BOKF-2013.03.31-10Q


 

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

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

Commission File No. 0-19341

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

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

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

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

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

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

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





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

Index

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




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

Performance Summary

BOK Financial Corporation (“the Company”) reported net income of $88.0 million or $1.28 per diluted share for the first quarter of 2013, compared to $83.6 million or $1.22 per diluted share for the first quarter of 2012 and $82.6 million or $1.21 per diluted share for the fourth quarter of 2012

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

- 1 -




The Company paid a regular quarterly cash dividend of $26 million or $0.38 per common share during the first quarter of 2013. The Company will pay a quarterly cash dividend of $0.38 per common share payable on or about May 31, 2013 to shareholders of record as of May 17, 2013.
Results of Operations
Net Interest Revenue and Net Interest Margin

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

Net interest revenue totaled $170.4 million for the first quarter of 2013 compared to $173.6 million for the first quarter of 2012 and $173.4 million for the fourth quarter of 2012. Net interest margin was 2.92% for the first quarter of 2013, 2.95% for the fourth quarter of 2012 and 3.19% for the first quarter of 2012

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

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

Average earning assets for the first quarter of 2013 increased $2.1 billion or 9% over the first quarter of 2012. The average balance of available for sale securities, which consists largely of U.S. government agency issued residential mortgage-backed securities, increased $1.3 billion. We purchase these securities to supplement earnings and to manage interest rate risk. Securities were purchased to productively deploy liquidity provided by recent deposit growth and the Company's strong capital position. Growth was primarily in short-duration U.S. government agency residential mortgage-backed securities and U.S. government agency commercial mortgage-backed securities. Average loans, net of allowance for loan losses, increased $827 million over the first quarter of 2012 due primarily to growth in average commercial loans.

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

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

- 2 -




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

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

The effectiveness of these strategies is reflected in the overall change in net interest revenue due to changes in interest rates as shown in Table 1 and in the interest rate sensitivity projections as shown in the Market Risk section of this report. Increases in net interest revenue have been based on growth in average earning assets.

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























- 3 -




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

 
$
2

 
$
(2
)
Trading securities
 
261

 
300

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

Tax-exempt securities
 
(66
)
 
1,081

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

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

 
(10,574
)
Tax-exempt securities
 
14

 
195

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

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

 
301

 
(277
)
Loans
 
(1,322
)
 
7,932

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

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

 
(852
)
Savings deposits
 
(22
)
 
27

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

 
(51
)
 
103

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

 
5,914

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

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

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

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

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

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


- 4 -




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

 
$
31,111

 
$
640

 
2
 %
 
$
31,958

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

 
25,430

 
2,262

 
9
 %
 
28,009

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

 
18,438

 
3,875

 
21
 %
 
22,030

 
283

 
1
 %
Deposit service charges and fees
 
22,966

 
24,379

 
(1,413
)
 
(6
)%
 
24,174

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

 
33,078

 
6,898

 
21
 %
 
46,410

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

 
2,871

 
355

 
12
 %
 
2,673

 
553

 
21
 %
Other revenue
 
10,187

 
9,264

 
923

 
10
 %
 
10,554

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

 
144,571

 
13,540

 
9
 %
 
165,808

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

 
(3,693
)
 
4,160

 
N/A

 
137

 
330

 
N/A

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

 
N/A

 
(637
)
 
(304
)
 
N/A

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

 
(2,081
)
 
(1,090
)
 
N/A

Gain on available for sale securities
 
4,855

 
4,331

 
524

 
N/A

 
1,066

 
3,789

 
N/A

Total other-than-temporary impairment
 

 
(505
)
 
505

 
N/A

 
(504
)
 
504

 
N/A

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

 
N/A

 
(1,163
)
 
916

 
N/A

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

 
N/A

 
(1,667
)
 
1,420

 
N/A

Total other operating revenue
 
$
159,074

 
$
137,281

 
$
21,793

 
16
 %
 
$
162,626

 
$
(3,552
)
 
(2
)%
Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Fees and commissions revenue

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

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

Securities trading revenue totaled $17.1 million for the first quarter of 2013, up $1.1 million over the first quarter of 2012. Securities trading revenue represents net realized and unrealized gains primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers. We believe these activities will be permitted under the Volcker Rule of the Dodd-Frank Act.

Customer hedging revenue is based primarily on realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs. As more fully discussed under Customer Derivative Programs in Note 3 of the Consolidated Financial Statements, we offer commodity, interest rate, foreign exchange and equity derivatives to our customers. Customer hedging revenue totaled $2.8 million for the first quarter of 2013 compared to $4.6 million for the first quarter of 2012.


- 5 -




Revenue earned from retail brokerage transactions increased $619 thousand or 8% over the first quarter of 2012 to $8.2 million. Retail brokerage revenue is primarily based on fees and commissions earned on sales of fixed income securities, annuities and mutual funds to retail customers. Revenue is primarily based on the volume of customer transactions during the quarter. The number of transactions typically increases with market volatility and decreases with market stability.

Investment banking, which includes fees earned upon completion of underwriting and financial advisory services, totaled $3.7 million for the first quarter of 2013, a $690 thousand or 23% increase over the first quarter of 2012 related to the timing and volume of completed transactions. The increased volume of transactions is primarily the result of the Company's expansion of its municipal financial advisory service capacity, particularly in the Texas market.

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

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

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

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

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

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

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


- 6 -




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

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

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

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

 
$
17,092

 
$
13,143

 
77
 %
 
$
35,337

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

 
2,310

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

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

 
$
(4,614
)
 
(125
)%
 
10,238

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

 
23,081

 
6,829

 
30
 %
 
35,989

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

 
9,997

 
69

 
1
 %
 
10,421

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

 
$
33,078

 
$
6,898

 
21
 %
 
$
46,410

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

 
$
747,436

 
$
208,879

 
28
 %
 
$
1,073,541

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

 
 

 
62
%
 
 

 
 



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

 
$
11,378,806

 
$
893,885

 
8
%
 
$
11,981,624

 
$
291,067

 
2
%

- 7 -




Net gains on securities, derivatives and other assets

In the first quarter of 2013, we recognized a $4.9 million gain from sales of $728 million of available for sale securities. Securities were sold either because they had reached their expected maximum potential return or to mitigate exposure to prepayment risk. We recognized $4.3 million of gains on sales of $992 million of available for sale securities in the first quarter of 2012 and $1.1 million of gain on sales of $84 million in the fourth quarter of 2012.

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

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

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

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

 
4,689

 
7,127

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

 
$
2,289

 
 
 
 
 
 
 
Net interest revenue on fair value option securities
 
$
828

 
$
748

 
$
3,165

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

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

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

- 8 -




Other Operating Expense

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

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

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

 
$
63,132

 
$
4,726

 
7
 %
 
$
67,678

 
$
180

 
 %
Incentive compensation:
 
 
 
 
 


 


 
 
 
 
 
 
Cash-based
 
27,045

 
26,241

 
804

 
3
 %
 
31,771

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

 
6,625

 
4,075

 
62
 %
 
11,982

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

 
32,866

 
4,879

 
15
 %
 
43,753

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

 
18,771

 
1,280

 
7
 %
 
19,761

 
290

 
1
 %
Total personnel expense
 
125,654

 
114,769

 
10,885

 
9
 %
 
131,192

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

 
4,388

 
1,065

 
24
 %
 
6,150

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

 

 

 
 %
 
2,062

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

 
7,599

 
(614
)
 
(8
)%
 
10,082

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

 
16,023

 
458

 
3
 %
 
16,883

 
(402
)
 
(2
)%
Insurance
 
3,745

 
3,866

 
(121
)
 
(3
)%
 
3,789

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

 
22,144

 
3,306

 
15
 %
 
25,010

 
440

 
2
 %
Printing, postage and supplies
 
3,674

 
3,311

 
363

 
11
 %
 
3,403

 
271

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

 
2,245

 
(999
)
 
(44
)%
 
6,665

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

 
575

 
301

 
52
 %
 
1,065

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

 
8,439

 
(1,085
)
 
(13
)%
 
10,542

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

 
(63
)%
 
(4,689
)
 
2,031

 
(43
)%
Other expense
 
7,064

 
5,905

 
1,159

 
20
 %
 
9,931

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

 
$
182,137

 
$
19,187

 
11
 %
 
$
222,085

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

 
4,630

 
67

 
1
 %
 
4,704

 
(7
)
 
 %

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

Personnel expense

Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs increased $4.7 million or 7% over the first quarter of 2012 primarily due to increases in headcount and standard annual merit increases which were effective for the majority of our staff March 1.


- 9 -




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

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

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


Non-personnel operating expenses

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

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

- 10 -




Income Taxes

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

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

- 11 -




Lines of Business

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

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

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

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

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

As shown in Table 6, net income attributable to our lines of business increased $6.1 million or 11% over the first quarter of 2012. The increase in net income attributed to our lines of business was due primarily to decreased net loans charged off and growth in nearly all of our diversified revenue categories over the prior year, partially offset by increased operating expenses.

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

 
$
32,984

Consumer Banking
 
20,418

 
20,141

Wealth Management
 
4,198

 
3,920

Subtotal
 
63,122

 
57,045

Funds Management and other
 
24,842

 
26,570

Total
 
$
87,964

 
$
83,615



- 12 -




Commercial Banking

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

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

 
$
89,492

 
$
1,326

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

Total net interest revenue
 
81,690

 
77,443

 
4,247

Net loans charged off
 
1,021

 
6,392

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

 
71,051

 
9,618

 
 
 
 
 
 
 
Fees and commissions revenue
 
41,432

 
38,748

 
2,684

Gain on financial instruments and other assets, net
 

 
44

 
(44
)
Other operating revenue
 
41,432

 
38,792

 
2,640

 
 
 
 
 
 
 
Personnel expense
 
25,480

 
24,843

 
637

Net losses and expenses of repossessed assets
 
1,170

 
667

 
503

Other non-personnel expense
 
19,983

 
17,725

 
2,258

Corporate allocations
 
12,447

 
12,625

 
(178
)
Total other operating expense
 
59,080

 
55,860

 
3,220

 
 
 
 
 
 
 
Income before taxes
 
63,021

 
53,983

 
9,038

Federal and state income tax
 
24,515

 
20,999

 
3,516

 
 
 
 
 
 
 
Net income
 
$
38,506

 
$
32,984

 
$
5,522

 
 
 
 
 
 
 
Average assets
 
$
10,629,339

 
$
10,013,866

 
$
615,473

Average loans
 
9,575,332

 
8,860,991

 
714,341

Average deposits
 
9,245,663

 
8,354,749

 
890,914

Average invested capital
 
890,844

 
896,552

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

Return on invested capital
 
17.53
%
 
14.80
%
 
273

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

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

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

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

- 13 -




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

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



- 14 -




Consumer Banking

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

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

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

 
$
26,587

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

 
4,879

 
604

 
Total net interest revenue
 
29,578

 
31,466

 
(1,888
)
 
Net loans charged off
 
930

 
1,432

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

 
30,034

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

 
55,935

 
7,269

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

 
50,240

 
6,901

 
 
 
 
 
 
 
 
 
Personnel expense
 
22,526

 
21,123

 
1,403

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

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

 
Other non-personnel expense
 
22,732

 
22,364

 
368

 
Corporate allocations
 
10,021

 
10,735

 
(714
)
 
Total other operating expense
 
52,371

 
47,310

 
5,061

 
 
 
 
 
 
 
 
 
Income before taxes
 
33,418

 
32,964

 
454

 
Federal and state income tax
 
13,000

 
12,823

 
177

 
 
 
 
 
 
 
 
 
Net income
 
$
20,418

 
$
20,141

 
$
277

 
 
 
 
 
 
 
 
 
Average assets
 
$
5,723,958

 
$
5,784,654

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

 
2,401,939

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

 
5,615,055

 
27,539

 
Average invested capital
 
297,074

 
283,496

 
13,578

 
Return on average assets
 
1.45
%
 
1.40
%
 
5

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

 
$
747,436

 
$
208,879

 


- 15 -




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

 
212

 
8

Residential mortgage loans servicing portfolio1
 
$
13,365,991

 
$
12,442,937

 
$
923,054

1 
Includes outstanding principal for loans serviced for affiliates

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

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

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

Excluding the change in the fair value of mortgage servicing rights, operating expenses increased $592 thousand over the first quarter of 2012. Personnel expenses were up $1.4 million or 7% primarily due to expansion of our mortgage banking division, which positioned us to benefit from increased demand as the result of continued low mortgage interest rates. Non-personnel expense increased $368 thousand or 2%. Corporate expense allocations were down $714 thousand compared to the first quarter of 2012. Net losses and operating expenses of repossessed assets were down $465 thousand compared to the prior year.

Average consumer deposits were largely unchanged compared to the first quarter of 2012. Average interest-bearing transaction accounts increased $126 million or 5% and average demand deposits increased $51 million or 8%. Average time deposit balances were down $199 million or 10% compared to the prior year.

Our Consumer Banking division originates, markets and services conventional and government-sponsored residential mortgage loans for all of our geographical markets. We funded $1.0 billion of residential mortgage loans in the first quarter of 2013 and $811 million in the first quarter of 2012. Mortgage loan fundings included $956 million of mortgage loans funded for sale in the secondary market and $46 million funded for retention within the consolidated group. Approximately 27% of our mortgage loans funded were in the Oklahoma market, 15% in the New Mexico market, 14% in the Texas market and 11% in the Colorado market. In addition, 20% of our mortgage loan fundings came from correspondent lenders. Expansion of our mortgage banking division in the Texas, Colorado and Kansas/Missouri markets positioned us to benefit from increased demand as the result of continued low mortgage interest rates.

At March 31, 2013, the Consumer Banking division serviced $12.3 billion of mortgage loans for others and $1.1 billion of loans retained within the consolidated group. Approximately 97% of the mortgage loans serviced by the Consumer Banking division were to borrowers in our primary geographical market areas. Loans past due 90 days or more totaled $72 million or 0.58% of loans serviced for others at March 31, 2013 compared to $84 million or 0.70% of loans serviced for others at December 31, 2012. Mortgage servicing revenue, including revenue on loans serviced for the consolidated group, totaled $10.6 million, largely unchanged compared to the first quarter of 2012.


- 16 -




Wealth Management

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

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

 
$
7,140

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

 
4,857

 
421

Total net interest revenue
11,794

 
11,997

 
(203
)
Net loans charged off
519

 
650

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

 
11,347

 
(72
)
 
 
 
 
 
 
Fees and commissions revenue
52,095

 
46,445

 
5,650

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

 
(52
)
 
560

Other operating revenue
52,603

 
46,393

 
6,210

 
 
 
 
 
 
Personnel expense
38,464

 
35,165

 
3,299

Net losses and expenses of repossessed assets
31

 
4

 
27

Other non-personnel expense
8,653

 
6,913

 
1,740

Corporate allocations
9,859

 
9,242

 
617

Other operating expense
57,007

 
51,324

 
5,683

 
 
 
 
 
 
Income before taxes
6,871

 
6,416

 
455

Federal and state income tax
2,673

 
2,496

 
177

 
 
 
 
 
 
Net income
$
4,198

 
$
3,920

 
$
278

 
 
 
 
 
 
Average assets
$
4,686,952

 
$
4,168,398

 
$
518,554

Average loans
931,790

 
927,538

 
4,252

Average deposits
4,613,056

 
4,106,236

 
506,820

Average invested capital
202,310

 
173,853

 
28,457

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

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

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

 
$
10,351,742

 
$
1,256,760

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

 
227,987

 
1,727,326

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

 
13,195,059

 
847,306

Total fiduciary assets
 
27,606,180

 
23,774,788

 
3,831,392

Assets held in safekeeping
 
21,562,010

 
19,902,629

 
1,659,381

Brokerage accounts under BOKF administration
 
4,528,168

 
4,318,795

 
209,373

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

 
$
47,996,212

 
$
5,700,146



- 17 -




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

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

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

Operating expenses increased $5.7 million or 11% over the first quarter of 2012 primarily due to The Milestone Group acquisition. Personnel expenses increased $3.3 million including a $2.2 million increase in regular compensation and $498 thousand increase in incentive compensation. Non-personnel expenses increased $1.7 million and corporate expense allocations increased $617 thousand.
Geographical Market Distribution

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

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

 
$
33,733

Bank of Texas
 
12,310

 
12,852

Bank of Albuquerque
 
6,317

 
4,479

Bank of Arkansas
 
2,353

 
2,170

Colorado State Bank & Trust
 
5,621

 
2,346

Bank of Arizona
 
979

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

 
2,362

Subtotal
 
61,405

 
56,107

Funds Management and other
 
26,559

 
27,508

Total
 
$
87,964

 
$
83,615



- 18 -




Bank of Oklahoma

Our Oklahoma offices are located primarily in the Tulsa and Oklahoma City metropolitan areas. Oklahoma is a significant market to the Company, representing 46% of our average loans, 54% of our average deposits and 36% of our consolidated net income in the first quarter of 2013. In addition, all of our mortgage servicing activity, TransFund EFT network and 64% of our fiduciary assets are attributed to the Oklahoma market.

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


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

 
$
59,653

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

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

 
57,999

 
(801
)
 
 
 
 
 
 
 
Fees and commissions revenue
 
78,433

 
77,360

 
1,073

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

 
71,613

 
955

 
 
 
 
 
 
 
Personnel expense
 
37,719

 
36,455

 
1,264

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

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

Other non-personnel expense
 
37,055

 
34,494

 
2,561

Corporate allocations
 
6,224

 
10,163

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

 
74,402

 
3,863

 
 
 
 
 
 
 
Income before taxes
 
51,501

 
55,210

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

 
21,477

 
(1,443
)
 
 
 
 
 
 
 
Net income
 
$
31,467

 
$
33,733

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

 
$
11,551,365

 
$
84,499

Average loans
 
5,620,496

 
5,636,172

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

 
10,342,518

 
387,042

Average invested capital
 
552,402

 
551,166

 
1,236

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

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

 
$
346,265

 
$
108,654


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

- 19 -




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

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

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

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

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

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

- 20 -




Bank of Texas

Our Texas offices are located primarily in the Dallas, Fort Worth and Houston metropolitan areas. Texas is our second largest market with 34% of our average loans, 25% of our average deposits and 14% of our consolidated net income in the first quarter of 2013.

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

 
$
34,946

 
$
2,479

Net loans charged off
 
2,674

 
284

 
2,390

Net interest revenue after net loans charged off
 
34,751

 
34,662

 
89

 
 
 
 
 
 
 
Fees and commissions revenue
 
22,940

 
19,267

 
3,673

Gain on financial instruments and other assets, net
 

 
44

 
(44
)
Other operating revenue
 
22,940

 
19,311

 
3,629

 
 
 
 
 
 
 
Personnel expense
 
20,622

 
19,656

 
966

Net (gains) losses and expenses of repossessed assets
 
252

 
(577
)
 
829

Other non-personnel expense
 
6,373

 
5,824

 
549

Corporate allocations
 
11,209

 
8,988

 
2,221

Total other operating expense
 
38,456

 
33,891

 
4,565

 
 
 
 
 
 
 
Income before taxes
 
19,235

 
20,082

 
(847
)
Federal and state income tax
 
6,925

 
7,230

 
(305
)
 
 
 
 
 
 
 
Net income
 
$
12,310

 
$
12,852

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

 
$
5,023,969

 
$
409,529

Average loans
 
4,154,176

 
3,782,795

 
371,381

Average deposits
 
4,934,384

 
4,482,885

 
451,499

Average invested capital
 
491,252

 
486,414

 
4,838

Return on average assets
 
0.92
%
 
1.03
%