As filed with the Securities and Exchange Commission on November 9, 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 September 30, 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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 66,877,555 shares of common
stock ($.00006 par value) as of October 31, 2006.
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2
BOK Financial Corporation
Form 10-Q
Quarter Ended September 30, 2006
Index
Part I. Financial Information
Management's Discussion and Analysis (Item 2) 2
Market Risk (Item 3) 27
Controls and Procedures (Item 4) 29
Consolidated Financial Statements - Unaudited (Item 1) 30
Nine Month Financial Summary - Unaudited (Item 2) 41
Quarterly Financial Summary - Unaudited (Item 2) 42
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44
Item 6. Exhibits 44
Signatures 45
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 $52.7 million, or $0.78 per diluted share for the third quarter of 2006,
compared with $50.8 million, or $0.76 per diluted share for the third quarter of
2005. The annualized returns on average assets and shareholders' equity were
1.24% and 12.90%, respectively for 2006, compared with returns of 1.29% and
13.56%, respectively for 2005.
Highlights of the quarter included:
o Average outstanding loans and average deposits increased 14% and 13%,
respectively over the third quarter of 2005.
o Net interest revenue grew $11.2 million or 10% over last year's third
quarter, 9% annualized over the second quarter of 2006.
o Net interest margin was 3.38%, up from 3.32% in the third quarter of last
year and stable throughout 2006.
o Fee income increased $2.7 million or 3% over the third quarter of 2005.
o Fair value of mortgage servicing rights declined $4.2 million, net of
hedging gains during the third quarter.
o Other operating expenses increased $9.2 million or 8%, including a $1.8
million non-cash charge related to taxes on a $202 million investment in
bank-owned life insurance; personnel costs were up $8.1 million.
o Income tax expense was reduced $2.2 million for the favorable resolution of
certain tax issues.
o Non-performing loans, annualized net charge-offs continued to be near
historic lows.
Net interest revenue grew $11.2 million or 10% over 2005. Average outstanding
loan balances increased $1.2 billion or 14% and average deposits increased $1.3
billion or 13%. Fees and commission revenue increased $2.7 million or 3% over
the third quarter of 2005. Total fee revenue, which recently had been growing at
a low double digit rate, slowed in most major categories of fees and
commissions. Mortgage banking revenue decreased $2.6 million or 27% due largely
to lower production volumes.
Operating expenses increased $9.2 million or 8% over the third quarter of 2005,
excluding changes in the value of mortgage servicing. Personnel costs increased
$8.1 million due largely to a $5.0 million increase in salaries and wages and a
$2.8 million increase in incentive compensation.
The fair value of mortgage servicing rights decreased $7.9 million during the
third quarter of 2006 due to falling interest rates and increasing prepayment
speeds. At the same time, falling interest rates increased the value of
securities held as an economic hedge of mortgage servicing rights $3.7 million
for a net pre-tax loss of $4.2 million.
3
Non-accruing loans totaled $30 million or 0.31% of outstanding loans at
September 30, 2006 compared with $37 million or 0.42 % of outstanding loans at
September 30, 2005. The combined allowance for loan losses and reserve for
off-balance sheet credit losses totaled $127 million or 1.28% of outstanding
loans at September 30, 2006 and $127 million or 1.44% of outstanding loans at
September 30, 2005. The provision for credit losses was $5.3 million for the
third quarter of 2006 and $4.0 million for the same period last year.
Net income for the first nine months of 2006 totaled $162.4 million, up $9.0
million or 6% over 2005. Net interest revenue grew $29.5 million or 9% due
primarily to a $1.2 billion increase in average loans. Loan growth was funded by
a $1.4 billion increase in average deposits. Net interest margin for the first
nine months of 2006 and 2005 was 3.39% and 3.41%, respectively. Fee income
increased $20.8 million or 8%. All categories of fee income increased over 2005
except mortgage banking revenue which decreased $2.7 million or 12%. Transaction
card revenue increased $5.4 million or 10% due to volume growth while trust fees
rose $4.1 million or 9%. Mortgage banking revenue decreased due largely to a
reduction in loan production volume which resulted from rising mortgage interest
rates over the last nine months. Other revenue grew $9.2 million or 38% due
primarily to a $4.0 million increase in fees on margin assets. The fair value of
mortgage servicing rights, net of losses on securities held as an economics
hedge, increased $2.1 million for the first nine months of 2006. Operating
expenses increased $33.1 million or 10% due to a $27.9 million increase in
personnel costs.
The Company is establishing a new regional bank in Kansas City. Initial
operations are expected to begin in the fourth quarter of 2006.
Results of Operations
Net Interest Revenue
Tax-equivalent net interest revenue increased to $125.8 million for the third
quarter of 2006 from $114.1 million for 2005, due primarily to a $1.2 billion or
14% increase in average outstanding loan principal. Average loan growth was
funded by a $1.3 billion or 13% increase in average deposits. The excess of
average deposits over growth in average loans was used to reduce other
borrowings, generally a higher-costing source of funds. 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 3.38% for the third quarter of 2006, compared with 3.32% for
the third quarter of 2005 and 3.40% for the second quarter of 2006. Yields on
average earning assets continued to trend upwards due to rising market interest
rates. The yield on average earning assets was 6.91%, up 108 basis points
compared with the third quarter of 2005 and 20 basis points over the preceding
quarter. The yield on average outstanding loans was 7.99%, up 133 basis points
over the third quarter of 2005 and 31 basis points over the second quarter of
2006. The tax-equivalent yield on securities was 4.68% for the third quarter of
2006, compared with 4.31% for the third quarter of 2005 and 4.77% for the second
quarter of 2006.
Rates paid on average interest-bearing liabilities during the third quarter of
2006 increased 114 basis points over the third quarter of 2005 and 25 basis
points over the preceding quarter. Rates paid on interest-bearing deposit
accounts increased 104 basis points over 2005. The cost of other
interest-bearing funds increased 172 basis points compared with the same period
last year and 27 basis points from the preceding quarter. Capital, non-interest
bearing funds and changes in the mix of funding sources added 45 basis points to
the net interest margin in third quarter of 2006 compared with 33 basis points
for 2005 and 42 basis points for the second quarter of 2006.
Our overall objective is to manage the Company's balance sheet to be essentially
neutral to changes in interest rate. Approximately 78% 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 would be 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 to offset the short-term nature of the majority of the Company's
funding sources. The expected duration of these securities is approximately 2.9
years based on a range of interest rate and prepayment assumptions. 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
4
notional amount of $797 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 position our balance sheet to be neutral
to changes in interest rates. 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
position our balance sheet to be neutral to changes in interest rates.
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 Market Risk section of this
report.
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Table 1 - Volume / Rate Analysis
(In thousands)
Three Months Ended Nine Months Ended
September 30, 2006 / 2005 September 30, 2006 / 2005
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Change Due To (1) Change Due To (1)
--------------------------------------------------------------------------
Yield / Yield
Change Volume Rate Change Volume /Rate
--------------------------------------------------------------------------
Tax-equivalent interest revenue:
Securities $ 3,942 $ (549) $ 4,491 $ 16,286 $ 3,225 $ 13,061
Trading securities 55 79 (24) 195 221 (26)
Loans 52,711 21,748 30,963 147,949 61,552 86,397
Funds sold and resell agreements 263 70 193 589 87 502
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Total 56,971 21,348 35,623 165,019 65,085 99,934
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Interest expense:
Transaction deposits 20,603 5,284 15,319 56,929 17,356 39,573
Savings deposits 80 (24) 104 229 (57) 286
Time deposits 13,285 3,585 9,700 38,243 12,819 25,424
Federal funds purchased and
repurchase agreements 9,830 766 9,064 28,055 557 27,498
Other borrowings 743 (3,380) 4,123 5,529 (6,334) 11,863
Subordinated debentures 733 (68) 801 5,371 3,706 1,665
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Total 45,274 6,163 39,111 134,356 28,047 106,309
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Tax-equivalent net interest revenue 11,697 15,185 (3,488) 30,663 37,038 (6,375)
Change in tax-equivalent adjustment (547) (1,208)
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Net interest revenue $ 11,150 $ 29,455
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(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 $10.7 million compared with the third quarter
of last year. Fees and commission revenue increased $2.7 million or 3%. In
addition, $3.7 million of securities gains were recognized in the third quarter
of 2006 compared with securities losses of $4.7 million in the third quarter of
2005. Securities gains and losses related primarily to economic hedges of our
mortgage servicing rights.
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 third quarter of
2006. We believe that a variety of fee revenue sources provide an offset to
changes in interest rates, values in the equity markets, commodity prices and
consumer spending, all of which can be volatile. We expect continued growth in
other operating revenue through offering new products and services and by
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 $1.4 million or 8%. Check card revenue
increased $775 thousand or 19% while ATM network revenue increased $784 thousand
or 10% over the third quarter of 2005. During the third quarter of 2006, the
Company signed agreements to place ATMs in 140 convenience stores in Oklahoma,
Texas, Missouri and Kansas. Growth in check card revenue was distributed among
all markets. Merchant discount fees decreased $146 thousand or 2% compared with
the third quarter of 2005.
5
Trust fees and commissions increased $725 thousand or 4% for the third quarter
of 2006. The fair value of all trust assets, which is the basis for a
significant portion of trust fees increased to $29.7 billion at September 30,
2006 compared with $27.6 billion at September 30, 2005. Personal trust
management fees, which provide 30% of total trust fees and commissions increased
$288 thousand or 6%. Employee benefit plan management fees, which provide 20% of
total trust fees, were unchanged from 2005. Net fees from mutual fund advisory
and administrative services, which provide 20% of total trust fees, were down
$97 thousand or 3%. In addition, revenue from the management of oil and gas
properties and other real estate increased $319 thousand or 28%.
Trust activities in the Oklahoma and Colorado markets provided $12.6 million and
$2.1 million, respectively, of total trust fees and commissions during the third
quarter of 2006. Trust revenue grew $218 thousand or 2% in the Oklahoma market
and $233 thousand or 13% in the Colorado market.
Brokerage and trading revenue decreased $408 thousand or 4%. Much of the
decrease in trading revenue is attributed to increased competition in the market
and lower demand caused by the flattening yield curve. Customer hedging revenue
increased $513 thousand or 21% to $3.0 million. Volatility in the energy markets
prompted our energy customers to more actively hedge their gas and oil
production. Revenue from securities trading activities decreased $1.3 million or
20%. Revenue from retail brokerage activities increased $340 thousand or 12%
over the same period of 2005.
Service charges on deposit accounts increased $703 thousand or 3% over the third
quarter of 2005. Overdraft fees grew $915 thousand or 5% due to increased
volume. Account service charge revenue decreased $206 thousand or 12%. 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 decreased $2.6 million or 27% compared
with 2005. Net gains on mortgage loans sold totaled $2.9 million, down $2.6
million from the third quarter of 2005. Servicing revenue totaled $4.0 million
for the third quarter of 2006, unchanged from the same period last year.
Other operating revenue included $2.9 million of fees earned on margin assets in
the third quarter of 2006 and $2.4 million in the third quarter of 2005. Margin
assets which are held primarily as part of the Company's customer derivatives
programs averaged $265 million for the third quarter of 2006, compared with $296
million for the third quarter of 2005. Fees earned on average margin assets
increased to 4.33% in the third quarter of 2006 from 3.27% in the third quarter
of 2005. Fee rates earned on margin assets are generally consistent with
short-term interest rates.
Other operating revenue also included investment banking revenue of $2.1 million
and $812 thousand in the third quarters of 2006 and 2005, respectively. A
recently created tax exempt leasing unit provided $716 thousand of investment
banking revenue in the third quarter of 2006.
Securities and derivatives
BOK Financial recognized net gains of $3.7 million on securities for the third
quarter of 2006, including net gains of $3.8 million on securities held as an
economic hedge of mortgage servicing rights. Securities held as an economic
hedge of the mortgage servicing rights are separately identified on the balance
sheet as "mortgage trading securities". Mortgage trading securities are carried
at fair value; changes in fair value are 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 third quarter of 2005, BOK Financial
recognized net losses of $4.7 million, substantially all due to securities held
as an economic hedge of mortgage servicing rights. Excluding securities held as
an economic hedge of mortgage servicing rights, the Company recognized losses on
securities of $39 thousand in the third quarter of 2006 and $58 thousand in the
third quarter of 2005.
Net gains on derivatives totaled $379 thousand for the third quarter of 2006,
compared with net gains of $606 thousand in 2005. Net gains or losses on
derivatives consist of fair value adjustments of derivatives used to manage
interest rate risk and the related hedged liabilities.
Year-to-date fees and commissions revenue
Fees and commissions revenue for the first nine months of 2006 totaled $276.8
million, a $20.8 million or 8% increase
6
over 2005. Transaction card revenue increased $5.4 million or 10% due to volume
increases in merchant discounts and debit card transactions. Trust fees and
commissions increased $4.1 million or 9% due to increase in asset values and
business growth. Other revenue increased $9.2 million or 38%, including $4.0
million from margin account fees.
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Table 2 - Other Operating Revenue
(In thousands)
Three Months Ended
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Sept. 30, June 30, March 31, Dec.31, Sept. 30,
2006 2006 2006 2005 2005
-------------------------------------------------------------------------------
Brokerage and trading revenue $ 10,958 $ 11,427 $ 12,010 $ 11,116 $ 11,366
Transaction card revenue 19,939 19,951 18,508 18,988 18,526
Trust fees and commissions 17,101 17,751 17,945 16,536 16,376
Deposit service charges and fees 26,322 26,341 23,986 25,222 25,619
Mortgage banking revenue 6,935 7,195 6,789 7,018 9,535
Other revenue 11,756 11,239 10,688 9,924 8,896
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Total fees and commissions 93,011 93,904 89,926 88,804 90,318
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Gain (loss) on sales of assets 475 (269) 1,041 214 675
Gain (loss) on securities, net 3,718 (2,583) (1,221) (1,780) (4,744)
Gain (loss) on derivatives, net 379 (172) (309) 106 606
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Total other operating revenue $ 97,583 $ 90,880 $ 89,437 $ 87,344 $ 86,855
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Other Operating Expense
Other operating expense for the third quarter of 2006 totaled $138.8 million, a
$21.8 million increase from 2005. The increase in other operating expenses
resulted largely from changes in the value of mortgage servicing rights.
Depreciation of the fair value of mortgage servicing rights during the third
quarter of 2006 increased operating expenses $7.9 million. Appreciation in the
value of mortgage servicing rights decreased operating expense by $4.7 million
in the third quarter of 2005. Operating expenses increased $9.2 million or 8%
over the third quarter or 2005, excluding changes in the value of mortgage
servicing due to higher personnel expense.
Personnel expense
Personnel expense totaled $74.6 million for the third quarter of 2006 compared
with $66.5 million for the third quarter of 2005.
Regular compensation expense which consists primarily of salaries and wages
totaled $45.9 million for the third quarter of 2006, up $5.0 million or 12%
increase over 2005. The increase in regular compensation expense was due to a 8%
increase in average regular compensation per full-time equivalent employee and a
4% increase in average staffing. Growth in average compensation per full-time
equivalent employee reflects the cost of hiring top talent to support expansion
in the regional markets, product development, and technology support.
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 $16.5 million for the third quarter of
2006, an increase of $2.8 million or 20% over 2005. Third quarter 2006 expense
for the Company's various cash-based incentive programs totaled $13.2 million,
up $1.9 million over last year. These programs consist primarily of
formula-based plans that determine incentive amounts based on pre-established
growth criteria. Compensation expense for stock-based compensation plans totaled
$2.8 million for both the third quarters of 2006 and 2005. Compensation expense
for stock-based compensation plans accounted for as equity awards totaled $1.6
million in the third quarter of 2006, compared with $1.5 million in the third
quarter of 2005. Expense for these awards is determined by 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 $1.2 million in the third quarter of
2006, compared with $965 thousand in 2005. Expense for these liability awards is
based on current fair value, including current period changes due to the market
value of BOK Financial common stock.
7
Employee benefit expenses totaled $11.0 million for the third quarter of 2006
and $10.4 million for the third quarter of 2005. Pension expense decreased $1.8
million due to the curtailment of pension plan benefits as of April 1, 2006. The
reduction in pension expense was largely offset by a $1.2 million increase in
the cost of enhanced employee thrift plan benefits and a $698 thousand increase
in employee insurance costs.
Data processing and communications expense
Data processing and communication expenses decreased $561 thousand, or 3%
compared to 2005. This expense consists of two broad categories, data processing
systems and transaction card processing. Data processing systems costs decreased
$465 thousand, or 4% compared with the third quarter of 2005. The Company
negotiated cost reductions on its primary data processing contract during the
quarter in exchange for a three-year contract extension. The benefit of these
cost reductions will be recognized over the remaining contract term. Transaction
card processing costs decreased $97 thousand or 1%.
Other operating expenses
Other expenses increased $1.5 million or 21% compared with the third quarter of
2005 due to a $1.8 million non-cash charge related to taxes on a $202 million
investment in bank-owned life insurance. These taxes, which totaled $8.2
million, will be credited to the Company over the next ten years. The third
quarter charge reduced the tax asset to its present value of $6.4 million.
Year to date operating expenses totaled $378.3 million, up 10% over 2005.
Personnel costs were up $27.9 million or 15%. Salaries and wages increased $14.8
million or 12% due to a 7% increase in average salaries per employee and a 4%
increase in the average number of employees. Incentive compensation expense was
up $11.3 million. Cash-based incentive programs increased $6.9 million.
Stock-based incentive compensation increased $4.4 million.
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Table 3 - Other Operating Expense
(In thousands)
Three Months Ended
----------------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2006 2006 2006 2005 2005
----------------------------------------------------------------------------------
Personnel $ 74,605 $ 72,369 $ 71,232 $ 68,666 $ 66,533
Business promotion 4,401 4,802 4,803 5,170 4,494
Professional fees and services 4,734 4,362 3,914 4,534 3,951
Net occupancy and equipment 13,222 13,199 13,026 12,864 12,587
Data processing & communications 16,931 16,157 16,995 18,054 17,492
Printing, postage and supplies 4,182 4,001 3,905 3,976 3,846
Net (gains) losses and operating
expenses of repossessed assets 34 54 219 335 (387)
Amortization of intangible assets 1,299 1,359 1,370 1,797 1,801
Mortgage banking costs 2,869 2,839 3,087 3,294 4,268
Change in fair value of mortgage
servicing rights 7,921 (3,613) (7,081) - -
Recovery for impairment of
mortgage servicing rights - - - (708) (4,671)
Other expense 8,612 6,598 5,909 5,921 7,120
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Total other operating expense $ 138,810 $ 122,127 $ 117,379 $ 123,903 $ 117,034
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Income Taxes
Income tax expense was $24.8 million or 32% of book taxable income, compared
with $27.8 million or 35% of book taxable income for the third quarter of 2005.
The statute of limitations expired on an uncertain tax position during the third
quarter of 2006. Income tax expense was reduced by $2.2 million from the
reversal of reserves previously established for this uncertainty. In addition,
income tax expense in the third quarter of 2006 was reduced by $800 thousand to
adjust 2006 estimated year-to-date tax expense.
8
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 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 Division 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 Sept. 30, Nine months ended Sept. 30,
2006 2005 2006 2005
---------------------------------------------------------------
Regional banking $ 22,175 $ 18,496 $ 67,679 $ 55,693
Oklahoma corporate banking 20,624 17,142 59,048 56,137
Mortgage banking (1,998) 252 2,487 2,009
Oklahoma consumer banking 9,470 6,481 26,483 17,388
Wealth management 6,146 5,869 19,524 16,849
Funds management and other (3,757) 2,587 (12,829) 5,271
----------------------------------------------------------------------------------------------------------------------
Total $ 52,660 $ 50,827 $162,392 $153,347
----------------------------------------------------------------------------------------------------------------------
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 $20.6 million or 39% to consolidated net income for the
third quarter of 2006. This compares to $17.1 million or 34% of consolidated net
income for 2005. Growth in net income provided by this division came primarily
from loan and deposit growth. Average loans attributed to the Oklahoma Corporate
Banking Division were $4.3 billion for the third quarter of 2006, compared with
$4.1 billion for the third quarter of 2005. Deposits attributed to Oklahoma
Corporate Banking averaged $1.8 billion for the third quarter of 2006, up $123
million or 7% over last year. Increased average loans and
9
deposits combined to increase net interest revenue $2.2 million or 6%. In
addition, other operating revenue increased $730 thousand or 3% due to growth in
ATM processing fees. Operating expenses decreased $770 thousand or 3%. Personnel
expense increased $1.3 million or 15% due to growth in both regular salaries and
incentive compensation. Allocations for shared services decreased $2.7 million.
Table 5 - Oklahoma Corporate Banking
(Dollars in Thousands)
Three months ended Sept. 30, Nine months ended Sept. 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- --- ------------- -- -------------- -- -------------
NIR (expense) from external sources $ 64,390 $ 54,647 $ 187,899 $ 149,934
NIR (expense) from internal sources (26,322) (18,828) (74,911) (46,665)
------------- ------------- -------------- -------------
Net interest revenue 38,068 35,819 112,988 103,269
Other operating revenue 23,261 22,531 68,535 65,747
Gain on sale of assets - - - 4,708
Operating expense 29,055 29,825 85,388 80,883
Net loans charged off / (recovered) (1,481) 408 (394) 891
Net income 20,624 17,142 59,048 56,137
Average assets $ 5,318,420 $ 4,808,422 $ 5,220,490 $ 4,630,076
Average economic capital 396,210 348,940 379,500 333,940
Return on assets 1.54% 1.41% 1.51% 1.62%
Return on economic capital 20.65% 19.49% 20.80% 22.48%
Economic capital ratio 7.45% 7.26% 7.27% 7.21%
Efficiency ratio 47.38% 51.11% 47.04% 46.56%
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 for the retail brokerage division of BOSC, Inc., a registered
broker / dealer. Consumer banking activities outside of Oklahoma are included in
the Regional Banking division. The Oklahoma Consumer Banking Division
contributed $9.5 million or 18% to consolidated net income for the third quarter
of 2006. This compares to $6.5 million or 13% of consolidated net income for
2005. Net interest revenue, which consisted primarily of credits for funds
provided to the funds management unit increased $3.4 million or 24%. Average
deposits attributed to this Division increased $174 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 $1.1 million or 6% over last year. Check card fees increased $600
thousand or 21% and overdraft charges increased $333 thousand or 3%. Operating
expenses decreased $259 thousand or 1%. Personnel expense grew $72 thousand or
1% while allocations for shared services decreased $371 thousand.
10
Table 6 - Oklahoma Consumer Banking
(Dollars in Thousands)
Three months ended Sept. 30, Nine months ended Sept. 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- --- ------------- -------------- -- -------------
NIR (expense) from external sources $ (16,559) $ (11,354) $ (44,849) $ (30,548)
NIR (expense) from internal sources 34,154 25,553 95,591 70,003
------------- ------------- -------------- -------------
Net interest revenue 17,595 14,199 50,742 39,455
Other operating revenue 18,579 17,499 53,973 48,949
Operating expense 19,883 20,142 59,727 57,709
Net loans charged off 816 960 1,723 2,114
Net income 9,470 6,481 26,483 17,388
Average assets $ 2,843,512 $ 2,669,817 $ 2,810,437 $ 2,622,826
Average economic capital 66,420 56,500 62,470 54,780
Return on assets 1.32% 0.96% 1.26% 0.89%
Return on economic capital 56.57% 45.51% 56.68% 42.44%
Economic capital ratio 2.34% 2.12% 2.22% 2.09%
Efficiency ratio 54.96% 63.54% 57.04% 65.28%
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.
Mortgage banking activities lost $2.0 million in the third quarter of 2006,
compared with a net profit of $252 thousand in 2005.
Mortgage banking activities consisted 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
loan servicing sector generally performs best when mortgage rates are relatively
high and prepayments are low. The general trend toward higher mortgage loan
commitment rates in the first half of 2006 shifted to a decrease during the
third quarter.
Loan Production Sector
Loan production revenue totaled $3.4 million for the third quarter of 2006,
including $3.1 million of capitalized mortgage servicing rights and a $730
thousand net loss on loans sold. Loan production revenue totaled $5.8 million
for the third quarter of 2005 due to $5.8 million of capitalized mortgage
servicing rights. Mortgage loans funded in the third quarter of 2006 totaled
$230 million, including $199 million of loans funded for resale and $30 million
of loans funded for retention by affiliates. Mortgage loans funded in the same
period of 2005 totaled $247 million. Approximately 67% of the loans funded
during the third quarter of 2006 was to borrowers in Oklahoma. Loan production
activities resulted in net pre-tax income of $249 thousand for the third quarter
of 2006 and net pre-tax income of $2.1 million for the third quarter of 2005.
The pipeline of mortgage loan applications totaled $240 million at September 30,
2006, compared with $276 million at June 30, 2006 and $290 million at September
30, 2005.
Loan Servicing Sector
The loan servicing sector had a net pre-tax loss of $3.8 million for the third
quarter of 2006 compared to a net pre-tax loss of $1.7 million for the same
period of 2005. The fair value of mortgage servicing rights decreased in 2006
due to a decrease in mortgage commitment rates and related factors. The fair
value of mortgage servicing rights increased during the third quarter of 2005
due to rising mortgage commitment rates.
Average mortgage commitment rates decreased 52 basis points since June 30, 2006.
This decrease in commitment rates combined with increased discount rates and
anticipated prepayment speeds to reduce the fair value of mortgage servicing
rights by $7.9 million. At the same time, gains of $3.8 million were recognized
from increases in the fair value of financial instruments held as an economic
hedge of the value of the servicing rights.
During the third quarter of 2005, a $4.7 million reversal of the allowance for
impairment of mortgage loan servicing
11
rights was recognized. A 50 basis point increase in mortgage interest rates
during this period increased the fair value of the servicing rights. The
impairment provision reversal was offset by net losses of $5.0 million on
financial instruments designated as economic hedges.
Servicing revenue, which is included in mortgage banking revenue on the
Consolidated Statements of Earnings, totaled $4.0 million in both the third
quarters of 2006 and 2005. The average outstanding balance of loans serviced for
others was $4.5 billion during 2006 compared to $3.9 billion during 2005.
Annualized servicing revenue per outstanding loan principal decreased to 36
basis points for the third quarter of 2006, compared with 42 basis points last
year.
In addition to changes in the fair value of mortgage servicing rights due to
anticipated prepayments and other factors, the fair value of mortgage servicing
rights decreased $2.5 million during the third quarter of 2006 due to actual
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 adoption of FAS 156 in the first quarter of 2006, 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 third quarter of 2005 totaled
$3.8 million. The decrease in expense related to the runoff of loans serviced
primarily reflects lower loan prepayment speeds.
Table 7 - Mortgage Banking
(Dollars in Thousands)
Three months ended Sept. 30, Nine months ended Sept. 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- --- ------------- -------------- -- -------------
NIR (expense) from external sources $ 6,132 $ 5,119 $ 16,538 $ 15,214
NIR (expense) from internal sources (5,055) (3,683) (13,969) (10,835)
------------- ------------- -------------- -------------
Net interest revenue 1,077 1,436 2,569 4,379
Capitalized mortgage servicing rights 3,134 5,849 9,302 12,386
Other operating revenue 4,258 3,770 13,012 13,068
Gain on sale of assets - - - 1,232
Operating expense 7,517 10,067 22,514 26,938
Change in fair value of mortgage servicing
rights (7,921) - 2,773 -
(Recovery) for impairment of mortgage
servicing rights - (4,671) - (3,207)
Gains (losses) on financial instruments, net 3,757 (5,047) (637) (3,719)
Net income (loss) (1,998) 252 2,487 2,009
Average assets $ 530,808 $ 532,583 $ 492,222 $ 530,405
Average economic capital 25,290 22,340 24,950 24,260
Return on assets (1.49)% 0.19% 0.68% 0.51%
Return on economic capital (31.34)% 4.48% 13.33% 11.07%
Economic capital ratio 4.76% 4.19% 5.07% 4.57%
Efficiency ratio 88.76% 91.06% 90.48% 86.71%
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. 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.
At September 30, 2006, financial instruments with a fair value of $112 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 September 30, 2006, the pre-tax results of this
modeling on reported earnings were:
12
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 $ 3,835 $ (4,419)
Fair value of hedging instruments (3,550) 3,777
----------------- ----------------
Net $ 285 $ (642)
----------------- ----------------
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 $3.8 million while a 50 basis point decrease is
expected to reduce value by $4.4 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.
This 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.
Modeling changes in value of the mortgage servicing rights due to changes in
interest rates assumes stable relationships between mortgage commitment rates
and discount rates used to determine the present value of future cash flows. It
also assumes a stable relationship between assumed loan prepayments and actual
prepayments of our loans. Based on these assumptions, at June 30, 2006 we
expected the value of our servicing rights to decrease $3.7 million if mortgage
commitment rates fell 50 basis points. As noted before, mortgage commitment
rates fell 52 basis points and the value of our mortgage servicing rights
decreased $7.9 million. We believe two factors caused most of the difference
between our expectation and the actual results. First, mortgage interest rates
have been very volatile over the past six months, rising 36 basis points during
the second quarter of 2006, then falling 52 basis points in the third quarter.
This volatility increased the discount spread that investors in servicing rights
would expect relative to market interest rates by 34 basis points over benchmark
rates. The increased discount spread reduced the value of our servicing rights
by $1.0 million. Second, actual prepayments of loans we service increased in
relation to forecasted prepayment speeds. Historically, our actual prepayments
have been approximately 76% of prepayments forecasted based on national trends.
Based on a moving average of the most recent twelve-month period, actual
prepayments increased to 80%. The increase in prepayment speeds reduced the
value of our servicing rights by $3.2 million.
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 and retirement products,
loans and other services to affluent individuals, businesses, not-for-profit
organizations, and governmental agencies. Wealth management 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 consists 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 $6.1 million or 12% to consolidated net income for
the third quarter of 2006. This is compared to $5.9 million or 12% of
consolidated net income for 2005. Trust and private financial services provided
$5.4 million of net income in the third quarter of 2006, up 2% over last year.
Net income provided by brokerage and trading activities totaled $766 thousand, a
$206 thousand or 37% increase compared with the third quarter of 2005.
Average loans attributed to trust and private financial services increased $206
million or 40% compared with the third quarter of 2005. Loan growth was funded
by a $108 million increase in average deposits and funds provided by the funds
management unit. The increase in loans and deposits combined to increase net
interest revenue by $2.1 million or 43%.
13
Other operating revenue for the third quarter of 2006 totaled $29.8 million, up
$1.8 million or 6% over 2005. Other operating revenue for the wealth management
division consists primarily of trust fees and commissions, investment banking
revenue and brokerage and trading revenue.
Trust fees and commissions totaled $15.0 million for the third quarter of 2006,
a $457 thousand or 3% increase over 2005. At September 30, 2006 and 2005, the
wealth management line of business was responsible for trust assets with
aggregate market values of $27.2 billion and $25.2 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 $10.1 billion of trust
assets at September 30, 2006, compared with $9.1 billion at September 30, 2005.
Investment banking revenue increased $1.3 million over the third quarter of 2005
due the timing of transaction closings and growth in a recently-created tax
exempt leasing unit.
Revenue from our customer hedging programs was up $879 thousand or 57% over last
year due largely to volatility in energy prices. Retail brokerage fees increased
$317 thousand or 11%. This revenue growth was largely offset by a $1.3 million
decrease in securities trading profits due to increased competition and a flat
yield curve.
Operating expenses totaled $26.6 million for the third quarter of 2006, a $3.4
million or 15% increase over 2005. Personnel costs rose $2.2 million or 15% due
primarily to higher costs in trust and private financial services.
Table 9 - Wealth Management
(Dollars in Thousands)
Three months ended Sept. 30, Nine months ended Sept. 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- --- ------------- -------------- -- -------------
NIR (expense) from external sources $ 5,516 $ 3,209 $ 10,992 $ 8,820
NIR (expense) from internal sources 1,387 1,627 9,085 7,065
------------- ------------- -------------- -------------
Net interest revenue 6,903 4,836 20,077 15,885
Other operating revenue 29,795 27,987 89,900 81,239
Operating expense 26,618 23,220 77,853 69,351
Net income 6,146 5,869 19,524 16,849
Average assets $ 1,776,658 $ 1,545,343 $ 1,855,114 $ 1,308,090
Average economic capital 132,530 128,620 126,690 108,340
Return on assets 1.37% 1.51% 1.41% 1.72%
Return on economic capital 18.40% 18.10% 20.60% 20.79%
Economic capital ratio 7.46% 8.32% 6.83% 8.28%
Efficiency ratio 72.53% 70.74% 70.79% 71.40%
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 primary
customer focus. Regional Banking contributed $22.2 million or 42% to
consolidated net income during the third quarter of 2006. This compares with
$18.5 million or 36% of consolidated net income for the same period in 2005.
Growth in net income contributed by the regional banks came primarily from
operations in Texas. Net income from Texas operations increased $1.6 million or
15% compared with the same period of 2005. In addition, net income for 2006 in
Colorado, New Mexico and Arizona increased $1.4 million, $402 thousand and $514
thousand, respectively. Net income in Arkansas decreased $250 thousand from last
year.
Net income from operations in Colorado was $2.9 million for the third quarter of
2006, compared with $1.5 million for the third quarter of 2005. Net interest
revenue increased $2.1 million or 29% due primarily to a $425 million increase
in average earning assets. Average loans increased $133 million while average
securities increased $292 million. The growth in earning assets was funded
primarily by a $276 million increase in deposits and $131 million of borrowings
from the funds management unit. Other operating revenue grew $362 thousand or
15% due primarily to trust fees and commissions. At September 30, 2006 and 2005,
Colorado regional banking was responsible for trust assets with
14
aggregate fair values of $2.6 billion and $2.4 billion, respectively, under
various fiduciary arrangements. We have sole or joint discretionary authority
over $980 million of trust assets at September 30, 2006, compared with $903
million at September 30, 2005. Operating expenses increased $988 thousand or 15%
including a $521 thousand or 18% increase in personnel costs.
Net income from Texas operations totaled $12.8 million for the third quarter of
2006, up $1.6 million or 15% over last year. Net interest revenue grew $4.9
million or 15%. Average earning assets increased $543 million, or 19% from the
third quarter of 2005. This increase resulted from a $420 million increase in
average loans and a $128 million increase in securities. The growth in average
earning assets was funded primarily by a $489 million increase in average
deposits. Operating expenses increased $496 thousand or 2%. An $816 thousand or
7% increase in personnel costs and a $457 thousand charge related to taxes on
bank-owned life insurance was partially offset by an $836 thousand reduction in
higher allocations for shared services. Net loans charged off during the third
quarter of 2006 included $1.6 million of commercial overdrafts from a single
customer.
Net income from New Mexico operations increased $402 thousand or 8%. Average
earning assets decreased $64 million. Average loans increased $20 million while
securities and funds sold to the funds management unit decreased $87 million.
Average deposits in the New Mexico market increased $114 million, including $112
million of consumer banking deposits. Average funds borrowed from external
sources decreased $143 million as the Company centralized borrowings from
external sources in the funds management unit. Operating expenses decreased $232
thousand or 3%.
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 $344 million for the third quarter of 2006, up $166
million from the third quarter of 2005's average of $177 million. Deposits
averaged $126 million for both the third quarters of 2006 and 2005. Loan growth
was funded by borrowings from the funds management unit. Operating expenses
increased $513 thousand or 16%. Personnel costs were up $985 thousand as we
continue to build a commercial banking presence in Phoenix and Tucson. Growth in
personnel costs was partially offset by a $585 thousand reduction in data
processing expense.
Table 10 - Bank of Texas
(Dollars in Thousands)
Three months ended Sept. 30, Nine months ended Sept. 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- --- ------------- -------------- -- -------------
NIR (expense) from external sources $ 44,075 $ 36,409 $ 124,277 $ 104,034
NIR (expense) from internal sources (6,386) (3,576) (15,913) (8,176)
------------- ------------- -------------- -------------
Net interest revenue 37,689 32,833 108,364 95,858
Other operating revenue 6,178 6,094 18,837 17,526
Operating expense 21,757 21,261 62,858 59,013
Net loans charged off 2,474 501 4,664 1,875
Net income 12,775 11,153 38,802 34,381
Average assets $ 3,805,207 $ 3,239,231 $ 3,654,725 $ 3,156,341
Average economic capital 261,770 176,360 233,180 174,080
Average invested capital 428,850 343,450 400,260 341,160
Return on assets 1.33% 1.37% 1.42% 1.46%
Return on economic capital 19.36% 25.09% 22.25% 26.41%
Return on average invested capital 11.82% 12.88% 12.96% 13.47%
Economic capital ratio 6.88% 5.44% 6.38% 5.52%
Efficiency ratio 49.60% 54.62% 49.42% 52.05%
15
Table 11 - Bank of Albuquerque
(Dollars in Thousands)
Three months ended Sept. 30, Nine months ended Sept. 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- --- ------------- -------------- -- -------------
NIR (expense) from external sources $ 16,323 $ 14,725 $ 47,989 $ 41,766
NIR (expense) from internal sources (4,478) (3,106) (12,489) (8,245)
------------- ------------- -------------- -------------
Net interest revenue 11,845 11,619 35,500 33,521
Other operating revenue 4,091 4,062 12,171 11,305
Operating expense 7,120 7,352 20,801 20,707
Net loans charged off 222 411 973 834
Net income 5,251 4,849 15,839 14,240
Average assets $ 1,445,371 $ 1,509,170 $ 1,454,653 $ 1,550,242
Average economic capital 74,160 75,000 75,640 71,790
Average invested capital 93,250 94,090 94,730 90,880
Return on assets 1.44% 1.27% 1.46% 1.23%
Return on economic capital 28.09% 25.65% 28.00% 26.52%
Return on average invested capital 22.34% 20.45% 22.35% 20.95%
Economic capital ratio 5.13% 4.97% 5.20% 4.63%
Efficiency ratio 44.68% 46.88% 43.63% 46.19%
Table 12 - Bank of Arkansas
(Dollars in Thousands)
Three months ended Sept. 30, Nine months ended Sept. 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- --- ------------- -------------- -- -------------
NIR (expense) from external sources $ 2,613 $ 2,864 $ 7,517 $ 8,312
NIR (expense) from internal sources (883) (1,009) (2,421) (2,593)
------------- ------------- -------------- -------------
Net interest revenue 1,730 1,855 5,096 5,719
Other operating revenue 734 780 1,263 1,335
Operating expense 1,025 905 2,752 2,623
Net loans charged off 88 10 60 32
Net income 802 1,052 2,143 2,699
Average assets $ 196,527 $ 251,047 $ 193,842 $ 252,346
Average economic capital 17,220 11,010 15,030 11,720
Average invested capital 17,220 11,010 15,030 11,720
Return on assets 1.62% 1.66% 1.48% 1.43%
Return on economic capital 18.48% 37.91% 19.06% 30.79%
Return on average invested capital 18.48% 37.91% 19.06% 30.79%
Economic capital ratio 8.76% 4.39% 7.75% 4.64%
Efficiency ratio 41.60% 34.35% 43.28% 37.18%
16
Table 13 - Colorado State Bank and Trust
(Dollars in Thousands)
Three months ended Sept. 30, Nine months ended Sept. 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- --- ------------- -------------- -- -------------
NIR (expense) from external sources $ 14,214 $ 9,288 $ 38,633 $ 24,975
NIR (expense) from internal sources (5,046) (2,196) (12,000) (5,138)
------------- ------------- -------------- -------------
Net interest revenue 9,168 7,092 26,633 19,837
Other operating revenue 2,709 2,347 8,751 7,234
Operating expense 7,136 6,148 19,499 17,136
Net loans charged off / (recovered) 13 840 (38) 2,492
Net income 2,889 1,498 9,729 4,548
Average assets $ 1,243,291 $ 809,547 $ 1,145,009 $ 735,492
Average economic capital 75,630 50,090 67,110 44,260
Average invested capital 117,610 92,070 109,090 86,240
Return on assets 0.92% 0.73% 1.14% 0.83%
Return on economic capital 15.16% 11.86% 19.38% 13.74%
Return on average invested capital 9.75% 6.46% 11.92% 7.05%
Economic capital ratio 6.08% 6.19% 5.86% 6.02%
Efficiency ratio 60.08% 65.13% 55.11% 63.30%
Table 14 - Bank of Arizona
(Dollars in Thousands)
Three months ended Sept. 30, Nine months ended Sept. 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- --- ------------- -------------- -- -------------
NIR (expense) from external sources $ 7,897 $ 3,612 $ 18,657 $ ***
NIR (expense) from internal sources (3,572) (934) (7,602) ***
------------- ------------- -------------- -------------
Net interest revenue 4,325 2,678 11,055 ***
Other operating revenue 128 283 414 ***
Operating expense 3,703 3,190 9,460 ***
Net loans charged off - 2 2 ***
Net income (loss) 458 (56) 1,166 ***
Average assets $ 444,269 $ 271,713 $ 369,225 $ ***
Average economic capital 30,520 14,390 23,900 ***
Average invested capital 47,170 31,040 40,550 ***
Return on assets 0.41% (0.08)% 0.42% ***
Return on economic capital 5.95% (1.54)% 6.52% ***
Return on average invested capital 3.85% (0.72)% 3.84% ***
Economic capital ratio 6.87% 5.30% 6.47% ***
Efficiency ratio 83.16% 107.73% 82.48% ***
*** Data not applicable due to acquisition of Bank of Arizona in April 2005.
17
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.
The amortized cost of available for sale securities totaled $4.8 billion at
September 30, 2006 and $4.9 billion at June 30, 2006. 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
2.9 years at September 30, 2006 and 3.1 years at June 30, 2006. Management
estimates that the effective duration of the mortgage-backed securities
portfolio would extend to 3.4 years assuming a 300 basis point immediate rate
shock.
Net unrealized losses on available for sale securities totaled $121 million at
September 30, 2006 compared with net unrealized losses of $187 million at June
30, 2006. The decrease in net unrealized losses during the quarter was due
primarily to falling interest rates. The aggregate gross amount of unrealized
losses at September 30, 2006 was $127 million, down $74 million from the
previous quarter's end. 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.
Management does not believe that any of the unrealized losses are due to credit
quality concerns. 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.
Bank-Owned Life Insurance
During the third quarter of 2006, the Company invested $202 million in
bank-owned life insurance. This investment is expected to provide a long-term
source of earnings to support existing employee benefit plans. Substantially all
of the funds are held in separate accounts and invested in U.S. government,
mortgage-backed and corporate debt securities. The cash surrender value of the
life insurance policies is further supported by a stable value wrap, which
protects against changes in the fair value of the investments. The cash
surrender value of the policies, including the value of the stable value wrap,
was $194 million at September 30, 2006. In addition to investment in the
separate accounts, $8.2 million of the amount invested paid taxes on the
insurance premiums. These taxes will be recovered over a ten-year period. A $6.4
million receivable based on the present value of the taxes was recorded as of
September 30, 2006.
Loans
The aggregate loan portfolio at September 30, 2006 totaled $10.0 billion, a $211
million increase since June 30, 2006, a 9% annualized rate. Commercial loans
increased $138 million while mortgage and consumer loans increased $35 million
and $36 million, respectively. Commercial real estate loans were substantially
unchanged during the quarter.
18
---------------------------------------------------------------------------------------------------------------------
Table 15 - Loans
(In thousands)
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2006 2006 2006 2005 2005
---------------------------------------------------------------------------------
Commercial:
Energy $ 1,538,651 $ 1,514,353 $ 1,367,400 $ 1,399,417 $ 1,350,835
Services 1,432,156 1,405,060 1,358,194 1,425,821 1,419,342
Wholesale/retail 894,608 879,203 850,013 793,032 804,628
Manufacturing 598,424 541,592 519,100 514,792 484,662
Healthcare 572,911 546,595 534,091 520,309 476,616
Agriculture 299,901 292,022 284,277 291,858 238,950
Other commercial and industrial 340,925 360,493 325,746 354,706 292,657
---------------------------------------------------------------------------------------------------------------------
Total commercial 5,677,576 5,539,318 5,238,821 5,299,935 5,067,690
---------------------------------------------------------------------------------------------------------------------
Commercial real estate:
Construction and land development 826,077 789,991 686,400 638,366 605,457
Multifamily 253,141 228,781 205,755 204,620 225,074
Other real estate loans 1,245,941 1,304,164 1,212,805 1,146,916 1,142,093
---------------------------------------------------------------------------------------------------------------------
Total commercial real estate 2,325,159 2,322,936 2,104,960 1,989,902 1,972,624
---------------------------------------------------------------------------------------------------------------------
Residential mortgage:
Secured by 1-4 family
residential properties 1,242,193 1,211,448 1,177,337 1,169,331 1,166,559
Residential mortgages held for sale 58,031 54,026 40,299 51,666 46,306
---------------------------------------------------------------------------------------------------------------------
Total residential mortgage 1,300,224 1,265,474 1,217,636 1,220,997 1,212,865
---------------------------------------------------------------------------------------------------------------------
Consumer 702,947 666,740 640,542 629,144 630,389
---------------------------------------------------------------------------------------------------------------------
Total $ 10,005,906 $ 9,794,468 $ 9,201,959 $ 9,139,978 $ 8,883,568
---------------------------------------------------------------------------------------------------------------------
The commercial loan portfolio totaled $5.7 billion at June 30, 2006. Energy
loans totaled $1.5 billion or 15% of total loans. Outstanding energy loans
increased $24 million, or 6% annualized, during the third quarter of 2006 after
increasing $147 million during the preceding quarter. Approximately $1.3 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. The services sector of the portfolio totaled
$1.4 billion, or 14% of the Company's total outstanding loans. Loans in this
sector of the portfolio increased $27 million or 8% annualized since June 30,
2006. The services sector consists of a large number of loans to a variety of
businesses, including communications, gaming and transportation services.
Approximately $1.0 billion of the services sector is made up of loans with
balances of less than $10 million.
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. The outstanding principal
balances of these loans totaled $1.3 billion at September 30, 2006 and $1.2
billion at June 30, 2006. Substantially all of these loans were to borrowers
with local market relationships. BOK Financial serves as the agent lender in
approximately 28% of the shared national credits, based on dollars committed.
Our 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 $2.3 billion or 23% of the loan portfolio
at September 30, 2006. Construction and land development loans totaled $826
million, up $36 million over June 30, 2006. Construction and land development
included $643 million of loans secured by single family residential lots and
premises, up $35 million from the previous quarter's end. The major components
of other commercial real estate loans were office buildings - $413 million and
retail facilities - $364 million.
Residential mortgage loans, excluding mortgage loans held for sale, included
$374 million of home equity loans, $392 million of loans held for business
relationship purposes, $257 million of adjustable rate mortgages and $167
million of loans held for community development. Consumer loans included $427
million of indirect automobile loans. Indirect
19
auto loans have increased $31 million since June 30, 2006. Approximately $366
million of these loans were purchased from dealers in Oklahoma. Growth during
the quarter included $16 million from indirect lending activities in Arkansas
and $15 million in Oklahoma.
Table 16 presents the distribution of the major loan categories among our
primary market areas.
20
---------------------------------------------------------------------------------------------------------------------
Table 16 - Loans by Principal Market Area
(In thousands)
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2006 2006 2006 2005 2005
---------------------------------------------------------------------------------
Oklahoma:
Commercial $ 3,213,532 $ 3,212,851 $ 3,074,406 $ 3,159,683 $ 3,101,209
Commercial real estate 1,008,341 1,019,815 936,030 862,700 890,737
Residential mortgage 878,870 855,087 847,848 842,757 839,344
Residential mortgage held for sale 58,031 54,026 40,299 51,666 46,306
Consumer 502,622 479,508 468,920 466,180 472,899
---------------------------------------------------------------------------------
Total Oklahoma $ 5,661,396 $ 5,621,287 $ 5,367,503 $ 5,382,986 $ 5,350,495
---------------------------------------------------------------------------------
Texas:
Commercial $ 1,557,361 $ 1,548,545 $ 1,420,860 $ 1,356,611 $ 1,294,606
Commercial real estate 639,327 669,698 604,413 569,921 537,576
Residential mortgage 212,114 212,987 200,957 199,726 196,593
Consumer 80,836 84,212 87,669 89,017 89,329
---------------------------------------------------------------------------------
Total Texas $ 2,489,638 $ 2,515,442 $ 2,313,899 $ 2,215,275 $ 2,118,104
---------------------------------------------------------------------------------
New Mexico:
Commercial $ 387,164 $ 334,984 $ 348,930 $ 383,325 $ 354,087
Commercial real estate 219,966 237,020 228,955 232,564 223,236
Residential mortgage 76,858 73,281 68,810 65,784 65,203
Consumer 13,899 13,404 13,820 15,137 15,195
---------------------------------------------------------------------------------
Total Albuquerque $ 697,887 $ 658,689 $ 660,515 $ 696,810 $ 657,721
---------------------------------------------------------------------------------
Arkansas:
Commercial $ 89,849 $ 80,539 $ 74,423 $ 79,719 $ 54,703
Commercial real estate 91,158 87,080 80,529 75,483 85,600
Residential mortgage 21,923 15,067 13,069 13,044 12,097
Consumer 67,206 51,166 33,548 25,659 20,397
---------------------------------------------------------------------------------
Total Northwest Arkansas $ 270,136 $ 233,852 $ 201,569 $ 193,905 $ 172,797
---------------------------------------------------------------------------------
Colorado:
Commercial $ 353,657 $ 299,380 $ 267,928 $ 270,108 $ 219,208
Commercial real estate 170,081 155,453 134,771 133,537 132,741
Residential mortgage 17,656 21,113 20,383 21,918 26,186
Consumer 32,647 31,939 31,487 27,871 26,126
---------------------------------------------------------------------------------
Total Colorado $ 574,041 $ 507,885 $ 454,569 $ 453,434 $ 404,261
---------------------------------------------------------------------------------
Arizona:
Commercial $ 76,013 $ 63,019 $ 52,274 $ 50,489 $ 43,877
Commercial real estate 196,286 153,870 120,262 115,697 102,734
Residential mortgage 34,772 33,913 26,270 26,102 27,136
Consumer 5,737 6,511 5,098 5,280 6,443
---------------------------------------------------------------------------------
Total Arizona $ 312,808 $ 257,313 $ 203,904 $ 197,568 $ 180,190
---------------------------------------------------------------------------------
Total BOK Financial loans $ 10,005,906 $ 9,794,468 $ 9,201,959 $ 9,139,978 $ 8,883,568
---------------------------------------------------------------------------------
Loan Commitments
BOK Financial enters into certain off-balance sheet arrangements in the normal
course of business. These arrangements included loan commitments which totaled
$5.0 billion and standby letters of credit which totaled $473 million at
September 30, 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.
21
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 from 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 September 30, 2006, the fair
value of derivative contracts reported as assets under these programs totaled
$321 million. This included energy contracts with fair values of $292 million,
interest rate contracts with fair values of $21 million and foreign exchange
contracts with fair values of $7 million. The aggregate fair values of
derivative contracts reported as liabilities totaled $328 million. Approximately
77% of the fair value of asset contracts was with customers. The credit risk of
these contracts is generally backed by energy production. The remaining 23% was
with dealer counterparties. The maximum net exposure to any single customer or
counterparty totaled $51 million.
Summary of Loan Loss Experience
The reserve for loan losses, which is available to absorb losses inherent in the
loan portfolio, totaled $105 million at September 30, 2006 and June 30, 2006,
and $110 million at September 30, 2005. These amounts represented 1.06%, 1.07%
and 1.24% of outstanding loans, excluding loans held for sale, at September 30,
2006, June 30, 2006 and September 30, 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 347% of outstanding balance of
non-accruing loans at September 30, 2006, compared with 337% at June 30, 2006
and 293% at September 30, 2005. Non-accruing loans totaled $30 million at
September 30, 2006, compared with $31 million at June 30, 2006 and $37 million
at September 30, 2005. Net loans charged off during the third quarter of 2006
totaled $4.3 million, up from $3.8 million in the second quarter of 2006 and
$3.3 million for the third quarter of 2005.
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
22
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
----------------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2006 2006 2006 2005 2005
----------------------------------------------------------------------------------
Reserve for loan losses:
Beginning balance $ 104,525 $ 104,143 $ 103,876 $ 109,621 $ 108,884
Loans charged off:
Commercial 4,550 2,523 1,242 5,772 819
Commercial real estate - - - 84 730
Residential mortgage 230 363 207 226 382
Consumer 3,319 2,995 2,700 3,497 3,380
------------------------------------------------------------------------------------------------------------------------------
Total 8,099 5,881 4,149 9,579 5,311
------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 1,985 720 847 826 711
Commercial real estate 276 6 40 8 7
Residential mortgage 19 20 97 133 21
Consumer 1,523 1,339 1,580 1,197 1,238
------------------------------------------------------------------------------------------------------------------------------
Total 3,803 2,085 2,564 2,164 1,977
------------------------------------------------------------------------------------------------------------------------------
Net loans charged off 4,296 3,796 1,585 7,415 3,334
Provision for loan losses 5,236 4,178 1,852 1,670 4,071
------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 105,465 $ 104,525 $ 104,143 $ 103,876 $ 109,621
------------------------------------------------------------------------------------------------------------------------------
Reserve for off-balance sheet credit losses:
Beginning balance $ 21,739 $ 22,122 $ 20,574 $ 17,794 $ 17,889
Provision for off-balance sheet credit losses 18 (383) 1,548 2,780 (95)
----------------------------------------------------------------------------------
Ending balance $ 21,757 $ 21,739 $ 22,122 $ 20,574 $ 17,794
------------------------------------------------------------------------------------------------------------------------------
Total provision for credit losses $ 5,254 $ 3,795 $ 3,400 $ 4,450 $ 3,976
------------------------------------------------------------------------------------------------------------------------------
Reserve for loan losses to loans outstanding
at period-end (1) 1.06% 1. 07% 1.14% 1.14% 1.24%
Net charge-offs (annualized)
to average loans (1) 0.18 0.16 0.07 0.33 0.16
Total provision for credit losses (annualized)
to average loans (1) 0.22 0.16 0.15 0.20 0.19
Recoveries to gross charge-offs 46.96 35.45 61.80 22.59 37.22
Reserve for loan losses as a multiple of net
charge-offs (annualized) 6.14x 6.88x 16.43x 3.50x 8.22x
Reserve for off-balance sheet credit losses to
off-balance sheet credit commitments 0.40% 0.41% 0.36% 0.42% 0.41%
Combined reserves for credit losses to loans
outstanding at period-end (1) 1.28 1.30 1.38 1.37 1.44
------------------------------------------------------------------------------------------------------------------------------
(1) Excludes residential mortgage loans held for sale.
Specific impairment reserves are determined through evaluation of estimated
future cash flows and collateral value. At September 30, 2006, specific
impairment reserves totaled $3.7 million on total impaired loans of $27.4
million. Required specific impairment reserves were $3.3 million at June 30,
2006.
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 September 30,
2006, the ranges of potential losses for the more significant factors were:
General economic conditions - $4.8 million to $8.5 million
Concentration in large loans - $1.4 million to $2.8 million
The provision for credit losses totaled $5.3 million for the third quarter of
2006, compared with $3.8 million for the second quarter of 2006 and $4.0 million
for the third quarter of 2005. Factors considered in determining the provision
for credit losses included an increase in net losses during the quarter,
partially offset by decreases in the outstanding balances of classified loans.
Net losses during the third quarter included $1.6 million of commercial
overdraft charge-offs while recoveries included $300 thousand received from the
sale of rights to pursue collection of old defaulted loans.
23
Nonperforming Assets
Information regarding nonperforming assets, which totaled $41 million at
September 30, 2006 and $39 million at June 30, 2006, 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 $30 million
at September 30, 2006 and $31 million at June 30, 2006. Newly identified
non-accruing loans totaled $6 million during the third quarter of 2006.
Non-accruing loans decreased $4 million for loans charged off or foreclosed, and
$3 million for cash payments received.
----------------------------------------------------------------------------------------------------------------------
Table 18 - Nonperforming Assets
(In thousands)
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2006 2006 2006 2005 2005
-----------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 15,061 $ 15,087 $ 17,073 $ 11,673 $ 17,920
Commercial real estate 3,540 4,369 6,444 5,370 10,422
Residential mortgage 7,889 7,604 8,057 7,347 8,531
Consumer 3,986 3,916 655 772 480
----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 30,476 30,976 32,229 25,162 37,353
----------------------------------------------------------------------------------------------------------------------
Renegotiated loans 1,064 - - - -
Other nonperforming assets 9,322 8,257 8,196 8,476 5,069
----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 40,862 $ 39,233 $ 40,425 $ 33,638 $ 42,422
----------------------------------------------------------------------------------------------------------------------
Ratios:
Reserve for loan losses to nonaccrual loans 346.06% 337.44% 323.13% 412.83% 293.48%
Combined reserves for credit
losses to nonaccrual loans 417.45 407.62 391.77 494.60 341.11
Nonaccrual loans to period-end loans (2) 0.31 0.32 0.35 0.28 0.42
----------------------------------------------------------------------------------------------------------------------
Loans past due (90 days) (1) $ 5,076 $ 9,630 $ 3,919 $ 8,708 $ 10,027
----------------------------------------------------------------------------------------------------------------------
(1) Includes residential mortgages
guaranteed by agencies of the U.S.
Government. $ 1,784 $ 2,310 $ 1,595 $ 2,021 $ 3,646
(2) Excludes residential mortgage loans held for sale.
----------------------------------------------------------------------------------------------------------------------
The loan review process also identifies 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 $25 million at September 30, 2006 and $23
million at June 30, 2006. Potential problem loans by primary industry included
healthcare - $11 million, services - $6 million and manufacturing - $5 million.
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 $11.4 billion for the third quarter of 2006, up $171
million, or 6% annualized compared with average deposits in the second quarter
of 2006. Average commercial deposits increased $199 million consisting of
increases of $163 million in Texas and $39 million in Oklahoma. Average deposits
attributed to consumer banking increased $90 million, including $29 million in
Colorado, $26 million in New Mexico and $24 million in Oklahoma.
24
Average deposits attributed to wealth management decreased $125 million.
Oklahoma wealth management deposits decreased $147 million. Funds received in
late 2005 had temporarily been held in a deposit account pending reinvestment
opportunities. The decrease in wealth management deposits in Oklahoma was
partially offset by a $23 million increase in Colorado. In addition, average
deposits attributed to mortgage banking, which consisted primarily of escrow
funds, increased $13 million.
Core deposits, which we define as deposits of less than $100,000, excluding
public funds and brokered deposits, averaged $5.5 billion for the third quarter
of 2006, an annualized increase of 6%. Average core deposits comprised 49% of
total deposits for the third quarter of 2006. Deposit accounts with balances in
excess of $100,000 increased at a 12% annualized rate to $4.7 billion or 42% of
total average deposits for the third quarter of 2006. Average public funds
decreased $43 million or 26% annualized from seasonal changes based on the
timing of tax receipts.
The distribution of deposit accounts among our principal markets is shown in
Table 19.
25
---------------------------------------------------------------------------------------------------------------------
Table 19 - Deposits by Principal Market Area
(In thousands)
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2006 2006 2006 2005 2005
---------------------------------------------------------------------------------
Oklahoma:
Demand $ 868,502 $ 908,034 $ 950,582 $ 1,003,284 $ 959,169
Interest-bearing:
Transaction 3,001,774 2,732,312 2,937,228 3,002,610 2,411,175
Savings 83,442 88,218 93,093 85,837 86,220
Time 2,621,522 2,662,770 2,623,352 2,564,337 2,728,224
---------------------------------------------------------------------------------
Total interest-bearing 5,706,738 5,483,300 5,653,673 5,652,784 5,225,619
---------------------------------------------------------------------------------
Total Oklahoma $ 6,575,240 $ 6,391,334 $ 6,604,255 $ 6,656,068 $ 6,184,788
---------------------------------------------------------------------------------
Texas:
Demand $ 582,014 $ 638,157 $ 551,411 $ 615,732 $ 533,475
Interest-bearing:
Transaction 1,671,993 1,530,491 1,455,856 1,535,570 1,299,279
Savings 25,888 26,370 27,827 27,398 29,620
Time 736,316 717,027 726,530 735,731 633,785
---------------------------------------------------------------------------------
Total interest-bearing 2,434,197 2,273,888 2,210,213 2,298,699 1,962,684
---------------------------------------------------------------------------------
Total Texas $ 3,016,211 $ 2,912,045 $ 2,761,624 $ 2,914,431 $ 2,496,159
---------------------------------------------------------------------------------
New Mexico:
Demand $ 144,138 $ 147,307 $ 159,125 $ 129,289 $ 155,517
Interest-bearing:
Transaction 434,521 410,166 408,160 381,099 338,706
Savings 16,804 16,860 17,805 17,839 17,614
Time 481,993 494,426 483,428 453,314 454,561
---------------------------------------------------------------------------------
Total interest-bearing 933,318 921,452 909,393 852,252 810,881
---------------------------------------------------------------------------------
Total New Mexico $ 1,077,456 $ 1,068,759 $ 1,068,518 $ 981,541 $ 966,398
---------------------------------------------------------------------------------
Arkansas:
Demand $ 11,914 $ 11,521 $ 11,629 $ 10,429 $ 13,772
Interest-bearing:
Transaction 19,504 20,577 26,675 22,354 23,335
Savings 1,058 1,072 1,051 1,058 1,268
Time 61,966 69,418 73,082 75,034 81,510
---------------------------------------------------------------------------------
Total interest-bearing 82,528 91,067 100,808 98,446 106,113
---------------------------------------------------------------------------------
Total Arkansas $ 94,442 $ 102,588 $ 112,437 $ 108,875 $ 119,885
---------------------------------------------------------------------------------
Colorado:
Demand $ 38,264 $ 45,214 $ 56,419 $ 61,647 $ 51,978
Interest-bearing:
Transaction 275,714 245,504 258,801 258,668 216,718
Savings 13,037 13,786 16,315 17,772 16,568
Time 421,841 379,239 309,068 264,020 221,753
---------------------------------------------------------------------------------
Total interest-bearing 710,592 638,529 584,184 540,460 455,039
---------------------------------------------------------------------------------
Total Colorado $ 748,856 $ 683,743 $ 640,603 $ 602,107 $ 507,017
---------------------------------------------------------------------------------
Arizona:
Demand $ 62,234 $ 73,696 $ 55,421 $ 45,567 $ 42,784
Interest-bearing:
Transaction 74,786 67,841 57,400 56,994 71,510
Savings 2,408 2,702 3,380 4,111 3,862
Time 4,549 4,077 4,608 5,624 6,802
---------------------------------------------------------------------------------
Total interest-bearing 81,743 74,620 65,388 66,729 82,174
---------------------------------------------------------------------------------
Total Arizona $ 143,977 $ 148,316 $ 120,809 $ 112,296 $ 124,958
---------------------------------------------------------------------------------
Total BOK Financial deposits $ 11,656,182 $ 11,306,785 $ 11,308,246 $ 11,375,318 $ 10,399,205
---------------------------------------------------------------------------------
26
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 September 30, 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 September
30, 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 $199 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 $129
million under this policy.
Equity capital for BOK Financial totaled $1.7 billion at September 30, 2006, up
$87 million during the quarter. Retained earnings, net income less cash
dividends provided $43 million of the increase. Accumulated other comprehensive
losses decreased $44 million due primarily to a reduction in net unrealized
losses on available for sale securities.
Capital is managed to maximize long-term value to the shareholders. Factors
considered in managing capital include projections of future earnings, asset
growth and acquisition strategies, and regulatory and debt covenant
requirements. Capital management may include subordinated debt issuance, share
repurchase and stock and cash dividends.
On April 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 programs may be suspended or
discontinued at any time without prior notice. During the third quarter of 2006,
the Company repurchased 71,447 common shares at an average price of $51.82 per
share. The Company may repurchase 1.7 million common shares in the future under
this program.
Cash dividends of $10.0 million or $0.15 per common share were paid during the
third quarter of 2006. On October 31, 2006 the Board of Directors approved
quarterly cash dividend of $0.15 per common share. The dividend will be payable
on or about November 30, 2006 to shareholders of record on November 13, 2006.
BOK Financial and its 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 material impact on
operations. These capital requirements include quantitative measures of assets,
liabilities, and off-balance sheet items. The capital standards are also subject
to qualitative judgments by the regulators.
For a banking institution to qualify as well capitalized, its Tier 1, Total and
Leverage capital ratios must be at least 6%, 10% and 5%, respectively. All of
the Company's banking subsidiaries exceeded the regulatory definition of well
capitalized. The capital ratios for BOK Financial on a consolidated basis are
presented in Table 20.
27
--------------------------------------------------------------------------------------------------------------------
Table 20 - Capital Ratios Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2006 2006 2006 2005 2005
--------------------------------------------------------------------------
Average shareholders' equity
to average assets 9.62% 9.49% 9.51% 9.30% 9.54%
Risk-based capital:
Tier 1 capital 9.99 10.00 10.16 9.84 9.71
Total capital 12.07 12.14 12.41 12.10 12.04
Leverage 8.88 8.74 8.60 8.30 8.01
Off-Balance Sheet Arrangements
During 2002, BOK Financial agreed to a limited price guarantee on a portion of
the common shares issued to purchase the 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 September
30, 2006 was $49.50 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 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 these earning
assets more rapidly than interest bearing liabilities in the short term.
Management has adopted several strategies to position the balance sheet to be
neutral to interest rate changes. 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 2.9 years based on a range of interest rate and
prepayment assumptions.
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 variable-rate loans with funding sources and long-term certificates of
deposit with earning assets. During the third quarter of 2006, net interest
revenue was reduced by $2.8 million from periodic settlements of these
contracts. Net interest revenue was decreased by $367 thousand from periodic
settlements of these contracts in the third quarter of 2005. These contracts are
carried on the balance sheet at fair value and changes in fair value are
reporting in income as derivatives gains or losses. A net gain of $379 thousand
was recognized in the third
28
quarter of 2006 compared to a net gain of $606 thousand in same period of 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 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 included the Federal Funds rate,
which affects short-term borrowings, and the prime lending rate and LIBOR, which
are the basis for much of the variable-rate loan pricing. Additionally, 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 $ (7,038) $ 9,378 $ 8,485 (5,426) $ 2,188 $ 7,917
(1.4)% 1.9% 1.6% (1.1)% 0.4% 1.6%
-------------------------------- --------------- ------------ --- ----------- -------------- -- ----------- ------------
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.
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
29
limit the VAR to $1.8 million. At September 30, 2006, the VAR was $717 thousand.
The greatest value at risk during the quarter was $717 thousand.
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.
30
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -----------
Consolidated Statements of Earnings (Unaudited)
(In Thousands Except Share and Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
----------- --- -------------- ---- -------------- ---- --------------
Interest Revenue
Loans $ 197,423 $ 144,747 $ 544,349 $ 396,523
Taxable securities 54,587 51,946 166,265 152,578
Tax-exempt securities 2,641 1,833 7,023 5,408
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Total securities 57,228 53,779 173,288 157,986
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Trading securities 180 144 573 479
Funds sold and resell agreements 649 386 1,295 706
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Total interest revenue 255,480 199,056 719,505 555,694
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Interest Expense
Deposits 88,471 54,503 241,351 145,950
Borrowed funds 37,821 27,248 100,689 67,105
Subordinated debentures 5,210 4,477 15,055 9,684
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Total interest expense 131,502 86,228 357,095 222,739
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Net Interest Revenue 123,978 112,828 362,410 332,955
Provision for Credit Losses 5,254 3,976 12,449 7,991
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Net Interest Revenue After Provision for Credit Losses 118,724 108,852 349,961 324,964
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Other Operating Revenue
Brokerage and trading revenue 10,958 11,366 34,395 33,106
Transaction card revenue 19,939 18,526 58,398 53,048
Trust fees and commissions 17,101 16,376 52,797 48,651
Deposit service charges and fees 26,322 25,619 76,649 73,139
Mortgage banking revenue 6,935 9,535 20,919 23,663
Other revenue 11,756 8,896 33,683 24,453
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Total fees and commissions 93,011 90,318 276,841 256,060
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Gain on sales of assets 475 675 1,247 7,584
Gain (loss) on securities, net 3,718 (4,744) (86) (5,115)
Gain (loss) on derivatives, net 379 606 (102) 1,073
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Total other operating revenue 97,583 86,855 277,900 259,602
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Other Operating Expense
Personnel 74,605 66,533 218,206 190,305
Business promotion 4,401 4,494 14,006 12,794
Professional fees and services 4,734 3,951 13,010 12,062
Net occupancy and equipment 13,222 12,587 39,447 37,331
Data processing and communications 16,931 17,492 50,083 48,972
Printing, postage and supplies 4,182 3,846 12,088 11,090
Net (gains) losses and operating expenses of
repossessed assets 34 (387) 307 237
Amortization of intangible assets 1,299 1,801 4,028 5,146
Mortgage banking costs 2,869 4,268 8,795 11,268
Change in fair value of mortgage servicing rights 7,921 - (2,773) -
Recovery for impairment of mortgage servicing rights - (4,671) - (3,207)
Other expense 8,612 7,120 21,119 19,205
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Total other operating expense 138,810 117,034 378,316 345,203
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Income Before Taxes 77,497 78,673 249,545 239,363
Federal and state income tax 24,837 27,846 87,153 86,016
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Net Income $ 52,660 $ 50,827 $ 162,392 $ 153,347
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Earnings Per Share:
Basic $ 0.79 $ 0.77 $ 2.43 $ 2.42
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Diluted $ 0.78 $ 0.76 $ 2.41 $ 2.29
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Average Shares Used in Computation:
Basic 66,756,458 66,427,447 66,749,141 63,239,165
------------------------------------------------------ --- ------------ --- -------------- ---- -------------- ---- --------------
Diluted 67,325,428 67,105,539 67,301,406 67,013,525
------------------------------------------------------ --- ------------ --- -------------- ---- -------------- ---- --------------
See accompanying notes to consolidated financial statements.
31
Consolidated Balance Sheets
(In Thousands Except Share Data)
Sept. 30, December 31, Sept. 30,
2006 2005 2005
--------------------------------------------------
(Unaudited) (Footnote 1) (Unaudited)
Assets
Cash and due from banks $ 595,566 $ 684,857 $ 564,987
Funds sold and resell agreements 31,765 14,465 49,475
Trading securities 21,437 18,633 38,032
Securities:
Available for sale 4,283,957 4,821,575 4,455,980
Available for sale securities pledged to creditors 369,512 - 368,118
Investment (fair value: September 30, 2006 - $242,052;
December 31, 2005 - $243,406;
September 30, 2005 - $240,179) 247,510 245,125 243,161
Mortgage trading securities 111,753 - -
--------------------------------------------------------------------------------------------------------------------
Total securities 5,012,732 5,066,700 5,067,259
--------------------------------------------------------------------------------------------------------------------
Loans 10,005,906 9,139,978 8,883,568
Less reserve for loan losses (105,465) (103,876) (109,622)
--------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 9,900,441 9,036,102 8,773,946
--------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 178,940 179,627 177,084
Accrued revenue receivable 108,685 99,874 88,721
Intangible assets, net 258,994 263,022 258,478
Mortgage servicing rights, net 65,788 54,097 52,872
Real estate and other repossessed assets 9,322 8,476 5,069
Bankers' acceptances 8,081 33,001 40,170
Derivative contracts 322,424 452,878 643,703
Cash surrender value of bank-owned life insurance 209,766 9,279 9,221
Receivable on unsettled securities trades 868 - -
Other assets 391,102 406,058 570,585
--------------------------------------------------------------------------------------------------------------------
Total assets $ 17,115,911 $ 16,327,069 $ 16,339,602
--------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Noninterest-bearing demand deposits $ 1,707,066 $ 1,865,948 $ 1,756,695
Interest-bearing deposits:
Transaction 5,478,292 5,257,295 4,360,723
Savings 142,637 154,015 155,152
Time 4,328,187 4,098,060 4,126,635
--------------------------------------------------------------------------------------------------------------------
Total deposits 11,656,182 11,375,318 10,399,205
--------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase agreements 2,339,585 1,337,911 2,173,791
Other borrowings 595,506 1,054,298 1,051,228
Subordinated debentures 297,370 295,964 296,401
Accrued interest, taxes and expense 83,411 92,219 70,667
Bankers' acceptances 8,081 33,001 40,170
Due on unsettled security transactions - 8,429 11,198
Derivative contracts 339,284 466,669 661,253
Other liabilities 126,574 124,106 122,147
--------------------------------------------------------------------------------------------------------------------
Total liabilities 15,445,993 14,787,915 14,826,060
--------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock ($.00006 par value; 2,500,000,000
shares authorized; shares issued and outstanding:
September 30, 2006 - 68,420,633; December 31, 2005
- 67,904,533; September 30, 2005 - 67,648,551) 4 4 4
Capital surplus 676,395 656,579 646,737
Retained earnings 1,126,445 990,422 948,928
Treasury stock (shares at cost: September 30, 2006 - 1,561,361;
December 31, 2005 - 1,202,125;
September 30, 2005 - 1,127,624) (57,443) (40,040) (36,561)
Accumulated other comprehensive loss (75,483) (67,811) (45,566)
--------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,669,918 1,539,154 1,513,542
--------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 17,115,911 $ 16,327,069 $ 16,339,602
--------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
32
---------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Changes in
Shareholders' Equity (Unaudited)
(In Thousands)
Accumulated
Other
Preferred Stock Common Stock Comprehensive Retained Treasury Stock
Capital
------------------------------------ --------------------
Shares Amount Shares Amount Loss Earnings Shares Amount Total
Surplus
----------------------------------------------------------------------------------------------------
Balances at
December 31, 2004 249,975 $ 60,421 $ $631,747 $809,261 998 $ $1,398,494
12 $ (11,625) (30,905)
4
Comprehensive income:
Net income - - - - - - 153,347 - - 153,347
Other comprehensive
income, net of - - - - (33,941) - - - - (33,941)
tax (1)
----------
Comprehensive income 119,406
----------
Treasury stock - - - - - - - 60 (2,439) (2,439)
purchase
Exercise of stock - - 307 - - 7,022 - 70 (3,217) 3,805
options
Conversion of
preferred (249,975) (12) 6,921 - - 12 - - - -
stock to common
Tax benefit on
exercise of - - - - - 1,878 - - - 1,878
stock options
Stock-based - - - - - 6,078 - - - 6,078
compensation
Cash dividends on:
Preferred stock - - - - - - (375) - - (375)
Common
Cash dividends on:
Preferred stock
-
-
-
-
-
-
(375)
-
-
----------------------------------------------------------------------------------------------------
Common stock - - - - - - (13,305) - - (13,305)
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Balances at
September 30, 2005 - $ - 67,649 $ 4 $ $ 646,737 $ 948,928 1,128 $(36,561) $1,513,542
(45,566)
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2005 - $ 67,905 $ 4 $ $ 656,579 $990,422 1,202 $(40,040) $1,539,154
- (67,811)
Effect of
implementing FAS
156, net of income - - - - - - 383 - - 383
taxes
Comprehensive income:
Net income - - - - - - 162,392 - - 162,392
Other
comprehensive - - - - (7,672) - - - - (7,672)
income, net of
tax (1)
----------
Comprehensive income 154,720
----------
Treasury stock - - - - - - - 241 (11,722) (11,722)
purchase
Exercise of stock - - 516 - - 12,369 - 118 (5,681) 6,688
options
Tax benefit on
exercise - - - - - 2,705 - - - 2,705
of stock
options
Stock-based - - - - - 4,742 - - - 4,742
compensation
Cash dividends on
common stock - - - - - - (26,752) - - (26,752)
---------------------------------------------------------------------------------------------------------------------------
Balances at
September 30, 2006 - $ - 68,421 $ 4 $ $ 676,395 $1,126,445 1,561 $(57,443) $1,669,918
(75,483)
---------------------------------------------------------------------------------------------------------------------------
(1) September 30, 2006 September 30, 2005
-------------- ------------------
Changes in other comprehensive loss:
Unrealized losses on securities $(12,401) $ (56,048)
Unrealized gains (losses) on cash flow hedges 524 (2,046)
Tax benefit on unrealized losses 4,148 20,876
Reclassification adjustment for losses
realized and included in net income 87 5,115
Reclassification adjustment for tax
benefit on realized losses (30) (1,838)
--------------------------------------
Net change in other comprehensive loss $(7,672) $ (33,941)
--------------------------------------
See accompanying notes to consolidated financial statements.
33
---------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands) Nine Months Ended September 30,
---------------------------------------------
2006 2005
---------------------------------------------
Cash Flows From Operating Activities:
Net income $ 162,392 $ 153,347
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses 12,449 7,991
Change in fair value of mortgage servicing rights (2,773) -
Recovery for mortgage servicing rights impairment - (3,207)
Unrealized losses from derivatives 10,825 12,085
Tax benefit on exercise of stock options (2,705) 1,878
Change in bank-owned life insurance 1,695 -
Stock-based compensation 7,779 3,817
Depreciation and amortization 29,673 33,658
Net accretion of securities discounts and premiums 1,382 (1,013)
Net gain on sale of assets (9,310) (14,108)
Mortgage loans originated for resale (506,582) (584,780)
Proceeds from sale of mortgage loans held for resale 574,304 569,728
Change in trading securities, including mortgage trading securities (65,025) (28,340)
Change in accrued revenue receivable 6,750 (9,077)
Change in other assets (77,579) (9,238)
Change in accrued interest, taxes and expense (8,808) (395)
Change in other liabilities (7,477) (29,855)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 126,990 102,491
---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities 56,468 50,956
Proceeds from maturities of available for sale securities 515,308 764,647
Purchases of investment securities (59,445) (73,269)
Purchases of available for sale securities (589,350) (2,167,719)
Proceeds from sales of investment securities 447 -
Proceeds from sales of available for sale securities 181,007 1,110,707
Loans originated or acquired net of principal collected (950,823) (1,016,092)
Proceeds from (payments on) derivative asset contracts (36,411) 4,857
Investment in bank-owned life insurance (201,987) -
Net change in other investment assets (4,050) 32,541
Proceeds from disposition of assets 78,174 86,453
Purchases of assets (36,467) (36,748)
Cash and cash equivalents of subsidiaries and branches acquired and sold, net - (29,093)
---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,047,129) (1,272,760)
---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net change in demand deposits, transaction deposits and savings accounts 50,737 242,024
Net change in time deposits 223,785 486,471
Net change in other borrowings 542,882 749,514
Pay down of other borrowings - (95,000)
Issuance of subordinated debenture - 147,855
Proceeds from (payments on) derivative liability contracts 34,997 (10,321)
Net change in derivative margin accounts 34,125 (322,660)
Change in amount receivable (due) on unsettled security transactions (9,297) 68,071
Issuance of preferred, common and treasury stock, net 6,688 3,805
Tax benefit on exercise of stock options 2,705 -
Repurchase of common stock (11,722) (2,439)
Dividends paid (26,752) (13,680)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 848,148 1,253,640
---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (71,991) 83,371
Cash and cash equivalents at beginning of period 699,322 531,091
---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 627,331 $ 614,462
---------------------------------------------------------------------------------------------------------------------------
Cash paid for interest $ 353,895 $ 218,974
---------------------------------------------------------------------------------------------------------------------------
Cash paid for taxes $ 89,052 $ 81,065
---------------------------------------------------------------------------------------------------------------------------
Net loans transferred to repossessed real estate and other assets $ 4,694 $ 6,138
---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
34
------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Liabilities
(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. Amounts presented as of December 31, 2005 have
been derived from BOK Financial's 2005 Form 10-K.
Newly Adopted and Pending 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 that 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 September 30, 2006 totaled 3,609,303, including
686,887 of vested options and 2,922,416 of unvested options. Management expects
that approximately 2.9 million of the unvested options will vest according to
their contractual terms. The weighted average exercise prices of vested and
unvested options are $26.45 and $40.27, respectively.
The intrinsic value of options exercised during the three and nine months ended
September 30, 2006 was $3.6 million and $9.4 million, respectively. The
intrinsic value of options exercised during the three and nine months ended
September 30, 2005 was $2.8 million and $7.3 million, respectively. The Company
received cash proceeds from stock options exercised of $1.0 million and $6.7
million, respectively, in the three and nine months ended September 30, 2006.
The Company received cash proceeds from stock options exercised of $0.6 million
and $3.8 million, respectively, in the three and nine months ended September 30,
2005.
Stock options are generally awarded annually. The determination of the persons
to whom stock options will be awarded and the number of options awarded will be
made prior to, and the exercise price of the options will be set at the closing
price on, the second business Friday in January.
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
35
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. 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.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 157, "Fair Value Measurements," ("FAS 157") in
September 2006. FAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. It does not expand the use of fair
value measurement to applications where it is not already required.
The definition of fair value focuses on a hypothetical transaction to either
sell an asset or transfer a liability at the measurement date based on
assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk. A fair value measurement assumes
that the transaction occurs in the principal market for the asset or liability
or, in the absence of a principal market, the most advantageous market for the
asset or liability.
FAS 157 also nullifies a portion of EITF Issue No. 02-3, "Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities." The nullified
portion of EITF Issue No. 02-3 formed the conceptual basis for our current
accounting policy for customer hedging programs.
FAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. Earlier
application is encouraged, provided that interim financial statements have not
previously been issued. BOK Financial must adopt FAS 157 as of January 1, 2008
and may choose to adopt FAS 157 as of January 1, 2007. Management is in the
process of determining the effect FAS 157 will have on the financial statements.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106
and 132(R)" ("FAS 158") in September 2006. FAS 158 requires employers to
recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in the funded status in the year in which the
change occurs through comprehensive income. The funded status of a benefit plan
is defined as the difference between the fair value of plan assets and the
benefit obligation measured as of the year-end statement of financial position
date. Gains or losses and prior service costs or credits that have not been
recognized in net income as components of net periodic benefit costs shall be
recognized as a component of other comprehensive income, net of tax. FAS 158
does not change existing generally accepted accounting principles used to
determine net periodic benefit costs.
Recognition of the funded status of a defined benefit postretirement plan is
effective for employers with publicly traded equity securities, such as BOK
Financial, for fiscal years ending after December 15, 2006. Retrospective
application of FAS 158 is not permitted.
The effect of FAS 158 on BOK Financial's statement of financial position will
not be know until the December 31, 2006 valuation is completed. However, if FAS
158 had been effective at December 31, 2005, the prepaid pension expense asset
would have been reduced from $21.9 million to $1.3 million and accumulated other
comprehensive losses would have increased from $67.8 million to $80.4 million.
36
The Financial Accounting Standards Board issued FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" ("FIN 48"), in June 2006. FIN 48
requires that an uncertain tax position must be more likely than not of being
upheld upon audit by the taxing authority for the benefit to be recognized. The
benefit of uncertain tax positions that do not meet this criterion may not be
recognized. In addition, FIN 48 requires that the amount of tax benefit that may
be recognized for uncertain positions that meet the recognition criterion shall
consider the amounts and probabilities of outcomes that could be realized upon
settlement.
FIN 48 is effective for fiscal years beginning after December 15, 2006.
Management is in the process of determining the effect, if any, the adoption of
FIN 48 will have on the financial statements.
(2) Derivatives
The fair values of derivative contracts at September 30, 2006 are as follows (in
thousands):
Assets Liabilities
-------------------------------
Customer Risk Management Programs:
Interest rate contracts $21,228 $22,991
Energy contracts 291,794 297,100
Cattle contracts 1,663 1,695
Foreign exchange contracts 6,560 6,560
--------------------------------------------- ----------- --- ---------------
Total Customer Derivatives 321,245 328,346
Interest Rate Risk Management Programs:
Interest rate contracts 1,179 10,938
--------------------------------------------- ----------- --- ---------------
Total Derivative Contracts $322,424 $339,284
--------------------------------------------- ----------- --- ---------------
37
(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 September 30, 2006, BOK Financial owned the rights to service 56,157 mortgage
loans with outstanding principal balances of $5.0 billion, including $471
million serviced for affiliates. The weighted average interest rate and
remaining term was 6.13% and 277 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 and nine months ended September 30, 2006, mortgage banking revenue
includes servicing fee income of $4.0 million and $12.3 million, respectively.
For the three and nine months ended September 30, 2005, mortgage banking revenue
includes servicing fee income of $4.0 million and $12.3 million, respectively.
Activity in capitalized mortgage servicing rights and related valuation
allowance during the nine months ending September 30, 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 6,774 9,302 16,076 - 16,076
Change in fair value due to loan runoff (1,798) (5,910) (7,708) - (7,708)
Change in fair value due to market
changes (238) 3,011 2,773 - 2,773
---------------------------------------- -- ---------- --- ---------- -- ---------- -- ------------- --- -----------
Balance at September 30, 2006 (1) $ 13,227 $ 52,561 $ 65,788 $ - $ 65,788
---------------------------------------- -- ---------- --- ---------- -- ---------- -- ------------- --- -----------
(1) Excludes approximately $796,000 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:
September 30, 2006 December 31, 2005
--------------------- -----------------------
Discount rate - risk-free rate plus a market premium 9.73% 10.85%
-------------
Prepayment rate - based upon loan interest rate,
---------------
original term and loan type 6.00% -18.90% 10.42% - 20.38%
Loan servicing costs - annually per loan based upon
--------------------
loan type $43 - $58 $35 - $46
Escrow earnings rate - indexed to rates paid on deposit
--------------------
accounts with comparable average life 5.45% 5.21%
38
Stratification of the mortgage loan servicing portfolio and outstanding
principal of loans serviced by interest rate at September 30, 2006 follows (in
thousands):
< 5.51% 5.51% - 6.50% 6.51% - 7.50% > 7.50% Total
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
Fair value $ 15,759 $ 33,313 $ 13,166 $3,550 $65,788
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
Outstanding principal of loans serviced (1) $ 1,061,900 $2,206,300 $ 942,700 $ 234,300 $ 4,445,200
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
(1) Excludes outstanding principal of $471 million for loans serviced for
affiliates and $54 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):
Nine Months Ended Sept. 30,
----------------------------------
2006 2005
-------------- ---------------
Proceeds $ 229,324 $ 1,110,707
Gross realized gains 889 4,750
Gross realized losses (339) (9,865)
Related federal and state income
tax expense (benefit) 192 (1,838)
(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 nine months ended September 30, 2006 and
2005, net periodic pension cost was approximately $1.8 million and $4.8 million,
respectively.
During the second quarter of 2006, the Company made Pension Plan contributions
totaling $2.8 million, which funded the remaining maximum contribution for 2005
permitted under applicable regulations. The Company made no other Pension Plan
contributions during the nine months ended September 30, 2006.
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 October 31, 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 November 30, 2006 to shareholders of record
on November 13, 2006.
39
(7) Earnings Per Share
The following table presents the Ended computation of basic and diluted earnings
per share (dollars in thousands, except share data):
Three Months Ended Nine Months Ended
-----------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2006 2005
-----------------------------------------------------
Numerator:
Net income $ 52,660 $ 50,827 $ 162,392 $ 153,347
Preferred stock dividends - - - (375)
---------------------------------------------------------------------------------------------------------------
Numerator for basic earnings per share - income
available to common shareholders 52,660 50,827 162,392 152,972
---------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock dividends - - - 375
---------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share - income available
to common shareholders after assumed conversion $ 52,660 $ 50,827 $ 162,392 $ 153,347
---------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share - weighted
average shares 66,756,458 66,427,447 66,749,141 63,239,165
Effect of dilutive securities:
Employee stock compensation plans (1) 568,970 678,092 552,265 630,906
Convertible preferred stock - - - 3,143,454
---------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 568,970 678,092 552,265 3,774,360
---------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 67,325,428 67,105,539 67,301,406 67,013,525
---------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.79 $ 0.77 $ 2.43 $ 2.42
---------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.78 $ 0.76 $ 2.41 $ 2.29
---------------------------------------------------------------------------------------------------------------
(1) Excludes employee stock options with exercise
prices greater than current market price. - 819,444 578,507 857,937
(8) Reportable Segments
Reportable segments reconciliation to the Consolidated Financial Statements for
the nine months ended September 30, 2006 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Average
Revenue Revenue (1) Expense Income Assets
--------------------------------------------- -- ----------- -- --------------
Total reportable segments $ 373,024 $ 276,158 $ 358,079 $ 175,221 $ 17,195,717
Unallocated items:
Tax-equivalent adjustment 4,998 - - 4,998 -
Funds management and other (15,612) 1,930 20,237 (17,827) (629,615)
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 362,410 $ 278,088 $ 378,316 $ 162,392 $ 16,566,102
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
40
Reportable segments reconciliation to the Consolidated Financial Statements for
the nine months ended September 30, 2005 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
------------ -- ------------ -- ------------- -- ----------- -- --------------
Total reportable segments $ 323,009 $ 265,388 $ 337,302 $ 147,901 $ 15,404,839
Unallocated items:
Tax-equivalent adjustment 3,790 - - 3,790 -
Funds management and other 6,156 (1,744) 7,901 1,656 (479,926)
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 332,955 $ 263,644 $ 345,203 $ 153,347 $ 14,924,913
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
(9) Contingent Liabilities
On October 10, 2006, the Securities and Exchange Commission (the "SEC") started
a special examination of AXIA Investment Advisers, Inc. ("AXIA"). AXIA is a
wholly-owned subsidiary of the Bank of Oklahoma, N.A. and the investment adviser
to the American Performance Funds (the "Funds"), a family of mutual funds. The
examination is focused on the BISYS Fund Services Ohio, Inc. (`BISYS") marketing
assistance agreements with AXIA that were terminated in 2004. In September 2006,
BISYS settled the SEC's two-year investigation of it by consenting to an order
in which the SEC determined that BISYS had "willfully aided and abetted and
caused" (1) the investment advisors to 27 different families of mutual funds to
violate provisions of the Investment Advisors Act of 1940 that prohibit
fraudulent conduct; (2) the investment advisors to the 27 fund families to
violate provisions of the Investment Company Act of 1940 (the "1940 Act") that
prohibit the making of any untrue statement of a material fact in a registration
statement filed by the mutual fund with the SEC; and (3) the 27 fund families to
violate provision of the 1940 Act that require the disclosure and inclusion of
all distribution arrangements and expenses in the fund's 12b-1 fee plan. AXIA
was one of the 27 advisers, and the Funds one of the mutual fund families, to
which the SEC referred. AXIA is not bound by the SEC BISYS Order and disagrees
with its findings as they relate to AXIA. Although the SEC's examination of AXIA
has just begun, the Company does not expect the examination or any action the
SEC may take based upon it to have a material adverse effect on the Company.
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 September 30, 2006, outstanding commitments and letters of credit were as
follows (in thousands):
Sept. 30,
2006
--------------
Commitments to extend credit $ 5,027,486
Standby letters of credit 472,853
Commercial letters of credit 16,493
Commitments to purchase securities 35,012
41
-------------------------------------------------------------------------------------------------------------------------------
Nine Month Financial Summary - Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share Data)
Nine Months Ended
-------------------------------------------------------------------------------------
September 30, 2006 September 30, 2005
------------------------------------------ ---------------------------------------
Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate
-------------------------------------------------------------------------------------
Assets
Taxable securities (3) $ 4,779,427 $ 166,267 4.66 % $ 4,754,020 $ 152,578 4.31%
Tax-exempt securities (3) 280,700 11,137 5.41 221,392 8,540 5.16
-------------------------------------------------------------------------------------------------------------------------------
Total securities (3) 5,060,127 177,404 4.70 4,975,412 161,118 4.34
-------------------------------------------------------------------------------------------------------------------------------
Trading securities 20,723 722 4.66 14,506 527 4.86
Funds sold and resell agreements 35,027 1,295 4.94 32,073 706 2.94
Loans (2) 9,485,916 545,082 7.68 8,315,930 397,133 6.38
Less reserve for loan losses 106,020 - - 110,823 - -
-------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 9,379,896 545,082 7.77 8,205,107 397,133 6.47
-------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 14,495,773 724,503 6.69 13,227,098 559,484 5.66
-------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,070,329 1,697,815
-------------------------------------------------------------------------------------------------------------------------------
Total assets $ 16,566,102 $ 14,924,913
-------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 5,380,045 105,575 2.62 % $ 4,261,669 48,646 1.53%
Savings deposits 151,643 1,043 0.92 161,153 814 0.68
Time deposits 4,233,166 134,733 4.26 3,785,850 96,490 3.41
-------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 9,764,854 241,351 3.30 8,208,672 145,950 2.38
-------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 1,997,804 71,747 4.80 1,978,594 43,692 2.95
Other borrowings 772,032 28,942 5.01 978,280 23,413 3.20
Subordinated debentures 293,795 15,055 6.85 216,561 9,684 5.98
-------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 12,828,485 357,095 3.72 11,382,107 222,739 2.62
-------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,471,014 1,633,718
Other liabilities 686,606 462,472
Shareholders' equity 1,579,997 1,446,616
-------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' $ 16,566,102 $ 14,924,913
equity
-------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (3) 367,408 2.97% 336,745 3.04 %
Tax-Equivalent Net Interest Revenue
To Earning Assets (3) 3.39 3.41
Less tax-equivalent adjustment (1) 4,998 3,790
-------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 362,410 332,955
Provision for credit losses 12,449 7,991
Other operating revenue 277,900 259,602
Other operating expense 378,316 345,203
-------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 249,545 239,363
Federal and state income tax 87,153 86,016
-------------------------------------------------------------------------------------------------------------------------------
Net Income $ 162,392 $ 153,347
-------------------------------------------------------------------------------------------------------------------------------
Earnings Per Average Common Share Equivalent:
Net Income:
Basic $ 2.43 $ 2.42
-------------------------------------------------------------------------------------------------------------------------------
Diluted $ 2.41 $ 2.29
-------------------------------------------------------------------------------------------------------------------------------
(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.
42
------------------------------------------------------------------------------------------------------------------------------
Quarterly Financial Summary - Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share Data)
Three Months Ended
-------------------------------------------------------------------------------------
September 30, 2006 June 30, 2006
------------------------------------------ -------------------------------------
Average Revenue/ Yield / Average Revenue/ Yield /
Balance Expense(1) Rate Balance Expense(1) Rate
-------------------------------------------------------------------------------------
Assets
Taxable securities (3) $ 4,694,588 $ 54,589 4.63% $ 4,783,280 $ 56,632 4.75%
Tax-exempt securities (3) 306,170 4,187 5.43 273,305 3,485 5.12
------------------------------------------------------------------------------------------------------------------------------
Total securities (3) 5,000,758 58,776 4.68 5,056,585 60,117 4.77
------------------------------------------------------------------------------------------------------------------------------
Trading securities 21,721 226 4.13 23,672 287 4.86
Funds sold and resell agreements 51,518 649 5.00 32,048 407 5.09
Loans (2) 9,813,602 197,665 7.99 9,472,309 181,269 7.68
Less reserve for loan losses 106,474 - - 106,048 - -
------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 9,707,128 197,665 8.08 9,366,261 181,269 7.76
------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 14,781,125 257,316 6.91 14,478,566 242,080 6.71
------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,049,998 2,085,724
------------------------------------------------------------------------------------------------------------------------------
Total assets $ 16,831,123 $ 16,564,290
------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 5,458,280 $ 39,571 2.88 % $ 5,353,413 $ 34,875 2.61 %
Savings deposits 146,276 360 0.98 153,200 353 0.92
Time deposits 4,314,672 48,540 4.46 4,220,204 44,798 4.26
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 9,919,228 88,471 3.54 9,726,817 80,026 3.30
------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 2,138,749 27,568 5.11 2,118,211 25,696 4.87
Other borrowings 750,247 10,253 5.42 684,431 8,682 5.09
Subordinated debentures 293,146 5,210 7.05 292,474 4,930 6.76
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 13,101,370 131,502 3.98 12,821,933 119,334 3.73
------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,453,163 1,474,835
Other liabilities 657,269 695,418
Shareholders' equity 1,619,321 1,572,104
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' $ 16,831,123 $ 16,564,290
equity
------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (3) $ 125,814 2.93% $ 122,746 2.98%
Tax-Equivalent Net Interest Revenue
To Earning Assets (3) 3.38 3.40
Less tax-equivalent adjustment (1) 1,836 1,640
------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 123,978 121,106
Provision for credit losses 5,254 3,795
Other operating revenue 97,583 90,880
Other operating expense 138,810 122,127
------------------------------------------------------------------------------------------------------------------------------
Income before taxes 77,497 86,064
Federal and state income tax 24,837 31,080
------------------------------------------------------------------------------------------------------------------------------
Net Income $ 52,660 $ 54,984
------------------------------------------------------------------------------------------------------------------------------
Earnings Per Average Common Share Equivalent:
Net income:
Basic $ 0.79 $ 0.82
------------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.78 $ 0.82
------------------------------------------------------------------------------------------------------------------------------
(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.
43
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended
-------------------------------------------------------------------------------------------------------------------------
March 31, 2006 December 31, 2005 September 30, 2005
-------------------------------------------------------------------------------------------------------------------------
Average Revenue/ Yield / Average Revenue/ Yield / Average Revenue/ Yield /
Balance Expense(1) Rate Balance Expense(1) Rate Balance Expense(1) Rate
-------------------------------------------------------------------------------------------------------------------------
$ 4,862,313 $ 55,046 4.60% $ 4,816,263 $ 53,375 4.44% $ 4,800,698 $ 51,946 4.28%
262,124 3,465 5.36 243,521 3,046 5.05 231,097 2,888 4.96
-------------------------------------------------------------------------------------------------------------------------
5,124,437 58,511 4.64 5,059,784 56,421 4.47 5,031,795 54,834 4.31
-------------------------------------------------------------------------------------------------------------------------
16,722 209 5.07 20,595 243 4.68 14,560 171 4.66
21,181 239 4.58 57,656 581 4.00 44,882 386 3.41
9,164,706 166,148 7.35 9,005,546 158,387 6.98 8,635,732 144,954 6.66
105,135 - - 108,998 - - 109,840 - -
-------------------------------------------------------------------------------------------------------------------------
9,059,571 166,148 7.44 8,896,548 158,387 7.06 8,525,892 144,954 6.75
-------------------------------------------------------------------------------------------------------------------------
14,221,911 225,107 6.42 14,034,583 215,632 6.12 13,617,129 200,345 5.83
-------------------------------------------------------------------------------------------------------------------------
2,048,328 2,168,128 1,970,746
-------------------------------------------------------------------------------------------------------------------------
$ 16,270,239 $ 16,202,711 $ 15,587,875
-------------------------------------------------------------------------------------------------------------------------
$ 5,327,004 $ 31,129 2.37% $ 4,821,627 $ 24,075 1.98% $ 4,533,912 $ 18,968 1.66%
155,554 330 0.86 154,316 292 0.75 157,772 280 0.70
4,162,952 41,395 4.03 4,216,625 40,083 3.77 3,958,948 35,255 3.53
-------------------------------------------------------------------------------------------------------------------------
9,645,510 72,854 3.06 9,192,568 64,450 2.78 8,650,632 54,503 2.50
-------------------------------------------------------------------------------------------------------------------------
1,731,983 18,483 4.33 1,812,752 17,914 3.92 2,067,432 17,738 3.40
882,878 10,007 4.60 1,049,635 10,807 4.08 1,047,423 9,510 3.60
295,792 4,915 6.74 296,021 4,683 6.28 297,284 4,477 5.97
-------------------------------------------------------------------------------------------------------------------------
12,556,163 106,259 3.43 12,350,976 97,854 3.14 12,062,771 86,228 2.84
-------------------------------------------------------------------------------------------------------------------------
1,485,398 1,530,504 1,424,102
680,897 814,192 613,667
1,547,781 1,507,039 1,487,335
-------------------------------------------------------------------------------------------------------------------------
$ 16,270,239 $ 16,202,711 $ 15,587,875
-------------------------------------------------------------------------------------------------------------------------
$ 118,848 2.99% $ 117,778 2.98% $ 114,117 2.99%
3.05
3.39 3.34 3.32
1,522 1,392 1,289
-------------------------------------------------------------------------------------------------------------------------
117,326 116,386 112,828
3,400 4,450 3,976
89,437 87,344 86,855
117,379 123,903 117,034
-------------------------------------------------------------------------------------------------------------------------
85,984 75,377 78,673
31,236 27,219 27,846
------------------------------------------------------------------------------------------------------------------------
$ 54,748 $ 48,158 $ 50,827
-------------------------------------------------------------------------------------------------------------------------
$ 0.82 $ 0.72 $ 0.77
-------------------------------------------------------------------------------------------------------------------------
$ 0.81 $ 0.72 $ 0.76
-------------------------------------------------------------------------------------------------------------------------
44
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 September 30, 2006.
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
Total Number Average Price Total Number of Shares Purchased Maximum Number of Shares
of Shares Paid per Share as Part of Publicly Announced that May Yet Be Purchased
Period Purchased (2) Plans or Programs (1) Under the Plans
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
July 1, 2006 to 11,618 $50.53 8,796 1,791,474
July 31, 2006
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
August 1, 2006 to 36,919 $53.11 2,651 1,788,823
August 31, 2006
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
September 1, 2006 to 61,089 $52.01 60,000 1,728,823
September 30, 2006
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
Total 109,626 71,447
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
(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 September 30,
2006, the Company had repurchased 271,177 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.
45
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOK FINANCIAL CORPORATION
(Registrant)
Date: November 9, 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