As filed with the Securities and Exchange Commission on May 10, 2006
==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
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 (IRS Employer
of Incorporation or Organization) 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 twelve 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 |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: 66,900,597 shares of
common stock ($.00006 par value) as of April 30, 2006.
===============================================================================
2
BOK Financial Corporation
Form 10-Q
Quarter Ended March 31, 2006
Index
Part I. Financial Information
Management's Discussion and Analysis (Item 2) 2
Market Risk (Item 3) 24
Controls and Procedures (Item 4) 26
Consolidated Financial Statements - Unaudited (Item 1) 27
Quarterly Financial Summary - Unaudited (Item 2) 36
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
Item 6. Exhibits 38
Signatures 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PERFORMANCE SUMMARY
BOK Financial Corporation ("BOK Financial" or the "Company") reported net income
of $54.7 million, or $0.81 per diluted share for the first quarter of 2006,
compared with $52.1 million, or $0.78 per diluted share for the first quarter of
2005. The annualized returns on average assets and shareholders' equity were
1.36% and 14.35%, respectively, for the first quarter of 2006, compared with
returns of 1.48% and 14.96%, respectively, for the first quarter of 2005. The
increase in net income was attributed to growth in net interest revenue and fees
and commission revenue, combined with appreciation in the value of mortgage
servicing rights.
Net interest revenue increased $9.7 million or 9% over 2005 due primarily to
loan growth. Average outstanding loan balances for the first quarter of 2006
increased $1.2 billion or 15% compared with the same period of 2005. Fees and
commission revenue increased $11.0 million, or 14%, over the first quarter of
2005. All categories of fees and commissions increased over the first quarter of
2005. Transaction card revenue and trust revenue grew $2.0 million and $1.9
million, respectively. The $3.4 million increase in other revenue included $2.5
million of fees earned on margin assets for the first quarter of 2006, compared
with $570 thousand for the same period last year.
The value of mortgage servicing rights appreciated $7.1 million during the first
quarter of 2006 due to rising interest rates and a slow-down in housing
turnover. BOK Financial adopted Statement of Financial Accounting Standards No.
156, "Accounting for Servicing of Financial Assets" ("FAS 156"), effective
January 1, 2006. FAS 156 allows mortgage servicing rights to be carried at fair
value, which permitted the Company to fully recognize this appreciation. The
increase in fair value of servicing rights, net of recognized losses on
financial instruments held as an economic hedge, contributed $3.3 million to net
income for the first quarter of 2006 compared with $2.3 million for the same
period of 2005. As required by FAS 156, beginning retained earnings were
increased by $383 thousand for the net-of-tax unrecognized appreciation of both
mortgage servicing rights and certain financial instruments designated as
economic hedges that existed at December 31, 2005.
Operating expenses increased $15.2 million, or 15%, over the first quarter of
2005. Personnel costs comprised $12.8 million of the increase due largely to a
$6.4 million increase in incentive compensation and a $5.5 million increase in
salaries and wages.
3
RESULTS OF OPERATIONS
NET INTEREST REVENUE
Tax-equivalent net interest revenue totaled $118.8 million for the first quarter
of 2006 compared with $108.9 million for 2005. The increase was due primarily to
a $1.5 billion increase in average earning assets. Average outstanding loan
principal grew $1.2 billion or 15% while average securities increased $279
million. Growth in average earning assets was funded primarily by a $1.5 billion
or 15% increase in average deposits. In addition to revenue growth due to
increased earning assets, net interest revenue for the first quarter of 2005
included $605 thousand from the collection of foregone interest on a
non-performing loan and a $650 thousand fee on a large commercial loan that paid
off during the quarter. Table 1 shows the effects on net interest revenue of
changes in average balances and interest rates for the various types of earning
assets and interest-bearing liabilities.
Net interest margin, the ratio of tax-equivalent net interest revenue to average
earning assets, was 3.39% for the first quarter of 2006, compared with 3.46% for
the first quarter of 2005 and 3.34% for the fourth quarter of 2005. Net interest
margin for the first quarter of 2005 was increased by 4 basis points by the
previously mentioned collection of interest on a non-performing loan and fees on
a loan payoff. The effect of these credits is excluded from the following
discussion. Yields on average earning assets continued to trend upwards due to
the effect of rising interest rates. The yield on average earning assets was
6.42%, up 96 basis points compared with the first quarter of 2005 and 30 basis
points over the fourth quarter of 2005. The yield on average outstanding loans
was 7.35%, an increase of 135 basis points over the first quarter of 2005 and 37
basis points over the preceding quarter. The tax-equivalent yield on securities
was 4.64% for the first quarter of 2006, compared with 4.36% for the first
quarter of 2005 and 4.47% for the fourth quarter of 2005. Rates paid on average
interest-bearing liabilities during the first quarter of 2006 increased 103
basis points over the first quarter of 2005 and 29 basis points over the
preceding quarter. Rates paid on deposit accounts, which increased 78 basis
points over 2005, continued to lag behind the increases in loan yields.
Non-interest bearing funds and the mix of funding sources added 40 basis points
to the net interest margin in first quarters of both 2006 and 2005, up four
basis points compared to the fourth quarter of 2005.
Our overall objective is to manage the Company's balance sheet to be essentially
neutral to changes in interest rate. Approximately 71% of our commercial loan
portfolio is either variable rate or fixed rate that will reprice within one
year. These loans are funded primarily by deposit accounts that are either
non-interest bearing, or that reprice more slowly than the loans. The result is
a balance sheet that is asset sensitive, which means that assets generally
reprice more quickly than liabilities. Among the strategies that we use to
achieve a rate-neutral position, we purchase fixed-rate, mortgage-backed
securities and fund them with short-term borrowings. The expected duration of
these securities is estimated to be approximately 2.8 years based on a range of
interest rate and prepayment assumptions. The funds borrowed to purchase these
securities generally reprice within 90 days. The liability-sensitive nature of
this strategy provides an offset to the asset-sensitive characteristics of our
loan portfolio.
We also use derivative instruments to manage our interest rate risk. We have
interest rate swaps with a combined notional amount of $795 million that convert
fixed rate liabilities to floating rate based on LIBOR. The purpose of these
derivatives, which generally have been designated as fair value hedges, is to
reduce the asset-sensitive nature of our balance sheet. We also have interest
rate swaps with a notional amount of $100 million that convert prime-based loans
to fixed rate. The purpose of these derivatives, which have been designated as
cash flow hedges, also is to reduce the asset-sensitive nature of our balance
sheet.
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.
4
------------------------------------------------------------------------------
Table 1 - Volume / Rate Analysis
(In thousands)
Three Months Ended
March 31, 2006 / 2005
-----------------------------------
Change Due To (1)
-----------------------------------
Yield /
Change Volume Rate
-----------------------------------
Tax-equivalent interest revenue:
Securities $ 6,312 $ 2,867 $ 3,445
Trading securities 18 (6) 24
Loans 47,142 19,869 27,273
Funds sold and resell agreements 75 (74) 149
------------------------------------------------------------------------------
Total 53,547 22,656 30,891
------------------------------------------------------------------------------
Interest expense:
Transaction deposits 17,500 6,552 10,948
Savings deposits 81 (7) 88
Time deposits 11,659 4,302 7,357
Federal funds purchased and
repurchase agreements 8,293 230 8,063
Other borrowings 3,260 (804) 4,064
Subordinated debentures 2,756 2,293 463
------------------------------------------------------------------------------
Total 43,549 12,566 30,983
------------------------------------------------------------------------------
Tax-equivalent net interest revenue 9,998 10,090 (92)
Change in tax-equivalent adjustment (266)
------------------------------------------------------------------------------
Net interest revenue $ 9,732
------------------------------------------------------------------------------
(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 increased $11.3 million compared with the first quarter
of last year due primarily to an $11.0 million increase in fees and commission
revenue. Diversified sources of fees and commission revenue are a significant
part of our business strategy and represented 43% of total revenue, excluding
gains and losses on asset sales, securities and derivatives, for the first
quarter of 2006. We believe that a variety of fee revenue sources provide a
stable source of income not affected by changes in interest rates, values in the
equity markets, commodity prices and consumer spending, all of which can be
volatile. We expect continued growth in other operating revenue through offering
new products and services and by expanding into new markets. However, increased
competition and saturation in our existing markets could affect the rate of
future increases.
FEES AND COMMISSIONS REVENUE
Transaction card revenue increased $2.0 million or 12% in the first quarter of
2006 compared to the same period of the prior year. Check card revenue increased
$1.0 million or 29% while merchant discount fees increased $739 thousand or 13%.
Transaction volumes provided the increased revenue. Growth in check card revenue
was distributed among the Oklahoma, New Mexico and Texas markets. Increased
merchant discount fees were centered primarily in Oklahoma. ATM network revenue
also increased, up $217 thousand or 3% over the first quarter of 2005.
Trust fees and commissions increased $1.9 million or 12% for the first quarter
of 2006. The fair value of all trust relationships, which is the basis for a
significant portion of trust fees, increased to $29.1 billion at March 31, 2006
compared with $25.4 billion at March 31, 2005. Revenue from the management of
oil and gas properties increased $509 thousand or 47% while personal trust
management fees increased $646 thousand or 13%. Trust activities in the Oklahoma
and Colorado markets provided $13.2 million and $2.4 million, respectively, of
total trust fees and commissions during the first quarter of 2006. Trust revenue
grew 10% in the Oklahoma market and 36% in the Colorado market, respectively,
over the first quarter of 2005.
Brokerage and trading revenue increased $674 thousand or 6% in the first quarter
of 2006 compared to the same period of the prior year. Customer hedging revenue
increased $2.3 million, or 189%, to $3.5 million. Volatility in the energy
5
markets prompted our energy customers to more actively hedge their gas and oil
production.
Revenue from securities trading activities decreased $1.7 million, or 25%. Much
of the decrease in trading revenue is attributed to increased competition in the
market for corporate securities and lower demand caused by the flattening yield
curve. Revenue from retail brokerage activities increased $114 thousand, or 4%,
over the same period of 2005.
Service charges on deposit accounts increased $1.8 million or 8% over the first
quarter of 2005. Overdraft fees grew $2.6 million or 21%. The volume of
overdraft items processed increased over last year. Additionally, the per item
overdraft charge was increased in the second quarter of 2005. Account service
charge revenue decreased $760 thousand or 10%. This decrease reflected the
change in earnings credit available to commercial deposit customers. The
earnings credit, which provides a non-cash method for commercial customers to
avoid incurring charges for deposit services, increases when interest rates
rise.
Mortgage banking revenue, which is discussed more fully in the Line of Business
- Mortgage Banking section of this report, increased $1.2 million or 22%
compared with 2005. Net gains on mortgage loans sold totaled $2.8 million, up
$1.3 million over the first quarter of 2005. Servicing revenue totaled $4.0
million for the first quarter of 2006, down 3% from last year due to a 4 basis
point decrease in average servicing fee rates. A change in the mix of loans
serviced for others decreased the average servicing fee rate compared with last
year.
Other operating revenue included $2.5 million of fees earned on margin assets in
the first quarter of 2006 and $570 thousand in the first quarter of 2005. Margin
assets, which are held primarily as part of the Company's customer derivatives
programs, averaged $249 million for the first quarter of 2006, compared with
$129 million for the first quarter of 2005. The increase in average margin
assets reflected growth in the fair value of liability derivative contracts due
primarily to increased volatility in energy markets. Fees earned on average
margin assets increased from 1.79% in the first quarter of 2005 to 4.13% in the
first quarter of 2006. Fee rates earned on margin assets are generally
consistent with short-term interest rates.
SECURITIES AND DERIVATIVES
BOK Financial recognized net losses of $1.2 million on securities for the first
quarter of 2006. This included net losses of $1.9 million on securities held as
an economic hedge of mortgage servicing rights. As permitted by FAS 156, certain
specifically identified securities held as an economic hedge of mortgage
servicing rights were transferred from the available for sale classification to
a new classification entitled "Mortgage Trading Securities" as of January 1,
2006. These securities had an aggregate fair value of $49 million and unrealized
gains of $52 thousand when transferred. The unrealized gain on these securities,
less deferred taxes, was recorded as an increase in retained earnings as of the
beginning of the first quarter. Mortgage trading securities are carried at fair
value with changes in fair value recognized in earnings as they occur. The
Company's use of securities as an economic hedge of mortgage servicing rights is
more fully discussed in the Line of Business - Mortgage Banking section of this
report. During the first quarter of 2005, BOK Financial recognized net losses on
securities of $2.6 million, including $2.4 million of losses on securities held
as an economic hedge of mortgage servicing rights.
Net losses on derivatives totaled $309 thousand for the first quarter of 2006,
compared with net gains of $778 thousand in 2005. Net losses in 2006 consisted
entirely of fair value adjustments of derivatives used to manage interest rate
risk and related hedged liabilities. Net gains on derivatives in the first
quarter of 2005 included a gain of $283 thousand from fair value adjustments of
derivative contracts held as economic hedges of mortgage servicing rights and
$495 thousand of net gains from fair value adjustments of derivatives used to
manage interest rate risk and related hedged liabilities.
6
--------------------------------------------------------------------------------------------------------------------------
Table 2 - Other Operating Revenue
(In thousands)
Three Months Ended
-------------------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
2006 2005 2005 2005 2005
-------------------------------------------------------------------------------
Brokerage and trading revenue $ 12,010 $ 11,116 $ 11,366 $ 10,404 $ 11,336
Transaction card revenue 18,508 18,988 18,526 17,979 16,543
Trust fees and commissions 17,945 16,536 16,376 16,259 16,016
Deposit service charges and fees 23,986 25,222 25,619 25,347 22,173
Mortgage banking revenue 6,789 7,018 9,535 8,550 5,578
Other revenue 10,811 10,067 9,490 8,160 7,397
--------------------------------------------------------------------------------------------------------------------------
Total fees and commissions 90,049 88,947 90,912 86,699 79,043
--------------------------------------------------------------------------------------------------------------------------
Gain on sales of assets 918 71 81 5,937 972
Gain (loss) on securities, net (1,221) (1,780) (4,744) 2,266 (2,637)
Gain (loss) on derivatives, net (309) 106 606 (311) 778
--------------------------------------------------------------------------------------------------------------------------
Total other operating revenue $ 89,437 $ 87,344 $ 86,855 $ 94,591 $ 78,156
--------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSE
Other operating expense for the first quarter of 2006 totaled $117.4 million, a
$15.2 million or 15% increase from 2005. This increase resulted primarily from a
$12.8 million increase in personnel expense.
PERSONNEL EXPENSE
Personnel expense totaled $71.2 million for the first quarter of 2006 compared
with $58.4 million for the first quarter of 2005. Regular compensation expense
totaled $44.0 million, a $5.5 million or 14% increase over 2005. The increase in
regular compensation expense was due to an 8% increase in average regular
compensation per full-time equivalent employee and a 6% increase in average
staffing. Average staffing increased 12% in Colorado and 5% in both Texas and
Oklahoma. In addition, regular compensation expense for the first quarter of
2006 included $755 thousand for Bank of Arizona, which was acquired in the
second quarter of 2005.
Incentive compensation expense includes the recognized costs of cash-based
commissions, bonus and incentive programs, stock-based compensation plans and
deferred compensation plans. Stock-based compensation plans include both equity
and liability awards.
Incentive compensation expense totaled $15.2 million for the first quarter of
2006, an increase of $6.4 million over 2005. First quarter 2006 expense for the
Company's various cash-based incentive programs totaled $12.6 million, up $2.4
million over last year. These programs consist primarily of formula-based plans
that determine incentive amounts based on pre-established criteria. Compensation
expense for stock-based compensation plans totaled $2.6 million for the first
quarter of 2006 compared with a $1.5 million credit in 2005. Compensation
expense for stock-based compensation plans accounted for as equity awards
totaled $1.5 million in the first quarter of 2006, compared with $1.2 million in
the first quarter of 2005. Expense for equity awards is determined by an award's
grant-date fair value and is not affected by subsequent changes in the market
value of BOK Financial common stock. Compensation expense for stock-based
compensation plans accounted for as liability awards totaled $1.0 million in the
first quarter of 2006, compared with a credit of $2.6 million in 2005. Expense
for liability awards is based on current fair value, including current period
changes due to the market value of BOK Financial common stock.
Employee benefit expenses increased $862 thousand, or 8%, to $12.0 million. This
increase was due primarily to payroll taxes. Expenses for employee medical and
other insurance increased $231 thousand, or 6%, while employee retirement
expenses increased $145 thousand, or 5%. Benefit expenses for the first quarter
of 2006 included $1.8 million of pension expense. This expense will be
substantially reduced in future periods by the curtailment of pension plan
benefits effective April 1, 2006. Management expects this expense reduction to
be largely offset by the cost of enhanced employee thrift plan benefits.
7
DATA PROCESSING AND COMMUNICATIONS EXPENSE
Data processing and communication expenses increased $1.9 million, or 13%,
compared to 2005. This expense consists of two broad categories, data processing
systems and transaction card processing. Transaction card processing costs
increased $1.1 million, or 19%, consistent with the growth rate in check card
and merchant discount revenue. Data processing systems costs increased $844
thousand, or 9%, compared with the first quarter of 2005.
OTHER OPERATING EXPENSES
Mortgage banking expenses decreased $526 thousand. Costs associated with loan
origination and sales activities totaled $362 thousand in the first quarter of
2006 and $435 thousand in the first quarter of 2005. Mortgage banking expense
also includes changes in the fair value of mortgage servicing rights due to
runoff of the underlying loans. Fair value of mortgage servicing rights
decreased $2.7 million in the first quarter of 2006 due to loan runoff.
Amortization expense, which also considers the runoff of underlying loans,
totaled $3.2 million in the first quarter of 2005. Additionally, other operating
expenses were reduced by $7.1 million in the first quarter of 2006 and $5.6
million in the first quarter of 2005 due to increases in the fair value of
mortgage servicing rights. These expenses are discussed more fully in the Line
of Business - Mortgage Banking section of this report.
----------------------------------------------------------------------------------------------------------------------
Table 3 - Other Operating Expense
(In thousands)
Three Months Ended
----------------------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
2006 2005 2005 2005 2005
----------------------------------------------------------------------------------
Personnel $ 71,232 $ 68,666 $ 66,533 $ 65,333 $ 58,439
Business promotion 4,803 5,170 4,494 3,870 4,430
Professional fees and services 3,914 4,534 3,951 4,492 3,619
Net occupancy and equipment 13,026 12,864 12,587 12,650 12,094
Data processing & communications 16,995 18,054 17,492 16,381 15,099
Printing, postage and supplies 3,905 3,976 3,846 3,629 3,615
Net (gains) losses and operating
expenses of repossessed assets 219 335 (387) 316 308
Amortization of intangible assets 1,370 1,797 1,801 1,808 1,537
Mortgage banking costs 3,087 3,294 4,268 3,387 3,613
Change in fair value of mortgage
servicing rights (7,081) - - - -
Provision (recovery) for impairment
of mortgage servicing rights - (708) (4,671) 7,088 (5,624)
Other expense 5,909 5,921 7,120 7,056 5,029
---------------------------------------------------------------------------------------------------------------------
Total other operating expense $ 117,379 $ 123,903 $ 117,034 $ 126,010 $ 102,159
---------------------------------------------------------------------------------------------------------------------
INCOME TAXES
Income tax expense was $31.2 million, compared with $29.5 million for the first
quarter of 2005. This represented 36% of book taxable income for both periods.
LINES OF BUSINESS
BOK Financial operates five principal lines of business: Oklahoma corporate
banking, Oklahoma consumer banking, mortgage banking, wealth management, and
regional banking. Mortgage banking activities include loan origination and
servicing across all markets served by the Company. Wealth management provides
brokerage and trading, private financial services and investment advisory
services in all markets. It also provides fiduciary services in all markets
except Colorado. Fiduciary services in Colorado are included in regional
banking. Regional banking consists primarily of corporate and consumer banking
activities in the respective local markets. In addition to its lines of
business, BOK Financial has a funds management unit. The primary purpose of this
unit is to manage the Company's overall liquidity needs and interest rate risk.
Each line of business borrows funds from and provides funds to the funds
management unit
8
as needed to support their operations.
BOK Financial allocates resources and evaluates performance of its lines of
business after allocation of funds, certain indirect expenses, taxes 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
for funds with similar duration. Market is generally based on the applicable
LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of
transfer-pricing funds that support assets of the operating lines of business
tends to insulate them from interest rate risk.
The value of funds provided by the operating lines of business to the funds
management unit is based on applicable Federal Home Loan Bank advance rates.
Deposit accounts with indeterminate maturities, such as demand deposit accounts
and interest-bearing transaction accounts, are transfer-priced at a rolling
average based on expected duration of the accounts. The expected duration ranges
from 90 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. Additional capital is assigned to the regional banking line of
business based on our investment in those entities.
Consolidated net income provided by the Regional Banking and the Oklahoma
Corporate Banking Divisions continued to increase due largely to asset growth.
Also, performance by business units that generate deposits for the Company, such
as the Oklahoma consumer banking unit, continued to improve due primarily to
internal funds pricing credits. The increased value of deposits when short-term
interest rates are rising is reflected in the internal transfer pricing credit.
The increase in internal transfer pricing credit is offset through the funds
management unit.
---------------------------------------------------------------------------
Table 4 - Net Income by Line of Business
(In thousands) Three months ended March 31,
2006 2005
------------------------------
Regional banking $ 22,769 $ 17,349
Oklahoma corporate banking 18,635 15,345
Mortgage banking 3,237 2,257
Oklahoma consumer banking 8,033 4,318
Wealth management 6,760 6,102
Funds management and other (4,686) 6,684
---------------------------------------------------------------------------
Total $ 54,748 $ 52,055
---------------------------------------------------------------------------
OKLAHOMA CORPORATE BANKING
The Oklahoma Corporate Banking Division provides loan and lease financing and
treasury and cash management services to businesses throughout Oklahoma and
certain relationships in surrounding states. In addition to serving the banking
needs of small businesses, middle market and larger customers, the Oklahoma
Corporate Banking Division has specialized groups that serve customers in the
energy, agriculture, healthcare and banking/finance industries, and includes
TransFund, our electronic funds transfer network. The Oklahoma Corporate Banking
Division contributed $18.6 million or 34% to consolidated net income for the
first quarter of 2006. This compares to $15.3 million or 29% of consolidated net
income for 2005. Growth in net income provided by this division came primarily
from loan growth. Average loans attributed to the Oklahoma Corporate Banking
Division were $4.1 billion for the first quarter of 2006, compared with $3.6
billion for the first quarter of 2005. Net loans charged off totaled $364
thousand for the first quarter of 2006, compared with $397 thousand in the first
quarter of 2005. Growth in other operating revenue was due largely to fees
earned on margin assets.
9
Table 5 - Oklahoma Corporate Banking
(Dollars in Thousands)
Three months ended March 31,
----------------------------------
2006 2005
-------------------------------
Net interest revenue $ 35,359 $ 31,966
Other operating revenue 23,543 20,366
Operating expense 28,039 26,821
Net loans charged off 364 397
Net income 18,635 15,345
Average assets $ 5,318,039 $ 4,535,152
Average economic capital 372,270 289,480
Return on assets 1.42% 1.37%
Return on economic capital 20.30% 21.50%
Efficiency ratio 47.60% 51.25%
OKLAHOMA CONSUMER BANKING
The Oklahoma Consumer Banking Division provides a full line of deposit, loan and
fee-based services to customers throughout Oklahoma through four major
distribution channels: traditional branches, supermarket branches, the 24-hour
ExpressBank call center and the Internet. Additionally, the division is a
significant referral source for the Bank of Oklahoma Mortgage Division ("BOk
Mortgage") and BOSC's retail brokerage division. The Consumer Banking Division
contributed $8.0 million or 15% to consolidated net income for the first quarter
of 2006. This compares to $4.3 million or 8% of consolidated net income for
2005. Average deposits attributed to this Division increased $182 million, or 7%
compared with last year. The value to the Company of these lower-costing retail
deposits continues to increase as short-term interest rates rise. Operating
revenue increased $2.5 million or 17% over last year due largely to a $1.7
million increase in deposit fees and overdraft charges.
Table 6 - Oklahoma Consumer Banking
(Dollars in Thousands)
Three months ended March 31,
----------------------------------
2006 2005
-------------------------------
Net interest revenue $ 16,095 $ 12,186
Other operating revenue 17,255 14,713
Operating expense 19,529 18,989
Net loans charged off 722 784
Net income 8,033 4,318
Average assets $ 2,951,359 $ 2,872,501
Average economic capital 69,670 69,360
Return on assets 1.10% 0.61%
Return on economic capital 46.76% 25.25%
Efficiency ratio 58.56% 70.59%
MORTGAGE BANKING
BOK Financial engages in mortgage banking activities through the BOk Mortgage
Division of Bank of Oklahoma. These activities include the origination,
marketing and servicing of conventional and government-sponsored mortgage loans.
Consolidated mortgage banking revenue, which is included in other operating
revenue, increased $1.2 million or 22% compared with the first quarter of 2005.
Mortgage banking activities contributed $3.2 million or 6% to consolidated net
income in the first quarter of 2006, compared with $2.3 million or 4% in 2005.
Mortgage banking activities consist of two sectors, loan production and loan
servicing. The loan production sector generally performs best when mortgage
rates are relatively low and loan origination volumes are high. Conversely, the
10
loan servicing sector generally performs best when mortgage rates are relatively
high and prepayments are low. The general trend has been toward higher mortgage
loan commitment rates, especially in the first quarter of 2006.
LOAN PRODUCTION SECTOR
Loan production revenue totaled $3.0 million for the first quarter of 2006,
including $2.8 million of capitalized mortgage servicing rights and $158
thousand of net gains on loans sold. Loan production revenue totaled $1.5
million for the first quarter of 2005, including $2.0 million of capitalized
mortgage servicing rights. The increase in loan production revenue was due to
production volume. Mortgage loans funded in the first quarter of 2006 totaled
$183 million, including $168 million of loans funded for resale and $15 million
of loans funded for retention by affiliates. Mortgage loans funded in the same
period of 2005 totaled $175 million, including $117 million of loans funded for
resale and $57 million of loans funded for retention by affiliates. The decrease
in loans funded for retention by affiliates was due primarily to increased sales
of community development loans in the secondary market. The Company generally
retains the rights to service these loans. Approximately 70% of the loans funded
during the first quarter of 2006 were to borrowers in Oklahoma. Loan production
activities resulted in net pre-tax income of $160 thousand for the first quarter
of 2006 and a net pre-tax loss of $138 thousand for the first quarter of 2005.
The pipeline of mortgage loan applications totaled $268 million at March 31,
2006, compared to $233 million at December 31, 2005 and $250 million at March
31, 2005.
LOAN SERVICING SECTOR
The loan servicing sector had pre-tax income of $5.5 million for the first
quarter of 2006 compared to pre-tax income of $3.4 million for the same period
of 2005. The fair value of mortgage servicing rights increased during both
periods due to rising mortgage commitment rates and related market factors.
A 28 basis point increase in average mortgage commitment rates since December
31, 2005 resulted in a $7.1 million increase in the value of servicing rights.
Rising mortgage commitment rates, along with other market factors, reduced
anticipated prepayment speeds and decreased the discount rate used to value the
servicing rights. As previously noted, the Company adopted the fair value method
of accounting for mortgage servicing rights permitted by FAS 156. By adopting
FAS 156 in the first quarter of 2006, the Company was permitted to fully
recognize this appreciation. Recognition would have been limited to $4.2 million
of the increase in fair value under the previously required "lower of cost or
fair value" accounting standard. Losses of $1.9 million were recognized from
decreases in the fair value of financial instruments held as an economic hedge
of the value of the servicing rights.
During the first quarter of 2005, the allowance for impairment of mortgage
servicing rights was reduced by $5.6 million due to an increase in the fair
value of the servicing rights. The reduction in the allowance was partially
offset by net losses of $2.1 million recognized on financial instruments
designated as an economic hedge.
Servicing revenue, which is included in mortgage banking revenue on the
Consolidated Statements of Earnings, totaled $4.0 million in the first quarter
of 2006 compared with $4.1 million in 2005. The decrease in servicing revenue
reflected a decrease in servicing rates. The average outstanding balance of
loans serviced for others was $4.0 billion during 2006 compared to $3.8 billion
during 2005. However, annualized servicing revenue per outstanding loan
principal decreased to 40 basis points for the first quarter of 2006, compared
with 44 basis points last year. Increased servicing of community development
loans and certain government-sponsored loans caused the decrease in the
servicing fee rates. Servicing fees on both of these loan types are less than
the portfolio average servicing fee rate.
On March 31, 2006, the Company paid approximately $6.8 million to acquire the
rights to service approximately $480 million of mortgage loans. Substantially
all of these loans are to borrowers in our primary market areas.
The fair value of mortgage servicing rights decreased $2.7 million during the
first quarter of 2006 due to runoff of the underlying loans serviced. This
reduction in fair value is included in mortgage banking costs in the
Consolidated Statements of Earnings. Prior to the adoption of FAS 156, mortgage
servicing rights were amortized in proportion to projected cash flows over the
estimated life of the loans serviced. Projected cash flows considered both
actual and estimated runoff of the underlying loans serviced. Amortization
expense recognized in mortgage banking costs during the first quarter of 2005
totaled $3.2 million. The decrease in expense related to the runoff of loans
serviced primarily reflects lower loan prepayment speeds.
11
Table 7 - Mortgage Banking
(Dollars in Thousands)
Three months ended March 31,
---------------------------------------
2006 2005
--------------------------------------
Net interest revenue $ 547 $ 1,430
Capitalized mortgage servicing rights 2,835 1,981
Other operating revenue 4,363 4,447
Operating expense 7,669 7,711
Change in fair value of mortgage
servicing rights (7,081) -
Recovery for impairment of mortgage
servicing rights - (5,624)
Losses on financial instruments, net (1,861) (2,076)
Net income 3,237 2,257
Average assets $ 446,434 $ 515,648
Average economic capital 23,070 23,300
Return on assets 2.94% 1.78%
Return on economic capital 56.90% 39.29%
Efficiency ratio 99.02% 98.13%
BOK Financial designates a portion of its securities portfolio as an economic
hedge against the risk of loss on its mortgage servicing rights. Mortgage-backed
securities and U.S. government agency debentures are designated as "mortgage
trading securities" when prepayment risks exceed certain levels. Additionally,
interest rate derivative contracts may also be designated as an economic hedge
of the risk of loss on mortgage servicing rights. Because the fair values of
these instruments are expected to vary inversely to the fair value of the
servicing rights, they are expected to partially offset risk. These financial
instruments are carried at fair value. Beginning January 1, 2006, with the
adoption of FAS 156, changes in fair value are recognized in current period
income. No special hedge accounting treatment is applicable to either the
mortgage servicing rights or the financial instruments designated as an economic
hedge.
The Company's hedging strategy presents certain risks. A well-developed market
determines the fair value for the securities and derivatives. However, there is
no comparable market for mortgage servicing rights. Therefore, the computed
change in value of the servicing rights for a specified change in interest rates
may not correlate to the change in value of the securities.
At March 31, 2006, financial instruments with a fair value of $65 million were
held for the economic hedge program. The interest rate sensitivity of the
mortgage servicing rights and securities held as a hedge is modeled over a range
of +/- 50 basis points. At March 31, 2006, the pre-tax results of this modeling
on reported earnings were:
Table 8 - Interest Rate Sensitivity - Mortgage Servicing
(Dollars in Thousands)
50 bp increase 50 bp decrease
----------------- ----------------
Anticipated change in:
Fair value of mortgage servicing rights $ 2,663 $ (3,717)
Fair value of hedging instruments (2,124) 2,326
----------------- ----------------
Net $ 539 $ (1,391)
----------------- ----------------
Table 8 shows the non-linear effect of changes in mortgage commitment rates on
the value of mortgage servicing rights. A 50 basis point increase in rates is
expected to increase value by $2.7 million while a 50 basis point decrease is
expected to reduce value by $3.7 million. This considers that there is an upper
limit to appreciation in the value of servicing rights as rates rise due to the
contractual repayment terms of the loans and other factors. There is much less
of a limit on the speed at which mortgage loans may prepay in a declining rate
environment.
WEALTH MANAGEMENT
BOK Financial provides a wide range of financial services through its wealth
management line of business, including trust and private financial services, and
brokerage and trading activities. This line of business includes the activities
of BOSC, Inc., a registered broker / dealer. Trust and private financial
services includes sales of institutional, investment
12
and retirement products, loans and other services to affluent individuals,
businesses, not-for-profit organizations, and governmental agencies. Trust
services are provided primarily to clients throughout Oklahoma, Texas and New
Mexico. Additionally, trust services include a nationally competitive,
self-directed 401-(k) program and administrative and advisory services to the
American Performance family of mutual funds. Brokerage and trading activities
within the wealth management line of business consist of retail sales of mutual
funds, securities and annuities, institutional sales of securities and
derivatives, bond underwriting and other financial advisory services. Customer
hedging programs are included in the Wealth Management Division.
Wealth Management contributed $6.8 million or 12% to consolidated net income for
the first quarter of 2006. This compared to $6.1 million or 12% of consolidated
net income for 2005.
Trust and private financial services provided $5.5 million of net income in
2006, an 18% increase over 2005. At March 31, 2006 and 2005, the wealth
management line of business was responsible for trust assets with aggregate
market values of $26.6 billion and $23.3 billion, respectively, under various
fiduciary arrangements. The growth in trust assets reflected increased market
value of assets managed in addition to new business generated during the year.
We have sole or joint discretionary authority over $9.5 billion of trust assets
at March 31, 2006, compared with $8.1 billion at March 31, 2005.
Brokerage and trading activities provided $1.3 million of total net income in
the first quarter of 2006 compared to $1.5 million provided in same period of
2005. Growth in net income from our customer hedging programs was partially
offset by a reduction in income from trading activities.
Table 9 - Wealth Management
(Dollars in Thousands)
Three months ended March 31,
----------------------------------
2006 2005
-------------------------------
Net interest revenue $ 8,265 $ 5,823
Other operating revenue 26,217 25,016
Operating expense 23,262 20,755
Net income 6,760 6,102
Average assets $ 1,723,255 $ 1,380,557
Average economic capital 120,880 99,590
Return on assets 1.59% 1.79%
Return on economic capital 22.68% 24.85%
Efficiency ratio 67.46% 67.30%
REGIONAL BANKING
Regional Banking consists primarily of the corporate and commercial banking
services provided by Bank of Texas, Bank of Albuquerque, Bank of Arkansas,
Colorado State Bank and Trust, and Bank of Arizona in their respective markets.
They also include fiduciary services provided by Colorado State Bank and Trust.
Small businesses and middle-market corporations are Regional Banking's primary
customer focus. Regional Banking contributed $22.8 million or 42% to
consolidated net income during the first quarter of 2006. This compares with
$17.3 million or 33% of consolidated net income for the same period in 2005.
Growth in net income contributed by the regional banks came primarily from
operations in Colorado. Net income from Colorado was $3.5 million for the first
quarter of 2006, compared with $792 thousand for the same period of 2005. In
addition, net income for 2006 in Texas and New Mexico increased $2.3 million, or
21%, and $805 thousand, or 18%, respectively.
Growth in net income from Texas operations resulted from a $4.0 million increase
in net interest revenue. Average earning assets increased $418 million, or 15%,
from the first quarter of 2005. This increase resulted from a $405 million
increase in average loans. The growth in average earning assets was funded
primarily by a $93 million increase in average demand deposits and a $265
million increase in average interest-bearing deposits.
The increase in net income from New Mexico operations was also based largely on
a $1.1 million increase in net interest revenue. Average earning assets
decreased $132 million. Average loans increased $59 million while funds sold to
the
13
funds management unit decreased $184 million. Average deposits in the New Mexico
market increased $121 million, including $28 million of demand deposits. Average
funds borrowed from external sources decreased $313 million.
Net income from operations in Colorado was $3.6 million for the first quarter of
2006, compared with $792 thousand for the first quarter of 2005. Net interest
revenue increased $2.5 million due primarily to a $365 million increase in
average earning assets. Average loans increased $78 million while average funds
sold to the funds management unit increased $290 million. The growth in earning
assets was funded primarily by a $286 million increase in interest-bearing
deposits. In addition to the effect of revenue growth on net income, net loans
charged-off or recovered decreased $1.7 million compared with the first quarter
of 2005.
We continue to expand operations in the Arizona market since the acquisition of
Bank of Arizona in the second quarter of 2005. Outstanding loans attributed to
the Arizona market averaged $212 million for the first quarter of 2006, compared
with $92 million of loans acquired in April 2005. Total deposits averaged $108
million for the first quarter of 2006.
Table 10 - Bank of Texas
(Dollars in Thousands)
Three months ended March 31,
----------------------------------
2006 2005
-------------------------------
Net interest revenue $ 34,788 $ 30,745
Other operating revenue 6,130 5,233
Operating expense 20,267 19,096
Net loans charged off 286 118
Net income 13,236 10,917
Average assets $ 3,545,820 $ 3,128,687
Average economic capital 218,430 164,660
Average invested capital 385,510 331,740
Return on assets 1.51% 1.42%
Return on economic capital 24.58% 26.89%
Return on average invested capital 13.92% 13.35%
Efficiency ratio 49.53% 53.08%
Table 11 - Bank of Albuquerque
(Dollars in Thousands)
Three months ended March 31,
----------------------------------
2006 2005
-------------------------------
Net interest revenue $ 11,749 $ 10,680
Other operating revenue 3,930 3,358
Operating expense 7,112 6,759
Net loans charged off 110 144
Net income 5,167 4,362
Average assets $ 1,472,394 $ 1,605,665
Average economic capital 76,570 81,420
Average invested capital 95,660 100,510
Return on assets 1.42% 1.10%
Return on economic capital 27.37% 21.73%
Return on average invested capital 21.91% 17.60%
Efficiency ratio 45.36% 48.15%
14
Table 12 - Bank of Arkansas
(Dollars in Thousands)
Three months ended March 31,
----------------------------------
2006 2005
-------------------------------
Net interest revenue $ 1,543 $ 2,186
Other operating revenue 2,812 3,112
Operating expense 2,949 3,197
Net loans charged off (10) 10
Net income 865 1,278
Average assets $ 198,741 $ 258,695
Average economic capital 13,490 11,170
Average invested capital 13,490 11,170
Return on assets 1.77% 2.00%
Return on economic capital 26.00% 46.40%
Return on average invested capital 26.00% 46.40%
Efficiency ratio 67.72% 60.34%
Table 13 - Colorado State Bank and Trust
(Dollars in Thousands)
Three months ended March 31,
----------------------------------
2006 2005
-------------------------------
Net interest revenue $ 8,525 $ 6,043
Other operating revenue 3,035 4,028
Operating expense 5,961 7,147
Net loans charged off (49) 1,628
Net income 3,451 792
Average assets $ 1,037,770 $ 668,653
Average economic capital 60,560 41,040
Average invested capital 102,540 83,030
Return on assets 1.35% 0.48%
Return on economic capital 23.11% 7.82%
Return on average invested capital 13.65% 3.87%
Efficiency ratio 51.57% 70.97%
Table 14 - Bank of Arizona
(Dollars in Thousands)
Three months ended March 31,
----------------------------------
2006 2005
-------------------------------
Net interest revenue $ 2,689 $ ***
Other operating revenue 106 ***
Operating expense 2,552 ***
Net loans charged off 2 ***
Net income 50 ***
Average assets $ 332,935 $ ***
Average economic capital 16,940 ***
Average invested capital 33,590 ***
Return on assets 0.06% ***
Return on economic capital 1.20% ***
Return on average invested capital 0.60% ***
Efficiency ratio 91.31% ***
*** Data not applicable due to acquisition of Bank of Arizona in April 2005.
15
FINANCIAL CONDITION
SECURITIES
Securities are classified as either held for investment, available for sale or
trading based upon asset/liability management strategies, liquidity and
profitability objectives and regulatory requirements. Investment securities,
which consist primarily of Oklahoma municipal bonds, are carried at cost and
adjusted for amortization of premiums or accretion of discounts. Management has
the ability and intent to hold these securities until they mature. Available for
sale securities, which may be sold prior to maturity, are carried at fair value.
Unrealized gains or losses, less deferred taxes, are recorded as accumulated
other comprehensive income in shareholders' equity. Certain mortgage-backed
securities, identified as mortgage trading securities, have been designated as
economic hedges of mortgage servicing rights. These securities are carried at
fair value with changes in fair value recognized in current period income. These
securities are held with the intent that gains or losses will offset changes in
the fair value of mortgage servicing rights. The Company also maintains a
separate trading securities portfolio. Trading portfolio securities, which are
also carried at fair value with changes in fair value recognized in current
period income, are acquired and held with the intent to sell at a profit to the
Company.
The amortized cost of available for sale securities totaled $4.9 billion at both
March 31, 2006 and December 31, 2005. Mortgage-backed securities continued to
represent substantially all available for sale securities. As previously
discussed in the Net Interest Revenue section of this report, we hold
mortgage-backed securities as part of our overall interest rate risk management
strategy.
The primary risk of holding mortgage-backed securities comes from extension
during periods of rising interest rates or prepayment during periods of falling
interest rates. We evaluate this risk through extensive modeling of risk both
before making an investment and throughout the life of the security. The
effective duration of the mortgage-backed securities portfolio was approximately
2.8 years at March 31, 2006 and at December 31, 2005. Management estimates that
the effective duration of the mortgage-backed securities portfolio would extend
to 3.1 years assuming a 300 basis point immediate rate shock.
Net unrealized losses on available for sale securities totaled $148 million at
March 31, 2006 compared with net unrealized losses of $105 million at December
31, 2005 due primarily to rising interest rates. The aggregate gross amount of
unrealized losses at March 31, 2006 totaled $157 million. Management evaluated
the securities with unrealized losses to determine if we believe that the losses
were temporary. This evaluation considered factors such as causes of the
unrealized losses and prospects for recovery over various interest rate
scenarios and time periods. We also considered our intent and ability to either
hold or sell the securities. It is management's belief, based on currently
available information and our evaluation, that the unrealized losses in these
securities are temporary.
LOANS
The aggregate loan portfolio at March 31, 2006 totaled $9.2 billion, a $62
million increase since December 31, 2005. Net loan growth slowed during the
first quarter of 2006 due largely to payoffs in the energy and services sectors
of the commercial loan portfolio.
16
---------------------------------------------------------------------------------------------------------------------
Table 15 - Loans
(In thousands)
March 31, Dec. 31, Sept. 30, June 30, March 31,
2006 2005 2005 2005 2005
---------------------------------------------------------------------------------
Commercial:
Energy $ 1,367,400 $ 1,399,417 $ 1,350,835 $ 1,278,885 $ 1,174,498
Services 1,358,194 1,425,821 1,419,342 1,340,411 1,263,527
Wholesale/retail 850,013 793,032 804,628 777,440 696,066
Manufacturing 519,100 514,792 484,662 483,211 468,615
Healthcare 534,091 520,309 476,616 434,132 441,651
Agriculture 284,277 291,858 238,950 244,687 263,382
Other commercial and industrial 325,746 354,706 292,657 301,013 283,107
---------------------------------------------------------------------------------------------------------------------
Total commercial 5,238,821 5,299,935 5,067,690 4,859,779 4,590,846
---------------------------------------------------------------------------------------------------------------------
Commercial real estate:
Construction and land development 686,400 638,366 605,457 542,049 518,137
Multifamily 205,755 204,620 225,074 237,904 224,533
Other real estate loans 1,212,805 1,146,916 1,142,093 1,081,906 975,115
---------------------------------------------------------------------------------------------------------------------
Total commercial real estate 2,104,960 1,989,902 1,972,624 1,861,859 1,717,785
---------------------------------------------------------------------------------------------------------------------
Residential mortgage:
Secured by 1-4 family
residential properties 1,177,337 1,169,331 1,166,559 1,151,674 1,215,022
Residential mortgages held for sale 40,299 51,666 46,306 74,410 44,429
---------------------------------------------------------------------------------------------------------------------
Total residential mortgage 1,217,636 1,220,997 1,212,865 1,226,084 1,259,451
---------------------------------------------------------------------------------------------------------------------
Consumer 640,542 629,144 630,389 566,958 517,884
---------------------------------------------------------------------------------------------------------------------
Total $ 9,201,959 $ 9,139,978 $ 8,883,568 $ 8,514,680 $ 8,085,966
---------------------------------------------------------------------------------------------------------------------
The commercial loan portfolio totaled $5.2 billion at March 31, 2006, down $61
million during the first quarter of 2006. The services sector of the portfolio
totaled $1.4 billion, or 15% of the Company's total outstanding loans. Loans in
this sector of the portfolio decreased $68 million since December 31, 2005. The
services sector consists of a large number of loans to a variety of businesses,
including communications, gaming and transportation services. Approximately $981
million of the services sector is made up of loans with individual balances of
less than $10 million. Energy loans totaled $1.4 billion or 15% of total loans.
Outstanding energy loans decreased $32 million, or 4%, during the first quarter
of 2006. Approximately $1.1 billion of loans in the energy portfolio was to oil
and gas producers. The amount of credit available to these customers generally
depends on a percentage of the value of their proven energy reserves based on
anticipated prices. The energy category also included loans to borrowers
involved in the transportation and sale of oil and gas and to borrowers that
manufacture equipment or provide other services to the energy industry.
Other notable loan concentrations by primary industry of the borrowers are
presented in Table 15.
BOK Financial participates in shared national credits when appropriate to obtain
or maintain business relationships with local customers. Shared national credits
are defined by banking regulators as credits of more than $20 million and with
three or more non-affiliated banks as participants. At March 31, 2006 and
December 31, 2005, the outstanding principal balances of these loans totaled
$1.2 billion and $1.1 billion, respectively. Substantially all of these loans
were to borrowers with local market relationships. BOK Financial serves as the
agent lender in approximately 32% of the shared national credits, based on
dollars committed. The Company's lending policies generally avoid loans in which
we do not have the opportunity to maintain or achieve other business
relationships with the customer.
Commercial real estate loans totaled $2.1 billion or 23% of the loan portfolio
at March 31, 2006. The outstanding balance of commercial real estate loans
increased $115 million, or 6%, since December 31, 2005. Commercial real estate
loans grew primarily in the Oklahoma and Texas markets. Construction and land
development loans included $536 million for single family residential lots and
premises, up $43 million, or 9%, since December 31, 2005. The major components
of other commercial real estate loans were office buildings - $493 million and
retail facilities - $334 million. Commercial real estate loans secured by retail
facilities increased $28 million, or 9%, during the quarter.
Residential mortgage loans, excluding mortgage loans held for sale, included
$352 million of home equity loans, $383 million of loans held for business
relationship purposes, $236 million of adjustable rate mortgages and $185
million of loans held for community development. Consumer loans included $370
million of indirect automobile loans, up $13
17
million since December 31, 2005. While substantially all of these loans were
purchased from dealers in Oklahoma, most of the current quarter's growth was
from activities in Arkansas.
Table 16 presents the distribution of the major loan categories among our
primary market areas.
---------------------------------------------------------------------------------------------------------------------
Table 16 - Loans by Principal Market Area
(In thousands)
March 31, Dec. 31, Sept. 30, June 30, March 31,
2006 2005 2005 2005 2005
---------------------------------------------------------------------------------
Oklahoma:
Commercial $ 3,074,406 $ 3,159,683 $ 3,101,209 $ 3,026,311 $ 2,871,566
Commercial real estate 936,030 862,700 890,737 856,617 791,816
Residential mortgage 847,848 842,757 839,344 827,431 936,375
Residential mortgage held for sale 40,299 51,666 46,306 74,410 44,429
Consumer 468,920 466,180 472,899 425,318 389,571
---------------------------------------------------------------------------------
Total Oklahoma $ 5,367,503 $ 5,382,986 $ 5,350,495 $ 5,210,087 $ 5,033,757
---------------------------------------------------------------------------------
Texas:
Commercial $ 1,420,860 $ 1,356,611 $ 1,294,606 $ 1,182,307 $ 1,135,509
Commercial real estate 604,413 569,921 537,576 509,472 477,487
Residential mortgage 200,957 199,726 196,593 196,457 177,919
Consumer 87,669 89,017 89,329 90,245 85,626
---------------------------------------------------------------------------------
Total Texas $ 2,313,899 $ 2,215,275 $ 2,118,104 $ 1,978,481 $ 1,876,541
---------------------------------------------------------------------------------
New Mexico:
Commercial $ 348,930 $ 383,325 $ 354,087 $ 340,378 $ 325,069
Commercial real estate 228,955 232,564 223,236 219,175 218,357
Residential mortgage 68,810 65,784 65,203 63,821 62,015
Consumer 13,820 15,137 15,195 15,813 12,306
---------------------------------------------------------------------------------
Total Albuquerque $ 660,515 $ 696,810 $ 657,721 $ 639,187 $ 617,747
---------------------------------------------------------------------------------
Arkansas:
Commercial $ 74,423 $ 79,719 $ 54,703 $ 54,703 $ 51,026
Commercial real estate 80,529 75,483 85,600 76,803 75,024
Residential mortgage 13,069 13,044 12,097 11,674 10,771
Consumer 33,548 25,659 20,397 4,560 3,599
---------------------------------------------------------------------------------
Total Northwest Arkansas $ 201,569 $ 193,905 $ 172,797 $ 147,740 $ 140,420
---------------------------------------------------------------------------------
Colorado:
Commercial $ 267,928 $ 270,108 $ 219,208 $ 210,142 $ 207,676
Commercial real estate 134,771 133,537 132,741 125,120 120,844
Residential mortgage 20,383 21,918 26,186 27,292 27,942
Consumer 31,487 27,871 26,126 27,996 26,782
---------------------------------------------------------------------------------
Total Colorado $ 454,569 $ 453,434 $ 404,261 $ 390,550 $ 383,244
---------------------------------------------------------------------------------
Arizona:
Commercial $ 52,274 $ 50,489 $ 43,877 $ 45,938 $ -
Commercial real estate 120,262 115,697 102,734 74,672 34,257
Residential mortgage 26,270 26,102 27,136 24,999 -
Consumer 5,098 5,280 6,443 3,026 -
---------------------------------------------------------------------------------
Total Arizona $ 203,904 $ 197,568 $ 180,190 $ 148,635 $ 34,257
---------------------------------------------------------------------------------
Total BOK Financial loans $ 9,201,959 $ 9,139,978 $ 8,883,568 $ 8,514,680 $ 8,085,966
---------------------------------------------------------------------------------
18
LOAN COMMITMENTS
BOK Financial enters into certain off-balance sheet arrangements in the normal
course of business. These arrangements included loan commitments which totaled
$4.7 billion and standby letters of credit which totaled $495 million at March
31, 2006. Loan commitments may be unconditional obligations to provide financing
or conditional obligations that depend on the borrower's financial condition,
collateral value or other factors. Standby letters of credit are unconditional
commitments to guarantee the performance of our customer to a third party. Since
some of these commitments are expected to expire before being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
DERIVATIVES WITH CREDIT RISK
BOK Financial offers programs that permit its customers to hedge various risks,
including fluctuations in energy and cattle prices, interest rates and foreign
exchange rates, or to take positions in derivative contracts. Each of these
programs work essentially the same way. Derivative contracts are executed
between the customers and BOK Financial. Offsetting contracts are executed
between the Company and selected counterparties to minimize the risk to us of
changes in commodity prices, interest rates, or foreign exchange rates. The
counterparty contracts are identical to the customer contracts, except for a
fixed pricing spread or a fee paid to us as compensation for administrative
costs, credit risk and profit.
These programs create credit risk for potential amounts due to BOK Financial
from its customers and from the counterparties. Customer credit risk is
monitored through existing credit policies and procedures. The effects of
changes in commodity prices, interest rates or foreign exchange rates are
evaluated across a range of possible options to determine the maximum exposure
we are willing to have individually to any customer. Customers may also be
required to provide margin collateral to further limit our credit risk.
Counterparty credit risk is evaluated through existing policies and procedures.
This evaluation considers the total relationship between BOK Financial and each
of the counterparties. Individual limits are established by management, approved
by Credit Administration and reviewed by the Asset / Liability Committee. Margin
collateral is required if the exposure between the Company and any counterparty
exceeds established limits. Based on declines in the counterparties' credit
rating, these limits are reduced and additional margin collateral is required.
A deterioration of the credit standing of one or more of the customers or
counterparties to these contracts may result in BOK Financial recognizing a loss
as the fair value of the affected contracts may no longer move in tandem with
the offsetting contracts. This could occur if the credit standing of the
customer or counterparty deteriorated such that either the fair value of
underlying collateral no longer supported the contract or the counterparty's
ability to provide margin collateral was impaired.
Derivative contracts are carried at fair value. At March 31, 2006, the fair
value of derivative contracts reported as assets under these programs totaled
$401 million. This included energy contracts with fair values of $358 million,
interest rate contracts with fair values of $32 million and foreign exchange
contracts with fair values of $10 million. The aggregate fair values of
derivative contracts reported as liabilities totaled $402 million. At December
31, 2005, the fair values of assets and liabilities reported under these
programs totaled $453 million and $452 million, respectively. Approximately 94%
of the fair value of asset contracts was with customers. The credit risk of
these contracts is generally backed by energy production. The remaining 6% was
with counterparties. The maximum net exposure to any single customer or
counterparty totaled $87 million.
SUMMARY OF LOAN LOSS EXPERIENCE
The reserve for loan losses, which is available to absorb losses inherent in the
loan portfolio, totaled $104 million at March 31, 2006, compared with $104
million at December 31, 2005 and $109 million at March 31, 2005. These amounts
represented 1.14%, 1.14% and 1.35% of outstanding loans, excluding loans held
for sale, at March 31, 2006, December 31, 2005 and March 31, 2005, respectively.
Losses on loans held for sale, principally mortgage loans accumulated for
placement into security pools, are charged to earnings through adjustment in the
carrying value. The reserve for loan losses also represented 323% of the
outstanding balance of nonperforming loans at March 31, 2006, compared with 413%
at December 31, 2005 and 219% at March 31, 2005. Nonperforming loans totaled $32
million at March 31, 2006, compared with $25 million at December 31, 2005 and
$50 million at March 31, 2005. Net loans charged off during the first quarter of
2006 totaled $1.6 million, down from $7.4 million in the fourth quarter of 2005
19
and $3.2 million for the first quarter of 2005. Net consumer loans charged off,
which includes deposit overdraft losses, totaled $1.1 million for the first
quarter of 2006.
The Company considers credit risk from loan commitments and letters of credit in
its evaluation of the adequacy of the reserve for loan losses. A separate
reserve for off-balance sheet credit risk is maintained. Table 17 presents the
trend of reserves for off-balance sheet credit losses and the relationship
between the reserve and loan commitments. The relationship between the combined
reserve for credit losses and outstanding loans is also presented to facilitate
comparison with peer banks and others who have not adopted this preferred
presentation. The provision for credit losses included the combined charge to
expense for both the reserve for loan losses and the reserve for off-balance
sheet credit losses. All losses incurred from lending activities will ultimately
be reflected in charge-offs against the reserve for loan losses following funds
advanced against outstanding commitments and after the exhaustion of collection
efforts. The reserve for off-balance sheet credit losses would decrease and the
reserve for loan losses would increase as outstanding commitments are funded.
------------------------------------------------------------------------------------------------------------------------------
Table 17 - Summary of Loan Loss Experience
(In thousands)
Three Months Ended
----------------------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
2006 2005 2005 2005 2005
----------------------------------------------------------------------------------
Reserve for loan losses:
Beginning balance $ 103,876 $ 109,621 $ 108,884 $ 108,958 $ 108,618
Loans charged off:
Commercial 1,242 5,772 819 1,641 1,438
Commercial real estate - 84 730 90 1,715
Residential mortgage 207 226 382 423 181
Consumer 2,700 3,497 3,380 2,890 2,490
------------------------------------------------------------------------------------------------------------------------------
Total 4,149 9,579 5,311 5,044 5,824
------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 847 826 711 1,435 1,099
Commercial real estate 40 8 7 73 29
Residential mortgage 97 133 21 16 10
Consumer 1,580 1,197 1,238 1,233 1,508
------------------------------------------------------------------------------------------------------------------------------
Total 2,564 2,164 1,977 2,757 2,646
------------------------------------------------------------------------------------------------------------------------------
Net loans charged off 1,585 7,415 3,334 2,287 3,178
Provision for loan losses 1,852 1,670 4,071 1,142 3,518
Additions due to acquisitions - - - 1,071 -
------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 104,143 $ 103,876 $ 109,621 $ 108,884 $ 108,958
------------------------------------------------------------------------------------------------------------------------------
Reserve for off-balance sheet credit losses:
Beginning balance $ 20,574 $ 17,794 $ 17,889 $ 16,984 $ 18,502
Provision for off-balance sheet credit losses 1,548 2,780 (95) 873 (1,518)
Additions due to acquisitions - - - 32 -
------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 22,122 $ 20,574 $ 17,794 $ 17,889 $ 16,984
------------------------------------------------------------------------------------------------------------------------------
Total provision for credit losses $ 3,400 $ 4,450 $ 3,976 $ 2,015 $ 2,000
------------------------------------------------------------------------------------------------------------------------------
Reserve for loan losses to loans
outstanding at period-end (1) 1.14% 1.14% 1.24% 1.29% 1.35%
Net charge-offs (annualized)
to average loans (1) 0.07 0.33 0.16 0.11 0.16
Total provision for credit losses
(annualized) to average loans (1) 0.15 0.20 0.19 0.10 0.10
Recoveries to gross charge-offs 61.80 22.59 37.22 54.66 45.43
Reserve for loan losses as a multiple of
net charge-offs (annualized) 16.43x 3.50x 8.22x 11.90x 8.57x
Reserve for off-balance sheet credit
losses to off-balance sheet credit commitments 0.36% 0.42% 0.41% 0.42% 0.41%
Combined reserves for credit losses to
loans outstanding at period-end (1) 1.38 1.37 1.44 1.50 1.57
------------------------------------------------------------------------------------------------------------------------------
(1) Excludes residential mortgage loans held for sale.
Specific impairment reserves are determined through evaluation of estimated
future cash flows and collateral value. At March 31, 2006, specific impairment
reserves totaled $5.0 million on total impaired loans of $21 million. Required
specific impairment reserves increased $2.3 million from December 31, 2005.
20
Nonspecific reserves are maintained for risks beyond factors specific to an
individual loan or those identified through migration analysis. A range of
potential losses is determined for each risk factor identified. At March 31,
2006, the ranges of potential losses for the more significant factors were:
General economic conditions - $6.4 million to $10.9 million Concentration in
large loans - $1.4 million to $2.9 million
The provision for credit losses totaled $3.4 million for the first quarter of
2006, compared with $4.4 million for the fourth quarter of 2005 and $2.0 million
for the first quarter of 2005. Factors considered in determining the provision
for credit losses included increases in the outstanding balances of classified,
criticized and non-performing loans. These factors were partially offset by
decreases in the minimum reserve level for certain loan grades based on analysis
of long-term loss experience and by reductions in net losses.
NONPERFORMING ASSETS
Information regarding nonperforming assets, which totaled $40 million at March
31, 2006 and $34 million at December 31, 2005, is presented in Table 18.
Nonperforming assets included non-accrual loans and excluded loans 90 days or
more past due but still accruing interest. Non-accrual loans totaled $32 million
at March 31, 2006 and $25 million at December 31, 2005. Newly identified
non-accruing loans totaled $11 million during the first quarter of 2006.
Non-accruing loans decreased $1 million for loans charged off or foreclosed, and
$3 million for cash payments received.
---------------------------------------------------------------------------------------------------------------------
Table 18 - Nonperforming Assets
(In thousands)
March 31, Dec. 31, Sept. 30, June 30, March 31,
2006 2005 2005 2005 2005
----------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 17,073 $ 11,673 $ 17,920 $ 21,173 $ 29,116
Commercial real estate 6,444 5,370 10,422 11,722 12,671
Residential mortgage 8,057 7,347 8,531 7,154 7,533
Consumer 655 772 480 478 483
---------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 32,229 25,162 37,353 40,527 49,803
Other nonperforming assets 8,196 8,476 5,069 5,062 3,187
---------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 40,425 $ 33,638 $ 42,422 $ 45,589 $ 52,990
---------------------------------------------------------------------------------------------------------------------
Ratios:
Reserve for loan losses to nonaccrual loans 323.13% 412.83% 293.48% 268.67% 218.78%
Combined reserves for credit
losses to nonaccrual loans 391.77 494.60 341.11 312.81 252.88
Nonaccrual loans to period-end loans (2) 0.35 0.28 0.42 0.48 0.62
---------------------------------------------------------------------------------------------------------------------
Loans past due (90 days) (1) $ 3,919 $ 8,708 $ 10,027 $ 7,125 $ 6,782
---------------------------------------------------------------------------------------------------------------------
(1) Includes residential mortgages
guaranteed by agencies of the U.S.
Government. $ 1,595 $ 2,021 $ 3,646 $ 3,713 $ 2,650
(2) Excludes residential mortgage loans held for sale.
---------------------------------------------------------------------------------------------------------------------
The loan review process also identified loans that possess more than the normal
amount of risk due to deterioration in the financial condition of the borrower
or the value of the collateral. Because the borrowers are still performing in
accordance with the original terms of the loan agreements, and no loss of
principal or interest is anticipated, these loans were not included in
Nonperforming Assets. Known information, however, causes management concerns as
to the borrowers' ability to comply with current repayment terms. These
potential problem loans totaled $23 million at March 31, 2006 and $28 million at
December 31, 2005. The current composition of potential problem loans by primary
industry included healthcare - $12 million, services - $6 million and real
estate - $3 million.
21
DEPOSITS
Deposit accounts represent our primary funding source. We compete for retail and
commercial deposits by offering a broad range of products and services and
focusing on customer convenience. Retail deposit growth is supported through our
Perfect Banking program, free checking and on-line Billpay services, an
extensive network of branch locations and ATMs and a 24-hour Express Bank call
center. Commercial deposit growth is supported by offering treasury management
and lockbox services.
Total deposits averaged $11.1 billion for the first quarter of 2006, up $408
million, or 4%, compared with average deposits in the fourth quarter of 2005.
The growth in average deposits was driven by a $976 million increase in total
deposits across all of our markets during the fourth quarter. Deposits continued
to grow in the New Mexico, Colorado, Arizona and Arkansas markets during the
first quarter of 2006. However, following fourth quarter deposit growth of $471
million in Oklahoma and $418 million in Texas, deposits decreased by $153
million and $52 million, respectively, during the first quarter of 2006.
Average core deposits, which we define as deposits of less than $100,000,
excluding public funds and brokered deposits, increased at an annualized rate of
4%. Average core deposits comprised 49% of total deposits for the first quarter
of 2006, down from 50% for the preceding quarter. Deposit accounts with balances
in excess of $100,000 represented 41% and 40% of average deposits for the first
quarter of 2006 and the fourth quarter of 2005, respectively.
The distribution of deposit accounts among principal markets is shown in Table
19.
22
---------------------------------------------------------------------------------------------------------------------
Table 19 - Deposits by Principal Market Area
(In thousands)
March 31, Dec. 31, Sept. 30, June 30, March 31,
2006 2005 2005 2005 2005
---------------------------------------------------------------------------------
Oklahoma:
Demand $ 950,582 $ 1,003,284 $ 959,169 $ 1,028,640 $ 1,091,132
Interest-bearing:
Transaction 2,937,228 3,002,610 2,411,175 2,367,511 2,235,950
Savings 93,093 85,837 86,220 89,972 93,655
Time 2,623,352 2,564,337 2,728,224 2,450,730 2,511,465
---------------------------------------------------------------------------------
Total interest-bearing 5,653,673 5,652,784 5,225,619 4,908,213 4,841,070
---------------------------------------------------------------------------------
Total Oklahoma $ 6,604,255 $ 6,656,068 $ 6,184,788 $ 5,936,853 $ 5,932,202
---------------------------------------------------------------------------------
Texas:
Demand $ 551,411 $ 615,732 $ 533,475 $ 478,855 $ 628,043
Interest-bearing:
Transaction 1,455,856 1,535,570 1,299,279 1,292,938 1,111,808
Savings 27,827 27,398 29,620 29,635 30,695
Time 726,530 735,731 633,785 606,528 601,397
---------------------------------------------------------------------------------
Total interest-bearing 2,210,213 2,298,699 1,962,684 1,929,101 1,743,900
---------------------------------------------------------------------------------
Total Texas $ 2,761,624 $ 2,914,431 $ 2,496,159 $ 2,407,956 $ 2,371,943
---------------------------------------------------------------------------------
New Mexico:
Demand $ 159,125 $ 129,289 $ 155,517 $ 139,107 $ 133,309
Interest-bearing:
Transaction 408,160 381,099 338,706 306,230 314,067
Savings 17,805 17,839 17,614 17,875 18,428
Time 483,428 453,314 454,561 449,180 434,131
---------------------------------------------------------------------------------
Total interest-bearing 909,393 852,252 810,881 773,285 766,626
---------------------------------------------------------------------------------
Total New Mexico $ 1,068,518 $ 981,541 $ 966,398 $ 912,392 $ 899,935
---------------------------------------------------------------------------------
Arkansas:
Demand $ 11,629 $ 10,429 $ 13,772 $ 10,890 $ 14,922
Interest-bearing:
Transaction 26,675 22,354 23,335 24,816 23,555
Savings 1,051 1,058 1,268 1,284 1,405
Time 73,082 75,034 81,510 83,388 88,031
---------------------------------------------------------------------------------
Total interest-bearing 100,808 98,446 106,113 109,488 112,991
---------------------------------------------------------------------------------
Total Arkansas $ 112,437 $ 108,875 $ 119,885 $ 120,378 $ 127,913
---------------------------------------------------------------------------------
Colorado:
Demand $ 56,419 $ 61,647 $ 51,978 $ 32,044 $ 73,383
Interest-bearing:
Transaction 258,801 258,668 216,718 228,881 220,618
Savings 16,315 17,772 16,568 16,791 22,140
Time 309,068 264,020 221,753 117,130 86,406
---------------------------------------------------------------------------------
Total interest-bearing 584,184 540,460 455,039 362,802 329,164
---------------------------------------------------------------------------------
Total Colorado $ 640,603 $ 602,107 $ 507,017 $ 394,846 $ 402,547
---------------------------------------------------------------------------------
Arizona:
Demand $ 55,421 $ 45,567 $ 42,784 $ 60,412 $ -
Interest-bearing:
Transaction 57,400 56,994 71,510 56,624 -
Savings 3,380 4,111 3,862 4,771 -
Time 4,608 5,624 6,802 6,574 -
---------------------------------------------------------------------------------
Total interest-bearing 65,388 66,729 82,174 67,969 -
---------------------------------------------------------------------------------
Total Arizona $ 120,809 $ 112,296 $ 124,958 $ 128,381 $ -
---------------------------------------------------------------------------------
Total BOK Financial deposits $ 11,308,246 $ 11,375,318 $ 10,399,205 $ 9,900,806 $ 9,734,540
---------------------------------------------------------------------------------
23
BORROWINGS AND CAPITAL
BOK Financial (parent company) has a $100 million unsecured revolving line of
credit with certain banks that expires in December 2010. There was no
outstanding principal balance on this credit agreement at March 31, 2006.
Interest is based on LIBOR plus a defined margin that is determined by the
Company's credit rating or a base rate. This margin ranges from 0.375% to
1.125%. The margin currently applicable to borrowings against this line is
0.500%. The base rate is defined as the greater of the daily federal funds rate
plus 0.500% or the SunTrust Bank prime rate. Interest is generally paid monthly.
Facility fees are paid quarterly on the unused portion of the commitment at
rates that range from 0.100% to 0.250% based on the Company's credit rating.
This credit agreement includes certain restrictive covenants that limit the
Company's ability to borrow additional funds, to make investments and to pay
cash dividends on common stock. These covenants also require BOK Financial and
subsidiary banks to maintain minimum capital levels and to exceed minimum net
worth ratios. BOK Financial met all of the restrictive covenants at March 31,
2006.
The primary source of liquidity for BOK Financial is dividends from subsidiary
banks, which are limited by various banking regulations to net profits, as
defined, for the preceding two years. Dividends are further restricted by
minimum capital requirements. Based on the most restrictive limitations, the
subsidiary banks could declare up to $171 million of dividends without
regulatory approval. Management has developed and the Board of Directors has
approved an internal capital policy that is more restrictive than the regulatory
capital standards. The subsidiary banks could declare dividends of up to $105
million under this policy.
Equity capital for BOK Financial increased $26 million to $1.6 billion at March
31, 2006. Retained earnings, net income less cash dividends, provided $48
million to this increase. Growth in capital from retained earnings was partially
offset by a $26 million increase in accumulated other comprehensive losses due
primarily to net unrealized losses on available for sale securities. The
remaining increase in capital during the first quarter of 2006 resulted
primarily from activity in employee stock options.
Capital is managed to maximize long-term value to the shareholders. Factors
considered in managing capital include projections of future earnings, asset
growth and acquisition strategies, and regulatory and debt covenant
requirements. Capital management may include subordinated debt issuance, share
repurchase and stock and cash dividends.
On April 26, 2005, the Board of Directors authorized a share repurchase program,
which replaced a previously authorized program. A maximum of two million common
shares may be repurchased. The specific timing and amount of shares repurchased
will vary based on market conditions, securities law limitations and other
factors. Repurchases may be made over time in open market or privately
negotiated transactions. The repurchase program may be suspended or discontinued
at any time without prior notice. During the first quarter of 2006, the Company
repurchased 61,408 common shares at an average price of $44.93 per share.
Cash dividends of $6.7 million or $0.10 per common share were paid during the
first quarter of 2006. On April 25, 2006, the Board of Directors approved a
quarterly cash dividend of $0.15 per common share. The dividend will be payable
on or about May 31, 2006 to shareholders of record on May 12, 2006.
BOK Financial and subsidiary banks are subject to various capital requirements
administered by federal agencies. Failure to meet minimum capital requirements
can result in certain mandatory and possibly additional discretionary actions by
regulators that could have a material impact on operations. These capital
requirements include quantitative measures of assets, liabilities, and
off-balance sheet items. The capital standards are also subject to qualitative
judgments by the regulators. The capital ratios for BOK Financial are presented
in Table 20.
--------------------------------------------------------------------------------------------------------------------
Table 20 - Capital Ratios March 31, Dec. 31, Sept. 30, June 30, March 31,
2006 2005 2005 2005 2005
--------------------------------------------------------------------------
Average shareholders' equity
to average assets 9.51% 9.30% 9.54% 9.56% 9.93%
Risk-based capital:
Tier 1 capital 10.16 9.85 9.71 9.84 10.19
Total capital 12.41 12.09 12.04 12.54 11.78
Leverage 8.60 8.34 8.01 8.08 8.36
24
OFF-BALANCE SHEET ARRANGEMENTS
During 2002, BOK Financial agreed to a limited price guarantee on a portion of
the common shares issued to purchase Bank of Tanglewood. Any holder of BOK
Financial common shares issued in this acquisition may annually make a claim for
the excess of the guaranteed price over the actual sales price of any shares
sold during a 60-day period after each of the first five anniversary dates after
October 25, 2002. The maximum annual number of shares subject to this guarantee
is 210,069. The price guarantee is non-transferable and non-cumulative. BOK
Financial may elect, in its sole discretion, to issue additional shares of
common stock or to pay cash to satisfy any obligation under the price guaranty.
The Company will have no obligation to issue additional common shares or pay
cash to satisfy any benchmark price protection obligation if the market value
per share of BOK Financial common stock remains above the highest benchmark
price of $42.53. The closing price of BOK Financial common stock on March 31,
2006 was $47.55 per share.
MARKET RISK
Market risk is a broad term for the risk of economic loss due to adverse changes
in the fair value of a financial instrument. These changes may be the result of
various factors, including interest rates, foreign exchange prices, commodity
prices or equity prices. Financial instruments that are subject to market risk
can be classified either as held for trading or held for purposes other than
trading.
BOK Financial is subject to market risk primarily through the effect of changes
in interest rates on both its assets held for purposes other than trading and
trading assets. The effects of other changes, such as foreign exchange rates,
commodity prices or equity prices do not pose significant market risk to BOK
Financial. BOK Financial has no material investments in assets that are affected
by changes in foreign exchange rates or equity prices. Energy derivative
contracts, which are affected by changes in commodity prices, are matched
against offsetting contracts as previously discussed.
Responsibility for managing market risk rests with the Asset / Liability
Committee that operates under policy guidelines established by the Board of
Directors. The acceptable negative variation in net interest revenue, net income
or economic value of equity due to a specified basis point increase or decrease
in interest rates is generally limited by these guidelines to +/- 10%. These
guidelines also set maximum levels for short-term borrowings, short-term assets,
public funds, and brokered deposits, and establish minimum levels for unpledged
assets, among other things. Compliance with these guidelines is reviewed
monthly.
INTEREST RATE RISK - OTHER THAN TRADING
BOK Financial has a large portion of its earning assets in variable rate loans
and a large portion of its liabilities in demand deposit accounts and
interest-bearing transaction accounts. Changes in interest rates affect earning
assets more rapidly than interest-bearing liabilities in the short term.
Management has adopted several strategies to reduce this interest rate
sensitivity. As previously noted in the Net Interest Revenue section of this
report, management acquires securities that are funded by borrowings in the
capital markets. The average duration of these securities is expected to be
approximately 2.8 years based on a range of interest rate and prepayment
assumptions. The funds borrowed to purchase these securities generally reprice
within 90 days.
BOK Financial also uses interest rate swaps in managing its interest rate
sensitivity. These products are generally used to more closely match interest on
certain fixed-rate loans with funding sources and long-term certificates of
deposit with earning assets. During the first quarter of 2006, net interest
revenue was reduced by $1.9 million from periodic settlements of these
contracts. Net interest revenue was increased by $366 thousand from periodic
settlements of these contracts in the first quarter of 2005. These contracts are
carried on the balance sheet at fair value and changes in fair value are
reported in income as derivatives gains or losses. A net loss of $309 thousand
was recognized in 2006 compared to a net gain of $778 thousand in 2005 from
adjustments of these swaps and hedged liabilities to fair value. Credit risk
from interest rate swaps is closely monitored as part of our overall process of
managing credit exposure to other financial institutions.
The effectiveness of these strategies in managing the overall interest rate risk
is evaluated through the use of an asset/liability model. BOK Financial performs
a sensitivity analysis to identify more dynamic interest rate risk exposures,
including embedded option positions, on net interest revenue, net income and
economic value of equity. A simulation model is used to estimate the effect of
changes in interest rates over the next 12 and 24 months based on eight interest
rate scenarios. Two specified interest rate scenarios are used to evaluate
interest rate risk against policy
25
guidelines. The first scenario assumes a sustained parallel 200 basis point
increase and the second assumes a sustained parallel 200 basis point decrease in
interest rates. The Company also performs a sensitivity analysis based on a
"most likely" interest rate scenario, which includes non-parallel shifts in
interest rates. An independent source is used to determine the most likely
interest rate scenario.
The Company's primary interest rate exposures include the Federal Funds rate,
which affects short-term borrowings, the prime lending rate and LIBOR, which are
the basis for much of the variable-rate loan pricing. Additionally, mortgage
rates directly affect the prepayment speeds for mortgage-backed securities and
mortgage servicing rights. Derivative financial instruments and other financial
instruments used for purposes other than trading are included in this
simulation. The model incorporates assumptions regarding the effects of changes
in interest rates and account balances on indeterminable maturity deposits based
on a combination of historical analysis and expected behavior. The impact of
planned growth and new business activities is factored into the simulation
model. The effects of changes in interest rates on the value of mortgage
servicing rights are excluded from Table 21 due to the extreme volatility over
such a large rate range. The effects of interest rate changes on the value of
mortgage servicing rights and securities identified as economic hedges are
presented in the Lines of Business - Mortgage Banking section of this report.
The simulations used to manage market risk are based on numerous assumptions
regarding the effects of changes in interest rates on the timing and extent of
repricing characteristics, future cash flows and customer behavior. These
assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net interest revenue, net income or economic value of equity
or precisely predict the impact of higher or lower interest rates on net
interest revenue, net income or economic value of equity. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes, market conditions and management strategies, among other factors.
Table 21 - Interest Rate Sensitivity
(Dollars in Thousands)
200 bp Increase 200 bp Decrease Most Likely
-------------------------- --------------------------- -------------------------
2006 2005 2006 2005 2006 2005
------------- ------------ ------------ -------------- ------------ ------------
Anticipated impact over the
next twelve months on
net interest revenue $ 6,413 $ 7,242 $ (4,174) *** $ 3,889 $ 7,270
1.2% 1.6% (0.8)% *** 0.7% 1.6%
-----------------------------------------------------------------------------------------------------------------------
***A 200 basis point decrease was not computed in 2005 due to low market interest rates.
TRADING ACTIVITIES
BOK Financial enters into trading activities both as an intermediary for
customers and for its own account. As an intermediary, BOK Financial will take
positions in securities, generally mortgage-backed securities, government agency
securities, and municipal bonds. These securities are purchased for resale to
customers, which include individuals, corporations, foundations and financial
institutions. BOK Financial will also take trading positions in U.S. Treasury
securities, mortgage-backed securities, municipal bonds and financial futures
for its own account. These positions are taken with the objective of generating
trading profits. Both of these activities involve interest rate risk.
A variety of methods are used to manage the interest rate risk of trading
activities. These methods include daily marking of all positions to market
value, independent verification of inventory pricing, and position limits for
each trading activity. Hedges in either the futures or cash markets may be used
to reduce the risk associated with some trading programs. The Risk Management
Department monitors trading activity daily and reports to senior management and
the Risk Oversight and Audit Committee of the BOK Financial Board of Directors
any exceptions to trading position limits and risk management policy exceptions.
Management uses a Value at Risk ("VAR") methodology to measure the market risk
inherent in its trading activities. VAR is calculated based upon historical
simulations over the past five years using a variance / covariance matrix of
interest rate changes. It represents an amount of market loss that is likely to
be exceeded only one out of every 100 two-week periods. Trading positions are
managed within guidelines approved by the Board of Directors. These guidelines
limit the VAR to $1.8 million. At March 31, 2006, the VAR was $583 thousand. The
greatest value at risk during the quarter was $1.1 million.
26
CONTROLS AND PROCEDURES
As required by Rule 13a-15(b), BOK Financial's management, including the Chief
Executive Officer and Chief Financial Officer, conducted an evaluation as of the
end of the period covered by their report, of the effectiveness of the company's
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures were effective as
of the end of the period covered by this report. As required by Rule 13a-15(d),
BOK Financial's management, including the Chief Executive Officer and Chief
Financial Officer, also conducted an evaluation of the company's internal
controls over financial reporting to determine whether any changes occurred
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, the company's internal controls over
financial reporting. Based on that evaluation, there has been no such change
during the quarter covered by this report.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are based on management's
beliefs, assumptions, current expectations, estimates, and projections about BOK
Financial, the financial services industry and the economy in general. Words
such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans,"
"projects," variations of such words and similar expressions are intended to
identify such forward-looking statements. Management judgments relating to and
discussion of the provision and reserve for loan losses involve judgments as to
expected events and are inherently forward-looking statements. Assessments that
BOK Financial's acquisitions and other growth endeavors will be profitable are
necessary statements of belief as to the outcome of future events, based in part
on information provided by others that BOK Financial has not independently
verified. These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions that are difficult to predict with
regard to timing, extent, likelihood and degree of occurrence. Therefore, actual
results and outcomes may materially differ from what is expressed, implied, or
forecasted in such forward-looking statements. Internal and external factors
that might cause such a difference include, but are not limited to: (1) the
ability to fully realize expected cost savings from mergers within the expected
time frames, (2) the ability of other companies on which BOK Financial relies to
provide goods and services in a timely and accurate manner, (3) changes in
interest rates and interest rate relationships, (4) demand for products and
services, (5) the degree of competition by traditional and nontraditional
competitors, (6) changes in banking regulations, tax laws, prices, levies, and
assessments, (7) the impact of technological advances and (8) trends in customer
behavior as well as their ability to repay loans. BOK Financial and its
affiliates undertake no obligation to update, amend, or clarify forward-looking
statements, whether as a result of new information, future events or otherwise.
27
---------------------------------------------------------------------------------------------
Consolidated Statements of Earnings (Unaudited)
(In Thousands Except Share and Per Share Data)
Three Months Ended
March 31,
2006 2005
------------------------------
INTEREST REVENUE
Loans $ 165,927 $ 118,810
Taxable securities 55,046 49,356
Tax-exempt securities 2,209 1,793
---------------------------------------------------------------------------------------------
Total securities 57,255 51,149
---------------------------------------------------------------------------------------------
Trading securities 164 181
Funds sold and resell agreements 239 164
---------------------------------------------------------------------------------------------
Total interest revenue 223,585 170,304
---------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 72,854 43,614
Borrowed funds 28,422 16,869
Subordinated debentures 4,983 2,227
---------------------------------------------------------------------------------------------
Total interest expense 106,259 62,710
---------------------------------------------------------------------------------------------
Net Interest Revenue 117,326 107,594
Provision for Credit Losses 3,400 2,000
---------------------------------------------------------------------------------------------
Net Interest Revenue After Provision for Credit Losses 113,926 105,594
---------------------------------------------------------------------------------------------
OTHER OPERATING REVENUE
Brokerage and trading revenue 12,010 11,336
Transaction card revenue 18,508 16,543
Trust fees and commissions 17,945 16,016
Service charges and fees on deposit accounts 23,986 22,173
Mortgage banking revenue 6,789 5,578
Other revenue 10,811 7,397
---------------------------------------------------------------------------------------------
Total fees and commissions 90,049 79,043
---------------------------------------------------------------------------------------------
Gain on sales of assets 918 972
Loss on securities, net (1,221) (2,637)
Gain (loss) on derivatives, net (309) 778
---------------------------------------------------------------------------------------------
Total other operating revenue 89,437 78,156
---------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSE
Personnel 71,232 58,439
Business promotion 4,803 4,430
Professional fees and services 3,914 3,619
Net occupancy and equipment 13,026 12,094
Data processing and communications 16,995 15,099
Printing, postage and supplies 3,905 3,615
Net losses and operating expenses of repossessed assets 219 308
Amortization of intangible assets 1,370 1,537
Mortgage banking costs 3,087 3,613
Change in fair value of mortgage servicing rights (7,081) -
Recovery for impairment of mortgage servicing rights - (5,624)
Other expense 5,909 5,029
---------------------------------------------------------------------------------------------
Total other operating expense 117,379 102,159
---------------------------------------------------------------------------------------------
Income Before Taxes 85,984 81,591
Federal and state income tax 31,236 29,536
---------------------------------------------------------------------------------------------
Net Income $ 54,748 $ 52,055
---------------------------------------------------------------------------------------------
Earnings Per Share:
---------------------------------------------------------------------------------------------
Basic $ 0.82 $ 0.87
---------------------------------------------------------------------------------------------
Diluted $ 0.81 $ 0.78
---------------------------------------------------------------------------------------------
Average Shares Used in Computation:
---------------------------------------------------------------------------------------------
Basic 66,715,396 59,432,812
---------------------------------------------------------------------------------------------
Diluted 67,260,659 66,946,765
---------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
28
--------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
(In Thousands Except Share Data)
March 31, December 31, March 31,
2006 2005 2005
--------------------------------------------------
(Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 610,563 $ 684,857 $ 505,412
Funds sold and resell agreements 25,720 14,465 14,861
Trading securities 26,055 18,633 13,381
Securities:
Available for sale 4,771,401 4,821,575 3,890,031
Available for sale securities pledged to creditors - - 689,949
Investment (fair value: March 31, 2006 - $232,468;
December 31, 2005 - $243,406;
March 31, 2005 - $221,906) 237,224 245,125 224,425
Mortgage trading securities 64,704 - -
--------------------------------------------------------------------------------------------------------------------
Total securities 5,073,329 5,066,700 4,804,405
--------------------------------------------------------------------------------------------------------------------
Loans 9,201,959 9,139,978 8,085,966
Less reserve for loan losses (104,143) (103,876) (108,958)
--------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 9,097,816 9,036,102 7,977,008
--------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 177,959 179,627 172,118
Accrued revenue receivable 102,759 99,874 78,577
Intangible assets, net 261,652 263,022 241,057
Mortgage servicing rights, net 68,608 54,097 50,105
Real estate and other repossessed assets 8,196 8,476 3,187
Bankers' acceptances 35,315 33,001 23,513
Receivable on unsettled security transactions - - 50,115
Derivative contracts 401,444 452,878 341,269
Other assets 411,353 415,337 336,080
--------------------------------------------------------------------------------------------------------------------
Total assets $ 16,300,769 $ 16,327,069 $ 14,611,088
--------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing demand deposits $ 1,784,587 $ 1,865,948 $ 1,940,789
Interest-bearing deposits:
Transaction 5,144,120 5,257,295 3,905,998
Savings 159,471 154,015 166,323
Time 4,220,068 4,098,060 3,721,430
--------------------------------------------------------------------------------------------------------------------
Total deposits 11,308,246 11,375,318 9,734,540
--------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase agreements 1,622,185 1,337,911 1,881,559
Other borrowings 833,114 1,054,298 873,217
Subordinated debentures 294,130 295,964 149,117
Accrued interest, taxes and expense 92,495 92,219 76,904
Bankers' acceptances 35,315 33,001 23,513
Due on unsettled security transactions 2,142 8,429 -
Derivative contracts 419,776 466,669 356,579
Other liabilities 127,931 124,106 100,455
--------------------------------------------------------------------------------------------------------------------
Total liabilities 14,735,334 14,787,915 13,195,884
--------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock - - 12
Common stock ($.00006 par value; 2,500,000,000
shares authorized; shares issued and outstanding:
March 31, 2006 - 68,214,101; December 31, 2005
- 67,904,533; March 31, 2005 - 60,544,085) 4 4 4
Capital surplus 666,800 656,579 638,679
Retained earnings 1,038,859 990,422 860,941
Treasury stock (shares at cost: March 31, 2006 - 1,331,064;
December 31, 2005 - 1,202,125; March 31, 2005 - 1,056,048) (45,915) (40,040) (33,443)
Accumulated other comprehensive loss (94,313) (67,811) (50,989)
--------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,565,435 1,539,154 1,415,204
--------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 16,300,769 $ 16,327,069 $ 14,611,088
--------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
29
---------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Changes in
Shareholders' Equity (Unaudited)
(In Thousands)
Accumulated
Preferred Stock Common Stock Other Treasury Stock
------------------------------------ Comprehensive Capital Retained ----------------
Shares Amount Shares Amount Loss Surplus Earnings Shares Amount Total
----------------------------------------------------------------------------------------------------
Balances at
December 31, 2004 249,975 $ 12 60,421 $ 4 $(11,625) $631,747 $809,261 998 $(30,905)$1,398,494
Comprehensive income:
Net income - - - - - - 52,055 - - 52,055
Other comprehensive
income, net of tax (1) - - - - (39,364) - - - - (39,364)
----------
Comprehensive income 12,691
----------
Treasury stock purchase - - - - - - - 30 (1,189) (1,189)
Exercise of stock options - - 123 - - 3,361 - 28 (1,349) 2,012
Tax benefit on exercise of
stock options - - - - - 418 - - - 418
Stock-based compensation - - - - - 3,153 - - - 3,153
Cash dividends on
preferred stock - - - - - - (375) - - (375)
---------------------------------------------------------------------------------------------------------------------------
Balances at
March 31, 2005 249,975 $ 12 60,544 $ 4 $(50,989) $638,679 $860,941 1,056 $(33,443)$1,415,204
---------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2005 - $ - 67,905 $ 4 $(67,811) $656,579 $990,422 1,202 $(40,040)$1,539,154
Effect of
implementing FAS 156,
net of income taxes - - - - - - 383 - - 383
Comprehensive income:
Net income - - - - - - 54,748 - - 54,748
Other comprehensive - - - - (26,502) - - - - (26,502)
income, net of tax (1)
----------
Comprehensive income 28,246
----------
Treasury stock purchase - - - - - - - 61 (2,759) (2,759)
Exercise of stock options - - 309 - - 7,554 - 68 (3,116) 4,438
Tax benefit on exercise of
stock options - - - - - 1,140 - - - 1,140
Stock-based compensation - - - - - 1,527 - - - 1,527
Cash dividends on
common stock - - - - - - (6,694) - - (6,694)
---------------------------------------------------------------------------------------------------------------------------
Balances at
March 31, 2006 - $ - 68,214 $ 4 $(94,313) $666,800$1,038,859 1,331 $(45,915)$1,565,435
---------------------------------------------------------------------------------------------------------------------------
(1) March 31, 2006 March 31, 2005
-------------- --------------
Changes in other comprehensive loss:
Unrealized losses on securities $ (42,660) $ (63,729)
Unrealized losses on cash flow hedges (187) (607)
Tax benefit on unrealized losses 15,567 23,290
Reclassification adjustment for losses
realized and included in net income 1,221 2,637
Reclassification adjustment for tax
benefit on realized losses (443) (955)
-----------------------------------
Net change in other comprehensive loss $ (26,502) $ (39,364)
-----------------------------------
See accompanying notes to consolidated financial statements.
30
--------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Three Months Ended March 31,
--------------------------------------
2006 2005
--------------------------------------
Cash Flows From Operating Activities:
Net income $ 54,748 $ 52,055
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses 3,400 2,000
Change in fair value of mortgage servicing rights (7,081) -
Recovery for mortgage servicing rights impairment - (5,624)
Unrealized losses from derivatives 3,358 5,768
Tax benefit on exercise of stock options (1,140) 418
Stock-based compensation 2,536 (1,508)
Depreciation and amortization 10,652 10,986
Net accretion of securities discounts and premiums (1,060) (2,001)
Net (gain) loss on sale of assets (2,469) 271
Mortgage loans originated for resale (162,905) (117,377)
Proceeds from sale of mortgage loans held for resale 176,147 116,153
Change in trading securities (7,422) (3,689)
Change in accrued revenue receivable (2,885) 1,067
Change in other assets 11,777 (12,750)
Change in accrued interest, taxes and expense 1,416 5,842
Change in other liabilities (13,996) 20,470
--------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 65,076 72,081
--------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities 10,828 7,497
Proceeds from maturities of available for sale securities 173,249 274,197
Purchases of investment securities (2,983) (10,888)
Purchases of available for sale securities (271,202) (658,088)
Proceeds from sales of available for sale securities 36,576 330,648
Loans originated or acquired net of principal collected (149,739) (232,738)
Proceeds from derivative asset contracts 2,340 2,183
Net change in other investment assets 410 1,294
Proceeds from disposition of assets 75,196 78,086
Purchases of assets (12,828) (7,608)
--------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (138,153) (215,417)
--------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net change in demand deposits, transaction deposits and savings accounts (189,080) (17,436)
Net change in time deposits 122,605 83,624
Net change in other borrowings 63,090 184,269
Payments on derivative liability contracts (1,754) (5,928)
Net change in derivative margin accounts 25,339 (119,217)
Change in amount receivable (due) on unsettled security transactions (6,287) 6,758
Issuance of preferred, common and treasury stock, net 4,438 2,012
Tax benefit on exercise of stock options 1,140 -
Repurchase of common stock (2,759) (1,189)
Dividends paid (6,694) (375)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 10,038 132,518
--------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (63,039) (10,818)
Cash and cash equivalents at beginning of period 699,322 531,091
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 636,283 $ 520,273
--------------------------------------------------------------------------------------------------------------------
Cash paid for interest $ 105,085 $ 63,545
--------------------------------------------------------------------------------------------------------------------
Cash paid for taxes $ 6,440 $ 4,620
--------------------------------------------------------------------------------------------------------------------
Net loans transferred to repossessed real estate
and other assets $ 957 $ 1,589
--------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited consolidated financial statements of BOK Financial Corporation
("BOK Financial" or "the Company") have been prepared in accordance with
accounting principles for interim financial information generally accepted in
the United States and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
The unaudited consolidated financial statements include accounts of BOK
Financial and its subsidiaries, principally Bank of Oklahoma, N.A. and its
subsidiaries ("BOk"), Bank of Texas, N.A., Bank of Arkansas, N.A., Bank of
Albuquerque, N.A. Colorado State Bank and Trust, N.A., Bank of Arizona, N.A.,
and BOSC, Inc. Certain prior period amounts have been reclassified to conform to
current period classification. Reclassification affecting the Consolidated
Balance Sheet as of December 31, 2005 included an increase in other assets from
$341 million to $415 million and accrued interest, taxes and expenses from $18
million to $92 million. This reclassification consistently presents deferred tax
assets for all periods presented.
The financial information should be read in conjunction with BOK Financial's
2005 Form 10-K filed with the Securities and Exchange Commission, which contains
audited financial statements.
NEWLY ADOPTED ACCOUNTING POLICIES
BOK Financial adopted Statement of Financial Accounting Standards No. 123-R,
"Share-Based Payments (FAS 123-R) as of January 1, 2006. FAS 123-R requires
companies to recognize in income statements the grant-date fair value of stock
options and other equity-based compensation issued to employees. Share-based
payments that will settle in equity instruments are measured at grant-date fair
value and not remeasured for subsequent changes in fair value. FAS 123-R also
requires that share-based payments the meet specified criteria to be classified
as liability awards and carried at current fair value. Fair value of liability
awards are remeasured at each balance sheet date until the award is settled. BOK
Financial had previously adopted the preferred income statement recognition
methods of the original FAS 123 retroactively to its effective date of December
15, 1994. The adoption of FAS 123-R did not significantly affect the Company's
financial statements.
Stock options outstanding at March 31, 2006 totaled 3,877,843, including
1,027,012 of vested options and 2,850,831 of unvested options. Management
expects that approximately 2.8 million of the unvested options will vest
according to their contractual terms. The weighted average exercise prices of
vested and unvested options are $26.99 and $40.18, respectively.
The intrinsic value of options exercised during the first quarters of 2006 and
2005 was $4.4 million and $2.3 million, respectively. The Company received cash
proceeds of $4.6 million in the first quarter of 2006 and $1.9 million in the
first quarter of 2005 from stock options exercised.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 156, "Accounting for Servicing of Financial Assets"
("FAS 156") during the first quarter of 2006. FAS 156 permitted companies that
service financial assets to elect to carry servicing rights at either fair value
or at the lower of amortized cost or fair value. Previously, generally accepted
accounting principles required servicing rights to be carried at the lower of
amortized cost or fair value. FAS 156 is effective for fiscal years that begin
after September 15, 2006. Early adoption is permitted as of the beginning of an
entity's fiscal year, provided that the entity has not yet issued any financial
statements for that year.
FAS 156 also permitted companies that service financial assets to reclassify
securities designated as an economic hedge of the servicing rights from the
available for sale classification to trading without tainting management's
classification of the remaining available for sale securities portfolio.
Effective January 1, 2006, BOK Financial designated all mortgage loan servicing
rights to be carried at fair value.
32
An adjustment to initially record servicing rights at fair value increased
retained earnings by $351 thousand, net of income taxes. Additionally, certain
specifically-identified securities that had been designated as economic hedges
of the mortgage servicing rights were reclassified from available for sale to
trading. These securities are identified as "mortgage trading securities" and
are separate from the Company's normal securities trading activities. An
adjustment to initially record these securities at fair value increased retained
earnings by $32 thousand, net of income taxes.
See Note 3 - Mortgage Banking Activities for additional disclosures required by
FAS 156.
(2) DERIVATIVES
The fair values of derivative contracts at March 31, 2006 are as follows (in
thousands):
Assets Liabilities
-------------------------------
Customer Risk Management Programs:
Interest rate contracts $32,387 $34,089
Energy contracts 358,286 357,092
Cattle contracts 554 563
Foreign exchange contracts 10,217 10,217
--------------------------------------------------------------------------
Total Customer Derivatives 401,444 401,961
Interest Rate Risk Management Programs:
Interest rate contracts - 17,815
--------------------------------------------------------------------------
Total Derivative Contracts $401,444 $419,776
--------------------------------------------------------------------------
(3) MORTGAGE BANKING ACTIVITIES
BOK Financial implemented Statement of Financial Accounting Standards No. 156,
"Accounting for Servicing of Financial Assets" in the first quarter of 2006. An
initial adjustment of the mortgage servicing rights to fair value of
approximately $351 thousand, net of income taxes, was recognized as an increase
to retained earnings in the same period. Also upon implementation of FAS 156,
certain securities designated as an economic hedge of mortgage servicing rights
were transferred from the available for sale classification to trading.
Approximately $32 thousand was transferred from accumulated other comprehensive
income to retained earnings for the net of tax effect of this reclassification.
At March 31, 2006, BOK Financial owned the rights to service 57,211 mortgage
loans with outstanding principal balances of $5.0 billion, including $439
million serviced for affiliates. The weighted average interest rate and
remaining term was 6.13% and 276 months, respectively.
On March 31, 2006, the Company paid approximately $6.8 million to acquire the
rights to service approximately $480 million of mortgage loans. Substantially
all of these loans are to borrowers in our primary market areas.
For the three months ended March 31, 2006 and 2005, mortgage banking revenue
includes servicing fee income of $4.0 million and $4.1 million, respectively.
33
Activity in capitalized mortgage servicing rights and related valuation
allowance during the three months ending March 31, 2006 is as follows (in
thousands):
Capitalized Mortgage Servicing Rights
-----------------------------------------------
Valuation
Purchased Originated Total Allowance Net
--------------------------------------------------------------------------------
Balance at
December 31, 2005 $ 8,606 $ 52,905 $ 61,511 $ (7,414) $ 54,097
Adoption of FAS 156 effective
January 1, 2006 (117) (6,747) (6,864) 7,414 550
Additions, net 6,770 2,835 9,605 - 9,605
Change in fair value due to loan runoff (535) (2,190) (2,725) - (2,725)
Change in fair value due to market
changes (116) 7,197 7,081 - 7,081
--------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2006 (1) $ 14,608 $ 54,000 $ 68,608 $ - $ 68,608
--------------------------------------------------------------------------------------------------------------------
(1) Excludes approximately $993,000 of loan servicing rights on mortgage loans
originated prior to the adoption of FAS 122.
Fair value is determined by discounting the projected net cash flows.
Significant assumptions used to determine fair value are:
March 31, 2006 December 31, 2005
-----------------------------------------------------
Discount rate - risk-free rate plus a market premium 10.11% 10.85%
Prepayment rate - based upon loan interest rate,
original term and loan type 6.50% - 20.20% 10.42% - 20.38%
Loan servicing costs - annually per loan based upon
loan type $40 - $63 $35 - $46
Escrow earnings rate - indexed to rates paid on deposit
accounts with comparable average life 5.68% 5.21%
Stratification of the mortgage loan servicing portfolio and outstanding
principal of loans serviced by interest rate at March 31, 2006 follows (in
thousands):
< 5.51% 5.51% - 6.50% 6.51% - 7.50% => 7.50% Total
---------------------------------------------------------------------------
Fair value $ 17,671 $ 34,681 $ 12,198 $ 4,058 $ 68,608
----------------------------------------------------------------------------------------------------------------------
Outstanding principal of loans serviced (1)$ 1,137,200 $ 2,178,600 $ 861,300 $261,500 $4,438,600
----------------------------------------------------------------------------------------------------------------------
(1) Excludes outstanding principal of $439 million for loans serviced for
affiliates and $62 million of mortgage loans for which there are no capitalized
mortgage servicing rights.
(4) DISPOSAL OF AVAILABLE FOR SALE SECURITIES
Sales of available for sale securities resulted in gains and losses as follows
(in thousands):
Three Months Ended March 31,
----------------------------------
2006 2005
-------------- ---------------
Proceeds $ 36,576 $ 330,648
Gross realized gains 714 535
Gross realized losses (1,935) (3,172)
Related federal and state income
tax benefit (444) (955)
34
(5) EMPLOYEE BENEFITS
BOK Financial has sponsored a defined benefit Pension Plan for all employees who
satisfied certain age and service requirements. During the fourth quarter of
2005, the Company modified the Pension Plan to curtail benefit accruals
effective April 1, 2006. During the first quarter of 2006 and 2005, net periodic
pension cost was approximately $1.8 million and $1.6 million, respectively.
The Company made no Pension Plan contributions during the first quarter of 2006
and 2005.
Management has been advised that no minimum contribution will be required for
2006. Due to the curtailment, the maximum allowable contribution for 2006 has
not yet been determined.
(6) SHAREHOLDERS' EQUITY
On April 25, 2006, the Board of Directors of BOK Financial Corporation approved
a $0.15 per share quarterly common stock dividend. The quarterly dividend will
be payable on or about May 31, 2006 to shareholders of record on May 12, 2006.
(7) EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per
share (dollars in thousands, except share data):
Three Months Ended
---------------------------
March 31, March 31,
2006 2005
---------------------------
Numerator:
Net income $ 54,748 $ 52,055
Preferred stock dividends - (375)
-------------------------------------------------------------------------------------
Numerator for basic earnings per share - income
available to common shareholders 54,748 51,680
-------------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock dividends - 375
-------------------------------------------------------------------------------------
Numerator for diluted earnings per share - income available
to common shareholders after assumed conversion $ 54,748 $ 52,055
-------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share - weighted
average shares 66,715,396 59,432,812
Effect of dilutive securities:
Employee stock compensation plans (1) 545,263 593,285
Convertible preferred stock - 6,920,668
-------------------------------------------------------------------------------------
Dilutive potential common shares 545,263 7,513,953
-------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 67,260,659 66,946,765
-------------------------------------------------------------------------------------
Basic earnings per share $ 0.82 $ 0.87
-------------------------------------------------------------------------------------
Diluted earnings per share $ 0.81 $ 0.78
-------------------------------------------------------------------------------------
(1) Excludes employee stock options with exercise prices
greater than current market price. 1,598,709 857,197
35
(8) REPORTABLE SEGMENTS
Reportable segments reconciliation to the Consolidated Financial Statements for
the three months ended March 31, 2006 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
------------------------------------------------------------------------------
Total reportable segments $ 119,560 $ 90,226 $ 110,259 $ 59,434 $ 17,026,747
Unallocated items:
Tax-equivalent adjustment 1,522 - - 1,522 -
Funds management and other (3,756) 741 7,120 (6,208) (756,508)
------------------------------------------------------------------------------
BOK Financial consolidated $ 117,326 $ 90,967 $ 117,379 $ 54,748 $ 16,270,239
==============================================================================
(1) Excluding financial instruments gains/(losses).
Reportable segments reconciliation to the Consolidated Financial Statements for
the three months ended March 31, 2005 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
------------------------------------------------------------------------------
Total reportable segments $ 101,059 $ 82,254 $ 104,851 $ 45,371 $ 14,965,558
Unallocated items:
Tax-equivalent adjustment 1,392 - - 1,392 -
Funds management and other 5,143 (2,239) (2,692) 5,292 (746,703)
------------------------------------------------------------------------------
BOK Financial consolidated $ 107,594 $ 80,015 $ 102,159 $ 52,055 $ 14,218,855
==============================================================================
(1) Excluding financial instruments gains/(losses).
(9) CONTINGENT LIABILITIES
In the ordinary course of business, BOK Financial and its subsidiaries are
subject to legal actions and complaints. Management believes, based upon the
opinion of counsel, that the actions and liability or loss, if any, resulting
from the final outcomes of the proceedings, will not be material in the
aggregate.
(10) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
BOK Financial is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to manage interest rate risk. Those financial instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in BOK
Financial's Consolidated Balance Sheets. Exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the notional
amount of those instruments.
As of March 31, 2006, outstanding commitments and letters of credit were as
follows (in thousands):
March 31,
2006
--------------
Commitments to extend credit $4,660,153
Standby letters of credit 495,006
Commercial letters of credit 9,270
Commitments to purchase securities 4,000
36
------------------------------------------------------------------------------------------------------------------------------
Quarterly Financial Summary - Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share Data)
Three Months Ended
-------------------------------------------------------------------------------------
March 31, 2006 December 31, 2005
------------------------------------------ -------------------------------------
Average Revenue/ Yield / Average Revenue/ Yield /
Balance Expense(1) Rate Balance Expense(1) Rate
-------------------------------------------------------------------------------------
Assets
Taxable securities (3) $ 4,862,313 $ 55,046 4.60% $ 4,816,263 $ 53,375 4.44%
Tax-exempt securities (3) 262,124 3,465 5.36 243,521 3,046 5.05
------------------------------------------------------------------------------------------------------------------------------
Total securities (3) 5,124,437 58,511 4.64 5,059,784 56,421 4.47
------------------------------------------------------------------------------------------------------------------------------
Trading securities 16,722 209 5.07 20,595 243 4.68
Funds sold and resell agreements 21,181 239 4.58 57,656 581 4.00
Loans (2) 9,164,706 166,148 7.35 9,005,546 158,387 6.98
Less reserve for loan losses 105,135 - - 108,998 - -
------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 9,059,571 166,148 7.44 8,896,548 158,387 7.06
------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 14,221,911 225,107 6.42 14,034,583 215,632 6.12
------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,048,328 2,168,128
------------------------------------------------------------------------------------------------------------------------------
Total assets $ 16,270,239 $ 16,202,711
------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 5,327,004 $ 31,129 2.37% $ 4,821,627 $ 24,075 1.98%
Savings deposits 155,554 330 0.86 154,316 292 0.75
Time deposits 4,162,952 41,395 4.03 4,216,625 40,083 3.77
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 9,645,510 72,854 3.06 9,192,568 64,450 2.78
------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 1,731,983 18,483 4.33 1,812,752 17,914 3.92
Other borrowings 882,878 9,939 4.57 1,049,635 10,807 4.08
Subordinated debentures 295,792 4,983 6.83 296,021 4,683 6.28
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 12,556,163 106,259 3.43 12,350,976 97,854 3.14
------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,485,398 1,530,504
Other liabilities 680,897 814,192
Shareholders' equity 1,547,781 1,507,039
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 16,270,239 $ 16,202,711
------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (3) $ 118,848 2.99% $ 117,778 2.98%
Tax-Equivalent Net Interest Revenue
To Earning Assets (3) 3.39 3.34
Less tax-equivalent adjustment (1) 1,522 1,392
------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 117,326 116,386
Provision for credit losses 3,400 4,450
Other operating revenue 89,437 87,344
Other operating expense 117,379 123,903
------------------------------------------------------------------------------------------------------------------------------
Income before taxes 85,984 75,377
Federal and state income tax 31,236 27,219
------------------------------------------------------------------------------------------------------------------------------
Net Income $ 54,748 $ 48,158
------------------------------------------------------------------------------------------------------------------------------
Earnings Per Average Common Share Equivalent:
Net income:
Basic $ 0.82 $ 0.72
------------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.81 $ 0.72
------------------------------------------------------------------------------------------------------------------------------
(1) Tax equivalent at the statutory federal and state rates for the periods
presented. The taxable equivalent adjustments shown are for comparative
purposes.
(2) The loan averages included loans on which the accrual of interest has been
discontinued and are stated net of unearned income.
(3) Yield calculations exclude security trades that have been recorded on trade
date with no corresponding interest income.
37
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended
-------------------------------------------------------------------------------------------------------------------------
September 30, 2005 June 30, 2005 March 31, 2005
-------------------------------------------------------------------------------------------------------------------------
Average Revenue/ Yield / Average Revenue/ Yield / Average Revenue/ Yield /
Balance Expense(1) Rate Balance Expense(1) Rate Balance Expense(1) Rate
-------------------------------------------------------------------------------------------------------------------------
$ 4,800,698 $ 51,946 4.28% $ 4,831,186 $ 51,275 4.32% $ 4,628,233 $ 49,356 4.32%
231,097 2,888 4.96 215,360 2,810 5.23 217,571 2,843 5.30
-------------------------------------------------------------------------------------------------------------------------
5,031,795 54,834 4.31 5,046,546 54,085 4.36 4,845,804 52,199 4.36
-------------------------------------------------------------------------------------------------------------------------
14,560 171 4.66 11,639 165 5.69 17,205 191 4.50
44,882 386 3.41 21,170 156 2.96 30,003 164 2.22
8,635,732 144,954 6.66 8,341,490 133,173 6.40 7,963,177 119,006 6.06
109,840 - - 111,056 - - 111,955 - -
-------------------------------------------------------------------------------------------------------------------------
8,525,892 144,954 6.75 8,230,434 133,173 6.49 7,851,222 119,006 6.15
-------------------------------------------------------------------------------------------------------------------------
13,617,129 200,345 5.83 13,309,789 187,579 5.68 12,744,234 171,560 5.46
-------------------------------------------------------------------------------------------------------------------------
1,970,746 1,750,686 1,474,621
-------------------------------------------------------------------------------------------------------------------------
$ 15,587,875 $ 15,060,475 $ 14,218,855
-------------------------------------------------------------------------------------------------------------------------
$ 4,533,912 $ 18,968 1.66% $ 4,323,513 $ 16,049 1.49% $ 3,920,844 $ 13,629 1.41%
157,772 280 0.70 166,426 285 0.69 159,276 249 0.63
3,958,948 35,255 3.53 3,710,338 31,499 3.41 3,685,257 29,736 3.27
-------------------------------------------------------------------------------------------------------------------------
8,650,632 54,503 2.50 8,200,277 47,833 2.34 7,765,377 43,614 2.28
-------------------------------------------------------------------------------------------------------------------------
2,067,432 17,738 3.40 2,160,031 15,764 2.93 1,704,327 10,190 2.42
1,047,423 9,510 3.60 914,968 7,224 3.17 971,616 6,679 2.79
297,284 4,477 5.97 200,038 2,980 5.98 150,752 2,227 5.99
-------------------------------------------------------------------------------------------------------------------------
12,062,771 86,228 2.84 11,475,314 73,801 2.58 10,592,072 62,710 2.40
-------------------------------------------------------------------------------------------------------------------------
1,424,102 1,586,248 1,895,989
613,667 558,655 319,375
1,487,335 1,440,258 1,411,419
-------------------------------------------------------------------------------------------------------------------------
$ 15,587,875 $ 15,060,475 $ 14,218,855
-------------------------------------------------------------------------------------------------------------------------
$ 114,117 2.99% $ 113,778 3.10% $ 108,850 3.06%
3.32 3.45 3.46
1,289 1,245 1,256
-------------------------------------------------------------------------------------------------------------------------
112,828 112,533 107,594
3,976 2,015 2,000
86,855 94,591 78,156
117,034 126,010 102,159
-------------------------------------------------------------------------------------------------------------------------
78,673 79,099 81,591
27,846 28,634 29,536
-------------------------------------------------------------------------------------------------------------------------
$ 50,827 $ 50,465 $ 52,055
-------------------------------------------------------------------------------------------------------------------------
$ 0.77 $ 0.79 $ 0.87
-------------------------------------------------------------------------------------------------------------------------
$ 0.76 $ 0.75 $ 0.78
-------------------------------------------------------------------------------------------------------------------------
38
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases made by
or on behalf of the Company or any "affiliated purchaser" (as defined in Rule
10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company's common
stock during the three months ended March 31, 2006.
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
Total Number Average Price Total Number of Shares Purchased Maximum Number of Shares
of Shares Paid per as Part of Publicly Announced that May Yet Be Purchased
Period Purchased (2) Share Plans or Programs (1) Under the Plans
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
January 1, 2006 to 57,450 $ 46.50 - 1,970,000
January 31, 2006
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
February 1, 2006 to 67,387 $ 44.96 60,868 1,909,132
February 28, 2006
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
March 1, 2006 to 4,364 $ 47.28 540 1,908,592
March 31, 2006
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
Total 129,201 61,408
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
(1) The Company had a stock repurchase plan that was initially authorized by
the Company's board of directors on February 24, 1998 and amended on May
25, 1999. Under the terms of that plan, the Company could repurchase up to
800,000 shares of its common stock. As of March 31, 2005, the Company had
repurchased 638,642 shares under that plan. On April 26, 2005, the
Company's board of directors terminated this authorization and replaced it
with a new stock repurchase plan authorizing the Company to repurchase up
to two million shares of the Company's common stock. As of March 31, 2006,
the Company had repurchased 91,408 shares under the new plan.
(2) The Company routinely repurchases mature shares from employees to cover the
exercise price and taxes in connection with employee stock option
exercises.
Item 6. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Items 1, 3, 4, and 5 are not applicable and have been omitted.
39
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOK FINANCIAL CORPORATION
(Registrant)
Date: May 10, 2006 /s/ Steven E. Nell
----------------------------- ---------------------------------
Steven E. Nell
Executive Vice President and
Chief Financial Officer
/s/ John C. Morrow
-----------------------------------
John C. Morrow
Senior Vice President and Director
of Financial Accounting & Reporting