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BOK Financial
BOKF
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$8.49 B
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๐Ÿ‡บ๐Ÿ‡ธ United States
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๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. BOK Financial
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2013 Q3

BOK Financial - 10-Q quarterly report FY2013 Q3


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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 September 30, 2013
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 68,787,584 shares of common stock ($.00006 par value) as of September 30, 2013.
 




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

Index

Part I.  Financial Information
 
Management’s Discussion and Analysis (Item 2)        
1
Market Risk (Item 3)                                                                                              
57
Controls and Procedures (Item 4)
59
Consolidated Financial Statements – Unaudited (Item 1)
61
Six Month Financial Summary – Unaudited (Item 2)
145
Quarterly Financial Summary – Unaudited (Item 2)
146
Quarterly Earnings Trend – Unaudited
148
 
 
Part II.  Other Information
 
Item 1.  Legal Proceedings
149
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
149
Item 6.  Exhibits
149
Signatures
150



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

Performance Summary

BOK Financial Corporation (“the Company”) reported net income of $75.7 million or $1.10 per diluted share for the third quarter of 2013, compared to $87.4 million or $1.27 per diluted share for the third quarter of 2012 and $79.9 million or $1.16 per diluted share for the second quarter of 2013. 

Net income for the nine months ended September 30, 2013 totaled $243.6 million or $3.54 per diluted share compared with $268.6 million or $3.92 per diluted share for the nine months ended September 30, 2012.

Highlights of the third quarter of 2013 included:
•
Net interest revenue totaled $166.4 million for the third quarter of 2013, compared to $176.0 million for the third quarter of 2012 and $167.2 million for the second quarter of 2013. Net interest margin was 2.80% for the third quarter of 2013. Net interest margin was 3.12% for the third quarter of 2012 and 2.81% for the second quarter of 2013. 
•
Fees and commissions revenue totaled $146.8 million for the third quarter of 2013, compared to $166.0 million for the third quarter of 2012 and $160.9 million for the second quarter of 2013. Mortgage banking revenue decreased $26.8 million compared to the third quarter of 2012 and $13.1 million compared to the second quarter of 2013 primarily due to a narrowed gain on sale margin and a change in product mix. Mortgage production volumes also decreased. Nearly all other fee-based revenue sources grew over the prior year and were largely unchanged compared to prior quarter.
•
Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $210.3 million for the third quarter of 2013, a decrease of $2.5 million compared to the third quarter of 2012 and largely unchanged compared to the previous quarter. Personnel costs increased $3.0 million over the third quarter of 2012 primarily annual merit increases and incentive compensation. Personnel costs decreased $2.3 million compared to the second quarter of 2013 primarily due to a seasonal decrease in payroll taxes. Non-personnel expense decreased $5.5 million compared to the third quarter of 2012. Lower repossessed asset impairment charges and mortgage banking expense, were partially offset by a $2.1 million discretionary contribution to the BOKF Foundation during the third quarter of 2013. Non-personnel expenses increased $1.7 million over the prior quarter primarily due to the discretionary contribution to the BOKF Foundation.  
•
An $8.5 million negative provision for credit losses was recorded in the third quarter of 2013 compared to no provision for credit losses in both the third quarter of 2012 and the second quarter of 2013. Gross charge-offs were $4.7 million in the third quarter of 2013, $8.9 million in the third quarter of 2012 and $8.6 million in the second quarter of 2013. Recoveries were $4.4 million in the third quarter of 2013, compared to $3.2 million in the third quarter of 2012 and $6.2 million in the second quarter of 2013.
•
The combined allowance for credit losses totaled $196 million or 1.59% of outstanding loans at September 30, 2013 compared to $205 million or 1.65% of outstanding loans at June 30, 2013. Nonperforming assets that are not guaranteed by U.S. government agencies totaled $183 million or 1.49% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at September 30, 2013 and $200 million or 1.62% of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at June 30, 2013.
•
Outstanding loan balances were $12.4 billion at September 30, 2013, a decrease of $91 million compared to June 30, 2013. Commercial loan balances decreased $137 million during the third quarter, partially offset by a $32 million increase in commercial real estate loans. Residential mortgage loans decreased by $5.0 million and consumer loans were up $19 million over June 30, 2013.
•
Period end deposits totaled $19.5 billion at September 30, 2013, largely unchanged compared to June 30, 2013. Demand deposit account balances increased $187 million during the third quarter, offset by a $147 million decrease in interest-bearing transaction accounts and a $48 million decrease in time deposits.
•
The tangible common equity ratio was 9.73% at September 30, 2013 and 9.38% at June 30, 2013. The tangible common equity ratio is a non-GAAP measure of capital strength used by the Company and investors based on shareholders’ equity as defined by generally accepted accounting principles in the United States of America (“GAAP”) minus intangible assets and equity that does not benefit common shareholders.

- 1 -



•
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 13.51% at September 30, 2013 and 13.37% at June 30, 2013.
•
The Company paid a regular quarterly cash dividend of $26 million or $0.38 per common share during the third quarter of 2013. On October 29, 2013, the board of directors approved an increase in the quarterly cash dividend to $0.40 per common share payable on or about November 29, 2013 to shareholders of record as of November 16, 2013.
Results of Operations
Net Interest Revenue and Net Interest Margin

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

Net interest revenue totaled $166.4 million for the third quarter of 2013 compared to $176.0 million for the third quarter of 2012 and $167.2 million for the second quarter of 2013. Net interest margin was 2.80% for the third quarter of 2013, 3.12% for the third quarter of 2012 and 2.81% for the second quarter of 2013.

Net interest revenue decreased $9.7 million compared to the third quarter of 2012. Net interest revenue decreased $11.7 million due to lower interest rates. Cash flows from the securities portfolio were reinvested at lower current market rates and loan yields decreased due to renewal of maturing fixed-rate loans at current lower rates and narrowing credit spreads. The decrease in yield on earning assets was partially offset by lower funding costs. Net interest revenue increased $2.1 million primarily due to the growth in average loan and securities balances, partially offset by an increase in the average balance of other borrowings.

Net interest margin also declined compared to the third quarter of 2012. The tax-equivalent yield on earning assets was 3.09% for the third quarter of 2013, down 38 basis points from the third quarter of 2012. The available for sale securities portfolio yield decreased 46 basis points to 1.92%. Cash flows received from payments on residential mortgage-backed securities are currently being reinvested in short-duration securities that yield nearly 1.75%. Loan yields decreased 27 basis points. Credit spreads have narrowed due to market pricing pressure and improved credit quality in our loan portfolio. Funding costs were down 10 basis points from the third quarter of 2012. The cost of interest-bearing deposits decreased 10 basis points and the cost of other borrowed funds decreased 4 basis points. The average rate of interest paid on subordinated debentures decreased 27 basis points compared to the third quarter of 2012. Additionally, the benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 13 basis points in the third quarter of 2013 compared to 17 basis points in the third quarter of 2012.

Average earning assets for the third quarter of 2013 increased $219 million or 1% over the third quarter of 2012. Average loans, net of allowance for loan losses, increased $692 million over the third quarter of 2012 due primarily to growth in average commercial loans. The average balance of available for sale securities decreased $499 million over the prior year. Available for sale securities consists largely of U.S. government agency issued residential mortgage-backed securities and U.S. agency commercial mortgage-backed securities that are purchased to supplement earnings and to manage interest rate risk. Growth was primarily in U.S. government agency commercial mortgage-backed securities, partially offset by a decrease in U.S. agency mortgage-backed securities. The average balance of investment securities was up over the prior year, partially offset by a decrease in the average balance of fair value option securities primarily held as an economic hedge of our mortgage servicing rights.

Average deposits increased $673 million over the third quarter of 2012, including a $392 million increase in average demand deposit balances and a $556 million increase in average interest-bearing transaction accounts, partially offset by a $326 million decrease in average time deposits. Average borrowed funds increased $863 million over the third quarter of 2012 due primarily to increased borrowing from the Federal Home Loan Banks.

- 2 -



Net interest margin decreased 1 basis point from the second quarter of 2013.  The yield on average earning assets decreased 2 basis points. The yield on the available for sale securities portfolio decreased 1 basis point to 1.92%. The loan portfolio yield decreased to 4.06% from 4.12% in the previous quarter primarily due to market pricing pressure. Funding costs decreased 1 basis point to 0.42%. Rates paid on time deposits and savings accounts each decreased 2 basis points. Rates paid on interest-bearing transaction accounts decreased a basis point. The cost of other borrowed funds and the benefit to net interest margin from earning assets funded by non-interest bearing liabilities was unchanged compared to the second quarter.
Average earning assets decreased $500 million during the third quarter of 2013. The available for sale securities portfolio decreased $502 million compared to the second quarter of 2013. Average outstanding loans increased $125 million. Average commercial loan balances were largely unchanged. Average commercial real estate loan balances increased $72 million, residential mortgage loan balances increased $30 million and consumer balances increased $26 million. Growth in average loan balances was offset by a $57 million decrease in trading securities, a $47 million decrease in fair value option securities and a $36 million decrease in the average balance of residential mortgage loans held for sale.
Average deposits decreased $80 million compared to the previous quarter. Demand deposit balances increased $221 million. Interest-bearing transaction account balances decreased $228 million and time deposit account balances decreased $76 million. The average balance of borrowed funds decreased $30 million over the second quarter of 2013.

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

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

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























- 3 -



Table 1 -- Volume/Rate Analysis
(In thousands)
 
 
Three Months Ended
Sept. 30, 2013 / 2012
 
Nine Months Ended
Sept. 30, 2013 / 2012
 
 
 
 
Change Due To1
 
 
 
Change Due To1
 
 
Change
 
Volume
 
Yield /
Rate
 
Change
 
Volume
 
Yield
/Rate
Tax-equivalent interest revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Funds sold and resell agreements
 
$
3

 
$
4

 
$
(1
)
 
$
3

 
$
9

 
$
(6
)
Trading securities
 
(15
)
 
(39
)
 
24

 
527

 
451

 
76

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(690
)
 
(635
)
 
(55
)
 
(2,004
)
 
(1,967
)
 
(37
)
Tax-exempt securities
 
289

 
1,856

 
(1,567
)
 
330

 
5,199

 
(4,869
)
Total investment securities
 
(401
)
 
1,221

 
(1,622
)
 
(1,674
)
 
3,232

 
(4,906
)
Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
(9,303
)
 
2,303

 
(11,606
)
 
(24,152
)
 
13,623

 
(37,775
)
Tax-exempt securities
 
(216
)
 
66

 
(282
)
 
(132
)
 
8,024

 
(8,156
)
Total available for sale securities
 
(9,519
)
 
2,369

 
(11,888
)
 
(24,284
)
 
21,647

 
(45,931
)
Fair value option securities
 
(1,084
)
 
(823
)
 
(261
)
 
(4,704
)
 
(3,266
)
 
(1,438
)
Residential mortgage loans held for sale
 
(142
)
 
(348
)
 
206

 
392

 
597

 
(205
)
Loans
 
(967
)
 
7,126

 
(8,093
)
 
(8,688
)
 
22,474

 
(31,162
)
Total tax-equivalent interest revenue
 
(12,125
)
 
9,510

 
(21,635
)
 
(38,428
)
 
45,144

 
(83,572
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
 
(725
)
 
299

 
(1,024
)
 
(2,215
)
 
625

 
(2,840
)
Savings deposits
 
(20
)
 
22

 
(42
)
 
(69
)
 
74

 
(143
)
Time deposits
 
(1,646
)
 
(1,252
)
 
(394
)
 
(5,205
)
 
(3,919
)
 
(1,286
)
Funds purchased
 
(498
)
 
(250
)
 
(248
)
 
(915
)
 
(611
)
 
(304
)
Repurchase agreements
 
(158
)
 
(62
)
 
(96
)
 
(413
)
 
(179
)
 
(234
)
Other borrowings
 
808

 
8,678

 
(7,870
)
 
1,429

 
27,097

 
(25,668
)
Subordinated debentures
 
(266
)
 
(30
)
 
(236
)
 
(4,971
)
 
(542
)
 
(4,429
)
Total interest expense
 
(2,505
)
 
7,405

 
(9,910
)
 
(12,359
)
 
22,545

 
(34,904
)
Tax-equivalent net interest revenue
 
(9,620
)
 
2,105

 
(11,725
)
 
(26,069
)
 
22,599

 
(48,668
)
Change in tax-equivalent adjustment
 
56

 
 
 
 
 
976

 
 
 
 
Net interest revenue
 
$
(9,676
)
 
 
 
 
 
$
(27,045
)
 
 
 
 
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 $145.3 million for the third quarter of 2013 compared to $179.9 million for the third quarter of 2012 and $150.8 million for the second quarter of 2013. Fees and commissions revenue decreased $19.2 million compared to the third quarter of 2012. Net gains (losses) on securities, derivatives and other assets decreased $15.0 million compared to the third quarter of 2012. Other-than temporary impairment charges were $405 thousand less than the prior year.

Other operating revenue decreased $5.4 million compared to the second quarter of 2013. Fees and commissions revenue decreased $14.1 million. Net gains on securities, derivatives and other assets increased $9.6 million. Other-than-temporary impairment charges were $957 thousand less than the previous quarter.

Table 2 – Other Operating Revenue 
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
 
 
 
 
Three Months Ended
June 30, 2013
 
 
 
 
 
 
2013
 
2012
 
Increase(Decrease)
 
% Increase(Decrease)
 
 
Increase(Decrease)
 
% Increase(Decrease)
Brokerage and trading revenue
 
$
32,338

 
$
31,261

 
$
1,077

 
3
 %
 
$
32,874

 
$
(536
)
 
(2
)%
Transaction card revenue
 
30,055

 
27,788

 
2,267

 
8
 %
 
29,942

 
113

 
—
 %
Trust fees and commissions
 
23,892

 
19,654

 
4,238

 
22
 %
 
24,803

 
(911
)
 
(4
)%
Deposit service charges and fees
 
24,742

 
25,148

 
(406
)
 
(2
)%
 
23,962

 
780

 
3
 %
Mortgage banking revenue
 
23,486

 
50,266

 
(26,780
)
 
(53
)%
 
36,596

 
(13,110
)
 
(36
)%
Bank-owned life insurance
 
2,408

 
2,707

 
(299
)
 
(11
)%
 
2,236

 
172

 
8
 %
Other revenue
 
9,852

 
9,149

 
703

 
8
 %
 
10,496

 
(644
)
 
(6
)%
Total fees and commissions revenue
 
146,773

 
165,973

 
(19,200
)
 
(12
)%
 
160,909

 
(14,136
)
 
(9
)%
Gain (loss) on other assets, net
 
(377
)
 
452

 
(829
)
 
N/A

 
(1,666
)
 
1,289

 
N/A

Gain (loss) on derivatives, net
 
31

 
464

 
(433
)
 
N/A

 
(2,527
)
 
2,558

 
N/A

Gain (loss) on fair value option securities, net
 
(80
)
 
6,192

 
(6,272
)
 
N/A

 
(9,156
)
 
9,076

 
N/A

Gain on available for sale securities
 
478

 
7,967

 
(7,489
)
 
N/A

 
3,753

 
(3,275
)
 
N/A

Total other-than-temporary impairment
 
(1,436
)
 
—

 
(1,436
)
 
N/A

 
(1,138
)
 
(298
)
 
N/A

Portion of loss recognized in (reclassified from) other comprehensive income
 
(73
)
 
(1,104
)
 
1,031

 
N/A

 
586

 
(659
)
 
N/A

Net impairment losses recognized in earnings
 
(1,509
)
 
(1,104
)
 
(405
)
 
N/A

 
(552
)
 
(957
)
 
N/A

Total other operating revenue
 
$
145,316

 
$
179,944

 
$
(34,628
)
 
(19
)%
 
$
150,761

 
$
(5,445
)
 
(4
)%
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 47% of total revenue for the third quarter of 2013, excluding provision for credit losses and gains and losses on asset sales, securities and derivatives. We believe that a variety of fee revenue sources provide an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. As an example of this strength, many of the economic factors that cause net interest revenue compression also may drive growth in our mortgage banking revenue. We expect continued growth in other operating revenue through offering new products and services and by further development of our presence in markets outside of Oklahoma. However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

Brokerage and trading revenue, which includes revenues from securities trading, retail brokerage, customer hedging and investment banking increased $1.1 million or 3% over the third quarter of 2012. 


- 5 -



Securities trading revenue totaled $17.3 million for the third quarter of 2013, down $1.6 million or 8% compared to the third quarter of 2012. Securities trading revenue represents net realized and unrealized gains primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers. We believe these activities will be permitted under the Volcker Rule of the Dodd-Frank Act.

Customer hedging revenue is based primarily on realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs. As more fully discussed under Customer Derivative Programs in Note 3 of the Consolidated Financial Statements, we offer commodity, interest rate, foreign exchange and equity derivatives to our customers. Customer hedging revenue decreased $1.5 million compared to the prior year to $545 thousand for the third quarter of 2013 primarily due to decreased activity by our mortgage banking customers.

Revenue earned from retail brokerage transactions increased $3.1 million or 46% over the third quarter of 2012 to $9.8 million. Retail brokerage revenue is primarily based on fees and commissions earned on sales of fixed income securities, annuities and mutual funds to retail customers. Revenue is primarily based on the volume of customer transactions during the quarter. The number of transactions typically increases with market volatility and decreases with market stability.

Investment banking, which includes fees earned upon completion of underwriting and financial advisory services and loan syndication fees, totaled $4.7 million for the third quarter of 2013, a $1.0 million or 29% increase over the third quarter of 2012 related to the timing and volume of completed transactions. The increased volume of transactions is primarily the result of the Company's expansion of its municipal financial advisory service capacity, particularly in the Texas market.

Brokerage and trading revenue decreased $536 thousand compared to the second quarter of 2013. Customer hedging revenue decreased $4.6 million primarily from decreased activity by our mortgage banking customers. Securities trading revenue increased $3.1 million primarily due to municipal securities and U.S. government agency securities. Retail brokerage fees were up $674 thousand and investment banking fees were up $273 thousand.

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

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

Transaction card revenue depends largely on the volume and amount of transactions processed, the number of TransFund automated teller machine (“ATM”) locations and the number of merchants served. Transaction card revenue for the third quarter of 2013 increased $2.3 million or 8% over the third quarter of 2012. Revenues from the processing of transactions on behalf of the members of our TransFund electronic funds transfer ("EFT") network totaled $15.3 million, up $800 thousand or 6%, due to increased transaction volumes and increased dollar amount per transaction. Merchant services fees totaled $10.0 million, up $1.1 million or 12% on increased transaction activity. Revenue from interchange fees paid by merchants for transactions processed from debit cards issued by the Company totaled $4.8 million, up $364 thousand or 8% over the third quarter of 2012.

Transaction card revenue was largely unchanged compared to the second quarter of 2013.

Effective October 1, 2011, the Federal Reserve issued its final rule that established a cap on interchange fees banks with more than $10 billion can charge merchants for certain debit card transaction, commonly known as the Durbin Amendment. The final rule has been successfully challenged by retail merchants and merchant trade groups and is currently on appeal. The ultimate resolution of this legal challenge is uncertain.

- 6 -



Trust fees and commissions grew by $4.2 million or 22% over the third quarter of 2012. The acquisition of the Milestone Group by BOK Financial in the third quarter of 2012 added $1.6 billion of fiduciary assets as of September 30, 2013. Trust fees and commissions generated by the Milestone Group were up $1.6 million over the third quarter of 2012. The remaining increase was primarily due to the growth in the fair value of fiduciary assets administered by the Company. Fiduciary assets are assets for which the Company possesses investment discretion on behalf of another or any other similar capacity. The fair value of fiduciary assets administered by the Company totaled $29.6 billion at September 30, 2013, $25.2 billion at September 30, 2012 and $28.3 billion at June 30, 2013. Trust fees and commissions were down $911 thousand compared to the second quarter of 2013 primarily due to the seasonal timing of tax service fees.

In addition to trust fees and commissions where we served as a fiduciary, we also earn fees as administrator to and investment adviser for the Cavanal Hill Funds, a diversified, open-ended investment company established as a business trust under the Investment Company Act of 1940. The Bank is custodian and BOSC, Inc. is distributor for the Cavanal Hill Funds. Products of the Cavanal Hill Funds are offered to customers, employee benefit plans, trusts and the general public in the ordinary course of business. We have voluntarily waived administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds in the current low short-term interest rate environment. Waived fees totaled $2.3 million for the third quarter of 2013 compared to $1.9 million for the third quarter of 2012 and $1.9 million for the second quarter of 2013.

Deposit service charges and fees decreased $406 thousand or 2% compared to the third quarter of 2012. Overdraft fees totaled $13.2 million for the third quarter of 2013, a decrease of $1.1 million or 8% compared to the third quarter of 2012. Consumers are generally maintaining higher average balances and better managing their accounts to reduce overdraft fees. Commercial account service charge revenue totaled $9.5 million, up $740 thousand or 8% over the prior year. Service charges on deposit accounts with a standard monthly fee were $2.1 million, down $63 thousand or 3% compared to the third quarter of 2012. Deposit service charges and fees increased $780 thousand over the prior quarter on increased overdraft fee volumes.

Mortgage banking revenue decreased $26.8 million compared to the third quarter of 2012. Revenue from originating and marketing mortgage loans totaled $12.5 million, down $27.8 million or 69% compared to the third quarter of 2012. Mortgage loans funded for sale totaled $1.1 billion in the third quarter of 2013, up $34 million over the third quarter of 2012. Outstanding commitments to originate mortgage loans were down $101 million or 22% compared to September 30, 2012. The decrease in mortgage banking revenue compared to third quarter of 2012 was primarily due to an overall narrowing of gain on sale margins and a shift in product mix toward loans with narrower margins. Approximately 39% of loans originated in the third quarter of 2013 were through correspondent channels, up from 9% for the third quarter of 2012. Refinanced mortgage loans decreased to 30% of loans originated in third quarter of 2013 compared to 61% of loans originated in third quarter of 2012.

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

Mortgage servicing revenue increased $1.0 million or 10% over the third quarter of 2012. The outstanding principal balance of mortgage loans serviced for others totaled $13.3 billion, an increase of $1.5 billion over September 30, 2012.

Mortgage banking revenue decreased $13.1 million compared to the second quarter of 2013. Residential mortgage loans funded for sale decreased $116 million over the previous quarter. Outstanding commitments to originate mortgage loans decreased $196 million or 36% compared to June 30, 2013.

Mortgage servicing revenue increased $698 thousand over the prior quarter. The outstanding balance of mortgage loans serviced for others increased $557 million over June 30, 2013.


- 7 -



Table 3 – Mortgage Banking Revenue 
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
Three Months Ended
June 30, 2013
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2013
 
2012
 
 
 
 
 
Originating and marketing revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages loan held for sale
 
$
31,047

 
$
40,463

 
$
(9,416
)
 
(23
)%
 
$
17,763

 
$
13,284

 
75
 %
Residential mortgage loan commitments
 
12,668

 
6,512

 
6,156

 
95
 %
 
(15,052
)
 
27,720

 
(184
)%
Forward sales contracts
 
(31,167
)
 
(6,618
)
 
(24,549
)
 
371
 %
 
23,645

 
(54,812
)
 
(232
)%
Total originating and marketing revenue
 
12,548

 
40,357

 
(27,809
)
 
(69
)%
 
26,356

 
(13,808
)
 
(52
)%
Servicing revenue
 
10,938

 
9,909

 
1,029

 
10
 %
 
10,240

 
698

 
7
 %
Total mortgage revenue
 
$
23,486

 
$
50,266

 
$
(26,780
)
 
(53
)%
 
$
36,596

 
$
(13,110
)
 
(36
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans funded for sale
 
$
1,080,167

 
$
1,046,608

 
$
33,559

 
3
 %
 
$
1,196,038

 
$
(115,871
)
 
(10
)%
Mortgage loan refinances to total funded
 
30
%
 
61
%
 
 

 
 

 
48
%
 
 

 
 


 
 
September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
 
Increase (Decrease)
 
% Increase (Decrease)
 
 
2013
 
2012
 
 
 
June 30,
2013
 
 
Period end outstanding mortgage commitments
 
$
351,196

 
$
452,129

 
$
(100,933
)
 
(22
)%
 
$
547,508

 
$
(196,312
)
 
(36
)%
Outstanding principal balance of mortgage loans serviced for others
 
$
13,298,479

 
$
11,756,350

 
$
1,542,129

 
13
 %
 
$
12,741,651

 
$
556,828

 
4
 %
Net gains on securities, derivatives and other assets

In the third quarter of 2013, we recognized a $478 thousand gain from sales of $356 million of available for sale securities. Securities were sold either because they had reached their expected maximum potential return or sold to reinvest those proceeds into shorter average life securities. In the third quarter of 2012, we recognized an $8.0 million gain from sales of $209 million of available for sale securities and a $3.8 million gain on sales of $1.1 billion of available for sale securities in the second quarter of 2013.

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

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

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


- 8 -



Table 4 -- Gain (Loss) on Mortgage Servicing Rights
(In thousands)
 
 
Three Months Ended
 
 
September 30,
2013
 
June 30,
2013
 
September 30,
2012
Gain (loss) on mortgage hedge derivative contracts, net
 
$
31

 
$
(2,526
)
 
$
645

Gain (loss) on fair value option securities, net
 
(89
)
 
(9,102
)
 
5,455

Gain (loss) on economic hedge of mortgage servicing rights
 
(58
)
 
(11,628
)
 
6,100

Gain (loss) on change in fair value of mortgage servicing rights
 
(346
)
 
14,315

 
(9,576
)
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges
 
$
(404
)
 
$
2,687

 
$
(3,476
)
 
 
 
 
 
 
 
Net interest revenue on fair value option securities
 
$
741

 
$
910

 
$
1,750

 
 
 
 
 
 
 
Average primary residential mortgage interest rate
 
4.44
%
 
3.67
%
 
3.55
%
Average secondary residential mortgage interest rate
 
3.51
%
 
2.72
%
 
2.28
%

Primary rates disclosed in Table 4 above represent rates generally available to borrowers on 30 year conforming mortgage loans and affect the value of our mortgage servicing rights. Secondary rates represent rates generally paid on 30 year residential mortgage-backed securities guaranteed by U.S. government agencies and affect the value of securities and derivative contracts used as an economic hedge of our mortgage servicing rights. The difference between average primary and secondary rates for the third quarter of 2013 was 93 basis points compared to 95 basis points for the second quarter of 2013 and 127 basis points for the third quarter of 2012.

As more fully discussed in Note 2 to the Consolidated Financial Statements, we recognized $1.5 million of other-than-temporary impairment losses in earnings during the third quarter of 2013 including a $1.4 million impairment on certain municipal securities and a $140 thousand impairment on certain private-label residential mortgage-backed securities we do not intend to sell. We recognized other-than-temporary impairment losses in earnings of $1.1 million in the third quarter of 2012 and $552 thousand in the second quarter of 2013.

- 9 -



Other Operating Expense

Other operating expense for the third quarter of 2013 totaled $210.6 million, down $11.7 million or 5% compared to the third quarter of 2012. Changes in the fair value of mortgage servicing rights increased operating expense $346 thousand in the third quarter of 2013 and increased operating expense $9.6 million in the third quarter of 2012. Excluding changes in the fair value of mortgage servicing rights, operating expenses decreased $2.5 million or 1% compared to the third quarter of 2012. Personnel expenses increased $3.0 million or 2%. Non-personnel expenses decreased $5.5 million or 6%.

Excluding changes in the fair value of mortgage servicing rights, operating expenses were down $623 thousand compared to the previous quarter. Personnel expenses decreased $2.3 million and non-personnel expenses increased $1.7 million.

Table 5 -- Other Operating Expense
(In thousands)
 
 
Three Months Ended
Sept. 30,
 
Increase (Decrease)
 
%
Increase (Decrease)
 
Three Months Ended
June 30, 2013
 
Increase (Decrease)
 
%
Increase (Decrease)
 
 
2013
 
2012
 
 
 
 
 
Regular compensation
 
$
68,483

 
$
66,708

 
$
1,775

 
3
 %
 
$
68,319

 
$
164

 
—
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
28,276

 
30,756

 
(2,480
)
 
(8
)%
 
31,081

 
(2,805
)
 
(9
)%
Stock-based
 
11,461

 
7,214

 
4,247

 
59
 %
 
9,500

 
1,961

 
21
 %
Total incentive compensation
 
39,737

 
37,970

 
1,767

 
5
 %
 
40,581

 
(844
)
 
(2
)%
Employee benefits
 
17,579

 
18,097

 
(518
)
 
(3
)%
 
19,210

 
(1,631
)
 
(8
)%
Total personnel expense
 
125,799

 
122,775

 
3,024

 
2
 %
 
128,110

 
(2,311
)
 
(2
)%
Business promotion
 
5,355

 
6,054

 
(699
)
 
(12
)%
 
5,770

 
(415
)
 
(7
)%
Charitable contribution to BOKF Foundation
 
2,062

 
—

 
2,062

 
—
 %
 
—

 
2,062

 
—
 %
Professional fees and services
 
7,183

 
7,991

 
(808
)
 
(10
)%
 
8,381

 
(1,198
)
 
(14
)%
Net occupancy and equipment
 
17,280

 
16,914

 
366

 
2
 %
 
16,909

 
371

 
2
 %
Insurance
 
3,939

 
3,690

 
249

 
7
 %
 
4,044

 
(105
)
 
(3
)%
Data processing and communications
 
25,695

 
26,486

 
(791
)
 
(3
)%
 
26,734

 
(1,039
)
 
(4
)%
Printing, postage and supplies
 
3,505

 
3,611

 
(106
)
 
(3
)%
 
3,580

 
(75
)
 
(2
)%
Net losses and operating expenses of repossessed assets
 
2,014

 
5,706

 
(3,692
)
 
(65
)%
 
282

 
1,732

 
614
 %
Amortization of intangible assets
 
835

 
742

 
93

 
13
 %
 
875

 
(40
)
 
(5
)%
Mortgage banking costs
 
8,753

 
13,036

 
(4,283
)
 
(33
)%
 
7,910

 
843

 
11
 %
Change in fair value of mortgage servicing rights
 
346

 
9,576

 
(9,230
)
 
(96
)%
 
(14,315
)
 
14,661

 
(102
)%
Other expense
 
7,878

 
5,759

 
2,119

 
37
 %
 
8,326

 
(448
)
 
(5
)%
Total other operating expense
 
$
210,644

 
$
222,340

 
$
(11,696
)
 
(5
)%
 
$
196,606

 
$
14,038

 
7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of employees (full-time equivalent)
 
4,626

 
4,627

 
(1
)
 
—
 %
 
4,712

 
(86
)
 
(2
)%

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

Personnel expense

The increase in personnel expense was primarily due to standard annual merit increases in regular compensation which were effective for the majority of our staff March 1 and increased incentive compensation. Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs increased $1.8 million or 3% over the third quarter of 2012.


- 10 -



Incentive compensation increased $1.8 million or 5% over the third quarter of 2012. Cash-based incentive compensation plans are either intended to provide current rewards to employees who generate long-term business opportunities for the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions. Total cash-based incentive compensation decreased $2.5 million or 8% over the third quarter of 2012. 

The Company also provides stock-based incentive compensation plans. Stock-based compensation plans include both equity and liability awards. Compensation expense for equity awards increased $1.7 million over the third quarter of 2012. Expense for equity awards is based on the grant-date fair value of the awards and is unaffected by subsequent changes in fair value. Stock-based compensation expense also includes deferred compensation that will ultimately be settled in cash indexed to the investment performance or changes in earnings per share. Certain executive officers are permitted to defer recognition of taxable income from their stock-based compensation. Deferred compensation may also be diversified into investments other than BOK Financial common stock. Compensation expense reflects changes in the market value of BOK Financial common stock and other investments. Expense based on changes in the fair value of BOK Financial common stock and other investments decreased $304 thousand compared to the the third quarter of 2012. In addition, $7.4 million was accrued in third quarter of 2013 and $4.5 million was accrued in the third quarter of 2012 for the BOK Financial Corp. 2011 True-Up Plan. Approved by shareholders on April 26, 2011, the True-Up Plan is designed to adjust annual and long-term performance-based incentive compensation for certain senior executives either upward or downward based on the earnings per share performance and compensation of comparable senior executives at peer banks for 2006 through 2013. The accrual for the 2011 True-Up Plan totaled $64 million at September 30, 2013. Based on currently available information, amounts estimated to be payable under the 2011 True-Up Plans are approximately $72 million. The final amount due under the 2011 True-Up Plan will be determined as of December 31, 2013 and distributed in 2014. Performance measurement through 2013 may result in future upward or downward adjustments to compensation expense.  

Employee benefit expense decreased $518 thousand or 3% compared to the third quarter of 2012 primarily due to decreased employee retirement plan and other benefit costs.
Personnel costs decreased $2.3 million over the second quarter of 2013 primarily due to a seasonal decrease in payroll taxes. Regular compensation expensed was unchanged compared to the prior quarter. Incentive compensation expense decreased $844 thousand. Cash-based incentive compensation, which rewards employees as they generate business opportunities for the Company by growing loans, deposits, customer relationships or other measurable metrics, decreased $2.8 million. Stock-based incentive compensation expense increased $2.0 million. Employee benefits expense decreased $1.6 million primarily due to a $2.1 million seasonal decrease in payroll taxes. Increased employee medical costs were partially offset by a decrease in employee retirement plan costs. The Company self-insures a portion of its employee health care coverage and these costs may be volatile.


Non-personnel operating expenses

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, decreased $5.5 million compared to the third quarter of 2012. Mortgage banking costs were down $4.3 million primarily due to a lower provision for potential losses on loans sold to U.S. government agencies under standard representations and warranties. Net losses and operating expenses of repossessed assets were down $3.7 million primarily due to decreased impairment charges based on regularly scheduled appraisal updates. During the third quarter of 2013, the Company made a $2.1 million discretionary contribution to the BOKF Foundation. The BOKF Foundation partners with various charitable organizations to support needs within our communities. All other expenses were up $423 thousand over the third quarter of 2012.

Excluding changes in the fair value of mortgage servicing rights, non-personnel operating expenses increased $1.7 million over the second quarter of 2013 primarily due to the discretionary contribution to the BOKF Foundation during the third quarter. Net losses and operating expenses of repossessed assets increased $1.7 million due to increased impairment charges as a result of regularly scheduled appraisal updates. Professional fees and services were down $1.2 million. Data processing and communications expense decreased $1.0 million compared to the prior quarter due to the benefit from service contract repricings. All other non-personnel expenses increased $171 thousand.

- 11 -



Income Taxes

Income tax expense was $33.5 million or 31% of book taxable income for the third quarter of 2013 compared to $45.8 million or 34% of book taxable income for the third quarter of 2012 and $41.4 million or 34% of book taxable income for the second quarter of 2013. The statute of limitations expired on uncertain income tax positions and the Company adjusted its current income tax liability to amounts on filed tax returns for 2012 during the third quarter of 2013. These adjustments reduced income tax expense by $1.4 million in the third quarter of 2013 and $1.0 million in the third quarter of 2012. The Company also made a charitable contribution to the BOKF Foundation and purchased state transferable tax credits in the third quarter of 2013, which reduced income tax expense by $1.1 million and $860 thousand, respectively. Excluding these items, income tax expense would have been 34% of book taxable income for the third quarter of 2013 and 35% of book taxable income for the third 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 September 30, 2013, $13 million at June 30, 2013 and $12 million at September 30, 2012.
Lines of Business

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

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

We allocate resources and evaluate the performance of our lines of business after allocation of funds, certain indirect expenses, taxes based on statutory rates, actual net credit losses and capital costs. The cost of funds borrowed from the Funds Management unit by the operating lines of business is transfer priced at rates that approximate market rates for funds with similar duration. Market rates are generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of transfer-pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk.

The value of funds provided by the operating lines of business to the Funds Management unit is also based on rates which approximate wholesale market rates for funds with similar duration and re-pricing characteristics. Market rates are generally based on LIBOR or interest rate swap rates. The funds credit formula applied to deposit products with indeterminate maturities is established based on their re-pricing characteristics reflected in a combination of the short-term LIBOR rate and a moving average of an intermediate term swap rate, with an appropriate spread applied to both. Shorter duration products are weighted towards the short term LIBOR rate and longer duration products are weighted towards the intermediate swap rates. The expected duration ranges from 30 days for certain rate-sensitive deposits to five years.

Economic capital is assigned to the business units by a capital allocation model that reflects management’s assessment of risk. This model assigns capital based upon credit, operating, interest rate and market risk inherent in our business lines and recognizes the diversification benefits among the units. The level of assigned economic capital is a combination of the risk taken by each business line, based on its actual exposures and calibrated to its own loss history where possible. Average invested capital includes economic capital and amounts we have invested in the lines of business.

As shown in Table 6, net income attributable to our lines of business decreased $4.9 million or 8% compared to the third quarter of 2012. The decrease was primarily due to lower mortgage banking revenue, partially offset by growth in other fee-based revenue and lower credit losses.


- 12 -



Table 6 -- Net Income by Line of Business
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Commercial Banking
 
$
39,716

 
$
33,351

 
$
117,775

 
$
109,651

Consumer Banking
 
11,830

 
22,050

 
52,575

 
57,603

Wealth Management
 
3,965

 
5,038

 
10,724

 
15,130

Subtotal
 
55,511

 
60,439

 
181,074

 
182,384

Funds Management and other
 
20,227

 
26,943

 
62,559

 
86,242

Total
 
$
75,738

 
$
87,382

 
$
243,633

 
$
268,626



- 13 -



Commercial Banking

Commercial Banking contributed $39.7 million to consolidated net income in the third quarter of 2013, up $6.4 million or 19% over the third quarter of 2012. Growth in commercial banking net income was largely due to a decrease in net loans charged off and lower repossessed asset costs.

Table 7 -- Commercial Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2013
 
2012
 
 
2013
 
2012
 
 
Net interest revenue from external sources
 
$
91,540

 
$
91,381

 
$
159

 
$
272,889

 
$
274,423

 
$
(1,534
)
 
Net interest expense from internal sources
 
(9,405
)
 
(11,002
)
 
1,597

 
(27,907
)
 
(34,491
)
 
6,584

 
Total net interest revenue
 
82,135

 
80,379

 
1,756

 
244,982

 
239,932

 
5,050

 
Net loans charged off (recovered)
 
(1,326
)
 
3,253

 
(4,579
)
 
(219
)
 
10,393

 
(10,612
)
 
Net interest revenue after net loans charged off (recovered)
 
83,461

 
77,126

 
6,335

 
245,201

 
229,539

 
15,662

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
42,507

 
40,091

 
2,416

 
127,269

 
116,635

 
10,634

 
Gain on financial instruments and other assets, net
 
2

 
—

 
2

 
83

 
14,407

 
(14,324
)
 
Other operating revenue
 
42,509

 
40,091

 
2,418

 
127,352

 
131,042

 
(3,690
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
27,011

 
25,655

 
1,356

 
79,214

 
76,003

 
3,211

 
Net losses and expenses of repossessed assets
 
2,157

 
4,908

 
(2,751
)
 
3,111

 
10,577

 
(7,466
)
 
Other non-personnel expense
 
19,084

 
19,571

 
(487
)
 
59,858

 
56,131

 
3,727

 
Corporate allocations
 
12,717

 
12,499

 
218

 
37,612

 
38,408

 
(796
)
 
Total other operating expense
 
60,969

 
62,633

 
(1,664
)
 
179,795

 
181,119

 
(1,324
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
65,001

 
54,584

 
10,417

 
192,758

 
179,462

 
13,296

 
Federal and state income tax
 
25,285

 
21,233

 
4,052

 
74,983

 
69,811

 
5,172

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
39,716

 
$
33,351

 
$
6,365

 
$
117,775

 
$
109,651

 
$
8,124

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
10,460,986

 
$
10,065,208

 
$
395,778

 
$
10,470,800

 
$
9,981,793

 
$
489,007

 
Average loans
 
9,722,064

 
9,117,263

 
604,801

 
9,640,823

 
9,001,334

 
639,489

 
Average deposits
 
9,150,841

 
8,446,680

 
704,161

 
9,141,123

 
8,338,034

 
803,089

 
Average invested capital
 
911,229

 
865,157

 
46,072

 
900,789

 
880,777

 
20,012

 
Return on average assets
 
1.51
 %
 
1.32
%
 
19

bp
1.50
%
 
1.47
%
 
3

bp
Return on invested capital
 
17.29
 %
 
15.34
%
 
195

bp
17.48
%
 
16.63
%
 
85

bp
Efficiency ratio
 
48.92
 %
 
51.99
%
 
(307
)
bp
48.30
%
 
50.80
%
 
(250
)
bp
Net charge-offs (annualized) to average loans
 
(0.05
)%
 
0.14
%
 
(19
)
bp
—
%
 
0.15
%
 
(15
)
bp

Net interest revenue increased $1.8 million or 2% over the prior year. Growth in net interest revenue was primarily due to a $605 million increase in average loan balances and a $704 million increase in average deposits over the third quarter of 2012, partially offset by reduced yields on loans and deposits sold to our Funds Management unit.


- 14 -



Fees and commissions revenue increased $2.4 million or 6% over the third quarter of 2012 primarily due to a $1.8 million increase in transaction card revenues. Commercial deposit service charges and fees increased $613 thousand over the prior year.

Operating expenses decreased $1.7 million or 3% compared to the third quarter of 2012. Personnel costs increased $1.4 million or 5% primarily due to standard annual merit increases and headcount. Net losses and operating expenses on repossessed assets decreased $2.8 million compared to the third quarter of 2012, primarily due to a decrease in impairment charges based on regularly scheduled appraisal updates. Other non-personnel expenses and corporate expense allocations were largely unchanged.

The average outstanding balance of loans attributed to Commercial Banking increased $605 million to $9.7 billion for the third quarter of 2013. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans which are primarily attributed to the Commercial Banking segment. 
 
Average deposits attributed to Commercial Banking were $9.2 billion for the third quarter of 2013, up $704 million or 8% over the third quarter of 2012. Average balances attributed to our commercial & industrial loan customers increased $248 million or 9%, treasury services customers were up $175 million or 12%, energy customers increased $135 million or 11% and small business customers grew by $117 million or 6% over the third quarter of 2012. Commercial customers continue to maintain high account balances due to continued economic uncertainty and persistently low yields available on high quality investments.


Consumer Banking

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

Consumer Banking contributed $11.8 million to consolidated net income for the third quarter of 2013, down $10.2 million compared to the third quarter of 2012 primarily due to a decrease in mortgage banking revenue, partially offset by lower mortgage banking costs. Excluding the impact of mortgage banking, net interest revenue was up. Non-personnel expenses and corporate expense allocations were also lower compared to the prior year. Changes in fair value of our mortgage servicing rights, net of economic hedge, increased net income attributed to consumer banking by $247 thousand in the third quarter of 2013, compared to decreasing net income attributed to Consumer Banking by $2.1 million in the third quarter of 2012.


- 15 -



Table 8 -- Consumer Banking
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2013
 
2012
 
 
2013
 
2012
 
 
Net interest revenue from external sources
 
$
25,131

 
$
24,862

 
$
269

 
$
74,056

 
$
77,173

 
$
(3,117
)
 
Net interest revenue from internal sources
 
5,060

 
5,410

 
(350
)
 
15,711

 
15,093

 
618

 
Total net interest revenue
 
30,191

 
30,272

 
(81
)
 
89,767

 
92,266

 
(2,499
)
 
Net loans charged off
 
1,331

 
338

 
993

 
3,663

 
5,991

 
(2,328
)
 
Net interest revenue after net loans charged off
 
28,860

 
29,934

 
(1,074
)
 
86,104

 
86,275

 
(171
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
48,220

 
75,942

 
(27,722
)
 
172,761

 
196,163

 
(23,402
)
 
Gain (loss) on financial instruments and other assets, net
 
(1,288
)
 
4,698

 
(5,986
)
 
(20,695
)
 
9,237

 
(29,932
)
 
Other operating revenue
 
46,932

 
80,640

 
(33,708
)
 
152,066

 
205,400

 
(53,334
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
22,357

 
23,270

 
(913
)
 
68,445

 
67,481

 
964

 
Net losses (gains) and expenses of repossessed assets
 
(437
)
 
379

 
(816
)
 
(480
)
 
774

 
(1,254
)
 
Change in fair value of mortgage servicing rights
 
346

 
9,576

 
(9,230
)
 
(16,627
)
 
13,899

 
(30,526
)
 
Other non-personnel expense
 
23,956

 
29,608

 
(5,652
)
 
70,070

 
81,378

 
(11,308
)
 
Corporate allocations
 
10,209

 
11,653

 
(1,444
)
 
30,714

 
33,867

 
(3,153
)
 
Total other operating expense
 
56,431

 
74,486

 
(18,055
)
 
152,122

 
197,399

 
(45,277
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
19,361

 
36,088

 
(16,727
)
 
86,048

 
94,276

 
(8,228
)
 
Federal and state income tax
 
7,531

 
14,038

 
(6,507
)
 
33,473

 
36,673

 
(3,200
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
11,830

 
$
22,050

 
$
(10,220
)
 
$
52,575

 
$
57,603

 
$
(5,028
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
5,655,914

 
$
5,671,356

 
$
(15,442
)
 
$
5,691,406

 
$
5,705,411

 
$
(14,005
)
 
Average loans
 
2,343,673

 
2,381,416

 
(37,743
)
 
2,353,721

 
2,390,019

 
(36,298
)
 
Average deposits
 
5,607,710

 
5,586,485

 
21,225

 
5,631,838

 
5,592,910

 
38,928

 
Average invested capital
 
293,716

 
292,280

 
1,436

 
295,394

 
287,888

 
7,506

 
Return on average assets
 
0.83
%
 
1.55
%
 
(72
)
bp
1.24
%
 
1.35
%
 
(11
)
bp
Return on invested capital
 
15.98
%
 
30.01
%
 
(1,403
)
bp
23.80
%
 
26.73
%
 
(293
)
bp
Efficiency ratio
 
71.53
%
 
61.11
%
 
1,042

bp
64.28
%
 
63.62
%
 
66

bp
Net charge-offs (annualized) to average loans
 
0.23
%
 
0.06
%
 
17

bp
0.21
%
 
0.33
%
 
(12
)
bp
Residential mortgage loans funded for sale
 
$
1,080,167

 
$
1,046,608

 
$
33,559

 
$
3,232,520

 
$
2,634,809

 
$
597,711

 

 
 
September 30,
2013
 
September 30,
2012
 
Increase
(Decrease)
Banking locations
 
220

 
213

 
7

Residential mortgage loans servicing portfolio1
 
$
14,395,227

 
$
12,853,987

 
$
1,541,240

1 
Includes outstanding principal for loans serviced for affiliates


- 16 -



Net interest revenue from Consumer Banking activities was essentially unchanged compared to the third quarter of 2012. Average loan balances were largely unchanged compared to the third quarter of 2012. Decreased balances of indirect automobile loans were offset by growth in other consumer loans. Net loans charged off by the Consumer Banking unit increased $1.0 million over the third quarter of 2012.

Fees and commissions revenue decreased $27.7 million or 37% compared to the third quarter of 2012 primarily due to a $26.8 million decrease in mortgage banking revenue as a result of narrowed gains on sale margins. Deposit service charges and fees also decreased $1.0 million compared to the prior year primarily due to lower overdraft fees.

Excluding the change in the fair value of mortgage servicing rights, operating expenses decreased $8.8 million compared to the third quarter of 2012. Personnel expenses were down $913 thousand or 4%. Net losses and operating expenses of repossessed assets were down $816 thousand compared to the prior year. Non-personnel expense decreased $5.7 million or 19% primarily due to decreased mortgage banking expenses. Accruals for potential credit losses on loans sold to U.S. government agencies under standard representations and warranties were higher in the prior year. Corporate expense allocations were down $1.4 million compared to the third quarter of 2012.

Average consumer deposits were unchanged compared to the third quarter of 2012. Average demand deposits balances were unchanged. Average interest-bearing transaction accounts increased $161 million or 6%. Average time deposit balances were down $182 million or 10% compared to the prior year.

Our Consumer Banking division originates, markets and services conventional and government-sponsored residential mortgage loans for all of our geographical markets. We funded $1.1 billion of residential mortgage loans in the third quarter of 2013 and $1.1 billion in the third quarter of 2012. Mortgage loan fundings included $1.1 billion of mortgage loans funded for sale in the secondary market and $38 million funded for retention within the consolidated group. Approximately 21% of our mortgage loans funded were in the Oklahoma market, 13% in the Texas market and 11% in the Colorado market. In addition, 37% of our mortgage loan fundings came from correspondent lenders compared to 8% in the third quarter of 2012.

At September 30, 2013, the Consumer Banking division serviced $13.3 billion of mortgage loans for others and $1.1 billion of loans retained within the consolidated group. Approximately 95% 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 $76 million or 0.57% of loans serviced for others at September 30, 2013 compared to $68 million or 0.54% of loans serviced for others at June 30, 2013. Mortgage servicing revenue, including revenue on loans serviced for the consolidated group, totaled $11.4 million, up $789 thousand or 7% over the third quarter of 2012.


- 17 -



Wealth Management

Wealth Management contributed $4.0 million to consolidated net income in third quarter of 2013, down $1.1 million or 21% compared to the third quarter of 2012.

Table 9 -- Wealth Management
(Dollars in thousands)
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
September 30,
 
 
September 30,
 
 
 
2013
 
2012
 
 
2013
 
2012
 
 
Net interest revenue from external sources
$
6,300

 
$
7,064

 
$
(764
)
 
$
19,373

 
$
21,340

 
$
(1,967
)
 
Net interest revenue from internal sources
4,837

 
5,452

 
(615
)
 
15,209

 
15,503

 
(294
)
 
Total net interest revenue
11,137

 
12,516

 
(1,379
)
 
34,582

 
36,843

 
(2,261
)
 
Net loans charged off
255

 
509

 
(254
)
 
1,704

 
1,680

 
24

 
Net interest revenue after net loans charged off
10,882

 
12,007

 
(1,125
)
 
32,878

 
35,163

 
(2,285
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
55,530

 
49,979

 
5,551

 
162,720

 
147,653

 
15,067

 
Gain on financial instruments and other assets, net
71

 
177

 
(106
)
 
648

 
452

 
196

 
Other operating revenue
55,601

 
50,156

 
5,445

 
163,368

 
148,105

 
15,263

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
40,891

 
36,967

 
3,924

 
121,483

 
108,734

 
12,749

 
Net losses and expenses of repossessed assets
38

 
19

 
19

 
87

 
39

 
48

 
Other non-personnel expense
9,126

 
7,789

 
1,337

 
27,118

 
22,041

 
5,077

 
Corporate allocations
9,938

 
9,142

 
796

 
30,006

 
27,691

 
2,315

 
Other operating expense
59,993

 
53,917

 
6,076

 
178,694

 
158,505

 
20,189

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
6,490

 
8,246

 
(1,756
)
 
17,552

 
24,763

 
(7,211
)
 
Federal and state income tax
2,525

 
3,208

 
(683
)
 
6,828

 
9,633

 
(2,805
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
3,965

 
$
5,038

 
$
(1,073
)
 
$
10,724

 
$
15,130

 
$
(4,406
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
$
4,385,941

 
$
4,273,386

 
$
112,555

 
$
4,537,922

 
$
4,202,977

 
$
334,945

 
Average loans
931,894

 
926,197

 
5,697

 
934,338

 
927,016

 
7,322

 
Average deposits
4,176,390

 
4,193,744

 
(17,354
)
 
4,373,562

 
4,129,188

 
244,374

 
Average invested capital
206,872

 
188,755

 
18,117

 
204,592

 
179,772

 
24,820

 
Return on average assets
0.36
%
 
0.47
%
 
(11
)
bp
0.32
%
 
0.48
%
 
(16
)
bp
Return on invested capital
7.62
%
 
10.59
%
 
(297
)
bp
7.00
%
 
11.25
%
 
(425
)
bp
Efficiency ratio
89.99
%
 
86.27
%
 
372

bp
90.57
%
 
85.91
%
 
466

bp
Net charge-offs (annualized) to average loans
0.11
%
 
0.22
%
 
(11
)
bp
0.24
%
 
0.24
%
 
—

bp


- 18 -



 
 
September 30,
2013
 
September 30,
2012
 
Increase
(Decrease)
Fiduciary assets in custody for which BOKF has sole or joint discretionary authority
 
$
12,144,305

 
$
10,946,350

 
$
1,197,955

Fiduciary assets not in custody for which BOKF has sole or joint discretionary authority
 
2,039,644

 
1,588,625

 
451,019

Non-managed trust assets in custody
 
15,409,191

 
12,673,301

 
2,735,890

Total fiduciary assets
 
29,593,140

 
25,208,276

 
4,384,864

Assets held in safekeeping
 
21,974,293

 
20,890,178

 
1,084,115

Brokerage accounts under BOKF administration
 
4,782,980

 
4,329,872

 
453,108

Assets under management or in custody
 
$
56,350,413

 
$
50,428,326

 
$
5,922,087


Net interest revenue for the third quarter of 2013 was down $1.4 million or 11% compared to the third quarter of 2012. Growth in average assets was largely due to funds sold to the Funds Management unit and was offset by lower yields. Average deposit balances were unchanged compared to the prior year. Interest-bearing transaction account balances grew by $23 million and non-interest bearing demand deposits were up $7 million. Higher-costing time deposit balances decreased $51 million. Average loan balances were largely unchanged compared to the prior year. Residential mortgage loans previously originated by our Wealth Management division decreased, offset by growth in lower yielding consumer loan balances. Net loans charged off decreased $254 thousand over the third quarter of 2012 to $255 thousand or 0.11% of average loans on an annualized basis. 

Fees and commissions revenue was up $5.6 million or 11% over the third quarter of 2012. Trust fees and commissions were up $4.2 million or 22%. The acquisition of The Milestone Group, a Denver based investment adviser to high net worth clients in the third quarter of 2012 added $1.6 million of revenue in the third quarter of 2013 compared to $1.1 million in the third quarter of 2012. The remaining increase was primarily due to the growth in the fair value of fiduciary assets administered by the Company. Brokerage and trading revenue increased $1.5 million or 5%. Growth in retail brokerage revenue and investment banking was partially offset by the effect of decreased hedging activity by mortgage banking customers.

Other operating revenue includes fees earned from state and municipal bond underwriting and financial advisory services, primarily in the Oklahoma and Texas markets. In the third quarter of 2013, the Wealth Management division participated in 129 underwritings that totaled $2.0 billion. As a participant, the Wealth Management division was responsible for facilitating the sale of approximately $718 million of these underwritings. In the third quarter of 2012, the Wealth Management division participated in 132 underwritings that totaled approximately $1.8 billion. Our interest in these underwritings totaled approximately $542 million.

Operating expenses increased $6.1 million or 11% over the third quarter of 2012. Operating expenses were up $1.5 million related to The Milestone Group acquisition, including a $971 thousand increase in personnel expenses and a $553 thousand increase in non-personnel expenses. Excluding the impact of the Milestone acquisition, personnel expenses increased $3.0 million including a $1.8 million increase in regular compensation and $678 thousand increase in incentive compensation. Non-personnel expenses increased $801 thousand, including amortization of identifiable intangible assets, and corporate expense allocations increased $796 thousand.

- 19 -



Geographical Market Distribution

The Company secondarily evaluates performance by primary geographical market. Loans are generally attributed to geographical markets based on the location of the customer and may not reflect the location of the underlying collateral. Brokered deposits and other wholesale funds are not attributed to a geographical market. Funds Management and other also includes insignificant results of operations in locations outside our primary geographic regions. Mortgage origination and marketing revenue is attributed to the geography where the mortgage was originated. Mortgage origination and marketing revenue related to correspondent banking is attributed to the Bank of Oklahoma. All interest revenue on mortgage loans retained by BOKF and servicing revenue for mortgage loans sold in the secondary market and serviced for others is also attributed to the Bank of Oklahoma.

Table 10 -- Net Income (Loss) by Geographic Region
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Bank of Oklahoma
 
$
28,689

 
$
27,662

 
$
88,180

 
$
99,053

Bank of Texas
 
13,668

 
12,596

 
39,917

 
36,948

Bank of Albuquerque
 
4,133

 
6,623

 
14,366

 
15,987

Bank of Arkansas
 
979

 
2,012

 
6,092

 
9,635

Colorado State Bank & Trust
 
4,506

 
6,317

 
16,559

 
12,076

Bank of Arizona
 
1,080

 
(76
)
 
4,239

 
(2,854
)
Bank of Kansas City
 
1,446

 
2,782

 
5,733

 
7,363

Subtotal
 
54,501

 
57,916

 
175,086

 
178,208

Funds Management and other
 
21,238

 
29,468

 
68,547

 
90,418

Total
 
$
75,739

 
$
87,384

 
$
243,633

 
$
268,626



Bank of Oklahoma

Our Oklahoma offices are located primarily in the Tulsa and Oklahoma City metropolitan areas. Oklahoma is a significant market to the Company, representing 44% of our average loans, 53% of our average deposits and 38% of our consolidated net income in the third quarter of 2013. In addition, all of our mortgage servicing activity, TransFund EFT network and 63% of our fiduciary assets are attributed to the Oklahoma market.

Net income generated by the Bank of Oklahoma in the third quarter of 2013 increased $1.0 million or 4% over the third quarter of 2012. Changes in the fair value of our mortgage servicing rights, net of economic hedge, decreased net income attributed to the Bank of Oklahoma by $247 thousand in the third quarter of 2013 compared to decreasing net income attributed to the Bank of Oklahoma by $2.1 million in the third quarter of 2012.

- 20 -



Table 11 -- Bank of Oklahoma
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2013
 
2012
 
 
2013
 
2012
 
 
Net interest revenue
 
$
55,939

 
$
60,135

 
$
(4,196
)
 
$
168,868

 
$
179,600

 
$
(10,732
)
 
Net loans charged off (recovered)
 
(120
)
 
6,486

 
(6,606
)
 
(246
)
 
11,566

 
(11,812
)
 
Net interest revenue after net loans charged off (recovered)
 
56,059

 
53,649

 
2,410

 
169,114

 
168,034

 
1,080

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
77,127

 
85,699

 
(8,572
)
 
230,430

 
246,188

 
(15,758
)
 
Gain (loss) on financial instruments and other assets, net
 
(1,215
)
 
4,876

 
(6,091
)
 
(20,354
)
 
25,446

 
(45,800
)
 
Other operating revenue
 
75,912

 
90,575

 
(14,663
)
 
210,076

 
271,634

 
(61,558
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
40,423

 
37,378

 
3,045

 
117,695

 
112,452

 
5,243

 
Net losses (gains) and expenses of repossessed assets
 
(10
)
 
257

 
(267
)
 
146

 
2,252

 
(2,106
)
 
Change in fair value of mortgage servicing rights
 
346

 
9,577

 
(9,231
)
 
(16,627
)
 
13,900

 
(30,527
)
 
Other non-personnel expense
 
37,798

 
43,410

 
(5,612
)
 
115,707

 
121,785

 
(6,078
)
 
Corporate allocations
 
6,460

 
8,329

 
(1,869
)
 
17,948

 
27,162

 
(9,214
)
 
Total other operating expense
 
85,017

 
98,951

 
(13,934
)
 
234,869

 
277,551

 
(42,682
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
46,954

 
45,273

 
1,681

 
144,321

 
162,117

 
(17,796
)
 
Federal and state income tax
 
18,265

 
17,611

 
654

 
56,141

 
63,064

 
(6,923
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
28,689

 
$
27,662

 
$
1,027

 
$
88,180

 
$
99,053

 
$
(10,873
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
11,024,084

 
$
11,347,373

 
$
(323,289
)
 
$
11,339,495

 
$
11,423,645

 
$
(84,150
)
 
Average loans
 
5,516,005

 
5,724,825

 
(208,820
)
 
5,569,385

 
5,725,743

 
(156,358
)
 
Average deposits
 
10,267,229

 
10,241,120

 
26,109

 
10,509,664

 
10,256,584

 
253,080

 
Average invested capital
 
553,274

 
548,057

 
5,217

 
552,590

 
549,533

 
3,057

 
Return on average assets
 
1.03
 %
 
0.97
%
 
6

bp
1.04
 %
 
1.16
%
 
(12
)
bp
Return on invested capital
 
20.57
 %
 
20.08
%
 
49

bp
21.34
 %
 
24.08
%
 
(274
)
bp
Efficiency ratio
 
63.63
 %
 
61.28
%
 
235

bp
62.98
 %
 
61.92
%
 
106

bp
Net charge-offs (annualized) to average loans
 
(0.01
)%
 
0.45
%
 
(46
)
bp
(0.01
)%
 
0.27
%
 
(28
)
bp
Residential mortgage loans funded for sale
 
$
639,328

 
$
459,368

 
$
179,960

 
$
1,697,095

 
$
1,189,222

 
$
507,873

 

Net interest revenue decreased $4.2 million or 7% compared to the third quarter of 2012. Average loan balances were down $209 million and loan yields decreased. Net interest earned on residential mortgage-backed securities held as an economic hedge of mortgage servicing rights declined by $881 thousand due to a $106 million reduction in the average balance of this portfolio. The favorable net interest impact of the $26 million increase in average deposit balances was offset by lower yields on funds sold to the Funds Management unit.


- 21 -



Fees and commission revenue was down $8.6 million compared to the third quarter of 2012 largely due to a decrease in mortgage banking revenue. Revenue growth from increased loan production was offset by an overall narrowing of gain on sale margins and a shift in product mix. Transaction card revenue was up $1.5 million on increased transaction volumes. Brokerage and trading revenue was up $1.4 million primarily due to growth in retail brokerage revenue.

Excluding the change in the fair value of mortgage servicing rights, other operating expenses were down $4.7 million compared to the prior year. Personnel expenses were up $3.0 million or 8% primarily due to increased incentive compensation expense and annual merit increases. Non-personnel expenses were down $5.6 million or 13% due primarily to decreased mortgage banking costs and data processing expenses. Accruals for potential losses on loans sold to U.S. government agencies under standard representations and warranties were higher in the prior year. Net losses and operating expenses of repossessed assets were down $267 thousand compared to the third quarter of 2012. Corporate expense allocations were down $1.9 million compared to the prior year.

Oklahoma had a net recovery of $120 thousand for third quarter of 2013 compared to net charge-offs of $6.5 million or 0.45% of average loans on an annualized basis for the third quarter of 2012.

Average deposits attributed to the Bank of Oklahoma for the third quarter of 2013 increased $26 million compared to the prior year. Commercial Banking deposit balances increased $148 million or 3% over the prior year. Increased deposits related to energy and treasury services customers were partially offset by decreased average balances from commercial & industrial and healthcare customers. Consumer deposits also increased $34 million over the third quarter of 2012. Wealth Management deposits decreased $156 million compared to the third quarter of 2012 primarily due to decreased trust deposits.

- 22 -



Bank of Texas

Our Texas offices are located primarily in the Dallas, Fort Worth and Houston metropolitan areas. Texas is our second largest market with 35% of our average loans, 25% of our average deposits and 18% of our consolidated net income in the third quarter of 2013.

Table 12 -- Bank of Texas
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2013
 
2012
 
 
2013
 
2012
 
 
Net interest revenue
 
$
37,496

 
$
35,562

 
$
1,934

 
$
112,234

 
$
106,545

 
$
5,689

 
Net loans charged off (recovered)
 
(70
)
 
1,780

 
(1,850
)
 
2,958

 
4,911

 
(1,953
)
 
Net interest revenue after net loans charged off (recovered)
 
37,566

 
33,782

 
3,784

 
109,276

 
101,634

 
7,642

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
23,296

 
23,033

 
263

 
72,470

 
64,303

 
8,167

 
Gain on financial instruments and other assets, net
 
—

 
—

 
—

 
81

 
188

 
(107
)
 
Other operating revenue
 
23,296

 
23,033

 
263

 
72,551

 
64,491

 
8,060

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
21,755

 
20,470

 
1,285

 
64,909

 
60,528

 
4,381

 
Net losses and expenses of repossessed assets
 
217

 
1,125

 
(908
)
 
647

 
1,542

 
(895
)
 
Other non-personnel expense
 
6,027

 
6,076

 
(49
)
 
19,045

 
18,190

 
855

 
Corporate allocations
 
11,507

 
9,463

 
2,044

 
34,855

 
28,134

 
6,721

 
Total other operating expense
 
39,506

 
37,134

 
2,372

 
119,456

 
108,394

 
11,062

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
21,356

 
19,681

 
1,675

 
62,371

 
57,731

 
4,640

 
Federal and state income tax
 
7,688

 
7,085

 
603

 
22,454

 
20,783

 
1,671

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
13,668

 
$
12,596

 
$
1,072

 
$
39,917

 
$
36,948

 
$
2,969

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
5,332,851

 
$
5,060,350

 
$
272,501

 
$
5,330,539

 
$
5,016,112

 
$
314,427

 
Average loans
 
4,291,909

 
3,827,175

 
464,734

 
4,222,012

 
3,786,717

 
435,295

 
Average deposits
 
4,849,171

 
4,538,400

 
310,771

 
4,839,832

 
4,500,972

 
338,860

 
Average invested capital
 
503,829

 
476,027

 
27,802

 
497,541

 
481,220

 
16,321

 
Return on average assets
 
1.02
 %
 
0.99
%
 
3

bp
1.00
%
 
0.98
%
 
2

bp
Return on invested capital
 
10.76
 %
 
10.53
%
 
23

bp
10.73
%
 
10.26
%
 
47

bp
Efficiency ratio
 
64.99
 %
 
63.37
%
 
162

bp
64.67
%
 
63.44
%
 
123

bp
Net charge-offs (annualized) to average loans
 
(0.01
)%
 
0.19
%
 
(20
)
bp
0.09
%
 
0.17
%
 
(8
)
bp
Residential mortgage loans funded for sale
 
$
132,836

 
$
145,638

 
$
(12,802
)
 
$
423,156

 
$
358,144

 
$
65,012

 

Net income for the Bank of Texas increased $1.1 million or 9% over the third quarter of 2012. Net interest revenue was up and net loans charged off declined from the prior year, partially offset by an increase in operating expenses.

Net interest revenue increased $1.9 million or 5% over the third quarter of 2012 primarily due to decreased deposit costs and growth of the loan portfolio and average deposit balances. Average outstanding loans grew by $465 million or 12% over the third quarter of 2012 and average deposits increased by $311 million or 7%.


- 23 -



Fees and commissions revenue increased $263 thousand or 1% over the third quarter of 2012. Mortgage banking revenue decreased $2.8 million or 39% compared to the prior year on lower gains on sale margins. Brokerage and trading revenue grew by $1.9 million or 49% primarily due to increased retail brokerage fees and investment banking revenue. Trust fees and commissions, transaction card revenue and deposit service charges and fees all increased over the prior year.

Operating expenses increased $2.4 million or 6% over the third quarter of 2012. Personnel costs were up $1.3 million or 6% primarily due to increased incentive compensation in addition to growth in head count and annual merit increases. Net losses and operating expenses of repossessed assets decreased $908 thousand compared to the third quarter of 2012 due primarily to lower impairment charges based on regularly scheduled appraisal updates. Non-personnel expenses were unchanged and corporate expense allocations were up $2.0 million on increased customer transaction activity.

Texas had a $70 thousand net recovery for the third quarter of 2013, compared to net charge-offs of $1.8 million or 0.19% of average loans for the third quarter of 2012 on an annualized basis.

- 24 -



Bank of Albuquerque

Net income attributable to the Bank of Albuquerque totaled $4.1 million or 5% of consolidated net income, down $2.5 million or 38% from the third quarter of 2012 primarily due to decreased mortgage banking revenue and increased net loans charged off, partially offset by decreased operating expenses. Net interest revenue was up $305 thousand over the third quarter of 2012. Average loan balances grew by $69 million over the prior year, primarily due to commercial loan growth. Average deposit balances were up $33 million or 3% over the prior year. Net loans charged off totaled $1.0 million or 0.50% of average loans on annualized basis in the third quarter of 2013 compared to net loans charged off of $232 thousand or 0.13% of average loans on an annualized basis in the third quarter of 2012. 

Fees and commissions revenue decreased $4.6 million or 34% over the prior year primarily due to a $5.0 million decrease in mortgage banking revenue. Other operating expense decreased $982 thousand or 9%. Personnel expenses were down $498 thousand primarily due to decreased regular compensation expense. Net losses and operating expenses of repossessed assets and non-personnel expenses were largely unchanged compared to the prior year. Corporate expense allocations were down $728 thousand.

Table 13 -- Bank of Albuquerque
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2013
 
2012
 
 
2013
 
2012
 
 
Net interest revenue
 
$
9,177

 
$
8,872

 
$
305

 
$
26,912

 
$
25,737

 
$
1,175

 
Net loans charged off
 
985

 
232

 
753

 
5,373

 
888

 
4,485

 
Net interest revenue after net loans charged off
 
8,192

 
8,640

 
(448
)
 
21,539

 
24,849

 
(3,310
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other operating revenue – fees and commission
 
9,075

 
13,685

 
(4,610
)
 
35,545

 
34,793

 
752

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
4,770

 
5,268

 
(498
)
 
15,678

 
15,013

 
665

 
Net losses (gains) and expenses of repossessed assets
 
126

 
22

 
104

 
271

 
(112
)
 
383

 
Other non-personnel expense
 
2,129

 
1,989

 
140

 
6,347

 
6,067

 
280

 
Corporate allocations
 
3,478

 
4,206

 
(728
)
 
11,276

 
12,508

 
(1,232
)
 
Total other operating expense
 
10,503

 
11,485

 
(982
)
 
33,572

 
33,476

 
96

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
6,764

 
10,840

 
(4,076
)
 
23,512

 
26,166

 
(2,654
)
 
Federal and state income tax
 
2,631

 
4,217

 
(1,586
)
 
9,146

 
10,179

 
(1,033
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
4,133

 
$
6,623

 
$
(2,490
)
 
$
14,366

 
$
15,987

 
$
(1,621
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
1,465,981

 
$
1,415,978

 
$
50,003

 
$
1,426,032

 
$
1,377,440

 
$
48,592

 
Average loans
 
777,449

 
708,760

 
68,689

 
763,416

 
707,809

 
55,607

 
Average deposits
 
1,328,049

 
1,295,201

 
32,848

 
1,302,380

 
1,251,766

 
50,614

 
Average invested capital
 
80,226

 
78,457

 
1,769

 
80,217

 
79,688

 
529

 
Return on average assets
 
1.12
%
 
1.86
%
 
(74
)
bp
1.35
%
 
1.55
%
 
(20
)
bp
Return on invested capital
 
20.43
%
 
33.58
%
 
(1,315
)
bp
23.94
%
 
26.80
%
 
(286
)
bp
Efficiency ratio
 
57.54
%
 
50.92
%
 
662

bp
53.75
%
 
55.30
%
 
(155
)
bp
Net charge-offs (recovered) to average loans (annualized)
 
0.50
%
 
0.13
%
 
37

bp
0.94
%
 
0.17
%
 
77

bp
Residential mortgage loans funded for sale
 
$
90,462

 
$
153,460

 
$
(62,998
)
 
$
399,125

 
$
394,701

 
$
4,424

 


- 25 -



Bank of Arkansas

Net income attributable to the Bank of Arkansas decreased $1.0 million compared to the third quarter of 2012. Net interest revenue decreased $400 thousand. Average loan balances were down $28 million or 14% primarily due to a decrease in multifamily residential sector loans and the continued runoff of indirect automobile loans. Average deposits grew $18 million or 9% over the prior year.

Fees and commissions revenue was down $750 thousand compared to the prior year primarily due to decreased securities trading revenue at our Little Rock office and decreased mortgage banking revenue. Other operating expenses were up $1.6 million primarily due to increased corporate expense allocations. 

Table 14 -- Bank of Arkansas
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2013
 
2012
 
 
2013
 
2012
 
 
Net interest revenue
 
$
1,358

 
$
1,758

 
$
(400
)
 
$
4,295

 
$
8,267

 
$
(3,972
)
 
Net loans charged off (recovered)
 
(85
)
 
934

 
(1,019
)
 
(224
)
 
(1,168
)
 
944

 
Net interest revenue after net loans charged off (recovered)
 
1,443

 
824

 
619

 
4,519

 
9,435

 
(4,916
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other operating revenue – fees and commissions
 
11,927

 
12,677

 
(750
)
 
38,597

 
36,428

 
2,169

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
6,397

 
6,100

 
297

 
19,094

 
17,731

 
1,363

 
Net losses and expenses of repossessed assets
 
1,045

 
85

 
960

 
1,277

 
160

 
1,117

 
Other non-personnel expense
 
1,110

 
1,125

 
(15
)
 
3,412

 
3,708

 
(296
)
 
Corporate allocations
 
3,216

 
2,898

 
318

 
9,362

 
8,494

 
868

 
Total other operating expense
 
11,768

 
10,208

 
1,560

 
33,145

 
30,093

 
3,052

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
1,602

 
3,293

 
(1,691
)
 
9,971

 
15,770

 
(5,799
)
 
Federal and state income tax
 
623

 
1,281

 
(658
)
 
3,879

 
6,135

 
(2,256
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
979

 
$
2,012

 
$
(1,033
)
 
$
6,092

 
$
9,635

 
$
(3,543
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
324,481

 
$
226,898

 
$
97,583

 
$
272,821

 
$
249,117

 
$
23,704

 
Average loans
 
176,318

 
204,278

 
(27,960
)
 
171,820

 
229,222

 
(57,402
)
 
Average deposits
 
226,704

 
208,229

 
18,475

 
219,916

 
210,193

 
9,723

 
Average invested capital
 
18,689

 
18,306

 
383

 
18,207

 
20,258

 
(2,051
)
 
Return on average assets
 
1.20
 %
 
3.53
%
 
(233
)
bp
2.99
 %
 
5.17
 %
 
(218
)
bp
Return on invested capital
 
20.78
 %
 
43.72
%
 
(2,294
)
bp
44.74
 %
 
63.53
 %
 
(1,879
)
bp
Efficiency ratio
 
88.58
 %
 
70.72
%
 
1,786

bp
77.28
 %
 
67.33
 %
 
995

bp
Net recoveries to average loans (annualized)
 
(0.19
)%
 
1.82
%
 
(201
)
bp
(0.17
)%
 
(0.68
)%
 
51

bp
Residential mortgage loans funded for sale
 
$
28,621

 
$
28,789

 
$
(168
)
 
$
86,800

 
$
79,543

 
$
7,257

 

- 26 -



Colorado State Bank & Trust

Net income attributed to Colorado State Bank & Trust decreased $1.8 million or 29% compared to the third quarter of 2012 to $4.5 million. Colorado State Bank & Trust experienced a net recovery of $699 thousand in the third quarter of 2013, compared to a net recovery of $2.4 million in the third quarter of 2012. Net interest revenue increased $691 thousand due primarily to a $57 million or 6% increase in average loans outstanding and lower deposit costs, partially offset by decreased yield on funds sold to the Funds Management unit. Average deposits grew $59 million or 5% over the third quarter of 2012. Interest-bearing transaction deposits grew by $64 million and demand deposits were up $35 million, partially offset by a $44 million decrease in time deposits.

Fees and commissions revenue was down $1.2 million over the third quarter of 2012. Trust fees and commissions increased $1.9 million due primarily to the acquisition of the Milestone Group during the third quarter of 2012. The Milestone Group is a Denver-based registered investment adviser which provides wealth management services to high net worth clients in Colorado and Nebraska. Mortgage banking revenue decreased $3.2 million due to lower gains on sale margins. Operating expenses were up $824 thousand over the prior year primarily due to the Milestone Group acquisition. Personnel expenses were up $790 thousand, and non-personnel expenses were up $268 thousand.


- 27 -



Table 15 -- Colorado State Bank & Trust
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2013
 
2012
 
 
2013
 
2012
 
 
Net interest revenue
 
$
9,869

 
$
9,178

 
$
691

 
$
29,774

 
$
26,678

 
$
3,096

 
Net loans charged off (recovered)
 
(699
)
 
(2,367
)
 
1,668

 
(2,710
)
 
(70
)
 
(2,640
)
 
Net interest revenue after net loans charged off (recovered)
 
10,568

 
11,545

 
(977
)
 
32,484

 
26,748

 
5,736

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other operating revenue – fees and commissions revenue
 
11,115

 
12,277

 
(1,162
)
 
36,526

 
28,846

 
7,680

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
7,875

 
7,085

 
790

 
23,479

 
19,123

 
4,356

 
Net losses and expenses of repossessed assets
 
196

 
144

 
52

 
28

 
216

 
(188
)
 
Other non-personnel expense
 
2,314

 
2,046

 
268

 
6,770

 
4,823

 
1,947

 
Corporate allocations
 
3,923

 
4,209

 
(286
)
 
11,631

 
11,667

 
(36
)
 
Total other operating expense
 
14,308

 
13,484

 
824

 
41,908

 
35,829

 
6,079

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
7,375

 
10,338

 
(2,963
)
 
27,102

 
19,765

 
7,337

 
Federal and state income tax
 
2,869

 
4,021

 
(1,152
)
 
10,543

 
7,689

 
2,854

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
4,506

 
$
6,317

 
$
(1,811
)
 
$
16,559

 
$
12,076

 
$
4,483

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
1,376,419

 
$
1,294,910

 
$
81,509

 
$
1,380,544

 
$
1,300,638

 
$
79,906

 
Average loans
 
1,016,173

 
958,842

 
57,331

 
1,048,439

 
890,021

 
158,418

 
Average deposits
 
1,334,937

 
1,276,068

 
58,869

 
1,343,124

 
1,288,010

 
55,114

 
Average invested capital
 
147,463

 
130,633

 
16,830

 
147,860

 
123,235

 
24,625

 
Return on average assets
 
1.30
 %
 
1.94
 %
 
(64
)
bp
1.60
 %
 
1.24
 %
 
36

bp
Return on invested capital
 
12.12
 %
 
19.24
 %
 
(712
)
bp
14.97
 %
 
13.09
 %
 
188

bp
Efficiency ratio
 
68.19
 %
 
62.85
 %
 
534

bp
63.21
 %
 
64.53
 %
 
(132
)
bp
Net charge-offs (recoveries) to average loans (annualized)
 
(0.27
)%
 
(0.98
)%
 
71

bp
(0.35
)%
 
(0.01
)%
 
(34
)
bp
Residential mortgage loans funded for sale
 
$
111,079

 
$
145,306

 
$
(34,227
)
 
$
348,914

 
$
338,121

 
$
10,793

 

- 28 -



Bank of Arizona

Bank of Arizona had net income of $1.1 million for the third quarter of 2013 compared to a net loss of $76 thousand for the third quarter of 2012. Net loans charged off totaled $345 thousand or 0.20% of average loans on an annualized basis for the third quarter of 2013 compared to a net recovery of $1.4 million in the third quarter of 2012.

Net interest revenue increased $1.3 million or 31% over the third quarter of 2012. Average loan balances were up $124 million or 22% over the third quarter of 2012. Average deposits were up $206 million or 58% over the third quarter of 2012. Interest-bearing transaction account balances increased $165 million and demand deposit balances increased $37 million both primarily due to growth in commercial and wealth management deposits.

Fees and commissions revenue was down $353 thousand primarily due to increased mortgage banking revenue. Trust fees and commissions and transaction card revenues both increased over the prior year. Other operating expense decreased $2.6 million or 32% compared to the third quarter of 2012. Personnel expenses increased due to increased headcount and annual merit increases. Net losses and operating expenses of repossessed assets totaled $163 thousand in the third quarter of 2013 compared to $3.6 million in the third quarter of 2012. Impairment charges against repossessed assets based on regularly scheduled appraisal updates were less than the prior year. Non-personnel expenses were unchanged and corporate allocations increased due to increased customer transaction activity.

- 29 -



Table 16 -- Bank of Arizona
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2013
 
2012
 
 
2013
 
2012
 
 
Net interest revenue
 
$
5,605

 
$
4,270

 
$
1,335

 
$
15,573

 
$
12,497

 
$
3,076

 
Net loans charged off (recovered)
 
345

 
(1,391
)
 
1,736

 
(249
)
 
3,029

 
(3,278
)
 
Net interest revenue after net loans charged off (recovered)
 
5,260

 
5,661

 
(401
)
 
15,822

 
9,468

 
6,354

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
2,243

 
2,596

 
(353
)
 
8,362

 
6,949

 
1,413

 
Gain on financial instruments and other assets, net
 
—

 
—

 
—

 
310

 
—

 
310

 
Other operating revenue
 
2,243

 
2,596

 
(353
)
 
8,672

 
6,949

 
1,723

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
3,009

 
2,639

 
370

 
9,200

 
7,634

 
1,566

 
Net losses and expenses of repossessed assets
 
163

 
3,616

 
(3,453
)
 
293

 
7,284

 
(6,991
)
 
Other non-personnel expense
 
876

 
860

 
16

 
2,814

 
2,484

 
330

 
Corporate allocations
 
1,687

 
1,267

 
420

 
5,249

 
3,686

 
1,563

 
Total other operating expense
 
5,735

 
8,382

 
(2,647
)
 
17,556

 
21,088

 
(3,532
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before taxes
 
1,768

 
(125
)
 
1,893

 
6,938

 
(4,671
)
 
11,609

 
Federal and state income tax
 
688

 
(49
)
 
737

 
2,699

 
(1,817
)
 
4,516

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
1,080

 
$
(76
)
 
$
1,156

 
$
4,239

 
$
(2,854
)
 
$
7,093

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
731,940

 
$
625,593

 
$
106,347

 
$
690,075

 
$
609,923

 
$
80,152

 
Average loans
 
690,975

 
567,198

 
123,777

 
643,790

 
553,260

 
90,530

 
Average deposits
 
560,638

 
354,865

 
205,773

 
565,362

 
288,533

 
276,829

 
Average invested capital
 
66,442

 
60,261

 
6,181

 
64,160

 
60,835

 
3,325

 
Return on average assets
 
0.59
%
 
(0.05
)%
 
64

bp
0.82
 %
 
(0.63
)%
 
145

bp
Return on invested capital
 
6.45
%
 
(0.50
)%
 
695

bp
8.83
 %
 
(6.27
)%
 
1,510

bp
Efficiency ratio
 
73.08
%
 
122.08
 %
 
(4,900
)
bp
73.35
 %
 
108.44
 %
 
(3,509
)
bp
Net charge-offs (recoveries) to average loans (annualized)
 
0.20
%
 
(0.98
)%
 
118

bp
(0.05
)%
 
0.73
 %
 
(78
)
bp
Residential mortgage loans funded for sale
 
$
27,154

 
$
29,340

 
$
(2,186
)
 
$
101,002

 
$
70,261

 
$
30,741

 

- 30 -



Bank of Kansas City

Net income attributed to the Bank of Kansas City was $1.4 million for the third quarter of 2013 compared to $2.8 million for the third quarter of 2012. Net interest revenue increased $630 thousand or 19%. Average loan balances increased $95 million or 22% and average deposit balances were up $55 million or 18%. Demand deposit balances grew $89 million due primarily to commercial account balances. Interest-bearing transaction account balances were down $27 million and higher costing time deposit balances decreased by $6.8 million. Bank of Kansas City had a net recovery of $57 thousand for the third quarter of 2013 compared to net charge-offs of $43 thousand for the third quarter of 2012.

Fees and commissions revenue decreased $3.6 million or 34% compared the prior year primarily due to decreased mortgage banking revenue and brokerage and trading revenue. Trust fees and commissions and deposit service charges and fees grew over the prior year. Personnel costs were down $578 thousand primarily due to reduced incentive compensation expense, partially offset by annual merit increases and growth in headcount. Non-personnel expense increased $297 thousand and corporate expense allocations decreased by $395 thousand.

Table 17 -- Bank of Kansas City
(Dollars in thousands)
 
 
Three Months Ended
 
Increase (Decrease)
 
Nine Months Ended
 
Increase (Decrease)
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2013
 
2012
 
 
2013
 
2012
 
 
Net interest revenue
 
$
4,032

 
$
3,402

 
$
630

 
$
11,663

 
$
9,755

 
$
1,908

 
Net loans charged off (recovered)
 
(57
)
 
43

 
(100
)
 
91

 
(113
)
 
204

 
Net interest revenue after net loans charged off (recovered)
 
4,089

 
3,359

 
730

 
11,572

 
9,868

 
1,704

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other operating revenue – fees and commission
 
7,168

 
10,798

 
(3,630
)
 
25,036

 
28,729

 
(3,693
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
4,884

 
5,462

 
(578
)
 
15,007

 
15,018

 
(11
)
 
Net losses and expenses of repossessed assets
 
22

 
58

 
(36
)
 
54

 
49

 
5

 
Other non-personnel expense
 
1,500

 
1,203

 
297

 
4,471

 
3,287

 
1,184

 
Corporate allocations
 
2,485

 
2,880

 
(395
)
 
7,693

 
8,193

 
(500
)
 
Total other operating expense
 
8,891

 
9,603

 
(712
)
 
27,225

 
26,547

 
678

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
2,366

 
4,554

 
(2,188
)
 
9,383

 
12,050

 
(2,667
)
 
Federal and state income tax
 
920

 
1,772

 
(852
)
 
3,650

 
4,687

 
(1,037
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
1,446

 
$
2,782

 
$
(1,336
)
 
$
5,733

 
$
7,363

 
$
(1,630
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
544,304

 
$
460,744

 
$
83,560

 
$
528,303

 
$
446,770

 
$
81,533

 
Average loans
 
528,801

 
433,798

 
95,003

 
510,020

 
425,597

 
84,423

 
Average deposits
 
368,212

 
313,024

 
55,188

 
366,244

 
264,073

 
102,171

 
Average invested capital
 
40,619

 
33,460

 
7,159

 
39,059

 
32,800

 
6,259

 
Return on average assets
 
1.05
 %
 
2.40
%
 
(135
)
bp
1.45
%
 
2.20
 %
 
(75
)
bp
Return on invested capital
 
14.12
 %
 
33.08
%
 
(1,896
)
bp
19.62
%
 
29.99
 %
 
(1,037
)
bp
Efficiency ratio
 
79.38
 %
 
67.63
%
 
1,175

bp
74.18
%
 
68.98
 %
 
520

bp
Net charge-offs (annualized) to average loans
 
(0.04
)%
 
0.04
%
 
(8
)
bp
0.02
%
 
(0.04
)%
 
6

bp
Residential mortgage loans funded for sale
 
$
50,687

 
$
84,707

 
$
(34,020
)
 
$
176,428

 
$
204,817

 
$
(28,389
)
 

- 31 -



Financial Condition
Securities

We maintain a securities portfolio to enhance profitability, support customer transactions, manage interest rate risk, provide liquidity and comply with regulatory requirements. Securities are classified as trading, held for investment, or available for sale. See Note 2 to the consolidated financial statements for the composition of the securities portfolio as of September 30, 2013, December 31, 2012 and September 30, 2012.

At September 30, 2013, the carrying value of investment (held-to-maturity) securities was $644 million and the fair value was $654 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 $83 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 $10.4 billion at September 30, 2013, a decrease of $290 million from June 30, 2013. The decrease was primarily in U.S. government agency residential mortgage-backed securities partially offset by an increase in U.S. government agency backed commercial mortgage-backed securities. Commercial mortgage-backed securities have prepayment penalties similar to commercial loans. At September 30, 2013, residential mortgage-backed securities represented 79% 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. Our best estimate of the duration of the residential mortgage-backed securities portfolio at September 30, 2013 is 3.3 years. Management estimates the duration extends to 3.8 years assuming an immediate 200 basis point upward shock. The estimated duration contracts to 3.1 years assuming a 50 basis point decline in the current rate environment. Net unamortized premiums are less than 1% of the available for sale securities portfolio amortized cost.

Residential mortgage-backed securities also have credit risk from delinquency or default of the underlying loans. We mitigate this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest payments on the underlying loans are fully guaranteed. At September 30, 2013, approximately $7.9 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 $8.0 billion at September 30, 2013.

We also hold amortized cost of $228 million in residential mortgage-backed securities privately issued by publicly-owned financial institutions, a decrease of $65 million from June 30, 2013. The decrease was due to the sale of approximately $45 million in amortized cost during the third quarter and cash received from paydowns. Other-than-temporary impairment losses charged against earnings related to privately issued mortgage-backed securities totaled $140 thousand during the third quarter of 2013. The fair value of our portfolio of privately issued residential mortgage-backed securities totaled $231 million at September 30, 2013.

The amortized cost of our portfolio of privately issued residential mortgage-backed securities included $118 million of Jumbo-A residential mortgage loans and $109 million of Alt-A residential mortgage loans. Jumbo-A residential mortgage loans generally meet government underwriting standards, but have loan balances that exceed agency maximums. Alt-A mortgage loans generally do not have sufficient documentation to meet government agency underwriting standards. Credit risk on residential mortgage-backed securities originated by private issuers is mitigated by investment in senior tranches with additional collateral support. All of our Alt-A residential mortgage-backed securities were issued with credit support from additional layers of loss-absorbing subordinated tranches, including all Alt-A residential mortgage-backed securities held that were originated in 2007 and 2006. The weighted average original credit enhancement of the Alt-A residential mortgage-backed securities was 10.2% and has been fully absorbed as of September 30, 2013. The Jumbo-A residential mortgage-backed securities had original credit enhancement of 9.7% and the current level is 4.0%. Approximately 80% 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 33% 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.

- 32 -




The aggregate gross amount of unrealized losses on available for sale securities totaled $132 million at September 30, 2013, compared to $99 million at June 30, 2013. On a quarterly basis, we perform separate evaluations on debt and equity securities to determine if the unrealized losses are temporary as more fully described in Note 2 of the Consolidated Financial Statements. Other-than-temporary impairment charges of $1.5 million were recognized in earnings in the third quarter of 2013 including $140 thousand of credit impairment related to certain privately issued residential mortgage-backed securities that we do not intend to sell and $1.4 million related to certain municipal securities which the Company now intends to sell prior to recovery of its amortized cost based on a tentative settlement offer from the securities issuer.

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 $282 million of bank-owned life insurance at September 30, 2013. This investment is expected to provide a long-term source of earnings to support existing employee benefit programs. Approximately $251 million is held in separate accounts. Our separate account holdings are invested in diversified portfolios of investment-grade fixed income securities and cash equivalents, including U.S. Treasury and Agency securities, residential mortgage-backed securities, corporate debt, asset-backed and commercial mortgage-backed securities. The portfolios are managed by unaffiliated professional managers within parameters established in the portfolio’s investment guidelines. The cash surrender value of certain life insurance policies is further supported by a stable value wrap, which protects against changes in the fair value of the investments. At September 30, 2013, the cash surrender value represented by the underlying fair value of investments held in separate accounts was approximately $263 million. As the underlying fair value of the investments held in a separate account at September 30, 2013 exceeded the net book value of the investments, no cash surrender value was supported by the stable value wrap. The stable value wrap is provided by a domestic financial institution. The remaining cash surrender value of $31 million primarily represents the cash surrender value of policies held in general accounts and other amounts due from various insurance companies.

- 33 -



Loans

The aggregate loan portfolio before allowance for loan losses totaled $12.4 billion at September 30, 2013, a decrease of $91 million compared to June 30, 2013.

Table 18 -- Loans
(In thousands)
 
 
September 30,
2013
 
June 30,
2013
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,311,991

 
$
2,384,746

 
$
2,349,432

 
$
2,460,659

 
$
2,416,877

Services
 
2,148,551

 
2,204,253

 
2,114,799

 
2,164,186

 
1,967,568

Wholesale/retail
 
1,181,806

 
1,175,543

 
1,085,000

 
1,106,439

 
1,060,061

Manufacturing
 
382,460

 
386,133

 
399,818

 
348,484

 
343,360

Healthcare
 
1,160,212

 
1,118,810

 
1,081,636

 
1,081,406

 
1,022,851

Integrated food services
 
141,440

 
163,551

 
173,800

 
191,106

 
200,453

Other commercial and industrial
 
244,615

 
275,084

 
213,820

 
289,632

 
255,737

Total commercial
 
7,571,075

 
7,708,120

 
7,418,305

 
7,641,912

 
7,266,907

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
216,456

 
225,654

 
237,829

 
253,093

 
293,733

Retail
 
556,918

 
553,412

 
584,279

 
522,786

 
535,456

Office
 
422,043

 
459,558

 
420,644

 
427,872

 
414,246

Multifamily
 
520,454

 
500,452

 
460,474

 
402,896

 
393,129

Industrial
 
245,022

 
253,990

 
237,049

 
245,994

 
183,846

Other real estate
 
388,336

 
324,030

 
344,885

 
376,358

 
356,862

Total commercial real estate
 
2,349,229

 
2,317,096

 
2,285,160

 
2,228,999

 
2,177,272

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,078,661

 
1,095,871

 
1,091,575

 
1,123,965

 
1,138,960

Permanent mortgages guaranteed by U.S. government agencies
 
163,919

 
156,887

 
162,419

 
160,444

 
162,271

Home equity
 
792,185

 
787,027

 
758,456

 
760,631

 
715,072

Total residential mortgage
 
2,034,765

 
2,039,785

 
2,012,450

 
2,045,040

 
2,016,303

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
10,757

 
16,555

 
24,368

 
34,735

 
47,281

Other consumer
 
384,274

 
359,226

 
353,281

 
360,770

 
324,604

Total consumer
 
395,031

 
375,781

 
377,649

 
395,505

 
371,885

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
12,350,100

 
$
12,440,782

 
$
12,093,564

 
$
12,311,456

 
$
11,832,367


Outstanding commercial loan balances decreased $137 million compared to June 30, 2013. Commercial loan balances grew in all the geographical markets except for Oklahoma and Colorado. Commercial real estate loans grew by $32 million during the third quarter of 2013, primarily in the Texas and Colorado markets. Residential mortgage loans were down $5.0 million compared to June 30, 2013. Consumer loans were up $19 million over June 30, 2013 primarily due to the growth in other consumer loans in the Texas market. 

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.





- 34 -



Table 19 -- Loans by Principal Market
(In thousands)
 
 
September 30,
2013
 
June 30,
2013
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
Bank of Oklahoma:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
2,801,979

 
$
2,993,247

 
$
2,853,608

 
$
3,089,686

 
$
3,015,621

Commercial real estate
 
564,141

 
569,780

 
568,500

 
580,694

 
598,667

Residential mortgage
 
1,497,027

 
1,503,457

 
1,468,434

 
1,488,486

 
1,466,590

Consumer
 
207,360

 
211,744

 
207,662

 
220,096

 
197,457

Total Bank of Oklahoma
 
5,070,507

 
5,278,228

 
5,098,204

 
5,378,962

 
5,278,335

 
 
 
 
 
 
 
 
 
 
 
Bank of Texas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
2,858,970

 
2,849,888

 
2,718,050

 
2,726,925

 
2,572,928

Commercial real estate
 
853,857

 
813,659

 
800,577

 
771,796

 
712,899

Residential mortgage
 
263,945

 
263,916

 
272,406

 
275,408

 
268,250

Consumer
 
129,144

 
105,390

 
110,060

 
116,252

 
108,854

Total Bank of Texas
 
4,105,916

 
4,032,853

 
3,901,093

 
3,890,381

 
3,662,931

 
 
 
 
 
 
 
 
 
 
 
Bank of Albuquerque:
 
 

 
 

 
 

 
 

 
 

Commercial
 
325,542

 
296,036

 
271,075

 
265,830

 
267,467

Commercial real estate
 
306,914

 
314,871

 
332,928

 
326,135

 
316,040

Residential mortgage
 
131,756

 
133,058

 
129,727

 
130,337

 
120,606

Consumer
 
14,583

 
14,364

 
14,403

 
15,456

 
15,883

Total Bank of Albuquerque
 
778,795

 
758,329

 
748,133

 
737,758

 
719,996

 
 
 
 
 
 
 
 
 
 
 
Bank of Arkansas:
 
 

 
 

 
 

 
 

 
 

Commercial
 
73,063

 
61,414

 
54,191

 
62,049

 
48,097

Commercial real estate
 
84,364

 
85,546

 
88,264

 
90,821

 
119,306

Residential mortgage
 
10,466

 
10,691

 
11,285

 
13,046

 
12,939

Consumer
 
9,426

 
11,819

 
13,943

 
15,421

 
19,720

Total Bank of Arkansas
 
177,319

 
169,470

 
167,683

 
181,337

 
200,062

 
 
 
 
 
 
 
 
 
 
 
Colorado State Bank & Trust:
 
 

 
 

 
 

 
 

 
 

Commercial
 
748,331

 
786,262

 
822,942

 
776,610

 
708,223

Commercial real estate
 
158,320

 
146,137

 
171,251

 
173,327

 
158,387

Residential mortgage
 
66,475

 
62,490

 
56,052

 
59,363

 
59,395

Consumer
 
22,592

 
23,148

 
20,990

 
19,333

 
19,029

Total Colorado State Bank & Trust
 
995,718

 
1,018,037

 
1,071,235

 
1,028,633

 
945,034

 
 
 
 
 
 
 
 
 
 
 
Bank of Arizona:
 
 

 
 

 
 

 
 

 
 

Commercial
 
379,817

 
355,698

 
326,266

 
313,296

 
300,544

Commercial real estate
 
250,129

 
258,938

 
229,020

 
201,760

 
204,164

Residential mortgage
 
49,109

 
51,774

 
54,285

 
57,803

 
65,513

Consumer
 
7,059

 
4,947

 
5,664

 
4,686

 
6,150

Total Bank of Arizona
 
686,114

 
671,357

 
615,235

 
577,545

 
576,371

 
 
 
 
 
 
 
 
 
 
 
Bank of Kansas City:
 
 

 
 

 
 

 
 

 
 

Commercial
 
383,373

 
365,575

 
372,173

 
407,516

 
354,027

Commercial real estate
 
131,504

 
128,165

 
94,620

 
84,466

 
67,809

Residential mortgage
 
15,987

 
14,399

 
20,261

 
20,597

 
23,010

Consumer
 
4,867

 
4,369

 
4,927

 
4,261

 
4,792

Total Bank of Kansas City
 
535,731

 
512,508

 
491,981

 
516,840

 
449,638

 
 
 
 
 
 
 
 
 
 
 
Total BOK Financial loans
 
$
12,350,100

 
$
12,440,782

 
$
12,093,564

 
$
12,311,456

 
$
11,832,367



- 35 -



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 healthcare sector loans grew $41 million over June 30, 2013. This growth was offset by decreases of $73 million in energy sector loans, $56 million in service sector loans, $30 million in integrated food service sector loans and $30 million in other commercial and industrial sector loans. Commercial loans attributed to the New Mexico market were up $30 million and commercial loans attributed to the Arizona market were up $24 million over June 30, 2013. Commercial loans also grew in the Kansas/Missouri, Arkansas and Texas markets. This loan growth was offset by a $191 million decrease in loans attributed to the Oklahoma market and a $38 million decrease in loans attributed to the Colorado market.

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

Table 20 -- Commercial Loans by Principal Market
(In thousands)
 
 
Bank of Oklahoma
 
Bank of Texas
 
Bank of Albuquerque
 
Bank of Arkansas
 
Colorado State Bank & Trust
 
Bank of Arizona
 
Bank of Kansas City
 
Total
Energy
 
$
873,257

 
$
1,010,919

 
$
6,208

 
$
196

 
$
421,411

 
$
—

 
$
—

 
$
2,311,991

Services
 
658,874

 
748,855

 
208,961

 
13,811

 
211,930

 
163,803

 
142,317

 
2,148,551

Wholesale/retail
 
402,098

 
548,067

 
28,019

 
43,064

 
12,777

 
93,484

 
54,297

 
1,181,806

Healthcare
 
576,577

 
320,526

 
63,920

 
3,653

 
79,647

 
86,957

 
28,932

 
1,160,212

Manufacturing
 
200,784

 
117,880

 
3,768

 
5,101

 
7,982

 
32,240

 
14,705

 
382,460

Integrated food services
 
3,574

 
5,102

 
—

 
—

 
12,059

 
—

 
120,705

 
141,440

Other commercial and industrial
 
86,815

 
107,621

 
14,666

 
7,238

 
2,525

 
3,333

 
22,417

 
244,615

Total commercial loans
 
$
2,801,979

 
$
2,858,970

 
$
325,542

 
$
73,063

 
$
748,331

 
$
379,817

 
$
383,373

 
$
7,571,075

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

Outstanding energy loans totaled $2.3 billion or 19% of total loans at September 30, 2013. Unfunded energy loan commitments increased by $124 million to $2.6 billion at September 30, 2013. Approximately $2.0 billion of energy loans were to oil and gas producers, down $65 million compared to June 30, 2013. Approximately 59% of the committed production loans are secured by properties primarily producing oil and 41% of the committed production loans are secured by properties primarily producing natural gas. Loans to borrowers engaged in wholesale or retail energy sales decreased $31 million to $209 million. At September 30, 2013, loans to borrowers that provide services to the energy industry were $56 million and loans to borrowers that manufacture equipment primarily for the energy industry were $21 million, largely unchanged compared to the prior quarter.


- 36 -



The services sector of the loan portfolio totaled $2.1 billion or 17% of total loans and consists of a large number of loans to a variety of businesses, including gaming, educational, public finance, insurance and community foundations. Service sector loans decreased $56 million from June 30, 2013. Approximately $1.1 billion of the services category is made up of loans with individual balances of less than $10 million. Service sector loans are generally secured by the assets of the borrower with repayment coming from the cash flows of ongoing operations of the customer’s business. 

We participate in shared national credits when appropriate to obtain or maintain business relationships with local customers. Shared national credits are defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants. At September 30, 2013, the outstanding principal balance of these loans totaled $2.3 billion. Substantially all of these loans are to borrowers with local market relationships. We serve as the agent lender in approximately 15% 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, banking regulators annually review a sample of shared national credits for proper risk grading.

Commercial Real Estate

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

Commercial real estate loans totaled $2.3 billion or 19% of the loan portfolio at September 30, 2013. The outstanding balance of commercial real estate loans increased $32 million over the second quarter of 2013. Loans secured by multifamily residential properties grew by $20 million, primarily growing in the Texas market and offset by decreases in loans attributed to the Arizona market. Other real estate loans increased $64 million primarily in the New Mexico and Texas markets. Loans secured by office buildings decreased $38 million primarily in the New Mexico market. Retail sector loans grew in the Arizona market, partially offset by decreases in the Oklahoma and Texas markets. The commercial real estate loan balance as a percentage of our total loan portfolio has ranged from 18% to 22% over the past five years. The commercial real estate sector of our loan portfolio is distributed as follows in Table 21.

Table 21 -- Commercial Real Estate Loans by Principal Market
(In thousands)
 
 
Bank of Oklahoma
 
Bank of Texas
 
Bank of Albuquerque
 
Bank of Arkansas
 
Colorado State Bank & Trust
 
Bank of Arizona
 
Bank of Kansas City
 
Total
Construction and land development
 
$
70,988

 
$
37,588

 
$
45,956

 
$
14,656

 
$
32,755

 
$
7,005

 
$
7,508

 
$
216,456

Retail
 
121,683

 
225,759

 
64,490

 
12,226

 
22,876

 
94,859

 
15,025

 
556,918

Office
 
84,765

 
186,570

 
55,552

 
8,658

 
25,822

 
47,773

 
12,903

 
422,043

Multifamily
 
145,766

 
185,429

 
40,056

 
21,088

 
17,052

 
52,129

 
58,934

 
520,454

Industrial
 
44,932

 
111,790

 
36,770

 
407

 
6,494

 
22,933

 
21,696

 
245,022

Other real estate
 
96,007

 
106,721

 
64,090

 
27,329

 
53,321

 
25,430

 
15,438

 
388,336

Total commercial real estate loans
 
$
564,141

 
$
853,857

 
$
306,914

 
$
84,364

 
$
158,320

 
$
250,129

 
$
131,504

 
$
2,349,229

 
Construction and land development loans, which consist primarily of residential construction properties and developed building lots, decreased $9.2 million from June 30, 2013 to $216 million at September 30, 2013 primarily due to payments. 

- 37 -



Residential Mortgage and Consumer

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

Residential mortgage loans totaled $2.0 billion, a decrease of $5.0 million compared to June 30, 2013. In general, we sell the majority of our conforming fixed rate loan originations in the secondary market and retain the majority of our non-conforming and adjustable-rate mortgage loans. We have no concentration in sub-prime residential mortgage loans. Our mortgage loan portfolio does not include payment option adjustable rate mortgage loans or adjustable rate mortgage loans with initial rates that are below market.

The majority of our permanent mortgage loan portfolio is primarily composed of various non-conforming mortgage programs to support customer relationships including jumbo mortgage loans, non-builder construction loans and special loan programs for high net worth individuals or certain professionals. The aggregate outstanding balance of loans in these programs is $1.0 billion. Jumbo loans may be fixed or variable rate and are fully amortizing. The size of jumbo loans exceed maximums set under government sponsored entity standards, but otherwise generally conform to those standards. These loans generally require a minimum FICO score of 720 and a maximum debt-to-income ratio (“DTI”) of 38%. Loan-to-value ratios (“LTV”) are tiered from 60% to 100%, depending on the market. Special mortgage programs include fixed and variable rate fully amortizing loans tailored to the needs of certain healthcare professionals. Variable rate loans are fully indexed at origination and may have fixed rates for three to ten years, then adjust annually thereafter.

Approximately $61 million or 6% of the non-guaranteed portion of the permanent mortgage loans consist of first lien, fixed-rate residential mortgage loans originated under various community development programs. The outstanding balance of these loans is down from $64 million at June 30, 2013. These loans were underwritten to standards approved by various U.S. government agencies under these programs and include full documentation. However, these loans do have a higher risk of delinquency and losses in the event of default than traditional residential mortgage loans. The initial maximum LTV of loans in these programs was 103%.

At September 30, 2013, $164 million of permanent residential mortgage loans are guaranteed by U.S. government agencies. We have minimal credit exposure on loans guaranteed by the agencies. This amount includes residential mortgage loans previously sold into GNMA mortgage pools that the Company may repurchase when certain defined delinquency criteria are met. Because of this repurchase right, the Company is deemed to have regained effective control over these loans and must include them on the Consolidated Balance Sheet. Permanent residential mortgage loans guaranteed by U.S. government agencies increased $7.0 million over June 30, 2013.

Home equity loans totaled $792 million at September 30, 2013, a $5.2 million increase over June 30, 2013. Our home equity loan portfolio is primarily composed of first-lien, fully amortizing home equity loans. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 40%. The maximum loan amount available for our home equity loan products is generally $400 thousand. Revolving loans have a 5 year revolving period followed by 15 year term of amortizing repayment. Interest-only home equity loans may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term subject to an update of certain credit information. A summary of our home equity loan portfolio at September 30, 2013 by lien position and amortizing status follows in Table 22.

Table 22 -- Home Equity Loans
(In thousands)
 
 
Revolving
 
Amortizing
 
Total
First lien
 
$
38,786

 
$
516,101

 
$
554,887

Junior lien
 
58,854

 
178,444

 
237,298

Total home equity
 
$
97,640

 
$
694,545

 
$
792,185



- 38 -



Indirect automobile loans decreased $5.8 million from June 30, 2013, primarily due to the previously-disclosed decision by the Company to exit the business in the first quarter of 2009. Approximately $11 million of indirect automobile loans remain outstanding at September 30, 2013. Other consumer loans increased $25 million, primarily in the Texas market, during the third quarter of 2013.

The composition of residential mortgage and consumer loans at September 30, 2013 is as follows in Table 23. All permanent residential mortgage loans originated and serviced by our mortgage banking unit are attributed to the Oklahoma market. Other permanent residential mortgage loans originated by the Bank are attributed to their respective principal market.

Table 23 -- Residential Mortgage and Consumer Loans by Principal Market
(In thousands)
 
 
Bank of Oklahoma
 
Bank of Texas
 
Bank of Albuquerque
 
Bank of Arkansas
 
Colorado State Bank & Trust
 
Bank of Arizona
 
Bank of Kansas City
 
Total
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
$
864,317

 
$
122,379

 
$
5,568

 
$
5,365

 
$
34,983

 
$
38,963

 
$
7,086

 
$
1,078,661

Permanent mortgages guaranteed by U.S. government agencies
 
163,919

 
—

 
—

 
—

 
—

 
—

 
—

 
163,919

Home equity
 
468,791

 
141,566

 
126,188

 
5,101

 
31,492

 
10,146

 
8,901

 
792,185

Total residential mortgage
 
$
1,497,027

 
$
263,945

 
$
131,756

 
$
10,466

 
$
66,475

 
$
49,109

 
$
15,987

 
$
2,034,765

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
$
4,973

 
$
2,222

 
$
—

 
$
3,562

 
$
—

 
$
—

 
$
—

 
$
10,757

Other consumer
 
202,387

 
126,922

 
14,583

 
5,864

 
22,592

 
7,059

 
4,867

 
384,274

Total consumer
 
$
207,360

 
$
129,144

 
$
14,583

 
$
9,426

 
$
22,592

 
$
7,059

 
$
4,867

 
$
395,031

Loan Commitments

We enter into certain off-balance sheet arrangements in the normal course of business. These arrangements included unfunded loan commitments which totaled $7.2 billion and standby letters of credit which totaled $440 million at September 30, 2013. Loan commitments may be unconditional obligations to provide financing or conditional obligations that depend on the borrower’s financial condition, collateral value or other factors. Standby letters of credit are unconditional commitments to guarantee the performance of our customer to a third party. Since some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Approximately $629 thousand of the outstanding standby letters of credit were issued on behalf of customers whose loans are nonperforming at September 30, 2013.

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 September 30, 2013, the principal balance of residential mortgage loans sold subject to recourse obligations totaled $198 million, down from $212 million at June 30, 2013. Substantially all of these loans are to borrowers in our primary markets including $138 million to borrowers in Oklahoma, $21 million to borrowers in Arkansas, $13 million to borrowers in New Mexico and $11 million to borrowers in the Kansas/Missouri market.

We also have an off-balance sheet obligation to repurchase residential mortgage loans sold to government sponsored entities through our mortgage banking activities due to standard representations and warranties made under contractual agreements as described further in Note 5 to the Consolidated Financial Statements. For the period from 2010 through the third quarter of 2013 combined, approximately 12% of repurchase requests have currently resulted in actual repurchases or indemnification by the Company. The accrual for credit losses related to potential loan repurchases under representations and warranties totaled $7.9 million at September 30, 2013 and $6.2 million at June 30, 2013.

- 39 -



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

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

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

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

Derivative contracts are carried at fair value. At September 30, 2013, the net fair values of derivative contracts, before consideration of cash margin, reported as assets under these programs totaled $386 million compared to $551 million at June 30, 2013. 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 $124 million, interest rate swaps sold to loan customers with fair values of $49 million, energy contracts with fair values of $31 million and foreign exchange contracts with fair values of $165 million. The aggregate net fair values of derivative contracts, before consideration of cash margin, held under these programs reported as liabilities totaled $382 million at September 30, 2013 and $545 million at June 30, 2013.

At September 30, 2013, total derivative assets were reduced by $9.2 million of cash collateral received from counterparties and total derivative liabilities were reduced by $152 million of cash collateral paid to counterparties related to instruments executed with the same counterparty under a master netting agreement.

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

The fair value of derivative contracts reported as assets under these programs, net of cash margin held by the Company, by category of debtor at September 30, 2013 follows in Table 24.


Table 24 -- Fair Value of Derivative Contracts
(In thousands)
Customers
 
$
247,717

Banks and other financial institutions
 
127,535

Energy companies
 
1,419

Exchanges and clearing organizations
 
654

Fair value of customer risk management program asset derivative contracts, net
 
$
377,325

 

- 40 -



At September 30, 2013, our largest exposure was to a loan customer for an interest rate swap which totaled $8.5 million at September 30, 2013. We have no direct exposure to European sovereign debt and our aggregate gross exposure to European financial institutions totaled $6.7 million at September 30, 2013. In addition, we have an aggregate gross exposure to internationally active domestic financial institutions of approximately $218 million at September 30, 2013.

Our customer derivative program also introduces liquidity and capital risk. We are required to provide cash margin to certain counterparties when the net negative fair value of the contracts exceeds established limits. Also, changes in commodity prices affect the amount of regulatory capital we are required to hold as support for the fair value of our derivative assets. These risks are modeled as part of the management of these programs. Based on current prices, a decrease in market prices equivalent to $32.43 per barrel of oil would increase the fair value of derivative assets by $10 million. An increase in prices equivalent to $159.60 per barrel of oil would increase the fair value of derivative assets by $351 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 our credit rating to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $27 million. The fair value of our to-be-announced residential mortgage-backed securities and interest rate swap derivative contracts is affected by changes in interest rates. Based on our assessment as of September 30, 2013, changes in interest rate would not materially impact regulatory capital or liquidity needed to support this portion of our customer derivative program.
Summary of Loan Loss Experience

We maintain an allowance for loan losses and an accrual for off-balance sheet credit risk. The combined allowance for loan losses and off-balance sheet credit losses totaled $196 million or 1.59% of outstanding loans and 174% of nonaccruing loans at September 30, 2013. The allowance for loans losses was $194 million and the accrual for off-balance sheet credit losses was $1.6 million. At June 30, 2013, the combined allowance for credit losses was $205 million or 1.65% of outstanding loans and 168% of nonaccruing loans at June 30, 2013. The allowance for loan losses was $203 million and the accrual for off-balance sheet credit losses was $1.6 million. 

The provision for credit losses is the amount necessary to maintain the allowance for loan losses and an accrual for off-balance sheet credit risk at an amount determined by management to be appropriate based on its evaluation. The provision includes the combined charge to expense for both the allowance for loan losses and the accrual for off-balance sheet credit risk. All losses incurred from lending activities will ultimately be reflected in charge-offs against the allowance for loan losses following funds advanced against outstanding commitments. After evaluating all credit factors, the Company determined that an $8.5 million negative provision for credit losses was necessary during the third quarter of 2013 primarily due to a decrease in gross loss rates. No provision for credit losses was recorded in both the second quarter of 2013 and the third quarter of 2012.


- 41 -



Table 25 -- Summary of Loan Loss Experience
(In thousands)
 
 
Three Months Ended
 
 
 
September 30,
2013
 
June 30,
2013
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
203,124

 
$
205,965

 
$
215,507

 
$
233,756

 
$
231,669

 
Loans charged off:
 
 
 
 
 
 
 
 
 
 

 
Commercial
 
(1,354
)
 
(4,538
)
 
(298
)
 
(1,501
)
 
(812
)
 
Commercial real estate
 
(419
)
 
(450
)
 
(4,800
)
 
(1,094
)
 
(2,607
)
 
Residential mortgage
 
(961
)
 
(2,057
)
 
(1,779
)
 
(2,600
)
 
(1,600
)
 
Consumer
 
(1,974
)
 
(1,507
)
 
(2,032
)
 
(2,805
)
 
(3,902
)
 
Total
 
(4,708
)
 
(8,552
)
 
(8,909
)
 
(8,000
)
 
(8,921
)
 
Recoveries of loans previously charged off:
 
 
 
 
 
 
 
 
 
 

 
Commercial
 
864

 
1,940

 
3,393

 
947

 
(890
)
1 
Commercial real estate
 
2,073

 
2,727

 
1,124

 
1,166

 
2,684

 
Residential mortgage
 
188

 
444

 
572

 
469

 
298

 
Consumer
 
1,284

 
1,099

 
1,468

 
1,141

 
1,112

 
Total
 
4,409

 
6,210

 
6,557

 
3,723

 
3,204

 
Net loans charged off
 
(299
)
 
(2,342
)
 
(2,352
)
 
(4,277
)
 
(5,717
)
 
Provision for loan losses
 
(8,500
)
 
(499
)
 
(7,190
)
 
(13,972
)
 
7,804

 
Ending balance
 
$
194,325

 
$
203,124

 
$
205,965

 
$
215,507

 
$
233,756

 
Accrual for off-balance sheet credit losses:
 
 
 
 
 
 
 
 
 
 

 
Beginning balance
 
$
1,604

 
$
1,105

 
$
1,915

 
$
1,943

 
$
9,747

 
Provision for off-balance sheet credit losses
 
—

 
499

 
(810
)
 
(28
)
 
(7,804
)
 
Ending balance
 
$
1,604

 
$
1,604

 
$
1,105

 
$
1,915

 
$
1,943

 
Total combined provision for credit losses
 
$
(8,500
)
 
$
—

 
$
(8,000
)
 
$
(14,000
)
 
$
—

 
Allowance for loan losses to loans outstanding at period-end
 
1.57
 %
 
1.63
%
 
1.70
 %
 
1.75
 %
 
1.98
%
 
Net charge-offs (annualized) to average loans
 
0.01
 %
 
0.08
%
 
0.08
 %
 
0.14
 %
 
0.19
%
1 
Total provision for credit losses (annualized) to average loans
 
(0.27
)%
 
—
%
 
(0.26
)%
 
(0.47
)%
 
—
%
 
Recoveries to gross charge-offs
 
93.65
 %
 
72.61
%
 
73.60
 %
 
46.54
 %
 
35.92
%
 
Accrual for off-balance sheet credit losses to off-balance sheet credit commitments
 
0.02
 %
 
0.02
%
 
0.02
 %
 
0.03
 %
 
0.03
%
 
Combined allowance for credit losses to loans outstanding at period-end
 
1.59
 %
 
1.65
%
 
1.71
 %
 
1.77
 %
 
1.99
%
 
1 
Includes $7.1 million of negative recovery related to a refund of a settlement between BOK Financial and the City of Tulsa invalidated by the Oklahoma Supreme Court. Excluding this refund, BOK Financial had net charge-offs (recoveries) to average loans of (0.05%) on an annualized basis.

- 42 -



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 estimated loss rates by loan class and non-specific allowances based on general economic conditions, concentration in loans with large balances and other relevant factors.

Loans are considered to be impaired when it is probable that we will not collect all amounts due according to the contractual terms of the loan agreement. This includes all nonaccruing loans, all loans modified in troubled debt restructurings and all government guaranteed loans repurchased from GNMA pools. At September 30, 2013, impaired loans totaled $276 million, including $2.5 million with specific allowances of $1.3 million and $274 million with no specific allowances because the loan balances represent the amounts we expect to recover. At June 30, 2013, impaired loans totaled $279 million, including $5.7 million of impaired loans with specific allowances of $2.0 million and $273 million with no specific allowances.

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

The aggregate amount of general allowances for all unimpaired loans totaled $152 million at September 30, 2013 compared to $159 million at June 30, 2013. The general allowance related to commercial loans decreased $2.3 million and the general allowance related to commercial real estate loans decreased $3.9 million primarily due to the continued downward trend of loss rates.

Nonspecific allowances are maintained for risks beyond factors specific to a particular portfolio segment or loan class. These factors include trends in the economy in our primary lending areas, concentrations in loans with large balances and other relevant factors. Nonspecific allowances totaled $41 million at September 30, 2013, largely unchanged from June 30, 2013. The nonspecific allowance at both September 30, 2013 and June 30, 2013 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. Risks related to the European debt crisis and domestic economic risks remain stable compared to the previous quarter. An identified risk related to the rapid rise in interest rates during the year is also considered. As interest rates increase and variable rate loans re-price, borrowers are impacted as their debt service increases.

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 loan 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 $75 million at September 30, 2013, primarily composed of $17 million of construction and land development loans, $12 million of loans secured by multifamily residential properties, $11 million of service sector loans and $11 million of other commercial real estate loans. Potential problem loans totaled $91 million at June 30, 2013.

- 43 -



Net Loans Charged Off

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

Net loans charged off during the third quarter of 2013 totaled $299 thousand compared to $2.3 million in the second quarter of 2013 and $5.7 million in the third quarter of 2012. The ratio of net loans charged off to average loans on an annualized basis was 0.01% for the third quarter of 2013 compared with 0.08% for the second quarter of 2013 and 0.19% for the third quarter of 2012. Net loans charged off in the third quarter of 2013 decreased $2.0 million compared to the previous quarter.

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



Table 26 -- Net Loans Charged Off (Recovered)
(In thousands)
 
 
Oklahoma
 
Texas
 
Colorado
 
Arkansas
 
New
Mexico
 
Arizona
 
Kansas/
Missouri
 
Total
Commercial
 
$
(506
)
 
$
(238
)
 
$
(4
)
 
$
(17
)
 
$
143

 
$
1,114

 
$
(2
)
 
$
490

Commercial real estate
 
(518
)
 
(1
)
 
(715
)
 
—

 
352

 
(772
)
 
—

 
(1,654
)
Residential mortgage
 
520

 
(37
)
 
—

 
5

 
304

 
(12
)
 
(7
)
 
773

Consumer
 
384

 
206

 
20

 
(73
)
 
186

 
15

 
(48
)
 
690

Total net loans charged off (recovered)
 
$
(120
)
 
$
(70
)
 
$
(699
)
 
$
(85
)
 
$
985

 
$
345

 
$
(57
)
 
$
299


Net commercial loans charged off during the third quarter of 2013 decreased $2.1 million. The impact of a $4.0 million charge-off related to a single wholesale/retail sector customer in the New Mexico market in the second quarter of 2013 was partially offset by a $1.1 million charge-off of a single service sector loan in the Arizona market during the third quarter.

Net charge-offs of commercial real estate loans increased $623 thousand over the second quarter of 2013. The second quarter of 2013 included $1.8 million recovery from a single construction and land development relationship attributed to the Colorado market. Net charge-offs in the New Mexico market were primarily composed of a $380 thousand loan to a single multifamily residential borrower.

Residential mortgage net charge-offs were down $840 thousand compared to the previous quarter and consumer loan net charge-offs, which include indirect auto loan and deposit account overdraft losses, increased $282 thousand. Net charge-offs related to residential mortgage loans serviced by the our mortgage banking division that were originated across the geographical footprint and retained by the Company are attributed to the Oklahoma market.

- 44 -



Nonperforming Assets

Table 27 -- Nonperforming Assets
(In thousands)
 
 
September 30,
2013
 
June 30,
2013
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
Nonaccruing loans:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
19,522

 
$
20,869

 
$
19,861

 
$
24,467

 
$
21,762

Commercial real estate
 
52,502

 
58,693

 
65,175

 
60,626

 
75,761

Residential mortgage
 
39,256

 
40,534

 
45,426

 
46,608

 
29,267

Consumer
 
1,624

 
2,037

 
2,171

 
2,709

 
5,109

Total nonaccruing loans
 
112,904

 
122,133

 
132,633

 
134,410

 
131,899

Accruing renegotiated loans:
 
 
 
 
 
 
 
 
 
 
Guaranteed by U.S. government agencies
 
50,099

 
48,733

 
47,942

 
38,515

 
24,590

Other
 
—

 
—

 
—

 
—

 
3,402

Total accruing renegotiated loans
 
50,099

 
48,733

 
47,942

 
38,515

 
27,992

Total nonperforming loans
 
163,003

 
170,866

 
180,575

 
172,925

 
159,891

Real estate and other repossessed assets:
 
 
 
 
 
 
 
 
 
 
Guaranteed by U.S. government agencies
 
37,906

 
32,155

 
27,864

 
22,365

 
22,819

Other
 
70,216

 
77,957

 
74,837

 
81,426

 
81,309

Real estate and other repossessed assets
 
108,122

 
110,112

 
102,701

 
103,791

 
104,128

Total nonperforming assets
 
$
271,125

 
$
280,978

 
$
283,276

 
$
276,716

 
$
264,019

Total nonperforming assets excluding those guaranteed by U.S. government agencies
 
$
182,543

 
$
200,007

 
$
207,256

 
$
215,347

 
$
216,610

 
 
 
 
 
 
 
 
 
 
 
Nonaccruing loans by principal market:
 
 
 
 
 
 
 
 

 
 

Bank of Oklahoma
 
$
49,245

 
$
52,541

 
$
54,392

 
$
56,424

 
$
41,599

Bank of Texas
 
20,127

 
21,620

 
37,571

 
31,623

 
28,046

Bank of Albuquerque
 
21,369

 
24,134

 
12,479

 
13,401

 
13,233

Bank of Arkansas
 
896

 
998

 
1,008

 
1,132

 
5,958

Colorado State Bank & Trust
 
8,754

 
9,510

 
11,771

 
14,364

 
22,878

Bank of Arizona
 
12,507

 
13,323

 
15,392

 
17,407

 
20,145

Bank of Kansas City
 
6

 
7

 
20

 
59

 
40

Total nonaccruing loans
 
$
112,904

 
$
122,133

 
$
132,633

 
$
134,410

 
$
131,899

 
 
 
 
 
 
 
 
 
 
 
Nonaccruing loans by loan portfolio segment and class:
 
 
 
 
 
 

 
 

Commercial:
 
 
 
 
 
 
 
 

 
 

Energy
 
$
1,953

 
$
2,277

 
$
2,377

 
$
2,460

 
$
3,063

Manufacturing
 
843

 
876

 
1,848

 
2,007

 
2,283

Wholesale / retail
 
7,223

 
6,700

 
2,239

 
3,077

 
2,007

Integrated food services
 
—

 
—

 
—

 
684

 
—

Services
 
6,927

 
7,448

 
9,474

 
12,090

 
10,099

Healthcare
 
1,733

 
2,670

 
2,962

 
3,166

 
3,305

Other
 
843

 
898

 
961

 
983

 
1,005

Total commercial
 
19,522

 
20,869

 
19,861

 
24,467

 
21,762

 
 
 
 
 
 
 
 
 
 
 

- 45 -



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

 
 

Land development and construction
 
20,784

 
21,135

 
23,462

 
26,131

 
38,143

Retail
 
7,914

 
8,406

 
8,921

 
8,117

 
6,692

Office
 
6,838

 
7,828

 
12,851

 
6,829

 
9,833

Multifamily
 
4,350

 
6,447

 
4,501

 
2,706

 
3,145

Industrial
 
—

 
—

 
2,198

 
3,968

 
4,064

Other commercial real estate
 
12,616

 
14,877

 
13,242

 
12,875

 
13,884

Total commercial real estate
 
52,502

 
58,693

 
65,175

 
60,626

 
75,761

Residential mortgage:
 
 
 
 
 
 
 
 

 
 

Permanent mortgage
 
31,797

 
32,747

 
38,153

 
39,863

 
23,207

Permanent mortgage guaranteed by U.S. government agencies
 
577

 
83

 
214

 
489

 
510

Home equity
 
6,882

 
7,704

 
7,059

 
6,256

 
5,550

Total residential mortgage
 
39,256

 
40,534

 
45,426

 
46,608

 
29,267

Consumer
 
1,624

 
2,037

 
2,171

 
2,709

 
5,109

Total nonaccruing loans
 
$
112,904

 
$
122,133

 
$
132,633

 
$
134,410

 
$
131,899

 
 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
 
 

 
 

Allowance for loan losses to nonaccruing loans
 
172.12
%
 
166.31
%
 
155.29
%
 
160.34
%
 
177.22
%
Nonaccruing loans to period-end loans
 
0.91
%
 
0.98
%
 
1.10
%
 
1.09
%
 
1.11
%
Accruing loans 90 days or more past due1
 
$
188

 
$
2,460

 
$
4,229

 
$
3,925

 
$
1,181

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

Nonperforming assets totaled $271 million or 2.18% of outstanding loans and repossessed assets at September 30, 2013. Nonaccruing loans totaled $113 million, accruing renegotiated residential mortgage loans totaled $50 million and real estate and other repossessed assets totaled $108 million. All accruing renegotiated residential mortgage loans, $577 thousand of nonaccruing loans and $38 million of real estate and other repossessed assets are guaranteed by U.S. government agencies. Excluding assets guaranteed by U.S. government agencies, nonperforming assets decreased $17 million during the third quarter. The Company generally retains nonperforming assets to maximize potential recovery which may cause future nonperforming assets to decrease more slowly.

Loans are generally classified as nonaccruing when it becomes probable that we will not collect the full contractual principal and interest. As more fully discussed in Note 4 to the Consolidated Financial Statements, we may modify loans in troubled debt restructurings. Modifications may include extension of payment terms and rate concessions. We do not forgive principal or accrued but unpaid interest. All loans modified in troubled debt restructurings, except for residential mortgage loans guaranteed by U.S. government agencies, are classified as nonaccruing. We may also renew matured nonaccruing loans. All nonaccuring loans, including those renewed or modified in troubled debt restructurings, are charged off when the loan balance is no longer covered by the paying capacity of the borrower based on a quarterly evaluation of available cash resources and collateral value. All nonaccruing loans generally remain on nonaccrual status until full collection of principal and interest in accordance with the original terms, including principal previously charged off, is probable. We generally do not voluntarily modify consumer loans to troubled borrowers. Consumer loans modified at the direction of bankruptcy court orders are identified as troubled debt restructurings and classified as nonaccruing.

At September 30, 2013, renegotiated loans consist solely of accruing residential mortgage loans guaranteed by U.S. government agencies that have been modified in troubled debt restructurings. See Note 4 to the Consolidated Financial Statements for additional discussion of troubled debt restructurings. Generally, we modify residential mortgage loans primarily by reducing interest rates and extending the number of payments in accordance with U.S. government agency guidelines. No unpaid principal or interest is forgiven. Interest continues to accrue based on the modified terms of the loan. Modified loans guaranteed by U.S. government agencies under residential mortgage loan programs may be sold once they become eligible according to U.S. government agency guidelines.

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


- 46 -



Table 28 -- Rollforward of Nonperforming Assets
(In thousands)
 
 
Three Months Ended
 
 
September 30, 2013
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, June 30, 2013
 
$
122,133

 
$
48,733

 
$
110,112

 
$
280,978

Additions
 
24,425

 
10,492

 
—

 
34,917

Transfers from premises and equipment
 
—

 
—

 
—

 
—

Payments
 
(9,257
)
 
(332
)
 
—

 
(9,589
)
Charge-offs
 
(4,708
)
 
—

 
—

 
(4,708
)
Net gains and write-downs
 
—

 
—

 
(438
)
 
(438
)
Foreclosure of nonperforming loans
 
(5,243
)
 
—

 
5,243

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
(14,865
)
 
—

 
14,865

 
—

Proceeds from sales
 
—

 
(8,193
)
 
(12,490
)
 
(20,683
)
Conveyance to U.S. government agencies
 
—

 
—

 
(9,114
)
 
(9,114
)
Net transfers to nonaccruing loans
 
(4
)
 
4

 
—

 
—

Return to accrual status
 
(802
)
 
—

 
—

 
(802
)
Other, net
 
1,225

 
(605
)
 
(56
)
 
564

Balance, Sept. 30, 2013
 
$
112,904

 
$
50,099

 
$
108,122

 
$
271,125


 
 
Nine Months Ended
 
 
September 30, 2013
 
 
 
Nonaccruing Loans
 
 
Renegotiated Loans
 
Real Estate and Other Repossessed Assets
 
Total Nonperforming Assets
Balance, Dec. 31, 2012
 
$
134,410

 
$
38,515

 
$
103,791

 
$
276,716

Additions
 
105,997

 
39,538

 
—

 
145,535

Transfers from premises and equipment
 
—

 
—

 
668

 
668

Payments
 
(35,002
)
 
(1,213
)
 
—

 
(36,215
)
Charge-offs
 
(22,169
)
 
—

 
—

 
(22,169
)
Net gains and write-downs
 
—

 
—

 
948

 
948

Foreclosure of nonperforming loans
 
(25,224
)
 
—

 
25,224

 
—

Foreclosure of loans guaranteed by U.S. government agencies
 
(47,183
)
 
—

 
47,183

 
—

Proceeds from sales
 
—

 
(26,852
)
 
(37,870
)
 
(64,722
)
Conveyance to U.S. government agencies
 
—

 
—

 
(31,641
)
 
(31,641
)
Net transfers to nonaccruing loans
 
344

 
(344
)
 
—

 
—

Return to accrual status
 
(931
)
 
—

 
—

 
(931
)
Other, net
 
2,662

 
455

 
(181
)
 
2,936

Balance, Sept. 30, 2013
 
$
112,904

 
$
50,099

 
$
108,122

 
$
271,125


We foreclose on loans guaranteed by U.S. government agencies in accordance with agency guidelines. Generally these loans are not eligible for modification programs or have failed to comply with modified loan terms. Principal is guaranteed by agencies of the U.S. government, subject to limitations and credit risk is minimal. These properties will be conveyed to the agencies once applicable criteria have been met. During the third quarter of 2013, $15 million of properties guaranteed by U.S. government agencies were foreclosed on and $9.1 million of properties were conveyed to the applicable U.S. government agencies.


- 47 -



Nonaccruing loans totaled $113 million or 0.91% of outstanding loans at September 30, 2013 and $122 million or 0.98% of outstanding loans at June 30, 2013. Nonaccruing loans decreased $9.2 million from June 30, 2013 due primarily to $9.3 million of payments, $4.7 million of charge-offs and $20 million of foreclosures. Newly identified nonaccruing loans totaled $24 million for the third quarter of 2013.

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

Table 29 -- Nonaccruing Loans by Principal Market
(Dollars in thousands)
 
 
September 30, 2013
 
June 30, 2013
 
Change
 
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
Bank of Oklahoma
 
$
49,245

 
0.97
%
 
$
52,541

 
1.00
%
 
$
(3,296
)
 
(3
)
bp
Bank of Texas
 
20,127

 
0.49
%
 
21,620

 
0.54
%
 
(1,493
)
 
(5
)
 
Bank of Albuquerque
 
21,369

 
2.74
%
 
24,134

 
3.18
%
 
(2,765
)
 
(44
)
 
Bank of Arkansas
 
896

 
0.51
%
 
998

 
0.59
%
 
(102
)
 
(8
)
 
Colorado State Bank & Trust
 
8,754

 
0.88
%
 
9,510

 
0.93
%
 
(756
)
 
(5
)
 
Bank of Arizona
 
12,507

 
1.82
%
 
13,323

 
1.98
%
 
(816
)
 
(16
)
 
Bank of Kansas City
 
6

 
—
%
 
7

 
—
%
 
(1
)
 
—

 
Total
 
$
112,904

 
0.91
%
 
$
122,133

 
0.98
%
 
$
(9,229
)
 
(7
)
bp

Nonaccruing loans attributed to the Bank of Oklahoma are primarily composed of $31 million of residential mortgage loans and $12 million of commercial real estate loans. All residential mortgage loans retained by the Company that were originated across our geographical footprint and serviced by our mortgage company are attributed to the Bank of Oklahoma. Nonaccruing loans attributed to the Bank of Texas included $12 million of commercial real estate loans and $4.4 million of residential mortgage loans. Nonaccruing loans attributed to the Bank of Albuquerque included $13 million of commercial real estate loans and $6.2 million of commercial loans. Nonaccruing loans attributed to the Bank of Arizona and Colorado State Bank & Trust both consisted primarily of commercial real estate loans.
Commercial

Nonaccruing commercial loans totaled $20 million or 0.26% of total commercial loans at September 30, 2013, compared to $21 million or 0.27% of total commercial loans at June 30, 2013. Nonaccruing commercial loans at September 30, 2013 were primarily composed of $7.2 million or 0.61% of wholesale/retail sector loans primarily attributed to Bank of Albuquerque and Bank of Oklahoma and $6.9 million or 0.32% of total services sector loans primarily attributed to the Bank of Arizona and Bank of Texas. Nonaccruing commercial loans attributed to the Bank of Albuquerque were primarily composed of a single wholesale/retail sector loan. Nonaccruing commercial loans decreased $1.3 million in the third quarter of 2013. Newly identified nonaccruing commercial loans of $1.8 million were partially offset by $1.4 million of charge-offs and $2.4 million in payments during the third quarter.
 
The distribution of nonaccruing commercial loans among our various markets was as follows in Table 30.


- 48 -



Table 30 -- Nonaccruing Commercial Loans by Principal Market
(Dollars in thousands)
 
 
September 30, 2013
 
June 30, 2013
 
Change
 
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
Bank of Oklahoma
 
$
5,663

 
0.20
%
 
$
5,166

 
0.17
%
 
$
497

 
3

bp
Bank of Texas
 
3,007

 
0.11
%
 
4,475

 
0.16
%
 
(1,468
)
 
(5
)
 
Bank of Albuquerque
 
6,219

 
1.91
%
 
6,106

 
2.06
%
 
113

 
(15
)
 
Bank of Arkansas
 
285

 
0.39
%
 
298

 
0.49
%
 
(13
)
 
(10
)
 
Colorado State Bank & Trust
 
597

 
0.08
%
 
632

 
0.08
%
 
(35
)
 
—

 
Bank of Arizona
 
3,751

 
0.99
%
 
4,192

 
1.18
%
 
(441
)
 
(19
)
 
Bank of Kansas City
 
—

 
—
%
 
—

 
—
%
 
—

 
—

 
Total commercial
 
$
19,522

 
0.26
%
 
$
20,869

 
0.27
%
 
$
(1,347
)
 
(1
)
bp
Commercial Real Estate

Nonaccruing commercial real estate loans decreased to $53 million or 2.23% of outstanding commercial real estate loans at September 30, 2013 from $59 million or 2.53% of outstanding commercial real estate loans at June 30, 2013. Nonaccruing commercial real estate loans continue to be largely concentrated in land development and residential construction loans. Newly identified nonaccruing commercial real estate loans totaled $2.4 million, offset by $5.7 million of cash payments received, $1.7 million of foreclosures and $419 thousand of charge-offs. The distribution of our nonaccruing commercial real estate loans among our geographic markets follows in Table 31.

Table 31 -- Nonaccruing Commercial Real Estate Loans by Principal Market
(Dollars in thousands)
 
 
September 30, 2013
 
June 30, 2013
 
Change
 
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
 
Amount
 
% of outstanding loans
Bank of Oklahoma
 
$
11,504

 
2.04
%
 
$
14,404

 
2.53
%
 
$
(2,900
)
 
(49
)
bp
Bank of Texas
 
12,337

 
1.44
%
 
12,213

 
1.50
%
 
124

 
(6
)
 
Bank of Albuquerque
 
13,155

 
4.29
%
 
15,590

 
4.95
%
 
(2,435
)
 
(66
)
 
Bank of Arkansas
 
—

 
—
%
 
—

 
—
%
 
—

 
—

 
Colorado State Bank & Trust
 
8,009

 
5.06
%
 
8,697

 
5.95
%
 
(688
)
 
(89
)
 
Bank of Arizona
 
7,497

 
3.00
%
 
7,789

 
3.01
%
 
(292
)
 
(1
)
 
Bank of Kansas City
 
—

 
—
%
 
—

 
—
%
 
—

 
—

 
Total commercial real estate
 
$
52,502

 
2.23
%
 
$
58,693

 
2.53
%
 
$
(6,191
)
 
(30
)
bp

Nonaccruing land development and residential construction loans totaled $21 million at September 30, 2013, primarily concentrated in the New Mexico and Texas markets. Other nonaccruing commercial real estate loans totaled $13 million primarily concentrated in the Arizona and Colorado markets.

Residential Mortgage and Consumer

Nonaccruing residential mortgage loans totaled $39 million or 1.93% of outstanding residential mortgage loans at September 30, 2013 compared to $41 million or 1.99% of outstanding residential mortgage loans at June 30, 2013. Newly identified nonaccruing residential mortgage loans totaled $18 million, partially offset by $17 million of foreclosures, $1.1 million of payments and $1.0 million of loans charged off during the quarter. Nonaccruing residential mortgage loans primarily consist of non-guaranteed permanent residential mortgage loans which totaled $32 million or 2.95% of outstanding non-guaranteed permanent residential mortgage loans at September 30, 2013. Nonaccruing home equity loans totaled $6.9 million or 0.87% of total home equity loans.


- 49 -



Payments of accruing residential mortgage loans and consumer loans may be delinquent. The composition of residential mortgage loans and consumer loans past due but still accruing is included in the following Table 32. Substantially all non-guaranteed residential loans past due 90 days or more are nonaccruing. Residential mortgage loans 30 to 89 days past due decreased $2.6 million in the third quarter to $9 million at September 30, 2013. Consumer loans past due 30 to 89 days decreased $754 thousand from June 30, 2013.

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

 
$
6,248

 
$
—

 
$
8,689

Home equity
 
28

 
2,321

 
—

 
2,451

Total residential mortgage
 
$
28

 
$
8,569

 
—

 
$
11,140

Consumer:
 
 

 
 

 
 

 
 

Indirect automobile
 
$
—

 
$
384

 
$
—

 
$
540

Other consumer
 
75

 
1,344

 
19

 
1,942

Total consumer
 
$
75

 
$
1,728

 
$
19

 
$
2,482

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 $108 million at September 30, 2013, largely unchanged compared to June 30, 2013. The distribution of real estate and other repossessed assets attributed by geographical market is included in Table 33 following.

Table 33 -- Real Estate and Other Repossessed Assets by Principal Market
(In thousands)
 
 
Oklahoma
 
Texas
 
Colorado
 
Arkansas
 
New
Mexico
 
Arizona
 
Kansas/
Missouri
 
Other
 
Total
1-4 family residential properties guaranteed by U.S. government agencies
 
$
9,333

 
$
2,031

 
$
1,181

 
$
1,246

 
$
20,242

 
$
493

 
$
2,517

 
$
862

 
$
37,905

Developed commercial real estate properties
 
2,185

 
693

 
2,151

 
1,050

 
8,460

 
1,471

 
731

 
7,198

 
23,939

1-4 family residential properties
 
5,244

 
1,005

 
826

 
857

 
1,826

 
6,545

 
535

 
1,451

 
18,289

Undeveloped land
 
999

 
4,446

 
3,961

 
68

 
132

 
6,164

 
1,294

 
—

 
17,064

Residential land development properties
 
366

 
68

 
1,827

 
1,292

 
—

 
5,100

 
136

 
—

 
8,789

Multifamily residential properties
 
—

 
—

 
—

 
—

 
1,650

 
—

 
—

 
—

 
1,650

Oil and gas properties
 
—

 
151

 
—

 
—

 
—

 
—

 
—

 
—

 
151

Vehicles
 
8

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
8

Other
 
—

 
—

 
—

 
—

 
—

 
324

 
—

 
4

 
328

Total real estate and other repossessed assets
 
$
18,135

 
$
8,394

 
$
9,946

 
$
4,513

 
$
32,310

 
$
20,097

 
$
5,213

 
$
9,515

 
$
108,123


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

- 50 -



Liquidity and Capital
Subsidiary Bank

Deposits and borrowed funds are the primary sources of liquidity for the subsidiary bank. Based on the average balances for the third quarter of 2013, approximately 71% of our funding was provided by deposit accounts, 14% from borrowed funds, 1% from long-term subordinated debt and 11% from equity. Our funding sources, which primarily include deposits and borrowings from the Federal Home Loan Banks and other banks, provide adequate liquidity to meet our operating needs.

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

Average deposits for the third quarter of 2013 totaled $19.4 billion and represented approximately 71% of total liabilities and capital compared with $19.5 billion and 71% of total liabilities and capital for the second quarter of 2013. Average deposits decreased $80 million from the second quarter of 2013. Interest-bearing transaction deposit accounts decreased $228 million, demand deposits increased $221 million and average time deposits decreased $76 million. 

Average Commercial Banking deposit balances increased $123 million over the second quarter of 2013. Balances related to commercial & industrial customers increased $168 million, balances related to our small business customers grew by $99 million and balances related to our healthcare customers increased $24 million over the second quarter of 2013. Balances related to energy customers decreased $87 million and treasury services customer balances were down $71 million. Commercial customers continue to retain large cash reserves primarily due to low yields available on other high quality investment alternatives and to minimize deposit service charges through the earnings credit. The earnings credit is a non-cash method that enables commercial customers to offset deposit service charges based on account balances. Average Consumer Banking deposit balances decreased $38 million. Interest-bearing transaction deposits grew by $42 million, offset by a $56 million decrease in time deposits and a $23 million decrease in demand deposits. Average Wealth Management deposits decreased $160 million compared to the second quarter of 2013 primarily due to a decrease in interest-bearing transaction deposit account balances.

Brokered deposits included in time deposits averaged $141 million for the third quarter of 2013, a decrease of $3.4 million compared to the second quarter of 2013. Average interest-bearing transaction accounts for the third quarter include $271 million of brokered deposits, an increase of $6.2 million over the second quarter of 2013.

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


- 51 -



Table 34 -- Period End Deposits by Principal Market Area
(In thousands)
 
 
September 30,
2013
 
June 30,
2013
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
Bank of Oklahoma:
 
 
 
 
 
 
 
 
 
 
Demand
 
$
3,458,114

 
$
3,561,255

 
$
3,602,581

 
$
4,223,923

 
$
3,734,901

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
5,574,615

 
5,653,062

 
6,140,899

 
6,031,541

 
5,496,724

Savings
 
189,411

 
185,345

 
185,363

 
163,512

 
155,276

Time
 
1,198,507

 
1,180,265

 
1,264,415

 
1,267,904

 
1,274,336

Total interest-bearing
 
6,962,533

 
7,018,672

 
7,590,677

 
7,462,957

 
6,926,336

Total Bank of Oklahoma
 
10,420,647

 
10,579,927

 
11,193,258

 
11,686,880

 
10,661,237

 
 
 
 
 
 
 
 
 
 
 
Bank of Texas:
 
 
 
 
 
 
 
 
 
 
Demand
 
2,499,021

 
2,299,631

 
2,098,891

 
2,606,176

 
1,983,678

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
1,853,586

 
1,931,758

 
1,979,318

 
2,129,084

 
1,782,296

Savings
 
63,368

 
63,745

 
63,218

 
58,429

 
52,561

Time
 
667,873

 
692,888

 
717,974

 
762,233

 
789,725

Total interest-bearing
 
2,584,827

 
2,688,391

 
2,760,510

 
2,949,746

 
2,624,582

Total Bank of Texas
 
5,083,848

 
4,988,022

 
4,859,401

 
5,555,922

 
4,608,260

 
 
 
 
 
 
 
 
 
 
 
Bank of Albuquerque:
 
 
 
 
 
 
 
 
 
 
Demand
 
491,894

 
455,580

 
446,841

 
427,510

 
416,796

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
541,565

 
525,481

 
513,611

 
511,593

 
526,029

Savings
 
34,003

 
34,096

 
35,560

 
31,926

 
31,940

Time
 
334,946

 
346,506

 
354,303

 
364,928

 
375,611

Total interest-bearing
 
910,514

 
906,083

 
903,474

 
908,447

 
933,580

Total Bank of Albuquerque
 
1,402,408

 
1,361,663

 
1,350,315

 
1,335,957

 
1,350,376

 
 
 
 
 
 
 
 
 
 
 
Bank of Arkansas:
 
 
 
 
 
 
 
 
 
 
Demand
 
32,621

 
31,108

 
31,957

 
38,935

 
29,254

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
205,420

 
186,689

 
155,571

 
101,366

 
168,827

Savings
 
1,919

 
1,974

 
2,642

 
2,239

 
2,246

Time
 
35,184

 
37,272

 
41,613

 
42,573

 
45,719

Total interest-bearing
 
242,523

 
225,935

 
199,826

 
146,178

 
216,792

Total Bank of Arkansas
 
275,144

 
257,043

 
231,783

 
185,113

 
246,046

 
 
 
 
 
 
 
 
 
 
 
Colorado State Bank & Trust:
 
 
 
 
 
 
 
 
 
 
Demand
 
373,200

 
365,161

 
295,067

 
331,157

 
330,641

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
536,730

 
519,580

 
528,056

 
676,140

 
627,015

Savings
 
27,782

 
27,948

 
27,187

 
25,889

 
24,689

Time
 
424,225

 
451,168

 
461,496

 
472,305

 
476,564

Total interest-bearing
 
988,737

 
998,696

 
1,016,739

 
1,174,334

 
1,128,268

Total Colorado State Bank & Trust
 
1,361,937

 
1,363,857

 
1,311,806

 
1,505,491

 
1,458,909

 
 
 
 
 
 
 
 
 
 
 

- 52 -



 
 
September 30,
2013
 
June 30,
2013
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
Bank of Arizona:
 
 
 
 
 
 
 
 
 
 
Demand
 
184,454

 
186,381

 
157,754

 
161,094

 
151,738

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
338,068

 
376,305

 
378,421

 
360,275

 
298,048

Savings
 
2,286

 
2,238

 
2,122

 
1,978

 
2,201

Time
 
35,791

 
35,490

 
34,690

 
31,371

 
33,169

Total interest-bearing
 
376,145

 
414,033

 
415,233

 
393,624

 
333,418

Total Bank of Arizona
 
560,599

 
600,414

 
572,987

 
554,718

 
485,156

 
 
 
 
 
 
 
 
 
 
 
Bank of Kansas City:
 
 
 
 
 
 
 
 
 
 
Demand
 
292,672

 
246,207

 
267,769

 
249,491

 
201,393

Interest-bearing:
 
 
 
 
 
 
 
 
 
 
Transaction
 
69,826

 
73,685

 
46,426

 
78,039

 
103,628

Savings
 
1,080

 
1,029

 
983

 
771

 
660

Time
 
23,494

 
24,383

 
25,563

 
26,678

 
27,202

Total interest-bearing
 
94,400

 
99,097

 
72,972

 
105,488

 
131,490

Total Bank of Kansas City
 
387,072

 
345,304

 
340,741

 
354,979

 
332,883

Total BOK Financial deposits
 
$
19,491,655

 
$
19,496,230

 
$
19,860,291

 
$
21,179,060

 
$
19,142,867


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 $319 million at September 30, 2013. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale securities. Federal Home Loan Bank borrowings are generally short term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and mortgage-backed securities, 1-4 family residential mortgage loans, multifamily and other qualifying commercial real estate loans). Amounts borrowed from the Federal Home Loan Bank of Topeka averaged $2.1 billion during the quarter, unchanged compared to the second quarter of 2013.

At September 30, 2013, the estimated unused credit available to the subsidiary bank from collateralized sources was approximately $8.3 billion.

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


- 53 -



Table 35 -- Borrowed Funds
(In thousands)
 
 
 
 
Three Months Ended
 
 
 
Three Months Ended
 
 
 
 
September 30, 2013
 
 
 
June 30, 2013
 
 
September 30, 2013
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
June 30, 2013
 
Average
Balance
During the
Quarter
 
Rate
 
Maximum
Outstanding
At Any Month
End During
the Quarter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent Company and Other Non-Bank Subsidiaries:
Other borrowings - Other
 
$
—

 
$
—

 
—
%
 
$
—

 
$
—

 
$
—

 
—
%
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subsidiary Bank:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds purchased
 
992,345

 
776,356

 
0.07
%
 
997,536

 
747,165

 
789,302

 
0.10
%
 
747,165

Repurchase agreements
 
782,418

 
799,175

 
0.06
%
 
855,797

 
845,106

 
819,373

 
0.06
%
 
845,106

Other borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank advances
 
1,805,622

 
2,144,532

 
0.19
%
 
2,304,622

 
2,451,197

 
2,144,513

 
0.19
%
 
2,451,197

GNMA repurchase liability
 
15,014

 
14,704

 
5.45
%
 
16,543

 
13,973

 
11,464

 
5.50
%
 
13,973

Other
 
16,545

 
16,511

 
2.84
%
 
16,545

 
16,474

 
16,440

 
2.93
%
 
16,475

Total other borrowings
 
1,837,181

 
2,175,747

 
0.25
%
 


 
2,481,644

 
2,172,417

 
0.24
%
 


Subordinated debentures
 
347,758

 
347,737

 
2.52
%
 
347,758

 
347,716

 
347,695

 
2.54
%
 
347,716

Total Subsidiary Bank
 
3,959,702

 
4,099,015

 
0.38
%
 
 
 
4,421,631

 
4,128,787

 
0.38
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Borrowed Funds
 
$
3,959,702

 
$
4,099,015

 
0.38
%
 
 
 
$
4,421,631

 
$
4,128,787

 
0.38
%
 
 
In 2007, the Company issued $250 million of subordinated debt due May 15, 2017 to fund the Worth National Bank and First United Bank acquisitions and fund continued asset growth. Interest on this debt was based on a fixed rate of 5.75% through May 14, 2012 which then converted to a floating rate of three-month LIBOR plus 0.69%. At September 30, 2013, $226 million of this subordinated debt remains outstanding.
In 2005, the Bank issued $150 million of 10-year, fixed rate subordinated debt. The cost of this subordinated debt, including issuance discounts and hedge loss is 5.56%. The proceeds of this debt were used to repay $95 million of BOK Financial's unsecured revolving line of credit and to provide additional capital to support assets growth. At September 30, 2013, $122 million of this subordinated debt remains outstanding.
The Bank also has a liability related to the repurchase of certain delinquent residential mortgage loans previously sold in GNMA mortgage pools. Interest is payable monthly at rates contractually due to investors.
Parent Company

The primary sources of liquidity for BOK Financial are cash on hand and dividends from the subsidiary bank. Dividends from the subsidiary bank are limited by various banking regulations to net profits, as defined, for the year plus retained profits for the two preceding years. Dividends are further restricted by minimum capital requirements. At September 30, 2013, based on the most restrictive limitations as well as management’s internal capital policy, the subsidiary bank could declare up to $314 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.


- 54 -



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 1.00% 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 1.25%. 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 5, 2014. The Credit Agreement contains customary representations and warranties, as well as affirmative and negative covenants including limits on the Company’s ability to borrow additional funds, make investments and sell assets. These covenants also require BOKF to maintain minimum capital levels. No amounts were outstanding under the Credit Facility at September 30, 2013 and the Company met all of the covenants.

Our equity capital at September 30, 2013 was $3.0 billion, an increase of $34 million over June 30, 2013. Net income less cash dividends paid increased equity $50 million during the third quarter of 2013. This was offset by a $22 million decrease in accumulated other comprehensive income primarily related to the change in unrealized gains on available for sale securities. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings, asset growth and acquisition strategies, and regulatory and debt covenant requirements. Capital management may include subordinated debt issuance, share repurchase and stock and cash dividends.

On April 24, 2012, the Board of Directors authorized the Company to purchase up to two million shares of our common stock. The specific timing and amount of shares repurchased will vary based on market conditions, regulatory limitations and other factors. Repurchases may be made over time in open market or privately negotiated transactions. The repurchase program may be suspended or discontinued at any time without prior notice. As of September 30, 2013, the Company has repurchased 39,496 shares for $2.1 million under this program. No shares were repurchased in the third quarter of 2013.

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

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

Table 36 -- Capital Ratios

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

 
10.88
%
 
10.95
%
 
10.90
%
 
10.81
%
 
11.08
%
Tangible common equity ratio
 
—

 
9.73
%
 
9.38
%
 
9.70
%
 
9.25
%
 
9.67
%
Tier 1 common equity ratio
 
—

 
13.33
%
 
13.19
%
 
13.16
%
 
12.59
%
 
13.01
%
Risk-based capital:
 
 

 
 
 
 
 
 
 
 

 
 

Tier 1 capital
 
6.00
%
 
13.51
%
 
13.37
%
 
13.35
%
 
12.78
%
 
13.21
%
Total capital
 
10.00
%
 
15.35
%
 
15.28
%
 
15.68
%
 
15.13
%
 
15.71
%
Leverage
 
5.00
%
 
9.80
%
 
9.43
%
 
9.28
%
 
9.01
%
 
9.34
%
In July 2013, banking regulators issued the final rule revising regulatory capital rules for substantially all U.S. banking organizations. The new capital rule will be effective for BOK Financial on January 1, 2015 and components of the rule will phase in through January 1, 2019. The new capital rule establishes a 7% threshold for the Tier 1 common equity ratio consisting of a minimum level plus capital conservation buffer. The Company expects to exclude unrealized gains and losses from available for sale securities from its calculation of Tier 1 capital, consistent with the treatment under current capital rules. BOK Financial's Tier 1 common equity ratio based on the existing Basel I standards was 13.33% as of September 30, 2013. Based on our interpretation of the new capital rule, our estimated Tier 1 common equity ratio is approximately 12.35%, nearly 535 basis points above the 7% regulatory threshold.


- 55 -



The rule also changes both the Tier 1 risk based capital requirements and the total risk based requirements to a minimum of 6% and 8%, respectively, plus a capital conservation buffer of 2.5% totaling 8.5% and 10.5%, respectively. The leverage ratio requirements under the rule is 5%. A bank which falls below these levels, including the capital conservation buffer, would be subject to regulatory restrictions on capital distributions (including but not limited to dividends and share repurchases) and executive bonus payments.

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. The requirements for annual capital stress tests will become effective for the Company in the fourth quarter of 2013 with public disclosure of specified results to occur in June of 2015. The resulting capital stress test process may place constraints on capital distributions or increases in required regulatory capital under certain circumstances.

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

Table 37 -- Non-GAAP Measures
(Dollars in thousands)
 
 
September 30,
2013
 
June 30,
2013
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
Tangible common equity ratio:
 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
$
2,991,244

 
$
2,957,637

 
$
3,011,958

 
$
2,957,860

 
$
2,975,657

Less: Goodwill and intangible assets, net
 
385,166

 
386,001

 
386,876

 
390,171

 
392,158

Tangible common equity
 
2,606,078

 
2,571,636

 
2,625,082

 
2,567,689

 
2,583,499

Total assets
 
27,166,367

 
27,808,200

 
27,447,158

 
28,148,631

 
27,117,641

Less: Goodwill and intangible assets, net
 
385,166

 
386,001

 
386,876

 
390,171

 
392,158

Tangible assets
 
$
26,781,201

 
$
27,422,199

 
$
27,060,282

 
$
27,758,460

 
$
26,725,483

Tangible common equity ratio
 
9.73
%
 
9.38
%
 
9.70
%
 
9.25
%
 
9.67
%
 
 
 
 
 
 
 
 
 
 
 
Tier 1 common equity ratio:
 
 
 
 
 
 
 
 

 
 

Tier 1 capital
 
$
2,616,610

 
$
2,561,399

 
$
2,503,892

 
$
2,430,671

 
$
2,436,791

Less: Non-controlling interest
 
35,730

 
35,245

 
35,934

 
35,821

 
36,818

Tier 1 common equity
 
2,580,880

 
2,526,154

 
2,467,958

 
2,394,850

 
2,399,973

Risk weighted assets
 
$
19,361,429

 
$
19,157,978

 
$
18,756,648

 
$
19,016,673

 
$
18,448,854

Tier 1 common equity ratio
 
13.33
%
 
13.19
%
 
13.16
%

12.59
%
 
13.01
%

Off-Balance Sheet Arrangements

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

- 56 -



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

- 57 -



Table 38 -- Interest Rate Sensitivity
(Dollars in thousands)
 
 
200 bp Increase
 
50 bp Decrease
 
 
2013
 
2012
 
2013
 
2012
Anticipated impact over the next twelve months on net interest revenue
 
$
(16,193
)
 
$
31,403

 
$
(13,699
)
 
$
(15,663
)
 
 
(2.38
)%
 
4.76
%
 
(1.93
)%
 
(2.38
)%
Trading Activities

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

A variety of methods are used to manage the interest rate risk of trading activities. These methods include daily marking of all positions to market value, independent verification of inventory pricing, and position and Value at Risk ("VAR") 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.

VAR is calculated based upon historical simulations over the past five years using a variance / covariance matrix of interest rate changes, a 10 business day holding period and a 99% confidence interval. It represents an amount of market loss that is likely to be exceeded in only one out of every 100 two-week periods. Trading activities are managed within guidelines approved by the Board of Directors. These guidelines limit the VAR to $7.3 million. There were no instances of VAR being exceeded during the three months ended September 30, 2013, June 30, 2013 and September 30, 2012.

Effective June 30, 2013, the Company became subject to the Federal Reserve Bank’s market risk rule. This rule was established to ensure banks hold enough capital to cover market risks. It requires banks to measure VAR and stressed VAR for Covered Positions. A Covered Position includes trading assets or trading liabilities held by the bank for the purpose of short-term resale or with the intent of benefiting from actual or expected shot-term price movement or to lock in arbitrage profits, as reported to banking regulators. Covered Positions also include transaction used to hedge th Company's mortgage servicing rights and mortgage pipeline. Consequently, the VAR calculated for Covered Positions exceeds that calculated for trading activities alone. The market risk rule also requires specific regulatory capital charges for certain issuers of trading securities. The Company’s Covered Positions entail minimal market risk. Consequently, the impact of this rule on our capital ratios is a negligible decline of 10 basis points. 

Table 39 following includes the required quarterly disclosure of (1) the high, low, and mean VAR-based measures over the reporting period and the VAR-based measure at period-end; (2) the high, low, and mean stressed VAR-based measures over the reporting period and the stressed VAR-based measure at period-end; and (3) a comparison of VAR-based measures with actual results. The estimated monthly changes from market risk are below the total VAR calculated. Virtually all market risk stems from interest rate risk, with a modicum due to foreign exchange risk.



- 58 -



Table 39 -- Market Risk
(In thousands)
 
September 30, 2013
 
September 30, 2012
 
VAR
 
Stressed VAR
 
Total VAR
 
VAR
 
Stressed VAR
 
Total VAR
Period End
$
4,117

 
$
6,852

 
$
10,968

 
$
12,846

 
$
20,029

 
$
32,876

For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
High
5,323

 
8,428

 
13,751

 
12,846

 
20,029

 
32,876

Low
4,117

 
6,757

 
10,874

 
5,608

 
6,894

 
12,502

Mean
4,635

 
7,345

 
11,981

 
8,186

 
11,397

 
19,583

For the Nine Months Ended:
 
 
 
 
 
 
 
 
 
 
 
High
10,142

 
11,756

 
21,897

 
12,846

 
20,471

 
32,876

Low
4,116

 
6,757

 
10,968

 
4,369

 
3,974

 
8,343

Mean
5,870

 
8,627

 
14,497

 
8,213

 
12,067

 
20,281

Estimated Monthly Change in Value from Market Risk
 
 
 
 
4,916

 
 
 
 
 
13,363


 
June 30, 2013
 
VAR
 
Stressed VAR
 
Total VAR
Period End
$
4,648

 
$
7,569

 
$
12,217

For the Three Months Ended:
 
 
 
 
 
High
6,722

 
11,357

 
18,080

Low
4,648

 
7,569

 
12,217

Mean
5,682

 
8,866

 
14,548

Estimated Monthly Change in Value from Market Risk
 
 
 
 
8,947


 
VAR
 
Stressed VAR
Interest Rate Changes Used
 
 
 
Swap Curve
3.35
%
 
4.64
%
Mortgage
2.48
%
 
8.85
%
Treasury
5.30
%
 
6.49
%


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

- 59 -



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.

- 60 -




Consolidated Statement of Earnings (Unaudited)
 
 
 
 
 
 
 
 
(In thousands, except share and per share data)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Interest revenue
 
2013
 
2012
 
2013
 
2012
Loans
 
$
125,069

 
$
126,248

 
$
374,479

 
$
384,406

Residential mortgage loans held for sale
 
2,168

 
2,310

 
6,254

 
5,862

Trading securities
 
509

 
555

 
1,608

 
1,219

Taxable securities
 
3,434

 
4,124

 
10,836

 
12,840

Tax-exempt securities
 
1,163

 
764

 
3,341

 
2,662

Total investment securities
 
4,597

 
4,888

 
14,177

 
15,502

Taxable securities
 
50,179

 
59,482

 
156,569

 
180,721

Tax-exempt securities
 
560

 
699

 
1,851

 
1,931

Total available for sale securities
 
50,739

 
60,181

 
158,420

 
182,652

Fair value option securities
 
802

 
1,886

 
2,980

 
7,684

Funds sold and resell agreements
 
6

 
3

 
12

 
9

Total interest revenue
 
183,890

 
196,071

 
557,930

 
597,334

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
13,526

 
15,917

 
42,316

 
49,805

Borrowed funds
 
1,804

 
1,652

 
5,134

 
5,033

Subordinated debentures
 
2,209

 
2,475

 
6,568

 
11,539

Total interest expense
 
17,539

 
20,044

 
54,018

 
66,377

Net interest revenue
 
166,351

 
176,027

 
503,912

 
530,957

Provision for credit losses
 
(8,500
)
 
—

 
(16,500
)
 
(8,000
)
Net interest revenue after provision for credit losses
 
174,851

 
176,027

 
520,412

 
538,957

Other operating revenue
 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
32,338

 
31,261

 
96,963

 
94,972

Transaction card revenue
 
30,055

 
27,788

 
87,689

 
79,976

Trust fees and commissions
 
23,892

 
19,654

 
71,008

 
58,023

Deposit service charges and fees
 
24,742

 
25,148

 
71,670

 
74,743

Mortgage banking revenue
 
23,486

 
50,266

 
100,058

 
122,892

Bank-owned life insurance
 
2,408

 
2,707

 
7,870

 
8,416

Other revenue
 
9,852

 
9,149

 
30,535

 
27,273

Total fees and commissions
 
146,773

 
165,973

 
465,793

 
466,295

Gain (loss) on assets, net
 
(377
)
 
452

 
(1,576
)
 
(1,552
)
Gain (loss) on derivatives, net
 
31

 
464

 
(3,437
)
 
336

Gain (loss) on fair value option securities, net
 
(80
)
 
6,192

 
(12,407
)
 
11,311

Gain on available for sale securities, net
 
478

 
7,967

 
9,086

 
32,779

Total other-than-temporary impairment losses
 
(1,436
)
 
—

 
(2,574
)
 
(640
)
Portion of loss recognized in (reclassified from) other comprehensive income
 
(73
)
 
(1,104
)
 
266

 
(5,044
)
Net impairment losses recognized in earnings
 
(1,509
)
 
(1,104
)
 
(2,308
)
 
(5,684
)
Total other operating revenue
 
145,316

 
179,944

 
455,151

 
503,485

Other operating expense
 
 

 
 

 
 

 
 

Personnel
 
125,799

 
122,775

 
379,563

 
359,841

Business promotion
 
5,355

 
6,054

 
16,578

 
17,188

Contribution to BOKF Foundation
 
2,062

 
—

 
2,062

 
—

Professional fees and services
 
7,183

 
7,991

 
22,549

 
23,933

Net occupancy and equipment
 
17,280

 
16,914

 
50,670

 
49,843

Insurance
 
3,939

 
3,690

 
11,728

 
11,567

Data processing and communications
 
25,695

 
26,486

 
77,879

 
73,894

Printing, postage and supplies
 
3,505

 
3,611

 
10,759

 
10,825

Net losses and operating expenses of repossessed assets
 
2,014

 
5,706

 
3,542

 
13,863

Amortization of intangible assets
 
835

 
742

 
2,586

 
1,862

Mortgage banking costs
 
8,753

 
13,036

 
24,017

 
33,792

Change in fair value of mortgage servicing rights
 
346

 
9,576

 
(16,627
)
 
13,899

Other expense
 
7,878

 
5,759

 
23,268

 
16,980

Total other operating expense
 
210,644

 
222,340

 
608,574

 
627,487

Net income before taxes
 
109,523

 
133,631

 
366,989

 
414,955

Federal and state income taxes
 
33,461

 
45,778

 
121,980

 
144,447

Net income
 
76,062

 
87,853

 
245,009

 
270,508

Net income attributable to non-controlling interest
 
324

 
471

 
1,376

 
1,882

Net income attributable to BOK Financial Corporation shareholders
 
$
75,738

 
$
87,382

 
$
243,633

 
$
268,626

Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
1.10

 
$
1.28

 
$
3.55

 
$
3.94

Diluted
 
$
1.10

 
$
1.27

 
$
3.54

 
$
3.92

Average shares used in computation:
 
 
 
 
 
 
 
 
Basic
 
68,049,179

 
67,966,700

 
67,953,253

 
67,704,343

Diluted
 
68,272,861

 
68,334,989

 
68,175,915

 
67,981,558

Dividends declared per share
 
$
0.38

 
$
0.38

 
$
1.14

 
$
1.09

See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
 

- 61 -



Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Net income
 
$
76,062

 
$
87,853

 
$
245,009

 
$
270,508

Other comprehensive income before income taxes:
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss)
 
(35,839
)
 
46,064

 
(240,384
)
 
86,098

Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
Interest revenue, Investments securities, Taxable securities
 
(696
)
 
(2,009
)
 
(2,717
)
 
(5,430
)
Interest expense, Subordinated debentures
 
85

 
68

 
209

 
399

Net impairment losses recognized in earnings
 
1,509

 
1,104

 
2,308

 
5,684

Gain on available for sale securities, net
 
(478
)
 
(7,967
)
 
(9,086
)
 
(32,779
)
Other comprehensive income (loss) before income taxes
 
(35,419
)
 
37,260

 
(249,670
)
 
53,972

Income tax benefit (expense)
 
13,779

 
(14,057
)
 
97,124

 
(20,558
)
Other comprehensive income (loss), net of income taxes
 
(21,640
)
 
23,203

 
(152,546
)
 
33,414

Comprehensive income
 
54,422

 
111,056

 
92,463

 
303,922

Comprehensive income attributable to non-controlling interests
 
324

 
471

 
1,376

 
1,882

Comprehensive income attributed to BOK Financial Corp. shareholders
 
$
54,098

 
$
110,585

 
$
91,087

 
$
302,040


See accompanying notes to consolidated financial statements.

- 62 -



Consolidated Balance Sheets
(In thousands, except share data)
 
 
 
 
 
 
 
 
September 30,
2013
 
Dec 31,
2012
 
September 30,
2012
 
 
(Unaudited)
 
(Footnote 1)
 
(Unaudited)
Assets
 
 
 
 
 
 
Cash and due from banks
 
$
1,133,771

 
$
1,266,834

 
$
596,590

Funds sold and resell agreements
 
27,214

 
19,405

 
18,904

Trading securities
 
150,887

 
214,102

 
204,242

Investment securities (fair value:  Sept. 30, 2013 – $654,479; December 31, 2012 – $528,458; Sept. 30, 2012 – $460,358)
 
644,225

 
499,534

 
432,114

Available for sale securities
 
10,372,903

 
11,287,221

 
11,506,434

Fair value option securities
 
167,860

 
284,296

 
331,887

Residential mortgage loans held for sale
 
230,511

 
293,762

 
325,102

Loans
 
12,350,100

 
12,311,456

 
11,832,367

Allowance for loan losses
 
(194,325
)
 
(215,507
)
 
(233,756
)
Loans, net of allowance
 
12,155,775

 
12,095,949

 
11,598,611

Premises and equipment, net
 
275,347

 
265,920

 
259,195

Receivables
 
108,435

 
114,185

 
116,243

Goodwill
 
359,759

 
361,979

 
358,962

Intangible assets, net
 
25,407

 
28,192

 
33,196

Mortgage servicing rights, net
 
140,863

 
100,812

 
89,653

Real estate and other repossessed assets, net of allowance (Sept. 30, 2013 – $26,910; December 31, 2012 – $36,873; Sept. 30, 2012 – $35,979)
 
108,122

 
103,791

 
104,128

Bankers’ acceptances
 
748

 
605

 
1,605

Derivative contracts
 
377,325

 
338,106

 
435,653

Cash surrender value of bank-owned life insurance
 
282,490

 
274,531

 
271,830

Receivable on unsettled securities sales
 
93,020

 
211,052

 
32,480

Other assets
 
511,705

 
388,355

 
400,812

Total assets
 
$
27,166,367

 
$
28,148,631

 
$
27,117,641

 
 
 
 
 
 
 
Noninterest-bearing demand deposits
 
$
7,331,976

 
$
8,038,286

 
$
6,848,401

Interest-bearing deposits:
 
 

 
 

 
 

Transaction
 
9,119,810

 
9,888,038

 
9,002,567

Savings
 
319,849

 
284,744

 
269,573

  Time
 
2,720,020

 
2,967,992

 
3,022,326

Total deposits
 
19,491,655

 
21,179,060

 
19,142,867

Funds purchased
 
992,345

 
1,167,416

 
1,680,626

Repurchase agreements
 
782,418

 
887,030

 
1,109,696

Other borrowings
 
1,837,181

 
651,775

 
639,254

Subordinated debentures
 
347,758

 
347,633

 
347,592

Accrued interest, taxes and expense
 
182,076

 
176,678

 
182,410

Bankers’ acceptances
 
748

 
605

 
1,605

Derivative contracts
 
232,544

 
283,589

 
254,422

Due on unsettled securities purchases
 
114,259

 
297,453

 
556,998

Other liabilities
 
158,409

 
163,711

 
189,696

Total liabilities
 
24,139,393

 
25,154,950

 
24,105,166

Shareholders' equity:
 
 

 
 

 
 

Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: Sept. 30, 2013 – 73,089,764; December 31, 2012 – 72,415,346; Sept. 30, 2012 – 72,223,473)
 
4

 
4

 
4

Capital surplus
 
890,433

 
859,278

 
849,390

Retained earnings
 
2,303,688

 
2,137,541

 
2,148,292

Treasury stock (shares at cost:  Sept. 30, 2013 – 4,302,180; December 31, 2012 – 4,087,995;  Sept. 30, 2012 – 4,008,119)
 
(200,255
)
 
(188,883
)
 
(184,422
)
Accumulated other comprehensive income (loss)
 
(2,626
)
 
149,920

 
162,393

Total shareholders’ equity
 
2,991,244

 
2,957,860

 
2,975,657

Non-controlling interest
 
35,730

 
35,821

 
36,818

Total equity
 
3,026,974

 
2,993,681

 
3,012,475

Total liabilities and equity
 
$
27,166,367

 
$
28,148,631

 
$
27,117,641


See accompanying notes to consolidated financial statements.

- 63 -



Consolidated Statements of Changes in Equity (Unaudited)
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Capital
Surplus
 
Retained
Earnings
 
Treasury Stock
 
Total
Shareholders’
Equity
 
Non-
Controlling
Interest
 
Total
 
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2011
 
71,533

 
$
4

 
$
128,979

 
$
818,817

 
$
1,953,332

 
3,380

 
$
(150,664
)
 
$
2,750,468

 
$
36,184

 
$
2,786,652

Net income
 
—

 
—

 
—

 
—

 
268,626

 
—

 
—

 
268,626

 
1,882

 
270,508

Other comprehensive income
 
—

 
—

 
33,414

 
—

 
—

 
—

 
—

 
33,414

 
—

 
33,414

Treasury stock purchases
 
—

 
—

 
—

 
—

 
—

 
384

 
(20,558
)
 
(20,558
)
 
—

 
(20,558
)
Exercise of stock options
 
690

 
—

 
—

 
24,726

 
—

 
244

 
(13,200
)
 
11,526

 
—

 
11,526

Tax benefit on exercise of stock options
 
—

 
—

 
—

 
(487
)
 
—

 
—

 
—

 
(487
)
 
—

 
(487
)
Stock-based compensation
 
—

 
—

 
—

 
6,334

 
—

 
—

 
—

 
6,334

 
—

 
6,334

Cash dividends on common stock
 
—

 
—

 
—

 
—

 
(73,666
)
 
—

 
—

 
(73,666
)
 
—

 
(73,666
)
Issuance of non-controlling interest in subsidiary
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,645

 
1,645

Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,893
)
 
(2,893
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, Sept. 30, 2012
 
72,223

 
$
4

 
$
162,393

 
$
849,390

 
$
2,148,292

 
4,008

 
$
(184,422
)
 
$
2,975,657

 
$
36,818

 
$
3,012,475

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2012
 
72,415

 
$
4

 
$
149,920

 
$
859,278

 
$
2,137,541

 
4,088

 
$
(188,883
)
 
$
2,957,860

 
$
35,821

 
$
2,993,681

Net income
 
—

 
—

 
—

 
—

 
243,633

 
—

 
—

 
243,633

 
1,376

 
245,009

Other comprehensive loss
 
—

 
—

 
(152,546
)
 
—

 
—

 
—

 
—

 
(152,546
)
 
—

 
(152,546
)
Treasury stock purchases
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Exercise of stock options
 
675

 
—

 
—

 
26,317

 
—

 
214

 
(11,372
)
 
14,945

 
—

 
14,945

Tax benefit on exercise of stock options
 
—

 
—

 
—

 
301

 
—

 
—

 
—

 
301

 
—

 
301

Stock-based compensation
 
—

 
—

 
—

 
4,537

 
—

 
—

 
—

 
4,537

 
—

 
4,537

Cash dividends on common stock
 
—

 
—

 
—

 
—

 
(77,486
)
 
—

 
—

 
(77,486
)
 
—

 
(77,486
)
Issuance of non-controlling interest in subsidiary
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Capital calls and distributions, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,467
)
 
(1,467
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, Sept. 30, 2013
 
73,090

 
$
4

 
$
(2,626
)
 
$
890,433

 
$
2,303,688

 
4,302

 
$
(200,255
)
 
$
2,991,244

 
$
35,730

 
$
3,026,974


See accompanying notes to consolidated financial statements.

- 64 -



Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Nine Months Ended
 
 
September 30,
 
 
2013
 
2012
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
245,009

 
$
270,508

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

 
 

Provision for credit losses
 
(16,500
)
 
(8,000
)
Change in fair value of mortgage servicing rights
 
(16,627
)
 
13,899

Unrealized (gains) losses from derivatives
 
23,270

 
(2,665
)
Tax benefit on exercise of stock options
 
(301
)
 
487

Change in bank-owned life insurance
 
(7,870
)
 
(8,416
)
Stock-based compensation
 
4,537

 
6,334

Depreciation and amortization
 
40,820

 
37,452

Net amortization of securities discounts and premiums
 
47,468

 
68,579

Net realized gains on financial instruments and other assets
 
(7,917
)
 
(19,631
)
Net gain on mortgage loans held for sale
 
(79,045
)
 
(85,262
)
Mortgage loans originated for sale
 
(3,232,520
)
 
(2,634,809
)
Proceeds from sale of mortgage loans held for sale
 
3,364,095

 
2,590,960

Capitalized mortgage servicing rights
 
(39,157
)
 
(29,754
)
Change in trading and fair value option securities
 
177,953

 
189,182

Change in receivables
 
7,716

 
7,328

Change in other assets
 
58,311

 
(5,747
)
Change in accrued interest, taxes and expense
 
5,398

 
29,220

Change in other liabilities
 
(5,676
)
 
28,980

Net cash provided by operating activities
 
568,964

 
448,645

Cash Flows From Investing Activities:
 
 

 
 

Proceeds from maturities or redemptions of investment securities
 
113,570

 
67,571

Proceeds from maturities or redemptions of available for sale securities
 
2,197,656

 
3,444,670

Purchases of investment securities
 
(261,629
)
 
(60,542
)
Purchases of available for sale securities
 
(3,708,188
)
 
(6,412,356
)
Proceeds from sales of available for sale securities
 
2,140,531

 
1,660,876

Change in amount receivable on unsettled securities transactions
 
118,032

 
42,671

Loans originated net of principal collected
 
(27,426
)
 
(594,261
)
Net payments on derivative asset contracts
 
(67,707
)
 
(108,296
)
Acquisitions, net of cash acquired
 
—

 
(28,671
)
Proceeds from disposition of assets
 
80,678

 
135,760

Purchases of assets
 
(120,539
)
 
(77,032
)
Net cash provided by (used in) investing activities
 
464,978

 
(1,929,610
)
Cash Flows From Financing Activities:
 
 

 
 

Net change in demand deposits, transaction deposits and savings accounts
 
(1,439,433
)
 
739,943

Net change in time deposits
 
(247,972
)
 
(359,656
)
Net change in other borrowed funds
 
817,105

 
974,189

Repayment of subordinated debt
 
—

 
(53,787
)
Net proceeds on derivative liability contracts
 
61,764

 
90,646

Net change in derivative margin accounts
 
(105,226
)
 
(101,683
)
Change in amount due on unsettled security transactions
 
(183,194
)
 
(96,373
)
Issuance of common and treasury stock, net
 
14,945

 
11,526

Tax benefit on exercise of stock options
 
301

 
(487
)
Repurchase of common stock
 
—

 
(20,558
)
Dividends paid
 
(77,486
)
 
(73,666
)
Net cash provided by (used in) financing activities
 
(1,159,196
)
 
1,110,094

Net decrease in cash and cash equivalents
 
(125,254
)
 
(370,871
)
Cash and cash equivalents at beginning of period
 
1,286,239

 
986,365

Cash and cash equivalents at end of period
 
$
1,160,985

 
$
615,494

 
 
 
 
 
Cash paid for interest
 
$
51,689

 
$
66,819

Cash paid for taxes
 
$
104,589

 
$
113,663

Net loans and bank premises transferred to repossessed real estate and other assets
 
$
73,075

 
$
97,142

Residential mortgage loans guaranteed by U.S. government agencies that became eligible for repurchase during the period
 
$
88,618

 
$
84,520

Conveyance of other real estate owned guaranteed by U.S. government agencies
 
$
31,641

 
$
65,344

See accompanying notes to consolidated financial statements.

- 65 -



Notes to Consolidated Financial Statements (Unaudited)

(1) Significant Accounting Policies

Basis of Presentation

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

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

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

The financial information should be read in conjunction with BOK Financial’s 2012 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. Amounts presented as of December 31, 2012 have been derived from the audited financial statements included in BOK Financial’s 2012 Form 10-K but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  Operating results for the three-month and nine-month periods ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

Newly Adopted and Pending Accounting Policies

Financial Accounting Standards Board (“FASB”)

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

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

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

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

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

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

- 66 -



(2) Securities
Trading Securities
 
The fair value and net unrealized gain (loss) included in trading securities is as follows (in thousands):
 
 
 
September 30, 2013
 
December 31, 2012
 
September 30, 2012
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair
Value
 
Net Unrealized Gain (Loss)
U.S. Government agency debentures
 
$
74,632

 
$
(598
)
 
$
16,545

 
$
(57
)
 
$
3,100

 
$
1

U.S. agency residential mortgage-backed securities
 
26,129

 
456

 
86,361

 
447

 
119,835

 
566

Municipal and other tax-exempt securities
 
37,057

 
81

 
90,326

 
(226
)
 
58,150

 
118

Other trading securities
 
13,069

 
(25
)
 
20,870

 
(13
)
 
23,157

 
(1
)
Total
 
$
150,887

 
$
(86
)
 
$
214,102

 
$
151

 
$
204,242

 
$
684

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

 
 
September 30, 2013
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized2
 
 
Cost
 
Value1
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
409,542

 
$
409,542

 
$
407,562

 
$
2,316

 
$
(4,296
)
U.S. agency residential mortgage-backed securities – Other
 
53,858

 
56,182

 
58,442

 
2,260

 
—

Other debt securities
 
178,501

 
178,501

 
188,475

 
10,094

 
(120
)
Total
 
$
641,901

 
$
644,225

 
$
654,479

 
$
14,670

 
$
(4,416
)
1 
Carrying value includes $2.3 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.
 
 
December 31, 2012
 
 
Amortized
 
Carrying
 
Fair
 
Gross Unrealized2
 
 
Cost
 
Value1
 
Value
 
Gain
 
Loss
Municipal and other tax-exempt
 
$
232,700

 
$
232,700

 
$
235,940

 
$
3,723

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

 
82,767

 
85,943

 
3,176

 
—

Other debt securities
 
184,067

 
184,067

 
206,575

 
22,528

 
(20
)
Total
 
$
494,493

 
$
499,534

 
$
528,458

 
$
29,427

 
$
(503
)
1 
Carrying value includes $5.0 million of net unrealized gain which remains in Accumulated other comprehensive income (“AOCI”) in the Consolidated Balance Sheets related to certain securities transferred from the Available for Sale securities portfolio to the Investment securities portfolio as discussed in greater detail following.
2 
Gross unrealized gains and losses are not recognized in AOCI in the Consolidated Balance Sheets.

- 67 -



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

 
$
155,144

 
$
159,464

 
$
4,329

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

 
91,911

 
95,128

 
3,356

 
(139
)
Other debt securities
 
185,059

 
185,059

 
205,766

 
20,737

 
(30
)
Total
 
$
425,902

 
$
432,114

 
$
460,358

 
$
28,422

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

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

The amortized cost and fair values of investment securities at September 30, 2013, by contractual maturity, are as shown in the following table (dollars in thousands):
 
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 
Total
 
Weighted
Average
Maturity²
Municipal and other tax-exempt:
 
 
 
 
 
 
 
 
 
 
 
 
Carrying value
 
$
28,674

 
$
277,808

 
$
93,703

 
$
9,357

 
$
409,542

 
3.92

Fair value
 
28,928

 
276,908

 
92,195

 
9,531

 
407,562

 
 
Nominal yield¹
 
3.35
%
 
1.52
%
 
2.29
%
 
2.74
%
 
1.85
%
 
 
Other debt securities:
 
 

 
 

 
 

 
 

 
 

 
 
Carrying value
 
9,631

 
32,542

 
35,539

 
100,789

 
178,501

 
8.78

Fair value
 
9,647

 
32,883

 
36,445

 
109,500

 
188,475

 
 
Nominal yield
 
3.98
%
 
5.08
%
 
5.51
%
 
6.27
%
 
5.78
%
 
 
Total fixed maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 
Carrying value
 
$
38,305

 
$
310,350

 
$
129,242

 
$
110,146

 
$
588,043

 
5.39

Fair value
 
38,575

 
309,791

 
128,640

 
119,031

 
596,037

 
 

Nominal yield
 
3.51
%
 
1.90
%
 
3.17
%
 
5.97
%
 
3.04
%
 
 

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Carrying value
 
 

 
 

 
 

 
 

 
$
56,182

 
³

Fair value
 
 

 
 

 
 

 
 

 
58,442

 
 

Nominal yield4
 
 

 
 

 
 

 
 

 
2.73
%
 
 

Total investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

Carrying value
 
 

 
 

 
 

 
 

 
$
644,225

 
 

Fair value
 
 

 
 

 
 

 
 

 
654,479

 
 

Nominal yield
 
 

 
 

 
 

 
 

 
3.02
%
 
 

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 4.2 years based upon current prepayment assumptions.
4 
The nominal yield on residential mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. See Quarterly Financial Summary - Unaudited for current yields on the investment securities portfolio.

- 68 -



Available for Sale Securities 

The amortized cost and fair value of available for sale securities are as follows (in thousands):
 
 
September 30, 2013
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,052

 
$
1,052

 
$
—

 
$
—

 
$
—

Municipal and other tax-exempt
 
93,897

 
95,440

 
2,792

 
(1,249
)
 
—

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
4,513,161

 
4,544,505

 
81,984

 
(50,640
)
 
—

FHLMC
 
2,412,948

 
2,412,116

 
30,673

 
(31,505
)
 
—

GNMA
 
978,361

 
984,065

 
11,054

 
(5,350
)
 
—

Other
 
38,979

 
40,701

 
1,722

 
—

 
—

Total U.S. government agencies
 
7,943,449

 
7,981,387

 
125,433

 
(87,495
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
109,234

 
109,592

 
2,970

 
—

 
(2,612
)
Jumbo-A loans
 
118,312

 
121,308

 
3,816

 
(138
)
 
(682
)
Total private issue
 
227,546

 
230,900

 
6,786

 
(138
)
 
(3,294
)
Total residential mortgage-backed securities
 
8,170,995

 
8,212,287

 
132,219

 
(87,633
)
 
(3,294
)
Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
1,985,924

 
1,946,295

 
354

 
(39,983
)
 
—

Other debt securities
 
35,091

 
35,362

 
459

 
(188
)
 
—

Perpetual preferred stock
 
22,171

 
23,680

 
1,534

 
(25
)
 
—

Equity securities and mutual funds
 
56,348

 
58,787

 
2,479

 
(40
)
 
—

Total
 
$
10,365,478

 
$
10,372,903

 
$
139,837

 
$
(129,118
)
 
$
(3,294
)
1 Gross unrealized gain/loss recognized in AOCI in the consolidated balance sheet.
2 Amounts represent unrealized loss that remains in AOCI after an other-than-temporary credit loss has been recognized in income.

- 69 -



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

 
$
1,002

 
$
2

 
$
—

 
$
—

Municipal and other tax-exempt
 
84,892

 
87,142

 
2,414

 
(164
)
 
—

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
5,308,463

 
5,453,549

 
146,247

 
(1,161
)
 
—

FHLMC
 
2,978,608

 
3,045,564

 
66,956

 
—

 
—

GNMA
 
1,215,554

 
1,237,041

 
21,487

 
—

 
—

Other
 
148,025

 
153,667

 
5,642

 
—

 
—

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

 
9,889,821

 
240,332

 
(1,161
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
124,314

 
123,174

 
1,440

 
—

 
(2,580
)
Jumbo-A loans
 
198,588

 
201,989

 
5,138

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

 
325,163

 
6,578

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

 
10,214,984

 
246,910

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

 
895,075

 
5,006

 
(677
)
 
—

Other debt securities
 
35,680

 
36,389

 
709

 
—

 
—

Perpetual preferred stock
 
22,171

 
25,072

 
2,901

 
—

 
—

Equity securities and mutual funds
 
24,593

 
27,557

 
3,242

 
(278
)
 
—

Total
 
$
11,032,634

 
$
11,287,221

 
$
261,184

 
$
(2,414
)
 
$
(4,183
)
1 Gross unrealized gain/loss recognized in AOCI in the consolidated balance sheet.
2 Amounts represent unrealized loss that remains in AOCI after an other-than-temporary credit loss has been recognized in income.

 
 
September 30, 2012
 
 
Amortized
 
Fair
 
Gross Unrealized1
 
 
 
 
Cost
 
Value
 
Gain
 
Loss
 
OTTI²
U.S. Treasury
 
$
1,000

 
$
1,002

 
$
2

 
$
—

 
$
—

Municipal and other tax-exempt
 
86,326

 
87,969

 
2,760

 
(152
)
 
(965
)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

FNMA
 
5,740,232

 
5,900,174

 
161,314

 
(1,372
)
 
—

FHLMC
 
3,322,692

 
3,400,215

 
77,523

 
—

 
—

GNMA
 
1,151,058

 
1,181,134

 
30,076

 
—

 
—

Other
 
167,262

 
173,298

 
6,036

 
—

 
—

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

 
10,654,821

 
274,949

 
(1,372
)
 
—

Private issue:
 
 

 
 

 
 

 
 

 
 

Alt-A loans
 
128,090

 
123,583

 
663

 
—

 
(5,170
)
Jumbo-A loans
 
208,900

 
208,139

 
3,617

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

 
331,722

 
4,280

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

 
10,986,543

 
279,229

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

 
339,095

 
3,271

 
(306
)
 
—

Other debt securities
 
35,710

 
36,456

 
746

 
—

 
—

Perpetual preferred stock
 
22,170

 
25,288

 
3,118

 
—

 
—

Equity securities and mutual funds
 
25,409

 
30,081

 
4,998

 
(326
)
 
—

Total
 
$
11,224,979

 
$
11,506,434

 
$
294,124

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

- 70 -




The amortized cost and fair values of available for sale securities at September 30, 2013, by contractual maturity, are as shown in the following table (dollars in thousands):
 
Less than
One Year
 
One to
Five Years
 
Six to
Ten Years
 
Over
Ten Years
 
Total
 
Weighted
Average
Maturity5
U.S. Treasuries:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$
1,052

 
$
—

 
$
—

 
$
—

 
$
1,052

 
1.42

Fair value
1,052

 
—

 
—

 
—

 
1,052

 
 
Nominal yield
0.24
%
 
—
%
 
—
%
 
—
%
 
0.24
%
 
 
Municipal and other tax-exempt:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
1,379

 
$
34,349

 
$
5,446

 
$
52,723

 
$
93,897

 
14.50

Fair value
1,404

 
35,542

 
5,689

 
52,805

 
95,440

 
 
Nominal yield¹
—
%
 
0.97
%
 
0.51
%
 
2.62
%
6 
1.85
%
 
 
Commercial mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
$
—

 
$
520,499

 
$
1,150,637

 
$
314,788

 
$
1,985,924

 
10.18

Fair value
—

 
514,668

 
1,121,936

 
309,691

 
1,946,295

 
 
Nominal yield
—
%
 
1.11
%
 
1.37
%
 
1.36
%
 
1.30
%
 
 
Other debt securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
—

 
$
30,191

 
$
—

 
$
4,900

 
$
35,091

 
5.56

Fair value
—

 
30,650

 
—

 
4,712

 
35,362

 
 
Nominal yield
—
%
 
1.80
%
 
—
%
 
1.54
%
6 
1.77
%
 
 
Total fixed maturity securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
$
2,431

 
$
585,039

 
$
1,156,083

 
$
372,411

 
$
2,115,964

 
10.29

Fair value
2,456

 
580,860

 
1,127,625

 
367,208

 
2,078,149

 
 
Nominal yield
—
%
 
1.13
%
 
1.36
%
 
1.54
%
 
1.33
%
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

 
 
 
 
Amortized cost
 

 
 

 
 

 
 

 
$
8,170,995

 
2 

Fair value
 

 
 

 
 

 
 

 
8,212,287

 
 
Nominal yield4
 

 
 

 
 

 
 

 
1.92
%
 
 
Equity securities and mutual funds:
 

 
 

 
 

 
 

 
 

 
 

Amortized cost
 

 
 

 
 

 
 

 
$
78,519

 
³

Fair value
 

 
 

 
 

 
 

 
82,467

 
 

Nominal yield
 

 
 

 
 

 
 

 
0.70
%
 
 

Total available-for-sale securities:
 

 
 

 
 

 
 

 
 
 
 

Amortized cost
 

 
 

 
 

 
 

 
$
10,365,478

 
 

Fair value
 

 
 

 
 

 
 

 
10,372,903

 
 

Nominal yield
 

 
 

 
 

 
 

 
1.79
%
 
 

1 
Calculated on a taxable equivalent basis using a 39% effective tax rate.
2 
The average expected lives of mortgage-backed securities were 3.5 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.


- 71 -



Sales of available for sale securities resulted in gains and losses as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Proceeds
$
355,650

 
$
209,325

 
$
2,140,531

 
$
1,660,876

Gross realized gains
3,164

 
7,967

 
18,948

 
40,133

Gross realized losses
(2,686
)
 
—

 
(9,862
)
 
(7,354
)
Related federal and state income tax expense
184

 
3,099

 
3,533

 
12,751


A summary of investment and available for sale securities that have been pledged as collateral for repurchase agreements, public trust funds on deposit and for other purposes, as required by law was as follows (in thousands):
 
September 30,
2013
 
December 31,
2012
 
September 30,
2012
Investment:
 
 
 
 
 
Carrying value
$
92,442

 
$
117,346

 
$
153,224

Fair value
95,658

 
121,647

 
158,899

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
Amortized cost
5,020,732

 
4,070,250

 
3,634,955

Fair value
5,009,611

 
4,186,390

 
3,763,664


The secured parties do not have the right to sell or re-pledge these securities. At December 31, 2012, municipal trading securities with a fair value of $13 million were pledged as collateral on a line of credit for the trading activities of BOSC, Inc. Under the terms of the credit agreement, the creditor has the right to sell or repledge the collateral. There were no securities pledged under this line of credit at September 30, 2013 or September 30, 2012.


- 72 -



Temporarily Impaired Securities as of September 30, 2013
(in thousands):
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
136

 
$
257,359

 
$
4,292

 
$
803

 
$
4

 
$
258,162

 
$
4,296

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

 
—

 
—

 
—

 
—

 
—

 
—

Other debt securities
 
29

 
1,326

 
59

 
780

 
61

 
2,106

 
120

Total investment
 
165

 
$
258,685

 
$
4,351

 
$
1,583

 
$
65

 
$
260,268

 
$
4,416


 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Available for sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
 
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Municipal and other tax-exempt1
 
46

 
$
20,274

 
$
352

 
$
19,575

 
$
897

 
$
39,849

 
$
1,249

Residential mortgage-backed securities:
 
 
 
 

 
 

 
 

 
 

 


 


U. S. agencies:
 
 
 
 

 
 

 
 

 
 

 


 


FNMA
 
79

 
2,328,213

 
50,640

 
—

 
—

 
2,328,213

 
50,640

FHLMC
 
46

 
1,402,010

 
31,505

 
—

 
—

 
1,402,010

 
31,505

GNMA
 
23

 
674,512

 
5,350

 
—

 
—

 
674,512

 
5,350

Total U.S. agencies
 
148

 
4,404,735

 
87,495

 
—

 
—

 
4,404,735

 
87,495

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
10

 
11,336

 
707

 
48,849

 
1,905

 
60,185

 
2,612

Jumbo-A loans
 
10

 
15,326

 
682

 
11,742

 
138

 
27,068

 
820

Total private issue
 
20

 
26,662

 
1,389

 
60,591

 
2,043

 
87,253

 
3,432

Total residential mortgage-backed securities
 
168

 
4,431,397

 
88,884

 
60,591

 
2,043

 
4,491,988

 
90,927

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
116

 
1,803,008

 
39,983

 
—

 
—

 
1,803,008

 
39,983

Other debt securities
 
3

 
4,712

 
188

 
—

 
—

 
4,712

 
188

Perpetual preferred stocks
 
1

 
4,975

 
25

 
—

 
—

 
4,975

 
25

Equity securities and mutual   funds
 
97

 
1,529

 
40

 
—

 
—

 
1,529

 
40

Total available for sale
 
431

 
$
6,265,895


$
129,472


$
80,166


$
2,940


$
6,346,061


$
132,412

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
 
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Alt-A loans
 
10

 
11,336

 
707

 
48,849

 
1,905

 
60,185

 
2,612

Jumbo-A loans
 
9

 
15,326

 
682

 
—

 
—

 
15,326

 
682


- 73 -



Temporarily Impaired Securities as of December 31, 2012
(In thousands)
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
53

 
$
92,768

 
$
483

 
$
—

 
$
—

 
$
92,768

 
$
483

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

 
—

 
—

 
—

 
—

 
—

 
—

Other debt securities
 
14

 
881

 
20

 
—

 
—

 
881

 
20

Total investment
 
67

 
$
93,649

 
$
503

 
$
—

 
$
—

 
$
93,649

 
$
503


 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Available for sale:
 
 

 
 

 
 

 
 

 
 

 


 


Municipal and other tax-exempt
 
38

 
$
6,150

 
$
11

 
$
26,108

 
$
153

 
$
32,258

 
$
164

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
12

 
161,828

 
1,161

 
—

 
—

 
161,828

 
1,161

FHLMC
 
—

 
—

 
—

 
—

 
—

 
—

 
—

GNMA
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total U.S. agencies
 
12

 
161,828

 
1,161

 
—

 
—

 
161,828

 
1,161

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
12

 
—

 
—

 
87,907

 
2,580

 
87,907

 
2,580

Jumbo-A loans
 
11

 
—

 
—

 
43,252

 
1,737

 
43,252

 
1,737

Total private issue
 
23

 
—

 
—

 
131,159

 
4,317

 
131,159

 
4,317

Total residential mortgage-backed securities
 
35

 
161,828

 
1,161

 
131,159

 
4,317

 
292,987

 
5,478

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

 
275,065

 
677

 
—

 
—

 
275,065

 
677

Other debt securities
 
3

 
4,899

 
—

 
—

 
—

 
4,899

 
—

Perpetual preferred stocks
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equity securities and mutual funds
 
22

 
202

 
1

 
2,161

 
277

 
2,363

 
278

Total available for sale
 
106

 
$
448,144

 
$
1,850

 
$
159,428

 
$
4,747

 
$
607,572

 
$
6,597

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

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Alt-A loans
 
12

 
$
—

 
$
—

 
$
87,907

 
$
2,580

 
$
87,907

 
$
2,580

Jumbo-A loans
 
10

 
—

 
—

 
29,128

 
1,602

 
29,128

 
1,602



- 74 -



Temporarily Impaired Securities as of September 30, 2012
(In thousands)
 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt
 
6

 
$
7,548

 
$
9

 
$
—

 
$
—

 
$
7,548

 
$
9

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

 
—

 
—

 
19,066

 
139

 
19,066

 
139

Other debt securities
 
14

 
871

 
30

 
—

 
—

 
871

 
30

Total investment
 
21

 
$
8,419

 
$
39

 
$
19,066

 
$
139

 
$
27,485

 
$
178


 
 
Number of Securities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Available for sale:
 
 

 
 

 
 

 
 

 
 

 


 


Municipal and other tax-exempt1
 
51

 
$
13,492

 
$
970

 
$
27,485

 
$
147

 
$
40,977

 
$
1,117

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 


 


U. S. agencies:
 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
12

 
483,258

 
1,372

 
—

 
—

 
483,258

 
1,372

FHLMC
 
—

 
—

 
—

 
—

 
—

 
—

 
—

GNMA
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total U.S. agencies
 
12

 
483,258

 
1,372

 
—

 
—

 
483,258

 
1,372

Private issue1:
 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
13

 
—

 
—

 
105,862

 
5,170

 
105,862

 
5,170

Jumbo-A loans
 
15

 
—

 
—

 
121,746

 
4,378

 
121,746

 
4,378

Total private issue
 
28

 
—

 
—

 
227,608

 
9,548

 
227,608

 
9,548

Total residential mortgage-backed securities
 
40

 
483,258

 
1,372

 
227,608

 
9,548

 
710,866

 
10,920

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

 
42,445

 
306

 
—

 
—

 
42,445

 
306

Other debt securities
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Perpetual preferred stocks
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Equity securities and mutual funds
 
2

 
2,551

 
326

 
—

 
—

 
2,551

 
326

Total available for sale
 
101

 
$
541,746

 
$
2,974

 
$
255,093

 
$
9,695

 
$
796,839

 
$
12,669

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

 
$
12,431

 
$
965

 
$
—

 
$
—

 
$
12,431

 
$
965

Alt-A loans
 
13

 
—

 
—

 
105,862

 
5,170

 
105,862

 
5,170

Jumbo-A loans
 
14

 
—

 
—

 
107,071

 
4,226

 
107,071

 
4,226


On a quarterly basis, the Company performs separate evaluations of impaired debt and equity investments 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

- 75 -



and securities portfolio management. Based on this evaluation as of September 30, 2013, the Company recorded a $1.4 million impairment related to certain municipal securities, which the Company now intends to sell prior to recovery of its amortized cost based on a tentative settlement offer from the securities issuer. We do not intend to sell any other impaired available for sale securities before fair value recovers to our current amortized cost and it is more-likely-than-not that we will not be required to sell impaired securities before fair value recovers, which may be maturity.

Impairment of debt securities rated investment grade by all nationally-recognized rating agencies are considered temporary unless specific contrary information is identified. None of the debt securities rated investment grade were considered to be other-than-temporarily impaired at September 30, 2013.

- 76 -



At September 30, 2013, the composition of the Company’s investment and available for sale securities portfolios by the lowest current credit rating assigned by any of the three nationally-recognized rating agencies is as follows (in thousands):
 
 
 
U.S. Govt / GSE 1
 

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

 
$
—

 
$
275,067

 
$
271,781

 
$
21,162

 
$
21,405

 
$
—

 
$
—

 
$
113,313

 
$
114,376

 
$
409,542

 
$
407,562

Mortgage-backed securities -- other
 
56,182

 
58,442

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
56,182

 
58,442

Other debt securities
 
—

 
—

 
167,463

 
177,502

 
—

 
—

 
—

 
—

 
11,038

 
10,973

 
178,501

 
188,475

Total investment securities
 
$
56,182

 
$
58,442

 
$
442,530

 
$
449,283

 
$
21,162

 
$
21,405

 
$
—

 
$
—

 
$
124,351

 
$
125,349

 
$
644,225

 
$
654,479

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

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
 
$
1,052

 
$
1,052

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,052

 
$
1,052

Municipal and other tax-exempt
 
—

 
—

 
47,747

 
48,564

 
15,819

 
15,525

 
17,924

 
19,140

 
12,407

 
12,211

 
93,897

 
95,440

Residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 


 


U. S. government agencies:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 


 


FNMA
 
4,513,161

 
4,544,505

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
4,513,161

 
4,544,505

FHLMC
 
2,412,948

 
2,412,116

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,412,948

 
2,412,116

GNMA
 
978,361

 
984,065

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
978,361

 
984,065

Other
 
38,979

 
40,701

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
38,979

 
40,701

Total U.S. government agencies
 
7,943,449

 
7,981,387

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
7,943,449

 
7,981,387

Private issue:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 


 


Alt-A loans
 
—

 
—

 
—

 
—

 
—

 
—

 
109,234

 
109,592

 
—

 
—

 
109,234

 
109,592

Jumbo-A loans
 
—

 
—

 
—

 
—

 
—

 
—

 
118,312

 
121,308

 
—

 
—

 
118,312

 
121,308

Total private issue
 
—

 
—

 
—

 
—

 
—

 
—

 
227,546

 
230,900

 
—

 
—

 
227,546

 
230,900

Total residential mortgage-backed securities
 
7,943,449

 
7,981,387

 
—

 
—

 
—

 
—

 
227,546

 
230,900

 
—

 
—

 
8,170,995

 
8,212,287

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
1,985,924

 
1,946,295

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,985,924

 
1,946,295

Other debt securities
 
—

 
—

 
4,900

 
4,712

 
30,191

 
30,650

 
—

 
—

 
—

 
—

 
35,091

 
35,362

Perpetual preferred stock
 
—

 
—

 
—

 
—

 
11,406

 
11,822

 
10,765

 
11,858

 
—

 
—

 
22,171

 
23,680

Equity securities and mutual funds
 
—

 
—

 
4

 
441

 
—

 
—

 
—

 
—

 
56,344

 
58,346

 
56,348

 
58,787

Total available for sale securities
 
$
9,930,425

 
$
9,928,734

 
$
52,651

 
$
53,717

 
$
57,416

 
$
57,997

 
$
256,235

 
$
261,898

 
$
68,751

 
$
70,557

 
$
10,365,478

 
$
10,372,903

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.

- 77 -



At September 30, 2013, the entire portfolio of privately issued residential mortgage-backed securities was rated below investment grade. The gross unrealized loss on these securities totaled $3.4 million. Ratings by the nationally-recognized rating agencies are subjective in nature and accordingly ratings can vary significantly amongst the agencies. Limitations generally expressed by the rating agencies include statements that ratings do not predict the specific percentage default likelihood over any given period of time and that ratings do not opine on expected loss severity of an obligation should the issuer default. As such, the impairment of securities rated below investment grade was evaluated to determine if we expect not to recover the entire amortized cost basis of the security. This evaluation was based on projections of estimated cash flows based on individual loans underlying each security using current and anticipated increases in unemployment and default rates, decreases in housing prices and estimated liquidation costs at foreclosure.

The primary assumptions used in this evaluation were:

 
September 30,
2013
 
December 31,
2012
 
September 30,
2012
 
 
 
 
 
 
Unemployment rate
Increasing to 7.5% over the next 12 months and remain at 7.5% thereafter
 
Increasing to 8.5% over the next 12 months, dropping to 8% over the following 21 months and holding at 8% thereafter.
 
Increasing to 8.5% over the next 12 months, dropping to 8% over the following 21 months and holding at 8% thereafter.
Housing price appreciation/depreciation
Starting with current depreciated housing prices based on information derived from the FHFA1, appreciating 5% over the next 12 months, then flat for the following 12 months and then appreciating at 2% per year thereafter.
 
Starting with current depreciated housing prices based on information derived from the FHFA1, depreciating 2% over the next 12 months, then flat for the following 12 months and then appreciating at 2% per year thereafter.
 
Starting with current depreciated housing prices based on information derived from the FHFA1, depreciating 2% over the next 12 months and then appreciating at 2% per year thereafter.
Estimated liquidation costs
Reflect actual historical liquidations costs observed on Jumbo and Alt-A residential mortgage loans in securities owned by the Company.
 
Reflect actual historical liquidations costs observed on Jumbo and Alt-A residential mortgage loans in securities owned by the Company.
 
Reflect actual historical liquidations costs observed on Jumbo and Alt-A residential mortgage loans in securities owned by the Company.
Discount rates
Estimated cash flows were discounted at rates that range from 2.00% to 6.25% based on our current expected yields.
 
Estimated cash flows were discounted at rates that range from 2.00% to 6.25% based on our current expected yields.
 
Estimated cash flows were discounted at rates that range from 2.00% to 6.25% based on our current expected yields.
1 
Federal Housing Finance Agency

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 senior or 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 senior or super-senior tranches which effectively increased the typical credit support for these types of bonds. Current projected losses consider depreciation of home prices based on FHFA data, estimated costs and additional losses to liquidate collateral and delinquency status of the individual loans underlying the security.

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

Based upon projected declines in expected cash flows from certain private-label residential mortgage-backed securities, the Company recognized $139 thousand of additional credit loss impairments in earnings during the three months ended September 30, 2013.


- 78 -



A distribution of the amortized cost (after recognition of the other-than-temporary impairment), fair value and credit loss impairments recognized on our privately issued residential mortgage-backed securities is as follows (in thousands, except for number of securities):
 
 
 
 
 
 
 
 
Credit Losses Recognized
 
 
 
 
 
 
 
 
Three months ended
 
 
 
 
 
 
 
 
 
 
September 30, 2013
 
Life-to-date
 
 
Number of Securities
 
Amortized Cost
 
Fair Value
 
Number of
Securities
 
Amount
 
Number of Securities
 
Amount
Alt-A
 
16

 
$
109,234

 
$
109,592

 
1

 
$
139

 
16

 
$
49,126

Jumbo-A
 
29

 
118,312

 
121,308

 
—

 
—

 
29

 
18,220

Total
 
45

 
$
227,546

 
$
230,900

 
1

 
$
139

 
45

 
$
67,346


Impaired equity securities, including perpetual preferred stocks, are evaluated based on management's ability and intent to hold the securities until fair value recovers over periods not to exceed three years. The assessment of the ability and intent to hold these securities focuses on the liquidity needs, asset/liability management objectives and securities portfolio objectives. Factors considered when assessing recovery include forecasts of general economic conditions and specific performance of the issuer, analyst ratings and credit spreads for preferred stocks which have debt-like characteristics. The Company has evaluated the near-term prospects of the investments in relation to the severity and duration of the impairment and based on that evaluation has the ability and intent to hold these investments until a recovery in fair value. Accordingly, all impairment of equity securities was considered temporary at September 30, 2013.

The following is a tabular roll forward of the amount of credit-related OTTI recognized on available for sale debt securities in earnings (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Balance of credit-related OTTI recognized on available for sale debt, beginning of period
 
$
76,027

 
$
72,915

 
$
75,228

 
$
76,131

Additions for credit-related OTTI not previously recognized
 
67

 
—

 
619

 
248

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
 
73

 
1,104

 
320

 
5,436

Reductions for change in intent to hold before recovery
 
(3,589
)
 
—

 
(3,589
)
 
—

Sales
 
(5,232
)
 
—

 
(5,232
)
 
(7,796
)
Balance of credit-related OTTI recognized on available for sale debt securities, end of period
 
$
67,346

 
$
74,019

 
$
67,346

 
$
74,019


Additions above exclude other-than-temporary impairment recorded due to change in intent to hold before recovery.

- 79 -



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

The fair value and net unrealized gain (loss) included in Fair value option securities is as follows (in thousands):
 
 
September 30, 2013
 
December 31, 2012
 
September 30, 2012
 
 
Fair Value
 
Net Unrealized Gain (Loss)
 
Fair Value
 
Net Unrealized Gain
 
Fair
Value
 
Net Unrealized Gain
U.S. agency residential mortgage-backed securities
 
$
163,567

 
$
(5,365
)
 
$
257,040

 
$
3,314

 
$
305,445

 
$
13,827

Corporate debt securities
 
—

 
—

 
26,486

 
1,409

 
26,442

 
1,359

Other securities
 
4,293

 
1

 
770

 
47

 
—

 
—

Total
 
$
167,860

 
$
(5,364
)
 
$
284,296

 
$
4,770

 
$
331,887

 
$
15,186


- 80 -



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

When bilateral netting agreements or similar arrangements exist between the Company and its counterparties that create a single legal claim or obligation to pay or receive the net amount in settlement of the individual derivative contracts, the Company reports derivative assets and liabilities on a net by derivative contract type by counterparty basis.

Derivative contracts may require the Company to provide or receive cash margin as collateral for derivative assets and liabilities. Derivative assets and liabilities are reported net of cash margin when certain conditions are met. In addition, derivative contracts executed with customers under Customer Risk Management Programs may be secured by non-cash collateral in conjunction with a credit agreement with that customer. Access to collateral, in the event of default is reasonably assured. As of September 30, 2013, a decrease in BOK Financial's credit rating to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $27 million.
 
None of these derivative contracts have been designated as hedging instruments.

Customer Risk Management Programs
 
BOK Financial offers programs to permit its customers to manage various risks, including fluctuations in energy, cattle and other agricultural products, and foreign exchange rates, or to take positions in derivative contracts. Customers may also manage interest rate risk through interest rate swaps used by borrowers to modify interest rate terms of their loans or to-be-announced securities used by mortgage banking customers to hedge their loan production. Derivative contracts are executed between the customers and BOK Financial. Offsetting contracts are executed between BOK Financial and other selected counterparties to minimize its risk of changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to BOK Financial as profit and compensation for administrative costs and credit risk which is recognized over the life of the contracts and included in other operating revenue – brokerage and trading revenue in the Consolidated Statements of Earnings.
 
Interest Rate Risk Management Programs
 
BOK Financial may use derivative contracts in managing its interest rate sensitivity and as part of its economic hedge of the change in the fair value of mortgage servicing rights. Interest rate swaps are generally used to reduce overall asset sensitivity by converting specific fixed-rate liabilities to floating-rate based on LIBOR. As of September 30, 2013, BOK Financial had interest rate swaps with a notional value of $47 million used as part of the economic hedge of the change in the fair value of the mortgage servicing rights.

As discussed in Note 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.



- 81 -



The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at September 30, 2013 (in thousands):
 
 
Assets
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
12,455,689

 
$
224,392

 
$
(99,970
)
 
$
124,422

 
$
(5,191
)
 
$
119,231

Interest rate swaps
 
1,361,499

 
49,183

 
—

 
49,183

 
—

 
49,183

Energy contracts
 
1,412,238

 
73,293

 
(42,078
)
 
31,215

 
(606
)
 
30,609

Agricultural contracts
 
262,770

 
5,783

 
(3,430
)
 
2,353

 
—

 
2,353

Foreign exchange contracts
 
164,970

 
164,970

 
—

 
164,970

 
—

 
164,970

Equity option contracts
 
212,452

 
14,339

 
—

 
14,339

 
(3,360
)
 
10,979

Total customer risk management programs
 
15,869,618

 
531,960

 
(145,478
)
 
386,482

 
(9,157
)
 
377,325

Interest rate risk management programs
 
—

 
—

 
—

 
—

 
—

 
—

Total derivative contracts
 
$
15,869,618

 
$
531,960

 
$
(145,478
)
 
$
386,482

 
$
(9,157
)
 
$
377,325

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional¹
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
12,529,704

 
$
221,720

 
$
(99,970
)
 
$
121,750

 
$
(118,166
)
 
$
3,584

Interest rate swaps
 
1,361,499

 
49,518

 
—

 
49,518

 
(21,240
)
 
28,278

Energy contracts
 
1,400,542

 
71,971

 
(42,078
)
 
29,893

 
(10,762
)
 
19,131

Agricultural contracts
 
261,782

 
5,731

 
(3,430
)
 
2,301

 
(2,242
)
 
59

Foreign exchange contracts
 
164,455

 
164,455

 
—

 
164,455

 
—

 
164,455

Equity option contracts
 
212,452

 
14,339

 
—

 
14,339

 
—

 
14,339

Total customer risk management programs
 
15,930,434

 
527,734

 
(145,478
)
 
382,256

 
(152,410
)
 
229,846

Interest rate risk management programs
 
47,000

 
2,698

 
—

 
2,698

 
—

 
2,698

Total derivative contracts
 
$
15,977,434

 
$
530,432

 
$
(145,478
)
 
$
384,954

 
$
(152,410
)
 
$
232,544

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



- 82 -



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

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

 
$
46,113

 
$
(15,656
)
 
$
30,457

 
$
—

 
$
30,457

Interest rate swaps
 
1,319,827

 
72,201

 
—

 
72,201

 
—

 
72,201

Energy contracts
 
1,346,780

 
82,349

 
(44,485
)
 
37,864

 
(3,464
)
 
34,400

Agricultural contracts
 
212,434

 
3,638

 
(3,164
)
 
474

 
—

 
474

Foreign exchange contracts
 
180,318

 
180,318

 
—

 
180,318

 
—

 
180,318

Equity option contracts
 
211,941

 
12,593

 
—

 
12,593

 
—

 
12,593

Total customer risk management programs
 
16,122,105

 
397,212

 
(63,305
)
 
333,907

 
(3,464
)
 
330,443

Interest rate risk management programs
 
66,000

 
7,663

 
—

 
7,663

 
—

 
7,663

Total derivative contracts
 
$
16,188,105

 
$
404,875

 
$
(63,305
)
 
$
341,570

 
$
(3,464
)
 
$
338,106

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

 
$
43,064

 
$
(15,656
)
 
$
27,408

 
$
(15,467
)
 
$
11,941

Interest rate swaps
 
1,319,827

 
72,724

 
—

 
72,724

 
(31,945
)
 
40,779

Energy contracts
 
1,334,349

 
83,654

 
(44,485
)
 
39,169

 
(1,769
)
 
37,400

Agricultural contracts
 
212,135

 
3,571

 
(3,164
)
 
407

 
(188
)
 
219

Foreign exchange contracts
 
179,852

 
179,852

 
—

 
179,852

 
—

 
179,852

Equity option contracts
 
211,941

 
12,593

 
—

 
12,593

 
—

 
12,593

Total customer risk management programs
 
16,497,182

 
395,458

 
(63,305
)
 
332,153

 
(49,369
)
 
282,784

Interest rate risk management programs
 
50,000

 
805

 
—

 
805

 
—

 
805

Total derivative contracts
 
$
16,547,182

 
$
396,263

 
$
(63,305
)
 
$
332,958

 
$
(49,369
)
 
$
283,589

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





- 83 -



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

 
$
276,678

 
$
(121,573
)
 
$
155,105

 
$
(7,287
)
 
$
147,818

Interest rate swaps
 
1,301,109

 
79,350

 
—

 
79,350

 
—

 
79,350

Energy contracts
 
1,556,164

 
105,588

 
(67,030
)
 
38,558

 
(3,866
)
 
34,692

Agricultural contracts
 
198,735

 
6,835

 
(6,011
)
 
824

 
—

 
824

Foreign exchange contracts
 
150,232

 
150,232

 
—

 
150,232

 
—

 
150,232

Equity option contracts
 
217,283

 
14,460

 
—

 
14,460

 
—

 
14,460

Total customer risk management programs
 
18,282,043

 
633,143

 
(194,614
)
 
438,529

 
(11,153
)
 
427,376

Interest rate risk management programs
 
66,000

 
8,277

 
—

 
8,277

 
—

 
8,277

Total derivative contracts
 
$
18,348,043

 
$
641,420

 
$
(194,614
)
 
$
446,806

 
$
(11,153
)
 
$
435,653

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
Notional1
 
Gross Fair Value
 
Netting Adjustments
 
Net Fair Value Before Cash Collateral
 
Cash Collateral
 
Fair Value Net of Cash Collateral
Customer risk management programs:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
14,738,232

 
$
274,195

 
$
(121,573
)
 
$
152,622

 
$
(143,945
)
 
$
8,677

Interest rate swaps
 
1,301,109

 
79,937

 
—

 
79,937

 
(37,841
)
 
42,096

Energy contracts
 
1,596,791

 
107,556

 
(67,030
)
 
40,526

 
(2,836
)
 
37,690

Agricultural contracts
 
195,068

 
6,750

 
(6,011
)
 
739

 
—

 
739

Foreign exchange contracts
 
149,977

 
149,977

 
—

 
149,977

 
—

 
149,977

Equity option contracts
 
217,283

 
14,460

 
—

 
14,460

 
—

 
14,460

Total customer risk management programs
 
18,198,460

 
632,875

 
(194,614
)
 
438,261

 
(184,622
)
 
253,639

Interest rate risk management programs
 
25,000

 
783

 
—

 
783

 
—

 
783

Total derivative contracts
 
$
18,223,460

 
$
633,658

 
$
(194,614
)
 
$
439,044

 
$
(184,622
)
 
$
254,422

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







- 84 -



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
 
 
September 30, 2013
 
September 30, 2012
 
 
Brokerage
and Trading Revenue
 
Gain (Loss)
on Derivatives, Net
 
Brokerage
and Trading
Revenue
 
Gain (Loss)
on Derivatives,
Net
Customer Risk Management Programs:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
(2,078
)
 
$
—

 
$
(803
)
 
$
—

Interest rate swaps
 
679

 
—

 
706

 
—

Energy contracts
 
1,682

 
—

 
1,856

 
—

Agricultural contracts
 
69

 
—

 
115

 
—

Foreign exchange contracts
 
192

 
—

 
124

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
544

 
—

 
1,998

 
—

Interest Rate Risk Management Programs
 
—

 
31

 
—

 
464

Total Derivative Contracts
 
$
544

 
$
31

 
$
1,998

 
$
464


 
 
Nine Months Ended
 
 
September 30, 2013
 
September 30, 2012
 
 
Brokerage
and Trading Revenue
 
Gain (Loss)
on Derivatives, Net
 
Brokerage
and Trading
Revenue
 
Gain (Loss)
on Derivatives,
Net
Customer Risk Management Programs:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
To-be-announced residential mortgage-backed securities
 
$
(377
)
 
$
—

 
$
504

 
$
—

Interest rate swaps
 
2,214

 
—

 
2,850

 
—

Energy contracts
 
5,901

 
—

 
6,754

 
—

Agricultural contracts
 
254

 
—

 
298

 
—

Foreign exchange contracts
 
552

 
—

 
455

 
—

Equity option contracts
 
—

 
—

 
—

 
—

Total customer risk management programs
 
8,544

 
—

 
10,861

 
—

Interest Rate Risk Management Programs
 
—

 
(3,437
)
 
—

 
336

Total Derivative Contracts
 
$
8,544

 
$
(3,437
)
 
$
10,861

 
$
336


Net interest revenue was not significantly impacted by the settlement of amounts receivable or payable on interest rate swaps for the nine months ended September 30, 2013 and 2012, respectively. 

- 85 -



(4) Loans and Allowances for Credit Losses

Loans

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

Interest is accrued at the applicable interest rate on the principal amount outstanding. Loans are placed on nonaccruing status when, in the opinion of management, full collection of principal or interest is uncertain. Internally risk graded loans are individually evaluated for nonaccruing status quarterly. Non-risk graded loans are generally placed on nonaccruing status when more than 90 days past due or within 60 days of being notified of the borrower bankruptcy filing. Interest previously accrued but not collected is charged against interest income when the loan is placed on nonaccruing status. Payments on nonaccruing loans are applied to principal or recognized as interest income, according to management’s judgment as to the collectability of principal. Loans may be returned to accruing status when, in the opinion of management, full collection of principal and interest, including principal previously charged off, is probable based on improvements in the borrower’s financial condition or a sustained period of performance.

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

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

All loans are charged off when the loan balance or a portion of the loan balance is no longer supported by the paying capacity of the borrower or when the required cash flow is reduced in a TDR. The charge-off amount is determined through a quarterly evaluation of available cash resources and collateral value and charge-offs are taken in the quarter in which the loss is identified. Non-risk graded loans that are past due between 60 and 180 days, based on the loan product type, are charged off. Loans to borrowers whose personal obligation has been discharged through Chapter 7 bankruptcy proceedings are charged off within 60 days of notice of the bankruptcy filing, regardless of payment status.

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

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

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


- 86 -



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

 
 
September 30, 2013
 
December 31, 2012
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
4,209,349

 
$
3,342,204

 
$
19,522

 
$
7,571,075

 
$
4,158,548

 
$
3,458,897

 
$
24,467

 
$
7,641,912

Commercial real estate
 
869,346

 
1,427,381

 
52,502

 
2,349,229

 
845,023

 
1,323,350

 
60,626

 
2,228,999

Residential mortgage
 
1,766,819

 
228,690

 
39,256

 
2,034,765

 
1,747,038

 
251,394

 
46,608

 
2,045,040

Consumer
 
137,193

 
256,214

 
1,624

 
395,031

 
175,412

 
217,384

 
2,709

 
395,505

Total
 
$
6,982,707

 
$
5,254,489

 
$
112,904

 
$
12,350,100

 
$
6,926,021

 
$
5,251,025

 
$
134,410

 
$
12,311,456

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
188

 
 

 
 

 
 

 
$
3,925

 
 
September 30, 2012
 
 
Fixed
Rate
 
Variable
Rate
 
Non-accrual
 
Total
Commercial
 
$
3,889,382

 
$
3,355,763

 
$
21,762

 
$
7,266,907

Commercial real estate
 
880,535

 
1,220,976

 
75,761

 
2,177,272

Residential mortgage
 
1,728,220

 
258,816

 
29,267

 
2,016,303

Consumer
 
181,614

 
185,162

 
5,109

 
371,885

Total
 
$
6,679,751

 
$
5,020,717

 
$
131,899

 
$
11,832,367

Accruing loans past due (90 days)1
 
 

 
 

 
 

 
$
1,181

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

At September 30, 2013, $5.1 billion or 41% of the total loan portfolio is to businesses and individuals attributed to the Oklahoma market and $4.1 billion or 33% of our total loan portfolio is to businesses and individuals attributed to the Texas market. These geographic concentrations subject the loan portfolio to the general economic conditions within these areas.

Commercial

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

At September 30, 2013, commercial loans attributed to the Oklahoma market totaled $2.8 billion or 37% of the commercial loan portfolio segment and commercial loans attributed to the Texas market totaled $2.9 billion or 38% of the commercial loan portfolio segment.

The commercial loan portfolio segment is further divided into loan classes. The energy loan class totaled $2.3 billion or 19% of total loans at September 30, 2013, including $2.0 billion of outstanding loans to energy producers. Approximately 59% of committed production loans are secured by properties primarily producing oil and 41% are secured by properties producing natural gas. The services loan class totaled $2.1 billion at September 30, 2013. Approximately $1.1 billion of loans in the services category consist of loans with individual balances of less than $10 million.  Businesses included in the services class include gaming, educational, public finance, insurance and community foundations.


- 87 -



Commercial Real Estate

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

At September 30, 2013, 36% of commercial real estate loans are secured by properties primarily located in the Dallas and Houston areas of Texas. An additional 24% of commercial real estate loans are secured by properties located primarily in the Tulsa and Oklahoma City metropolitan areas of Oklahoma. 

Residential Mortgage and Consumer

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

At September 30, 2013, residential mortgage loans included $164 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 $792 million at September 30, 2013. Approximately, 70% of the home equity loan portfolio is comprised of first lien loans and 30% of the home equity portfolio is comprised of junior lien loans. Junior lien loans are distributed 75% to amortizing term loans and 25% to revolving lines of credit. Home equity loans generally require a minimum FICO score of 700 and a maximum DTI of 40%. The maximum loan amount available for our home equity loan products is generally $400 thousand. Revolving loans have a 5 year revolving period followed by a 15 year term of amortizing repayments. Interest-only home equity loans may not be extended for any additional revolving time. All other home equity loans may be extended at management's discretion for an additional 5 year revolving term, subject to an update of certain credit information.

Credit Commitments
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At September 30, 2013, outstanding commitments totaled $7.2 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.


- 88 -



Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Because the credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan commitments, BOK Financial uses the same credit policies in evaluating the creditworthiness of the customer. Additionally, BOK Financial uses the same evaluation process in obtaining collateral on standby letters of credit as it does for loan commitments. The term of these standby letters of credit is defined in each commitment and typically corresponds with the underlying loan commitment. At September 30, 2013, outstanding standby letters of credit totaled $440 million. Commercial letters of credit are used to facilitate customer trade transactions with the drafts being drawn when the underlying transaction is consummated. At September 30, 2013, outstanding commercial letters of credit totaled $12 million.

Allowances for Credit Losses

BOK Financial maintains an allowance for loan losses and an accrual for off-balance sheet credit risk. The accrual for off-balance sheet credit risk is maintained at a level that is appropriate to cover estimated losses associated with credit instruments that are not currently recognized as assets such as loan commitments, standby letters of credit or guarantees. As discussed in greater detail in Note 5, the Company also has separate accruals for off-balance sheet credit risk related to residential mortgage loans previously sold with full or partial recourse and for residential mortgage loans sold to government sponsored agencies under standard representations and warranties.

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

The allowance for loan losses consists of specific allowances attributed to impaired loans that have not yet been charged down to amounts we expect to recover, general allowances for unimpaired loans based on estimated loss rates by loan class and nonspecific allowances based on general economic conditions, risk concentration and related factors. There have been no material changes in the approach or techniques utilized in developing the allowance for loan losses and the accrual for off-balance sheet credit losses for the three and nine months ended September 30, 2013.

Loans are considered to be impaired when it becomes probable that BOK Financial will be unable to collect all amounts due according to the contractual terms of the loan agreements. Internally risk graded loans are evaluated individually for impairment. Substantially all commercial and commercial real estate loans and certain residential mortgage and consumer loans are risk graded based on evaluation of the borrowers' ability to repay. Certain commercial loans and most residential mortgage and consumer loans are small balance, homogeneous pools of loans that are not risk graded. Non-risk graded loans are identified as impaired based on performance status. Generally, non-risk graded loans 90 days or more past due or modified in a TDR or in bankruptcy are considered to be impaired.

Specific allowances for impaired loans are measured by an evaluation of estimated future cash flows discounted at the loans’ initial effective interest rate or the fair value of collateral for certain collateral dependent loans. Collateral value of real property is generally based on third party appraisals that conform to Uniform Standards of Professional Appraisal Practice, less estimated selling costs. Appraised values are on an "as-is" basis and are generally not adjusted by the Company. Updated appraisals are obtained at least annually or more frequently if market conditions indicate collateral values have declined. Collateral value of mineral rights is generally determined by our internal staff of engineers based on projected cash flows under current market conditions. Collateral values and available cash resources that support impaired loans are evaluated quarterly. Historical statistics may be used as a practical way to estimate impairment in limited situations, such as when a collateral dependent loan is identified as impaired at the end of a reporting period, until an updated appraisal of collateral value is received or a full assessment of future cash flows is completed. Estimates of future cash flows and collateral values require significant judgments and may be volatile.


- 89 -



General allowances for unimpaired loans are based on estimated loss rates by loan class. The gross loss rate for each loan class is determined by the greater of the current gross loss rate based on the most recent twelve months or a ten-year gross loss rate. Recoveries are not directly considered in the estimation of loss rates. Recoveries generally do not follow predictable patterns and are not received until well after the charge-off date as a result of protracted legal actions. For risk graded loans, gross loss rates are adjusted for changes in risk grading. For each loan class, the current weighted average risk grade is compared to the long-term average risk grade. This comparison determines whether credit risk in each loan class is increasing or decreasing. Loss rates are adjusted upward or downward in proportion to changes in average risk grading. General allowances for unimpaired loans also consider inherent risks identified for each loan class. Inherent risks consider loss rates that most appropriately represent the current credit cycle and other factors attributable to specific loan classes which have not yet been represented in the gross loss rates or risk grading. These factors include changes in commodity prices or engineering imprecision, which may affect the value of reserves that secure our energy loan portfolio, construction risk that may affect commercial real estate loans, changes in regulations and public policy that may disproportionately impact health care loans and changes in loan products.

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

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

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

The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended September 30, 2013 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Consumer
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
64,044

 
$
49,687

 
$
39,206

 
$
7,738

 
$
42,449

 
$
203,124

Provision for loan losses
 
(1,774
)
 
(6,279
)
 
(136
)
 
1,256

 
(1,567
)
 
(8,500
)
Loans charged off
 
(1,354
)
 
(419
)
 
(961
)
 
(1,974
)
 
—

 
(4,708
)
Recoveries
 
864

 
2,073

 
188

 
1,284

 
—

 
4,409

Ending balance
 
$
61,780

 
$
45,062

 
$
38,297

 
$
8,304

 
$
40,882

 
$
194,325

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
402

 
$
1,178

 
$
6

 
$
18

 
$
—

 
$
1,604

Provision for off-balance sheet credit losses
 
(228
)
 
202

 
42

 
(16
)
 
—

 
—

Ending balance
 
$
174

 
$
1,380

 
$
48

 
$
2

 
$
—

 
$
1,604

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
(2,002
)
 
$
(6,077
)
 
$
(94
)
 
$
1,240

 
$
(1,567
)
 
$
(8,500
)


- 90 -



The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the nine months ended September 30, 2013 is summarized as follows (in thousands):
 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Consumer
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
65,280

 
$
54,884

 
$
41,703

 
$
9,453

 
$
44,187

 
$
215,507

Provision for loan losses
 
(3,507
)
 
(10,077
)
 
187

 
513

 
(3,305
)
 
(16,189
)
Loans charged off
 
(6,190
)
 
(5,669
)
 
(4,797
)
 
(5,513
)
 
—

 
(22,169
)
Recoveries
 
6,197

 
5,924

 
1,204

 
3,851

 
—

 
17,176

Ending balance
 
$
61,780

 
$
45,062

 
$
38,297

 
$
8,304

 
$
40,882

 
$
194,325

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
475

 
$
1,353

 
$
78

 
$
9

 
$
—

 
$
1,915

Provision for off-balance sheet credit losses
 
(301
)
 
27

 
(30
)
 
(7
)
 
—

 
(311
)
Ending balance
 
$
174

 
$
1,380

 
$
48

 
$
2

 
$
—

 
$
1,604

 
 
 
 
 
 
 
 
 
 
 
 
 
Total provision for credit losses
 
$
(3,808
)
 
$
(10,050
)
 
$
157

 
$
506

 
$
(3,305
)
 
$
(16,500
)

The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the three months ended September 30, 2012 is summarized as follows (in thousands):

 
 
Commercial
 
Commercial Real Estate
 
Residential Mortgage
 
Consumer
 
Nonspecific Allowance
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
83,477

 
$
55,806

 
$
42,688

 
$
8,840

 
$
40,858

 
$
231,669

Provision for loan losses
 
4

 
4,821

 
(370
)
 
3,293

 
56

 
7,804

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

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

 
298

 
1,112

 
—

 
3,204

Ending balance
 
$
81,779

 
$
60,704

 
$
41,016

 
$
9,343

 
$
40,914

 
$
233,756

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
8,224

 
$
1,425

 
$
80

 
$
18

 
$
—

 
$
9,747

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

 
(4
)
 
5

 
—

 
(7,804
)
Ending balance
 
$
401

 
$
1,443

 
$
76

 
$
23

 
$
—

 
$
1,943

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

 
$
(374
)
 
$
3,298

 
$
56

 
$
—

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


- 91 -



The activity in the allowance for loan losses and the allowance for off-balance sheet credit losses related to loan commitments and standby letters of credit for the nine months ended September 30, 2012 is summarized as follows (in thousands):

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

 
$
67,034

 
$
46,476

 
$
10,178

 
$
46,350

 
$
253,481

Provision for loan losses
 
995

 
(322
)
 
528

 
3,553

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

 
(34,138
)
Recoveries
 
5,181

1 
4,540

 
1,459

 
3,915

 
—

 
15,095

Ending balance
 
$
81,779

 
$
60,704

 
$
41,016

 
$
9,343

 
$
40,914

 
$
233,756

Allowance for off-balance sheet credit losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
7,906

 
$
1,250

 
$
91

 
$
14

 
$
—

 
$
9,261

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

 
(15
)
 
9

 
—

 
(7,318
)
Ending balance
 
$
401

 
$
1,443

 
$
76

 
$
23

 
$
—

 
$
1,943

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

 
$
3,562

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


The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at September 30, 2013 is as follows (in thousands):

 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
7,551,553

 
$
61,208

 
$
19,522

 
$
572

 
$
7,571,075

 
$
61,780

Commercial real estate
 
2,296,727

 
44,574

 
52,502

 
488

 
2,349,229

 
45,062

Residential mortgage
 
1,996,086

 
38,083

 
38,679

 
214

 
2,034,765

 
38,297

Consumer
 
393,407

 
8,304

 
1,624

 
—

 
395,031

 
8,304

Total
 
12,237,773

 
152,169

 
112,327

 
1,274

 
12,350,100

 
153,443

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
40,882

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
12,237,773

 
$
152,169

 
$
112,327

 
$
1,274

 
$
12,350,100

 
$
194,325




- 92 -



The allowance for loan losses and recorded investment of the related loans by portfolio segment for each impairment measurement method at December 31, 2012 is as follows (in thousands):

 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
7,617,445

 
$
65,050

 
$
24,467

 
$
230

 
$
7,641,912

 
$
65,280

Commercial real estate
 
2,168,373

 
51,775

 
60,626

 
3,109

 
2,228,999

 
54,884

Residential mortgage
 
1,998,921

 
40,934

 
46,119

 
769

 
2,045,040

 
41,703

Consumer
 
392,796

 
9,328

 
2,709

 
125

 
395,505

 
9,453

Total
 
12,177,535

 
167,087

 
133,921

 
4,233

 
12,311,456

 
171,320

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
44,187

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
12,177,535

 
$
167,087

 
$
133,921

 
$
4,233

 
$
12,311,456

 
$
215,507



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

 
 
Collectively Measured
for Impairment
 
Individually Measured
for Impairment
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
7,245,145

 
$
81,575

 
$
21,762

 
$
204

 
$
7,266,907

 
$
81,779

Commercial real estate
 
2,101,511

 
57,587

 
75,761

 
3,117

 
2,177,272

 
60,704

Residential mortgage
 
1,987,546

 
40,799

 
28,757

 
217

 
2,016,303

 
41,016

Consumer
 
366,776

 
9,214

 
5,109

 
129

 
371,885

 
9,343

Total
 
11,700,978

 
189,175

 
131,389

 
3,667

 
11,832,367

 
192,842

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
40,914

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11,700,978

 
$
189,175

 
$
131,389

 
$
3,667

 
$
11,832,367

 
$
233,756


- 93 -



Credit Quality Indicators

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

The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at September 30, 2013 is as follows (in thousands):

 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
7,553,151

 
$
60,570

 
$
17,924

 
$
1,210

 
$
7,571,075

 
$
61,780

Commercial real estate
 
2,349,229

 
45,062

 
—

 
—

 
2,349,229

 
45,062

Residential mortgage
 
236,399

 
3,764

 
1,798,366

 
34,533

 
2,034,765

 
38,297

Consumer
 
268,690

 
2,797

 
126,341

 
5,507

 
395,031

 
8,304

Total
 
10,407,469

 
112,193

 
1,942,631

 
41,250

 
12,350,100

 
153,443

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
40,882

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,407,469

 
$
112,193

 
$
1,942,631

 
$
41,250

 
$
12,350,100

 
$
194,325

 
The allowance for loan losses and recorded investment of the related loans by portfolio segment for risk graded and non-risk graded loans at December 31, 2012 is as follows (in thousands):

 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
7,624,442

 
$
64,181

 
$
17,470

 
$
1,099

 
$
7,641,912

 
$
65,280

Commercial real estate
 
2,228,999

 
54,884

 
—

 
—

 
2,228,999

 
54,884

Residential mortgage
 
265,503

 
5,270

 
1,779,537

 
36,433

 
2,045,040

 
41,703

Consumer
 
231,376

 
2,987

 
164,129

 
6,466

 
395,505

 
9,453

Total
 
10,350,320

 
127,322

 
1,961,136

 
43,998

 
12,311,456

 
171,320

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
44,187

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,350,320

 
$
127,322

 
$
1,961,136

 
$
43,998

 
$
12,311,456

 
$
215,507



- 94 -



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

 
 
Internally Risk Graded
 
Non-Graded
 
Total
 
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related
Allowance
Commercial
 
$
7,249,429

 
$
80,676

 
$
17,478

 
$
1,103

 
$
7,266,907

 
$
81,779

Commercial real estate
 
2,177,235

 
60,704

 
37

 
—

 
2,177,272

 
60,704

Residential mortgage
 
275,490

 
6,416

 
1,740,813

 
34,600

 
2,016,303

 
41,016

Consumer
 
202,897

 
2,711

 
168,988

 
6,632

 
371,885

 
9,343

Total
 
9,905,051

 
150,507

 
1,927,316

 
42,335

 
11,832,367

 
192,842

 
 
 
 
 
 
 
 
 
 
 
 
 
Nonspecific allowance
 
—

 
—

 
—

 
—

 
—

 
40,914

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
9,905,051

 
$
150,507

 
$
1,927,316

 
$
42,335

 
$
11,832,367

 
$
233,756


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 guidelines. Other loans especially mentioned are in compliance with the original terms of the agreement but may have a weakness that deserves management’s close attention. Performing loans also include past due residential mortgages that are guaranteed by agencies of the U.S. government.

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


- 95 -



The following table summarizes the Company’s loan portfolio at September 30, 2013 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
Potential Problem
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,305,225

 
$
4,813

 
$
1,953

 
$
—

 
$
—

 
$
2,311,991

Services
 
2,130,169

 
11,455

 
6,927

 
—

 
—

 
2,148,551

Wholesale/retail
 
1,171,923

 
2,660

 
7,223

 
—

 
—

 
1,181,806

Manufacturing
 
378,723

 
2,894

 
843

 
—

 
—

 
382,460

Healthcare
 
1,158,436

 
43

 
1,733

 
—

 
—

 
1,160,212

Integrated food services
 
136,650

 
4,790

 
—

 
—

 
—

 
141,440

Other commercial and industrial
 
225,895

 
—

 
796

 
17,877

 
47

 
244,615

Total commercial
 
7,507,021

 
26,655

 
19,475

 
17,877

 
47

 
7,571,075

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
178,278

 
17,394

 
20,784

 
—

 
—

 
216,456

Retail
 
548,197

 
807

 
7,914

 
—

 
—

 
556,918

Office
 
413,083

 
2,122

 
6,838

 
—

 
—

 
422,043

Multifamily
 
504,548

 
11,556

 
4,350

 
—

 
—

 
520,454

Industrial
 
244,768

 
254

 
—

 
—

 
—

 
245,022

Other commercial real estate
 
365,051

 
10,669

 
12,616

 
—

 
—

 
388,336

Total commercial real estate
 
2,253,925

 
42,802

 
52,502

 
—

 
—

 
2,349,229

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
222,630

 
4,633

 
5,441

 
819,601

 
26,356

 
1,078,661

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
163,342

 
577

 
163,919

Home equity
 
3,695

 
—

 
—

 
781,608

 
6,882

 
792,185

Total residential mortgage
 
226,325

 
4,633

 
5,441

 
1,764,551

 
33,815

 
2,034,765

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
9,800

 
957

 
10,757

Other consumer
 
267,564

 
846

 
280

 
115,197

 
387

 
384,274

Total consumer
 
267,564

 
846

 
280

 
124,997

 
1,344

 
395,031

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,254,835

 
$
74,936

 
$
77,698

 
$
1,907,425

 
$
35,206

 
$
12,350,100



- 96 -



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

 
$
9,245

 
$
2,460

 
$
—

 
$
—

 
$
2,460,659

Services
 
2,119,734

 
32,362

 
12,090

 
—

 
—

 
2,164,186

Wholesale/retail
 
1,093,413

 
9,949

 
3,077

 
—

 
—

 
1,106,439

Manufacturing
 
337,132

 
9,345

 
2,007

 
—

 
—

 
348,484

Healthcare
 
1,077,773

 
467

 
3,166

 
—

 
—

 
1,081,406

Integrated food services
 
190,422

 
—

 
684

 
—

 
—

 
191,106

Other commercial and industrial
 
266,329

 
4,914

 
919

 
17,406

 
64

 
289,632

Total commercial
 
7,533,757

 
66,282

 
24,403

 
17,406

 
64

 
7,641,912

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
204,010

 
22,952

 
26,131

 
—

 
—

 
253,093

Retail
 
508,342

 
6,327

 
8,117

 
—

 
—

 
522,786

Office
 
405,763

 
15,280

 
6,829

 
—

 
—

 
427,872

Multifamily
 
393,566

 
6,624

 
2,706

 
—

 
—

 
402,896

Industrial
 
241,761

 
265

 
3,968

 
—

 
—

 
245,994

Other commercial real estate
 
351,663

 
11,820

 
12,875

 
—

 
—

 
376,358

Total commercial real estate
 
2,105,105

 
63,268

 
60,626

 
—

 
—

 
2,228,999

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
242,823

 
10,271

 
12,409

 
831,008

 
27,454

 
1,123,965

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
159,955

 
489

 
160,444

Home equity
 
—

 
—

 
—

 
754,375

 
6,256

 
760,631

Total residential mortgage
 
242,823

 
10,271

 
12,409

 
1,745,338

 
34,199

 
2,045,040

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
33,157

 
1,578

 
34,735

Other consumer
 
229,570

 
1,091

 
715

 
128,978

 
416

 
360,770

Total consumer
 
229,570

 
1,091

 
715

 
162,135

 
1,994

 
395,505

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
10,111,255

 
$
140,912

 
$
98,153

 
$
1,924,879

 
$
36,257

 
$
12,311,456



- 97 -



The following table summarizes the Company’s loan portfolio at September 30, 2012 by the risk grade categories (in thousands): 
 
 
Internally Risk Graded
 
Non-Graded
 
 
 
 
Performing
 
Potential Problem
 
Nonaccrual
 
Performing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,403,364

 
$
10,450

 
$
3,063

 
$
—

 
$
—

 
$
2,416,877

Services
 
1,923,017

 
34,452

 
10,099

 
—

 
—

 
1,967,568

Wholesale/retail
 
1,053,813

 
4,241

 
2,007

 
—

 
—

 
1,060,061

Manufacturing
 
330,608

 
10,469

 
2,283

 
—

 
—

 
343,360

Healthcare
 
1,019,362

 
184

 
3,305

 
—

 
—

 
1,022,851

Integrated food services
 
199,769

 
684

 
—

 
—

 
—

 
200,453

Other commercial and industrial
 
231,890

 
5,437

 
932

 
17,405

 
73

 
255,737

Total commercial
 
7,161,823

 
65,917

 
21,689

 
17,405

 
73

 
7,266,907

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
230,022

 
25,568

 
38,143

 
—

 
—

 
293,733

Retail
 
520,568

 
8,196

 
6,692

 
—

 
—

 
535,456

Office
 
391,859

 
12,554

 
9,833

 
—

 
—

 
414,246

Multifamily
 
383,317

 
6,667

 
3,145

 
—

 
—

 
393,129

Industrial
 
175,339

 
4,443

 
4,064

 
—

 
—

 
183,846

Other commercial real estate
 
329,659

 
13,319

 
13,847

 
—

 
37

 
356,862

Total commercial real estate
 
2,030,764

 
70,747

 
75,724

 
—

 
37

 
2,177,272

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
253,859

 
11,776

 
9,855

 
850,118

 
13,352

 
1,138,960

Permanent mortgages guaranteed by U.S. government agencies
 
—

 
—

 
—

 
161,761

 
510

 
162,271

Home equity
 
—

 
—

 
—

 
709,522

 
5,550

 
715,072

Total residential mortgage
 
253,859

 
11,776

 
9,855

 
1,721,401

 
19,412

 
2,016,303

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
45,349

 
1,932

 
47,281

Other consumer
 
198,419

 
1,663

 
2,815

 
121,345

 
362

 
324,604

Total consumer
 
198,419

 
1,663

 
2,815

 
166,694

 
2,294

 
371,885

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
9,644,865

 
$
150,103

 
$
110,083

 
$
1,905,500

 
$
21,816

 
$
11,832,367




- 98 -



Impaired Loans

Loans are considered to be impaired when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. This includes all nonaccruing loans, all loans modified in a TDR and all loans repurchased from GNMA pools.

A summary of impaired loans follows (in thousands):
 
As of
 
For the
 
For the
 
September 30, 2013
 
Three Months Ended
 
Nine Months Ended
 
 
 
Recorded Investment
 
 
 
September 30, 2013
 
September 30, 2013
 
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
$
1,954

 
$
1,953

 
$
1,953

 
$
—

 
$
—

 
$
2,115

 
$
—

 
$
2,207

 
$
—

Services
9,105

 
6,927

 
5,789

 
1,138

 
515

 
7,188

 
—

 
9,509

 
—

Wholesale/retail
11,262

 
7,223

 
7,188

 
35

 
9

 
6,962

 
—

 
5,150

 
—

Manufacturing
1,051

 
843

 
843

 
—

 
—

 
860

 
—

 
1,425

 
—

Healthcare
2,340

 
1,733

 
1,685

 
48

 
48

 
2,202

 
—

 
2,450

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

 
—

 
342

 
—

Other commercial and industrial
8,535

 
843

 
843

 
—

 
—

 
871

 
—

 
913

 
—

Total commercial
34,247

 
19,522

 
18,301

 
1,221

 
572

 
20,198

 
—

 
21,996

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
24,219

 
20,784

 
20,395

 
389

 
148

 
20,960

 
—

 
23,458

 
—

Retail
9,380

 
7,914

 
7,914

 
—

 
—

 
8,160

 
—

 
8,016

 
—

Office
8,254

 
6,838

 
6,830

 
8

 
8

 
7,333

 
—

 
6,834

 
—

Multifamily
4,351

 
4,350

 
4,350

 
—

 
—

 
5,399

 
—

 
3,528

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,984

 
—

Other real estate loans
14,868

 
12,616

 
12,020

 
596

 
332

 
13,747

 
—

 
12,746

 
—

Total commercial real estate
61,072

 
52,502

 
51,509

 
993

 
488

 
55,599

 
—

 
56,566

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
39,648

 
31,797

 
31,527

 
270

 
214

 
32,272

 
539

 
35,829

 
1,142

Permanent mortgage guaranteed by U.S. government agencies1
171,935

 
163,919

 
163,919

 
—

 
—

 
162,497

 
1,722

 
162,337

 
5,130

Home equity
7,091

 
6,882

 
6,882

 
—

 
—

 
7,293

 
—

 
6,569

 
—

Total residential mortgage
218,674

 
202,598

 
202,328

 
270

 
214

 
202,062

 
2,261

 
204,735

 
6,272

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
960

 
957

 
957

 
—

 
—

 
1,073

 
—

 
1,268

 
—

Other consumer
677

 
667

 
667

 
—

 
—

 
758

 
—

 
899

 
—

Total consumer
1,637

 
1,624

 
1,624

 
—

 
—

 
1,831

 
—

 
2,167

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
315,630

 
$
276,246

 
$
273,762

 
$
2,484

 
$
1,274

 
$
279,690

 
$
2,261

 
$
285,464

 
$
6,272

1 
All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At September 30, 2013, $577 thousand of these loans were nonaccruing and $163 million were accruing based on the guarantee by U.S. government agencies.


- 99 -



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

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

 
$
2,460

 
$
2,460

 
$
—

 
$
—

Services
 
15,715

 
12,090

 
11,940

 
150

 
149

Wholesale/retail
 
9,186

 
3,077

 
3,016

 
61

 
15

Manufacturing
 
2,447

 
2,007

 
2,007

 
—

 
—

Healthcare
 
4,256

 
3,166

 
2,050

 
1,116

 
66

Integrated food services
 
684

 
684

 
684

 
—

 
—

Other commercial and industrial
 
8,482

 
983

 
983

 
—

 
—

Total commercial
 
43,230

 
24,467

 
23,140

 
1,327

 
230

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
44,721

 
26,131

 
25,575

 
556

 
155

Retail
 
9,797

 
8,117

 
8,117

 
—

 
—

Office
 
8,949

 
6,829

 
6,604

 
225

 
21

Multifamily
 
3,189

 
2,706

 
2,706

 
—

 
—

Industrial
 
3,968

 
3,968

 
—

 
3,968

 
2,290

Other real estate loans
 
15,377

 
12,875

 
10,049

 
2,826

 
643

Total commercial real estate
 
86,001

 
60,626

 
53,051

 
7,575

 
3,109

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
51,153

 
39,863

 
37,564

 
2,299

 
769

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

 
160,444

 
160,444

 
—

 
—

Home equity
 
6,256

 
6,256

 
6,256

 
—

 
—

Total residential mortgage
 
228,149

 
206,563

 
204,264

 
2,299

 
769

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
1,578

 
1,578

 
1,578

 
—

 
—

Other consumer
 
1,300

 
1,131

 
1,006

 
125

 
125

Total consumer
 
2,878

 
2,709

 
2,584

 
125

 
125

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
360,258

 
$
294,365

 
$
283,039

 
$
11,326

 
$
4,233

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


- 100 -



A summary of impaired loans at September 30, 2012 follows (in thousands): 
 
As of
 
For the
 
For the
 
As of September 30, 2012
 
Three Months Ended
 
Nine Months Ended
 
 
 
Recorded Investment
 
 
 
September 30, 2012
 
September 30, 2012
 
Unpaid
Principal
Balance
 
Total
 
With No
Allowance
 
With Allowance
 
Related Allowance
 
Average Recorded
Investment
 
Interest Income Recognized
 
Average Recorded
Investment
 
Interest Income Recognized
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
3,273

 
$
3,063

 
$
3,063

 
$
—

 
$
—

 
$
3,075

 
$
—

 
$
1,700

 
$
—

Services
13,135

 
10,099

 
9,978

 
121

 
120

 
10,111

 
—

 
13,534

 
—

Wholesale/retail
8,039

 
2,007

 
1,937

 
70

 
18

 
3,091

 
—

 
11,594

 
—

Manufacturing
6,548

 
2,283

 
2,283

 
—

 
—

 
7,257

 
—

 
12,667

 
—

Healthcare
4,395

 
3,305

 
2,159

 
1,146

 
66

 
3,308

 
—

 
4,396

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
8,504

 
1,005

 
1,005

 
—

 
—

 
1,305

 
—

 
1,398

 
—

Total commercial
43,894

 
21,762

 
20,425

 
1,337

 
204

 
28,147

 
—

 
45,289

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Construction and land development
67,087

 
38,143

 
37,579

 
564

 
155

 
42,097

 
—

 
50,009

 
—

Retail
8,372

 
6,692

 
6,692

 
—

 
—

 
7,300

 
—

 
6,778

 
—

Office
13,736

 
9,833

 
9,608

 
225

 
21

 
10,211

 
—

 
10,645

 
—

Multifamily
3,259

 
3,145

 
3,145

 
—

 
—

 
3,182

 
—

 
3,329

 
—

Industrial
4,064

 
4,064

 
—

 
4,064

 
2,290

 
2,032

 
—

 
2,032

 
—

Other real estate loans
16,473

 
13,884

 
11,454

 
2,430

 
651

 
13,166

 
—

 
14,685

 
—

Total commercial real estate
112,991

 
75,761

 
68,478

 
7,283

 
3,117

 
77,988

 
—

 
87,478

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Permanent mortgage
31,068

 
23,207

 
22,906

 
301

 
217

 
20,672

 
398

 
24,287

 
1,193

Permanent mortgage guaranteed by U.S. government agencies1
169,622

 
162,271

 
162,271

 
—

 
—

 
163,863

 
1,680

 
178,542

 
5,039

Home equity
5,550

 
5,550

 
5,550

 
—

 
—

 
5,071

 
—

 
4,976

 
—

Total residential mortgage
206,240

 
191,028

 
190,727

 
301

 
217

 
189,606

 
2,078

 
207,805

 
6,232

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Indirect automobile
1,932

 
1,932

 
1,932

 
—

 
—

 
2,095

 
—

 
2,063

 
—

Other consumer
5,219

 
3,177

 
3,048

 
129

 
129

 
3,967

 
—

 
2,249

 
—

Total consumer
7,151

 
5,109

 
4,980

 
129

 
129

 
6,062

 
—

 
4,312

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
370,276

 
$
293,660

 
$
284,610

 
$
9,050

 
$
3,667

 
$
301,803

 
$
2,078

 
$
344,884

 
$
6,232

1 
All permanent mortgage loans guaranteed by U.S. government agencies are considered impaired as we do not expect full collection of contractual principal and interest. At September 30, 2012, $510 thousand of these loans were nonaccruing and $162 million were accruing based on the guarantee by U.S. government agencies.

- 101 -



Troubled Debt Restructurings

A summary of troubled debt restructurings ("TDRs") by accruing status as of September 30, 2013 were as follows (in thousands):

 
 
As of September 30, 2013
 
Amounts Charged Off During
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Three Months Ended September 30, 2013
 
Nine Months Ended
Sept. 30, 2013
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
 
3,791

 
1,274

 
2,517

 
250

 
—

 
—

Wholesale/retail
 
275

 
141

 
134

 
9

 
—

 
—

Manufacturing
 
396

 
—

 
396

 
—

 
154

 
154

Healthcare
 
—

 
—

 
—

 
—

 
—

 
—

Integrated food services
 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
772

 
30

 
742

 
—

 
—

 
—

Total commercial
 
5,234

 
1,445

 
3,789

 
259

 
154

 
154

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
10,673

 
1,776

 
8,897

 
148

 
—

 
54

Retail
 
6,030

 
2,032

 
3,998

 
—

 
—

 
627

Office
 
5,448

 
1,294

 
4,154

 
—

 
—

 
77

Multifamily
 
980

 
980

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
 
8,482

 
6,874

 
1,608

 
—

 
—

 
—

Total commercial real estate
 
31,613

 
12,956

 
18,657

 
148

 
—

 
758

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
17,319

 
9,579

 
7,740

 
13

 
73

 
450

Home equity
 
3,782

 
3,219

 
563

 
—

 
61

 
127

Total residential mortgage
 
21,101

 
12,798

 
8,303

 
13

 
134

 
577

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
817

 
737

 
80

 
—

 
—

 
1

Other consumer
 
471

 
287

 
184

 
—

 
2

 
2

Total consumer
 
1,288

 
1,024

 
264

 
—

 
2

 
3

 
 
 
 
 
 
 
 
 
 
 
 
 
Total nonaccruing TDRs
 
$
59,236

 
$
28,223

 
$
31,013

 
$
420

 
$
290

 
$
1,492

 
 
 
 
 
 
 
 
 
 
 
 
 

- 102 -



 
 
As of September 30, 2013
 
Amounts Charged Off During
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Three Months Ended September 30, 2013
 
Nine Months Ended
Sept. 30, 2013
Accruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
—

 
—

 
—

 
—

 
—

 
—

Permanent mortgages guaranteed by U.S. government agencies
 
50,099

 
11,975

 
38,124

 
—

 
—

 
—

Total residential mortgage
 
50,099

 
11,975

 
38,124

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total accruing TDRs
 
50,099

 
11,975

 
38,124

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total TDRs
 
$
109,335

 
$
40,198

 
$
69,137

 
$
420

 
$
290

 
$
1,492



- 103 -



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

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

 
$
—

 
$
—

 
$
—

Services
 
2,492

 
2,099

 
393

 
45

Wholesale/retail
 
2,290

 
1,362

 
928

 
15

Manufacturing
 
—

 
—

 
—

 
—

Healthcare
 
64

 
64

 
—

 
—

Integrated food services
 
—

 
—

 
—

 
—

Other commercial and industrial
 
675

 
—

 
675

 
—

Total commercial
 
5,521

 
3,525

 
1,996

 
60

 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

Construction and land development
 
14,898

 
9,989

 
4,909

 
76

Retail
 
6,785

 
5,735

 
1,050

 
—

Office
 
3,899

 
1,920

 
1,979

 
—

Multifamily
 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

Other real estate loans
 
5,017

 
3,399

 
1,618

 
—

Total commercial real estate
 
30,599

 
21,043

 
9,556

 
76

 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

Permanent mortgage
 
20,490

 
12,214

 
8,276

 
54

Home equity
 
—

 
—

 
—

 
—

Total residential mortgage
 
20,490

 
12,214

 
8,276

 
54

 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

Indirect automobile
 
532

 
492

 
40

 
—

Other consumer
 
2,328

 
2,097

 
231

 
83

Total consumer
 
2,860

 
2,589

 
271

 
83

 
 
 
 
 
 
 
 
 
Total nonaccuring TDRs
 
$
59,470

 
$
39,371

 
$
20,099

 
$
273


- 104 -



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

 
—

 
—

 
—

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

 
8,755

 
29,760

 
—

Total residential mortgage
 
38,515

 
8,755

 
29,760

 
—

 
 
 
 
 
 
 
 
 
Total accruing TDRs
 
38,515

 
8,755

 
29,760

 
—

 
 
 
 
 
 
 
 
 
Total TDRs
 
$
97,985

 
$
48,126

 
$
49,859

 
$
273



- 105 -



A summary of troubled debt restructurings by accruing status as of September 30, 2012 were as follows (in thousands):
 
 
As of September 30, 2012
 
Amounts Charged Off During
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Three Months Ended Sept. 30, 2012
 
Nine Months Ended
Sept. 30, 2012
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
 
2,594

 
2,109

 
485

 
—

 
—

 
—

Wholesale/retail
 
1,557

 
1,385

 
172

 
18

 
—

 
—

Manufacturing
 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
 
72

 
72

 
—

 
—

 
—

 
—

Integrated food services
 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
 
678

 
—

 
678

 
—

 
—

 
—

Total commercial
 
4,901

 
3,566

 
1,335

 
18

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
18,406

 
9,842

 
8,564

 
76

 
982

 
3,252

Retail
 
3,448

 
3,448

 
—

 
—

 
150

 
150

Office
 
3,376

 
1,368

 
2,008

 
—

 
—

 
269

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

Industrial
 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
 
5,310

 
3,574

 
1,736

 
55

 
87

 
2,269

Total commercial real estate
 
30,540

 
18,232

 
12,308

 
131

 
1,219

 
5,940

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
6,925

 
4,245

 
2,680

 
54

 
—

 
24

Home equity
 
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
 
6,925

 
4,245

 
2,680

 
54

 
—

 
24

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
—

 
—

 
—

 
—

 
—

 
—

Other consumer
 
2,213

 
443

 
1,770

 
88

 
1,345

 
1,345

Total consumer
 
2,213

 
443

 
1,770

 
88

 
1,345

 
1,345

 
 
 
 
 
 
 
 
 
 
 
 
 
Total nonaccruing TDRs
 
$
44,579

 
$
26,486

 
$
18,093

 
$
291

 
$
2,564

 
$
7,309


- 106 -



 
 
As of September 30, 2012
 
Amounts Charged Off During
 
 
Recorded
Investment
 
Performing in Accordance With Modified Terms
 
Not
Performing in Accordance With Modified Terms
 
Specific
Allowance
 
Three Months Ended Sept. 30, 2012
 
Nine Months Ended
Sept. 30, 2012
Nonaccruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing TDRs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
 
3,402

 
2,225

 
1,177

 
—

 
—

 
83

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

 
7,684

 
16,906

 
—

 
—

 
—

Total residential mortgage
 
27,992

 
9,909

 
18,083

 
—

 
—

 
83

 
 
 
 
 
 
 
 
 
 
 
 
 
Total accruing TDRs
 
27,992

 
9,909

 
18,083

 
—

 
—

 
83

 
 
 
 
 
 
 
 
 
 
 
 
 
Total TDRs
 
$
72,571

 
$
36,395

 
$
36,176

 
$
291

 
$
2,564

 
$
7,392


- 107 -



Troubled debt restructurings generally consist of interest rates concessions, payment stream concessions or a combination of concessions to distressed borrowers. The following tables detail the recorded balance of loans at September 30, 2013 by class that were restructured during the three and nine months ended September 30, 2013 by primary type of concession (in thousands):

 
Three Months Ended
Sept. 30, 2013
 
Accruing
 
Nonaccrual
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Interest Rate
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
610

 
228

 
—

 
838

 
838

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
396

 
—

 
396

 
396

Healthcare
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
610

 
624

 
—

 
1,234

 
1,234

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 

 

Construction and land development
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Retail
—

 
—

 
—

 
—

 
498

 
—

 
498

 
498

Office
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
498

 
—

 
498

 
498

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
—

 
—

 
—

 
—

 
222

 
222

 
222

Permanent mortgage guaranteed by U.S. government agencies
1,971

 
2,892

 
4,863

 
—

 
—

 
—

 
—

 
4,863

Home equity
—

 
—

 
—

 
—

 
—

 
515

 
515

 
515

Total residential mortgage
1,971

 
2,892

 
4,863

 
—

 
—

 
737

 
737

 
5,600

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indirect automobile
—

 
—

 
—

 
—

 
—

 
58

 
58

 
58

Other consumer
—

 
—

 
—

 
—

 
—

 
58

 
58

 
58

Total consumer
—

 
—

 
—

 
—

 
—

 
116

 
116

 
116

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
1,971

 
$
2,892

 
$
4,863

 
$
610

 
$
1,122

 
$
853

 
$
2,585

 
$
7,448



- 108 -



 
Nine Months Ended
September 30, 2013
 
Accruing
 
Nonaccrual
 
Total
 
Payment Stream
 
Combination & Other
 
Total
 
Interest Rate
 
Payment Stream
 
Combination & Other
 
Total
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
610

 
1,351

 
—

 
1,961

 
1,961

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
396

 
—

 
396

 
396

Healthcare
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
145

 
—

 
—

 
145

 
145

Total commercial
—

 
—

 
—

 
755

 
1,747

 
—

 
2,502

 
2,502

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Retail
—

 
—

 
—

 
—

 
1,110

 
—

 
1,110

 
1,110

Office
—

 
—

 
—

 
—

 
3,173

 
—

 
3,173

 
3,173

Multifamily
—

 
—

 
—

 
—

 
980

 
—

 
980

 
980

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
3,870

 
—

 
3,870

 
3,870

Total commercial real estate
—

 
—

 
—

 
—

 
9,133

 
—

 
9,133

 
9,133

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
—

 
—

 
—

 
132

 
864

 
996

 
996

Permanent mortgage guaranteed by U.S. government agencies
9,817

 
9,589

 
19,406

 
—

 
—

 
—

 
—

 
19,406

Home equity
—

 
—

 
—

 
—

 
—

 
2,490

 
2,490

 
2,490

Total residential mortgage
9,817

 
9,589

 
19,406

 
—

 
132

 
3,354

 
3,486

 
22,892

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indirect automobile
—

 
—

 
—

 
—

 
—

 
633

 
633

 
633

Other consumer
—

 
—

 
—

 
81

 
—

 
130

 
211

 
211

Total consumer
—

 
—

 
—

 
81

 
—

 
763

 
844

 
844

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
9,817

 
$
9,589

 
$
19,406

 
$
836

 
$
11,012

 
$
4,117

 
$
15,965

 
$
35,371



- 109 -



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

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

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
875

 
—

 
—

 
875

 
875

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
875

 
—

 
—

 
875

 
875

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
—

 
—

 
—

 
—

 
6,598

 
—

 
6,598

 
6,598

Retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Office
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
—

 
—

 
—

 
6,598

 
—

 
6,598

 
6,598

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Permanent mortgage guaranteed by U.S. government agencies
—

 
961

 
961

 
—

 
—

 
—

 
—

 
961

Home equity
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
—

 
961

 
961

 
—

 
—

 
—

 
—

 
961

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indirect automobile
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other consumer
—

 
—

 
—

 
87

 
—

 
—

 
87

 
87

Total consumer
—

 
—

 
—

 
87

 
—

 
—

 
87

 
87

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
—

 
$
961

 
$
961

 
$
962

 
$
6,598

 
$
—

 
$
7,560

 
$
8,521



- 110 -



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

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
—

 
—

 
875

 
70

 
—

 
945

 
945

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
72

 
72

 
72

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
—

 
—

 
875

 
70

 
72

 
1,017

 
1,017

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
—

 
—

 
—

 
1,280

 
6,598

 
—

 
7,878

 
7,878

Retail
—

 
—

 
—

 
2,398

 
—

 
—

 
2,398

 
2,398

Office
—

 
—

 
—

 
1,368

 
—

 
—

 
1,368

 
1,368

Multifamily
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
1,605

 
—

 
1,605

 
1,605

Total commercial real estate
—

 
—

 
—

 
5,046

 
8,203

 
—

 
13,249

 
13,249

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
151

 
151

 
—

 
—

 
781

 
781

 
932

Permanent mortgage guaranteed by U.S. government agencies
—

 
4,465

 
4,465

 
—

 
—

 
—

 
—

 
4,465

Home equity
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
—

 
4,616

 
4,616

 
—

 
—

 
781

 
781

 
5,397

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indirect automobile
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other consumer
—

 
—

 
—

 
452

 
—

 
1,630

 
2,082

 
2,082

Total consumer
—

 
—

 
—

 
452

 
—

 
1,630

 
2,082

 
2,082

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
—

 
$
4,616

 
$
4,616

 
$
6,373

 
$
8,273

 
$
2,483

 
$
17,129

 
$
21,745



- 111 -



The following table summarizes, by loan class, the recorded investment at September 30, 2013 of loans modified as TDRs within the previous 12 months and for which there was a payment default during the three and nine months ended September 30, 2013 (in thousands):

 
Three Months Ended
Sept. 30, 2013
 
Nine Months Ended
Sept. 30, 2013
 
Accruing
 
Nonaccrual
 
Total
 
Accruing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
1,338

 
1,338

 
—

 
1,948

 
1,948

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
396

 
396

 
—

 
396

 
396

Healthcare
—

 
—

 
—

 
—

 
—

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
145

 
145

 
—

 
168

 
168

Total commercial
—

 
1,879

 
1,879

 
—

 
2,512

 
2,512

 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
—

 
257

 
257

 
—

 
257

 
257

Retail
—

 
1,110

 
1,110

 
—

 
1,110

 
1,110

Office
—

 
3,173

 
3,173

 
—

 
3,173

 
3,173

Multifamily
—

 
—

 
—

 
—

 
980

 
980

Industrial
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
3,870

 
3,870

Total commercial real estate
—

 
4,540

 
4,540

 
—

 
9,390

 
9,390

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
—

 
820

 
820

 
—

 
941

 
941

Permanent mortgage guaranteed by U.S. government agencies
22,359

 
—

 
22,359

 
26,636

 
—

 
26,636

Home equity
—

 
563

 
563

 
—

 
630

 
630

Total residential mortgage
22,359

 
1,383

 
23,742

 
26,636

 
1,571

 
28,207

 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
Indirect automobile
—

 
81

 
81

 
—

 
116

 
116

Other consumer
—

 
53

 
53

 
—

 
53

 
53

Total consumer
—

 
134

 
134

 
—

 
169

 
169

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
22,359

 
$
7,936

 
$
30,295

 
$
26,636

 
$
13,642

 
$
40,278


A payment default is defined as being 30 days or more past due. The table above includes loans that experienced a payment default during the period, but may be performing in accordance with the modified terms as of the balance sheet date.


- 112 -



The following table summarizes, by loan class, the recorded investment at September 30, 2012 of loans modified as TDRs within the previous 12 months and for which there was a payment default during the three and nine months ended September 30, 2012 (in thousands):
 
Three Months Ended
Sept. 30, 2012
 
Nine Months Ended
Sept. 30, 2012
 
Accruing
 
Nonaccrual
 
Total
 
Accruing
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Energy
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Services
—

 
70

 
70

 
—

 
70

 
70

Wholesale/retail
—

 
—

 
—

 
—

 
—

 
—

Manufacturing
—

 
—

 
—

 
—

 
—

 
—

Healthcare
—

 
—

 
—

 
—

 
—

 
—

Integrated food services
—

 
—

 
—

 
—

 
—

 
—

Other commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

Total commercial
—

 
70

 
70

 
—

 
70

 
70

 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
—

 
1,183

 
1,183

 
—

 
1,183

 
1,183

Retail
—

 
—

 
—

 
—

 
2,398

 
2,398

Office
—

 
—

 
—

 
—

 
1,368

 
1,368

Multifamily
—

 
—

 
—

 
—

 
—

 
—

Industrial
—

 
—

 
—

 
—

 
—

 
—

Other real estate loans
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate
—

 
1,183

 
1,183

 
—

 
4,949

 
4,949

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 
 
 
 
 
 
 
 
 
 
Permanent mortgage
151

 
—

 
151

 
151

 
—

 
151

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

 
—

 
3,946

 
4,635

 
—

 
4,635

Home equity
—

 
—

 
—

 
—

 
—

 
—

Total residential mortgage
4,097

 
—

 
4,097

 
4,786

 
—

 
4,786

 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
Indirect automobile
—

 
—

 
—

 
—

 
—

 
—

Other consumer
—

 
1,770

 
1,770

 
—

 
1,770

 
1,770

Total consumer
—

 
1,770

 
1,770

 
—

 
1,770

 
1,770

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
4,097

 
$
3,023

 
$
7,120

 
$
4,786

 
$
6,789

 
$
11,575


- 113 -



Nonaccrual & Past Due Loans

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

A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of September 30, 2013 is as follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 89
Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,308,639

 
$
1,399

 
$
—

 
$
1,953

 
$
2,311,991

Services
 
2,140,835

 
704

 
85

 
6,927

 
2,148,551

Wholesale/retail
 
1,173,628

 
955

 
—

 
7,223

 
1,181,806

Manufacturing
 
381,048

 
569

 
—

 
843

 
382,460

Healthcare
 
1,158,340

 
139

 
—

 
1,733

 
1,160,212

Integrated food services
 
141,440

 
—

 
—

 
—

 
141,440

Other commercial and industrial
 
243,656

 
116

 
—

 
843

 
244,615

Total commercial
 
7,547,586

 
3,882

 
85

 
19,522

 
7,571,075

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
195,672

 
—

 
—

 
20,784

 
216,456

Retail
 
548,810

 
194

 
—

 
7,914

 
556,918

Office
 
415,205

 
—

 
—

 
6,838

 
422,043

Multifamily
 
516,104

 
—

 
—

 
4,350

 
520,454

Industrial
 
244,415

 
607

 
—

 
—

 
245,022

Other real estate loans
 
375,250

 
470

 
—

 
12,616

 
388,336

Total commercial real estate
 
2,295,456

 
1,271

 
—

 
52,502

 
2,349,229

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,040,616

 
6,248

 
—

 
31,797

 
1,078,661

Permanent mortgages guaranteed by U.S. government agencies
 
20,985

 
18,639

 
123,718

 
577

 
163,919

Home equity
 
782,954

 
2,321

 
28

 
6,882

 
792,185

Total residential mortgage
 
1,844,555

 
27,208

 
123,746

 
39,256

 
2,034,765

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
9,416

 
384

 
—

 
957

 
10,757

Other consumer
 
382,188

 
1,344

 
75

 
667

 
384,274

Total consumer
 
391,604

 
1,728

 
75

 
1,624

 
395,031

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
12,079,201

 
$
34,089

 
$
123,906

 
$
112,904

 
$
12,350,100



- 114 -



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

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

 
$
3,071

 
$
200

 
$
2,460

 
$
2,460,659

Services
 
2,150,386

 
1,710

 
—

 
12,090

 
2,164,186

Wholesale/retail
 
1,103,307

 
5

 
50

 
3,077

 
1,106,439

Manufacturing
 
346,442

 
35

 
—

 
2,007

 
348,484

Healthcare
 
1,077,022

 
1,040

 
178

 
3,166

 
1,081,406

Integrated food services
 
190,416

 
6

 
—

 
684

 
191,106

Other commercial and industrial
 
288,522

 
127

 
—

 
983

 
289,632

Total commercial
 
7,611,023

 
5,994

 
428

 
24,467

 
7,641,912

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
226,962

 
—

 
—

 
26,131

 
253,093

Retail
 
514,252

 
349

 
68

 
8,117

 
522,786

Office
 
417,866

 
3,177

 
—

 
6,829

 
427,872

Multifamily
 
400,151

 
39

 
—

 
2,706

 
402,896

Industrial
 
242,026

 
—

 
—

 
3,968

 
245,994

Other real estate loans
 
358,030

 
2,092

 
3,361

 
12,875

 
376,358

Total commercial real estate
 
2,159,287

 
5,657

 
3,429

 
60,626

 
2,228,999

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,075,687

 
8,366

 
49

 
39,863

 
1,123,965

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

 
13,046

 
120,349

 
489

 
160,444

Home equity
 
752,100

 
2,275

 
—

 
6,256

 
760,631

Total residential mortgage
 
1,854,347

 
23,687

 
120,398

 
46,608

 
2,045,040

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
31,869

 
1,273

 
15

 
1,578

 
34,735

Other consumer
 
358,308

 
1,327

 
4

 
1,131

 
360,770

Total consumer
 
390,177

 
2,600

 
19

 
2,709

 
395,505

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
12,014,834

 
$
37,938

 
$
124,274

 
$
134,410

 
$
12,311,456


- 115 -



A summary of loans currently performing, loans past due and accruing and nonaccrual loans as of September 30, 2012 is as follows (in thousands):

 
 
 
 
Past Due
 
 
 
 
 
 
Current
 
30 to 89
Days
 
90 Days
or More
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Energy
 
$
2,408,812

 
$
5,002

 
$
—

 
$
3,063

 
$
2,416,877

Services
 
1,956,190

 
741

 
538

 
10,099

 
1,967,568

Wholesale/retail
 
1,056,730

 
1,324

 
—

 
2,007

 
1,060,061

Manufacturing
 
340,243

 
834

 
—

 
2,283

 
343,360

Healthcare
 
1,014,771

 
4,775

 
—

 
3,305

 
1,022,851

Integrated food services
 
200,453

 
—

 
—

 
—

 
200,453

Other commercial and industrial
 
254,167

 
240

 
325

 
1,005

 
255,737

Total commercial
 
7,231,366

 
12,916

 
863

 
21,762

 
7,266,907

 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

Construction and land development
 
245,258

 
10,297

 
35

 
38,143

 
293,733

Retail
 
528,396

 
368

 
—

 
6,692

 
535,456

Office
 
403,223

 
1,190

 
—

 
9,833

 
414,246

Multifamily
 
389,949

 
35

 
—

 
3,145

 
393,129

Industrial
 
177,951

 
1,831

 
—

 
4,064

 
183,846

Other real estate loans
 
340,586

 
2,391

 
1

 
13,884

 
356,862

Total commercial real estate
 
2,085,363

 
16,112

 
36

 
75,761

 
2,177,272

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage:
 
 

 
 

 
 

 
 

 
 

Permanent mortgage
 
1,097,550

 
17,953

 
250

 
23,207

 
1,138,960

Permanent mortgages guaranteed by U.S. government agencies
 
19,786

 
16,629

 
125,346

 
510

 
162,271

Home equity
 
706,561

 
2,961

 
—

 
5,550

 
715,072

Total residential mortgage
 
1,823,897

 
37,543

 
125,596

 
29,267

 
2,016,303

 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 

 
 

 
 

 
 

Indirect automobile
 
43,588

 
1,729

 
32

 
1,932

 
47,281

Other consumer
 
319,549

 
1,878

 
—

 
3,177

 
324,604

Total consumer
 
363,137

 
3,607

 
32

 
5,109

 
371,885

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11,503,763

 
$
70,178

 
$
126,527

 
$
131,899

 
$
11,832,367


- 116 -



(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 loan commitments and forward contract sales and their related fair values included in Mortgage loans held for sale on the Consolidated Balance Sheets were (in thousands):
 
 
September 30, 2013
 
December 31, 2012
 
September 30, 2012
 
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid
Principal
 Balance/
Notional
 
Fair Value
Residential mortgage loans held for sale
 
$
220,800

 
$
228,926

 
$
269,718

 
$
281,935

 
$
294,794

 
$
313,927

Residential mortgage loan commitments
 
351,196

 
10,948

 
356,634

 
12,733

 
452,129

 
22,319

Forward sales contracts
 
560,069

 
(9,363
)
 
598,442

 
(906
)
 
722,043

 
(11,144
)
 
 
 

 
$
230,511

 
 

 
$
293,762

 
 

 
$
325,102


No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of September 30, 2013, December 31, 2012 or September 30, 2012. No credit losses were recognized on residential mortgage loans held for sale for the nine month periods ended September 30, 2013 and 2012.

Mortgage banking revenue was as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
2013
 
September 30,
2012
 
September 30,
2013
 
September 30,
2012
Originating and marketing revenue:
 
 
 
 
 
 
 
 
Residential mortgages loan held for sale
 
$
31,047

 
$
40,463

 
$
79,045

 
$
85,262

Residential mortgage loan commitments
 
12,668

 
6,512

 
(1,774
)
 
15,722

Forward sales contracts
 
(31,167
)
 
(6,618
)
 
(8,457
)
 
(7,856
)
Total originating and marketing revenue
 
12,548

 
40,357

 
68,814

 
93,128

Servicing revenue
 
10,938

 
9,909

 
31,244

 
29,764

Total mortgage banking revenue
 
$
23,486

 
$
50,266

 
$
100,058

 
$
122,892


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.


- 117 -



Residential Mortgage Servicing

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

The following represents a summary of mortgage servicing rights (Dollars in thousands):
 
 
September 30,
2013
 
December 31,
2012
 
September 30,
2012
Number of residential mortgage loans serviced for others
 
104,115

 
98,246

 
97,465

Outstanding principal balance of residential mortgage loans serviced for others
 
$
13,298,479

 
$
11,981,624

 
$
11,756,350

Weighted average interest rate
 
4.42
%
 
4.71
%
 
4.85
%
Remaining term (in months)
 
292

 
289

 
289


Activity in capitalized mortgage servicing rights during the three months ended September 30, 2013 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, June 30, 2013
 
$
15,582

 
$
117,307

 
$
132,889

Additions, net
 
—

 
13,225

 
13,225

Change in fair value due to loan runoff
 
(693
)
 
(4,212
)
 
(4,905
)
Change in fair value due to market changes
 
(76
)
 
(270
)
 
(346
)
Balance, Sept. 30, 2013
 
$
14,813

 
$
126,050

 
$
140,863


Activity in capitalized mortgage servicing rights during the nine months ended September 30, 2013 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, December 31, 2012
 
$
12,976

 
$
87,836

 
$
100,812

Additions, net
 
—

 
39,157

 
39,157

Change in fair value due to loan runoff
 
(2,504
)
 
(13,229
)
 
(15,733
)
Change in fair value due to market changes
 
4,341

 
12,286

 
16,627

Balance, Sept. 30, 2013
 
$
14,813

 
$
126,050

 
$
140,863


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

 
$
75,422

 
$
91,783

Additions, net
 
—

 
12,107

 
12,107

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

 
$
76,938

 
$
89,653



- 118 -



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

 
$
67,880

 
$
86,783

Additions, net
 
—

 
29,754

 
29,754

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

 
$
76,938

 
$
89,653

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

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

 
 
September 30,
2013
 
December 31,
2012
 
September 30,
2012
Discount rate – risk-free rate plus a market premium
 
10.23%
 
10.29%
 
10.32%
Prepayment rate – based upon loan interest rate, original term and loan type
 
7.03% - 30.92%
 
8.38% - 43.94%
 
9.14% - 46.42
Loan servicing costs – annually per loan based upon loan type:
 
 
 
 
 
 
    Performing loans
 
$58 - $105
 
$55 - $105
 
$55 - $105
    Delinquent loans
 
$135 - $500
 
$135 - $500
 
$135 - $500
    Loans in foreclosure
 
$875 - $4,250
 
$875 - $4,250
 
$875 - $3,750
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life
 
1.54%
 
0.87%
 
0.77%

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

Stratification of the residential mortgage loan servicing portfolio and outstanding principal of loans serviced for others by interest rate at September 30, 2013 follows (in thousands):
 
 
< 4.00%
 
4.00% - 4.99%

 
5.00% - 5.99%

 
> 5.99%
 
Total
Fair value
 
$
60,587

 
$
47,954

 
$
25,965

 
$
6,357

 
$
140,863

Outstanding principal of loans serviced for others
 
$
5,367,632

 
$
4,214,910

 
$
2,436,350

 
$
1,279,587

 
$
13,298,479

Weighted average prepayment rate1
 
7.03
%
 
8.26
%
 
12.05
%
 
30.92
%
 
10.64
%
1 
Annual prepayment estimates based upon loan interest rate, original term and loan type. Weighted average prepayment rate is determined by weighting the prepayment speed for each loan by its unpaid principal balance.

The interest rate sensitivity of our mortgage servicing rights and securities and derivative contracts held as an economic hedge is modeled over a range of +/- 50 basis points. At September 30, 2013, a 50 basis point increase in mortgage interest rates is expected to increase the fair value of our mortgage servicing rights, net of economic hedge by $1.7 million. A 50 basis point decrease in mortgage interest rates is expected to decrease the fair value of our mortgage servicing rights, net of economic hedge by $2.1 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.


- 119 -



The aging status of our mortgage loans serviced for others by investor at September 30, 2013 follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89
Days
 
90 Days or More
 
Total
FHLMC
 
$
4,603,938

 
$
38,363

 
$
9,870

 
$
35,126

 
$
4,687,297

FNMA
 
3,787,198

 
22,249

 
5,441

 
20,040

 
3,834,928

GNMA
 
4,381,908

 
127,465

 
36,463

 
14,793

 
4,560,629

Other
 
208,047

 
1,588

 
18

 
5,972

 
215,625

Total
 
$
12,981,091

 
$
189,665

 
$
51,792

 
$
75,931

 
$
13,298,479


The Company has off-balance sheet credit risk related to residential mortgage loans sold to U.S. government agencies with recourse prior to 2008 under various community development programs. These loans consist of first lien, fixed-rate residential mortgage loans underwritten to standards approved by the agencies including full documentation and originated under programs available only for owner-occupied properties. However, these loans have a higher risk of delinquency and loss given default than traditional residential mortgage loans. The Company no longer sells residential mortgage loans with recourse other than obligations under standard representations and warranties. The recourse obligation relates to loan performance for the life of the loan and the Company is obligated to repurchase the loan at the time of foreclosure for the unpaid principal balance plus unpaid interest. The principal balance of residential mortgage loans sold subject to recourse obligations totaled $198 million at September 30, 2013, $227 million at December 31, 2012 and $238 million at September 30, 2012. A separate accrual for these off-balance sheet commitments is included in Other liabilities in the Consolidated Balance Sheets totaling $9.3 million at September 30, 2013, $11 million at December 31, 2012 and $18 million at September 30, 2012. At September 30, 2013, approximately 6% of the loans sold with recourse with an outstanding principal balance of $11 million were either delinquent more than 90 days, in bankruptcy or in foreclosure and 6% with an outstanding balance of $12 million were past due 30 to 89 days. The provision for credit losses on loans sold with recourse is included in Mortgage banking costs in the Consolidated Statements of Earnings.

The activity in the allowance for losses on loans sold with recourse included in Other liabilities in the Consolidated Balance Sheets is summarized as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Beginning balance
 
$
9,665

 
$
17,832

 
$
11,359

 
$
18,683

Provision for recourse losses
 
601

 
1,055

 
270

 
3,495

Loans charged off, net
 
(981
)
 
(1,255
)
 
(2,344
)
 
(4,546
)
Ending balance
 
$
9,285

 
$
17,632

 
$
9,285

 
$
17,632


The Company also has an off-balance sheet obligation to repurchase or provide indemnification for residential mortgage loans sold to government sponsored entities due to standard representations and warranties made under contractual agreements.The Company has established an accrual for credit losses related to potential loan repurchases under representations and warranties that is included in Other liabilities in the Consolidated Balance Sheets and in Mortgage banking costs in the Consolidated Statements of Earnings. The level of repurchases and indemnifications related to standard representations and warranties has remained low. The Company repurchased 5 loans from the agencies for $232 thousand during the third quarter of 2013 and had no related losses. There were two indemnification on loans paid during third quarter of 2013. 

A summary of unresolved deficiency requests from the agencies and related accrual for credit losses follows (in thousands, except for number of unresolved deficiency requests):
 
September 30,
2013
 
December 31,
2012
Number of unresolved deficiency requests
524

 
389

Aggregate outstanding principal balance subject to unresolved deficiency requests
$
64,428

 
$
44,831

Unpaid principal balance subject to indemnification by the Company
2,440

 
1,233

Accrual for credit losses related to potential loan repurchases under representations and warranties
7,903

 
5,291


- 120 -



(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 $500 thousand and $965 thousand for the three months ended September 30, 2013 and 2012, respectively and $1.5 million and $2.9 million for the nine months ended September 30, 2013 and 2012, respectively. The Company made no Pension Plan contributions during the three and nine months ended September 30, 2013 and 2012.

Management has been advised that the maximum allowable contribution for 2013 is $23 million. No minimum contribution is required for 2013.
(7)  Commitments and Contingent Liabilities

Litigation Contingencies

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

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

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

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

Alternative Investment Commitments

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

BOKF Equity, LLC, an indirect wholly-owned subsidiary, is the general partner of two consolidated private equity funds (“the Funds”). The Funds provide alternative investment opportunities to certain customers, some of which are related parties, through unaffiliated limited partnerships. These unaffiliated limited partnerships generally invest in distressed assets, asset buy-outs or venture capital companies. As general partner, BOKF Equity, LLC has the power to direct activities that most significantly affect the Funds' performance and contingent obligations to make additional investments totaling $6.4 million at September 30, 2013. Substantially all of the obligations are offset by limited partner commitments. The Company does not accrue its contingent liability to fund investments. The Volcker Rule in Title VI of the Dodd-Frank Act limits both the amount and structure of these types of investments. As a result, the Company's private equity activity might be curtailed.

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


- 121 -



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

A summary of consolidated and unconsolidated alternative investments as of September 30, 2013, December 31, 2012 and September 30, 2012 is as follows (in thousands):

 
 
September 30, 2013
 
 
Loans
 
Other
assets
 
Other
liabilities
 
Other
borrowings
 
Non-controlling
interest
Consolidated:
 
 
 
 
 
 
 
 
 
 
Private equity funds
 
$
—

 
$
27,799

 
$
—

 
$
—

 
$
23,710

Tax credit entities
 
10,000

 
13,577

 
—

 
10,964

 
10,000

Other
 
—

 
9,510

 
—

 
—

 
2,020

Total consolidated
 
$
10,000

 
$
50,886

 
$
—

 
$
10,964

 
$
35,730

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
30,345

 
$
92,039

 
$
44,285

 
$
—

 
$
—

Other
 
—

 
9,596

 
1,698

 
—

 
—

Total unconsolidated
 
$
30,345

 
$
101,635

 
$
45,983

 
$
—

 
$
—


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

 
$
28,169

 
$
—

 
$
—

 
$
23,691

Tax credit entities
 
10,000

 
13,965

 
—

 
10,964

 
10,000

Other
 
—

 
8,952

 
—

 
—

 
2,130

Total consolidated
 
$
10,000

 
$
51,086

 
$
—

 
$
10,964

 
$
35,821

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
22,354

 
$
78,109

 
$
43,052

 
$
—

 
$
—

Other
 
—

 
9,113

 
1,802

 
—

 
—

Total unconsolidated
 
$
22,354

 
$
87,222

 
$
44,854

 
$
—

 
$
—



- 122 -



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

 
$
28,792

 
$
—

 
$
—

 
$
24,777

Tax credit entities
 
10,000

 
14,094

 
—

 
10,964

 
10,000

Other
 
—

 
9,024

 
—

 
—

 
2,041

Total consolidated
 
$
10,000

 
$
51,910

 
$
—

 
$
10,964

 
$
36,818

 
 
 
 
 
 
 
 
 
 
 
Unconsolidated:
 
 
 
 
 
 
 
 
 
 
Tax credit entities
 
$
17,486

 
$
69,717

 
$
36,433

 
$
—

 
$
—

Other
 
—

 
9,902

 
2,062

 
—

 
—

Total unconsolidated
 
$
17,486

 
$
79,619

 
$
38,495

 
$
—

 
$
—



Other Commitments and Contingencies

At September 30, 2013, Cavanal Hill Funds’ assets included $843 million of U.S. Treasury, $1.2 billion of cash management and $273 million of tax-free money market funds. Assets of these funds consist of highly-rated, short-term obligations of the U.S. Treasury, corporate issuers and U.S. states and municipalities. The net asset value of units in these funds was $1.00 at September 30, 2013. An investment in these funds is not insured by the Federal Deposit Insurance Corporation or guaranteed by BOK Financial or any of its subsidiaries. BOK Financial may, but is not obligated to purchase assets from these funds to maintain the net asset value at $1.00. No assets were purchased from the funds in 2013 or 2012.

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

The Company agreed to guarantee rents totaling $28.7 million through September of 2017 to the City of Tulsa as owner of a building immediately adjacent to the Bank’s main office for space currently rented by third-party tenants in the building. All rent payments are current. Remaining guaranteed rents totaled $12.0 million at September 30, 2013. Current leases expire or are subject to lessee termination options in 2014. Our obligation under the agreement would be affected by lessee decisions to exercise these options. In return for this guarantee, the Company will receive 80% of net cash flow as defined in an agreement with the City of Tulsa through September 2017 from rental of space that was vacant at the inception of the agreement. The maximum amount that the Company may receive under this agreement is $4.5 million.

The Company has agreed to purchase approximately $13 million of Oklahoma income tax credits from certain operators of zero emission power facilities during 2013. Tax credits are generated based on power sold to unrelated third parties and are transferable for a period of ten years following the year of creation. Tax credits will be sold to qualifying taxpayers as BOK Financial is limited by statute on the amount of credits that may be utilized. Oklahoma statutes were amended in May 2013, so that beginning in the year 2014, transferable credits will no longer be generated by zero emission power facilities. Prior to the amended statute, the Company anticipated credits would be purchased through 2022 under long term contracts with the producers. The agreements contained provisions that they may be terminated in the event of changes in federal law or Oklahoma statutes invalidating the tax credits or their transferability.

- 123 -



(8) Shareholders' Equity

On October 29, 2013, the Company declared a a quarterly cash dividend of $0.40 per common share on or about November 29, 2013 to shareholders of record as of November 16, 2013.

Dividends declared during the three and nine months ended September 30, 2013 were $0.38 and $1.14 per share, respectively. Dividends declared during the three and nine months ended September 30, 2012 were $0.38 and $1.09 per share, respectively.

Accumulated Other Comprehensive Income (Loss)

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

A rollforward of the components of accumulated other comprehensive income (loss) is included as follows (in thousands):
 
 
Unrealized Gain (Loss) on
 
 
 
 
 
 
Available for Sale Securities
 
Investment Securities Transferred from AFS
 
Employee Benefit Plans
 
Loss on Effective Cash Flow Hedges
 
Total
Balance, December 31, 2011
 
$
135,740

 
$
6,673

 
$
(12,742
)
 
$
(692
)
 
$
128,979

Net change in unrealized gain (loss)
 
86,390

 
—

 
(292
)
 
—

 
86,098

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

 
(5,430
)
 
—

 
—

 
(5,430
)
Interest expense, Subordinated debentures
 
—

 
—

 
—

 
399

 
399

Net impairment losses recognized in earnings
 
5,684

 
—

 
—

 
—

 
5,684

Gain on available for sale securities, net
 
(32,779
)
 
—

 
—

 
—

 
(32,779
)
Other comprehensive income (loss), before income taxes
 
59,295

 
(5,430
)
 
(292
)
 
399

 
53,972

Income tax benefit (expense)1
 
(23,066
)
 
2,550

 
113

 
(155
)
 
(20,558
)
Other comprehensive income (loss), net of income taxes
 
36,229

 
(2,880
)
 
(179
)
 
244

 
33,414

Balance, Sept. 30, 2012
 
$
171,969

 
$
3,793

 
$
(12,921
)
 
$
(448
)
 
$
162,393

 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2012
 
$
155,553

 
$
3,078

 
$
(8,296
)
 
$
(415
)
 
$
149,920

Net change in unrealized gains (losses)
 
(240,384
)
 
—

 
—

 
—

 
(240,384
)
Reclassification adjustments included in earnings:
 
 
 
 
 
 
 
 
 
 
Interest revenue, Investment securities, Taxable securities
 
—

 
(2,717
)
 
—

 
—

 
(2,717
)
Interest expense, Subordinated debentures
 
—

 
—

 
—

 
209

 
209

Net impairment losses recognized in earnings
 
2,308

 
—

 
—

 
—

 
2,308

Gain on available for sale securities, net
 
(9,086
)
 
—

 
—

 
—

 
(9,086
)
Other comprehensive income (loss), before income taxes
 
(247,162
)
 
(2,717
)
 
—

 
209

 
(249,670
)
Income tax benefit (expense)1
 
96,146

 
1,059

 
—

 
(81
)
 
97,124

Other comprehensive income (loss), net of income taxes
 
(151,016
)
 
(1,658
)
 
—

 
128

 
(152,546
)
Balance, Sept. 30, 2013
 
$
4,537

 
$
1,420

 
$
(8,296
)
 
$
(287
)
 
$
(2,626
)
1 
Calculated using a 39% effective tax rate.

- 124 -



(9)  Earnings Per Share
 
(In thousands, except share and per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to BOK Financial Corp. shareholders
 
$
75,738

 
$
87,382

 
$
243,633

 
$
268,626

Less: Earnings allocated to participating securities
 
799

 
278

 
2,623

 
1,994

Numerator for basic earnings per share – income available to common shareholders
 
74,939

 
87,104

 
241,010

 
266,632

Effect of reallocating undistributed earnings of participating securities
 
2

 
1

 
6

 
6

Numerator for diluted earnings per share – income available to common shareholders
 
$
74,941

 
$
87,105

 
$
241,016

 
$
266,638

 
 
 
 
 
 
 
 
 
Denominator:
 
 

 
 

 
 

 
 

Weighted average shares outstanding
 
68,770,950

 
68,183,171

 
68,687,609

 
68,204,078

Less:  Participating securities included in weighted average shares outstanding
 
721,771

 
216,471

 
734,356

 
499,735

Denominator for basic earnings per common share
 
68,049,179

 
67,966,700

 
67,953,253

 
67,704,343

Dilutive effect of employee stock compensation plans1
 
223,682

 
368,289

 
222,662

 
277,215

Denominator for diluted earnings per common share
 
68,272,861

 
68,334,989

 
68,175,915

 
67,981,558

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
1.10

 
$
1.28

 
$
3.55

 
$
3.94

Diluted earnings per share
 
$
1.10

 
$
1.27

 
$
3.54

 
$
3.92

1  Excludes employee stock options with exercise prices greater than current market price.
 
—

 
87,749

 
—

 
270,288


- 125 -



(10)  Reportable Segments

Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended September 30, 2013 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
91,540

 
$
25,131

 
$
6,300

 
$
43,380

 
$
166,351

Net interest revenue (expense) from internal sources
 
(9,405
)
 
5,060

 
$
4,837

 
(492
)
 
—

Net interest revenue
 
82,135

 
30,191

 
11,137

 
42,888

 
166,351

Provision for credit losses
 
(1,326
)
 
1,331

 
255

 
(8,760
)
 
(8,500
)
Net interest revenue after provision for credit losses
 
83,461

 
28,860

 
10,882

 
51,648

 
174,851

Other operating revenue
 
42,509

 
46,932

 
55,601

 
274

 
145,316

Other operating expense
 
60,969

 
56,431

 
59,993

 
33,251

 
210,644

Net income before taxes
 
65,001

 
19,361

 
6,490

 
18,671

 
109,523

Federal and state income taxes
 
25,285

 
7,531

 
2,525

 
(1,880
)
 
33,461

Net income
 
39,716

 
11,830

 
3,965

 
20,551

 
76,062

Net loss attributable to non-controlling interest
 
—

 
—

 
—

 
324

 
324

Net income attributable to BOK Financial Corp. shareholders
 
$
39,716

 
$
11,830

 
$
3,965

 
$
20,227

 
$
75,738

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
10,460,986

 
$
5,655,914

 
$
4,385,941

 
$
6,751,891

 
$
27,254,732

Average invested capital
 
911,229

 
293,716

 
206,872

 
1,553,106

 
2,964,923

 
 
 
 
 
 
 
 
 
 
 
Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.51
%
 
0.83
%
 
0.36
%
 


 
1.10
%
Return on average invested capital
 
17.29
%
 
15.98
%
 
7.62
%
 


 
10.13
%
Efficiency ratio
 
48.92
%
 
71.53
%
 
89.99
%
 


 
66.03
%


- 126 -



Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2013 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
272,889

 
$
74,056

 
$
19,373

 
$
137,594

 
$
503,912

Net interest revenue (expense) from internal sources
 
(27,907
)
 
15,711

 
$
15,209

 
(3,013
)
 
—

Net interest revenue
 
244,982

 
89,767

 
34,582

 
134,581

 
503,912

Provision for credit losses
 
(219
)
 
3,663

 
1,704

 
(21,648
)
 
(16,500
)
Net interest revenue after provision for credit losses
 
245,201

 
86,104

 
32,878

 
156,229

 
520,412

Other operating revenue
 
127,352

 
152,066

 
163,368

 
12,365

 
455,151

Other operating expense
 
179,795

 
152,122

 
178,694

 
97,963

 
608,574

Net income before taxes
 
192,758

 
86,048

 
17,552

 
70,631

 
366,989

Federal and state income taxes
 
74,983

 
33,473

 
6,828

 
6,696

 
121,980

Net income
 
117,775

 
52,575

 
10,724

 
63,935

 
245,009

Net income attributable to non-controlling interest
 
—

 
—

 
—

 
1,376

 
1,376

Net income attributable to BOK Financial Corp. shareholders
 
$
117,775

 
$
52,575

 
$
10,724

 
$
62,559

 
$
243,633

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
10,470,800

 
$
5,691,406

 
$
4,537,922

 
$
6,774,754

 
$
27,474,882

Average invested capital
 
900,789

 
295,394

 
204,592

 
1,595,910

 
2,996,685

 
 
 
 
 
 
 
 
 
 
 
Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.50
%
 
1.24
%
 
0.32
%
 
 
 
1.19
%
Return on average invested capital
 
17.48
%
 
23.80
%
 
7.00
%
 
 
 
10.87
%
Efficiency ratio
 
48.30
%
 
64.28
%
 
90.57
%
 
 
 
63.35
%



- 127 -



Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended September 30, 2012 is as follows (in thousands):
 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
91,381

 
$
24,862

 
$
7,064

 
$
52,720

 
$
176,027

Net interest revenue (expense) from internal sources
 
(11,002
)
 
5,410

 
5,452

 
140

 
—

Net interest revenue
 
80,379

 
30,272

 
12,516

 
52,860

 
176,027

Provision for credit losses
 
3,253

 
338

 
509

 
(4,100
)
 
—

Net interest revenue after provision for credit losses
 
77,126

 
29,934

 
12,007

 
56,960

 
176,027

Other operating revenue
 
40,091

 
80,640

 
50,156

 
9,057

 
179,944

Other operating expense
 
62,633

 
74,486

 
53,917

 
31,304

 
222,340

Net income before taxes
 
54,584

 
36,088

 
8,246

 
34,713

 
133,631

Federal and state income taxes
 
21,233

 
14,038

 
3,208

 
7,299

 
45,778

Net income
 
33,351

 
22,050

 
5,038

 
27,414

 
87,853

Net loss attributable to non-controlling interest
 
—

 
—

 
—

 
471

 
471

Net income attributable to BOK Financial Corp. shareholders
 
$
33,351

 
$
22,050

 
$
5,038

 
$
26,943

 
$
87,382

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
10,065,208

 
$
5,671,356

 
$
4,273,386

 
$
6,578,222

 
$
26,588,172

Average invested capital
 
865,157

 
292,280

 
188,755

 
1,601,000

 
2,947,192

 
 
 
 
 
 
 
 
 
 
 
Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.32
%
 
1.55
%
 
0.47
%
 
 
 
1.31
%
Return on average invested capital
 
15.34
%
 
30.01
%
 
10.59
%
 
 
 
11.80
%
Efficiency ratio
 
51.99
%
 
61.11
%
 
86.27
%
 
 
 
61.18
%

- 128 -



Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2012 is as follows (in thousands):

 
 
Commercial
 
Consumer
 
Wealth
Management
 
Funds Management and Other
 
BOK
Financial
Consolidated
Net interest revenue from external sources
 
$
274,423

 
$
77,173

 
$
21,340

 
$
158,021

 
$
530,957

Net interest revenue (expense) from internal sources
 
(34,491
)
 
15,093

 
15,503

 
3,895

 
—

Net interest revenue
 
239,932

 
92,266

 
36,843

 
161,916

 
530,957

Provision for credit losses
 
10,393

 
5,991

 
1,680

 
(26,064
)
 
(8,000
)
Net interest revenue after provision for credit losses
 
229,539

 
86,275

 
35,163

 
187,980

 
538,957

Other operating revenue
 
131,042

 
205,400

 
148,105

 
18,938

 
503,485

Other operating expense
 
181,119

 
197,399

 
158,505

 
90,464

 
627,487

Net income before taxes
 
179,462

 
94,276

 
24,763

 
116,454

 
414,955

Federal and state income taxes
 
69,811

 
36,673

 
9,633

 
28,330

 
144,447

Net income
 
109,651

 
57,603

 
15,130

 
88,124

 
270,508

Net income attributable to non-controlling interest
 
—

 
—

 
—

 
1,882

 
1,882

Net income attributable to BOK Financial Corp. shareholders
 
$
109,651

 
$
57,603

 
$
15,130

 
$
86,242

 
$
268,626

 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
9,981,793

 
$
5,705,411

 
$
4,202,977

 
$
5,993,489

 
$
25,883,670

Average invested capital
 
880,777

 
287,888

 
179,772

 
1,535,515

 
2,883,952

 
 
 
 
 
 
 
 
 
 
 
Performance measurements:
 
 

 
 

 
 

 
 

 
 

Return on average assets
 
1.47
%
 
1.35
%
 
0.48
%
 
 
 
1.39
%
Return on average invested capital
 
16.63
%
 
26.73
%
 
11.25
%
 
 
 
12.44
%
Efficiency ratio
 
50.80
%
 
63.62
%
 
85.91
%
 
 
 
60.68
%


- 129 -



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

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

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

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

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

Transfers between levels are recognized as of the end of the reporting period. There were no transfers in or out of quoted prices in active markets for identical instruments, significant other observable inputs or significant unobservable inputs during the nine months ended September 30, 2013 and 2012, respectively.

The underlying methods used by the third-party pricing services are considered in determining the primary inputs used to determine fair values. Management has evaluated the methodologies employed by the third-party pricing services by comparing the price provided by the pricing service with other sources, including brokers' quotes, sales or purchases of similar instruments and discounted cash flows to establish a basis for reliance on the pricing service values. Significant differences between the pricing service provided value and other sources are discussed with the pricing service to understand the basis for their values. Based on all observable inputs, management may adjust prices obtained from third-party pricing services to more appropriately reflect the prices that would be received to sell assets or paid to transfer liabilities in orderly transactions in the current market. No significant adjustments were made to prices provided by third-party pricing services at September 30, 2013, December 31, 2012 or September 30, 2012.


- 130 -



Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of financial assets and liabilities that are measured on a recurring basis are as follows as of September 30, 2013 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
$
74,632

 
$
—

 
$
74,632

 
$
—

U.S. agency residential mortgage-backed securities
 
26,129

 
—

 
26,129

 
—

Municipal and other tax-exempt securities
 
37,057

 
—

 
37,057

 
—

Other trading securities
 
13,069

 
—

 
13,069

 
—

Total trading securities
 
150,887

 
—

 
150,887

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,052

 
1,052

 
—

 
—

Municipal and other tax-exempt
 
95,440

 
—

 
55,769

 
39,671

U.S. agency residential mortgage-backed securities
 
7,981,387

 
—

 
7,981,387

 
—

Privately issued residential mortgage-backed securities
 
230,900

 
—

 
230,900

 
—

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
1,946,295

 
—

 
1,946,295

 
—

Other debt securities
 
35,362

 
—

 
30,650

 
4,712

Perpetual preferred stock
 
23,680

 
—

 
23,680

 
—

Equity securities and mutual funds
 
58,787

 
—

 
54,580

 
4,207

Total available for sale securities
 
10,372,903

 
1,052

 
10,323,261

 
48,590

Fair value option securities:
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
163,567

 
—

 
163,567

 
—

     Other securities
 
4,293

 
—

 
4,293

 
—

Total fair value option securities
 
167,860

 
—

 
167,860

 
—

Residential mortgage loans held for sale
 
230,511

 
—

 
230,511

 
—

Mortgage servicing rights1
 
140,863

 
—

 
—

 
140,863

Derivative contracts, net of cash margin2
 
377,325

 
644

 
376,681

 
—

Other assets – private equity funds
 
27,799

 
—

 
—

 
27,799

Liabilities:
 
 

 
 

 
 

 
 

Derivative contracts, net of cash margin2
 
232,544

 
—

 
232,544

 
—

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. Derivative contracts based on quoted prices in active markets for identical instruments (Level 1) are exchange-traded energy and agricultural derivative contacts, net of cash margin.


- 131 -



The fair value of financial assets and liabilities that are measured on a recurring basis are as follows as of December 31, 2012 (in thousands):
 
 
Total
 
Quoted Prices in Active Markets for Identical Instruments
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Assets:
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
$
16,545

 
$
—

 
$
16,545

 
$
—

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

 
—

 
86,361

 
—

Municipal and other tax-exempt securities
 
90,326

 
—

 
90,326

 
—

Other trading securities
 
20,870

 
—

 
20,870

 
—

Total trading securities
 
214,102

 
—

 
214,102

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,002

 
1,002

 
—

 
—

Municipal and other tax-exempt
 
87,142

 
—

 
46,440

 
40,702

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

 
—

 
9,889,821

 
—

Privately issued residential mortgage-backed securities
 
325,163

 
—

 
325,163

 
—

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

 
—

 
895,075

 
—

Other debt securities
 
36,389

 
—

 
30,990

 
5,399

Perpetual preferred stock
 
25,072

 
—

 
25,072

 
—

Equity securities and mutual funds
 
27,557

 
4,165

 
21,231

 
2,161

Total available for sale securities
 
11,287,221

 
5,167

 
11,233,792

 
48,262

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

 
—

 
257,040

 
—

Corporate debt securities
 
26,486

 
—

 
26,486

 
—

     Other securities
 
770

 
—

 
770

 
—

Total fair value option securities
 
284,296

 
—

 
284,296

 
—

Residential mortgage loans held for sale
 
293,762

 
—

 
293,762

 
—

Mortgage servicing rights1
 
100,812

 
—

 
—

 
100,812

Derivative contracts, net of cash margin2
 
338,106

 
11,597

 
326,509

 
—

Other assets – private equity funds
 
28,169

 
—

 
—

 
28,169

Liabilities:
 
 

 
 

 
 

 
 

Derivative contracts, net of cash margin 2
 
283,589

 
—

 
283,589

 
—

1 
A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 5, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type. Derivative contracts based on quoted prices in active markets for identical instruments (Level 1) are exchange-traded energy and agricultural derivative contacts, net of cash margin.



- 132 -



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

 
$
—

 
$
3,100

 
$
—

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

 
—

 
119,835

 
—

Municipal and other tax-exempt securities
 
58,150

 
—

 
58,150

 
—

Other trading securities
 
23,157

 
—

 
23,157

 
—

Total trading securities
 
204,242

 
—

 
204,242

 
—

Available for sale securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,002

 
1,002

 
—

 
—

Municipal and other tax-exempt
 
87,969

 
—

 
46,690

 
41,279

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

 
—

 
10,654,821

 
—

Privately issued residential mortgage-backed securities
 
331,722

 
—

 
331,722

 
—

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

 
—

 
339,095

 
—

Other debt securities
 
36,456

 
—

 
31,056

 
5,400

Perpetual preferred stock
 
25,288

 
—

 
25,288

 
—

Equity securities and mutual funds
 
30,081

 
6,912

 
23,169

 
—

Total available for sale securities
 
11,506,434

 
7,914

 
11,451,841

 
46,679

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

 
—

 
305,445

 
—

Corporate debt securities
 
26,442

 
—

 
26,442

 
—

Total fair value option securities
 
331,887

 
—

 
331,887

 
—

Residential mortgage loans held for sale
 
325,102

 
—

 
325,102

 
—

Mortgage servicing rights1
 
89,653

 
—

 
—

 
89,653

Derivative contracts, net of cash margin 2
 
472,783

 
8,301

 
464,482

 
—

Other assets – private equity funds
 
28,792

 
—

 
—

 
28,792

Liabilities:
 
 

 
 

 
 

 
 

Derivative contracts, net of cash margin 2
 
435,497

 
—

 
435,497

 
—

1 
A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 5, Mortgage Banking Activities.
2 
See Note 3 for detail of fair value of derivative contracts by contract type. Derivative contracts based on quoted prices in active markets for identical instruments (Level 1) are exchange-traded energy and agricultural derivative contacts, net of cash margin.



- 133 -



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

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

Derivatives

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

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

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

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


- 134 -



The following represents the changes for the three months ended September 30, 2013 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Equity securities and mutual funds
 
Other assets – private equity funds
Balance, June 30, 2013
 
$
38,847

 
$
5,193

 
$
2,247

 
$
28,379

Purchases and capital calls
 
—

 
—

 
—

 
567

Redemptions and distributions
 
—

 
(500
)
 
—

 
(1,589
)
Gain (loss) recognized in earnings:
 
 

 
 

 
 
 
 

Gain on other assets, net
 
—

 
—

 
—

 
442

Gain on available for sale securities, net
 
—

 
—

 
—

 
—

Other-than-temporary impairment losses
 
(1,369
)
 
—

 
—

 
—

Other comprehensive gain (loss)
 
2,193

 
19

 
1,960

 
—

Balance, Sept. 30, 2013
 
$
39,671

 
$
4,712

 
$
4,207

 
$
27,799


The following represents the changes for the nine months ended September 30, 2013 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
 
 
Available for Sale Securities
 
 
 
 
Municipal and other tax-exempt
 
Other debt securities
 
Equity securities and mutual funds
 
Other assets – private equity funds
Balance, Dec. 31, 2012
 
$
40,702

 
$
5,399

 
$
2,161

 
$
28,169

Purchases and capital calls
 
—

 
—

 
—

 
1,207

Redemptions and distributions
 
(98
)
 
(500
)
 
—

 
(3,424
)
Gain (loss) recognized in earnings:
 
 

 
 

 
 
 
 

Gain on other assets, net
 
—

 
—

 
—

 
1,847

Gain on available for sale securities, net
 
—

 
—

 
—

 
—

Other-than-temporary impairment losses
 
(1,369
)
 
—

 
—

 
—

Other comprehensive gain (loss)
 
436

 
(187
)
 
2,046

 
—

Balance, Sept. 30, 2013
 
$
39,671

 
$
4,712

 
$
4,207

 
$
27,799


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

 
$
5,388

 
$
31,492

Purchases, and capital calls
 
—

 
—

 
476

Redemptions and distributions
 
1

 
—

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

 
 

 
 

Gain on other assets, net
 
—

 
—

 
730

Gain on available for sale securities, net
 
—

 
—

 
—

Other-than-temporary impairment losses
 
—

 
—

 
—

Other comprehensive (loss)
 
(384
)
 
12

 
—

Balance, Sept. 30, 2012
 
$
41,279

 
$
5,400

 
$
28,792


- 135 -




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

 
$
5,900

 
$
30,902

Purchases, and capital calls
 
—

 
—

 
2,385

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

 
 

 
 
Gain on other assets, net
 
—

 
—

 
2,577

Gain on available for sale securities, net
 
1

 
—

 
—

Other-than-temporary impairment losses
 
—

 
—

 
—

Other comprehensive (loss)
 
(613
)
 
—

 
—

Balance, Sept. 30, 2012
 
$
41,279

 
$
5,400

 
$
28,792


A summary of quantitative information about assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of September 30, 2013 follows (in thousands):
Quantitative Information about Level 3 Recurring Fair Value Measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Par
Value
 
Amortized
Cost6
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
$
21,545

 
$
21,467

 
$
20,531

 
Discounted cash flows
1 
Interest rate spread
 
4.98%-5.28% (5.15%)
2 
95.02%-95.55% (95.29%)
3 
Below investment grade
 
23,925

 
17,924

 
19,140

 
Proposed settlement agreement
4 
Discount for settlement uncertainty
 
 
 
80.00% (80.00%)
3 
Total municipal and other tax-exempt securities
 
45,470

 
39,391

 
39,671

 
 
 
 
 
 
 
Other debt securities
 
4,900

 
4,900

 
4,712

 
Discounted cash flows
1 
Interest rate spread
 
5.60%-5.68% (5.67%)
5 
96.16%-96.16% (96.16%)
3 
Equity securities and mutual funds
 
N/A
 
2,420

 
4,207

 
Publicly announced preliminary purchase price information from acquirer.
 
Discount for settlement uncertainty
 
N/A
7 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets - private equity funds
 
N/A
 
N/A
 
27,799

 
Net asset value reported by underlying fund
 
Net asset value reported by underlying fund
 
N/A
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume
2 
Interest rate yields used to value investment grade tax-exempt securities represent a spread of 462 to 517 basis points over average yields for comparable tax-exempt securities.
3 
Represents fair value as a percentage of par value
4 
Fair value based on proposed settlement agreement between bond holders and issuer.
5 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding less than 1%.
6 
Amortized cost reduced by other-than-temporary impairments recorded in earnings. See Note 2 for additional discussion.
7 
Fair value of shares of a smaller privately-held financial institution were valued using preliminary announced purchase information by a publicly-traded acquirer.



- 136 -



The fair value of these securities measured at fair value using significant unobservable inputs are sensitive primarily to changes in interest rate spreads. At September 30, 2013, for tax-exempt securities rated investment grade by all nationally-recognized rating agencies, a 100 basis point increase in the spreads over average yields for comparable securities would result in an additional decrease in the fair value of $199 thousand. For taxable securities rated investment grade by all nationally-recognized rating agencies, a 100 basis point increase in the spreads over average yield for comparable securities would result in an additional decrease in the fair value of $45 thousand. For municipal and other tax-exempt securities rated below investment grade by at least one of the nationally-recognized rating agencies, a 100 basis point increase in the spread over average yields for comparable securities would significant change the fair value of these securities.

A summary of quantitative information about Recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of December 31, 2012 follows (in thousands):
Quantitative Information about Level 3 Recurring Fair Value Measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Par
Value
 
Amortized
Cost6
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
$
28,570

 
$
28,473

 
$
28,318

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

 
12,384

 
12,384

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

 
40,857

 
40,702

 
 
 
 
 
 
 
Other debt securities
 
5,400

 
5,400

 
5,399

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

 
2,161

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

 
Net asset value reported by underlying fund
 
Net asset value reported by underlying fund
 
N/A
 
1 
Discounted cash flows developed using discount rates primarily based on reference to interest rate spreads for comparable securities of similar duration and credit rating as determined by the nationally-recognized rating agencies, adjusted for lack of trading volume
2 
Interest rate yields used to value investment grade tax-exempt securities represent a spread of 75 to 80 basis points over average yields for comparable tax-exempt securities.
3 
Represents fair value as a percentage of par value
4 
Interest rate yields determined using a spread of 700 basis points over comparable municipal securities of varying durations.
5 
Interest rate yields used to value investment grade taxable securities based on comparable short-term taxable securities which are generally yielding less than 1%.
6 
Amortized cost reduced by other-than-temporary impairments recorded in earnings. See Note 2 for additional discussion.
7 
Fair value of shares of a smaller privately-held financial institution were valued using the tangible book value per share of similarly sized financial institutions within the immediate geographical market with a discount of 20% due to the liquidity of the shares.



- 137 -



A summary of quantitative information about Recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2012 follows (in thousands):

Quantitative Information about Level 3 Recurring Fair Value Measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Par
Value
 
Amortized
Cost6
 
Fair
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal and other tax-exempt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
$
29,100

 
$
28,999

 
$
28,848

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

 
13,396

 
12,431

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

 
42,395

 
41,279

 
 
 
 
 
 
 
Other debt securities
 
5,400

 
5,400

 
5,400

 
Discounted cash flows
1 
Interest rate spread
 
1.70%-1.73% (1.71%)
5 
100.00%-100.00% (100.00%)
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets - private equity funds
 
N/A
 
N/A
 
28,792

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


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

Assets measured at fair value on a non-recurring basis include 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.

The following represents the carrying value of assets measured at fair value on a non-recurring basis (and related losses) during the period. The carrying value represents only those assets with a balance at September 30, 2013 for which the fair value was adjusted during the nine months ended September 30, 2013:
 
 
 
 
 
 
 
Fair Value Adjustments for the
 
Carrying Value at September 30, 2013
 
Three Months Ended September 30, 2013 Recognized in:
 
Nine Months Ended September 30, 2013 Recognized in:
 
Quoted Prices
in Active Markets for Identical Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Gross charge-offs against allowance for loan losses
 
Net losses and expenses of repossessed assets, net
 
Gross charge-offs against allowance for loan losses
 
Net losses and expenses of repossessed assets, net
Impaired loans
$
—

 
$
10,607

 
$
4,787

 
$
660

 
$
—

 
$
6,900

 
$
—

Real estate and other repossessed assets
—

 
14,901

 
170

 
—

 
1,767

 
—

 
2,560

 

- 138 -



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

 
$
25,521

 
$
1,655

 
$
3,915

 
$
—

 
$
10,797

 
$
—

Real estate and other repossessed assets
—

 
38,386

 
6,617

 
—

 
4,398

 
—

 
11,068


The fair value of collateral-dependent impaired loans and real estate and other repossessed assets and the related fair value adjustments are generally based on unadjusted third-party appraisals. Our appraisal review policies require appraised values to be supported by observed inputs derived principally from or corroborated by observable market data. Appraisals that are not based on observable inputs or that require significant adjustments or fair value measurements that are not based on third-party appraisals are considered to be based on significant unobservable inputs. Non-recurring fair value measurements of collateral-dependent impaired loans and real estate and other repossessed assets based on significant unobservable inputs are generally due to estimate of current fair values between appraisal dates. Significant unobservable inputs include listing prices for the same or comparable assets, uncorroborated expert opinions or management's knowledge of the collateral or industry. These inputs are developed by asset management and workout professional and approved by senior Credit Administration executives.

A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2013 follows (in thousands):
Quantitative Information about Level 3 Non-recurring Fair Value Measurements
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
4,787

 
Appraised value, as adjusted
 
Broker quotes and management's knowledge of industry and collateral.
 
N/A
Real estate and other repossessed assets
 
170

 
Listing value, less cost to sell
 
Marketability adjustments off appraised value
 
82%-85% (83%)1
1 
Marketability adjustments include consideration of estimated costs to sell which is approximately 15% of fair value.

A summary of quantitative information about Non-recurring Fair Value Measurements based on Significant Unobservable Inputs (Level 3) as of September 30, 2012 follows (in thousands):
Quantitative Information about Level 3 Non-recurring Fair Value Measurements
 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
1,655

 
Appraised value, as adjusted
 
Broker quotes and management's knowledge of industry and collateral.
 
N/A
Real estate and other repossessed assets
 
6,617

 
Listing value, less cost to sell
 
Marketability adjustments off appraised value
 
68%-100% (85%)1
1 
Marketability adjustments include consideration of estimated costs to sell which is approximately 15% of fair value. In addition, $796 thousand of real estate and other repossessed assets at September 30, 2012 are based on expert opinions or management's knowledge of the collateral or industry and do not have and independently appraised value.

- 139 -



Fair Value of Financial Instruments

The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of September 30, 2013 (dollars in thousands):
 
 
Carrying
Value
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
 
Estimated
Fair
Value
Cash and cash equivalents
 
$
1,133,771

 
 
 
 
 
 
 
$
1,133,771

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
74,632

 
 
 
 
 
 
 
74,632

U.S. agency residential mortgage-backed securities
 
26,129

 
 
 
 
 
 
 
26,129

Municipal and other tax-exempt securities
 
37,057

 
 
 
 
 
 
 
37,057

Other trading securities
 
13,069

 
 
 
 
 
 
 
13,069

Total trading securities
 
150,887

 
 
 
 
 
 
 
150,887

Investment securities:
 
 

 
 
 
 
 
 
 
 

Municipal and other tax-exempt
 
409,542

 
 
 
 
 
 
 
407,562

U.S. agency residential mortgage-backed securities
 
56,182

 
 
 
 
 
 
 
58,442

Other debt securities
 
178,501

 
 
 
 
 
 
 
188,475

Total investment securities
 
644,225

 
 
 
 
 
 
 
654,479

Available for sale securities:
 
 

 
 
 
 
 
 
 
 

U.S. Treasury
 
1,052

 
 
 
 
 
 
 
1,052

Municipal and other tax-exempt
 
95,440

 
 
 
 
 
 
 
95,440

U.S. agency residential mortgage-backed securities
 
7,981,387

 
 
 
 
 
 
 
7,981,387

Privately issued residential mortgage-backed securities
 
230,900

 
 
 
 
 
 
 
230,900

Commercial mortgage-backed securities guaranteed by U.S. government agencies
 
1,946,295

 
 
 
 
 
 
 
1,946,295

Other debt securities
 
35,362

 
 
 
 
 
 
 
35,362

Perpetual preferred stock
 
23,680

 
 
 
 
 
 
 
23,680

Equity securities and mutual funds
 
58,787

 
 
 
 
 
 
 
58,787

Total available for sale securities
 
10,372,903

 
 
 
 
 
 
 
10,372,903

Fair value option securities:
 
 
 
 
 
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
163,567

 
 
 
 
 
 
 
163,567

      Other securities
 
4,293

 
 
 
 
 
 
 
4,293

Total fair value option securities
 
167,860

 
 
 
 
 
 
 
167,860

Residential mortgage loans held for sale
 
230,511

 
 
 
 
 
 
 
230,511

Loans:
 
 

 
 
 
 
 
 
 
 

Commercial
 
7,571,075

 
0.25% - 30.00%
 
0.46

 
0.50% - 4.19%

 
7,493,143

Commercial real estate
 
2,349,229

 
0.38% - 18.00%
 
0.79

 
1.20% - 3.42%

 
2,326,908

Residential mortgage
 
2,034,765

 
0.38% - 18.00%
 
2.56

 
0.64% - 4.40%

 
2,056,072

Consumer
 
395,031

 
0.38% - 21.00%
 
0.55

 
1.24% - 3.71%

 
388,490

Total loans
 
12,350,100

 
 
 
 

 
 

 
12,264,613

Allowance for loan losses
 
(194,325
)
 
 
 
 

 
 

 
—

Net loans
 
12,155,775

 
 
 
 

 
 

 
12,264,613

Mortgage servicing rights
 
140,863

 
 
 
 

 
 

 
140,863

Derivative instruments with positive fair value, net of cash margin
 
377,325

 
 
 
 

 
 

 
377,325

Other assets – private equity funds
 
27,799

 
 
 
 

 
 

 
27,799

Deposits with no stated maturity
 
16,771,635

 
 
 
 

 
 

 
16,771,635

Time deposits
 
2,720,020

 
0.01% - 9.64%
 
2.08

 
0.75% - 1.28%

 
2,739,764

Other borrowed funds
 
3,611,944

 
0.25% - 4.78%
 
—

 
0.06% - 2.65%

 
3,570,228

Subordinated debentures
 
347,758

 
0.95% - 5.00%
 
2.87

 
2.22
%
 
344,854

Derivative instruments with negative fair value, net of cash margin
 
232,544

 
 
 
 

 
 

 
232,544


- 140 -



The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of December 31, 2012 (dollars in thousands):
 
 
Carrying
Value
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
 
Estimated
Fair
Value
Cash and cash equivalents
 
$
1,286,239

 
 
 
 
 
 
 
$
1,286,239

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

 
 
 
 
 
 
 
16,545

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

 
 
 
 
 
 
 
86,361

Municipal and other tax-exempt securities
 
90,326

 
 
 
 
 
 
 
90,326

Other trading securities
 
20,870

 
 
 
 
 
 
 
20,870

Total trading securities
 
214,102

 
 
 
 
 
 
 
214,102

Investment securities:
 
 

 
 
 
 
 
 
 
 

Municipal and other tax-exempt
 
232,700

 
 
 
 
 
 
 
235,940

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

 
 
 
 
 
 
 
85,943

Other debt securities
 
184,067

 
 
 
 
 
 
 
206,575

Total investment securities
 
499,534

 
 
 
 
 
 
 
528,458

Available for sale securities:
 
 

 
 
 
 
 
 
 
 

U.S. Treasury
 
1,002

 
 
 
 
 
 
 
1,002

Municipal and other tax-exempt
 
87,142

 
 
 
 
 
 
 
87,142

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

 
 
 
 
 
 
 
9,889,821

Privately issued residential mortgage-backed securities
 
325,163

 
 
 
 
 
 
 
325,163

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

 
 
 
 
 
 
 
895,075

Other debt securities
 
36,389

 
 
 
 
 
 
 
36,389

Perpetual preferred stock
 
25,072

 
 
 
 
 
 
 
25,072

Equity securities and mutual funds
 
27,557

 
 
 
 
 
 
 
27,557

Total available for sale securities
 
11,287,221

 
 
 
 
 
 
 
11,287,221

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

 
 
 
 
 
 
 
257,040

Corporate debt securities
 
26,486

 
 
 
 
 
 
 
26,486

      Other securities
 
770

 
 
 
 
 
 
 
770

Total fair value option securities
 
284,296

 
 
 
 
 
 
 
284,296

Residential mortgage loans held for sale
 
293,762

 
 
 
 
 
 
 
293,762

Loans:
 
 

 
 
 
 

 
 

 
 

Commercial
 
7,641,912

 
0.21% - 30.00%
 
0.69

 
0.51% - 3.59%

 
7,606,505

Commercial real estate
 
2,228,999

 
0.21% - 18.00%
 
0.92

 
1.26% - 3.18%

 
2,208,217

Residential mortgage
 
2,045,040

 
0.38% - 18.00%
 
3.34

 
0.86% - 3.09%

 
2,110,773

Consumer
 
395,505

 
0.38% - 21.00%
 
0.32

 
1.37% - 3.60%

 
388,748

Total loans
 
12,311,456

 
 
 
 

 
 

 
12,314,243

Allowance for loan losses
 
(215,507
)
 
 
 
 

 
 

 
—

Net loans
 
12,095,949

 
 
 
 

 
 

 
12,314,243

Mortgage servicing rights
 
100,812

 
 
 
 

 
 

 
100,812

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

 
 
 
 

 
 

 
338,106

Other assets – private equity funds
 
28,169

 
 
 
 

 
 

 
28,169

Deposits with no stated maturity
 
18,211,068

 
 
 
 

 
 

 
18,211,068

Time deposits
 
2,967,992

 
0.01% - 9.64%
 
2.15

 
0.80% - 1.15%

 
3,037,708

Other borrowed funds
 
2,706,221

 
0.09% - 5.25%
 
—

 
0.09% - 2.67%

 
2,696,574

Subordinated debentures
 
347,633

 
1.00% - 5.00%
 
3.56

 
2.40
%
 
345,675

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

 
 
 
 

 
 

 
283,589



- 141 -



The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of September 30, 2012 (dollars in thousands):
 
 
Carrying
Value
 
Range of
Contractual
Yields
 
Average
Re-pricing
(in years)
 
Discount
Rate
 
Estimated
Fair
Value
Cash and cash equivalents
 
$
615,494

 
 
 
 
 
 
 
$
615,494

Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. Government agency debentures
 
3,100

 
 
 
 
 
 
 
3,100

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

 
 
 
 
 
 
 
119,835

Municipal and other tax-exempt securities
 
58,150

 
 
 
 
 
 
 
58,150

Other trading securities
 
23,157

 
 
 
 
 
 
 
23,157

Total trading securities
 
204,242

 
 
 
 
 
 
 
204,242

Investment securities:
 
 

 
 
 
 
 
 
 
 

Municipal and other tax-exempt
 
155,144

 
 
 
 
 
 
 
159,464

U.S. agency residential mortgage-backed securities
 
91,911

 
 
 
 
 
 
 
95,128

Other debt securities
 
185,059

 
 
 
 
 
 
 
205,766

Total investment securities
 
432,114

 
 
 
 
 
 
 
460,358

Available for sale securities:
 
 

 
 
 
 
 
 
 
 

U.S. Treasury
 
1,002

 
 
 
 
 
 
 
1,002

Municipal and other tax-exempt
 
87,969

 
 
 
 
 
 
 
87,969

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

 
 
 
 
 
 
 
10,654,821

Privately issued residential mortgage-backed securities
 
331,722

 
 
 
 
 
 
 
331,722

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

 
 
 
 
 
 
 
339,095

Other debt securities
 
36,456

 
 
 
 
 
 
 
36,456

Perpetual preferred stock
 
25,288

 
 
 
 
 
 
 
25,288

Equity securities and mutual funds
 
30,081

 
 
 
 
 
 
 
30,081

Total available for sale securities
 
11,506,434

 
 
 
 
 
 
 
11,506,434

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

 
 
 
 
 
 
 
305,445

Corporate debt securities
 
26,442

 
 
 
 
 
 
 
26,442

Total fair value option securities
 
331,887

 
 
 
 
 
 
 
331,887

Residential mortgage loans held for sale
 
325,102

 
 
 
 
 
 
 
325,102

Loans:
 
 

 
 
 
 
 
 
 
 

Commercial
 
7,266,907

 
0.25% - 30.00%
 
0.64

 
0.58% - 3.50%

 
7,232,761

Commercial real estate
 
2,177,272

 
0.38% - 18.00%
 
0.93

 
1.30% - 3.17%

 
2,142,239

Residential mortgage
 
2,016,303

 
0.38% - 18.00%
 
3.31

 
0.99% - 3.17%

 
2,084,251

Consumer
 
371,885

 
0.38% - 21.00%
 
0.32

 
1.43% - 3.69%

 
368,546

Total loans
 
11,832,367

 
 
 
 

 
 

 
11,827,797

Allowance for loan losses
 
(233,756
)
 
 
 
 

 
 

 
—

Net loans
 
11,598,611

 
 
 
 

 
 

 
11,827,797

Mortgage servicing rights
 
89,653

 
 
 
 

 
 

 
89,653

Derivative instruments with positive fair value, net of cash margin
 
472,783

 
 
 
 

 
 

 
472,783

Other assets – private equity funds
 
28,791

 
 
 
 

 
 

 
28,791

Deposits with no stated maturity
 
16,120,541

 
 
 
 

 
 

 
16,120,541

Time deposits
 
3,022,326

 
0.01% - 9.64%
 
2.14

 
0.85% - 1.15%

 
3,099,183

Other borrowed funds
 
3,429,575

 
0.09% - 5.25%
 
—

 
0.09% - 2.67%

 
3,420,135

Subordinated debentures
 
347,592

 
1.12% - 5.00%
 
3.79

 
2.26
%
 
345,852

Derivative instruments with negative fair value, net of cash margin
 
435,497

 
 
 
 

 
 

 
435,497


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.

- 142 -



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 $153 million at September 30, 2013, $171 million at December 31, 2012 and $193 million at September 30, 2012.
 
Deposits
 
The fair values of time deposits are based on discounted cash flow analyses using interest rates currently being offered on similar transactions which are considered Significant Unobservable Inputs. Estimated fair value of deposits with no stated maturity, which includes demand deposits, transaction deposits, money market deposits and savings accounts, is equal to the amount payable on demand. Although market premiums paid reflect an additional value for these low cost deposits, adjusting fair value for the expected benefit of these deposits is prohibited. Accordingly, the positive effect of such deposits is not included in the tables above.
 
Other Borrowings and Subordinated Debentures
 
The fair values of these instruments are based upon discounted cash flow analyses using interest rates currently being offered on similar instruments which are considered Significant Unobservable Inputs

Off-Balance Sheet Instruments
 
The fair values of commercial loan commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of these off-balance sheet instruments were not significant at September 30, 2013, December 31, 2012 or September 30, 2012.
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.

- 143 -



(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
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Amount:
 
 
 
 
 
 
 
 
Federal statutory tax
 
$
38,333

 
$
46,771

 
$
128,446

 
$
145,234

Tax exempt revenue
 
(1,860
)
 
(1,398
)
 
(5,405
)
 
(3,996
)
Effect of state income taxes, net of federal benefit
 
2,072

 
3,640

 
8,572

 
10,210

Utilization of tax credits
 
(1,669
)
 
(718
)
 
(5,217
)
 
(3,282
)
Bank-owned life insurance
 
(871
)
 
(931
)
 
(2,749
)
 
(2,886
)
Reduction of tax accrual
 
(1,400
)
 
(950
)
 
(1,400
)
 
(950
)
Charitable Contribution to BOKF Foundation
 
(1,115
)
 
—

 
(1,115
)
 
—

Other, net
 
(29
)
 
(636
)
 
848

 
117

Total
 
$
33,461

 
$
45,778

 
$
121,980

 
$
144,447


 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Percent of pretax income:
 
 
 
 
 
 
 
 
Federal statutory tax
 
35
 %
 
35
 %
 
35
 %
 
35
 %
Tax exempt revenue
 
(2
)
 
(1
)
 
(1
)
 
(1
)
Effect of state income taxes, net of federal benefit
 
2

 
3

 
2

 
2

Utilization of tax credits
 
(1
)
 
(1
)
 
(1
)
 
(1
)
Bank-owned life insurance
 
(1
)
 
(1
)
 
(1
)
 
(1
)
Reduction of tax accrual
 
(1
)
 
(1
)
 
(1
)
 
—

Charitable Contribution to BOKF Foundation
 
(1
)
 
—

 
—

 
—

Other, net
 
—

 
—

 
—

 
1

Total
 
31
 %
 
34
 %
 
33
 %
 
35
 %
(13) Subsequent Events

The Company evaluated events from the date of the consolidated financial statements on September 30, 2013 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q. No events were identified requiring recognition in and/or disclosure in the consolidated financial statements.


- 144 -


Nine-Month Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share Data)
 
Nine Months Ended
 
 
September 30, 2013
 
September 30, 2012
 
 
Average
Balance
 
Revenue/
Expense1
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense1
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Funds sold and resell agreements
 
$
37,603

 
$
12

 
0.04
%
 
$
16,142

 
$
9

 
0.07
%
Trading securities
 
156,165

 
2,224

 
1.90
%
 
123,790

 
1,697

 
1.83
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable3
 
246,922

 
10,836

 
5.87
%
 
291,551

 
12,840

 
5.88
%
Tax-exempt3
 
342,333

 
4,552

 
1.91
%
 
127,019

 
4,222

 
4.64
%
Total investment securities
 
589,255

 
15,388

 
3.63
%
 
418,570

 
17,062

 
5.52
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable3
 
10,876,172

 
156,569

 
1.96
%
 
10,286,996

 
180,721

 
2.46
%
Tax-exempt3
 
91,661

 
2,748

 
4.05
%
 
81,052

 
2,880

 
4.83
%
Total available for sale securities3
 
10,967,833

 
159,317

 
1.98
%
 
10,368,048

 
183,601

 
2.47
%
Fair value option securities
 
212,143

 
2,980

 
1.94
%
 
408,853

 
7,684

 
2.59
%
Residential mortgage loans held for sale
 
234,894

 
6,254

 
3.56
%
 
212,757

 
5,862

 
3.68
%
Loans2
 
12,302,149

 
379,586

 
4.13
%
 
11,597,586

 
388,274

 
4.47
%
Less: allowance for loan losses
 
207,435

 
 
 
 
 
242,067

 
 
 
 
Loans, net of allowance
 
12,094,714

 
379,586

 
4.20
%
 
11,355,519

 
388,274

 
4.57
%
Total earning assets3
 
24,292,607

 
565,761

 
3.14
%
 
22,903,679

 
604,189

 
3.60
%
Receivable on unsettled securities sales
 
134,522

 
 
 
 
 
166,115

 
 
 
 
Cash and other assets
 
3,047,753

 
 
 
 
 
2,813,878

 
 
 
 
Total assets
 
$
27,474,882

 
 
 
 
 
$
25,883,672

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and equity
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Transaction
 
$
9,536,771

 
$
8,589

 
0.12
%
 
$
8,938,958

 
$
10,804

 
0.16
%
Savings
 
309,963

 
347

 
0.15
%
 
256,151

 
416

 
0.22
%
Time
 
2,824,541

 
33,380

 
1.58
%
 
3,148,858

 
38,585

 
1.64
%
Total interest-bearing deposits
 
12,671,275

 
42,316

 
0.45
%
 
12,343,967

 
49,805

 
0.54
%
Funds purchased
 
905,823

 
703

 
0.10
%
 
1,585,663

 
1,618

 
0.14
%
Repurchase agreements
 
832,118

 
398

 
0.06
%
 
1,130,576

 
811

 
0.10
%
Other borrowings
 
1,741,982

 
4,033

 
0.31
%
 
85,569

 
2,604

 
4.06
%
Subordinated debentures
 
347,696

 
6,568

 
2.53
%
 
369,099

 
11,539

 
4.18
%
Total interest-bearing liabilities
 
16,498,894

 
54,018

 
0.44
%
 
15,514,874

 
66,377

 
0.57
%
Non-interest bearing demand deposits
 
7,000,765

 
 
 
 
 
6,283,126

 
 
 
 
Due on unsettled securities
 
367,340

 
 
 
 
 
636,971

 
 
 
 
Other liabilities
 
611,198

 
 
 
 
 
564,749

 
 
 
 
Total equity
 
2,996,685

 
 
 
 
 
2,883,952

 
 
 
 
Total liabilities and equity
 
$
27,474,882

 
 
 
 
 
$
25,883,672

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax-equivalent Net Interest Revenue3
 
 
 
$
511,743

 
2.71
%
 
 
 
$
537,812

 
3.03
%
Tax-equivalent Net Interest Revenue to Earning Assets3
 
 
 
 
 
2.84
%
 
 
 
 
 
3.20
%
Less tax-equivalent adjustment1
 
 
 
7,831

 
 
 
 
 
6,855

 
 
Net Interest Revenue
 
 
 
503,912

 
 
 
 
 
530,957

 
 
Provision for credit losses
 
 
 
(16,500
)
 
 
 
 
 
(8,000
)
 
 
Other operating revenue
 
 
 
455,151

 
 
 
 
 
503,485

 
 
Other operating expense
 
 
 
608,574

 
 
 
 
 
627,487

 
 
Income before taxes
 
 
 
366,989

 
 
 
 
 
414,955

 
 
Federal and state income tax
 
 
 
121,980

 
 
 
 
 
144,447

 
 
Net income before non-controlling interest
 
 
 
245,009

 
 
 
 
 
270,508

 
 
Net income attributable to non-controlling interest
 
 
 
1,376

 
 
 
 
 
1,882

 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
243,633

 
 
 
 
 
$
268,626

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Net income:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
3.55

 
 

 
 

 
$
3.94

 
 

Diluted
 
 

 
$
3.54

 
 

 
 

 
$
3.92

 
 



- 145 -



Quarterly Financial Summary – Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands, Except Per Share Data)
 
Three Months Ended
 
 
September 30, 2013
 
June 30, 2013
 
 
Average
Balance
 
Revenue/
Expense1
 
Yield/
Rate
 
Average
Balance
 
Revenue/
Expense1
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Funds sold and resell agreements
 
$
44,578

 
$
6

 
0.05
%
 
$
42,604

 
$
4

 
0.04
%
Trading securities
 
124,689

 
688

 
2.19
%
 
181,866

 
829

 
1.83
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable3
 
237,487

 
3,434

 
5.74
%
 
245,311

 
3,604

 
5.89
%
Tax-exempt3
 
383,617

 
1,501

 
1.59
%
 
365,629

 
1,568

 
1.89
%
Total investment securities
 
621,104

 
4,935

 
3.20
%
 
610,940

 
5,172

 
3.59
%
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Taxable3
 
10,463,957

 
50,179

 
1.91
%
 
10,967,141

 
51,371

 
1.91
%
Tax-exempt3
 
94,720

 
828

 
3.47
%
 
93,559

 
1,013

 
4.46
%
Total available for sale securities3
 
10,558,677

 
51,007

 
1.92
%
 
11,060,700

 
52,384

 
1.93
%
Fair value option securities
 
169,299

 
802

 
1.85
%
 
216,312

 
1,013

 
1.91
%
Residential mortgage loans held for sale
 
225,789

 
2,168

 
3.81
%
 
261,977

 
2,294

 
3.51
%
Loans2
 
12,402,096

 
126,849

 
4.06
%
 
12,277,444

 
125,992

 
4.12
%
Less allowance for loan losses
 
201,616

 
 
 
 
 
206,807

 
 
 
 
Loans, net of allowance
 
12,200,480

 
126,849

 
4.12
%
 
12,070,637

 
125,992

 
4.19
%
Total earning assets3
 
23,944,616

 
186,455

 
3.09
%
 
24,445,036

 
187,688

 
3.11
%
Receivable on unsettled securities sales
 
90,014

 
 
 
 
 
135,964

 
 
 
 
Cash and other assets
 
3,220,102

 
 
 
 
 
3,078,324

 
 
 
 
Total assets
 
$
27,254,732

 
 
 
 
 
$
27,659,324

 
 
 
 
Liabilities and equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Transaction
 
$
9,276,136

 
$
2,681

 
0.11
%
 
$
9,504,128

 
$
2,762

 
0.12
%
Savings
 
317,912

 
107

 
0.13
%
 
315,421

 
120

 
0.15
%
Time
 
2,742,970

 
10,738

 
1.55
%
 
2,818,533

 
11,027

 
1.57
%
Total interest-bearing deposits
 
12,337,018

 
13,526

 
0.43
%
 
12,638,082

 
13,909

 
0.44
%
Funds purchased
 
776,356

 
134

 
0.07
%
 
789,302

 
205

 
0.10
%
Repurchase agreements
 
799,175

 
123

 
0.06
%
 
819,373

 
129

 
0.06
%
Other borrowings
 
2,175,747

 
1,547

 
0.28
%
 
2,172,417

 
1,442

 
0.27
%
Subordinated debentures
 
347,737

 
2,209

 
2.52
%
 
347,695

 
2,200

 
2.54
%
Total interest-bearing liabilities
 
16,436,033

 
17,539

 
0.42
%
 
16,766,869

 
17,885

 
0.43
%
Non-interest bearing demand deposits
 
7,110,079

 
 
 
 
 
6,888,983

 
 
 
 
Due on unsettled securities
 
111,998

 
 
 
 
 
330,926

 
 
 
 
Other liabilities
 
631,699

 
 
 
 
 
644,892

 
 
 
 
Total equity
 
2,964,923

 
 
 
 
 
3,027,654

 
 
 
 
Total liabilities and equity
 
$
27,254,732

 
 
 
 
 
$
27,659,324

 
 
 
 
Tax-equivalent Net Interest Revenue3
 
 
 
$
168,916

 
2.67
%
 
 
 
$
169,803

 
2.68
%
Tax-equivalent Net Interest Revenue to Earning Assets3
 
 
 
 
 
2.80
%
 
 
 
 
 
2.81
%
Less tax-equivalent adjustment1
 
 
 
2,565

 
 
 
 
 
2,647

 
 
Net Interest Revenue
 
 
 
166,351

 
 
 
 
 
167,156

 
 
Reduction of allowance for credit losses
 
 
 
(8,500
)
 
 
 
 
 
—

 
 
Other operating revenue
 
 
 
145,316

 
 
 
 
 
150,761

 
 
Other operating expense
 
 
 
210,644

 
 
 
 
 
196,606

 
 
Income before taxes
 
 
 
109,523

 
 
 
 
 
121,311

 
 
Federal and state income tax
 
 
 
33,461

 
 
 
 
 
41,423

 
 
Net income before non-controlling interest
 
 
 
76,062

 
 
 
 
 
79,888

 
 
Net income (loss) attributable to non-controlling interest
 
 
 
324

 
 
 
 
 
(43
)
 
 
Net income attributable to BOK Financial Corp. shareholders
 
 
 
$
75,738

 
 
 
 
 
$
79,931

 
 
Earnings Per Average Common Share Equivalent:
 
 

 
 

 
 

 
 

 
 

 
 

Net income:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
 

 
$
1.10

 
 

 
 

 
$
1.16

 
 

Diluted
 
 

 
$
1.10

 
 

 
 

 
$
1.16

 
 

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.

- 146 -



Three Months Ended
March 31, 2013
 
December 31, 2012
 
September 30, 2012
Average Balance
 
Revenue /Expense1
 
Yield / Rate
 
Average Balance
 
Revenue / Expense1
 
Yield / Rate
 
Average Balance
 
Revenue / Expense1
 
Yield / Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
25,418

 
$
2

 
0.03
%
 
$
19,553

 
$
3

 
0.06
%
 
$
17,837

 
$
3

 
0.07
%
162,353

 
707

 
1.77
%
 
165,109

 
441

 
1.06
%
 
132,213

 
703

 
2.12
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
258,196

 
3,798

 
5.97
%
 
271,957

 
4,008

 
5.86
%
 
281,347

 
4,124

 
5.83
%
276,576

 
1,483

 
2.42
%
 
202,128

 
1,379

 
2.93
%
 
127,299

 
1,212

 
4.12
%
534,772

 
5,281

 
4.22
%
 
474,085

 
5,387

 
4.67
%
 
408,646

 
5,336

 
5.33
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11,205,566

 
55,019

 
2.07
%
 
11,394,797

 
56,514

 
2.08
%
 
10,969,610

 
59,482

 
2.36
%
86,615

 
907

 
4.25
%
 
87,415

 
836

 
3.80
%
 
88,445

 
1,044

 
4.70
%
11,292,181

 
55,926

 
2.09
%
 
11,482,212

 
57,350

 
2.10
%
 
11,058,055

 
60,526

 
2.38
%
251,725

 
1,165

 
2.05
%
 
292,490

 
772

 
1.58
%
 
336,160

 
1,886

 
2.27
%
216,816

 
1,792

 
3.35
%
 
272,581

 
2,323

 
3.39
%
 
264,024

 
2,310

 
3.48
%
12,224,960

 
126,745

 
4.20
%
 
11,989,319

 
130,510

 
4.33
%
 
11,739,662

 
127,816

 
4.33
%
214,017

 
 
 
 
 
229,095

 
 
 
 
 
231,177

 
 
 
 
12,010,943

 
126,745

 
4.28
%
 
11,760,224

 
130,510

 
4.41
%
 
11,508,485

 
127,816

 
4.42
%
24,494,208

 
191,618

 
3.24
%
 
24,466,254

 
196,786

 
3.30
%
 
23,725,420

 
198,580

 
3.47
%
178,561

 
 
 
 
 
144,077

 
 
 
 
 
99,355

 
 
 
 
2,840,662

 
 
 
 
 
2,886,445

 
 
 
 
 
2,763,397

 
 
 
 
$
27,513,431

 
 
 
 
 
$
27,496,776

 
 
 
 
 
$
26,588,172

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
9,836,204

 
$
3,146

 
0.13
%
 
$
9,343,421

 
$
3,496

 
0.15
%
 
$
8,719,648

 
$
3,406

 
0.16
%
296,319

 
120

 
0.16
%
 
278,714

 
124

 
0.18
%
 
267,498

 
127

 
0.19
%
2,913,999

 
11,615

 
1.62
%
 
3,010,367

 
13,588

 
1.80
%
 
3,068,870

 
12,384

 
1.61
%
13,046,522

 
14,881

 
0.46
%
 
12,632,502

 
17,208

 
0.54
%
 
12,056,016

 
15,917

 
0.53
%
1,155,983

 
364

 
0.13
%
 
1,295,442

 
477

 
0.15
%
 
1,678,006

 
632

 
0.15
%
878,679

 
146

 
0.07
%
 
900,131

 
197

 
0.09
%
 
1,112,847

 
281

 
0.10
%
863,360

 
1,044

 
0.49
%
 
364,425

 
824

 
0.90
%
 
97,003

 
739

 
3.03
%
347,654

 
2,159

 
2.52
%
 
347,613

 
2,239

 
2.56
%
 
352,432

 
2,475

 
2.79
%
16,292,198

 
18,594

 
0.46
%
 
15,540,113

 
20,945

 
0.54
%
 
15,296,304

 
20,044

 
0.52
%
7,002,046

 
 
 
 
 
7,505,074

 
 
 
 
 
6,718,572

 
 
 
 
665,175

 
 
 
 
 
854,474

 
 
 
 
 
1,054,239

 
 
 
 
556,173

 
 
 
 
 
625,628

 
 
 
 
 
571,865

 
 
 
 
2,997,839

 
 
 
 
 
2,971,487

 
 
 
 
 
2,947,192

 
 
 
 
$
27,513,431

 
 
 
 
 
$
27,496,776

 
 
 
 
 
$
26,588,172

 
 
 
 
 
 
$
173,024

 
2.78
%
 
 
 
$
175,841

 
2.76
%
 
 
 
$
178,536

 
2.95
%
 
 
 
 
2.92
%
 
 
 
 
 
2.95
%
 
 
 
 
 
3.12
%
 
 
2,619

 
 
 
 
 
2,472

 
 
 
 
 
2,509

 
 
 
 
170,405

 
 
 
 
 
173,369

 
 
 
 
 
176,027

 
 
 
 
(8,000
)
 
 
 
 
 
(14,000
)
 
 
 
 
 
—

 
 
 
 
159,074

 
 
 
 
 
162,626

 
 
 
 
 
179,944

 
 
 
 
201,324

 
 
 
 
 
222,085

 
 
 
 
 
222,340

 
 
 
 
136,155

 
 
 
 
 
127,910

 
 
 
 
 
133,631

 
 
 
 
47,096

 
 
 
 
 
44,293

 
 
 
 
 
45,778

 
 
 
 
89,059

 
 
 
 
 
83,617

 
 
 
 
 
87,853

 
 
 
 
1,095

 
 
 
 
 
1,051

 
 
 
 
 
471

 
 
 
 
$
87,964

 
 
 
 
 
$
82,566

 
 
 
 
 
$
87,382

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
$
1.28

 
 

 
 

 
$
1.21

 
 

 
 

 
$
1.28

 
 

 

 
$
1.28

 
 

 
 

 
$
1.21

 
 

 
 

 
$
1.27

 
 




- 147 -




Quarterly Earnings Trends – Unaudited
(In thousands, except share and per share data)
 
 
Three Months Ended
 
 
September 30,
2013
 
June 30,
2013
 
March 31,
2013
 
December 31,
2012
 
September 30,
2012
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
183,890

 
$
185,041

 
$
188,999

 
$
194,314

 
$
196,071

Interest expense
 
17,539

 
17,885

 
18,594

 
20,945

 
20,044

Net interest revenue
 
166,351

 
167,156

 
170,405

 
173,369

 
176,027

Provision for credit losses
 
(8,500
)
 
—

 
(8,000
)
 
(14,000
)
 
—

Net interest revenue after provision for credit losses
 
174,851

 
167,156

 
178,405

 
187,369

 
176,027

Other operating revenue
 
 

 
 

 
 

 
 

 
 

Brokerage and trading revenue
 
32,338

 
32,874

 
31,751

 
31,958

 
31,261

Transaction card revenue
 
30,055

 
29,942

 
27,692

 
28,009

 
27,788

Trust fees and commissions
 
23,892

 
24,803

 
22,313

 
22,030

 
19,654

Deposit service charges and fees
 
24,742

 
23,962

 
22,966

 
24,174

 
25,148

Mortgage banking revenue
 
23,486

 
36,596

 
39,976

 
46,410

 
50,266

Bank-owned life insurance
 
2,408

 
2,236

 
3,226

 
2,673

 
2,707

Other revenue
 
9,852

 
10,496

 
10,187

 
10,554

 
9,149

Total fees and commissions
 
146,773

 
160,909

 
158,111

 
165,808

 
165,973

Gain (loss) on other  assets, net
 
(377
)
 
(1,666
)
 
467

 
137

 
452

Gain (loss) on derivatives, net
 
31

 
(2,527
)
 
(941
)
 
(637
)
 
464

Gain (loss) on fair value option securities, net
 
(80
)
 
(9,156
)
 
(3,171
)
 
(2,081
)
 
6,192

Gain on available for sale securities, net
 
478

 
3,753

 
4,855

 
1,066

 
7,967

Total other-than-temporary impairment losses
 
(1,436
)
 
(1,138
)
 
—

 
(504
)
 
—

Portion of loss recognized in (reclassified from) other comprehensive income
 
(73
)
 
586

 
(247
)
 
(1,163
)
 
(1,104
)
Net impairment losses recognized in earnings
 
(1,509
)
 
(552
)
 
(247
)
 
(1,667
)
 
(1,104
)
Total other operating revenue
 
145,316

 
150,761

 
159,074

 
162,626

 
179,944

Other operating expense
 
 

 
 

 
 

 
 

 
 

Personnel
 
125,799

 
128,110

 
125,654

 
131,192

 
122,775

Business promotion
 
5,355

 
5,770

 
5,453

 
6,150

 
6,054

Contribution to BOKF Charitable Foundation
 
2,062

 
—

 
—

 
2,062

 
—

Professional fees and services
 
7,183

 
8,381

 
6,985

 
10,082

 
7,991

Net occupancy and equipment
 
17,280

 
16,909

 
16,481

 
16,883

 
16,914

Insurance
 
3,939

 
4,044

 
3,745

 
3,789

 
3,690

Data processing and communications
 
25,695

 
26,734

 
25,450

 
25,010

 
26,486

Printing, postage and supplies
 
3,505

 
3,580

 
3,674

 
3,403

 
3,611

Net losses and operating expenses of repossessed assets
 
2,014

 
282

 
1,246

 
6,665

 
5,706

Amortization of intangible assets
 
835

 
875

 
876

 
1,065

 
742

Mortgage banking costs
 
8,753

 
7,910

 
7,354

 
10,542

 
13,036

Change in fair value of mortgage servicing rights
 
346

 
(14,315
)
 
(2,658
)
 
(4,689
)
 
9,576

Other expense
 
7,878

 
8,326

 
7,064

 
9,931

 
5,759

Total other operating expense
 
210,644

 
196,606

 
201,324

 
222,085

 
222,340

Net income before taxes
 
109,523

 
121,311

 
136,155

 
127,910

 
133,631

Federal and state income taxes
 
33,461

 
41,423

 
47,096

 
44,293

 
45,778

Net income before non-controlling interest
 
76,062

 
79,888

 
89,059

 
83,617

 
87,853

Net income (loss) attributable to non-controlling interest
 
324

 
(43
)
 
1,095

 
1,051

 
471

Net income attributable to BOK Financial Corporation
 
$
75,738

 
$
79,931

 
$
87,964

 
$
82,566

 
$
87,382

 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$1.10

$1.16

$1.28

$1.21

$1.28
Diluted
 
$1.10

$1.16

$1.28

$1.21

$1.27
Average shares used in computation:
 
 
 
 
 
 
 
 
 
 
Basic
 
68,049,179

 
67,993,822

 
67,814,550

 
67,622,777

 
67,966,700

Diluted
 
68,272,861

 
68,212,497

 
68,040,180

 
67,914,717

 
68,334,989



- 148 -



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 September 30, 2013.
 
Period
 
Total Number of Shares Purchased2
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans
July 1 to July 31, 2013
 
12,137

 
$
47.39

 
—

 
1,960,504

August 1 to August 31, 2013
 
150

 
$
45.89

 
—

 
1,960,504

September 1 to September 30, 2013
 
—

 
$
—

 
—

 
1,960,504

Total
 
12,287

 
 

 
—

 
 

1 
On April 24, 2012, the Company’s board of directors authorizing the Company to repurchase up to two million shares of the Company’s common stock. As of September 30, 2013, the Company had repurchased 39,496 shares under this plan.
2 
The Company routinely repurchases mature shares from employees to cover the exercise price and taxes in connection with employee stock option exercises.

Item 6. Exhibits

31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act   of 2002

31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statement of Cash Flows and (v) the Notes to Consolidated Financial Statements


Items 1A, 3, 4 and 5 are not applicable and have been omitted.



- 149 -



Signatures


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


BOK FINANCIAL CORPORATION
(Registrant)



Date:        November 1, 2013                                                                  



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


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

- 150 -

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