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BOK Financial 10-Q 2012

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-99.A
  6. Ex-99.A
BOKF-2012.09.30-10Q


 

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

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

Commission File No. 0-19341

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 68,215,354 shares of common stock ($.00006 par value) as of September 30, 2012.
 





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

Index

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




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

Performance Summary

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

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

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

- 1 -




as defined by generally accepted accounting principles in the United States of America (“GAAP”) minus intangible assets and equity that does not benefit common shareholders.
The Company and its subsidiary bank continue to exceed the regulatory definition of well capitalized. The Company’s Tier 1 capital ratios as defined by banking regulations were 13.21% at September 30, 2012 and 13.62% at June 30, 2012.
The Company paid a cash dividend of $26 million or $0.38 per common share during the third quarter of 2012. On October 30, 2012 the board of directors approved a quarterly cash dividend of $0.38 per common share payable on or about November 30, 2012 to shareholders of record as of November 16, 2012. In addition, on October 30, 2012, the board of directors approved a special cash dividend of $1.00 per common share payable on or about November 30, 2012 to shareholders of record as of November 16, 2012.
Results of Operations
Net Interest Revenue and Net Interest Margin

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

Net interest revenue totaled $176.0 million for the third quarter of 2012 compared to $175.4 million for the third quarter of 2011 and $181.4 million for the second quarter of 2012. Net interest margin was 3.12% for the third quarter of 2012, 3.30% for the second quarter of 2012 and 3.34% for the third quarter of 2011. Net interest revenue for the second quarter of 2012 included $2.9 million from a full recovery of a nonaccruing commercial loan. Excluding this recovery, net interest margin was 3.25% for the second quarter of 2012.

Net interest revenue increased $643 thousand over the third quarter of 2011. Net interest revenue increased $18.3 million primarily due to the growth in average loan and securities balances. Net interest decreased $17.4 million due to interest rates. Cash flows from the securities portfolio were reinvested at lower current market rates and loan yields decreased due to renewal of maturing fixed-rate loans at current lower rates and narrowing credit spreads, partially offset by lower funding costs.

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

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

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


- 2 -




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

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

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

The effectiveness of these strategies is reflected in the overall change in net interest revenue due to changes in interest rates as shown in Table 1 and in the interest rate sensitivity projections as shown in the Market Risk section of this report. As shown in Table 1, increases in net interest revenue have been based on growth in average earning assets. Net interest margin may continue to decline as our ability to further decrease funding costs are limited. Assuming short and intermediate interest rates stay low, net interest margin could migrate below 3%. Although we have sufficient capital and liquidity, our ability to continue net interest revenue support through asset growth without accepting excessive risk in a rising interest rate environment may be constrained.


- 3 -




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

 
$
(4
)
 
$
(3
)
 
$
2

 
$
(5
)
Trading securities
 
66

 
272

 
(206
)
 
(100
)
 
878

 
(978
)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
 
1,365

 
1,251

 
114

 
4,936

 
5,055

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

 
1,041

 
(147
)
 
3,161

 
3,531

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

 
(11,123
)
 
(24,311
)
 
13,819

 
(38,130
)
Tax-exempt securities
 
174

 
220

 
(46
)
 
210

 
425

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

 
(11,169
)
 
(24,101
)
 
14,244

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

 
1,022

 
(328
)
 
1,402

 
2,196

 
(794
)
Loans
 
(1,257
)
 
9,702

 
(10,959
)
 
9,548

 
29,765

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

 
(24,406
)
 
(16,181
)
 
48,872

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

 
(91
)
 
(157
)
 
101

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

 
175

 
322

 
887

 
519

 
368

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

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

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

 
18,313

 
(17,394
)
 
10,973

 
58,092

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

 
 
 
 
 
40

 
 
 
 
Net interest revenue
 
$
643

 
 
 
 
 
$
10,933

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


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Other Operating Revenue

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

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


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

 
$
29,451

 
$
1,810

 
6
 %
 
$
32,600

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

 
31,328

 
(3,540
)
 
(11
)%
 
26,758

 
1,030

 
4
 %
Trust fees and commissions
 
19,654

 
17,853

 
1,801

 
10
 %
 
19,931

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

 
24,614

 
534

 
2
 %
 
25,216

 
(68
)
 
 %
Mortgage banking revenue
 
50,266

 
29,493

 
20,773

 
70
 %
 
39,548

 
10,718

 
27
 %
Bank-owned life insurance
 
2,707

 
2,761

 
(54
)
 
(2
)%
 
2,838

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

 
10,535

 
(1,059
)
 
(10
)%
 
7,559

 
1,917

 
25
 %
Total fees and commissions revenue
 
166,300

 
146,035

 
20,265

 
14
 %
 
154,450

 
11,850

 
8
 %
Gain on other assets, net
 
125

 
351

 
(226
)
 
N/A

 
2,990

 
(2,865
)
 
N/A

Gain on derivatives, net
 
464

 
4,048

 
(3,584
)
 
N/A

 
2,345

 
(1,881
)
 
N/A

Gain on fair value option securities, net
 
6,192

 
17,788

 
(11,596
)
 
N/A

 
6,852

 
(660
)
 
N/A

Gain on available for sale securities
 
7,967

 
16,694

 
(8,727
)
 
N/A

 
20,481

 
(12,514
)
 
N/A

Total other-than-temporary impairment
 

 
(9,467
)
 
9,467

 
N/A

 
(135
)
 
135

 
N/A

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

 
N/A

 
(723
)
 
(381
)
 
N/A

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

 
N/A

 
(858
)
 
(246
)
 
N/A

Total other operating revenue
 
$
179,944

 
$
173,616

 
$
6,328

 
4
 %
 
$
186,260

 
$
(6,316
)
 
(3
)%

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

Fees and commissions revenue

Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 49% of total revenue for the third quarter of 2012, excluding provision for credit losses and gains and losses on asset sales, securities and derivatives. We believe that a variety of fee revenue sources provide an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. As an example of this strength, many of the economic factors that are causing net interest revenue compression are also driving strong growth in our mortgage banking

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revenue. We expect continued growth in other operating revenue through offering new products and services and by further development of our presence in markets outside of Oklahoma. However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

Brokerage and trading revenue, which includes revenues from securities trading, retail brokerage, customer hedging and investment banking increased $1.8 million or 6% over the third quarter of 2011

Securities trading revenue totaled $18.9 million for the third quarter of 2012, up $3.2 million over the third quarter of 2011. Securities trading revenue represents net realized and unrealized gains primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers. We believe these activities will be permitted under the Volcker Rule of the Dodd-Frank Act.

Customer hedging revenue is based primarily on realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs. As more fully discussed under Customer Derivative Programs in Note 3 of the Consolidated Financial Statements, we offer commodity, interest rate, foreign exchange and equity derivatives to our customers. Customer hedging revenue totaled $2.0 million for the third quarter of 2012 compared to $3.3 million for the third quarter of 2011.

Revenue earned from retail brokerage transactions decreased $697 thousand or 9% compared to the third quarter of 2011 to $6.7 million. Retail brokerage revenue is primarily based on fees and commissions earned on sales of fixed income securities, annuities and mutual funds to retail customers. Revenue is primarily based on the volume of customer transactions during the quarter. The number of transactions typically increases with market volatility and decreases with market stability.

Investment banking, which includes fees earned upon completion of underwriting and financial advisory services, totaled $3.6 million for the third quarter of 2012, a $641 thousand or 21% increase over the third quarter of 2011 related to the timing and volume of completed transactions. The increased volume of transactions is primarily the result of the Company's expansion of its municipal financial advisory service capacity, particularly in the Texas market.

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

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

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

- 6 -





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

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

Trust fees and commissions increased $1.8 million or 10% over the third quarter of 2011 primarily due to the growth in the fair value of assets administered by the Company. The fair value of trust assets administered by the Company totaled $37.7 billion at September 30, 2012, $32.0 billion at September 30, 2011 and $35.7 billion at June 30, 2012. Trust fees and commissions decreased $277 thousand compared to the second quarter of 2012. We continue to voluntarily waive administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds in the current low short-term interest rate environment. Waived fees totaled $1.9 million for the third quarter of 2012 compared to $2.1 million for the third quarter of 2011 and $2.2 million for the second quarter of 2012.

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

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

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


- 7 -




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

 
$
19,703

 
$
20,655

 
105
%
 
$
29,689

 
$
10,669

 
36
%
Servicing revenue
 
9,908

 
9,790

 
118

 
1
%
 
9,859

 
49

 
%
Total mortgage revenue
 
$
50,266

 
$
29,493

 
$
20,773

 
70
%
 
$
39,548

 
$
10,718

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

 
$
637,127

 
$
409,481

 
64
%
 
$
841,959

 
$
204,649

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

 
 

 
51
%
 
 

 
 



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

 
$
11,249,503

 
$
506,847

 
5
%
 
$
11,564,643

 
$
191,707

 
2
%
Net gains on securities, derivatives and other assets

In the third quarter of 2012, we recognized an $8.0 million gain from sales of $209 million of available for sale securities. Securities were sold either because they had reached their expected maximum potential return or to mitigate exposure to prepayment risk. We recognized $16.7 million of gains on sales of $654 million of available for sale securities in the third quarter of 2011. In the second quarter of 2012, we recognized a $14.2 million gain on the sale of $26 million of common stock received in 2009 in partial satisfaction of a defaulted commercial loan. In addition, we recognized $6.1 million in gains on sales of $433 million of residential mortgage-backed securities guaranteed by U.S. government agencies.

We also maintain a portfolio of residential mortgage-backed securities issued by U.S. government agencies and interest rate derivative contracts designated as an economic hedge of the changes in the fair value of our mortgage servicing rights. The fair value of our mortgage servicing rights fluctuate due to changes in prepayment speeds and other assumptions as more fully described in Note 6 to the Consolidated Financial Statements. As benchmark mortgage rates increase, prepayment speeds slow and the value of our mortgage servicing rights increase. As benchmark mortgage rates fall, prepayment speeds increase and the value of our mortgage servicing rights decrease.

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

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



- 8 -




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

 
$
2,623

 
$
4,048

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

 
6,908

 
17,788

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

 
9,531

 
21,836

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

 
$
2,148

 
$
5,036

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

Primary rates disclosed in Table 4 above represent rates generally available to borrowers on 30 year conforming mortgage loans and affect the value of our mortgage servicing rights. Secondary rates represents rates generally paid on 30 year residential mortgage-backed securities guaranteed by U.S. government agencies and affect the value of securities and derivative contracts used as an economic hedge of our mortgage servicing rights. The difference between average primary and secondary rates for the third quarter of 2012 was 127 basis points compared to 105 basis points for the second quarter of 2012 and 85 basis points for the third quarter of 2011.

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

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

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

- 9 -




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

 
$
62,002

 
$
4,706

 
8
 %
 
$
65,218

 
$
1,490

 
2
 %
Incentive compensation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash-based
 
30,756

 
26,257

 
4,499

 
17
 %
 
27,950

 
2,806

 
10
 %
Stock-based
 
7,214

 
(595
)
 
7,809

 
(1,312
)%
 
11,349

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

 
25,662

 
12,308

 
48
 %
 
39,299

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

 
15,596

 
2,501

 
16
 %
 
17,780

 
317

 
2
 %
Total personnel expense
 
122,775

 
103,260

 
19,515

 
19
 %
 
122,297

 
478

 
 %
Business promotion
 
6,054

 
5,280

 
774

 
15
 %
 
6,746

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

 
4,000

 
(4,000
)
 
(100
)%
 

 

 
 %
Professional fees and services
 
7,991

 
7,418

 
573

 
8
 %
 
8,343

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

 
16,627

 
287

 
2
 %
 
16,906

 
8

 
 %
Insurance
 
3,690

 
2,206

 
1,484

 
67
 %
 
4,011

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

 
24,446

 
2,040

 
8
 %
 
25,264

 
1,222

 
5
 %
Printing, postage and supplies
 
3,611

 
3,780

 
(169
)
 
(4
)%
 
3,903

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

 
5,939

 
(233
)
 
(4
)%
 
5,912

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

 
896

 
(154
)
 
(17
)%
 
545

 
197

 
36
 %
Mortgage banking costs
 
11,566

 
9,349

 
2,217

 
24
 %
 
11,173

 
393

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

 
24,822

 
(15,246
)
 
(61
)%
 
11,450

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

 
12,512

 
(5,283
)
 
(42
)%
 
6,461

 
768

 
12
 %
Total other operating expense
 
$
222,340

 
$
220,535

 
$
1,805

 
1
 %
 
$
223,011

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

 
4,454

 
173

 
4
 %
 
4,585

 
42

 
1
 %

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

Personnel expense

Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs increased $4.7 million or 8% over the third quarter of 2011 primarily due to increases in headcount and standard annual merit increases which were fully effective in the second quarter of 2012. The Company generally awards annual merit increases during the first quarter for a majority of its staff.

Incentive compensation increased $12.3 million or 48% over the third quarter of 2011. Cash-based incentive compensation plans are either intended to provide current rewards to employees who generate long-term business opportunities for the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions. Total cash-based incentive compensation increased $4.5 million or 17% over the third quarter of 2011. Cash-based incentive compensation related to brokerage and trading revenue was up $975 thousand over the third quarter of 2011 and all other cash-based incentive compensation was up $3.5 million over the prior year.

The Company also provides stock-based incentive compensation plans. Stock-based compensation plans include both equity and liability awards. Compensation expense for equity awards decreased $694 thousand compared to the third quarter of 2011. Expense for equity awards is based on the grant-date fair value of the awards and is unaffected by subsequent changes in fair value. Compensation expense related to liability awards increased $8.5 million over the third quarter of 2011. Expense

- 10 -




based on changes in the fair value of BOK Financial common stock and other investments increased $4.0 million over the prior year. In addition, $4.5 million was accrued in third quarter of 2012 related to the BOK Financial Corp. 2011 True-Up Plan. Approved by shareholders on April 26, 2011, the True-Up Plan is designed to adjust annual and long-term performance-based incentive compensation for certain senior executives either upward or downward based on the earnings per share performance and compensation of comparable senior executives at peer banks.   

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

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

Non-personnel operating expenses

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

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

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

BOK Financial operates in numerous jurisdictions, which requires judgment regarding the allocation of income, expense and earnings under various laws and regulations of each of these taxing jurisdictions. Each jurisdiction may audit our tax returns and may take different positions with respect to these allocations. The reserve for uncertain tax positions was $12 million at September 30, 2012, $13 million at June 30, 2012 and $12 million at September 30, 2011.

- 11 -




Lines of Business

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

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

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

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

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

As shown in Table 6, net income attributable to our lines of business increased $7.9 million over the third quarter of 2011. The increase in net income attributed to our lines of business was due primarily to growth in mortgage banking revenue and decreased net loans charged off, partially offset by increased personnel expense.

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

 
$
33,136

 
$
110,149

 
$
93,314

Consumer Banking
 
21,226

 
14,707

 
55,421

 
28,322

Wealth Management
 
5,132

 
4,080

 
15,427

 
12,273

Subtotal
 
59,863

 
51,923

 
180,997

 
133,909

Funds Management and other
 
27,519

 
33,178

 
87,629

 
84,973

Total
 
$
87,382

 
$
85,101

 
$
268,626

 
$
218,882



- 12 -




Commercial Banking

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

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

 
$
85,560

 
$
5,818

 
$
274,411

 
$
254,143

 
$
20,268

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

 
78,858

 
1,773

 
240,744

 
230,723

 
10,021

 
Net loans charged off
 
3,253

 
5,041

 
(1,788
)
 
10,393

 
16,646

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

 
73,817

 
3,561

 
230,351

 
214,077

 
16,274

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
40,091

 
37,924

 
2,167

 
116,635

 
109,345

 
7,290

 
Gain on financial instruments and other assets, net
 

 

 

 
14,407

 
9

 
14,398

 
Other operating revenue
 
40,091

 
37,924

 
2,167

 
131,042

 
109,354

 
21,688

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
25,655

 
23,701

 
1,954

 
76,003

 
70,796

 
5,207

 
Net losses and expenses of repossessed assets
 
4,908

 
3,081

 
1,827

 
10,577

 
12,271

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

 
19,633

 
(62
)
 
56,131

 
55,738

 
393

 
Corporate allocations
 
12,499

 
11,094

 
1,405

 
38,406

 
31,903

 
6,503

 
Total other operating expense
 
62,633

 
57,509

 
5,124

 
181,117

 
170,708

 
10,409

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
54,836

 
54,232

 
604

 
180,276

 
152,723

 
27,553

 
Federal and state income tax
 
21,331

 
21,096

 
235

 
70,127

 
59,409

 
10,718

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
33,505

 
$
33,136

 
$
369

 
$
110,149

 
$
93,314

 
$
16,835

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average assets
 
$
10,134,288

 
$
9,526,993

 
$
607,295

 
$
10,050,873

 
$
9,222,883

 
$
827,990

 
Average loans
 
9,117,046

 
8,338,344

 
778,702

 
9,001,100

 
8,195,347

 
805,753

 
Average deposits
 
8,446,680

 
7,834,992

 
611,688

 
8,338,034

 
7,640,843

 
697,191

 
Average invested capital
 
865,157

 
886,538

 
(21,381
)
 
866,346

 
874,259

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

bp
Return on invested capital
 
15.41
%
 
14.83
%
 
58

bp
16.98
%
 
14.27
%
 
271

bp
Efficiency ratio
 
51.88
%
 
49.24
%
 
264

bp
50.68
%
 
50.20
%
 
48

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

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

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

- 13 -




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

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

The average outstanding balance of loans attributed to Commercial Banking increased $779 million to $9.1 billion for the third quarter of 2012. See the Loans section of Management’s Discussion and Analysis of Financial Condition following for additional discussion of changes in commercial and commercial real estate loans which are primarily attributed to the Commercial Banking segment. Net Commercial Banking loans charged off decreased $1.8 million compared to the third quarter of 2011 to $3.3 million or 0.14% of average loans attributed to this line of business on an annualized basis. Net charge-offs for the third quarter included the return of a $7.1 million loan settlement received in 2008 as discussed in greater detail in in Management's Discussion & Analysis of Financial Condition – Summary of Loan Loss Experience following. Excluding the impact of this item, the decrease in net loans charged off was primarily due to a decrease in losses on commercial real estate loans.
 
Average deposits attributed to Commercial Banking were $8.4 billion for the third quarter of 2012, up $612 million or 8% over the third quarter of 2011. Average balances attributed to our commercial & industrial loan customers increased $584 million or 21% and average balances attributed to our energy customers increased $310 million or 33% . Average balances held by treasury services customers were down $339 million compared to the third quarter of 2011. Commercial customers continue to maintain high account balances due to continued economic uncertainty and persistently low yields available on high quality investments.


Consumer Banking

Consumer banking services are provided through five primary distribution channels:  traditional branches, supermarket branches, the 24-hour ExpressBank call center, Internet banking and mobile banking.

Consumer banking contributed $21.2 million to consolidated net income for the third quarter of 2012, up $6.5 million primarily due to growth in mortgage banking revenue. Revenue from mortgage loan production was up $20.6 million over the third quarter of 2011. Changes in fair value of our mortgage servicing rights, net of economic hedge, decreased net income attributed to consumer banking by $2.1 million in the third quarter of 2012 and $1.8 million in the third quarter of 2011.


- 14 -




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

 
$
24,553

 
$
(2,358
)
 
$
69,154

 
$
64,574

 
$
4,580

 
Net interest revenue from internal sources
 
6,457

 
8,108

 
(1,651
)
 
18,462

 
25,188

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

 
32,661

 
(4,009
)
 
87,616

 
89,762

 
(2,146
)
 
Net loans charged off
 
485

 
3,837

 
(3,352
)
 
6,137

 
9,568

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

 
28,824

 
(657
)
 
81,479

 
80,194

 
1,285

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions revenue
 
75,942

 
58,601

 
17,341

 
196,163

 
148,318

 
47,845

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

 
21,165

 
(16,467
)
 
9,237

 
25,923

 
(16,686
)
 
Other operating revenue
 
80,640

 
79,766

 
874

 
205,400

 
174,241

 
31,159

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
23,270

 
22,166

 
1,104

 
67,481

 
64,101

 
3,380