
0.58
%
 
531

bp
Return on invested capital
 
113.13
 %
 
0.33
%
 
11,280

bp
76.14
 %
 
7.43
%
 
6,871

bp
Efficiency ratio
 
60.34
 %
 
79.10
%
 
(1,876
)
bp
65.72
 %
 
81.68
%
 
(1,596
)
bp
Net charge-offs (recoveries) to average loans (annualized)
 
(3.89
)%
 
3.19
%
 
(708
)
bp
(1.75
)%
 
1.80
%
 
(355
)
bp

- 25 -



Colorado Market

Net income attributed to our Colorado market increased $2.1 million over the second quarter of 2011 to $3.5 million. Net loans charged off decreased $1.2 million compared to the second quarter of 2011 to $471 thousand or 0.21% on an annualized basis. Net loans charged off in the second quarter of 2011 totaled $1.7 million or 0.89% of loans on an annualized basis. Net interest revenue increased $845 thousand due primarily to a $111 million or 14% increase in average loans outstanding and lower deposit costs, partially offset by decreased yield on funds sold to the funds management unit. Average deposits attributable to the Colorado market were down $12 million compared to the second quarter of 2011. Demand deposits grew by $89 million during the second quarter due primarily to increased commercial account balances, offset by a $59 million decrease in time deposits and a $45 million decrease in interest-bearing transaction deposit account balances.

Fees and commissions revenue was up $3.1 million over the second quarter of 2011 primarily related to growth in mortgage banking revenue. Operating expenses were up $1.8 million over the prior year. Personnel expenses were up $966 thousand and corporate expense allocations increased $731 thousand. Net losses and operating expenses of repossessed assets increased $118 thousand. Non-personnel expenses were flat compared to the prior year.

Table 15 – Colorado
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Increase
 
June 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue
 
$
9,170

 
$
8,325

 
$
845

 
$
17,944

 
$
16,399

 
$
1,545

 
Net loans charged off
 
471

 
1,705

 
(1,234
)
 
2,354

 
1,655

 
699

 
Net interest revenue after net loans charged off
 
8,699

 
6,620

 
2,079

 
15,590

 
14,744

 
846

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
8,845

 
5,740

 
3,105

 
16,569

 
11,674

 
4,895

 
Gain on financial instruments and other assets, net
 
—

 
—

 
—

 
—

 
1

 
(1
)
 
Other operating revenue
 
8,845

 
5,740

 
3,105

 
16,569

 
11,675

 
4,894

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
6,262

 
5,296

 
966

 
12,038

 
10,348

 
1,690

 
Net losses (gains) and expenses of repossessed assets
 
90

 
(28
)
 
118

 
72

 
278

 
(206
)
 
Other non-personnel expense
 
1,437

 
1,422

 
15

 
2,777

 
2,974

 
(197
)
 
Corporate allocations
 
4,016

 
3,285

 
731

 
7,458

 
6,487

 
971

 
Total other operating expense
 
11,805

 
9,975

 
1,830

 
22,345

 
20,087

 
2,258

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
5,739

 
2,385

 
3,354

 
9,814

 
6,332

 
3,482

 
Federal and state income tax
 
2,232

 
928

 
1,304

 
3,818

 
2,463

 
1,355

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
3,507

 
$
1,457

 
$
2,050

 
$
5,996

 
$
3,869

 
$
2,127

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
1,337,832

 
$
1,351,710

 
$
(13,878
)
 
$
1,359,146

 
$
1,325,967

 
$
33,179

 
Average loans
 
884,198

 
772,800

 
111,398

 
855,233

 
769,144

 
86,089

 
Average deposits
 
1,272,015

 
1,284,000

 
(11,985
)
 
1,294,047

 
1,258,578

 
35,469

 
Average invested capital
 
117,673

 
116,653

 
1,020

 
116,711

 
116,884

 
(173
)
 
Return on average assets
 
1.05
%
 
0.43
%
 
62

bp
0.89
%
 
0.59
%
 
30

bp
Return on invested capital
 
11.99
%
 
5.01
%
 
698

bp
10.33
%
 
6.68
%
 
365

bp
Efficiency ratio
 
65.53
%
 
70.92
%
 
(539
)
bp
64.74
%
 
71.55
%
 
(681
)
bp
Net charge-offs (annualized) to average loans
 
0.21
%
 
0.89
%
 
(67
)
bp
0.55
%
 
0.43
%
 
12

bp

- 26 -



Arizona Market

The Arizona market had a net loss of $910 thousand for the second quarter of 2012 compared to a net loss of $902 thousand for the second quarter of 2011. Net loans charged off improved to $807 thousand or 0.60% of average loans on an annualized basis compared to $1.5 million or 1.03% of average loans on an annualized basis for the second quarter of 2011. Net losses and operating expenses on repossessed assets remain elevated totaling $2.4 million in the second quarter of 2012 compared to $814 thousand in the second quarter of 2011. Write-downs of repossessed assets increased compared to the prior year primarily due to regularly scheduled appraisal updates.

Net interest revenue decreased $119 thousand or 3% compared to the second quarter of 2011. Average loan balances were down $43 million or 7%. Average deposits were down $8.2 million or 3%. Higher costing time deposits balances were down $16 million compared to the prior year. Demand deposit balances increased $9.5 million primarily due to growth in commercial and wealth management demand deposits.

Fees and commissions revenue was up $808 thousand primarily due to increased mortgage banking revenue. Personnel expenses decreased $122 thousand, non-personnel expenses decreased $161 thousand and corporate expense allocations were up $48 thousand.

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


- 27 -



Table 16 – Arizona
(Dollars in thousands)
 
 
Three Months Ended
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Increase
 
June 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue
 
$
4,022

 
$
4,141

 
$
(119
)
 
$
8,356

 
$
7,708

 
$
648

 
Net loans charged off
 
807

 
1,495

 
(688
)
 
4,427

 
3,384

 
1,043

 
Net interest revenue after net loans charged off
 
3,215

 
2,646

 
569

 
3,929

 
4,324

 
(395
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other operating revenue – fees and commissions
 
2,508

 
1,700

 
808

 
4,353

 
3,520

 
833

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
2,640

 
2,762

 
(122
)
 
4,995

 
5,590

 
(595
)
 
Net losses and expenses of repossessed assets
 
2,438

 
814

 
1,624

 
3,667

 
4,382

 
(715
)
 
Other non-personnel expense
 
862

 
1,023

 
(161
)
 
1,623

 
2,001

 
(378
)
 
Corporate allocations
 
1,272

 
1,224

 
48

 
2,420

 
2,369

 
51

 
Total other operating expense
 
7,212

 
5,823

 
1,389

 
12,705

 
14,342

 
(1,637
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss before taxes
 
(1,489
)
 
(1,477
)
 
(12
)
 
(4,423
)
 
(6,498
)
 
2,075

 
Federal and state income tax
 
(579
)
 
(575
)
 
(4
)
 
(1,721
)
 
(2,528
)
 
807

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(910
)
 
$
(902
)
 
$
(8
)
 
$
(2,702
)
 
$
(3,970
)
 
$
1,268

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
594,492

 
$
648,926

 
$
(54,434
)
 
$
602,001

 
$
634,937

 
$
(32,936
)
 
Average loans
 
537,763

 
580,373

 
(42,610
)
 
546,214

 
566,916

 
(20,702
)
 
Average deposits
 
262,692

 
270,926

 
(8,234
)
 
255,002

 
254,833

 
169

 
Average invested capital
 
59,061

 
65,579

 
(6,518
)
 
58,979

 
64,885

 
(5,906
)
 
Return on average assets
 
(0.62
)%
 
(0.56
)%
 
(6
)
bp
(0.90
)%
 
(1.26
)%
 
36

bp
Return on invested capital
 
(6.20
)%
 
(5.52
)%
 
(68
)
bp
(9.21
)%
 
(12.34
)%
 
313

bp
Efficiency ratio
 
110.44
 %
 
99.69
 %
 
1,075

bp
99.97
 %
 
127.73
 %
 
(2,776
)
bp
Net charge-offs (annualized) to average loans
 
0.60
 %
 
1.03
 %
 
(43
)
bp
1.63
 %
 
1.20
 %
 
43

bp

- 28 -



Kansas/Missouri Market

Net income attributed to the Kansas / Missouri market increased by $1.1 million over the second quarter of 2011. Net interest revenue increased $491 thousand or 18%. Average loan balances increased $65 million or 18% and average deposits balances were down $35 million or 13%. Demand deposit balances grew $67 million due primarily to commercial account balances. Interest-bearing transaction account balances were down $82 million and higher costing time deposit balances decreased by $19 million.

Fees and commissions revenue increased $3.9 million or 77% over the prior year primarily due to increased mortgage banking revenue and brokerage and trading revenue. Trust fees and commissions and deposit service charges and fees were also up over the prior year. Personnel costs were up $867 thousand primarily due to increased incentive compensation related to brokerage and trading activity and increased headcount. Corporate expense allocations increased by $1.5 million on higher customer transaction volume and non-personnel expense increased $241 thousand.

Table 17 – Kansas / Missouri
(Dollars in thousands)

 
 
Three Months Ended
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Increase
 
June 30,
 
Increase
 
 
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
 
Net interest revenue
 
$
3,239

 
$
2,748

 
$
491

 
$
6,351

 
$
5,581

 
$
770

 
Net loans charged off (recovered)
 
(130
)
 
18

 
(148
)
 
414

 
231

 
183

 
Net interest revenue after net loans charged off (recovered)
 
3,369

 
2,730

 
639

 
5,937

 
5,350

 
587

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other operating revenue – fees and commission
 
9,043

 
5,121

 
3,922

 
17,739

 
10,117

 
7,622

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
4,756

 
3,889

 
867

 
9,556

 
7,319

 
2,237

 
Net losses (gains) and expenses of repossessed assets
 
(27
)
 
(61
)
 
34

 
(8
)
 
132

 
(140
)
 
Other non-personnel expense
 
1,092

 
851

 
241

 
2,083

 
1,827

 
256

 
Corporate allocations
 
3,145

 
1,604

 
1,541

 
5,261

 
3,035

 
2,226

 
Total other operating expense
 
8,966

 
6,283

 
2,683

 
16,892

 
12,313

 
4,579

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
3,446

 
1,568

 
1,878

 
6,784

 
3,154

 
3,630

 
Federal and state income tax
 
1,340

 
610

 
730

 
2,639

 
1,227

 
1,412

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
2,106

 
$
958

 
$
1,148

 
$
4,145

 
$
1,927

 
$
2,218

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
440,109

 
$
366,349

 
$
73,760

 
$
439,706

 
$
367,670

 
$
72,036

 
Average loans
 
420,727

 
356,160

 
64,567

 
421,451

 
358,327

 
63,124

 
Average deposits
 
239,658

 
274,202

 
(34,544
)
 
239,021

 
321,401

 
(82,380
)
 
Average invested capital
 
32,729

 
25,507

 
7,222

 
32,157

 
25,397

 
6,760

 
Return on average assets
 
1.92
 %
 
1.05
%
 
87

bp
1.90
%
 
1.06
%
 
84

bp
Return on invested capital
 
25.88
 %
 
15.06
%
 
1,082

bp
25.92
%
 
15.30
%
 
1,062

bp
Efficiency ratio
 
73.00
 %
 
79.84
%
 
(684
)
bp
70.12
%
 
78.44
%
 
(832
)
bp
Net charge-offs (annualized) to average loans
 
(0.12
)%
 
0.02
%
 
(14
)
bp
0.20
%
 
0.13
%
 
7

bp



Financial Condition

- 29 -



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 June 30, 2012, December 31, 2011 and June 30, 2011.

At June 30, 2012, the carrying value of investment (held-to-maturity) securities was $412 million and the fair value was $441 million. Investment securities consist primarily of long-term, fixed-rate Oklahoma municipal bonds, taxable Texas school construction bonds and residential mortgage backed securities issued by U.S. government agencies. The investment security portfolio is diversified among issuers. The largest obligation of any single issuer is $30 million. Substantially all of these bonds are general obligations of the issuers. Approximately $89 million of the Texas school construction bonds are also guaranteed by the Texas Permanent School Fund Guarantee Program supervised by the State Board of Education for the State of Texas.

Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, net of deferred taxes, are recorded as accumulated other comprehensive income in shareholders’ equity. The amortized cost of available for sale securities totaled $10.2 billion at June 30, 2012, an increase of $244 million over March 31, 2012. At June 30, 2012, residential mortgage-backed securities represented 98% 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 June 30, 2012 is 2.1 years. Management estimates the duration extends to 3.5 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 1.4 years assuming a 50 basis point decline in the current low rate environment. Net unamortized premiums are less than 1% of the available for sale securities portfolio amortized cost.

Residential mortgage-backed securities also have credit risk from delinquency or default of the underlying loans. We mitigate this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest payments on the underlying loans are fully guaranteed. At June 30, 2012, approximately $9.6 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 $9.9 billion at June 30, 2012.

We also hold amortized cost of $354 million in residential mortgage-backed securities privately issued by publicly-owned financial institutions, a decrease of $17 million from March 31, 2012. The decline was primarily due to $16 million of cash received and $858 thousand of other-than-temporary impairment losses charged against earnings during the second quarter of 2012. The fair value of our portfolio of privately issued residential mortgage-backed securities totaled $318 million at June 30, 2012.

The amortized cost of our portfolio of privately issued residential mortgage-backed securities included $220 million of Jumbo-A residential mortgage loans and $134 million of Alt-A residential mortgage loans. Jumbo-A residential mortgage loans generally meet government underwriting standards, but have loan balances that exceed agency maximums. Alt-A mortgage loans generally do not have sufficient documentation to meet government agency underwriting standards. Credit risk on residential mortgage-backed securities originated by private issuers is mitigated by investment in senior tranches with additional collateral support. All of our Alt-A residential mortgage-backed securities were issued with credit support from additional layers of loss-absorbing subordinated tranches, including all Alt-A residential mortgage backed securities held that were originated in 2007 and 2006. The weighted average original credit enhancement of the Alt-A residential mortgage-backed securities was 10.2% and currently stands at 1.9%. The Jumbo-A residential mortgage-backed securities had original credit enhancement of 9.4% and the current level is 6.6%. 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 25% 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.

The aggregate gross amount of unrealized losses on available for sale securities totaled $41 million at June 30, 2012. On a quarterly basis, we perform separate evaluations on debt and equity securities to determine if the unrealized losses are temporary as more fully described in Note 2 of the Consolidated Financial Statements. Other-than-temporary impairment

- 30 -



charges of $858 thousand were recognized in earnings in the second quarter of 2012 related to certain privately issued residential mortgage-backed securities that we do not intend to sell.

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

We have approximately $269 million of bank-owned life insurance at June 30, 2012. This investment is expected to provide a long-term source of earnings to support existing employee benefit programs. Approximately $238 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 June 30, 2012, the cash surrender value represented by the underlying fair value of investments held in separate accounts was approximately $260 million. As the underlying fair value of the investments held in a separate account at June 30, 2012 exceeded the net book value of the investments, no cash surrender value was supported by the stable value wrap. The stable value wrap is provided by a domestic financial institution. The remaining cash surrender value of $31 million primarily represents the cash surrender value of policies held in general accounts and other amounts due from various insurance companies.


- 31 -



Loans

The aggregate loan portfolio before allowance for loan losses totaled $11.6 billion at June 30, 2012, largely unchanged compared to March 31, 2012.
Table 18 – Loans
(In thousands)
 
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
 
June 30,
2011
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,278,336

 
$
2,166,406

 
$
2,005,041

 
$
1,749,203

 
$
1,710,106

Services
 
1,931,520

 
1,912,537

 
1,761,538

 
1,872,947

 
1,725,289

Wholesale/retail
 
960,184

 
1,027,170

 
967,426

 
1,021,070

 
1,054,149

Manufacturing
 
362,877

 
352,297

 
336,733

 
373,074

 
367,414

Healthcare
 
1,009,128

 
1,000,854

 
978,160

 
914,346

 
855,744

Integrated food services
 
216,978

 
211,288

 
204,311

 
192,200

 
187,833

Other commercial and industrial
 
293,521

 
288,540

 
301,861

 
298,762

 
269,710

Total commercial
 
7,052,544

 
6,959,092

 
6,555,070

 
6,421,602

 
6,170,245

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
287,059

 
318,539

 
342,054

 
370,465

 
372,225

Retail
 
492,377

 
466,444

 
509,402

 
457,176

 
449,784

Office
 
384,392

 
369,179

 
405,923

 
422,284

 
485,731

Multifamily
 
362,165

 
435,946

 
369,028

 
388,304

 
334,541

Industrial
 
231,033

 
288,650

 
278,186

 
224,222

 
159,806

Other real estate
 
369,188

 
354,925

 
386,710

 
410,382

 
385,944

Total commercial real estate
 
2,126,214

 
2,233,683

 
2,291,303

 
2,272,833

 
2,188,031

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,141,371

 
1,134,934

 
1,153,644

 
1,180,310

 
1,155,291

Permanent mortgages guaranteed by U.S. government agencies
 
168,059

 
186,119

 
188,462

 
173,540

 
134,458

Home equity
 
695,667

 
647,319

 
632,421

 
596,051

 
582,205

Total residential mortgage
 
2,005,097

 
1,968,372

 
1,974,527

 
1,949,901

 
1,871,954

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
62,924

 
81,792

 
105,149

 
130,296

 
162,500

Other consumer
 
329,652

 
334,505

 
343,694

 
349,937

 
344,814

Total consumer
 
392,576

 
416,297

 
448,843

 
480,233

 
507,314

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11,576,431

 
$
11,577,444

 
$
11,269,743

 
$
11,124,569

 
$
10,737,544


Outstanding commercial loan balances increased $93 million over March 31, 2012 primarily due to growth in the Colorado and Texas markets, partially offset by a decrease in loan balances attributed to the Arkansas market. Commercial real estate loans decreased $107 million during the second quarter of 2012 primarily due to improved market conditions for permanent financing. Residential mortgage loans were up $37 million over March 31, 2012. Consumer loans decreased $24 million from March 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.


- 32 -



Table 19 – Loans by Principal Market
(In thousands)
 
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
 
June 30,
2011
Oklahoma:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
3,098,651

 
$
3,107,726

 
$
2,826,649

 
$
2,865,740

 
$
2,722,370

Commercial real estate
 
644,761

 
631,891

 
607,030

 
615,848

 
607,100

Residential mortgage
 
1,332,319

 
1,303,486

 
1,320,051

 
1,251,874

 
1,180,502

Consumer
 
205,436

 
215,693

 
235,909

 
250,048

 
267,993

Total Oklahoma
 
5,281,167

 
5,258,796

 
4,989,639

 
4,983,510

 
4,777,965

 
 
 
 
 
 
 
 
 
 
 
Texas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
2,414,824

 
2,354,593

 
2,249,888

 
2,116,377

 
2,050,112

Commercial real estate
 
678,745

 
802,979

 
830,642

 
759,574

 
727,940

Residential mortgage
 
295,972

 
288,751

 
285,091

 
294,310

 
303,538

Consumer
 
115,602

 
124,692

 
126,570

 
133,454

 
138,713

Total Texas
 
3,505,143

 
3,571,015

 
3,492,191

 
3,303,715

 
3,220,303

 
 
 
 
 
 
 
 
 
 
 
New Mexico:
 
 

 
 

 
 

 
 

 
 

Commercial
 
262,144

 
273,284

 
258,668

 
279,319

 
283,760

Commercial real estate
 
285,871

 
282,834

 
303,500

 
302,980

 
307,190

Residential mortgage
 
144,944

 
144,180

 
132,772

 
139,922

 
131,943

Consumer
 
15,828

 
18,378

 
19,369

 
19,393

 
19,120

Total New Mexico
 
708,787

 
718,676

 
714,309

 
741,614

 
742,013

 
 
 
 
 
 
 
 
 
 
 
Arkansas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
49,305

 
64,595

 
76,199

 
80,304

 
73,287

Commercial real estate
 
119,895

 
139,670

 
136,170

 
134,028

 
122,749

Residential mortgage
 
23,510

 
23,350

 
22,593

 
22,172

 
23,975

Consumer
 
24,270

 
28,783

 
35,911

 
44,445

 
52,572

Total Arkansas
 
216,980

 
256,398

 
270,873

 
280,949

 
272,583

 
 
 
 
 
 
 
 
 
 
 
Colorado:
 
 

 
 

 
 

 
 

 
 

Commercial
 
610,384

 
541,280

 
544,020

 
495,429

 
500,442

Commercial real estate
 
149,541

 
144,757

 
156,013

 
189,948

 
167,414

Residential mortgage
 
89,428

 
89,861

 
85,689

 
104,572

 
92,769

Consumer
 
20,612

 
19,790

 
21,598

 
22,183

 
19,619

Total Colorado
 
869,965

 
795,688

 
807,320

 
812,132

 
780,244

 
 
 
 
 
 
 
 
 
 
 
Arizona:
 
 

 
 

 
 

 
 

 
 

Commercial
 
278,119

 
269,099

 
271,914

 
269,381

 
275,469

Commercial real estate
 
181,513

 
180,830

 
198,160

 
227,085

 
207,300

Residential mortgage
 
76,616

 
81,281

 
94,363

 
100,132

 
103,657

Consumer
 
6,227

 
5,381

 
5,633

 
6,670

 
6,813

Total Arizona
 
542,475

 
536,591

 
570,070

 
603,268

 
593,239

 
 
 
 
 
 
 
 
 
 
 
Kansas / Missouri:
 
 

 
 

 
 

 
 

 
 

Commercial
 
339,117

 
348,515

 
327,732

 
315,052

 
264,805

Commercial real estate
 
65,888

 
50,722

 
59,788

 
43,370

 
48,338

Residential mortgage
 
42,308

 
37,463

 
33,968

 
36,919

 
35,570

Consumer
 
4,601

 
3,580

 
3,853

 
4,040

 
2,484

Total Kansas / Missouri
 
451,914

 
440,280

 
425,341

 
399,381

 
351,197

 
 
 
 
 
 
 
 
 
 
 
Total BOK Financial loans
 
$
11,576,431

 
$
11,577,444

 
$
11,269,743

 
$
11,124,569

 
$
10,737,544



- 33 -



Commercial

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

The commercial loan portfolio grew by $93 million during the second quarter of 2012. Energy sector loans increased $112 million over March 31, 2012, growing in the Colorado, Oklahoma and Texas markets. Service sector loans increased $19 million. Service sector loans in the Texas market grew by $43 million offset by a $46 million decrease in service sector loans in the Oklahoma market. Service sector loans in both the Colorado and Arizona market grew in the second quarter. Wholesale/retail sector loans were down $67 million primarily due to a decrease in loans attributed to the Texas and Oklahoma markets. Wholesale/retail sector loans in the Arkansas market were down $11 million due to the payoff of a nonaccruing loan related to a single customer. Manufacturing sector loans increased $11 million over March 31, 2012. Growth in the Texas and Oklahoma markets was partially offset by decreased loan balances in the Kansas/Missouri and Colorado markets. Healthcare sector loans were up $8.3 million with the Colorado market growing by $16 million, offset by decreased balances 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)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/
Missouri
 
Total
Energy
 
$
1,060,774

 
$
869,905

 
$
4,421

 
$
238

 
$
342,949

 
$
—

 
$
49

 
$
2,278,336

Services
 
689,014

 
686,898

 
175,599

 
12,788

 
162,853

 
135,791

 
68,577

 
1,931,520

Wholesale/retail
 
406,032

 
360,582

 
46,062

 
30,370

 
16,074

 
69,638

 
31,426

 
960,184

Healthcare
 
612,726

 
259,081

 
13,010

 
4,584

 
74,560

 
44,158

 
1,009

 
1,009,128

Manufacturing
 
188,752

 
112,378

 
6,256

 
1,165

 
8,266

 
27,122

 
18,938

 
362,877

Integrated food services
 
9,773

 
7,333

 
—

 
2

 
2,752

 
—

 
197,118

 
216,978

Other commercial and industrial
 
131,580

 
118,647

 
16,796

 
158

 
2,930

 
1,410

 
22,000

 
293,521

Total commercial loans
 
$
3,098,651

 
$
2,414,824

 
$
262,144

 
$
49,305

 
$
610,384

 
$
278,119

 
$
339,117

 
$
7,052,544

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

Energy loans totaled $2.3 billion or 20% of total loans at June 30, 2012. Outstanding energy loans increased $112 million during the second quarter of 2012. Unfunded energy loan commitments increased by $220 million to $2.1 billion at June 30, 2012. Approximately $2.0 billion of energy loans were to oil and gas producers, up $143 million over March 31, 2012. Approximately 55% of the committed production loans are secured by properties primarily producing natural gas and 45% of the committed production loans are secured by properties primarily producing oil. Loans to borrowers engaged in wholesale or retail energy sales decreased $44 million to $138 million. Loans to borrowers that provide services to the energy

- 34 -



industry decreased $21 million during the second quarter of 2012 to $66 million and loans to borrowers that manufacture equipment primarily for the energy industry decreased $1.7 million during the second quarter of 2012 to $34 million.

The services sector of the loan portfolio totaled $1.9 billion or 17% of total loans and consists of a large number of loans to a variety of businesses, including community foundations, communications, educational, gaming and transportation services. Service sector loans increased $19 million over March 31, 2012. Approximately $1.0 billion of the services category is made up of loans with individual balances of less than $10 million. Service sector loans are generally secured by the assets of the borrower with repayment coming from the cash flows of ongoing operations of the customer’s business. Loans in this sector may also be secured by personal guarantees of the owners or related parties.

We participate in shared national credits when appropriate to obtain or maintain business relationships with local customers. Shared national credits are defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants. At June 30, 2012, the outstanding principal balance of these loans totaled $2.2 billion. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 31% 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 $2.1 billion or 18% of the loan portfolio at June 30, 2012. The outstanding balance of commercial real estate loans decreased $107 million over the first quarter of 2012 primarily due to improved market conditions for permanent financing such as commercial mortgage-backed securities or with insurance companies. The trend in decreasing commercial real estate loan balances has reduced the percentage of commercial real estate loans to our total loan portfolio below its historical range of 20% to 23% over the past five years. The commercial real estate sector of our loan portfolio is distributed as follows in Table 21.

 Table 21 – Commercial Real Estate Loans by Principal Market
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/
Missouri
 
Total
Construction and land development
 
$
95,024

 
$
48,989

 
$
55,387

 
$
18,295

 
$
44,779

 
$
16,519

 
$
8,066

 
$
287,059

Retail
 
136,916

 
191,124

 
61,954

 
12,162

 
19,361

 
58,282

 
12,578

 
492,377

Office
 
93,794

 
169,169

 
66,440

 
12,233

 
13,397

 
29,299

 
60

 
384,392

Multifamily
 
147,143

 
86,181

 
22,128

 
45,135

 
24,510

 
21,667

 
15,401

 
362,165

Industrial
 
58,053

 
102,790

 
34,779

 
1,725

 
6,938

 
15,337

 
11,411

 
231,033

Other real estate
 
113,831

 
80,492

 
45,183

 
30,345

 
40,556

 
40,409

 
18,372

 
369,188

Total commercial real estate loans
 
$
644,761

 
$
678,745

 
$
285,871

 
$
119,895

 
$
149,541

 
$
181,513

 
$
65,888

 
$
2,126,214

 
Construction and land development loans, which consist primarily of residential construction properties and developed building lots, decreased $31 million from March 31, 2012 to $287 million at June 30, 2012 primarily due to payments. Only $181 thousand of construction and land development loans were charged-off in the second quarter of 2012 and $1.6 million were transferred to other real estate owned. This sector of the loan portfolio is expected to continue to decrease as construction projects currently in process are completed.


- 35 -



Loans secured by multifamily residential properties decreased $74 million and loans secured by industrial properties decreased $58 million from March 31, 2012, both primarily in the Texas market. Loans secured by offices increased $15 million during the second quarter of 2012, primarily in the Texas market.
Residential Mortgage and Consumer

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

Residential mortgage loans totaled $2.0 billion, up $37 million over March 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 $1.1 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 $78 million or 7% of the non-guaranteed portion of the permanent mortgage loans consist of first lien, fixed rate residential mortgage loans originated under various community development programs. The outstanding balance of these loans is down from $82 million at March 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 June 30, 2012, $168 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 $36 million of residential mortgage loans previously sold into GNMA mortgage pools. The Company may repurchase these loans when certain defined delinquency criteria are met. Because of this repurchase right, the Company is deemed to have regained effective control over these loans and must include them on the Consolidated Balance Sheet. The remaining amount represents loans that the Company has repurchased from GNMA mortgage pools. Permanent residential mortgage loans guaranteed by U.S. government agencies decreased $18 million compared to March 31, 2012.

Home equity loans totaled $696 million at June 30, 2012, a $48 million increase over March 31, 2012. Approximately 39% of the home equity portfolio is comprised of junior lien loans and 61% of the home equity portfolio is comprised of first lien loans. Junior lien loans are distributed 79% to amortizing term loans and 21% to revolving lines of credit. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 40%. The maximum loan amount available for our home equity loan products is generally $400 thousand.

Indirect automobile loans decreased $19 million from March 31, 2012, primarily due to the previously-disclosed decision by the Company to exit the business in the first quarter of 2009. Approximately $63 million of indirect automobile loans remain outstanding at June 30, 2012. Other consumer loans decreased $4.9 million during the second quarter of 2012.

The composition of residential mortgage and consumer loans at June 30, 2012 is as follows in Table 22. 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.

- 36 -



Table 22 – Residential Mortgage and Consumer Loans by Principal Market
(In thousands)
 
 
Oklahoma
 
Texas
 
New Mexico
 
Arkansas
 
Colorado
 
Arizona
 
Kansas/
Missouri
 
Total
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
$
743,509

 
$
178,404

 
$
40,974

 
$
17,837

 
$
63,552

 
$
62,702

 
$
34,393

 
$
1,141,371

Permanent mortgages guaranteed by U.S. government agencies
 
168,059

 
—

 
—

 
—

 
—

 
—

 
—

 
168,059

Home equity
 
420,751

 
117,568

 
103,970

 
5,673

 
25,876

 
13,914

 
7,915

 
695,667

Total residential mortgage
 
$
1,332,319

 
$
295,972

 
$
144,944

 
$
23,510

 
$
89,428

 
$
76,616

 
$
42,308

 
$
2,005,097

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
$
32,920

 
$
11,244

 
$
—

 
$
18,760

 
$
—

 
$
—

 
$
—

 
$
62,924

Other consumer
 
172,516

 
104,358

 
15,828

 
5,510

 
20,612

 
6,227

 
4,601

 
329,652

Total consumer
 
$
205,436

 
$
115,602

 
$
15,828

 
$
24,270

 
$
20,612

 
$
6,227

 
$
4,601

 
$
392,576

Loan Commitments

We enter into certain off-balance sheet arrangements in the normal course of business. These arrangements included unfunded loan commitments which totaled $6.1 billion and standby letters of credit which totaled $449 million at June 30, 2012. Loan commitments may be unconditional obligations to provide financing or conditional obligations that depend on the borrower’s financial condition, collateral value or other factors. Standby letters of credit are unconditional commitments to guarantee the performance of our customer to a third party. Since some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Approximately $2.9 million of the outstanding standby letters of credit were issued on behalf of customers whose loans are nonperforming at June 30, 2012.

As more fully described in Note 5 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 June 30, 2012, the principal balance of residential mortgage loans sold subject to recourse obligations totaled $241 million, down from $248 million at March 31, 2012. Substantially all of these loans are to borrowers in our primary markets including $170 million to borrowers in Oklahoma, $24 million to borrowers in Arkansas, $15 million to borrowers in New Mexico, $14 million to borrowers in the Kansas/Missouri area and $11 million to borrowers in Texas.

Under certain conditions, we also have an off-balance sheet obligation to repurchase residential mortgage loans sold to government sponsored entities through our mortgage banking activities due to standard representations and warranties made under contractual agreements. At June 30, 2012, we have unresolved deficiency requests from the agencies on 303 loans with an aggregate outstanding balance of $40 million. At March 31, 2012, we had unresolved deficiency requests from the agencies on 280 loans with an aggregate outstanding balance of $36 million. For all of 2012, 2011 and 2010 combined, less than 10% of repurchase requests have currently resulted in actual repurchases or indemnification by the Company. We repurchased 15 loans from the agencies during the second quarter of 2012 for $1.4 million and recognized minimal losses. We also provided indemnification to the agencies on 3 additional loans with an unpaid balance of $58 thousand during the second quarter of 2012. While the level of repurchase requests resulting in actual repurchases or indemnifications by the Company has remained low, the loss severity has trended higher. As such, we increased our accrual for credit losses related to potential loan repurchases under representations and warranties to $5.0 million at June 30, 2012 from $2.1 million at March 31, 2012.


- 37 -



Customer Derivative Programs
 
We offer programs that permit our customers to hedge various risks, including fluctuations in energy, cattle and other agricultural product prices, interest rates and foreign exchange rates, or to take positions in derivative contracts. Each of these programs work essentially the same way. Derivative contracts are executed between the customers and the Company. Offsetting contracts are executed between the Company and selected counterparties to minimize the risk to us of changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or a fee paid to us as compensation for administrative costs, credit risk and profit.

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

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

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

Derivative contracts are carried at fair value. At June 30, 2012, the net fair values of derivative contracts reported as assets under these programs totaled $359 million, compared to $379 million at March 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 $105 million, interest rate swaps sold to loan customers with fair values of $77 million, energy contracts with fair values of $76 million and foreign exchange contracts with fair values of $137 million. The aggregate net fair values of derivative contracts held under these programs reported as liabilities totaled $369 million.

At June 30, 2012, total derivative assets were reduced by $51 million of cash collateral received from counterparties and total derivative liabilities were reduced by $43 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 June 30, 2012 follows in Table 23.

Table 23 – Fair Value of Derivative Contracts
(In thousands)
Customers
 
$
199,805

Banks and other financial institutions
 
122,678

Exchanges
 
30,806

Energy companies
 
5,282

Fair value of customer hedge asset derivative contracts, net
 
$
358,571

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

Our aggregate gross exposure to all European banks totaled $4.5 million at June 30, 2012. In addition, $8.5 million is owed to

- 38 -



us by MF Global which filed for bankruptcy protection on October 31, 2011 after partial distributions from the bankruptcy trustee. The remaining amount due was written down in the fourth quarter of 2011 to $6.8 million based on our evaluation of the amount we expect to recover.

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 $19.65 per barrel of oil would increase the fair value of derivative assets by $42 million. An increase in prices equivalent to $153.99 per barrel of oil would increase the fair value of derivative assets by $294 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 from A1 to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $38 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 June 30, 2012, changes in interest rate would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program.
Summary of Loan Loss Experience

We maintain an allowance for loan losses and an accrual for off-balance sheet credit risk. The combined allowance for loan losses and off-balance sheet credit losses totaled $241 million or 2.09% of outstanding loans and 167.09% of nonaccruing loans at June 30, 2012. The allowance for loans losses was $232 million and the accrual for off-balance sheet credit losses was $9.7 million. At March 31, 2012, the combined allowance for credit losses was $254 million or 2.20% of outstanding loans and 139% of nonaccruing loans at March 31, 2012. The allowance for loan losses was $244 million and the accrual for off-balance sheet credit losses was $10 million. The accruals for off-balance sheet credit losses for June 30, 2012, March 31, 2012 and December 31, 2011 included $7.1 million which was refunded to the City of Tulsa subsequent to June 30, 2012, related to an Oklahoma Supreme Court ruling that reversed a loan settlement agreement between the Company and the City of Tulsa. The refund of this settlement will increase third quarter net charge-offs.

The provision for credit losses is the amount necessary to maintain the allowance for loan losses and an accrual for off-balance sheet credit risk at an amount determined by management to be appropriate based on its evaluation. The provision includes the combined charge to expense for both the allowance for loan losses and the accrual for off-balance sheet credit risk. All losses incurred from lending activities will ultimately be reflected in charge-offs against the allowance for loan losses following funds advanced against outstanding commitments and after exhaustion of collection efforts. An $8.0 million negative provision for credit losses was recorded in the second quarter of 2012 based on a continued trend of declining charge-offs, reduced nonaccruing loans and improvements in other credit quality factors. No provision for credit losses was recorded in the first quarter of 2012 and the provision for credit losses totaled $2.7 million in the second quarter of 2011.


- 39 -



Table 24 – Summary of Loan Loss Experience
(In thousands)
 
 
Three Months Ended
 
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
 
June 30,
2011
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
244,209

 
$
253,481

 
$
271,456

 
$
286,611

 
$
289,549

Loans charged off:
 
 
 
 
 
 
 
 

 
 

Commercial
 
(4,094
)
 
(2,934
)
 
(4,099
)
 
(5,083
)
 
(3,302
)
Commercial real estate
 
(1,216
)
 
(6,725
)
 
(3,365
)
 
(2,335
)
 
(3,380
)
Residential mortgage
 
(4,061
)
 
(1,786
)
 
(4,375
)
 
(3,403
)
 
(3,381
)
Consumer
 
(2,172
)
 
(2,229
)
 
(2,932
)
 
(3,202
)
 
(2,711
)
Total
 
(11,543
)
 
(13,674
)
 
(14,771
)
 
(14,023
)
 
(12,774
)
Recoveries of loans previously charged off:
 
 
 
 
 
 
 
 

 
 

Commercial
 
4,125

 
1,946

 
2,316

 
1,404

 
2,187

Commercial real estate
 
544

 
1,312

 
1,220

 
911

 
306

Residential mortgage
 
750

 
411

 
715

 
283

 
254

Consumer
 
1,283

 
1,520

 
1,060

 
1,271

 
1,509

Total
 
6,702

 
5,189

 
5,311

 
3,869

 
4,256

Net loans charged off
 
(4,841
)
 
(8,485
)
 
(9,460
)
 
(10,154
)
 
(8,518
)
Provision for loan losses
 
(7,699
)
 
(787
)
 
(8,515
)
 
(5,001
)
 
5,580

Ending balance
 
$
231,669

 
$
244,209

 
$
253,481

 
$
271,456

 
$
286,611

Accrual for off-balance sheet credit losses:
 
 
 
 
 
 
 
 

 
 

Beginning balance
 
$
10,048

 
$
9,261

 
$
15,746

 
$
10,745

 
$
13,625

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

 
(6,485
)
 
5,001

 
(2,880
)
Ending balance
 
$
9,747

 
$
10,048

 
$
9,261

 
$
15,746

 
$
10,745

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

 
$
(15,000
)
 
$
—

 
$
2,700

Allowance for loan losses to loans outstanding at period-end
 
2.00
 %
 
2.11
%
 
2.25
 %
 
2.44
%
 
2.67
%
Net charge-offs (annualized) to average loans
 
0.17
 %
 
0.30
%
 
0.34
 %
 
0.37
%
 
0.32
%
Total provision for credit losses (annualized) to average loans
 
(0.28
)%
 
—
%
 
(0.54
)%
 
—
%
 
0.10
%
Recoveries to gross charge-offs
 
58.06
 %
 
37.95
%
 
35.96
 %
 
27.59
%
 
33.32
%
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments
 
0.15
 %
 
0.15
%
 
0.14
 %
 
0.25
%
 
0.18
%
Combined allowance for credit losses to loans outstanding at period-end
 
2.09
 %
 
2.20
%
 
2.33
 %
 
2.58
%
 
2.77
%
Allowance for Loan Losses

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

At June 30, 2012, risk-graded impaired loans totaled $126 million, including $6.2 million with specific allowances of $1.8 million and $120 million with no specific allowances because the loans balances represent the amounts we expect to recover. At March 31, 2012, risk-graded impaired loans totaled $160 million, including $8.8 million of impaired loans with specific allowances of $2.3 million and $152 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

- 40 -



graded and non-risk graded loans may be further adjusted for inherent risk identified for the given loan class which have not yet been captured in the loss rate.

The aggregate amount of general allowances for all unimpaired loans totaled $189 million at June 30, 2012 and $198 million at March 31, 2012. The decrease in the aggregate amount of general allowance for unimpaired loans was primarily due to the declining trend of charge-offs.

Nonspecific allowances are maintained for risks beyond factors specific to a particular loan or loan class. These factors include trends in the economy in our primary lending areas, concentrations in loans with large balances and other relevant factors. Nonspecific allowances totaled $41 million at June 30, 2012 and $44 million at March 31, 2012. The nonspecific allowance at both June 30, 2012 and March 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.

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 $159 million at June 30, 2012. The current composition of potential problem loans by primary industry included services - $40 million, construction and land development - $27 million, other commercial real estate - $14 million, residential mortgage - $13 million, wholesale / retail - $12 million, commercial real estate secured by office buildings - $12 million, and energy - $11 million. Potential problem loans totaled $173 million at March 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 collateralvalue. Commercial and commercial real estate loans are evaluated quarterly and charge-offs are taken in the quarter in which the loss is identified. Residential mortgage and consumer loans are generally charged off when payments are between 90 days and 180 days past due, depending on loan class.

Net loans charged off during the second quarter of 2012 totaled $4.8 million compared to $8.5 million in the previous quarter and $8.5 million in the second quarter of 2011. The ratio of net loans charged off (annualized) to average outstanding loans was 0.17% for the second quarter of 2012 compared with 0.30% for the first quarter of 2012 and 0.32% for the second quarter of 2011. Net loans charged off in the second quarter of 2012 decreased $3.6 million compared to the previous quarter.

Net loans charged off (recovered) by category and principal market area during the second quarter of 2012 follow in Table 25.

Table 25 – Net Loans Charged Off (Recovered)
(In thousands)
 
 
Oklahoma
 
Texas
 
Colorado
 
Arkansas
 
New
Mexico
 
Arizona
 
Kansas/
Missouri
 
Total
Commercial
 
$
20

 
$
2,325

 
$
—

 
$
(2,094
)
 
$
(139
)
 
$
106

 
$
(249
)
 
$
(31
)
Commercial real estate
 
258

 
—

 
367

 
—

 
(292
)
 
339

 
—

 
672

Residential mortgage
 
2,667

 
222

 
18

 
(4
)
 
75

 
333

 
—

 
3,311

Consumer
 
481

 
300

 
24

 
(67
)
 
126

 
19

 
6

 
889

Total net loans charged off (recovered)
 
$
3,426

 
$
2,847

 
$
409

 
$
(2,165
)
 
$
(230
)
 
$
797

 
$
(243
)
 
$
4,841


Net commercial loans charged off during the second quarter of 2012 decreased $1.0 million compared to the prior quarter and were comprised primarily of a gross charge-off of $3.0 million from a single healthcare sector loan in the Texas market offset by a $2.0 million recovery from a single wholesale/retail sector customer in the Arkansas market and $1.1 million recovery from the service sector of the loan portfolio, primarily in the Texas market.


- 41 -



Net charge-offs of commercial real estate loans decreased $4.7 million from the first quarter of 2012 and were primarily comprised of net charge-offs of land and residential construction sector loans in the Arizona and Colorado markets.

Residential mortgage net charge-offs were up $1.9 million over the previous quarter and consumer loan net charge-offs, which include indirect auto loan and deposit account overdraft losses, increased $180 thousand over the previous quarter.  All residential mortgage net charge-offs related to loans serviced by our mortgage company across our geographical footprint are attributed to the Oklahoma market.
Nonperforming Assets

Table 26 – Nonperforming Assets
(In thousands)
 
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
 
June 30,
2011
Nonaccruing loans:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
34,529

 
$
61,750

 
$
68,811

 
$
83,736

 
$
53,365

Commercial real estate
 
80,214

 
86,475

 
99,193

 
110,048

 
110,363

Residential mortgage
 
22,727

 
27,462

 
29,767

 
31,731

 
31,693

Consumer
 
7,012

 
7,672

 
3,515

 
3,960

 
4,749

Total nonaccruing loans
 
144,482

 
183,359

 
201,286

 
229,475

 
200,170

Renegotiated loans2
 
28,415

 
36,764

 
32,893

 
30,477

 
22,261

Total nonperforming loans
 
172,897

 
220,123

 
234,179

 
259,952

 
222,431

Real estate and other repossessed assets
 
105,708

 
115,790

 
122,753

 
127,943

 
129,026

Total nonperforming assets
 
$
278,605

 
$
335,913

 
$
356,932

 
$
387,895

 
$
351,457

 
 
 
 
 
 
 
 
 
 
 
Nonaccruing loans by principal market:
 
 
 
 
 
 
 
 

 
 

Oklahoma
 
$
49,931

 
$
64,097

 
$
65,261

 
$
73,794

 
$
41,411

Texas
 
24,553

 
29,745

 
28,083

 
29,783

 
32,385

New Mexico
 
13,535

 
15,029

 
15,297

 
17,242

 
17,244

Arkansas
 
6,865

 
18,066

 
23,450

 
26,831

 
24,842

Colorado
 
28,239

 
28,990

 
33,522

 
36,854

 
37,472

Arizona
 
21,326

 
27,397

 
35,673

 
44,929

 
43,307

Kansas / Missouri
 
33

 
35

 
—

 
42

 
3,509

Total nonaccruing loans
 
$
144,482

 
$
183,359

 
$
201,286

 
$
229,475

 
$
200,170

 
 
 
 
 
 
 
 
 
 
 
Nonaccruing loans by loan portfolio sector:
 
 
 
 
 
 
 
 

 
 

Commercial:
 
 
 
 
 
 
 
 

 
 

Energy
 
$
3,087

 
$
336

 
$
336

 
$
3,900

 
$
345

Manufacturing
 
12,230

 
23,402

 
23,051

 
27,691

 
4,366

Wholesale / retail
 
4,175

 
15,388

 
21,180

 
27,088

 
25,138

Integrated food services
 
—

 
—

 
—

 
—

 
—

Services
 
10,123

 
12,890

 
16,968

 
18,181

 
16,254

Healthcare
 
3,310

 
7,946

 
5,486

 
5,715

 
5,962

Other
 
1,604

 
1,788

 
1,790

 
1,161

 
1,300

Total commercial
 
34,529

 
61,750

 
68,811

 
83,736

 
53,365


- 42 -



Table 26 – Nonperforming Assets
(In thousands)
 
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
 
June 30,
2011
Commercial real estate:
 
 
 
 
 
 
 
 

 
 

Land development and construction
 
46,050

 
52,416

 
61,874

 
72,207

 
76,265

Retail
 
7,908

 
6,193

 
6,863

 
6,492

 
4,642

Office
 
10,589

 
10,733

 
11,457

 
11,967

 
11,473

Multifamily
 
3,219

 
3,414

 
3,513

 
4,036

 
4,717

Industrial
 
—

 
—

 
—

 
—

 
—

Other commercial real estate
 
12,448

 
13,719

 
15,486

 
15,346

 
13,266

Total commercial real estate
 
80,214

 
86,475

 
99,193

 
110,048

 
110,363

Residential mortgage:
 
 
 
 
 
 
 
 

 
 

Permanent mortgage
 
18,136

 
22,822

 
25,366

 
27,486

 
27,991

Home equity
 
4,591

 
4,640

 
4,401

 
4,245

 
3,702

Total residential mortgage
 
22,727

 
27,462

 
29,767

 
31,731

 
31,693

Consumer
 
7,012

 
7,672

 
3,515

 
3,960

 
4,749

Total nonaccrual loans
 
$
144,482

 
$
183,359

 
$
201,286

 
$
229,475

 
$
200,170

 
 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
 
 

 
 

Allowance for loan losses to nonaccruing loans
 
160.34
%
 
133.19
%
 
125.93
%
 
118.29
%
 
143.18
%
Nonaccruing loans to period-end loans
 
1.25
%
 
1.58
%
 
1.79
%
 
2.06
%
 
1.86
%
Accruing loans 90 days or more past due1
 
$
691

 
$
6,140

 
$
2,496

 
$
1,401

 
$
2,341

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

 
 

2Includes residential mortgages guaranteed by agencies of the U.S. Government.  These loans have been modified to extend payment terms and/or reduce interest rates.
 
$
24,760

 
$
32,770

 
$
28,974

 
$
26,670

 
$
18,716


Nonperforming assets decreased $57 million during the second quarter of 2012 to $279 million or 2.38% of outstanding loans and repossessed assets at June 30, 2012. Nonaccruing loans totaled $144 million, renegotiated residential mortgage loans totaled $28 million (composed primarily of $25 million of residential mortgage loans guaranteed by U.S. government agencies) and real estate and other repossessed assets totaled $106 million. The Company generally retains nonperforming assets to maximize potential recovery which may cause future nonperforming assets to decrease more slowly.

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

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

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

- 43 -




A rollforward of nonperforming assets for the second quarter of 2012 follows in Table 27.

Table 27 – Rollforward of Nonperforming Assets
(In thousands)
 
 
Three Months Ended
 
 
June 30, 2012
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, March 31, 2012
 
$
183,359

 
$
36,764

 
$
115,790

 
$
335,913

Additions
 
18,164

 
2,274

 
—

 
20,438

Payments
 
(37,977
)
 
(144
)
 
—

 
(38,121
)
Charge-offs
 
(11,543
)
 
—

 
—

 
(11,543
)
Net write-downs and losses
 
—

 
—

 
(3,242
)
 
(3,242
)
Foreclosure of nonperforming loans
 
(6,235
)
 
(2,593
)
 
8,828

 
—

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

 
—

 
20,952

 
20,952

Proceeds from sales
 
—

 
(4,993
)
 
(17,147
)
 
(22,140
)
Conveyance to U.S. government agencies
 
—

 
—

 
(19,568
)
 
(19,568
)
Net transfers to nonaccruing loans
 
414

 
(414
)
 
—

 
—

Return to accrual status
 
(950
)
 
—

 
—

 
(950
)
Other, net
 
(750
)
 
(2,479
)
 
95

 
(3,134
)
Balance, June 30, 2012
 
$
144,482

 
$
28,415

 
$
105,708

 
$
278,605


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

 
$
32,893

 
$
122,753

 
$
356,932

Additions
 
39,260

 
9,102

 
—

 
48,362

Payments
 
(57,546
)
 
(486
)
 
—

 
(58,032
)
Charge-offs
 
(25,217
)
 
—

 
—

 
(25,217
)
Net writedowns and losses
 
—

 
—

 
(3,762
)
 
(3,762
)
Foreclosure of nonperforming loans
 
(13,156
)
 
(3,965
)
 
17,121

 
—

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

 
—

 
38,700

 
38,700

Proceeds from sales
 
—

 
(6,320
)
 
(35,900
)
 
(42,220
)
Conveyance to U.S. government agencies
 
—

 
—

 
(34,247
)
 
(34,247
)
Net transfers to nonaccruing loans
 
232

 
(232
)
 
—

 
—

Return to accrual status
 
(950
)
 
—

 
—

 
(950
)
Other, net
 
573

 
(2,577
)
 
1,043

 
(961
)
Balance, June 30, 2012
 
$
144,482

 
$
28,415

 
$
105,708


$
278,605


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 second quarter of 2012, $21 million of properties guaranteed by U.S. government agencies were foreclosed on and $20 million of properties were conveyed to the applicable U.S. government agencies during the second quarter of 2012. For the six months ended June 30, 2012 , $39 million of properties guaranteed by U.S. government agencies were foreclosed on and $34 million of properties conveyed.


- 44 -



Nonaccruing loans totaled $144 million or 1.25% of outstanding loans at June 30, 2012 and $183 million or 1.58% of outstanding loans at March 31, 2012. Nonaccruing loans decreased $39 million from March 31, 2012 due primarily to $38 million of payments, $12 million of charge-offs and $6.2 million of foreclosures. Newly identified nonaccruing loans totaled $18 million for the second quarter of 2012.

The distribution of nonaccruing loans among our various markets follows in Table 28.
Table 28 – Nonaccruing Loans by Principal Market
(Dollars In thousands)
 
 
June 30, 2012
 
March 31, 2012
 
Change
 
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
Oklahoma
 
$
49,931

 
0.95
%
 
$
64,097

 
1.22
%
 
$
(14,166
)
 
(27
)
bp
Texas
 
24,553

 
0.70
%
 
29,745

 
0.83
%
 
(5,192
)
 
(13
)
 
New Mexico
 
13,535

 
1.91
%
 
15,029

 
2.09
%
 
(1,494
)
 
(18
)
 
Arkansas
 
6,865

 
3.16
%
 
18,066

 
7.05
%
 
(11,201
)
 
(389
)
 
Colorado
 
28,239

 
3.25
%
 
28,990

 
3.64
%
 
(751
)
 
(39
)
 
Arizona
 
21,326

 
3.93
%
 
27,397

 
5.11
%
 
(6,071
)
 
(118
)
 
Kansas / Missouri
 
33

 
0.01
%
 
35

 
0.01
%
 
(2
)
 
—

 
Total
 
$
144,482

 
1.25
%
 
$
183,359

 
1.58
%
 
$
(38,877
)
 
(33
)
bp

Nonaccruing loans in the Oklahoma market are primarily composed of $10 million of manufacturing sector loans, $15 million of residential mortgage loans and $15 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 Oklahoma market. Nonaccruing loans in the Arizona and Colorado markets consisted primarily of commercial real estate loans. Nonaccruing loans attributed to the Texas market included $9.0 million of commercial real estate loans, $3.9 million of residential mortgage loans and $4.0 million of consumer loans.
Commercial

Nonaccruing commercial loans totaled $35 million or 0.49% of total commercial loans at June 30, 2012, down from $62 million or 0.89% of total commercial loans at March 31, 2012. Nonaccruing commercial loans at June 30, 2012 were primarily composed of $12 million or 3.37% of total manufacturing sector loans and $10 million or 0.52% of total services sector loans. Nonaccruing manufacturing sectors loans were primarily composed of a single customer in the Oklahoma market totaling $9.5 million at June 30, 2012, down from $21 million at March 31, 2012 on payments received during the second quarter. Nonaccruing wholesale/retail sector loans were primarily composed of a single customer relationship in the Arkansas market totaling $11 million at March 31, 2012. This loan was fully paid off during the second quarter including a recovery of $2.0 million of amounts previously charged off and $2.9 million of foregone interest and fees.

Nonaccruing commercial loans decreased $27 million in the second quarter of 2012 primarily due to $29 million in payments and $4 million in charge-offs, partially offset by $8 million of newly identified nonaccruing commercial loans during the quarter.
 
The distribution of nonaccruing commercial loans among our various markets was as follows in Table 29.



- 45 -



Table 29 – Nonaccruing Commercial Loans by Principal Market
(Dollars in thousands)
 
 
June 30, 2012
 
March 31, 2012
 
Change
 
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
Oklahoma
 
$
17,320

 
0.56
%
 
$
26,456

 
0.85
%
 
$
(9,136
)
 
(29
)
bp
Texas
 
7,682

 
0.32
%
 
11,751

 
0.50
%
 
(4,069
)
 
(18
)
 
New Mexico
 
2,137

 
0.82
%
 
2,854

 
1.04
%
 
(717
)
 
(22
)
 
Arkansas
 
358

 
0.73
%
 
11,369

 
17.60
%
 
(11,011
)
 
(1,687
)
 
Colorado
 
2,008

 
0.33
%
 
3,037

 
0.56
%
 
(1,029
)
 
(23
)
 
Arizona
 
5,024

 
1.81
%
 
6,283

 
2.33
%
 
(1,259
)
 
(52
)
 
Kansas / Missouri
 
—

 
—
%
 
—

 
—
%
 
—

 
—

 
Total commercial
 
$
34,529

 
0.49
%
 
$
61,750

 
0.89
%
 
$
(27,221
)
 
(40
)
bp

Commercial Real Estate

Nonaccruing commercial real estate loans totaled $80 million or 3.77% of outstanding commercial real estate loans at June 30, 2012 compared to $86 million or 3.87% of outstanding commercial real estate loans at March 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 down $6.3 million compared to the prior quarter. Newly identified nonaccruing commercial real estate loans totaled $5.0 million, offset by $8.5 million of cash payments received, $1.2 million of charge-offs and $1.6 million of foreclosures. The distribution of our nonaccruing commercial real estate loans among our geographic markets follows in Table 30.

Table 30 – Nonaccruing Commercial Real Estate Loans by Principal Market
(Dollars in thousands)
 
 
June 30, 2012
 
March 31, 2012
 
Change
 
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
Oklahoma
 
$
15,180

 
2.35
%
 
$
15,519

 
2.46
%
 
$
(339
)
 
(11
)
bp
Texas
 
8,955

 
1.32
%
 
9,914

 
1.23
%
 
(959
)
 
9

 
New Mexico
 
9,843

 
3.44
%
 
10,651

 
3.77
%
 
(808
)
 
(33
)
 
Arkansas
 
5,588

 
4.66
%
 
5,588

 
4.00
%
 
—

 
66

 
Colorado
 
26,064

 
17.43
%
 
25,780

 
17.81
%
 
284

 
(38
)
 
Arizona
 
14,584

 
8.03
%
 
19,023

 
10.52
%
 
(4,439
)
 
(249
)
 
Kansas / Missouri
 
—

 
—
%
 
—

 
—
%
 
—

 
—

 
Total commercial real estate
 
$
80,214

 
3.77
%
 
$
86,475

 
3.87
%
 
$
(6,261
)
 
(10
)
bp

Nonaccruing commercial real estate loans are primarily concentrated in the Colorado, Oklahoma and Arizona markets. Nonaccruing commercial real estate loans attributed to the Colorado market consist primarily of nonaccruing residential construction and land development loans. Nonaccruing commercial real estate loans in the Oklahoma market consisted primarily of $5.3 million of residential construction and land development loans, $3.2 million of loans secured by multifamily residential properties, $2.5 million of other commercial real estate loans and $2.4 million of loans secured by retail facilities. Nonaccruing commercial real estate loans in the Arizona market primarily consist of $5.5 million of other commercial real estate loans, $4.5 million of residential construction and land development loans and $3.4 million of loans secured by office buildings.

Residential Mortgage and Consumer

Nonaccruing residential mortgage loans totaled $23 million or 1.13% of outstanding residential mortgage loans at June 30, 2012 compared to $27 million or 1.40% of outstanding residential mortgage loans at March 31, 2012. Newly identified nonaccrual residential mortgage loans totaled $2.9 million, offset by $4.1 million of loans charged off and $3.7 million of foreclosures during the quarter. Nonaccruing residential mortgage loans primarily consist of permanent residential mortgage

- 46 -



loans which totaled $18 million or 1.39% of outstanding permanent residential mortgage loans at June 30, 2012. Nonaccruing home equity loans totaled $4.6 million or 0.66% 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 31. Principally all non-guaranteed residential loans past due 90 days or more are nonaccruing. Residential mortgage loans 30 to 89 days past due increased $2.5 million to $17 million at June 30, 2012. Consumer loans past due 30 to 89 days decreased $1.2 million from March 31, 2012.

Table 31 – Residential Mortgage and Consumer Loans Past Due
(In thousands)
 
 
June 30, 2012
 
March 31, 2012
 
 
90 Days or More
 
30 to 89 Days
 
90 Days or More
 
30 to 89 Days
Residential mortgage:
 
 
 
 
 
 
 
 
   Permanent mortgage1
 
$
495

 
$
15,130

 
$
54

 
$
12,705

Home equity
 
44

 
2,211

 
—

 
2,087

Total residential mortgage
 
$
539

 
$
17,341

 
54

 
$
14,792

Consumer:
 
 

 
 

 
 

 
 

Indirect automobile
 
$
1

 
$
1,771

 
$
—

 
$
2,231

Other consumer
 
14

 
718

 
42

 
1,467

Total consumer
 
$
15

 
$
2,489

 
$
42

 
$
3,698

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

Real Estate and Other Repossessed Assets

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

Real estate and other repossessed assets totaled $106 million at June 30, 2012, a $10.1 million decrease from March 31, 2012. The distribution of real estate and other repossessed assets attributed by geographical market is included in Table 32 following.



- 47 -



Table 32 – 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
 
$
2,356

 
$
8,066

 
$
2,380

 
$
1,506

 
$
3,103

 
$
14,633

 
$
404

 
$
—

 
$
32,448

1-4 family residential properties
 
6,438

 
3,621

 
2,342

 
1,541

 
1,826

 
1,785

 
687

 
595

 
18,835

1-4 family residential properties guaranteed by U.S. government agencies
 
4,919

 
1,685

 
229

 
326

 
12,208

 
283

 
1,068

 
687

 
21,405

Undeveloped land
 
361

 
4,417

 
2,903

 
123

 
200

 
5,720

 
3,679

 
—

 
17,403

Residential land development properties
 
702

 
3,769

 
2,139

 
46

 
1,360

 
5,839

 
153

 
—

 
14,008

Oil and gas properties
 
—

 
709

 
—

 
—

 
—

 
—

 
—

 
—

 
709

Construction equipment
 
—

 
—

 
—

 
—

 
—

 
—

 
178

 
—

 
178

Vehicles
 
115

 
39

 
—

 
85

 
—

 
—

 
—

 
—

 
239

Multifamily residential properties
 
—

 
—

 
—

 
323

 
—

 
136

 
—

 
—

 
459

Other
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
24

 
24

Total real estate and other repossessed assets
 
$
14,891

 
$
22,306

 
$
9,993

 
$
3,950

 
$
18,697

 
$
28,396

 
$
6,169

 
$
1,306

 
$
105,708


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




- 48 -



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 second quarter of 2012, approximately 72% 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 second quarter of 2012 totaled $18.4 billion and represented approximately 72% of total liabilities and capital compared with $18.7 billion and 73% of total liabilities and capital for the first quarter of 2012. Average deposits decreased $206 million compared to the first quarter of 2012. Average demand deposits increased $431 million. Average interest-bearing transaction deposit accounts decreased $540 million and average time deposits decreased $114 million. 

Average Commercial Banking deposit balances were down $143 million compared to the first quarter of 2012. Growth in demand deposits was offset by decreased balances in interest-bearing transaction deposit accounts. Balances attributed to our treasury services customers were down $131 million, balances related to our integrated food services customers were down $70 million and balances related to our energy customers were down $26 million. Small business customer balances grew by $30 million, balances attributed to our commercial real estate customers were up $25 million, and average deposits attributable to our commercial and industrial customers were up $18 million. Commercial customers continue to retain large cash reserves primarily due to continued economic uncertainty and low yields available on other high quality investment alternatives. Average Consumer Banking deposit balances were down $38 million compared to the first quarter of 2012. Time deposits balances were down $77 million, partially offset by a $17 million increase in saving accounts and a $16 million increase in interest-bearing deposits accounts. Consumer demand deposit accounts were essentially flat compared to the first quarter of 2012. Wealth Management Deposits were down $19 million compared to the first quarter of 2012 primarily due to a decrease in time deposits. Growth in demand deposits attributed to Wealth Management was largely offset by a decrease in interest-bearing deposit accounts.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”) provided temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts at all FDIC-insured depository institutions effective December 31, 2010. This temporary program is set to expire on December 31, 2012 although an extension of this program is currently under consideration. Upon expiration, noninterest-bearing transaction accounts will be insured only up to $250,000. Demand deposits represent 34% of total average deposits for the second quarter of 2012. The impact of the expiration of this temporary program is uncertain, but could result in a decrease in average demand deposits held by customers.

Brokered deposits, which are included in time deposits, averaged $187 million for the second quarter of 2012, flat compared to the first quarter of 2012.

The distribution of our period-end deposit account balances among principal markets follows in Table 33.



- 49 -



Table 33 – Period-end Deposits by Principal Market Area
(In thousands)
 
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
 
June 30,
2011
Oklahoma:
 
 
 
 
 
 
 
 
 
 
Demand
 
$
3,499,834

 
$
3,445,424

 
$
3,223,201

 
$
2,953,410

 
$
2,486,671

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
5,412,002

 
5,889,625

 
6,050,986

 
6,038,770

 
5,916,784

Savings
 
150,353

 
148,556

 
126,763

 
122,829

 
120,278

Time
 
1,354,148

 
1,370,868

 
1,450,571

 
1,489,486

 
1,462,137

Total interest-bearing
 
6,916,503

 
7,409,049

 
7,628,320

 
7,651,085

 
7,499,199

Total Oklahoma
 
10,416,337

 
10,854,473

 
10,851,521

 
10,604,495

 
9,985,870

 
 
 
 
 
 
 
 
 
 
 
Texas:
 
 
 
 
 
 
 
 
 
 
Demand
 
1,966,465

 
1,876,133

 
1,808,491

 
1,710,315

 
1,528,772

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
1,813,209

 
1,734,655

 
1,940,819

 
1,820,116

 
1,741,176

Savings
 
51,114

 
50,331

 
45,872

 
42,272

 
42,185

Time
 
772,809

 
789,860

 
867,664

 
938,200

 
992,366

Total interest-bearing
 
2,637,132

 
2,574,846

 
2,854,355

 
2,800,588

 
2,775,727

Total Texas
 
4,603,597

 
4,450,979

 
4,662,846

 
4,510,903

 
4,304,499

 
 
 
 
 
 
 
 
 
 
 
New Mexico:
 
 
 
 
 
 
 
 
 
 
Demand
 
357,367

 
333,707

 
319,269

 
325,612

 
299,305

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
506,165

 
503,015

 
491,068

 
480,816

 
483,026

Savings
 
31,215

 
32,688

 
27,487

 
26,127

 
24,613

Time
 
383,350

 
392,234

 
410,722

 
431,436

 
449,618

Total interest-bearing
 
920,730

 
927,937

 
929,277

 
938,379

 
957,257

Total New Mexico
 
1,278,097

 
1,261,644

 
1,248,546

 
1,263,991

 
1,256,562

 
 
 
 
 
 
 
 
 
 
 
Arkansas:
 
 
 
 
 
 
 
 
 
 
Demand
 
16,921

 
22,843

 
18,513

 
21,809

 
17,452

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
172,829

 
151,708

 
131,181

 
181,486

 
138,954

Savings
 
2,220

 
2,358

 
1,727

 
1,735

 
1,673

Time
 
48,517

 
54,157

 
61,329

 
74,163

 
82,112

Total interest-bearing
 
223,566

 
208,223

 
194,237

 
257,384

 
222,739

Total Arkansas
 
240,487

 
231,066

 
212,750

 
279,193

 
240,191

 
 
 
 
 
 
 
 
 
 
 
Colorado:
 
 
 
 
 
 
 
 
 
 
Demand
 
301,646

 
311,057

 
272,565

 
217,394

 
196,915

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
465,276

 
476,718

 
511,993

 
520,743

 
509,738

Savings
 
24,202

 
23,409

 
22,771

 
22,599

 
21,406

Time
 
491,280

 
498,124

 
523,969

 
547,481

 
563,642

Total interest-bearing
 
980,758

 
998,251

 
1,058,733

 
1,090,823

 
1,094,786

Total Colorado
 
1,282,404

 
1,309,308

 
1,331,298

 
1,308,217

 
1,291,701

 
 
 
 
 
 
 
 
 
 
 

- 50 -



Table 33 – Period-end Deposits by Principal Market Area
(In thousands)
 
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
 
June 30,
2011
Arizona:
 
 
 
 
 
 
 
 
 
 
Demand
 
137,313

 
131,539

 
106,741

 
138,971

 
150,194

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
113,310

 
95,010

 
104,961

 
101,933

 
107,961

Savings
 
2,313

 
1,772

 
1,192

 
1,366

 
1,364

Time
 
31,539

 
34,199

 
37,641

 
40,007

 
44,619

Total interest-bearing
 
147,162

 
130,981

 
143,794

 
143,306

 
153,944

Total Arizona
 
284,475

 
262,520

 
250,535

 
282,277

 
304,138

 
 
 
 
 
 
 
 
 
 
 
Kansas / Missouri:
 
 
 
 
 
 
 
 
 
 
Demand
 
160,829

 
68,469

 
51,004

 
46,773

 
46,668

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
69,083

 
57,666

 
123,449

 
108,973

 
115,684

Savings
 
581

 
505

 
545

 
503

 
358

Time
 
26,307

 
26,657

 
30,086

 
33,697

 
40,206

Total interest-bearing
 
95,971

 
84,828

 
154,080

 
143,173

 
156,248

Total Kansas / Missouri
 
256,800

 
153,297

 
205,084

 
189,946

 
202,916

Total BOK Financial deposits
 
$
18,362,197

 
$
18,523,287

 
$
18,762,580

 
$
18,439,022

 
$
17,585,877


In addition to deposits, subsidiary bank liquidity is provided primarily by federal funds purchased, securities repurchase agreements and Federal Home Loan Bank borrowings. Federal funds purchased consist primarily of unsecured, overnight funds acquired from other financial institutions. Funds are primarily purchased from bankers’ banks and Federal Home Loan banks from across the country. The largest single source of federal funds purchased totaled $330 million at June 30, 2012. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale securities. Federal Home Loan Bank borrowings are generally short term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and mortgage-backed securities, 1-4 family residential mortgage loans, multifamily and other qualifying commercial real estate loans). Amounts borrowed from the Federal Home Loan Bank of Topeka averaged $32 million during the quarter.

At June 30, 2012, the estimated unused credit available to the subsidiary bank from collateralized sources was approximately $7.5 billion.

A summary of other borrowing by the subsidiary bank follows in Table 34.

- 51 -



Table 34 – Other borrowings
(In thousands)
 
 
 
 
Three Months Ended
 
 
 
Three Months Ended
 
 
 
 
June 30, 2012
 
 
 
March 31, 2012
 
 
June 30, 2012
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
March 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 debt
 
$
—

 
$
279

 
—
%
 
$
—

 
$
—

 
$
—

 
—
%
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subsidiary Bank:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds purchased
 
1,453,750

 
1,740,354

 
0.16
%
 
1,675,049

 
1,784,940

 
1,337,614

 
0.09
%
 
1,784,940

Repurchase agreements
 
1,136,948

 
1,095,298

 
0.10
%
 
1,136,948

 
1,162,546

 
1,183,778

 
0.09
%
 
1,272,151

Federal Home Loan Bank advances
 
3,947

 
32,198

 
0.39
%
 
253,647

 
155,087

 
8,296

 
0.36
%
 
155,087

Subordinated debentures
 
353,378

 
357,609

 
3.95
%
 
355,452

 
394,760

 
397,440

 
5.62
%
 
398,897

GNMA repurchase liability
 
37,397

 
37,513

 
5.98
%
 
37,864

 
37,504

 
48,012

 
7.07
%
 
47,840

Other
 
16,712

 
16,677

 
4.58
%
 
16,713

 
16,640

 
16,603

 
4.65
%
 
16,640

Total Subsidiary Bank
 
3,002,132

 
3,279,649

 
0.65
%
 
 
 
 
 
 
 
0.96
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Other Borrowings
 
3,002,132

 
3,279,928

 
0.65
%
 
 
 
$
3,551,477

 
$
2,991,743

 
0.96
%
 
 
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 June 30, 2012, $233 million of this subordinated debt remains outstanding.

Parent Company

The primary sources of liquidity for BOK Financial are cash on hand and dividends from the subsidiary bank. Dividends from the subsidiary bank are limited by various banking regulations to net profits, as defined, for the year plus retained profits for the two preceding years. Dividends are further restricted by minimum capital requirements. At June 30, 2012, based on the most restrictive limitations as well as management’s internal capital policy, the subsidiary bank could declare up to $157 million of dividends without regulatory approval. Future losses or increases in required regulatory capital at the subsidiary bank could affect its ability to pay dividends to the parent company.

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

Our equity capital at June 30, 2012 was $2.9 billion, up $52 million over March 31, 2012. Net income less cash dividends paid increased equity $72 million during the second quarter of 2012. Capital is managed to maximize long-term value to the

- 52 -



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 June 30, 2012, the Company has repurchased 39,496 shares for $2.1 million under this program. The Company repurchased 345,300 shares for $18.4 million in the first quarter of 2012 under a previously approved program. No shares were repurchased in the second quarter of 2011.

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 35.

Table 35 – Capital Ratios
 
 
Well Capitalized
Minimums
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
 
June 30,
2011
Average total equity to average assets
 
—

 
11.23
%
 
11.11
%
 
10.81
%
 
11.12
%
 
11.05
%
Tangible common equity ratio
 
—

 
10.07
%
 
9.75
%
 
9.56
%
 
9.65
%
 
9.71
%
Tier 1 common equity ratio
 
—

 
13.41
%
 
12.83
%
 
13.06
%
 
12.93
%
 
13.15
%
Risk-based capital:
 
 

 
 
 
 
 
 
 
 

 
 

Tier 1 capital
 
6.00
%
 
13.62
%
 
13.03
%
 
13.27
%
 
13.14
%
 
13.30
%
Total capital
 
10.00
%
 
16.19
%
 
16.16
%
 
16.49
%
 
16.55
%
 
16.80
%
Leverage
 
5.00
%
 
9.64
%
 
9.35
%
 
9.15
%
 
9.37
%
 
9.29
%
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 13.41% as of June 30, 2012. Our estimated Tier 1 common equity ratio under a fully phased in Basel III framework is approximately 12.75%, nearly 575 basis points above the 7% regulatory threshold. This estimate is subject to interpretation of rules that are not yet final. Additionally, the proposed definition of Tier 1 common equity includes unrealized gains and losses on available for sale securities which are subject to changes from market conditions and inherently volatile.

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

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

Table 36 following provides a reconciliation of the non-GAAP measures with financial measures defined by GAAP.


- 53 -



Table 36 – Non-GAAP Measures
(Dollars in thousands)
 
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
 
June 30,
2011
Tangible common equity ratio:
 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
$
2,885,934

 
$
2,834,419

 
$
2,750,468

 
$
2,732,592

 
$
2,667,717

Less: Goodwill and intangible assets, net
 
344,699

 
345,246

 
345,820

 
346,716

 
347,611

Tangible common equity
 
2,541,235

 
2,489,173

 
2,404,648

 
2,385,876

 
2,320,106

Total assets
 
25,576,046

 
25,884,173

 
25,493,946

 
25,066,265

 
24,238,182

Less: Goodwill and intangible assets, net
 
344,699

 
345,246

 
345,820

 
346,716

 
347,611

Tangible assets
 
$
25,231,347

 
$
25,538,927

 
$
25,148,126

 
$
24,719,549

 
$
23,890,571

Tangible common equity ratio
 
10.07
%
 
9.75
%
 
9.56
%
 
9.65
%
 
9.71
%
Tier 1 common equity ratio:
 
 
 
 
 
 
 
 

 
 

Tier 1 capital
 
$
2,418,985

 
$
2,344,779

 
$
2,295,061

 
$
2,247,576

 
$
2,188,199

Less: Non-controlling interest
 
36,787

 
35,982

 
36,184

 
34,958

 
24,457

Tier 1 common equity
 
2,382,198

 
2,308,797

 
2,258,877

 
2,212,618

 
2,163,742

Risk weighted assets
 
$
17,758,118

 
$
17,993,379

 
$
17,291,105

 
$
17,106,533

 
$
16,452,305

Tier 1 common equity ratio
 
13.41
%
 
12.83
%
 
13.06
%

12.93
%
 
13.15
%

Off-Balance Sheet Arrangements

See Note 7 to the Consolidated Financial Statements for a discussion of the Company’s significant off-balance sheet commitments.


Market Risk

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

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

The Asset / Liability Committee is responsible for managing market risk in accordance with policy guidelines established by the Board of Directors. The Committee monitors projected variation in net interest revenue, net interest income and economic value of equity due to specified changes in interest rates. The internal policy limit for net interest revenue variation is a maximum decline of 5% to an up or down 200 basis point change over twelve months. These guidelines also set maximum levels for short-term borrowings, short-term assets, public funds and brokered deposits and establish minimum levels for unpledged assets, among other things. Compliance with these internal guidelines is reviewed monthly.

Interest Rate Risk – Other than Trading
 
As previously noted in the Net Interest Revenue section of this report, management has implemented strategies to manage the Company’s balance sheet to have relatively limited exposure to changes in interest rates over a twelve month period. The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model. BOK Financial performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions, on net interest revenue, net income and economic value of equity. A simulation model is used to estimate the effect of changes in interest rates over the next 12 months and longer time periods based on multiple interest rate scenarios. Two specified interest rate scenarios are used to evaluate interest rate risk against policy guidelines. The first assumes a sustained parallel 200 basis point increase and the second assumes a sustained parallel 50 basis point decrease in interest rates. Management historically evaluated interest rate sensitivity for a sustained 200 basis point decrease in interest

- 54 -



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 37 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 5 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 37 – Interest Rate Sensitivity
(Dollars in thousands)
 
 
200 bp Increase
 
50 bp Decrease
 
 
2012
 
2011
 
2012
 
2011
Anticipated impact over the next twelve months on net interest revenue
 
$
27,360

 
$
3,552

 
$
(16,658
)
 
$
(17,884
)
 
 
4.11
%
 
0.50
%
 
(2.50
)%
 
(2.50
)%

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.

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 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. It represents an amount of market loss that is likely to be exceeded 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. At June 30, 2012, the VAR was $2.3 million.  The greatest value at risk during the second quarter of 2012 was $4.3 million. At June 30, 2012, there were no trading positions for the purposes of enhancing returns on the Company's securities portfolio.
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

- 55 -



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.


- 56 -



Consolidated Statements of Earnings (Unaudited)
(In thousands, except share and per share data)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Interest revenue
 
2012
 
2011
 
2012
 
2011
Loans
 
$
131,175

 
$
123,830

 
$
258,158

 
$
247,570

Residential mortgage loans held for sale
 
1,784

 
1,505

 
3,552

 
2,844

Trading securities
 
364

 
434

 
664

 
848

Taxable securities
 
4,282

 
2,800

 
8,716

 
5,145

Tax-exempt securities
 
921

 
1,324

 
1,898

 
2,720

Total investment securities
 
5,203

 
4,124

 
10,614

 
7,865

Taxable securities
 
61,583

 
69,978

 
121,239

 
138,992

Tax-exempt securities
 
631

 
600

 
1,232

 
1,207

Total available for sale securities
 
62,214

 
70,578

 
122,471

 
140,199

Fair value option securities
 
2,311

 
5,243

 
5,798

 
8,473

Funds sold and resell agreements
 
4

 
3

 
6

 
7

Total interest revenue
 
203,055

 
205,717

 
401,263

 
407,806

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
16,390

 
23,160

 
33,888

 
47,202

Borrowed funds
 
1,792

 
3,015

 
3,381

 
4,846

Subordinated debentures
 
3,512

 
5,541

 
9,064

 
11,118

Total interest expense
 
21,694

 
31,716

 
46,333

 
63,166

Net interest revenue
 
181,361

 
174,001

 
354,930

 
344,640

Provision for credit losses
 
(8,000
)
 
2,700

 
(8,000
)
 
8,950

Net interest revenue after provision for credit losses
 
189,361

 
171,301

 
362,930

 
335,690

Other operating revenue
 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
32,600

 
23,725

 
63,711

 
49,101

Transaction card revenue
 
26,758

 
31,024

 
52,188

 
59,469

Trust fees and commissions
 
19,931

 
19,150

 
38,369

 
37,572

Deposit service charges and fees
 
25,216

 
23,857

 
49,595

 
46,337

Mortgage banking revenue
 
39,548

 
19,356

 
72,626

 
36,712

Bank-owned life insurance
 
2,838

 
2,872

 
5,709

 
5,735

Other revenue
 
7,559

 
7,842

 
16,586

 
16,174

Total fees and commissions
 
154,450

 
127,826

 
298,784

 
251,100

Gain on sales of assets, net
 
3,765

 
3,344

 
3,409

 
3,276

Gain (loss) on derivatives, net
 
2,345

 
1,225

 
(128
)
 
(1,188
)
Gain on fair value option securities, net
 
6,852

 
9,921

 
5,119

 
6,403

Gain on available for sale securities, net
 
20,481

 
5,468

 
24,812

 
10,370

Total other-than-temporary impairment losses
 
(135
)
 
(74
)
 
(640
)
 
(74
)
Portion of loss reclassified from other comprehensive income
 
(723
)
 
(4,750
)
 
(3,940
)
 
(9,349
)
Net impairment losses recognized in earnings
 
(858
)
 
(4,824
)
 
(4,580
)
 
(9,423
)
Total other operating revenue
 
187,035

 
142,960

 
327,416

 
260,538

Other operating expense
 
 

 
 

 
 

 
 

Personnel
 
122,297

 
105,603

 
237,066

 
205,597

Business promotion
 
6,746

 
4,777

 
11,134

 
9,401

Professional fees and services
 
8,343

 
6,258

 
15,942

 
13,716

Net occupancy and equipment
 
16,906

 
15,554

 
32,929

 
31,158

Insurance
 
4,011

 
4,771

 
7,877

 
10,957

Data processing and communications
 
25,264

 
24,428

 
47,408

 
46,931

Printing, postage and supplies
 
3,903

 
3,586

 
7,214

 
6,668

Net losses and expenses of repossessed assets
 
5,912

 
5,859

 
8,157

 
11,874

Amortization of intangible assets
 
545

 
896

 
1,120

 
1,792

Mortgage banking costs
 
11,173

 
8,968

 
18,746

 
15,439

Change in fair value of mortgage servicing rights
 
11,450

 
13,493

 
4,323

 
10,364

Other expense
 
7,236

 
9,016

 
17,107

 
17,761

Total other operating expense
 
223,786

 
203,209

 
409,023

 
381,658

Income before taxes
 
152,610

 
111,052

 
281,323

 
214,570

Federal and state income tax
 
53,149

 
39,357

 
98,669

 
78,109

Net income
 
99,461

 
71,695

 
182,654

 
136,461

Net income attributable to non-controlling interest
 
1,833

 
2,688

 
1,411

 
2,680

Net income attributable to BOK Financial Corp. shareholders
 
$
97,628

 
$
69,007

 
$
181,243

 
$
133,781

Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
1.43

 
$
1.01

 
$
2.66

 
$
1.96

Diluted
 
$
1.43

 
$
1.00

 
$
2.65

 
$
1.95

Average shares used in computation:
 
 

 
 

 
 

 
 

Basic
 
67,472,665

 
67,898,483

 
67,573,280

 
67,900,279

Diluted
 
67,744,828

 
68,169,485

 
67,847,659

 
68,173,182

Dividends declared per share
 
$
0.38

 
$
0.275

 
$
0.71

 
$
0.525

 See accompanying notes to consolidated financial statements.

- 57 -



Consolidated Statements of Comprehensive Income (Unaudited)
 
 
 
 
(In thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
Net income
 
$
99,461

 
$
71,695

 
$
182,654

 
$
136,461

Other comprehensive income before income taxes:
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
(15,401
)
 
62,502

 
40,034

 
63,943

Other–than–temporary impairment losses recognized in earnings
 
858

 
4,824

 
4,580

 
9,423

Reclassification adjustment for net (gains) losses realized and included in earnings
 
(20,202
)
 
(5,395
)
 
(24,481
)
 
(10,214
)
Amortization of unrealized gain on investment securities transferred from available for sale
 
(1,633
)
 
—

 
(3,421
)
 
—

Other comprehensive income (loss) before income taxes
 
(36,378
)
 
61,931

 
16,712

 
63,152

Income tax expense
 
14,150

 
(23,989
)
 
(6,501
)
 
(24,736
)
Other comprehensive income (loss), net of income taxes
 
(22,228
)
 
37,942

 
10,211

 
38,416

Comprehensive income
 
77,233

 
109,637

 
192,865

 
174,877

Comprehensive income (loss) attributable to non-controlling interests
 
1,833

 
2,688

 
1,411

 
2,680

Comprehensive income attributed to BOK Financial Corp. shareholders
 
75,400

 
106,949

 
191,454

 
172,197




- 58 -



Consolidated Balance Sheets
(In thousands, except share data)
 
 
 
 
 
 
 
 
Jun 30,
2012
 
Dec 31,
2011
 
Jun 30,
2011
 
 
(Unaudited)
 
(Footnote 1)
 
(Unaudited)
Assets
 
 
 
 
 
 
Cash and due from banks
 
$
628,092

 
$
976,191

 
$
1,098,721

Funds sold and resell agreements
 
11,171

 
10,174

 
12,040

Trading securities
 
149,317

 
76,800

 
99,846

Investment securities (fair value:  June 30, 2012 – $440,638; December 31, 2011 - $462,657; June 30, 2011 – $369,247)
 
412,479

 
439,236

 
349,583

Available for sale securities
 
10,395,415

 
10,179,365

 
9,567,008

Fair value option securities
 
325,177

 
651,226

 
553,231

Residential mortgage loans held for sale
 
259,174

 
188,125

 
169,609

Loans
 
11,576,431

 
11,269,743

 
10,737,544

Less allowance for loan losses
 
(231,669
)
 
(253,481
)
 
(286,611
)
Loans, net of allowance
 
11,344,762

 
11,016,262

 
10,450,933

Premises and equipment, net
 
261,508

 
262,735

 
265,057

Receivables
 
121,944

 
123,257

 
129,944

Goodwill
 
335,601

 
335,601

 
335,601

Intangible assets, net
 
9,098

 
10,219

 
12,010

Mortgage servicing rights, net
 
91,783

 
86,783

 
109,192

Real estate and other repossessed assets
 
105,708

 
122,753

 
129,026

Bankers’ acceptances
 
2,873

 
1,881

 
1,661

Derivative contracts
 
366,204

 
293,859

 
229,887

Cash surrender value of bank-owned life insurance
 
269,093

 
263,318

 
261,203

Receivable on unsettled securities trades
 
32,876

 
75,151

 
170,600

Other assets
 
453,771

 
381,010

 
293,030

Total assets
 
$
25,576,046

 
$
25,493,946

 
$
24,238,182

 
 
 
 
 
 
 
Noninterest-bearing demand deposits
 
$
6,440,375

 
$
5,799,785

 
$
4,725,977

Interest-bearing deposits:
 
 

 
 

 
 

Transaction
 
8,551,874

 
9,354,456

 
9,013,323

Savings
 
261,998

 
226,357

 
211,877

  Time
 
3,107,950

 
3,381,982

 
3,634,700

Total deposits
 
18,362,197

 
18,762,580

 
17,585,877

Funds purchased
 
1,453,750

 
1,063,318

 
1,706,893

Repurchase agreements
 
1,136,948

 
1,233,064

 
1,106,163

Other borrowings
 
58,056

 
74,485

 
149,703

Subordinated debentures
 
353,378

 
398,881

 
398,788

Accrued interest, taxes and expense
 
140,434

 
149,508

 
104,493

Bankers’ acceptances
 
2,873

 
1,881

 
1,661

Derivative contracts
 
370,053

 
236,522

 
173,917

Due on unsettled securities trades
 
603,800

 
653,371

 
166,607

Other liabilities
 
171,836

 
133,684

 
151,906

Total liabilities
 
22,653,325

 
22,707,294

 
21,546,008

Shareholders' equity:
 
 

 
 

 
 

Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: June 30, 2012 – 72,006,628; December 31, 2011 – 71,533,354; June 30, 2011 – 71,100,444)
 
4

 
4

 
4

Capital surplus
 
836,065

 
818,817

 
794,292

Retained earnings
 
2,086,565

 
1,953,332

 
1,842,022

Treasury stock (shares at cost:  June 30, 2012 – 3,862,469; December 31, 2011 – 3,380,310;  June 30, 2011 – 2,637,575)
 
(175,890
)
 
(150,664
)
 
(114,856
)
Accumulated other comprehensive income
 
139,190

 
128,979

 
146,255

Total shareholders’ equity
 
2,885,934

 
2,750,468

 
2,667,717

Non-controlling interest
 
36,787

 
36,184

 
24,457

Total equity
 
2,922,721

 
2,786,652

 
2,692,174

Total liabilities and equity
 
$
25,576,046

 
$
25,493,946

 
$
24,238,182


See accompanying notes to consolidated financial statements.

- 59 -



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

 
$
4

 
$
107,839

 
$
782,805

 
$
1,743,880

 
2,608

 
$
(112,802
)
 
$
2,521,726

 
$
22,152

 
$
2,543,878

Comprehensive income:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
 
—

 
—

 
—

 
—

 
133,781

 
—

 
—

 
133,781

 
2,680

 
136,461

Other comprehensive income
 
—

 
—

 
38,416

 
—

 
—

 
—

 
—

 
38,416

 
—

 
38,416

Exercise of stock options
 
284

 
—

 
—

 
6,345

 
—

 
30

 
(2,054
)
 
4,291

 
—

 
4,291

Tax benefit on exercise of stock options
 
—

 
—

 
—

 
339

 
—

 
—

 
—

 
339

 
—

 
339

Stock-based compensation
 
—

 
—

 
—

 
4,803

 
—

 
—

 
—

 
4,803

 
—

 
4,803

Cash dividends on common stock
 
—

 
—

 
—

 
—

 
(35,639
)
 
—

 
—

 
(35,639
)
 
—

 
(35,639
)
Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(375
)
 
(375
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2011
 
71,100

 
$
4

 
$
146,255

 
$
794,292

 
$
1,842,022

 
2,638

 
$
(114,856
)
 
$
2,667,717

 
$
24,457

 
$
2,692,174

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2011
 
71,533

 
$
4

 
$
128,979

 
$
818,817

 
$
1,953,332

 
3,380

 
$
(150,664
)
 
$
2,750,468

 
$
36,184

 
$
2,786,652

Comprehensive income:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
 
—

 
—

 
—

 
—

 
181,243

 
—

 
—

 
181,243

 
1,411

 
182,654

Other comprehensive income
 
—

 
—

 
10,211

 
—

 
—

 
—

 
—

 
10,211

 
—

 
10,211

Treasury stock purchases
 
—

 
—

 
—

 
—

 
—

 
384

 
(20,558
)
 
(20,558
)
 
—

 
(20,558
)
Exercise of stock options
 
473

 
—

 
—

 
13,122

 
—

 
98

 
(4,668
)
 
8,454

 
—

 
8,454

Tax benefit on exercise of stock options
 
—

 
—

 
—

 
(677
)
 
—

 
—

 
—

 
(677
)
 
—

 
(677
)
Stock-based compensation
 
—

 
—

 
—

 
4,803

 
—

 
—

 
—

 
4,803

 
—

 
4,803

Cash dividends on common stock
 
—

 
—

 
—

 
—

 
(48,010
)
 
—

 
—

 
(48,010
)
 
—

 
(48,010
)
Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(808
)
 
(808
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2012
 
72,006

 
$
4

 
$
139,190

 
$
836,065

 
$
2,086,565

 
3,862

 
$
(175,890
)
 
$
2,885,934

 
$
36,787

 
$
2,922,721


See accompanying notes to consolidated financial statements.

- 60 -



Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Six Months Ended
 
 
June 30,
 
 
2012
 
2011
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
182,654

 
$
136,461

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

 
 

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

Change in fair value of mortgage servicing rights
 
4,323

 
10,364

Unrealized (gains) losses from derivatives
 
(7,626
)
 
5,834

Tax benefit on exercise of stock options
 
677

 
(339
)
Change in bank-owned life insurance
 
(5,709
)
 
(5,735
)
Stock-based compensation
 
4,803

 
4,803

Depreciation and amortization
 
24,636

 
24,529

Net amortization of securities discounts and premiums
 
47,789

 
48,751

Net realized gains on financial instruments and other assets
 
(60,122
)
 
(16,789
)
Mortgage loans originated for resale
 
(1,588,200
)
 
(902,774
)
Proceeds from sale of mortgage loans held for resale
 
1,569,921

 
1,013,516

Capitalized mortgage servicing rights
 
(17,647
)
 
(10,767
)
Change in trading and fair value option securities
 
251,682

 
(169,581
)
Change in receivables
 
(9,667
)
 
18,996

Change in other assets
 
2,838

 
17,073

Change in accrued interest, taxes and expense
 
(9,074
)
 
(29,614
)
Change in other liabilities
 
7,888

 
(35,125
)
Net cash provided by operating activities
 
391,166

 
118,553

Cash Flows From Investing Activities:
 
 

 
 

Proceeds from maturities or redemptions of investment securities
 
43,678

 
26,986

Proceeds from maturities or redemptions of available for sale securities
 
2,486,198

 
1,216,168

Purchases of investment securities
 
(16,971
)
 
(37,085
)
Purchases of available for sale securities
 
(4,162,486
)
 
(2,967,565
)
Proceeds from sales of available for sale securities
 
1,451,551

 
1,447,073

Change in amount receivable on unsettled securities transactions
 
42,275

 
(35,541
)
Loans originated net of principal collected
 
(327,349
)
 
(87,541
)
Proceeds from derivative asset contracts
 
(119,495
)
 
55,877

Proceeds from disposition of assets
 
101,550

 
62,060

Purchases of assets
 
(40,991
)
 
(19,984
)
Net cash used in investing activities
 
(542,040
)
 
(339,552
)
Cash Flows From Financing Activities:
 
 

 
 

Net change in demand deposits, transaction deposits and savings accounts
 
(126,351
)
 
281,284

Net change in time deposits
 
(274,032
)
 
125,692

Net change in other borrowings
 
229,401

 
(214,296
)
Repayment of subordinated debt
 
(46,882
)
 
—

Net payments or proceeds on derivative liability contracts
 
110,249

 
(58,891
)
Net change in derivative margin accounts
 
21,749

 
(46,606
)
Change in amount due on unsettled security transactions
 
(49,571
)
 
6,182

Issuance of common and treasury stock, net
 
8,454

 
4,291

Tax benefit on exercise of stock options
 
(677
)
 
339

Repurchase of common stock
 
(20,558
)
 
—

Dividends paid
 
(48,010
)
 
(35,639
)
Net cash provided by (used in) financing activities
 
(196,228
)
 
62,356

Net decrease in cash and cash equivalents
 
(347,102
)
 
(158,643
)
Cash and cash equivalents at beginning of period
 
986,365

 
1,269,404

Cash and cash equivalents at end of period
 
$
639,263

 
$
1,110,761

 
 
 
 
 
Cash paid for interest
 
$
48,536

 
$
63,563

Cash paid for taxes
 
$
81,738

 
$
87,888

Net loans and bank premises transferred to repossessed real estate and other assets
 
$
55,821

 
$
33,894

Increase in U.S. government guaranteed loans eligible for repurchase
 
$
48,486

 
$
59,697

Increase in receivables from conveyance of other real estate owned guaranteed by U.S. government agencies
 
$
34,247

 
$
—


See accompanying notes to consolidated financial statements.

- 61 -



Notes to Consolidated Financial Statements (Unaudited)

(1) Significant Accounting Policies

Basis of Presentation

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

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

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

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

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board (“FASB”)

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

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

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

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

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

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


- 62 -



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

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

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

On December 23, 2011, FASB issued ASU 2011-12, which defers the requirement in ASU 2011-05 for presentation of reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) in both net income and other comprehensive income on the face of the financial statements. This deferral will enable FASB to address certain concerns raised with regards to presentation requirements for reclassification adjustments. The amendment is effective at the same time as ASU 2011-05 which was effective for the Company on January 1, 2012.
(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities is as follows (in thousands):
 
 
 
June 30, 2012
 
December 31, 2011
 
June 30, 2011
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair
Value
 
Net Unrealized Gain (Loss)
U.S. Government agency obligations
 
$
53,514

 
$
23

 
$
22,203

 
$
63

 
$
11,825

 
$
(37
)
U.S. agency residential mortgage-backed securities
 
46,502

 
222

 
12,379

 
59

 
22,739

 
9

Municipal and other tax-exempt securities
 
44,632

 
9

 
39,345

 
652

 
62,285

 
(249
)
Other trading securities
 
4,669

 
(14
)
 
2,873

 
9

 
2,997

 
(13
)
Total
 
$
149,317

 
$
240

 
$
76,800

 
$
783

 
$
99,846

 
$
(290
)
Investment Securities
 
The amortized cost and fair values of investment securities are as follows (in thousands):

 
 
June 30, 2012
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized2
 
 
Cost
 
Value1
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
126,168

 
$
126,168

 
$
130,308

 
$
4,165

 
$
(25
)
U.S. agency residential mortgage-backed securities – Other
 
94,126

 
102,347

 
105,535

 
3,188

 
—

Other debt securities
 
183,964

 
183,964

 
204,795

 
20,831

 
—

Total
 
$
404,258

 
$
412,479

 
$
440,638

 
$
28,184

 
$
(25
)
1 
Carrying value includes $7.5 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.

- 63 -



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

 
$
128,697

 
$
133,670

 
$
4,975

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

 
121,704

 
120,536

 
602

 
(1,770
)
Other debt securities
 
188,835

 
188,835

 
208,451

 
19,616

 
—

Total
 
$
427,594

 
$
439,236

 
$
462,657

 
$
25,193

 
$
(1,772
)
1 
Carrying value includes $12 million of net unrealized gain which remains in Accumulated other comprehensive income (“AOCI”) in the Consolidated Balance Sheets related to certain securities transferred from the Available for Sale securities portfolio to the Investment securities portfolio as discussed in greater detail following.
2 
Gross unrealized gains and losses are not recognized in AOCI in the Consolidated Balance Sheets.

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.
 
 
June 30, 2011
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
Cost
 
Value
 
Gain
 
Loss
U.S. agency residential mortgage-backed securities – Other
 
$
160,870

 
$
165,449

 
$
4,583

 
$
(4
)
Other debt securities
 
188,713

 
203,798

 
15,085

 
—

Total
 
$
349,583

 
$
369,247

 
$
19,668

 
$
(4
)
1 
Gross unrealized gains and losses are not recognized in AOCI in the Consolidated Balance Sheets.


- 64 -



The amortized cost and fair values of investment securities at June 30, 2012, by contractual maturity, are as shown in the following table (dollars in thousands):
 
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 
Total
 
Weighted
Average
Maturity²
Municipal and other tax-exempt:
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value
 
$
36,814

 
$
64,881

 
$
21,162

 
$
3,311

 
$
126,168

 
2.93

Fair value
 
37,171

 
67,131

 
22,456

 
3,550

 
130,308

 
 

Nominal yield¹
 
4.38

 
3.91

 
4.79

 
6.49

 
4.26

 
 

Other debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

Carrying value
 
9,553

 
31,148

 
28,970

 
114,293

 
183,964

 
9.70

Fair value
 
9,612

 
32,223

 
31,160

 
131,800

 
204,795

 
 

Nominal yield
 
4.02

 
5.25

 
5.58

 
6.21

 
5.83

 
 

Total fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

Carrying value
 
$
46,367

 
$
96,029

 
$
50,132

 
$
117,604

 
$
310,132

 
6.94

Fair value
 
46,783

 
99,354

 
53,616

 
135,350

 
335,103

 
 

Nominal yield
 
4.31

 
4.34

 
5.25

 
6.22

 
5.19

 
 

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Carrying value
 
 

 
 

 
 

 
 

 
$
102,347

 
³

Fair value
 
 

 
 

 
 

 
 

 
105,535

 
 

Nominal yield4
 
 

 
 

 
 

 
 

 
2.71

 
 

Total investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

Carrying value
 
 

 
 

 
 

 
 

 
$
412,479

 
 

Fair value
 
 

 
 

 
 

 
 

 
440,638

 
 

Nominal yield
 
 

 
 

 
 

 
 

 
4.58

 
 

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 3.8 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.

- 65 -



Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
 
 
June 30, 2012
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,001

 
$
1,003

 
$
3

 
$
—

 
$
—

Municipal and other tax-exempt
 
86,808

 
88,458

 
2,430

 
(187
)
 
(593
)
Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

U. S. agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
5,270,918

 
5,426,832

 
156,699

 
(785
)
 
—

FHLMC
 
3,527,123

 
3,607,060

 
81,679

 
(1,742
)
 
—

GNMA
 
645,103

 
674,006

 
28,973

 
(70
)
 
—

Other
 
188,831

 
195,634

 
6,803

 
—

 
—

Total U.S. agencies
 
9,631,975

 
9,903,532

 
274,154

 
(2,597
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
134,266

 
118,414

 
—

 
—

 
(15,852
)
Jumbo-A loans
 
219,917

 
199,347

 
618

 
(943
)
 
(20,245
)
Total private issue
 
354,183

 
317,761

 
618

 
(943
)
 
(36,097
)
Total residential mortgage-backed securities
 
9,986,158

 
10,221,293

 
274,772

 
(3,540
)
 
(36,097
)
Other debt securities
 
35,739

 
36,286

 
559

 
(12
)
 
—

Perpetual preferred stock
 
22,171

 
23,431

 
1,811

 
(552
)
 
—

Equity securities and mutual funds
 
21,285

 
24,944

 
3,989

 
(330
)
 
—

Total
 
$
10,153,162

 
$
10,395,415

 
$
283,564

 
$
(4,621
)
 
$
(36,690
)
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.
 
 
December 31, 2011
 
 
Amortized
 
Fair
 
Gross Unrealized¹
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,001

 
$
1,006

 
$
5

 
$
—

 
$
—

Municipal and other tax-exempt
 
66,435

 
68,837

 
2,543

 
(141
)
 
—

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

U. S. agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
5,823,972

 
5,987,287

 
163,319

 
(4
)
 
—

FHLMC
 
2,756,180

 
2,846,215

 
90,035

 
—

 
—

GNMA
 
647,569

 
678,924

 
31,358

 
(3
)
 
—

Other
 
69,668

 
75,751

 
6,083

 
—

 
—

Total U.S. agencies
 
9,297,389

 
9,588,177

 
290,795

 
(7
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
168,461

 
132,242

 
—

 
—

 
(36,219
)
Jumbo-A loans
 
334,607

 
286,924

 
—

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

 
419,166

 
—

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

 
10,007,343

 
290,795

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

 
36,495

 
197

 
—

 
—

Perpetual preferred stock
 
19,171

 
18,446

 
1,030

 
(1,755
)
 
—

Equity securities and mutual funds
 
33,843

 
47,238

 
13,727

 
(332
)
 
—

Total
 
$
9,957,205

 
$
10,179,365

 
$
308,297

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

- 66 -



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

 
$
1,003

 
$
2

 
$
—

 
$
—

Municipal and other tax-exempt
 
68,502

 
70,210

 
2,375

 
(146
)
 
(521
)
Residential mortgage-backed securities:
 


 


 


 


 


U. S. agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
5,359,939

 
5,524,849

 
166,016

 
(1,106
)
 
—

FHLMC
 
2,447,830

 
2,544,684

 
97,575

 
(721
)
 
—

GNMA
 
704,168

 
742,411

 
38,243

 
—

 
—

Other
 
76,971

 
81,845

 
4,874

 
—

 
—

Total U.S. agencies
 
8,588,908

 
8,893,789

 
306,708

 
(1,827
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
195,932

 
166,757

 
46

 
(104
)
 
(29,117
)
Jumbo-A loans
 
385,371

 
346,465

 
513

 
(11,949
)
 
(27,470
)
Total private issue
 
581,303

 
513,222

 
559

 
(12,053
)
 
(56,587
)
Total residential mortgage-backed securities
 
9,170,211

 
9,407,011

 
307,267

 
(13,880
)
 
(56,587
)
Other debt securities
 
5,900

 
5,893

 
—

 
(7
)
 
—

Perpetual preferred stock
 
19,511

 
22,694

 
3,183

 
—

 
—

Equity securities and mutual funds
 
38,683

 
60,197

 
21,516

 
(2
)
 
—

Total
 
$
9,303,808

 
$
9,567,008

 
$
334,343

 
$
(14,035
)
 
$
(57,108
)
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.


- 67 -



The amortized cost and fair values of available for sale securities at June 30, 2012, by contractual maturity, are as shown in the following table (dollars in thousands):
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years6
 
Total
 
Weighted
Average
Maturity5
U.S. Treasuries:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$
1,001

 


 


 


 
$
1,001

 
0.86
Fair value
1,003

 


 


 


 
1,003

 
 
Nominal yield¹
0.55

 


 


 


 
0.55

 
 
Municipal and other tax-exempt:
 

 
 

 
 

 
 

 
 

 
 
Amortized cost
587

 
25,541

 
15,146

 
45,534

 
86,808

 
15.20
Fair value
589

 
26,729

 
16,049

 
45,091

 
88,458

 
 
Nominal yield¹
0.09

 
0.71

 
1.23

 
2.78

 
1.88

 
 
Other debt securities:
 

 
 

 
 

 
 

 
 

 
 
Amortized cost


 
30,339

 


 
5,400

 
35,739

 
6.96
Fair value


 
30,898

 


 
5,388

 
36,286

 
 
Nominal yield¹


 
1.80

 


 
1.71

 
1.79

 
 
Total fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 
Amortized cost
$
1,588

 
$
55,880

 
$
15,146

 
$
50,934

 
$
123,548

 
12.63
Fair value
1,592

 
57,627

 
16,049

 
50,479

 
125,747

 
 
Nominal yield
0.38

 
1.30

 
1.23

 
2.67

 
1.85

 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 
Amortized cost
 

 
 

 
 

 
 

 
9,986,158

 
²
Fair value
 

 
 

 
 

 
 

 
10,221,293

 
 
Nominal yield4
 

 
 

 
 

 
 

 
2.72

 
 
Equity securities and mutual funds:
 

 
 

 
 

 
 

 
 

 
 
Amortized cost
 

 
 

 
 

 
 

 
43,456

 
³
Fair value
 

 
 

 
 

 
 

 
48,375

 
 
Nominal yield
 

 
 

 
 

 
 

 
1.20

 
 
Total available-for-sale securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
 

 
 

 
 

 
 

 
$
10,153,162

 
 
Fair value
 

 
 

 
 

 
 

 
10,395,415

 
 
Nominal yield
 

 
 

 
 

 
 

 
2.70

 
 
1 
Calculated on a taxable equivalent basis using a 39% effective tax rate.
2 
The average expected lives of mortgage-backed securities were 2.0 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.

Sales of available for sale securities resulted in gains and losses as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Proceeds
$
459,610

 
$
653,921

 
$
1,451,551

 
$
1,447,073

Gross realized gains
20,481

 
9,122

 
32,166

 
19,602

Gross realized losses
—

 
(3,654
)
 
(7,354
)
 
(9,232
)
Related federal and state income tax expense
7,967

 
2,127

 
9,652

 
4,034


- 68 -




Securities with an amortized cost of $3.7 billion at June 30, 2012, $4.4 billion at December 31, 2011 and $3.6 billion at June 30, 2011 have been pledged as collateral for repurchase agreements, public and trust funds on deposit and for other purposes, as required by law. The secured parties do not have the right to sell or re-pledge these securities.

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

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

 
$
9,321

 
$
25

 
$
—

 
$
—

 
$
9,321

 
$
25

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

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Total investment
 
6

 
9,321

 
25

 
—

 
—

 
9,321

 
25

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Municipal and other tax-exempt1
 
66

 
21,950

 
640

 
27,864

 
140

 
49,814

 
780

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

 


 


U. S. agencies:
 
 
 
 

 
 

 
 

 
 

 


 


FNMA
 
13

 
528,649

 
785

 
—

 
—

 
528,649

 
785

FHLMC
 
10

 
438,190

 
1,742

 
—

 
—

 
438,190

 
1,742

GNMA
 
2

 
74,789

 
70

 
—

 
—

 
74,789

 
70

Total U.S. agencies
 
25

 
1,041,628

 
2,597

 
—

 
—

 
1,041,628

 
2,597

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
16

 
—

 
—

 
118,414

 
15,852

 
118,414

 
15,852

Jumbo-A loans
 
27

 
—

 
—

 
174,234

 
21,188

 
174,234

 
21,188

Total private issue
 
43

 
—

 
—

 
292,648

 
37,040

 
292,648

 
37,040

Total residential mortgage-backed securities
 
68

 
1,041,628

 
2,597

 
292,648

 
37,040

 
1,334,276

 
39,637

Other debt securities
 
2

 
—

 
—

 
988

 
12

 
988

 
12

Perpetual preferred stocks
 
5

 
10,717

 
552

 
—

 
—

 
10,717

 
552

Equity securities and mutual   funds
 
12

 
2,579

 
330

 
—

 
—

 
2,579

 
330

Total available for sale
 
153

 
1,076,874

 
4,119

 
321,500

 
37,192

 
1,398,374

 
41,311

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

 
$
12,804

 
$
593

 
$
—

 
$
—

 
$
12,804

 
$
593

Alt-A loans
 
16

 
—

 
—

 
118,414

 
15,852

 
118,414

 
15,852

Jumbo-A loans
 
27

 
—

 
—

 
162,754

 
20,245

 
162,754

 
20,245


- 69 -




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

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

 
$
479

 
$
2

 
$
—

 
$
—

 
$
479

 
$
2

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

 
92,571

 
1,770

 
—

 
—

 
92,571

 
1,770

Total investment
 
6

 
93,050

 
1,772

 
—

 
—

 
93,050

 
1,772

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 

 
 

 
 

 
 

 
 

 


 


Municipal and other tax-exempt1
 
26

 
5,008

 
7

 
21,659

 
134

 
26,667

 
141

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
2

 
68,657

 
4

 
—

 
—

 
68,657

 
4

FHLMC
 
—

 
—

 
—

 
—

 
—

 
—

 
—

GNMA
 
1

 
2,072

 
3

 
—

 
—

 
2,072

 
3

Total U.S. agencies
 
3

 
70,729

 
7

 
—

 
—

 
70,729

 
7

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
19

 
—

 
—

 
132,242

 
36,219

 
132,242

 
36,219

Jumbo-A loans
 
48

 
8,142

 
842

 
278,781

 
46,841

 
286,923

 
47,683

Total private issue
 
67

 
8,142

 
842

 
411,023

 
83,060

 
419,165

 
83,902

Total residential mortgage-backed securities
 
70

 
78,871

 
849

 
411,023

 
83,060

 
489,894

 
83,909

Perpetual preferred stocks
 
6

 
11,147

 
1,755

 
—

 
—

 
11,147

 
1,755

Equity securities and mutual funds
 
7

 
221

 
5

 
2,551

 
327

 
2,772

 
332

Total available for sale
 
109

 
95,247

 
2,616

 
435,233

 
83,521

 
530,480

 
86,137

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

 
$
—

 
$
—

 
$
132,242

 
$
36,219

 
$
132,242

 
$
36,219

Jumbo-A loans
 
36

 
3,809

 
256

 
202,874

 
36,331

 
206,683

 
36,587



- 70 -



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

 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax- exempt
 
2

 
$
619

 
$
4

 
$
—

 
$
—

 
$
619

 
$
4

Other debt securities
 
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Total investment
 
2

 
619

 
4

 
—

 
—

 
619

 
4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 

 
 

 
 

 
 

 
 

 


 


Municipal and other tax-exempt1
 
51

 
24,065

 
301

 
19,593

 
366

 
43,658

 
667

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
7

 
230,949

 
1,106

 
—

 
—

 
230,949

 
1,106

FHLMC
 
2

 
98,169

 
721

 
—

 
—

 
98,169

 
721

GNMA
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total U.S. agencies
 
9

 
329,118

 
1,827

 
—

 
—

 
329,118

 
1,827

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
20

 
—

 
—

 
156,796

 
29,221

 
156,796

 
29,221

Jumbo-A loans
 
39

 
—

 
—

 
301,397

 
39,419

 
301,397

 
39,419

Total private issue
 
59

 
—

 
—

 
458,193

 
68,640

 
458,193

 
68,640

Total residential mortgage-backed securities
 
68

 
329,118

 
1,827

 
458,193

 
68,640

 
787,311

 
70,467

Other debt securities
 
2

 
—

 
—

 
993

 
7

 
993

 
7

Equity securities and mutual funds
 
1

 
213

 
2

 
—

 
—

 
213

 
2

Total available for sale
 
122

 
353,396

 
2,130

 
478,779

 
69,013

 
832,175

 
71,143

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

 
6,948

 
244

 
7,115

 
277

 
14,063

 
521

Alt-A loans
 
19

 
—

 
—

 
153,632

 
29,117

 
153,632

 
29,117

Jumbo-A loans
 
21

 
—

 
—

 
138,205

 
27,470

 
138,205

 
27,470


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 June 30, 2012, we do not intend to sell any impaired available for sale securities before fair value recovers to our current amortized cost and it is more-likely-than-not that we will not be required to sell impaired securities before fair value recovers, which may be maturity.

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


- 71 -



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

 
 
 
U.S. Govt / GSE 1
 
 
AAA - AA
 
 
A - BBB
 
 
Below Investment Grade
 
 
Not Rated
 
 
Total
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
$
—

 
$
—

 
$
42,921

 
$
44,351

 
$
29,500

 
$
30,177

 
$
—

 
$
—

 
$
53,747

 
$
55,780

 
$
126,168

 
$
130,308

Mortgage-backed securities -- other
 
102,347

 
105,535

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
102,347

 
105,535

Other debt securities
 
—

 
—

 
174,573

 
195,264

 
600

 
600

 
—

 
—

 
8,791

 
8,931

 
183,964

 
204,795

Total investment securities
 
$
102,347

 
$
105,535

 
$
217,494

 
$
239,615

 
$
30,100

 
$
30,777

 
$
—

 
$
—

 
$
62,538

 
$
64,711

 
$
412,479

 
$
440,638

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

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
 
$
1,001

 
$
1,003

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,001

 
$
1,003

Municipal and other tax-exempt
 
—

 
—

 
60,374

 
62,365

 
11,618

 
11,730

 
13,396

 
12,804

 
1,420

 
1,559

 
86,808

 
88,458

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 


 


U. S. agencies:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
5,270,918

 
5,426,832

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5,270,918

 
5,426,832

FHLMC
 
3,527,123

 
3,607,060

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3,527,123

 
3,607,060

GNMA
 
645,103

 
674,006

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
645,103

 
674,006

Other
 
188,831

 
195,634

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
188,831

 
195,634

Total U.S. agencies
 
9,631,975

 
9,903,532

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
9,631,975

 
9,903,532

Private issue:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
—

 
—

 
—

 
—

 
—

 
—

 
134,266

 
118,414

 
—

 
—

 
134,266

 
118,414

Jumbo-A loans
 
—

 
—

 
—

 
—

 
—

 
—

 
219,917

 
199,347

 
—

 
—

 
219,917

 
199,347

Total private issue
 
—

 
—

 
—

 
—

 
—

 
—

 
354,183

 
317,761

 
—

 
—

 
354,183

 
317,761

Total residential mortgage-backed securities
 
9,631,975

 
9,903,532

 
—

 
—

 
—

 
—

 
354,183

 
317,761

 
—

 
—

 
9,986,158

 
10,221,293

Other debt securities
 
—

 
—

 
5,400

 
5,388

 
30,339

 
30,898

 
—

 
—

 
—

 
—

 
35,739

 
36,286

Perpetual preferred stock
 
—

 
—

 
—

 
—

 
22,171

 
23,431

 
—

 
—

 
—

 
—

 
22,171

 
23,431

Equity securities and mutual funds
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
21,285

 
24,944

 
21,285

 
24,944

Total available for sale securities
 
$
9,632,976

 
$
9,904,535

 
$
65,774

 
$
67,753

 
$
64,128

 
$
66,059

 
$
367,579

 
$
330,565

 
$
22,705

 
$
26,503

 
$
10,153,162

 
$
10,395,415

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.

At June 30, 2012, the entire $354 million portfolio of privately issued residential mortgage-backed securities (based on amortized cost after impairment charges) was rated below investment grade by at least one of the nationally-recognized rating agencies. The net unrealized loss on these securities totaled $36 million. Ratings by the nationally recognized rating agencies are subjective in nature

- 72 -



and accordingly ratings can vary significantly amongst the agencies. Limitations generally expressed by the rating agencies include statements that ratings do not predict the specific percentage default likelihood over any given period of time and that ratings do not opine on expected loss severity of an obligation should the issuer default. As such, the impairment of securities rated below investment grade by at least one of the nationally-recognized rating agencies was evaluated to determine if we expect not to recover the entire amortized cost basis of the security. This evaluation was based on projections of estimated cash flows based on individual loans underlying each security using current and anticipated increases in unemployment and default rates, decreases in housing prices and estimated liquidation costs at foreclosure.

The primary assumptions used in this evaluation were:

•
Unemployment rates – increasing to 9.5% over the next 12 months, dropping to 8% over the following 21 months, and holding at 8% thereafter.
•
Housing price depreciation – starting with current depreciated housing prices based on information derived from the Federal Housing Finance Agency (“FHFA”) data, decreasing by an additional 6% over the next twelve months and then growing at 2% per year thereafter. At December 31, 2011, we assumed that housing prices would decrease an additional 8% over the next twelve months and then grow at 2% per year thereafter.
•
Estimated Liquidation Costs – reflect actual historical liquidation costs observed on Jumbo and Alt-A residential mortgage loans in the securities owned by the Company.
•
Discount rates – estimated cash flows were discounted at rates that range from 2.00% to 6.25% based on our current expected yields.

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

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

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

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

Based upon projected declines in expected cash flows from certain private-label residential mortgage-backed securities, the Company recognized $858 thousand of additional credit loss impairments in earnings during the three months ended June 30, 2012.

A distribution of the amortized cost (after recognition of the other-than-temporary impairment), fair value and credit loss impairments recognized on our privately issued residential mortgage-backed securities is as follows (in thousands, except for number of securities):
 
 
 
 
 
 
 
 
Credit Losses Recognized
 
 
 
 
 
 
 
 
Three months ended
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
Life-to-date
Current LTV Ratio
 
Number of Securities
 
Amortized Cost
 
Fair Value
 
Number of
Securities
 
Amount
 
Number of Securities
 
Amount
Alt-A
 
16

 
$
134,266

 
$
118,414

 
3

 
$
739

 
16

 
$
47,417

Jumbo-A
 
33

 
219,917

 
199,347

 
2

 
119

 
31

 
22,921

Total
 
49

 
$
354,183

 
$
317,761

 
5

 
$
858

 
47

 
$
70,338


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

- 73 -



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 June 30, 2012.

The following is a tabular roll forward of the amount of credit-related OTTI recognized on available for sale debt securities in earnings (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
Balance of credit-related OTTI recognized on available for sale debt, beginning of period
 
$
72,057

 
$
57,223

 
$
76,131

 
$
52,624

Additions for credit-related OTTI not previously recognized
 
135

 
37

 
248

 
37

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
 
723

 
4,787

 
4,332

 
9,386

Sales
 
—

 
—

 
(7,796
)
 
—

Balance of credit-related OTTI recognized on available for sale debt securities, end of period
 
$
72,915

 
$
62,047

 
$
72,915

 
$
62,047

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):

 
 
June 30, 2012
 
December 31, 2011
 
June 30, 2011
 
 
Fair Value
 
Net Unrealized Gain
 
Fair Value
 
Net Unrealized Gain
 
Fair
Value
 
Net Unrealized Gain
U.S. agency residential mortgage-backed securities
 
$
299,467

 
$
8,373

 
$
626,109

 
$
19,233

 
$
553,231

 
$
5,731

Corporate debt securities
 
25,710

 
621

 
25,117

 
18

 
—

 
—

Total
 
$
325,177

 
$
8,994

 
$
651,226

 
$
19,251

 
$
553,231

 
$
5,731



- 74 -



(3) Derivatives
 
The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at June 30, 2012 (in thousands):
 
 
Gross Basis
 
Net Basis²
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
 
Notional¹
 
Fair Value
 
Notional¹
 
Fair Value
 
Fair Value
 
Fair Value
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts3
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced mortgage-backed securities
 
$
13,724,514

 
$
144,158

 
$
13,579,184

 
$
140,873

 
$
104,781

 
$
101,496

Interest rate swaps
 
1,271,138

 
77,121

 
1,271,138

 
77,671

 
77,121

 
77,671

Energy contracts
 
1,667,819

 
150,754

 
1,653,592

 
156,690

 
75,625

 
81,561

Agricultural contracts
 
140,722

 
4,655

 
140,255

 
4,604

 
1,125

 
1,074

Foreign exchange contracts
 
136,815

 
136,815

 
136,483

 
136,483

 
136,815

 
136,483

Equity option contracts
 
218,149

 
13,726

 
218,149

 
13,726

 
13,726

 
13,726

Total customer derivative before cash collateral
 
17,159,157

 
527,229

 
16,998,801

 
530,047

 
409,193

 
412,011

Less: cash collateral
 
—

 
—

 
—

 
—

 
(50,622
)
 
(42,559
)
Total customer derivatives
 
17,159,157

 
527,229

 
16,998,801

 
530,047

 
358,571

 
369,452

Interest rate risk management programs
 
66,000

 
7,633

 
25,000

 
601

 
7,633

 
601

Total derivative contracts
 
$
17,225,157

 
$
534,862

 
$
17,023,801

 
$
530,648

 
$
366,204

 
$
370,053

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

Derivative contracts may also require the Company to provide or receive cash margin as collateral for derivative assets and liabilities. Derivative assets and liabilities are reported net of cash margin when certain conditions are met. As of June 30, 2012, a decrease in credit rating from A1 to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $38 million.
 

- 75 -



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

 
$
101,189

 
$
9,051,627

 
$
99,211

 
$
68,519

 
$
66,541

Interest rate swaps
 
1,272,617

 
81,261

 
1,272,617

 
81,891

 
81,261

 
81,891

Energy contracts
 
1,554,400

 
158,625

 
1,799,367

 
171,050

 
62,945

 
75,370

Agricultural contracts
 
146,252

 
4,761

 
148,924

 
4,680

 
782

 
701

Foreign exchange contracts
 
73,153

 
73,153

 
72,928

 
72,928

 
73,153

 
72,928

Equity option contracts
 
208,647

 
12,508

 
208,647

 
12,508

 
12,508

 
12,508

Total customer derivative before cash collateral
 
12,373,696

 
431,497

 
12,554,110

 
442,268

 
299,168

 
309,939

Less: cash collateral
 
—

 
—

 
—

 
—

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

 
431,497

 
12,554,110

 
442,268

 
287,478

 
236,227

Interest rate risk management programs
 
44,000

 
6,381

 
25,000

 
295

 
6,381

 
295

Total derivative contracts
 
$
12,417,696

 
$
437,878

 
$
12,579,110

 
$
442,563

 
$
293,859

 
$
236,522

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


The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at June 30, 2011 (in thousands):
 
 
Gross Basis
 
Net Basis2
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
 
Notional¹
 
Fair Value
 
Notional¹
 
Fair Value
 
Fair Value
 
Fair Value
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts3
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
7,060,740

 
$
51,503

 
$
6,899,052

 
$
49,483

 
$
27,997

 
$
25,977

Interest rate swaps
 
1,197,499

 
64,051

 
1,197,499

 
64,051

 
63,442

 
64,051

Energy contracts
 
1,917,521

 
158,922

 
2,094,878

 
157,998

 
51,820

 
50,896

Agricultural contracts
 
125,644

 
6,025

 
132,573

 
5,961

 
1,847

 
1,783

Foreign exchange contracts
 
78,471

 
78,471

 
78,572

 
78,572

 
78,471

 
78,572

Equity option contracts
 
181,964

 
18,112

 
181,964

 
18,112

 
18,112

 
18,112

Total customer derivative before cash collateral
 
10,561,839

 
377,084

 
10,584,538

 
374,177

 
241,689

 
239,391

Less: cash collateral
 
—

 
—

 
—

 
—

 
(14,014
)
 
(65,474
)
Total customer derivatives
 
10,561,839

 
377,084

 
10,584,538

 
374,177

 
227,675

 
173,917

Interest rate risk management programs
 
44,000

 
2,212

 
—

 
—

 
2,212

 
—

Total derivative contracts
 
$
10,605,839

 
$
379,296

 
$
10,584,538

 
$
374,177

 
$
229,887

 
$
173,917

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

- 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
 
Three Months Ended
 
 
June 30, 2012
 
June 30, 2011
 
 
Brokerage
and Trading Revenue
 
Gain (Loss)
on Derivatives, Net
 
Brokerage
and Trading
Revenue
 
Gain (Loss)
on Derivatives,
Net
Customer Risk Management Programs:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
186

 
$
—

 
$
(648
)
 
$
—

Interest rate swaps
 
1,231

 
—

 
672

 
—

Energy contracts
 
2,588

 
—

 
912

 
—

Agricultural contracts
 
92

 
—

 
92

 
—

Foreign exchange contracts
 
125

 
—

 
118

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total Customer Derivatives
 
4,222

 
—

 
1,146

 
—

Interest Rate Risk Management Programs
 
—

 
2,345

 
—

 
1,225

Total Derivative Contracts
 
$
4,222

 
$
2,345

 
$
1,146

 
$
1,225


 
 
Six Months Ended
 
Six Months Ended
 
 
June 30, 2012
 
June 30, 2011
 
 
Brokerage
and Trading Revenue
 
Gain (Loss)
on Derivatives, Net
 
Brokerage
and Trading
Revenue
 
Gain (Loss)
on Derivatives,
Net
Customer Risk Management Programs:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
1,307

 
$
—

 
$
(4,055
)
 
$
—

Interest rate swaps
 
2,144

 
—

 
1,542

 
—

Energy contracts
 
4,898

 
—

 
4,399

 
—

Agricultural contracts
 
183

 
—

 
160

 
—

Foreign exchange contracts
 
331

 
—

 
227

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total Customer Derivatives
 
8,863

 
—

 
2,273

 
—

Interest Rate Risk Management Programs
 
—

 
(128
)
 
—

 
(1,348
)
Total Derivative Contracts
 
$
8,863

 
$
(128
)
 
$
2,273

 
$
(1,348
)

Customer Risk Management Programs
 
BOK Financial offers programs to permit its customers to manage various risks, including fluctuations in energy, cattle and other agricultural products, interest rates and foreign exchange rates, or to take positions in derivative contracts. Derivative contracts are executed between the customers and BOK Financial. Offsetting contracts are executed between BOK Financial and other selected counterparties to minimize its risk of changes in commodity prices, interest rates or foreign exchange rates.  The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to BOK Financial as profit and compensation for administrative costs and credit risk which is recognized over the life of the contracts and included in other operating revenue – brokerage and trading revenue in the Consolidated Statements of Earnings.
 
Interest Rate Risk Management Programs
 
BOK Financial may use interest rate swaps in managing its interest rate sensitivity and as part of its economic hedge of the change in the fair value of mortgage servicing rights. Interest rate swaps are generally used to reduce overall asset sensitivity by converting specific fixed rate liabilities to floating rate based on LIBOR. Net interest revenue was not significantly impacted by the settlement of amounts receivable or payable on interest rate swaps for the three and six months ended June 30, 2012 and

- 77 -



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

As discussed in Note 5, 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 5, for additional discussion of notional, fair value and impact on earnings of these contracts. Forward sales contracts are not considered swaps under the Commodity and Futures Trading Commission final rules.

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

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

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

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

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

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

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

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

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


- 78 -



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

 
 
June 30, 2012
 
December 31, 2011
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
3,536,199

 
$
3,481,816

 
$
34,529

 
$
7,052,544

 
$
3,261,344

 
$
3,224,915

 
$
68,811

 
$
6,555,070

Commercial real estate
 
864,077

 
1,181,923

 
80,214

 
2,126,214

 
896,820

 
1,295,290

 
99,193

 
2,291,303

Residential mortgage
 
1,708,252

 
274,118

 
22,727

 
2,005,097

 
1,646,554

 
298,206

 
29,767

 
1,974,527

Consumer
 
200,897

 
184,667

 
7,012

 
392,576

 
245,711

 
199,617

 
3,515

 
448,843

Total
 
$
6,309,425

 
$
5,122,524

 
$
144,482

 
$
11,576,431

 
$
6,050,429

 
$
5,018,028

 
$
201,286

 
$
11,269,743

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
691

 
 

 
 

 
 

 
$
2,496

 
 
June 30, 2011
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
2,847,559

 
$
3,269,321

 
$
53,365

 
$
6,170,245

Commercial real estate
 
868,513

 
1,209,155

 
110,363

 
2,188,031

Residential mortgage
 
1,517,676

 
322,585

 
31,693

 
1,871,954

Consumer
 
296,595

 
205,970

 
4,749

 
507,314

Total
 
$
5,530,343

 
$
5,007,031

 
$
200,170

 
$
10,737,544

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
2,341

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

At June 30, 2012, $5.3 billion or 46% of the total loan portfolio is to businesses and individuals in Oklahoma and $3.5 billion or 30% of our total loan portfolio is to businesses and individuals in Texas. These geographic concentrations subject the loan portfolio to the general economic conditions within these areas.

Commercial

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

At June 30, 2012, commercial loans to businesses in Oklahoma totaled $3.1 billion or 44% of the commercial loan portfolio segment and loans to businesses in Texas totaled $2.4 billion or 34% of the commercial loan portfolio segment. The commercial loan portfolio segment is further divided into loan classes. The energy loan class totaled $2.2 billion or 20% of total loans at June 30, 2012, including $2.0 billion of outstanding loans to energy producers. Approximately 55% of committed production loans are secured by properties primarily producing oil and 45% are secured by properties producing natural gas. The services loan class totaled $1.9 billion at June 30, 2012. Approximately $1.0 billion of loans in the services category consists of loans with individual balances of less than $10 million.  Businesses included in the services class include community foundations, communications, education, gaming and transportation.

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

- 79 -



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 June 30, 2012, 32% of commercial real estate loans are secured by properties primarily located in the Dallas and Houston areas of Texas. An additional 30% of commercial real estate loans are secured by properties located primarily in the Tulsa and Oklahoma City metropolitan areas of Oklahoma. 

Residential Mortgage and Consumer

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

At June 30, 2012, residential mortgage loans included $168 million of loans guaranteed by U.S. government agencies previously sold into GNMA mortgage pools. These loans either have been repurchased or are eligible to be repurchased by the Company when certain defined delinquency criteria are met. Although payments on these loans generally are past due more than 90 days, interest continues to accrue based on the government guarantee.

Home equity loans totaled $696 million at June 30, 2012. Approximately, 39% of the home equity portfolio is comprised of junior lien loans and 61% of the home equity loan portfolio is comprised of first lien loans. Junior lien loans are distributed 79% to amortizing term loans and 21% to revolving lines of credit. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 40%. The maximum loan amount available for our home equity loan products is generally $400 thousand.

Credit Commitments
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At June 30, 2012, outstanding commitments totaled $6.1 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 June 30, 2012, outstanding standby letters of credit totaled $449 million. Commercial letters of credit are used to facilitate customer trade transactions with the drafts being drawn when the underlying transaction is consummated. At June 30, 2012, outstanding commercial letters of credit totaled $8 million.


- 80 -



Allowances for Credit Losses

BOK Financial maintains an allowance for loan losses and an accrual for off-balance sheet credit risk related to commitments to extend credit and standby letters of credit. As discussed in greater detail in Note 5, the Company also has separate accruals related to off-balance sheet credit risk related to residential mortgage loans previously sold with full or partial recourse and for residential mortgage loans sold to government sponsored agencies under standard representations and warranties.

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

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

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

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

General allowances for unimpaired loans are based on estimated loss rates by loan class. For risk-graded loans, loss rates are developed using historical gross loss rates, as adjusted for changes in risk grading and inherent risks identified by loan class. Loss rates for each loan class are determined by the current loss rate based on the most recent twelve months or a long-term gross loss rate that most appropriately represents the current economic environment. For each loan class, current average risk grades are compared to long-term average risk grades to determine if risk is increasing or decreasing. Loss rates are accordingly adjusted upward or downward in proportion to increasing or decreasing risk. Historical loss rates may be further adjusted for inherent risks identified for the given loan class which have not yet been captured in the actual gross loss rates or risk gradings.

Nonspecific allowances are maintained for risks beyond factors specific to a particular loan or loan class. These factors include trends in the economy in our primary lending areas, concentrations in loans with large balances and other relevant factors.
An accrual for off-balance sheet credit losses is included in Other liabilities in the Consolidated Balance Sheets. The appropriateness of this accrual is determined in the same manner as the allowance for loan losses. Changes in the accrual for off-balance sheet credit losses are recognized through the provision for credit losses in the Consolidated Statements of Earnings.


- 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 June 30, 2012 is summarized as follows (in thousands):

 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Consumer
 
Nonspecific allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
85,972

 
$
62,742

 
$
41,628

 
$
9,517

 
$
44,350

 
$
244,209

Provision for loan losses
 
(2,526
)
 
(6,264
)
 
4,371

 
212

 
(3,492
)
 
(7,699
)
Loans charged off
 
(4,094
)
 
(1,216
)
 
(4,061
)
 
(2,172
)
 
—

 
(11,543
)
Recoveries
 
4,125

 
544

 
750

 
1,283

 
—

 
6,702

Ending balance
 
$
83,477

 
$
55,806

 
$
42,688

 
$
8,840

 
$
40,858

 
$
231,669

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
8,362

 
$
1,575

 
$
82

 
$
29

 
$
—

 
$
10,048

Provision for off-balance sheet credit losses
 
(138
)
 
(150
)
 
(2
)
 
(11
)
 
—

 
(301
)
Ending balance
 
$
8,224

 
$
1,425

 
$
80

 
$
18

 
$
—

 
$
9,747

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
(2,664
)
 
$
(6,414
)
 
$
4,369

 
$
201

 
$
(3,492
)
 
$
(8,000
)

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 six months ended June 30, 2012 is summarized as follows (in thousands):

 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Consumer
 
Nonspecific allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
83,443

 
$
67,034

 
$
46,476

 
$
10,178

 
$
46,350

 
$
253,481

Provision for loan losses
 
991

 
(5,143
)
 
898

 
260

 
(5,492
)
 
(8,486
)
Loans charged off
 
(7,028
)
 
(7,941
)
 
(5,847
)
 
(4,401
)
 
—

 
(25,217
)
Recoveries
 
6,071

 
1,856

 
1,161

 
2,803

 
—

 
11,891

Ending balance
 
$
83,477

 
$
55,806

 
$
42,688

 
$
8,840

 
$
40,858

 
$
231,669

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
7,906

 
$
1,250

 
$
91

 
$
14

 
$
—

 
$
9,261

Provision for off-balance sheet credit losses
 
318

 
175

 
(11
)
 
4

 
—

 
486

Ending balance
 
$
8,224

 
$
1,425

 
$
80

 
$
18

 
$
—

 
$
9,747

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
1,309

 
$
(4,968
)
 
$
887

 
$
264

 
$
(5,492
)
 
$
(8,000
)


- 82 -



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 June 30, 2011 is summarized as follows (in thousands):

 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Consumer
 
Nonspecific allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
113,706

 
$
94,535

 
$
45,649

 
$
10,410

 
$
25,249

 
$
289,549

Provision for loan losses
 
980

 
289

 
2,721

 
(286
)
 
1,876

 
5,580

Loans charged off
 
(3,302
)
 
(3,380
)
 
(3,381
)
 
(2,711
)
 
—

 
(12,774
)
Recoveries
 
2,187

 
306

 
254

 
1,509

 
—

 
4,256

Ending balance
 
$
113,571

 
$
91,750

 
$
45,243

 
$
8,922

 
$
27,125

 
$
286,611

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
12,256

 
$
875

 
$
155

 
$
339

 
$
—

 
$
13,625

Provision for off-balance sheet credit losses
 
(3,020
)
 
145

 
25

 
(30
)
 
—

 
(2,880
)
Ending balance
 
$
9,236

 
$
1,020

 
$
180

 
$
309

 
$
—

 
$
10,745

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
(2,040
)
 
$
434

 
$
2,746

 
$
(316
)
 
$
1,876

 
$
2,700


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 six months ended June 30, 2011 is summarized as follows (in thousands):

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

 
$
98,709

 
$
50,281

 
$
12,614

 
$
26,736

 
$
292,971

Provision for loan losses
 
10,836

 
2,665

 
(45
)
 
(1,369
)
 
389

 
12,476

Loans charged off
 
(5,654
)
 
(10,273
)
 
(6,329
)
 
(5,750
)
 
—

 
(28,006
)
Recoveries
 
3,758

 
649

 
1,336

 
3,427

 
—

 
9,170

Ending balance
 
$
113,571

 
$
91,750

 
$
45,243

 
$
8,922

 
$
27,125

 
$
286,611

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
13,456

 
$
443

 
$
131

 
$
241

 
$
—

 
$
14,271

Provision for off-balance sheet credit losses
 
(4,220
)
 
577

 
49

 
68

 
—

 
(3,526
)
Ending balance
 
$
9,236

 
$
1,020

 
$
180

 
$
309

 
$
—

 
$
10,745

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
6,616

 
$
3,242

 
$
4

 
$
(1,301
)
 
$
389

 
$
8,950


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


- 83 -



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

 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
7,018,115

 
$
83,199

 
$
34,429

 
$
278

 
$
7,052,544

 
$
83,477

Commercial real estate
 
2,046,006

 
54,526

 
80,208

 
1,280

 
2,126,214

 
55,806

Residential mortgage
 
1,997,887

 
42,453

 
7,210

 
235

 
2,005,097

 
42,688

Consumer
 
388,106

 
8,798

 
4,470

 
42

 
392,576

 
8,840

Total
 
11,450,114

 
188,976

 
126,317

 
1,835

 
11,576,431

 
190,811

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
40,858

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11,450,114

 
$
188,976

 
$
126,317

 
$
1,835

 
$
11,576,431

 
$
231,669


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

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

 
$
81,907

 
$
68,759

 
$
1,536

 
$
6,555,070

 
$
83,443

Commercial real estate
 
2,192,110

 
63,092

 
99,193

 
3,942

 
2,291,303

 
67,034

Residential mortgage
 
1,967,086

 
46,178

 
7,441

 
298

 
1,974,527

 
46,476

Consumer
 
447,747

 
10,178

 
1,096

 
—

 
448,843

 
10,178

Total
 
11,093,254

 
201,355

 
176,489

 
5,776

 
11,269,743

 
207,131

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
46,350

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11,093,254

 
$
201,355

 
$
176,489

 
$
5,776

 
$
11,269,743

 
$
253,481


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

 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
6,117,083

 
$
111,131

 
$
53,162

 
$
2,440

 
$
6,170,245

 
$
113,571

Commercial real estate
 
2,077,668

 
88,611

 
110,363

 
3,139

 
2,188,031

 
91,750

Residential mortgage
 
1,861,069

 
44,254

 
10,885

 
989

 
1,871,954

 
45,243

Consumer
 
505,393

 
8,807

 
1,921

 
115

 
507,314

 
8,922

Total
 
10,561,213

 
252,803

 
176,331

 
6,683

 
10,737,544

 
259,486

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
27,125

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,561,213

 
$
252,803

 
$
176,331

 
$
6,683

 
$
10,737,544

 
$
286,611



- 84 -



Credit Quality Indicators

The Company utilizes loan class and risk grading as a primary credit quality indicator. 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 June 30, 2012 is as follows (in thousands):

 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
7,034,934

 
$
82,357

 
$
17,610

 
$
1,120

 
$
7,052,544

 
$
83,477

Commercial real estate
 
2,126,208

 
55,806

 
6

 
—

 
2,126,214

 
55,806

Residential mortgage
 
283,031

 
6,987

 
1,722,066

 
35,701

 
2,005,097

 
42,688

Consumer
 
201,044

 
1,895

 
191,532

 
6,945

 
392,576

 
8,840

Total
 
9,645,217

 
147,045

 
1,931,214

 
43,766

 
11,576,431

 
190,811

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
40,858

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
9,645,217

 
$
147,045

 
$
1,931,214

 
$
43,766

 
$
11,576,431

 
$
231,669

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

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

 
$
82,263

 
$
18,468

 
$
1,180

 
$
6,555,070

 
$
83,443

Commercial real estate
 
2,291,303

 
67,034

 
—

 
—

 
2,291,303

 
67,034

Residential mortgage
 
317,798

 
8,262

 
1,656,729

 
38,214

 
1,974,527

 
46,476

Consumer
 
217,195

 
2,527

 
231,648

 
7,651

 
448,843

 
10,178

Total
 
9,362,898

 
160,086

 
1,906,845

 
47,045

 
11,269,743

 
207,131

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
46,350

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
9,362,898

 
$
160,086

 
$
1,906,845

 
$
47,045

 
$
11,269,743

 
$
253,481



- 85 -



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

 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
6,151,384

 
$
111,392

 
$
18,861

 
$
2,179

 
$
6,170,245

 
$
113,571

Commercial real estate
 
2,188,031

 
91,750

 
—

 
—

 
2,188,031

 
91,750

Residential mortgage
 
355,102

 
7,911

 
1,516,852

 
37,332

 
1,871,954

 
45,243

Consumer
 
220,300

 
1,877

 
287,014

 
7,045

 
507,314

 
8,922

Total
 
8,914,817

 
212,930

 
1,822,727

 
46,556

 
10,737,544

 
259,486

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
27,125

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
8,914,817

 
$
212,930

 
$
1,822,727

 
$
46,556

 
$
10,737,544

 
$
286,611


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

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


- 86 -



The following table summarizes the Company’s loan portfolio at June 30, 2012 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
Potential Problem
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,264,290

 
$
10,959

 
$
3,087

 
$
—

 
$
—

 
$
2,278,336

Services
 
1,881,143

 
40,254

 
10,123

 
—

 
—

 
1,931,520

Wholesale/retail
 
944,412

 
11,597

 
4,175

 
—

 
—

 
960,184

Manufacturing
 
340,815

 
9,832

 
12,230

 
—

 
—

 
362,877

Healthcare
 
1,004,773

 
1,045

 
3,310

 
—

 
—

 
1,009,128

Integrated food services
 
216,282

 
696

 
—

 
—

 
—

 
216,978

Other commercial and industrial
 
274,082

 
325

 
1,504

 
17,510

 
100

 
293,521

Total commercial
 
6,925,797

 
74,708

 
34,429

 
17,510

 
100

 
7,052,544

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
214,263

 
26,746

 
46,050

 
—

 
—

 
287,059

Retail
 
476,179

 
8,290

 
7,908

 
—

 
—

 
492,377

Office
 
361,451

 
12,352

 
10,589

 
—

 
—

 
384,392

Multifamily
 
352,269

 
6,677

 
3,219

 
—

 
—

 
362,165

Industrial
 
230,760

 
273

 
—

 
—

 
—

 
231,033

Other commercial real estate
 
342,815

 
13,925

 
12,442

 
—

 
6

 
369,188

Total commercial real estate
 
1,977,737

 
68,263

 
80,208

 
—

 
6

 
2,126,214

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
262,423

 
13,398

 
7,210

 
847,414

 
10,926

 
1,141,371

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
168,059

 
—

 
168,059

Home equity
 
—

 
—

 
—

 
691,076

 
4,591

 
695,667

Total residential mortgage
 
262,423

 
13,398

 
7,210

 
1,706,549

 
15,517

 
2,005,097

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
60,667

 
2,257

 
62,924

Other consumer
 
193,521

 
3,053

 
4,470

 
128,323

 
285

 
329,652

Total consumer
 
193,521

 
3,053

 
4,470

 
188,990

 
2,542

 
392,576

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
9,359,478

 
$
159,422

 
$
126,317

 
$
1,913,049

 
$
18,165

 
$
11,576,431



- 87 -



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

 
$
1,417

 
$
336

 
$
—

 
$
—

 
$
2,005,041

Services
 
1,713,232

 
31,338

 
16,968

 
—

 
—

 
1,761,538

Wholesale/retail
 
912,090

 
34,156

 
21,180

 
—

 
—

 
967,426

Manufacturing
 
311,292

 
2,390

 
23,051

 
—

 
—

 
336,733

Healthcare
 
969,260

 
3,414

 
5,486

 
—

 
—

 
978,160

Integrated food services
 
203,555

 
756

 
—

 
—

 
—

 
204,311

Other commercial and industrial
 
281,645

 
10

 
1,738

 
18,416

 
52

 
301,861

Total commercial
 
6,394,362

 
73,481

 
68,759

 
18,416

 
52

 
6,555,070

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
252,936

 
27,244

 
61,874

 
—

 
—

 
342,054

Retail
 
499,295

 
3,244

 
6,863

 
—

 
—

 
509,402

Office
 
381,918

 
12,548

 
11,457

 
—

 
—

 
405,923

Multifamily
 
357,436

 
8,079

 
3,513

 
—

 
—

 
369,028

Industrial
 
277,906

 
280

 
—

 
—

 
—

 
278,186

Other commercial real estate
 
355,381

 
15,843

 
15,486

 
—

 
—

 
386,710

Total commercial real estate
 
2,124,872

 
67,238

 
99,193

 
—

 
—

 
2,291,303

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
294,478

 
15,879

 
7,441

 
817,921

 
17,925

 
1,153,644

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
188,462

 
—

 
188,462

Home equity
 
—

 
—

 
—

 
628,020

 
4,401

 
632,421

Total residential mortgage
 
294,478

 
15,879

 
7,441

 
1,634,403

 
22,326

 
1,974,527

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
102,955

 
2,194

 
105,149

Other consumer
 
212,150

 
3,949

 
1,096

 
126,274

 
225

 
343,694

Total consumer
 
212,150

 
3,949

 
1,096

 
229,229

 
2,419

 
448,843

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
9,025,862

 
$
160,547

 
$
176,489

 
$
1,882,048

 
$
24,797

 
$
11,269,743


- 88 -



The following table summarizes the Company’s loan portfolio at June 30, 2011 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
Potential Problem
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
1,705,073

 
$
4,688

 
$
345

 
$
—

 
$
—

 
$
1,710,106

Services
 
1,675,545

 
33,490

 
16,254

 
—

 
—

 
1,725,289

Wholesale/retail
 
988,076

 
40,935

 
25,138

 
—

 
—

 
1,054,149

Manufacturing
 
360,221

 
2,827

 
4,366

 
—

 
—

 
367,414

Healthcare
 
846,790

 
2,992

 
5,962

 
—

 
—

 
855,744

Integrated food services
 
186,573

 
1,260

 
—

 
—

 
—

 
187,833

Other commercial and industrial
 
246,342

 
3,410

 
1,097

 
18,658

 
203

 
269,710

Total commercial
 
6,008,620

 
89,602

 
53,162

 
18,658

 
203

 
6,170,245

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
280,210

 
15,750

 
76,265

 
—

 
—

 
372,225

Retail
 
438,129

 
7,013

 
4,642

 
—

 
—

 
449,784

Office
 
459,507

 
14,751

 
11,473

 
—

 
—

 
485,731

Multifamily
 
323,964

 
5,860

 
4,717

 
—

 
—

 
334,541

Industrial
 
159,518

 
288

 
—

 
—

 
—

 
159,806

Other commercial real estate
 
351,640

 
21,038

 
13,266

 
—

 
—

 
385,944

Total commercial real estate
 
2,012,968

 
64,700

 
110,363

 
—

 
—

 
2,188,031

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
330,464

 
13,752

 
10,885

 
783,084

 
17,106

 
1,155,291

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
134,458

 
—

 
134,458

Home equity
 
—

 
—

 
—

 
578,503

 
3,702

 
582,205

Total residential mortgage
 
330,464

 
13,752

 
10,885

 
1,496,045

 
20,808

 
1,871,954

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
159,771

 
2,729

 
162,500

Other consumer
 
215,056

 
3,245

 
1,921

 
124,493

 
99

 
344,814

Total consumer
 
215,056

 
3,245

 
1,921

 
284,264

 
2,828

 
507,314

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
8,567,108

 
$
171,299

 
$
176,331

 
$
1,798,967

 
$
23,839

 
$
10,737,544




- 89 -



Impaired Loans

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

 
As of
 
For the
 
For the
 
June 30, 2012
 
Three Months Ended
 
Six Months Ended
 
 
 
Recorded Investment
 
 
 
June 30, 2012
 
June 30, 2012
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
 
Average Recorded
Investment
 
Interest Income Recognized
 
Average Recorded
Investment
 
Interest Income Recognized
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
3,297

 
$
3,087

 
$
3,087

 
$
—

 
$
—

 
$
1,712

 
$
—

 
$
1,712

 
$
—

Services
18,858

 
10,123

 
9,996

 
127

 
127

 
11,507

 
—

 
13,546

 
—

Wholesale/retail
5,763

 
4,175

 
4,096

 
79

 
20

 
9,782

 
—

 
12,678

 
—

Manufacturing
15,864

 
12,230

 
12,230

 
—

 
—

 
17,816

 
—

 
17,641

 
—

Healthcare
4,400

 
3,310

 
2,069

 
1,241

 
131

 
5,628

 
—

 
4,398

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
9,003

 
1,504

 
1,504

 
—

 
—

 
1,609

 
—

 
1,621

 
—

Total commercial
57,185

 
34,429

 
32,982

 
1,447

 
278

 
48,054

 
—

 
51,596

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
78,447

 
46,050

 
45,477

 
573

 
155

 
49,233

 
—

 
53,962

 
—

Retail
9,395

 
7,908

 
5,541

 
2,367

 
905

 
7,051

 
—

 
7,386

 
—

Office
13,744

 
10,589

 
10,364

 
225

 
21

 
10,661

 
—

 
11,023

 
—

Multifamily
3,333

 
3,219

 
3,219

 
—

 
—

 
3,317

 
—

 
3,366

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
14,744

 
12,442

 
11,518

 
924

 
199

 
13,081

 
—

 
13,964

 
—

Total commercial real estate
119,663

 
80,208

 
76,119

 
4,089

 
1,280

 
83,343

 
—

 
89,701

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
8,421

 
7,210

 
6,593

 
617

 
235

 
7,361

 
—

 
7,326

 
—

Home equity
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
8,421

 
7,210

 
6,593

 
617

 
235

 
7,361

 
—

 
7,326

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other consumer
5,056

 
4,470

 
4,428

 
42

 
42

 
4,621

 
—

 
2,784

 
—

Total consumer
5,056

 
4,470

 
4,428

 
42

 
42

 
4,621

 
—

 
2,784

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
190,325

 
$
126,317

 
$
120,122

 
$
6,195

 
$
1,835

 
$
143,379

 
$
—

 
$
151,407

 
$
—


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


- 90 -



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

 
$
336

 
$
336

 
$
—

 
$
—

Services
 
26,916

 
16,968

 
16,200

 
768

 
360

Wholesale/retail
 
24,432

 
21,180

 
19,702

 
1,478

 
1,102

Manufacturing
 
26,186

 
23,051

 
23,051

 
—

 
—

Healthcare
 
6,825

 
5,486

 
5,412

 
74

 
74

Integrated food services
 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
9,237

 
1,738

 
1,738

 
—

 
—

Total commercial
 
93,932

 
68,759

 
66,439

 
2,320

 
1,536

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
98,053

 
61,874

 
56,740

 
5,134

 
1,777

Retail
 
8,645

 
6,863

 
4,373

 
2,490

 
1,062

Office
 
14,588

 
11,457

 
9,567

 
1,890

 
291

Multifamily
 
3,512

 
3,513

 
3,513

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

Other real estate loans
 
16,702

 
15,486

 
7,887

 
7,599

 
812

Total commercial real estate
 
141,500

 
99,193

 
82,080

 
17,113

 
3,942

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
8,697

 
7,441

 
4,980

 
2,461

 
298

Home equity
 
—

 
—

 
—

 
—

 
—

Total residential mortgage
 
8,697

 
7,441

 
4,980

 
2,461

 
298

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
—

 
—

Other consumer
 
1,727

 
1,096

 
1,096

 
—

 
—

Total consumer
 
1,727

 
1,096

 
1,096

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
245,856

 
$
176,489

 
$
154,595

 
$
21,894

 
$
5,776



- 91 -



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

 
As of
 
For the
 
For the
 
June 30, 2011
 
Three Months Ended
 
Six Months Ended
 
 
 
Recorded Investment
 
 
 
June 30, 2011
 
June 30, 2011
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
 
Average Recorded
Investment
 
Interest Income Recognized
 
Average Recorded
Investment
 
Interest Income Recognized
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
345

 
$
345

 
$
345

 
$
—

 
$
—

 
$
380

 
$
—

 
$
405

 
$
—

Services
26,441

 
16,254

 
15,525

 
729

 
273

 
15,987

 
—

 
17,758

 
—

Wholesale/retail
31,770

 
25,138

 
22,751

 
2,387

 
1,742

 
27,775

 
—

 
16,812

 
—

Manufacturing
9,259

 
4,366

 
2,012

 
2,354

 
259

 
4,456

 
—

 
3,241

 
—

Healthcare
7,659

 
5,962

 
5,103

 
859

 
166

 
4,268

 
—

 
4,748

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
3

 
—

 
7

 
—

Other commercial and industrial
8,596

 
1,097

 
1,097

 
—

 
—

 
2,363

 
—

 
2,772

 
—

Total commercial
84,070

 
53,162

 
46,833

 
6,329

 
2,440

 
55,232

 
—

 
45,743

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Construction and land development
115,337

 
76,265

 
65,094

 
11,171

 
1,966

 
83,486

 
—

 
87,922

 
—

Retail
5,652

 
4,642

 
1,855

 
2,787

 
612

 
4,959

 
—

 
4,810

 
—

Office
14,749

 
11,473

 
9,713

 
1,760

 
207

 
13,051

 
—

 
15,564

 
—

Multifamily
5,381

 
4,717

 
4,717

 
—

 
—

 
3,309

 
—

 
5,721

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,044

 
—

Other real estate loans
15,203

 
13,266

 
11,755

 
1,511

 
354

 
13,130

 
—

 
14,305

 
—

Total commercial real estate
156,322

 
110,363

 
93,134

 
17,229

 
3,139

 
117,935

 
—

 
130,366

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Permanent mortgage
12,122

 
10,885

 
5,016

 
5,869

 
989

 
11,479

 
—

 
11,475

 
—

Home equity
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
12,122

 
10,885

 
5,016

 
5,869

 
989

 
11,479

 
—

 
11,475

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Indirect automobile
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other consumer
2,449

 
1,921

 
1,348

 
573

 
115

 
2,244

 
—

 
1,836

 
—

Total consumer
2,449

 
1,921

 
1,348

 
573

 
115

 
2,244

 
—

 
1,836

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
254,963

 
$
176,331

 
$
146,331

 
$
30,000

 
$
6,683

 
$
186,890

 
$
—

 
$
189,420

 
$
—




- 92 -



Troubled Debt Restructurings

Troubled debt restructurings of internally risk graded impaired loans at June 30, 2012 were as follows (in thousands):

 
 
As of
 
Amounts Charged-off
 
 
June 30, 2012
 
During:
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Three months ended
June 30, 2012
 
Six months ended
June 30, 2012
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
 
2,700

 
1,381

 
1,319

 
—

 
—

 
—

Wholesale/retail
 
1,612

 
1,428

 
184

 
20

 
—

 
—

Manufacturing
 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
 
77

 
77

 
—

 
—

 
—

 
—

Integrated food services
 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
779

 
—

 
779

 
—

 
—

 
—

Total commercial
 
5,168

 
2,886

 
2,282

 
20

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
18,217

 
4,238

 
13,979

 
76

 
769

 
2,579

Retail
 
3,618

 
3,618

 
—

 
—

 
—

 
—

Office
 
3,387

 
2,489

 
898

 
—

 
—

 
269

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
 
5,730

 
1,933

 
3,797

 
103

 
—

 
2,182

Total commercial real estate
 
30,952

 
12,278

 
18,674

 
179

 
769

 
5,030

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
4,646

 
4,327

 
319

 
54

 
121

 
145

Home equity
 
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
 
4,646

 
4,327

 
319

 
54

 
121

 
145

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
—

 
—

 
—

Other consumer
 
3,502

 
3,502

 
—

 
—

 
—

 
—

Total consumer
 
3,502

 
3,502

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
44,268

 
$
22,993

 
$
21,275

 
$
253

 
$
890

 
$
5,175


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

In addition to risk graded loans discussed above, non-risk graded residential mortgage loans may be modified in troubled debt restructurings primarily consist of loans that are guaranteed by U.S. government agencies. At June 30, 2012, approximately $11 million of the renegotiated residential mortgage loans are currently performing in accordance with the modified terms, $7.0 million are 30 to 89 days past due and $10 million are past due 90 days or more. Restructured residential mortgage loans guaranteed by agencies of the U.S. government in accordance with agency guidelines represent $25 million of our $28 million

- 93 -



portfolio of renegotiated loans. All renegotiated loans past due 90 days or more are guaranteed by U.S. government agencies. 

Troubled debt restructurings of internally risk graded impaired loans at December 31, 2011 were as follows (in thousands):

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

 
$
—

 
$
—

 
$
—

Services
 
3,529

 
1,907

 
1,622

 
—

Wholesale/retail
 
1,739

 
961

 
778

 
24

Manufacturing
 
—

 
—

 
—

 
—

Healthcare
 
—

 
—

 
—

 
—

Integrated food services
 
—

 
—

 
—

 
—

Other commercial and industrial
 
960

 
—

 
960

 
—

Total commercial
 
6,228

 
2,868

 
3,360

 
24

 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

Construction and land development
 
25,890

 
3,585

 
22,305

 
1,577

Retail
 
1,070

 
—

 
1,070

 
—

Office
 
2,496

 
1,134

 
1,362

 
215

Multifamily
 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

Other real estate loans
 
8,171

 
387

 
7,784

 
662

Total commercial real estate
 
37,627

 
5,106

 
32,521

 
2,454

 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

Permanent mortgage
 
4,103

 
1,396

 
2,707

 
282

Home equity
 
—

 
—

 
—

 
—

Total residential mortgage
 
4,103

 
1,396

 
2,707

 
282

 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
—

Other consumer
 
168

 
168

 
—

 
—

Total consumer
 
168

 
168

 
—

 
—

 
 
 
 
 
 
 
 
 
Total
 
$
48,126

 
$
9,538

 
$
38,588

 
$
2,760


At December 31, 2011, approximately $13 million of the renegotiated residential mortgage loans are currently performing in accordance with the modified terms, $5.8 million are 30 to 89 days past due and $14 million are past due 90 days or more. Restructured residential mortgage loans guaranteed by agencies of the U.S. government in accordance with agency guidelines represent $29 million of our $33 million portfolio of renegotiated loans. All renegotiated loans past due 90 days or more are guaranteed by U.S. government agencies. 


- 94 -



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 June 30, 2012 is as follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 89
Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,272,989

 
$
2,260

 
$
—

 
$
3,087

 
$
2,278,336

Services
 
1,917,655

 
3,705

 
37

 
10,123

 
1,931,520

Wholesale/retail
 
954,475

 
1,534

 
—

 
4,175

 
960,184

Manufacturing
 
350,647

 
—

 
—

 
12,230

 
362,877

Healthcare
 
1,005,538

 
180

 
100

 
3,310

 
1,009,128

Integrated food services
 
212,075

 
4,903

 
—

 
—

 
216,978

Other commercial and industrial
 
291,328

 
589

 
—

 
1,604

 
293,521

Total commercial
 
7,004,707

 
13,171

 
137

 
34,529

 
7,052,544

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
240,208

 
801

 
—

 
46,050

 
287,059

Retail
 
478,843

 
5,626

 
—

 
7,908

 
492,377

Office
 
373,278

 
525

 
—

 
10,589

 
384,392

Multifamily
 
358,204

 
742

 
—

 
3,219

 
362,165

Industrial
 
230,641

 
392

 
—

 
—

 
231,033

Other real estate loans
 
353,412

 
3,328

 
—

 
12,448

 
369,188

Total commercial real estate
 
2,034,586

 
11,414

 
—

 
80,214

 
2,126,214

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,107,610

 
15,130

 
495

 
18,136

 
1,141,371

Permanent mortgages guaranteed by U.S. government agencies
 
26,460

 
14,473

 
127,126

 
—

 
168,059

Home equity
 
688,821

 
2,211

 
44

 
4,591

 
695,667

Total residential mortgage
 
1,822,891

 
31,814

 
127,665

 
22,727

 
2,005,097

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
58,895

 
1,771

 
1

 
2,257

 
62,924

Other consumer
 
324,165

 
718

 
14

 
4,755

 
329,652

Total consumer
 
383,060

 
2,489

 
15

 
7,012

 
392,576

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11,245,244

 
$
58,888

 
$
127,817

 
$
144,482

 
$
11,576,431



- 95 -



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

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

 
$
1,065

 
$
448

 
$
336

 
$
2,005,041

Services
 
1,729,775

 
13,608

 
1,187

 
16,968

 
1,761,538

Wholesale/retail
 
945,776

 
470

 
—

 
21,180

 
967,426

Manufacturing
 
313,028

 
654

 
—

 
23,051

 
336,733

Healthcare
 
971,265

 
1,362

 
47

 
5,486

 
978,160

Integrated food services
 
204,306

 
—

 
5

 
—

 
204,311

Other commercial and industrial
 
298,105

 
1,966

 
—

 
1,790

 
301,861

Total commercial
 
6,465,447

 
19,125

 
1,687

 
68,811

 
6,555,070

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
278,901

 
1,279

 
—

 
61,874

 
342,054

Retail
 
502,167

 
372

 
—

 
6,863

 
509,402

Office
 
394,227

 
239

 
—

 
11,457

 
405,923

Multifamily
 
365,477

 
38

 
—

 
3,513

 
369,028

Industrial
 
278,186

 
—

 
—

 
—

 
278,186

Other real estate loans
 
367,643

 
3,444

 
137

 
15,486

 
386,710

Total commercial real estate
 
2,186,601

 
5,372

 
137

 
99,193

 
2,291,303

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,110,418

 
17,259

 
601

 
25,366

 
1,153,644

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

 
12,163

 
155,301

 
—

 
188,462

Home equity
 
624,942

 
3,036

 
42

 
4,401

 
632,421

Total residential mortgage
 
1,756,358

 
32,458

 
155,944

 
29,767

 
1,974,527

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
98,345

 
4,581

 
29

 
2,194

 
105,149

Other consumer
 
340,087

 
2,286

 
—

 
1,321

 
343,694

Total consumer
 
438,432

 
6,867

 
29

 
3,515

 
448,843

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,846,838

 
$
63,822

 
$
157,797

 
$
201,286

 
$
11,269,743


- 96 -



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

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 89
Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
1,709,608

 
$
153

 
$
—

 
$
345

 
$
1,710,106

Services
 
1,703,683

 
3,759

 
1,593

 
16,254

 
1,725,289

Wholesale/retail
 
1,027,827

 
697

 
487

 
25,138

 
1,054,149

Manufacturing
 
363,048

 
—

 
—

 
4,366

 
367,414

Healthcare
 
849,605

 
177

 
—

 
5,962

 
855,744

Integrated food services
 
187,833

 
—

 
—

 
—

 
187,833

Other commercial and industrial
 
268,161

 
192

 
57

 
1,300

 
269,710

Total commercial
 
6,109,765

 
4,978

 
2,137

 
53,365

 
6,170,245

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
293,627

 
2,333

 
—

 
76,265

 
372,225

Retail
 
442,231

 
2,911

 
—

 
4,642

 
449,784

Office
 
471,938

 
2,320

 
—

 
11,473

 
485,731

Multifamily
 
329,824

 
—

 
—

 
4,717

 
334,541

Industrial
 
159,422

 
384

 
—

 
—

 
159,806

Other real estate loans
 
370,110

 
2,393

 
175

 
13,266

 
385,944

Total commercial real estate
 
2,067,152

 
10,341

 
175

 
110,363

 
2,188,031

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,108,565

 
18,735

 
—

 
27,991

 
1,155,291

Permanent mortgages guaranteed by U.S. government agencies
 
8,426

 
3,728

 
122,304

 
—

 
134,458

Home equity
 
576,045

 
2,450

 
8

 
3,702

 
582,205

Total residential mortgage
 
1,693,036

 
24,913

 
122,312

 
31,693

 
1,871,954

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
152,496

 
7,256

 
19

 
2,729

 
162,500

Other consumer
 
341,761

 
1,031

 
2

 
2,020

 
344,814

Total consumer
 
494,257

 
8,287

 
21

 
4,749

 
507,314

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,364,210

 
$
48,519

 
$
124,645

 
$
200,170

 
$
10,737,544





- 97 -



(5) 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):

 
 
June 30, 2012
 
December 31, 2011
 
June 30, 2011
 
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid
Principal
 Balance/
Notional
 
Fair Value
Residential mortgage loans held for sale
 
$
236,160

 
$
247,893

 
$
177,319

 
$
184,816

 
$
162,579

 
$
167,300

Residential mortgage loan commitments
 
392,247

 
15,807

 
189,770

 
6,597

 
156,209

 
2,793

Forward sales contracts
 
605,856

 
(4,526
)
 
349,447

 
(3,288
)
 
302,526

 
(484
)
 
 
 

 
$
259,174

 
 

 
$
188,125

 
 

 
$
169,609


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

Mortgage banking revenue was follows (in thousands):

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Originating and marketing revenue:
 
 
 
 
 
 
 
 
Residential mortgages loan held for sale
 
$
27,706

 
$
10,037

 
$
44,798

 
$
23,373

Residential mortgage loan commitments
 
6,900

 
(702
)
 
9,210

 
542

Forward sales contracts
 
(4,917
)
 
74

 
(1,238
)
 
(6,977
)
Total originating and marketing revenue
 
29,689

 
9,409

 
52,770

 
16,938

Servicing revenue
 
9,859

 
9,947

 
19,856

 
19,774

Total mortgage banking revenue
 
$
39,548

 
$
19,356

 
$
72,626

 
$
36,712


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.


- 98 -



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):

 
 
June 30,
2012
 
December 31,
2011
 
June 30,
2011
Number of residential mortgage loans serviced for others
 
96,772

 
95,841

 
96,578

Outstanding principal balance of residential mortgage loans serviced for others
 
$
11,564,643

 
$
11,300,986

 
$
11,283,442

Weighted average interest rate
 
4.99
%
 
5.19
%
 
5.36
%
Remaining term (in months)
 
289

 
290

 
291


Activity in capitalized mortgage servicing rights during the three months ended June 30, 2012 is as follows
(in thousands):
 
 
Purchased
 
Originated
 
Total
Balance at March 31, 2012
 
$
21,204

 
$
76,934

 
$
98,138

Additions, net
 
—

 
9,275

 
9,275

Change in fair value due to loan runoff
 
(950
)
 
(3,230
)
 
(4,180
)
Change in fair value due to market changes
 
(3,893
)
 
(7,557
)
 
(11,450
)
Balance, June 30, 2012
 
$
16,361

 
$
75,422

 
$
91,783


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

 
$
67,880

 
$
86,783

Additions, net
 
—

 
17,647

 
17,647

Change in fair value due to loan runoff
 
(1,960
)
 
(6,364
)
 
(8,324
)
Change in fair value due to market changes
 
(582
)
 
(3,741
)
 
(4,323
)
Balance, June 30, 2012
 
$
16,361

 
$
75,422

 
$
91,783


Activity in capitalized mortgage servicing rights during the three months ended June 30, 2011 is as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance at March 31, 2011
 
$
38,343

 
$
82,002

 
$
120,345

Additions, net
 
—

 
5,798

 
5,798

Change in fair value due to loan runoff
 
(1,218
)
 
(2,240
)
 
(3,458
)
Change in fair value due to market changes
 
(4,259
)
 
(9,234
)
 
(13,493
)
Balance, June 30, 2011
 
$
32,866

 
$
76,326

 
$
109,192


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

 
$
77,823

 
$
115,723

Additions, net
 
—

 
10,767

 
10,767

Change in fair value due to loan runoff
 
(2,551
)
 
(4,383
)
 
(6,934
)
Change in fair value due to market changes
 
(2,483
)
 
(7,881
)
 
(10,364
)
Balance, June 30, 2011
 
$
32,866

 
$
76,326

 
$
109,192

 

- 99 -



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 considered significant unobservable inputs used to determine fair value are:

 
 
June 30, 2012
 
December 31,
2011
 
June 30,
2011
Discount rate – risk-free rate plus a market premium
 
10.33%
 
10.34%
 
10.4%
Prepayment rate – based upon loan interest rate, original term and loan type
 
11.44% - 53.10%
 
10.88% - 49.68%
 
10.26% - 38.37%
Loan servicing costs – annually per loan based upon loan type
 
$55 - $105
 
$55 - $105
 
$55 - $105
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life
 
0.97%
 
1.21%
 
2.02%

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 June 30, 2012 follows (in thousands):
 
 
< 5.00%
 
5.00% - 5.99%

 
6.00% - 6.99

 
> 6.99%
 
Total
Fair value
 
$
56,754

 
$
28,724

 
$
5,152

 
$
1,153

 
$
91,783

Outstanding principal of loans serviced for others
 
$
5,976,173

 
$
3,652,815

 
$
1,558,553

 
$
377,102

 
$
11,564,643

Weighted average prepayment rate1
 
11.44
%
 
23.88
%
 
20.00
%
 
46.08
%
 
21.50
%
1 
Annual prepayment estimates based upon loan interest rate, original term and loan type

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 June 30, 2012, a 50 basis point increase in mortgage interest rates is expected to increase the fair value of our mortgage servicing rights, net of economic hedge by $3.3 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 $7.8 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 June 30, 2012 follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89
Days
 
90 Days or More
 
Total
FHLMC
 
$
5,000,735

 
$
47,486

 
$
13,663

 
$
46,600

 
$
5,108,484

FNMA
 
1,961,099

 
21,050

 
5,632

 
20,711

 
2,008,492

GNMA
 
3,764,570

 
129,482

 
34,188

 
27,953

 
3,956,193

Other
 
464,850

 
9,930

 
3,056

 
13,638

 
491,474

Total
 
$
11,191,254

 
$
207,948

 
$
56,539

 
$
108,902

 
$
11,564,643


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

- 100 -



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 $241 million at June 30, 2012, $259 million at December 31, 2011 and $274 million at June 30, 2011. A separate accrual for these off-balance sheet commitments is included in Other liabilities in the Consolidated Balance Sheets totaling $18 million at June 30, 2012, $19 million at December 31, 2011 and $18 million at June 30, 2011. At June 30, 2012, approximately 5% of the loans sold with recourse with an outstanding principal balance of $12 million were either delinquent more than 90 days, in bankruptcy or in foreclosure and 6% with an outstanding balance of $14 million were past due 30 to 89 days. The provision for credit losses on loans sold with recourse is included in Mortgage banking costs in the Consolidated Statements of Earnings.

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

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
Beginning balance
 
$
18,651

 
$
16,487

 
$
18,683

 
$
16,667

Provision for recourse losses
 
768

 
2,532

 
2,440

 
3,326

Loans charged off, net
 
(1,587
)
 
(1,479
)
 
(3,291
)
 
(2,453
)
Ending balance
 
$
17,832

 
$
17,540

 
$
17,832

 
$
17,540


The Company also has off-balance sheet credit risk for residential mortgage loans sold to government sponsored entities due to standard representations and warranties made under contractual agreements. At June 30, 2012, we have unresolved deficiency requests from the agencies on 303 loans with an aggregate outstanding principal balance of $40 million. At December 31, 2011, the Company had unresolved deficiency requests from the agencies on 247 loans with an aggregate principal balance of $37 million. For the six months ended June 30, 2012, the Company has repurchased 30 loans for $3.0 million from the agencies and provided indemnification for 3 loans for $58 thousand. Losses incurred on these loans as of June 30, 2012 totaled $1.0 million. The Company has established an accrual for credit losses related to potential loan repurchases under representations and warranties is included in Other liabilities in the Consolidated Balance Sheets and in Mortgage banking costs in the Consolidated Statement of Earnings. While the level of repurchases and indemnifications related to standard representations and warranties has remained low, the severity of the losses have trended higher. Accordingly, the Company increased its accrual for credit losses related to potential loan repurchases under representations and warranties to $5.0 million at June 30, 2012. The accrual was $2.2 million at December 31, 2011.
(6) Employee Benefits

BOK Financial has sponsored a defined benefit Pension Plan for all employees who satisfied certain age and service requirements.  Pension Plan benefits were curtailed as of April 1, 2006. The Company recognized periodic pension expense of $1.0 million and $1.2 million for the three months ended June 30, 2012 and 2011, respectively, and $1.9 million for each of the six months ended June 30, 2012 and 2011.  The Company made no Pension Plan contributions during the six months ended June 30, 2012 and 2011.

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

Litigation Contingencies

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

- 101 -



Court approval and had been fully accrued as of March 31, 2012.

In an opinion dated October 11, 2011, the Oklahoma Supreme Court invalidated, pursuant to a petition brought by certain taxpayers, a $7.1 million settlement agreement between the Bank and the City of Tulsa (“the City”). The agreement settled claims asserted by the Bank against the City and against the Tulsa Airports Improvement Trust ("the Trust") related to a defaulted loan made by the Bank to a start-up airline. The Trust agreed to purchase the loan and its collateral from the Bank in the event of a default by the airline. As of June 30, 2012, the $7.1 million settlement amount was included in the accrual for off-balance sheet credit risk. On July 18, 2012, the Company paid the $7.1 million to the City and is pursuing its claims against the Trust. 

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

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

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

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

Alternative Investment Commitments

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

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 $10 million at June 30, 2012. Substantially all of the obligations are offset by limited partner commitments. The Company does not accrue its contingent liability to fund investments. The Volcker Rule in Title VI of the Dodd-Frank Act limits both the amount and structure of these type of investments. As a result, the Company's private equity activity might be curtailed.

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

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

- 102 -




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

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

 
$
31,492

 
$
—

 
$
—

 
$
26,648

Tax credit entities
 
10,000

 
14,224

 
—

 
10,964

 
10,000

Other
 
—

 
7,031

 
—

 
—

 
139

Total consolidated
 
$
10,000

 
$
52,747

 
$
—

 
$
10,964

 
$
36,787

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
—

 
$
71,298

 
$
39,510

 
$
—

 
$
—

Other
 
—

 
9,298

 
1,943

 
—

 
—

Total unconsolidated
 
$
—

 
$
80,596

 
$
41,453

 
$
—

 
$
—


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

 
$
30,902

 
$
—

 
$
—

 
$
26,042

Tax credit entities
 
10,000

 
14,483

 
—

 
10,964

 
10,000

Other
 
—

 
7,206

 
—

 
—

 
143

Total consolidated
 
$
10,000

 
$
52,591

 
$
—

 
$
10,964

 
$
36,185

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
—

 
$
37,890

 
$
16,084

 
$
—

 
$
—

Other
 
—

 
10,950

 
2,194

 
—

 
—

Total unconsolidated
 
$
—

 
$
48,840

 
$
18,278

 
$
—

 
$
—


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

 
$
30,991

 
$
—

 
$
—

 
$
24,264

Tax credit entities
 
—

 
—

 
—

 
—

 
—

Other
 
—

 
8,298

 
—

 
—

 
192

Total consolidated
 
$
—

 
$
39,289

 
$
—

 
$
—

 
$
24,456

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
—

 
$
25,684

 
$
14,464

 
$
—

 
$
—

Other
 
—

 
17,637

 
3,516

 
—

 
—

Total unconsolidated
 
$
—

 
$
43,321

 
$
17,980

 
$
—

 
$
—



- 103 -



Other Commitments and Contingencies

At June 30, 2012, Cavanal Hill Funds’ assets included $1.1 billion of U.S. Treasury, $935 million of cash management and $430 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 June 30, 2012. An investment in these funds is not insured by the Federal Deposit Insurance Corporation or guaranteed by BOK Financial or any of its subsidiaries. BOK Financial may, but is not obligated to purchase assets from these funds to maintain the net asset value at $1.00. No assets were purchased from the funds in 2012 or 2011.

Cottonwood Valley Ventures, Inc. (“CVV, Inc.”), an indirectly wholly-owned subsidiary of BOK Financial, is being audited by the Oklahoma Tax Commission (“OTC”) for tax years 2007 through 2009. CVV, Inc. is a qualified venture capital company under the applicable Oklahoma statute. As authorized by the statute, CVV, Inc. guarantees transferable Oklahoma state income tax credits by providing direct debt financing to private companies which qualify as statutory business ventures.  Due to certain statutory limitations on utilization of such credits, CVV, Inc. must sell the majority of the credits to provide the economic incentives provided for by the statute. In the event that the OTC successfully disallows any of the credits, CVV, Inc. would be required to indemnify purchasers for the tax credits disallowed. Management does not anticipate that this audit will have a material adverse impact to the financial statements.

The Company agreed to guarantee rents totaling $28.7 million through September of 2017 to the City as owner of a building immediately adjacent to the Bank’s main office for space currently rented by third-party tenants in the building. All rent payments are current. Remaining guaranteed rents totaled $15.7 million at June 30, 2012. Current leases expire or are subject to lessee termination options at various dates in 2013 and 2014. Our obligation under the agreement would be affected by lessee decisions to exercise these options. In return for this guarantee, the Company will receive 80% of net cash flow as defined in an agreement with the City through September 2017 from rental of space that was vacant at the inception of the agreement. The maximum amount that the Company may receive under this agreement is $4.5 million.
(8) Shareholders’ Equity

On July 31, 2012, the Board of Directors of BOK Financial approved a quarterly common stock dividend of $0.38 per share. The quarterly dividend will be payable on or about August 31, 2012 to shareholders of record as of August 17, 2012.

Dividends declared during the three and six months ended June 30, 2012 were $0.38 per share and $0.71 per share, respectively. Dividends declared during the three and six months ended June 30, 2011 were $0.275 per share and $0.525 per share, respectively.

Accumulated Other Comprehensive Income (Loss)

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


- 104 -



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

 
$
—

 
$
(13,777
)
 
$
(878
)
 
$
107,839

Net change in unrealized gains (losses)
 
63,944

 
—

 
(1
)
 
—

 
63,943

Other-than-temporary impairment losses recognized in earnings
 
9,423

 
—

 
—

 
—

 
9,423

Reclassification adjustment for net (gains) losses realized and included in earnings
 
(10,370
)
 
—

 
—

 
156

 
(10,214
)
Income tax expense (benefit)
 
(24,676
)
 
—

 
—

 
(60
)
 
(24,736
)
Balance, June 30, 2011
 
$
160,815

 
$
—

 
$
(13,778
)
 
$
(782
)
 
$
146,255

 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2011
 
$
135,740

 
$
6,673

 
$
(12,742
)
 
$
(692
)
 
$
128,979

Net change in unrealized gains (losses)
 
40,325

 
—

 
(291
)
 
—

 
40,034

Other-than-temporary impairment losses recognized in earnings
 
4,580

 
—

 
—

 
—

 
4,580

Amortization of unrealized gain on investments securities transferred from AFS
 
—

 
(3,421
)
 
—

 
—

 
(3,421
)
Reclassification adjustment for net(gains) losses realized and included in earnings
 
(24,812
)
 
—

 
—

 
331

 
(24,481
)
Income tax benefit (expense)
 
(7,816
)
 
1,331

 
113

 
(129
)
 
(6,501
)
Balance, June 30, 2012
 
$
148,017

 
$
4,583

 
$
(12,920
)
 
$
(490
)
 
$
139,190



- 105 -



(9)  Earnings Per Share
 
(In thousands, except share and per share amounts)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to BOK Financial Corp.
 
$
97,628

 
$
69,007

 
$
181,243

 
$
133,781

Earnings allocated to participating securities
 
(977
)
 
(559
)
 
(1,716
)
 
(1,020
)
Numerator for basic earnings per share – income available to common shareholders
 
96,651

 
68,448

 
179,527

 
132,761

Effect of reallocating undistributed earnings of participating securities
 
3

 
2

 
5

 
3

Numerator for diluted earnings per share – income available to common shareholders
 
$
96,654

 
$
68,450

 
$
179,532

 
$
132,764

 
 
 
 
 
 
 
 
 
Denominator:
 
 

 
 

 
 

 
 

Weighted average shares outstanding
 
68,152,242

 
68,451,428

 
68,214,648

 
68,419,699

Less:  Participating securities included in weighted average shares outstanding
 
(679,577
)
 
(552,945
)
 
(641,368
)
 
(519,420
)
Denominator for basic earnings per common share
 
67,472,665

 
67,898,483

 
67,573,280

 
67,900,279

Dilutive effect of employee stock compensation plans1
 
272,163

 
271,002

 
274,379

 
272,903

Denominator for diluted earnings per common share
 
67,744,828

 
68,169,485

 
67,847,659

 
68,173,182

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
1.43

 
$
1.01

 
$
2.66

 
$
1.96

Diluted earnings per share
 
$
1.43

 
$
1.00

 
$
2.65

 
$
1.95

1  Excludes employee stock options with exercise prices greater than current market price.
 
366,407

 
785,686

 
361,558

 
771,343




- 106 -



(10)  Reportable Segments

Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended June 30, 2012 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
93,360

 
$
23,125

 
$
7,137

 
$
57,739

 
$
181,361

Net interest revenue (expense) from internal sources
 
(11,164
)
 
5,885

 
5,306

 
(27
)
 
—

Net interest revenue
 
82,196

 
29,010

 
12,443

 
57,712

 
181,361

Provision for (reduction of ) allowances for credit losses
 
748

 
4,221

 
521

 
(13,490
)
 
(8,000
)
Net interest revenue after provision for (reduction of) allowances for credit losses
 
81,448

 
24,789

 
11,922

 
71,202

 
189,361

Other operating revenue
 
52,158

 
75,200

 
51,556

 
8,121

 
187,035

Other operating expense
 
62,625

 
75,888

 
53,209

 
32,064

 
223,786

Income before taxes
 
70,981

 
24,101

 
10,269

 
47,259

 
152,610

Federal and state income tax
 
27,612

 
9,375

 
3,995

 
12,167

 
53,149

Net income
 
43,369

 
14,726

 
6,274

 
35,092

 
99,461

Net income attributable to non-controlling interest
 
—

 
—

 
—

 
1,833

 
1,833

Net income attributable to BOK Financial Corp.
 
$
43,369

 
$
14,726

 
$
6,274

 
$
33,259

 
$
97,628

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
9,934,469

 
$
5,695,019

 
$
4,194,153

 
$
5,714,876

 
$
25,538,517

Average invested capital
 
862,816

 
289,443

 
176,704

 
1,539,770

 
2,868,733

 
 
 
 
 
 
 
 
 
 
 
Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.76
%
 
1.04
%
 
0.60
%
 


 
1.54
%
Return on average invested capital
 
20.22
%
 
20.46
%
 
14.28
%
 


 
13.69
%
Efficiency ratio
 
52.19
%
 
69.07
%
 
83.57
%
 


 
62.45
%


- 107 -



Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2012 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
182,698

 
$
46,939

 
$
14,277

 
$
111,016

 
$
354,930

Net interest revenue (expense) from internal sources
 
(22,920
)
 
12,005

 
10,279

 
636

 
—

Net interest revenue
 
159,778

 
58,944

 
24,556

 
111,652

 
354,930

Provision for (reduction of) allowances for credit losses
 
7,140

 
5,653

 
1,171

 
(21,964
)
 
(8,000
)
Net interest revenue after provision for (reduction of) allowances for credit losses
 
152,638

 
53,291

 
23,385

 
133,616

 
362,930

Other operating revenue
 
90,950

 
126,297

 
97,949

 
12,220

 
327,416

Other operating expense
 
118,485

 
123,640

 
104,484

 
62,414

 
409,023

Income before taxes
 
125,103

 
55,948

 
16,850

 
83,422

 
281,323

Federal and state income tax
 
48,665

 
21,764

 
6,555

 
21,685

 
98,669

Net income
 
76,438

 
34,184

 
10,295

 
61,737

 
182,654

Net income attributable to non-controlling interest
 
—

 
—

 
—

 
1,411

 
1,411

Net income attributable to BOK Financial Corp.
 
$
76,438

 
$
34,184

 
$
10,295

 
$
60,326

 
$
181,243

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
10,008,708

 
$
5,757,046

 
$
4,195,283

 
$
5,566,513

 
$
25,527,550

Average invested capital
 
864,167

 
288,351

 
176,149

 
1,523,316

 
2,851,983

 
 
 
 
 
 
 
 
 
 
 
Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.54
%
 
1.19
%
 
0.49
%
 


 
1.43
%
Return on average invested capital
 
17.79
%
 
23.91
%
 
11.75
%
 


 
12.78
%
Efficiency ratio
 
50.14
%
 
66.60
%
 
85.48
%
 


 
61.14
%


- 108 -



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

 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
85,325

 
$
21,358

 
$
7,926

 
$
59,392

 
$
174,001

Net interest revenue (expense) from internal sources
 
(7,444
)
 
7,675

 
3,696

 
(3,927
)
 
—

Net interest revenue
 
77,881

 
29,033

 
11,622

 
55,465

 
174,001

Provision for (reduction of) allowances for credit losses
 
4,829

 
3,049

 
623

 
(5,801
)
 
2,700

Net interest revenue after provision for (reduction of) allowances for credit losses
 
73,052

 
25,984

 
10,999

 
61,266

 
171,301

Other operating revenue
 
36,014

 
57,486

 
42,788

 
6,672

 
142,960

Other operating expense
 
57,447

 
71,852

 
47,397

 
26,513

 
203,209

Income before taxes
 
51,619

 
11,618

 
6,390

 
41,425

 
111,052

Federal and state income tax
 
20,080

 
4,519

 
2,486

 
12,272

 
39,357

Net income
 
31,539

 
7,099

 
3,904

 
29,153

 
71,695

Net income attributable to non-controlling interest
 
—

 
—

 
—

 
2,688

 
2,688

Net income attributable to BOK Financial Corp.
 
$
31,539

 
$
7,099

 
$
3,904

 
$
26,465

 
$
69,007

Average assets
 
$
9,174,216

 
$
5,864,942

 
$
3,883,815

 
$
5,056,262

 
$
23,979,235

Average invested capital
 
867,491

 
271,353

 
176,070

 
1,335,975

 
2,650,889

Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.38
%
 
0.49
%
 
0.40
%
 


 
1.15
%
Return on average invested capital
 
14.58
%
 
10.49
%
 
8.89
%
 


 
10.44
%
Efficiency ratio
 
50.44
%
 
77.47
%
 
87.95
%
 


 
62.23
%


- 109 -



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

 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
168,583

 
$
40,022

 
$
16,150

 
$
119,885

 
$
344,640

Net interest revenue (expense) from internal sources
 
(16,718
)
 
17,080

 
6,667

 
(7,029
)
 
—

Net interest revenue
 
151,865

 
57,102

 
22,817

 
112,856

 
344,640

Provision for (reduction of) allowances for credit losses
 
11,605

 
5,731

 
1,061

 
(9,447
)
 
8,950

Net interest revenue after provision for (reduction of) allowances for credit losses
 
140,260

 
51,371

 
21,756

 
122,303

 
335,690

Other operating revenue
 
71,430

 
94,968

 
82,756

 
11,384

 
260,538

Other operating expense
 
113,198

 
124,054

 
91,102

 
53,304

 
381,658

Income before taxes
 
98,492

 
22,285

 
13,410

 
80,383

 
214,570

Federal and state income tax
 
38,313

 
8,669

 
5,216

 
25,911

 
78,109

Net income
 
60,179

 
13,616

 
8,194

 
54,472

 
136,461

Net income attributable to non-controlling interest
 
—

 
—

 
—

 
2,680

 
2,680

Net income attributable to BOK Financial Corp.
 
$
60,179

 
$
13,616

 
$
8,194

 
$
51,792

 
$
133,781

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
9,068,308

 
$
5,992,191

 
$
3,862,949

 
$
4,926,163

 
$
23,849,611

Average invested capital
 
865,439

 
272,301

 
175,506

 
1,294,835

 
2,608,081

 
 
 
 
 
 
 
 
 
 
 
Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.34
%
 
0.46
%
 
0.43
%
 


 
1.13
%
Return on average invested capital
 
14.02
%
 
10.08
%
 
9.41
%
 


 
10.34
%
Efficiency ratio
 
50.70
%
 
77.44
%
 
86.76
%
 


 
61.70
%
(11) 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 transaction 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;

- 110 -



•
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.

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 this evaluation, we determined that the results represent prices that would be received to sell assets or paid to transfer liabilities in orderly transactions in the current market.

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 June 30, 2012 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
$
53,514

 
$
992

 
$
52,522

 
$
—

U.S. agency residential mortgage-backed securities
 
46,502

 
—

 
46,502

 
—

Municipal and other tax-exempt securities
 
44,632

 
—

 
44,632

 
1,852

Other trading securities
 
4,669

 
—

 
4,545

 
124

Total trading securities
 
$
149,317

 
992

 
148,201

 
1,976

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,003

 
1,003

 
—

 
—

Municipal and other tax-exempt
 
88,458

 
—

 
46,796

 
41,662

U.S. agency residential mortgage-backed securities
 
9,903,532

 
—

 
9,903,532

 
—

Privately issued residential mortgage-backed securities
 
317,761

 
—

 
317,761

 
—

Other debt securities
 
36,286

 
—

 
30,898

 
5,388

Perpetual preferred stock
 
23,431

 
—

 
23,431

 
—

Equity securities and mutual funds
 
24,944

 
6,912

 
18,032

 
—

Total available for sale securities
 
10,395,415

 
7,915

 
10,340,450

 
47,050

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
299,467

 
—

 
299,467

 
—

Corporate debt securities
 
25,710

 
—

 
25,710

 
—

Total fair value option securities
 
325,177

 
—

 
325,177

 
—

Residential mortgage loans held for sale
 
259,174

 
—

 
259,174

 
—

Mortgage servicing rights1
 
91,783

 
—

 
—

 
91,783

Derivative contracts, net of cash margin2
 
366,204

 
802

 
365,402

 
—

Other assets – private equity funds
 
31,492

 
—

 
—

 
31,492

Liabilities:
 
 

 
 

 
 

 
 

Derivative contracts, net of cash margin2
 
370,053

 
251

 
369,802

 
—

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 5, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type.

- 111 -



The fair value of financial assets and liabilities that are measured on a recurring basis are as follows as of December 31, 2011 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
Assets:
 
 
 
 
 
 
 
 
 
Trading securities
 
$
76,800

 
$
—

 
$
76,623

 
$
177

 
 
 
 
 
 
 
 
 
 
 
Available for sale securities:
 
 

 
 

 
 

 
 

 
U.S. Treasury
 
1,006

 
1,006

 
—

 
—

 
Municipal and other tax-exempt
 
68,837

 
—

 
26,484

 
42,353

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

 
—

 
9,588,177

 
—

 
Privately issued residential mortgage-backed securities
 
419,166

 
—

 
419,166

 
—

 
Other debt securities
 
36,495

 
—

 
30,595

 
5,900

 
Perpetual preferred stock
 
18,446

 
—

 
18,446

 
—

 
Equity securities and mutual funds
 
47,238

 
23,596

 
23,642

 
—

 
Total available for sale securities
 
10,179,365

 
24,602

 
10,106,510

 
48,253

 
 
 
 
 
 
 
 
 
 
 
Fair value option securities
 
651,226

 
—

 
651,226

 
—

 
Residential mortgage loans held for sale
 
188,125

 
—

 
188,125

 
—

 
Mortgage servicing rights
 
86,783

 
—

 
—

 
86,783

1 
Derivative contracts, net of cash margin 2
 
293,859

 
457

 
293,402

 
—

 
Other assets – private equity funds
 
30,902

 
—

 
—

 
30,902

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
Derivative contracts, net of cash margin 2
 
236,522

 
—

 
236,522

 
—

 
1 
A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 5, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type.


- 112 -



The fair value of financial assets and liabilities that are measured on a recurring basis are as follows as of June 30, 2011 (in thousands):
 
 
Total
 
Quoted Prices in
Active Markets for Identical Instruments
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Trading securities
 
$
99,846

 
$
2,327

 
$
97,519

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities:
 
 

 
 

 
 

 
 

 
 
U.S. Treasury
 
1,003

 
1,003

 
—

 
—

 
 
Municipal and other tax-exempt
 
70,210

 
—

 
26,552

 
43,658

 
 
U.S. agency residential mortgage-backed securities
 
8,893,789

 
—

 
8,893,789

 
—

 
 
Privately issued residential mortgage-backed securities
 
513,222

 
—

 
513,222

 
—

 
 
Other debt securities
 
5,893

 
—

 
—

 
5,893

 
 
Perpetual preferred stock
 
22,694

 
—

 
22,694

 
—

 
 
Equity securities and mutual funds
 
60,197

 
41,557

 
18,640

 
—

 
 
Total available for sale securities
 
9,567,008

 
42,560

 
9,474,897

 
49,551

 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value option securities
 
553,231

 
—

 
553,231

 
—

 
 
Residential mortgage loans held for sale
 
169,609

 
—

 
169,609

 
—

 
 
Mortgage servicing rights
 
109,192

 
—

 
—

 
109,192

 
1 
Derivative contracts, net of cash margin 2
 
229,887

 
—

 
229,887

 
—

 
 
Other assets – private equity funds
 
28,313

 
—

 


 
28,313

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 
Derivative contracts, net of cash margin 2
 
173,917

 
—

 
173,917

 
—

 
 
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 5, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type.

The following represents the changes for the three months ended June 30, 2012 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):

 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Other assets – private equity funds
Balance at March 31, 2012
 
$
41,977

 
$
5,900

 
$
30,993

Purchases and capital calls
 
—

 
—

 
820

Redemptions and distributions
 
(363
)
 
(500
)
 
(2,559
)
Gain (loss) recognized in earnings:
 
 

 
 

 
 

Gain on other assets, net
 
—

 
—

 
2,238

Gain on available for sale securities, net
 
—

 
—

 
—

Other-than-temporary impairment losses
 
—

 
—

 
—

Other comprehensive gain (loss)
 
48

 
(12
)
 
—

Balance, June 30, 2012
 
$
41,662

 
$
5,388

 
$
31,492



- 113 -



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

 
$
5,900

 
$
30,902

Purchases and capital calls
 
—

 
—

 
1,909

Redemptions and distributions
 
(463
)
 
(500
)
 
(3,166
)
Gain (loss) recognized in earnings:
 
 

 
 

 
 

Brokerage and trading revenue
 
—

 
—

 
—

Gain on other assets, net
 
—

 
—

 
1,847

Gain on securities, net
 
1

 
—

 
—

Other-than-temporary impairment losses
 
—

 
—

 
—

Other comprehensive (loss)
 
(229
)
 
(12
)
 
—

Balance, June 30, 2012
 
$
41,662

 
$
5,388

 
$
31,492


The following represents the changes for the three months ended June 30, 2011 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Other assets – private equity funds
Balance at March 31, 2011
 
$
43,767

 
$
5,899

 
$
25,046

Purchases, sales, issuances and settlements, net
 
—

 
—

 
746

Redemptions and distributions
 
—

 
—

 
(783
)
Gain (loss) recognized in earnings
 
 

 
 

 
 

Brokerage and trading revenue
 
—

 
—

 
—

Gain (loss) on other assets, net
 
—

 
—

 
3,304

Gain on securities, net
 
—

 
—

 
—

Other-than-temporary impairment losses
 
(521
)
 
—

 
—

Other comprehensive (loss)
 
412

 
(6
)
 
—

Balance, June 30, 2011
 
$
43,658

 
$
5,893

 
$
28,313


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

 
$
6,400

 
$
25,436

Purchases, sales, issuances and settlements, net
 
7,520

 
—

 
1,652

Redemptions and distributions
 
(9,975
)
 
(500
)
 
(2,185
)
Gain (loss) recognized in earnings
 
 

 
 

 
 

Brokerage and trading revenue
 
(576
)
 
—

 
—

Gain (loss) on other assets, net
 
—

 
—

 
3,410

Gain on securities, net
 
18

 
—

 
—

Other-than-temporary impairment losses
 
(521
)
 
—

 
—

Other comprehensive (loss)
 
99

 
(7
)
 
—

Balance, June 30, 2011
 
$
43,658

 
$
5,893

 
$
28,313




- 114 -



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.
 
These securities may be either investment grade or below investment grade. As of June 30, 2012, taxable securities rated investment grade by all nationally recognized rating agencies are generally valued to yield 1.30% to 1.75%. Average yields on comparable short-term taxable securities are generally less than 1%. Tax-exempt securities rated investment grade by all nationally recognized rating agencies are generally valued to yield a range of 1.00% to 1.50%, which represents a spread of 75 to 80 basis points over average yields of comparable tax-exempt securities as of June 30, 2012. The resulting estimated fair value of securities rated investment grade ranges from 98.88% to 99.49% of par value at June 30, 2012. The fair value of these securities is sensitive primarily to changes in interest rate spreads. At June 30, 2012, a 100 basis point increase in the spreads over average yields for comparable taxable and tax-exempt securities would result in an additional decrease in the fair value of these securities of $337 thousand.

Approximately $13 million of our municipal and other tax-exempt securities are rated below investment grade by at least one of the three nationally recognized rating agencies. The fair value of these securities was determined based on yields ranging from 6.20% to 9.16%. These yields were determined using a spread of 600 basis points over comparable municipal securities of varying durations. The resulting estimated fair value of securities rated below investment grade ranges from 75.21% to 75.49% of par value as of June 30, 2012. The fair value of these municipal and other debt securities based on Significant Other Unobservable Inputs is primarily sensitive to changes in interest rate spreads. At June 30, 2012, 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 $384 thousand.

Taxable securities rated investment grade by all nationally recognized rating agencies were generally valued at par to yield 1.60% to 1.80% at December 31, 2011 and 1.69% to 1.75% at June 30, 2011. Average yields on comparable short-term taxable securities were less than 1% at both December 31, 2011 and June 30, 2011. Tax-exempt investment grade securities were valued to yield a range of 1.00% to 1.50% at December 31, 2011 and 1.05% to 1.35% at June 30, 2011. This represents a spread of 75 to 80 basis points over average yields for comparable securities. The resulting estimated fair value of securities rated investment grade ranged from 98.79% to 100.00% of par at December 31, 2011 and 98.89% to 99.34% of par at June 30, 2011.

After other-than-temporary impairment charges, municipal and other tax-exempt securities rated below investment grade by at least one of the nationally recognized rating agencies totaled $13 million at December 31, 2011 and $14 million at June 30, 2011. These below investment grade municipal and other tax-exempt securities were valued based on a range of 6.25% to 9.58% at December 31, 2011 and 6.23% to 10.30% at June 30, 2011. This represented a spread of 600 basis points over comparable municipal securities of varying durations. The resulting estimated fair value of securities rated below investment grade ranged from 76.45% to 76.99% at December 31, 2011 and 82.66% to 82.83% of par value at June 30, 2011

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

- 115 -



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. Private equity fund assets are long-term, illiquid investments. No secondary market exists for these assets. They may only be realized through cash distributions from the underlying funds.

There were no transfers in or out of quoted prices in active markets for identical instruments, significant other observable inputs or significant unobservable input during the six months ended June 30, 2012 and 2011, respectively.


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

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

The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period.  The carrying value represents only those assets with a balance at June 30, 2012 for which the fair value was adjusted during the six months ended June 30, 2012:
 
Carrying Value at June 30, 2012
 
Fair Value Adjustments for the
three months ended June 30, 2012 Recognized in:
 
Fair Value Adjustments for the six months ended June 30, 2012 Recognized in:
 
Quoted Prices
in Active Markets for Identical Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Gross charge-offs against allowance for loan losses
 
Gross charge-offs against accrual for recourse loans
 
Net losses and expenses of repossessed assets, net
 
Gross charge-offs against allowance for loan losses
 
Gross charge-offs against accrual for recourse loans
 
Net losses and expenses of repossessed assets, net
Impaired loans
$
—

 
$
29,369

 
$
2,881

 
$
4,406

 
$
311

 
$
—

 
$
10,826

 
$
311

 
$
—

Real estate and other repossessed assets
—

 
27,474

 
3,035

 
—

 
—

 
4,488

 
—

 
—

 
6,876

 

- 116 -



The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period. he carrying value represents only those assets with a balance at June 30, 2011 for which the fair value was adjusted during the six months ended June 30, 2011:
 
Carrying Value at June 30, 2011
 
Fair Value Adjustments for the Three Months Ended June 30, 2011 Recognized in:
 
Fair Value Adjustments for the Six Months Ended June 30, 2011 Recognized in:
 
Quoted Prices
in Active Markets for Identical Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Gross charge-offs against allowance for loan losses
 
Gross charge-offs against accrual for recourse loans
 
Net losses and expenses of repossessed assets, net
 
Gross charge-offs against allowance for loan losses
 
Gross charge-offs against accrual for recourse loans
 
Net losses and expenses of repossessed assets, net
Impaired loans
$
—

 
$
17,949

 
$
—

 
$
4,071

 
$
146

 
$
—

 
$
4,719

 
$
146

 
$
—

Real estate and other repossessed assets
—

 
50,885

 
—

 
—

 
—

 
4,127

 
—

 
—

 
8,863


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.

- 117 -



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 June 30, 2012 (dollars in thousands):
 
 
Carrying
Value
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
 
Estimated
Fair
Value
Cash and cash equivalents
 
$
639,263

 
 
 
 
 
 
 
$
639,263

Trading securities:
 
 
 
 
 
 
 
 
 
 
Obligations of the U.S. government
 
53,514

 
 
 
 
 
 
 
53,514

U.S. agency residential mortgage-backed securities
 
46,502

 
 
 
 
 
 
 
46,502

Municipal and other tax-exempt securities
 
44,632

 
 
 
 
 
 
 
44,632

Other trading securities
 
4,669

 
 
 
 
 
 
 
4,669

Total trading securities
 
149,317

 
 
 
 
 
 
 
149,317

Investment securities:
 
 

 
 
 
 
 
 
 
 

Municipal and other tax-exempt
 
126,168

 
 
 
 
 
 
 
130,308

U.S. agency residential mortgage-backed securities
 
102,347

 
 
 
 
 
 
 
105,535

Other debt securities
 
183,964

 
 
 
 
 
 
 
204,795

Total investment securities
 
412,479

 
 
 
 
 
 
 
440,638

Available for sale securities:
 
 

 
 
 
 
 
 
 
 

U.S. Treasury
 
1,003

 
 
 
 
 
 
 
1,003

Municipal and other tax-exempt
 
88,458

 
 
 
 
 
 
 
88,458

U.S. agency residential mortgage-backed securities
 
9,903,532

 
 
 
 
 
 
 
9,903,532

Privately issued residential mortgage-backed securities
 
317,761

 
 
 
 
 
 
 
317,761

Other debt securities
 
36,286

 
 
 
 
 
 
 
36,286

Perpetual preferred stock
 
23,431

 
 
 
 
 
 
 
23,431

Equity securities and mutual funds
 
24,944

 
 
 
 
 
 
 
24,944

Total available for sale securities
 
10,395,415

 
 
 
 
 
 
 
10,395,415

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
299,467

 
 
 
 
 
 
 
299,467

Corporate debt securities
 
25,710

 
 
 
 
 
 
 
25,710

Total fair value option securities
 
325,177

 
 
 
 
 
 
 
325,177

Residential mortgage loans held for sale
 
259,174

 
 
 
 
 
 
 
259,174

Loans:
 
 

 
 
 
 
 
 
 
 

Commercial
 
7,052,544

 
0.25 - 30.00%
 
0.70

 
0.63 - 3.68%

 
7,010,486

Commercial real estate
 
2,126,214

 
0.38 - 18.00%
 
0.92

 
1.33 - 3.33%

 
2,105,823

Residential mortgage
 
2,005,097

 
0.38 - 18.00%
 
3.10

 
1.08 - 3.52%

 
2,042,362

Consumer
 
392,576

 
0.38 - 21.00%
 
0.34

 
1.59 - 3.79%

 
387,423

Total loans
 
11,576,431

 
 
 
 

 
 

 
11,546,094

Allowance for loan losses
 
(231,669
)
 
 
 
 

 
 

 
—

Net loans
 
11,344,762

 
 
 
 

 
 

 
11,546,094

Mortgage servicing rights
 
91,783

 
 
 
 

 
 

 
91,783

Derivative instruments with positive fair value, net of cash margin
 
366,204

 
 
 
 

 
 

 
366,204

Other assets – private equity funds
 
31,492

 
 
 
 

 
 

 
31,492

Deposits with no stated maturity
 
15,254,247

 
 
 
 

 
 

 
15,157,587

Time deposits
 
3,107,950

 
0.01 - 9.64%
 
2.17

 
0.92 - 1.31%

 
3,175,687

Other borrowings
 
2,648,753

 
0.09 - 5.25%
 
—

 
0.09 - 2.70%

 
2,642,598

Subordinated debentures
 
353,378

 
1.16 - 5.00%
 
4.02

 
2.40
%
 
350,813

Derivative instruments with negative fair value, net of cash margin
 
370,053

 
 
 
 

 
 

 
370,053


- 118 -



The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of December 31, 2011 (dollars in thousands):
 
 
Carrying
Value
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
 
Estimated
Fair
Value
Cash and cash equivalents
 
$
986,365

 
 
 
 
 
 
 
$
986,365

Trading securities
 
76,800

 
 
 
 
 
 
 
76,800

Investment securities:
 
 

 
 
 
 
 
 
 
 

Municipal and other tax-exempt
 
128,697

 
 
 
 
 
 
 
133,670

U.S. agency residential mortgage-backed securities
 
121,704

 
 
 
 
 
 
 
120,536

Other debt securities
 
188,835

 
 
 
 
 
 
 
208,451

Total investment securities
 
439,236

 
 
 
 
 
 
 
462,657

 
 
 
 
 
 
 
 
 
 
 
Available for sale securities:
 
 

 
 
 
 
 
 
 
 

U.S. Treasury
 
1,006

 
 
 
 
 
 
 
1,006

Municipal and other tax-exempt
 
68,837

 
 
 
 
 
 
 
68,837

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

 
 
 
 
 
 
 
9,588,177

Privately issued residential mortgage-backed securities
 
419,166

 
 
 
 
 
 
 
419,166

Other debt securities
 
36,495

 
 
 
 
 
 
 
36,495

Perpetual preferred stock
 
18,446

 
 
 
 
 
 
 
18,446

Equity securities and mutual funds
 
47,238

 
 
 
 
 
 
 
47,238

Total available for sale securities
 
10,179,365

 
 
 
 
 
 
 
10,179,365

 
 
 
 
 
 
 
 
 
 
 
Fair value option securities
 
651,226

 
 
 
 
 
 
 
651,226

Residential mortgage loans held for sale
 
188,125

 
 
 
 
 
 
 
188,125

Loans:
 
 

 
 
 
 

 
 

 
 

Commercial
 
6,571,454

 
0.25 - 30.00%
 
0.57

 
0.63 - 3.85%

 
6,517,795

Commercial real estate
 
2,279,909

 
0.38 - 18.00%
 
1.26

 
0.28 - 3.51%

 
2,267,375

Residential mortgage
 
1,970,461

 
0.38 - 18.00%
 
3.26

 
1.14 - 3.70%

 
2,034,898

Consumer
 
447,919

 
0.38 - 21.00%
 
0.42

 
1.88 - 3.88%

 
436,490

Total loans
 
11,269,743

 
 
 
 

 
 

 
11,256,558

Allowance for loan losses
 
(253,481
)
 
 
 
 

 
 

 
—

Net loans
 
11,016,262

 
 
 
 

 
 

 
11,256,558

 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
86,783

 
 
 
 

 
 

 
86,783

Derivative instruments with positive fair value, net of cash margin
 
293,859

 
 
 
 

 
 

 
293,859

Other assets – private equity funds
 
30,902

 
 
 
 

 
 

 
30,902

Deposits with no stated maturity
 
15,380,598

 
 
 
 

 
 

 
15,380,598

Time deposits
 
3,381,982

 
0.01 - 9.64%
 
2.07

 
1.02 - 1.43%

 
3,441,610

Other borrowings
 
2,370,867

 
0.25 - 6.58%
 
—

 
0.04 - 2.76%

 
2,369,224

Subordinated debentures
 
398,881

 
5.19 - 5.82%
 
1.44

 
3.29
%
 
411,243

Derivative instruments with negative fair value, net of cash margin
 
236,522

 
 
 
 

 
 

 
236,522

A1pha-509




- 119 -



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 June 30, 2011 (dollars in thousands):
 
 
Carrying
Value
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
 
Estimated
Fair
Value
Cash and cash equivalents
 
$
1,110,761

 
 
 
 
 
 
 
$
1,110,761

Trading securities
 
99,846

 
 
 
 
 
 
 
99,846

Investment securities:
 
 

 
 
 
 
 
 
 
 

Municipal and other tax-exempt
 
160,870

 
 
 
 
 
 
 
165,449

Other debt securities
 
188,713

 
 
 
 
 
 
 
203,798

Total investment securities
 
349,583

 
 
 
 
 
 
 
369,247

 
 
 
 
 
 
 
 
 
 
 
Available for sale securities:
 
 

 
 
 
 
 
 
 
 

U.S. Treasury
 
1,003

 
 
 
 
 
 
 
1,003

Municipal and other tax-exempt
 
70,210

 
 
 
 
 
 
 
70,210

U.S. agency residential mortgage-backed securities
 
8,893,789

 
 
 
 
 
 
 
8,893,789

Privately issued residential mortgage-backed securities
 
513,222

 
 
 
 
 
 
 
513,222

Other debt securities
 
5,893

 
 
 
 
 
 
 
5,893

Perpetual preferred stock
 
22,694

 
 
 
 
 
 
 
22,694

Equity securities and mutual funds
 
60,197

 
 
 
 
 
 
 
60,197

Total available for sale securities
 
9,567,008

 
 
 
 
 
 
 
9,567,008

 
 
 
 
 
 
 
 
 
 
 
Fair value option securities
 
553,231

 
 
 
 
 
 
 
553,231

Residential mortgage loans held for sale
 
169,609

 
 
 
 
 
 
 
169,609

 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 
 
 
 
 
 
 

Commercial
 
6,178,596

 
0.25 - 18.00%
 
0.60

 
0.72 - 4.50%

 
6,085,941

Commercial real estate
 
2,183,715

 
0.38 - 18.00%
 
1.18

 
0.28 - 3.66%

 
2,134,950

Residential mortgage
 
1,867,997

 
0.38 - 18.00%
 
3.32

 
0.74 - 4.31%

 
1,915,710

Consumer
 
507,236

 
0.38 - 21.00%
 
0.53

 
1.96 - 3.74%

 
507,831

Total loans
 
10,737,544

 
 
 
 

 
 

 
10,644,432

Allowance for loan losses
 
(286,611
)
 
 
 
 

 
 

 
—

Net loans
 
10,450,933

 
 
 
 

 
 

 
10,644,432

 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
109,192

 
 
 
 

 
 

 
109,192

Derivative instruments with positive fair value, net of cash margin
 
229,887

 
 
 
 

 
 

 
229,887

Other assets – private equity funds
 
28,313

 
 
 
 

 
 

 
28,313

Deposits with no stated maturity
 
13,951,177

 
 
 
 

 
 

 
13,951,177

Time deposits
 
3,634,700

 
0.01 - 9.64%
 
1.91

 
0.76 - 1.45%

 
3,655,527

Other borrowings
 
2,962,759

 
0.07 - 6.58%
 
—

 
0.07 - 2.65%

 
2,962,773

Subordinated debentures
 
398,788

 
5.19 - 5.82%
 
1.87

 
3.50
%
 
412,242

Derivative instruments with negative fair value, net of cash margin
 
173,917

 
 
 
 

 
 

 
173,917


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.
 

- 120 -



The following methods and assumptions were used in estimating the fair value of these financial instruments:
 
Cash and Cash Equivalents
 
The book value reported in the consolidated balance sheet for cash and short-term instruments approximates those assets’ fair values.
 
Securities
 
The fair values of securities are generally based on Significant Other Observable Inputs such as quoted prices for comparable instruments or interest rates and credit spreads, yield curves, volatilities prepayment speeds and loss severities. 

Loans
 
The fair value of loans, excluding loans held for sale, are based on discounted cash flow analyses using interest rates and credit and liquidity spreads currently being offered for loans with similar remaining terms to maturity and risk, adjusted for the impact of interest rate floors and ceilings which are classified as Significant Unobservable Inputs. The fair values of loans were estimated to approximate their discounted cash flows less loan loss allowances allocated to these loans of $191 million at June 30, 2012, $207 million at December 31, 2011 and $259 million at June 30, 2011.
 
Deposits
 
The fair values of time deposits are based on discounted cash flow analyses using interest rates currently being offered on similar transactions which are considered Significant Unobservable Inputs. Estimated fair value of deposits with no stated maturity, which includes demand deposits, transaction deposits, money market deposits and savings accounts, is equal to the amount payable on demand. Although market premiums paid reflect an additional value for these low cost deposits, adjusting fair value for the expected benefit of these deposits is prohibited. Accordingly, the positive effect of such deposits is not included in the tables above.
 
Other Borrowings and Subordinated Debentures
 
The fair values of these instruments are based upon discounted cash flow analyses using interest rates currently being offered on similar instruments which are considered Significant Unobservable Inputs

Off-Balance Sheet Instruments
 
The fair values of commercial loan commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of these off-balance sheet instruments were not significant at June 30, 2012, December 31, 2011 or June 30, 2011.

Fair Value Election

As more fully disclosed in Note 2 and Note 5 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.



- 121 -



(12) 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
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
Amount:
 
 
 
 
 
 
 
 
Federal statutory tax
 
$
53,414

 
$
38,868

 
$
98,463

 
$
75,100

Tax exempt revenue
 
(1,334
)
 
(1,331
)
 
(2,598
)
 
(2,694
)
Effect of state income taxes, net of federal benefit
 
3,572

 
2,738

 
6,570

 
5,376

Utilization of tax credits
 
(1,467
)
 
(594
)
 
(2,564
)
 
(1,093
)
Bank-owned life insurance
 
(976
)
 
(979
)
 
(1,955
)
 
(1,964
)
Other, net
 
(60
)
 
655

 
753

 
3,384

Total
 
$
53,149

 
$
39,357

 
$
98,669

 
$
78,109



 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
Percent of pretax income:
 
 
 
 
 
 
 
 
Federal statutory tax
 
35
 %
 
35
 %
 
35
 %
 
35
 %
Tax exempt revenue
 
(1
)
 
(1
)
 
(1
)
 
(1
)
Effect of state income taxes, net of federal benefit
 
3

 
3

 
2

 
3

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

 
—

 
1

 
1

Total
 
35
 %
 
35
 %
 
35
 %
 
36
 %

During the first quarter of 2012, the Internal Revenue Service completed an audit of the Company's federal income tax return for the year ended December 31, 2008 with no adjustments.
(13) Subsequent Events

The Company evaluated events from the date of the consolidated financial statements on June 30, 2012 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q. No events were identified requiring recognition in and/or disclosure in the consolidated financial statements other than those previously discussed in Note 7.




- 122 -




Six-Month Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share Data)
 
Six Months Ended
 
 
June 30, 2012
 
June 30, 2011
 
 
Average
Balance
 
Revenue/
Expense1
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense1
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Funds sold and resell agreements
 
$
15,286

 
$
6

 
0.08
%
 
$
14,714

 
$
7

 
0.10
%
Trading securities
 
119,532

 
994

 
1.67
%
 
70,494

 
1,159

 
3.32
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable3
 
296,709

 
8,716

 
5.91
%
 
168,902

 
5,145

 
6.14
%
Tax-exempt3
 
126,878

 
3,010

 
4.89
%
 
179,621

 
4,314

 
4.85
%
Total investment securities
 
423,587

 
11,726

 
5.61
%
 
348,523

 
9,459

 
5.48
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable3
 
9,941,938

 
121,239

 
2.50
%
 
9,393,136

 
138,992

 
3.09
%
Tax-exempt3
 
77,315

 
1,836

 
4.91
%
 
67,402

 
1,801

 
5.39
%
Total available for sale securities3
 
10,019,253

 
123,075

 
2.52
%
 
9,460,538

 
140,793

 
3.10
%
Fair value option securities
 
445,599

 
5,798

 
2.72
%
 
457,917

 
8,473

 
4.14
%
Residential mortgage loans held for sale
 
186,842

 
3,552

 
3.82
%
 
130,211

 
2,844

 
4.40
%
Loans2
 
11,525,766

 
260,458

 
4.54
%
 
10,667,329

 
249,653

 
4.72
%
Less: allowance for loan losses
 
247,571

 
 
 
 
 
293,151

 
 
 
 
Loans, net of allowance
 
11,278,195

 
260,458

 
4.64
%
 
10,374,178

 
249,653

 
4.85
%
Total earning assets3
 
22,488,294

 
405,609

 
3.66
%
 
20,856,575

 
412,388

 
4.06
%
Cash and other assets
 
3,039,256

 
 
 
 
 
2,993,036

 
 
 
 
Total assets
 
$
25,527,550

 
 
 
 
 
$
23,849,611

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and equity
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction
 
$
9,049,819

 
$
7,398

 
0.16
%
 
$
9,407,130

 
$
13,714

 
0.29
%
Savings
 
250,414

 
289

 
0.23
%
 
207,192

 
390

 
0.38
%
Time
 
3,189,291

 
26,201

 
1.65
%
 
3,624,602

 
33,098

 
1.84
%
Total interest-bearing deposits
 
12,489,524

 
33,888

 
0.55
%
 
13,238,924

 
47,202

 
0.72
%
Funds purchased
 
1,538,984

 
986

 
0.13
%
 
995,780

 
596

 
0.12
%
Repurchase agreements
 
1,139,538

 
530

 
0.09
%
 
1,033,127

 
1,554

 
0.30
%
Other borrowings
 
79,789

 
1,865

 
4.70
%
 
166,331

 
2,696

 
3.27
%
Subordinated debentures
 
377,525

 
9,064

 
4.83
%
 
398,745

 
11,118

 
5.62
%
Total interest-bearing liabilities
 
15,625,360

 
46,333

 
0.60
%
 
15,832,907

 
63,166

 
0.80
%
Non-interest bearing demand deposits
 
6,063,012

 
 
 
 
 
4,410,625

 
 
 
 
Other liabilities
 
987,195

 
 
 
 
 
997,998

 
 
 
 
Total equity
 
2,851,983

 
 
 
 
 
2,608,081

 
 
 
 
Total liabilities and equity
 
$
25,527,550

 
 
 
 
 
$
23,849,611

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax-equivalent Net Interest Revenue3
 
 
 
$
359,276

 
3.07
%
 
 
 
$
349,222

 
3.26
%
Tax-equivalent Net Interest Revenue to Earning Assets3
 
 
 
 
 
3.25
%
 
 
 
 
 
3.43
%
Less tax-equivalent adjustment1
 
 
 
4,346

 
 
 
 
 
4,582

 
 
Net Interest Revenue
 
 
 
354,930

 
 
 
 
 
344,640

 
 
Provision for (reduction of) allowance for credit losses
 
 
 
(8,000
)
 
 
 
 
 
8,950

 
 
Other operating revenue
 
 
 
327,416

 
 
 
 
 
260,538

 
 
Other operating expense
 
 
 
409,023

 
 
 
 
 
381,658

 
 
Income before taxes
 
 
 
281,323

 
 
 
 
 
214,570

 
 
Federal and state income tax
 
 
 
98,669

 
 
 
 
 
78,109

 
 
Net income before non-controlling interest
 
 
 
182,654

 
 
 
 
 
136,461

 
 
Net income attributable to non-controlling interest
 
 
 
1,411

 
 
 
 
 
2,680

 
 
Net income attributable to BOK Financial Corp.
 
 
 
$
181,243

 
 
 
 
 
$
133,781

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Net income:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
2.66

 
 

 
 

 
$
1.96

 
 

Diluted
 
 

 
$
2.65

 
 

 
 

 
$
1.95

 
 

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.

- 123 -




Quarterly Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Three Months Ended
 
 
June 30, 2012
 
March 31, 2012
 
 
Average
Balance
 
Revenue/
Expense1
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense1
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Funds sold and resell agreements
 
$
19,187

 
$
4

 
0.08
%
 
$
11,385

 
$
2

 
0.07
%
Trading securities
 
143,770

 
548

 
1.53
%
 
95,293

 
446

 
1.88
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable3
 
290,557

 
4,282

 
5.93
%
 
302,861

 
4,434

 
5.89
%
Tax-exempt3
 
125,727

 
1,461

 
4.90
%
 
128,029

 
1,549

 
4.87
%
Total investment securities
 
416,284

 
5,743

 
5.63
%
 
430,890

 
5,983

 
5.59
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable3
 
10,007,368

 
61,583

 
2.52
%
 
9,876,508

 
59,656

 
2.48
%
Tax-exempt3
 
83,911

 
943

 
4.69
%
 
70,719

 
893

 
5.17
%
Total available for sale securities3
 
10,091,279

 
62,526

 
2.54
%
 
9,947,227

 
60,549

 
2.50
%
Fair value option securities
 
335,965

 
2,311

 
2.62
%
 
555,233

 
3,487

 
2.79
%
Residential mortgage loans held for sale
 
191,311

 
1,784

 
3.75
%
 
182,372

 
1,768

 
3.90
%
Loans2
 
11,614,722

 
132,391

 
4.58
%
 
11,436,811

 
128,067

 
4.50
%
Less allowance for loan losses
 
242,605

 
 
 
 
 
252,538

 
 
 
 
Loans, net of allowance
 
11,372,117

 
132,391

 
4.68
%
 
11,184,273

 
128,067

 
4.61
%
Total earning assets3
 
22,569,913

 
205,307

 
3.69
%
 
22,406,673

 
200,302

 
3.64
%
Cash and other assets
 
2,968,604

 
 
 
 
 
3,109,910

 
 
 
 
Total assets
 
$
25,538,517

 
 
 
 
 
$
25,516,583

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
8,779,659

 
$
3,572

 
0.16
%
 
$
9,319,978

 
$
3,826

 
0.17
%
Savings
 
259,386

 
147

 
0.23
%
 
241,442

 
142

 
0.24
%
Time
 
3,132,220

 
12,671

 
1.63
%
 
3,246,362

 
13,530

 
1.68
%
Total interest-bearing deposits
 
12,171,265

 
16,390

 
0.54
%
 
12,807,782

 
17,498

 
0.55
%
Funds purchased
 
1,740,354

 
674

 
0.16
%
 
1,337,614

 
312

 
0.09
%
Repurchase agreements
 
1,095,298

 
265

 
0.10
%
 
1,183,778

 
265

 
0.09
%
Other borrowings
 
86,667

 
853

 
3.96
%
 
72,911

 
1,012

 
5.58
%
Subordinated debentures
 
357,609

 
3,512

 
3.95
%
 
397,440

 
5,552

 
5.62
%
Total interest-bearing liabilities
 
15,451,193

 
21,694

 
0.56
%
 
15,799,525

 
24,639

 
0.63
%
Non-interest bearing demand deposits
 
6,278,342

 
 
 
 
 
5,847,682

 
 
 
 
Other liabilities
 
940,249

 
 
 
 
 
1,034,143

 
 
 
 
Total equity
 
2,868,733

 
 
 
 
 
2,835,233

 
 
 
 
Total liabilities and equity
 
$
25,538,517

 
 
 
 
 
$
25,516,583

 
 
 
 
Tax-equivalent Net Interest Revenue3
 
 
 
$
183,613

 
3.13
%
 
 
 
$
175,663

 
3.01
%
Tax-equivalent Net Interest Revenue to Earning Assets3
 
 
 
 
 
3.30
%
 
 
 
 
 
3.19
%
Less tax-equivalent adjustment1
 
 
 
2,252

 
 
 
 
 
2,094

 
 
Net Interest Revenue
 
 
 
181,361

 
 
 
 
 
173,569

 
 
Provision for (reduction of ) allowance for credit losses
 
 
 
(8,000
)
 
 
 
 
 
—

 
 
Other operating revenue
 
 
 
187,035

 
 
 
 
 
140,381

 
 
Other operating expense
 
 
 
223,786

 
 
 
 
 
185,237

 
 
Income before taxes
 
 
 
152,610

 
 
 
 
 
128,713

 
 
Federal and state income tax
 
 
 
53,149

 
 
 
 
 
45,520

 
 
Net income before non-controlling interest
 
 
 
99,461

 
 
 
 
 
83,193

 
 
Net income (loss) attributable to non-controlling interest
 
 
 
1,833

 
 
 
 
 
(422
)
 
 
Net income attributable to BOK Financial Corp.
 
 
 
$
97,628

 
 
 
 
 
$
83,615

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Net income:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
1.43

 
 

 
 

 
$
1.22

 
 

Diluted
 
 

 
$
1.43

 
 

 
 

 
$
1.22

 
 

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.

- 124 -



Three Months Ended
December 31, 2011
 
September 30, 2011
 
June 30, 2011
Average Balance
 
Revenue /Expense1
 
Yield / Rate
 
Average Balance
 
Revenue / Expense1
 
Yield / Rate
 
Average Balance
 
Revenue / Expense1
 
Yield / Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
12,035

 
$
3

 
0.10
%
 
$
12,344

 
$
5

 
0.16
%
 
$
8,814

 
$
3

 
0.14
%
97,972

 
689

 
2.79
%
 
88,576

 
637

 
2.85
%
 
80,113

 
584

 
2.92
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
314,217

 
4,677

 
5.91
%
 
194,371

 
2,759

 
5.63
%
 
183,084

 
2,800

 
6.13
%
129,109

 
1,565

 
4.81
%
 
135,256

 
1,683

 
4.94
%
 
174,614

 
2,100

 
4.82
%
443,326

 
6,242

 
5.59
%
 
329,627

 
4,442

 
5.35
%
 
357,698

 
4,900

 
5.49
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9,845,351

 
54,839

 
2.36
%
 
9,586,411

 
66,040

 
2.82
%
 
9,473,401

 
69,978

 
3.02
%
69,172

 
896

 
5.14
%
 
70,181

 
870

 
4.92
%
 
70,081

 
894

 
5.12
%
9,914,523

 
55,735

 
2.38
%
 
9,656,592

 
66,910

 
2.83
%
 
9,543,482

 
70,872

 
3.04
%
660,025

 
4,877

 
2.98
%
 
594,629

 
5,299

 
3.66
%
 
518,073

 
5,243

 
4.42
%
201,242

 
2,032

 
4.01
%
 
156,621

 
1,616

 
4.09
%
 
134,876

 
1,505

 
4.48
%
11,152,315

 
130,736

 
4.65
%
 
10,872,805

 
129,073

 
4.71
%
 
10,680,755

 
124,871

 
4.69
%
266,473

 
 
 
 
 
285,570

 
 
 
 
 
291,308

 
 
 
 
10,885,842

 
130,736

 
4.76
%
 
10,587,235

 
129,073

 
4.84
%
 
10,389,447

 
124,871

 
4.82
%
22,214,965

 
200,314

 
3.69
%
 
21,425,624

 
207,982

 
3.91
%
 
21,032,503

 
207,978

 
4.01
%
3,422,475

 
 
 
 
 
3,196,114

 
 
 
 
 
2,946,732

 
 
 
 
$
25,637,440

 
 
 
 
 
$
24,621,738

 
 
 
 
 
$
23,979,235

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
9,276,608

 
$
4,213

 
0.18
%
 
$
9,310,046

 
$
5,488

 
0.23
%
 
$
9,184,141

 
$
6,130

 
0.27
%
220,236

 
146

 
0.26
%
 
214,979

 
183

 
0.34
%
 
210,707

 
203

 
0.39
%
3,485,059

 
14,922

 
1.70
%
 
3,617,731

 
16,736

 
1.84
%
 
3,632,130

 
16,827

 
1.86
%
12,981,903

 
19,281

 
0.59
%
 
13,142,756

 
22,407

 
0.68
%
 
13,026,978

 
23,160

 
0.71
%
1,197,154

 
186

 
0.06
%
 
994,099

 
135

 
0.05
%
 
1,168,670

 
276

 
0.09
%
1,189,861

 
404

 
0.13
%
 
1,128,275

 
495

 
0.17
%
 
1,004,217

 
513

 
0.20
%
88,489

 
1,059

 
4.75
%
 
128,288

 
1,701

 
5.26
%
 
187,441

 
2,226

 
4.76
%
398,858

 
5,640

 
5.61
%
 
398,812

 
5,627

 
5.60
%
 
398,767

 
5,541

 
5.57
%
15,856,265

 
26,570

 
0.66
%
 
15,792,230

 
30,365

 
0.76
%
 
15,786,073

 
31,716

 
0.81
%
5,588,596

 
 
 
 
 
5,086,538

 
 
 
 
 
4,554,000

 
 
 
 
1,422,092

 
 
 
 
 
1,004,564

 
 
 
 
 
988,273

 
 
 
 
2,770,487

 
 
 
 
 
2,738,406

 
 
 
 
 
2,650,889

 
 
 
 
$
25,637,440

 
 
 
 
 
$
24,621,738

 
 
 
 
 
$
23,979,235

 
 
 
 
 
 
$
173,744

 
3.03
%
 
 
 
$
177,617

 
3.15
%
 
 
 
$
176,262

 
3.20
%
 
 
 
 
3.20
%
 
 
 
 
 
3.34
%
 
 
 
 
 
3.40
%
 
 
2,274

 
 
 
 
 
2,233

 
 
 
 
 
2,261

 
 
 
 
171,470

 
 
 
 
 
175,384

 
 
 
 
 
174,001

 
 
 
 
(15,000
)
 
 
 
 
 
—

 
 
 
 
 
2,700

 
 
 
 
138,027

 
 
 
 
 
173,977

 
 
 
 
 
142,960

 
 
 
 
219,197

 
 
 
 
 
220,896

 
 
 
 
 
203,209

 
 
 
 
105,300

 
 
 
 
 
128,465

 
 
 
 
 
111,052

 
 
 
 
37,396

 
 
 
 
 
43,006

 
 
 
 
 
39,357

 
 
 
 
67,904

 
 
 
 
 
85,459

 
 
 
 
 
71,695

 
 
 
 
911

 
 
 
 
 
358

 
 
 
 
 
2,688

 
 
 
 
$
66,993

 
 
 
 
 
$
85,101

 
 
 
 
 
$
69,007

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
$
0.98

 
 

 
 

 
$
1.24

 
 

 
 

 
$
1.01

 
 

 

 
$
0.98

 
 

 
 

 
$
1.24

 
 

 
 

 
$
1.00

 
 





- 125 -




Quarterly Earnings Trends – Unaudited
(In thousands, except share and per share data)
 
 
Three Months Ended
 
 
June 30,
2012
 
March 31,
2012
 
December 31,
2011
 
September 30,
2011
 
June 30,
2011
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
203,055

 
$
198,208

 
$
198,040

 
$
205,749

 
$
205,717

Interest expense
 
21,694

 
24,639

 
26,570

 
30,365

 
31,716

Net interest revenue
 
181,361

 
173,569

 
171,470

 
175,384

 
174,001

Provision for (reduction of) allowance for credit losses
 
(8,000
)
 
—

 
(15,000
)
 
—

 
2,700

Net interest revenue after provision for (reduction of) credit losses
 
189,361

 
173,569

 
186,470

 
175,384

 
171,301

Other operating revenue
 
 

 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
32,600

 
31,111

 
25,629

 
29,451

 
23,725

Transaction card revenue
 
26,758

 
25,430

 
25,960

 
31,328

 
31,024

Trust fees and commissions
 
19,931

 
18,438

 
17,865

 
17,853

 
19,150

Deposit service charges and fees
 
25,216

 
24,379

 
24,921

 
24,614

 
23,857

Mortgage banking revenue
 
39,548

 
33,078

 
25,438

 
29,493

 
19,356

Bank-owned life insurance
 
2,838

 
2,871

 
2,784

 
2,761

 
2,872

Other revenue
 
7,559

 
9,027

 
9,189

 
10,535

 
7,842

Total fees and commissions
 
154,450

 
144,334

 
131,786

 
146,035

 
127,826

Gain (loss) on other  assets, net
 
3,765

 
(356
)
 
1,897

 
712

 
3,344

Gain (loss) on derivatives, net
 
2,345

 
(2,473
)
 
(174
)
 
4,048

 
1,225

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

 
(1,733
)
 
222

 
17,788

 
9,921

Gain on available for sale securities, net
 
20,481

 
4,331

 
7,080

 
16,694

 
5,468

Total other-than-temporary impairment losses
 
(135
)
 
(505
)
 
(1,037
)
 
(9,467
)
 
(74
)
Portion of loss reclassified from other comprehensive income
 
(723
)
 
(3,217
)
 
(1,747
)
 
(1,833
)
 
(4,750
)
Net impairment losses recognized in earnings
 
(858
)
 
(3,722
)
 
(2,784
)
 
(11,300
)
 
(4,824
)
Total other operating revenue
 
187,035

 
140,381

 
138,027

 
173,977

 
142,960

Other operating expense
 
 

 
 

 
 

 
 

 
 

Personnel
 
122,297

 
114,769

 
121,129

 
103,260

 
105,603

Business promotion
 
6,746

 
4,388

 
5,868

 
5,280

 
4,777

Contribution to BOKF Charitable Foundation
 
—

 
—

 
—

 
4,000

 
—

Professional fees and services
 
8,343

 
7,599

 
7,664

 
7,418

 
6,258

Net occupancy and equipment
 
16,906

 
16,023

 
16,826

 
16,627

 
15,554

Insurance
 
4,011

 
3,866

 
3,636

 
2,206

 
4,771

Data processing and communications
 
25,264

 
22,144

 
26,599

 
24,446

 
24,428

Printing, postage and supplies
 
3,903

 
3,311

 
3,637

 
3,780

 
3,586

Net losses and operating expenses of repossessed assets
 
5,912

 
2,245

 
6,180

 
5,939

 
5,859

Amortization of intangible assets
 
545

 
575

 
895

 
896

 
896

Mortgage banking costs
 
11,173

 
7,573

 
10,154

 
9,349

 
8,968

Change in fair value of mortgage servicing rights
 
11,450

 
(7,127
)
 
5,261

 
24,822

 
13,493

Other expense
 
7,236

 
9,871

 
11,348

 
12,873

 
9,016

Total other operating expense
 
223,786

 
185,237

 
219,197

 
220,896

 
203,209

Income before taxes
 
152,610

 
128,713

 
105,300

 
128,465

 
111,052

Federal and state income tax
 
53,149

 
45,520

 
37,396

 
43,006

 
39,357

Net income before non-controlling interest
 
99,461

 
83,193

 
67,904

 
85,459

 
71,695

Net income (loss) attributable to non-controlling interest
 
1,833

 
(422
)
 
911

 
358

 
2,688

Net income attributable to BOK Financial Corp.
 
$
97,628

 
$
83,615

 
$
66,993

 
$
85,101

 
$
69,007

 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$1.43
 
$1.22
 
$0.98
 
$1.24
 
$1.01
Diluted
 
$1.43
 
$1.22
 
$0.98
 
$1.24
 
$1.00
Average shares used in computation:
 
 
 
 
 
 
 
 

 
 

Basic
 
67,472,665

 
67,665,300

 
67,526,009

 
67,827,591

 
67,898,483

Diluted
 
67,744,828

 
67,941,895

 
67,774,721

 
68,037,419

 
68,169,485


- 126 -




PART II. Other Information

Item 1. Legal Proceedings
 
See discussion of legal proceedings at Note 7 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 June 30, 2012.
 
 
Period
 
Total Number of Shares Purchased2
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans
April 1 to April 30, 2012
 
—

 
$
—

 
—

 
2,000,000

May 1 to May 31, 2012
 
—

 
$
—

 
—

 
2,000,000

June 1 to June 30, 2012
 
77,263

 
$
55.30

 
39,496

 
1,960,504

Total
 
77,263

 
 

 
39,496

 
 

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 June 30, 2012, the Company had repurchased 39,496 shares under this plan.
2 
The Company routinely repurchases mature shares from employees to cover the exercise price and taxes in connection with employee stock option exercises.

Item 6. Exhibits

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.

* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

- 127 -



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:         August 7, 2012                                                                  



/s/ Steven E. Nell                                                                       
Steven E. Nell
Executive Vice President and
Chief Financial Officer
    


/s/ John C. Morrow                                                             
John C. Morrow
Senior Vice President and
Chief Accounting Officer

- 128 -

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