As filed with the Securities and Exchange Commission on August 8, 2008
===============================================================================
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 June 30, 2008
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: 67,415,581 shares of common
stock ($.00006 par value) as of July 31, 2008.
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2
BOK Financial Corporation
Form 10-Q
Quarter Ended June 30, 2008
Index
Part I. Financial Information
Management's Discussion and Analysis (Item 2) 2
Market Risk (Item 3) 32
Controls and Procedures (Item 4) 34
Consolidated Financial Statements - Unaudited (Item 1) 35
Six Month Financial Summary - Unaudited (Item 2) 48
Quarterly Financial Summary - Unaudited (Item 2) 49
Part II. Other Information
Item 1. Legal Proceedings 51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 51
Item 4. Submission of Matters to a Vote of Security Holders 52
Item 6. Exhibits 52
Signatures 53
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Performance Summary
BOK Financial Corporation reported a net loss of $1.2 million or $0.02 per
diluted share for the second quarter of 2008. Net income totaled $53.9 million
or $0.80 per diluted share for the second quarter of 2007 and $62.3 million or
$0.92 per diluted share for the first quarter of 2008. Net income for the six
months ended June 30, 2008 totaled $61.1 million or $0.90 per diluted share. Net
income for the six months ended June 30, 2007 totaled $106.7 million or $1.58
per diluted share. The Company recognized $87.0 million of pre-tax charges for
loan and energy derivative credit exposure to SemGroup LP in the second quarter
of 2008. These charges reduced net income by approximately $57.0 million or
$0.84 per diluted share.
Highlights of the second quarter of 2008 included:
o Net interest margin was 3.44% for the second quarter of 2008, up 13 basis
points from both the second quarter of 2007 and the first of 2008. Net
interest revenue increased 18% over the second quarter of 2007.
o Average outstanding loans increased 10% over the second quarter of 2007.
Period-end annualized loan growth rate was 8% since the end of the first
quarter of 2008.
o Non-performing assets totaled $181 million or 1.45% of outstanding loans
and repossessed assets at June 30, 2008, up from $126 million or 1.02% of
outstanding loans and repossessed assets at March 31, 2008 and $70 million
or 0.60% of outstanding loans at June 30, 2007.
o Net loans charged off and provision for credit losses were $39.0 million
and $59.3 million, respectively, for the second quarter of 2008, including
a $26.0 million charge off and a $26.3 million provision for SemGroup. Net
loans charged off and provision for credit losses were $8.9 million and
$17.6 million, respectively for the first quarter of 2008. Net loans
charged off and provision for credit losses were $5.8 million and $7.8
million, respectively for the second quarter of 2007.
o Fees and commissions revenue totaled $63.6 million for the second quarter
of 2008, compared with $97.0 million for the second quarter of 2007 and
$113.9 million for the first quarter of 2008. Brokerage and trading
revenue, which is a component of fees and commissions revenue, was reduced
by a $60.7 million charge to adjust the fair value of energy derivative
contracts with SemGroup to their estimated fair value.
o Net losses on securities, derivatives used by the Company to manage its
interest rate risk and mortgage servicing rights totaled $9.0 million for
the second quarter of 2008, compared with net losses of $1.4 million for
the second quarter of 2007 and net gains on securities, derivatives and
mortgage servicing rights of $5.0 million for the first quarter of 2008.
3
o No other than temporary impairment charges against the Company's securities
portfolio were recognized in the second quarter of 2008, compared with
charges of $5.3 million in the first quarter of 2008. The Company has no
equity investments in FNMA or FHLMC.
Credit Exposure to SemGroup, LP and Related Entities
At June 30, 2008, BOK Financial had credit exposure to SemGroup LP and related
entities of approximately $147 million consisting of $97 million from energy
derivative contracts and $50 million from loans and loan commitments. BOK
Financial is a participant in an approximately $2.4 billion working capital and
term facility to SemGroup; another commercial bank is the lead lender for this
facility. The working capital and term facility is secured by SemGroup's
inventory and accounts receivable. All of BOK Financial's energy derivative
contracts and $46 million of the loans and loan commitments to SemGroup are
secured by the working capital facility collateral. The $34 million outstanding
balance of the working capital loan was reduced by a $26 million charge off.
Included under the working capital and term facility are $11 million of letters
of credit. BOK Financial also has a $4 million participation interest in an $806
million loan secured by SemGroup's fixed and other assets.
On July 22, 2008, SemGroup LP and 24 related entities filed for bankruptcy
protection. BOK Financial assessed a range of values for SemGroup using
information currently available, including information provided by a nationally
recognized financial advisor to SemGroup. The range considers both the value of
SemGroup as a reorganized entity (going concern value) and its liquidation
value. Based on the lower end of the range of values, BOK Financial recognized a
$26.3 million charge to increase its provision for loan losses and a $60.7
million charge against trading revenue to reduce the estimated fair value of
energy derivative contracts.
The Company's net remaining credit exposure to SemGroup at June 30, 2008 totaled
approximately $60 million, including $37 million from energy derivative
contracts and $23 million of loans and loan commitments. Non-accruing loans
include $12 million from SemGroup. This amount will increase if the amounts due
under the energy derivative contracts, primarily in the third quarter of 2008,
are not paid on their contractual settlement dates. Non-accruing loans may also
increase if funding is required of all or some of $11 million of letters of
credit. Mr. Thomas S. Kivisto, President and CEO of SemGroup, LP resigned from
the Board of Directors of BOK Financial and Bank of Oklahoma, N.A. on July 16,
2008. The Company has no direct credit exposure to Mr. Kivisto.
Results of Operations
Net Interest Revenue and Net Interest Margin
Net interest revenue totaled $158.9 million for the second quarter of 2008, up
$24.0 million or 18% over the second quarter of 2007 and $11.8 million over the
first quarter of 2008. Average earning assets increased $2.1 billion or 13% over
the second quarter of 2007, including a $1.2 billion increase in average
outstanding loans and a $917 million increase in average securities. Growth in
the securities portfolio generally consisted of highly-rated, fixed-rate
mortgage-backed securities. These securities were purchased to take advantage of
widened spreads caused by short-term disruptions in the mortgage-backed
securities markets.
Growth in average earning assets was funded primarily by a $1.9 billion or 48%
increase in average federal funds purchased and other borrowed funds. In
addition, average deposits were up $915 million or 7% over the second quarter of
2007. Average interest-bearing transaction accounts grew $1.3 billion or 20% and
average time deposits decreased $431 million or 10% compared with the second
quarter of 2007. Average demand deposits increased $41 million or 3%.
Funds generated by growth in deposits and borrowings were also used to fund a
$667 million increase in average margin assets. Margin assets are placed by the
Company to secure its obligations under various derivative contracts. Margin
assets are generally reported as a reduction of the derivative liabilities which
they secure on the Company's consolidated balance sheet. Fees earned on margin
assets are included in fees and commissions revenue.
Net interest margin was 3.44% for the second quarter of 2008 compared with 3.31%
for both the second quarter of 2007 and the first quarter of 2008. Widening of
the spread between LIBOR and the federal funds rate increased net interest
margin. LIBOR is the basis for interest earned on many of our loans. The federal
funds rate is the basis for interest paid on many of our interest-bearing
liabilities. Yields on average earning assets decreased 139 basis points to
5.61% and the cost of interest-bearing liabilities decreased 183 basis points to
2.29% compared with the second quarter of 2007. Loan yields decreased 215 basis
points to 5.79% while securities yields increased 24 basis points to 5.14%. Our
securities re-price as cash flow received is reinvested at current market rates.
The resulting change in yield on the securities portfolio
4
occurs more slowly than changes in market rates. The cost of interest bearing
deposits decreased 147 basis points to 2.22% and the cost of funds purchased and
other borrowings decreased 288 basis points. Competition for deposits in all our
markets limited our ability to move deposit rates down as interest rates
declined. The benefit to the net interest margin from earning assets funded by
non-interest bearing liabilities was 12 basis points in the second quarter of
2008 compared with 43 basis points in the second quarter of 2007 and 25 basis
points in the preceding quarter.
Management regularly models the effects of changes in interest rates on net
interest revenue. Based on this modeling, we expect net interest revenue to
decrease slightly over a one-year forward looking period. However, other factors
such as loan spread compression, deposit product mix, the overall balance sheet
composition and the previously noted widening of the spread between LIBOR and
the federal funds rate may affect this general expectation.
Our overall objective is to manage the Company's balance sheet to be relatively
neutral to changes in interest rates. Approximately 67% of our commercial and
commercial real estate loan portfolios are either variable rate or fixed rate
that will re-price within one year. These loans are funded primarily by deposit
accounts that are either non-interest bearing, or that re-price more slowly than
the loans. The result is a balance sheet that would be asset sensitive, which
means that assets generally re-price more quickly than liabilities. Among the
strategies that we use to achieve a relatively 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 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. Interest rate swaps with a combined notional amount of $410 million
convert fixed rate liabilities to floating rate based on LIBOR. The purpose of
these derivatives is to position our balance sheet to be relatively 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 the Market Risk section of
this report.
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Table 1 - Volume / Rate Analysis
(In thousands)
Three Months Ended Six Months Ended
June 30, 2008 / 2007 June 30, 2008 / 2007
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Change Due To (1) Change Due To (1)
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Yield / Yield
Change Volume Rate Change Volume /Rate
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Tax-equivalent interest revenue:
Securities $ 15,267 $ 11,689 $ 3,578 $ 29,114 $ 21,977 $ 7,137
Trading securities 786 652 134 1,700 1,477 223
Loans (44,068) 20,107 (64,175) (57,470) 44,323 (101,793)
Funds sold and resell agreements (569) 50 (619) (394) 318 (712)
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Total (28,584) 32,498 (61,082) (27,050) 68,095 (95,145)
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Interest expense:
Transaction deposits (20,487) 7,216 (27,703) (24,679) 16,430 (41,109)
Savings deposits (229) 2 (231) (355) 28 (383)
Time deposits (15,229) (4,632) (10,597) (20,636) (6,590) (14,046)
Federal funds purchased and repurchase
agreements (17,949) 4,339 (22,288) (27,865) 8,588 (36,453)
Other borrowings 2,272 13,840 (11,568) 4,892 21,507 (16,615)
Subordinated debentures (1,003) (205) (798) (807) 1,382 (2,189)
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Total (52,625) 20,560 (73,185) (69,450) 41,345 (110,795)
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Tax-equivalent net interest revenue 24,041 11,938 12,103 42,400 26,750 15,650
Change in tax-equivalent adjustment (15) (84)
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Net interest revenue $ 24,026 $ 42,316
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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 decreased $34.6 million compared with the second quarter
of last year. Fees and commission revenue decreased $33.4 million. The decrease
in fees and commission revenue included a $60.7 million charge to write down
SemGroup derivative contracts to estimated fair value, partially offset by a
$27.3 million increase in all other fees and commissions revenue sources. Net
losses on securities and derivatives used by the Company to manage its interest
rate risk during the second quarter of 2008 totaled $8.2 million, compared with
net losses on securities and derivatives of $6.4 million for the second quarter
of 2007. Other operating revenue was down $64.9 million from the first quarter
of 2008. Fees and commissions revenue decreased $50.3 million due primarily to
the write down of SemGroup derivative contracts. Net gains on securities and
derivatives used by the Company to manage its interest rate risk totaled $6.7
million for the first quarter of 2008 due primarily to Visa, Inc.'s initial
public offering.
Diversified sources of fees and commissions revenue are a significant part of
our business strategy and generally represent 40% to 45% of our total revenue,
excluding gains and losses on asset sales, securities and derivatives. We
believe that a variety of fee revenue sources provide an offset to changes in
interest rates, values in the equity markets, commodity prices and consumer
spending, all of which can be volatile.
Fees and commissions revenue
Brokerage and trading activities resulted in a net loss of $35.5 million for the
second quarter of 2008 due to the $60.7 million charge to write down SemGroup
derivative contracts to fair value. Excluding this charge and revenue from
transactions with SemGroup that may not be recurring, brokerage and trading
revenue totaled $23.3 million for the second quarter of 2008, up $10.6 million
or 84% over the second quarter of 2007. Revenue from trading and institutional
securities sales totaled $11.6 million in the second quarter of 2008 compared
with $5.4 million in the second quarter of 2007. Revenue from retail brokerage
activities totaled $6.2 million for the second quarter of 2008 and $4.5 million
for the second quarter of 2007. Customer hedging revenue, excluding the
write-down of derivative contracts and revenue from transactions with SemGroup,
totaled $4.0 million for the second quarter of 2008 and $2.1 million for the
second quarter of 2007.
Brokerage and trading revenue, excluding the charge to write down derivative
contracts to fair value and revenue from transactions with SemGroup, increased
$469 thousand or 8% annualized compared with the first quarter of 2008. Revenue
from trading and institutional securities sales were down $1.2 million and
revenue from retail brokerage activities were up $857 thousand from the first
quarter of 2008. Customer hedging revenue was up $106 thousand, excluding
revenue from SemGroup transactions. In addition, investment banking revenue for
the second quarter of 2008 totaled $1.4 million, up $752 thousand over the first
quarter of 2008.
Transaction card revenue increased $2.9 million or 13% over the second quarter
of 2007. ATM network revenue increased $1.3 million or 13% while check card
revenue increased $1.2 million or 20% over the second quarter of 2007 due to
volume growth. Merchant discount fees increased $296 thousand, or 4%, over the
second quarter of 2007. Transaction card revenue for the second quarter of 2008
was up $2.2 million over the first quarter of 2008 due largely to seasonal
changes. ATM network fees increased $948 thousand and merchant discount fees
increased $602 thousand due to transaction volumes. Check card revenue was up
$661 thousand over the previous quarter.
Trust fees and commissions increased $1.5 million or 8% for the second quarter
of 2008. The fair value of all trust assets, which is the basis for a
significant portion of trust revenue, totaled $34.4 billion at June 30, 2008
compared with $33.7 billion at June 30, 2007. Net fees from mutual fund advisory
and administrative services, which provide 21% of total trust fees and
commissions increased $188 thousand or 4%. Personal trust management fees, which
provide 33% of total trust fees and commissions increased $863 thousand or 14%.
Employee benefit plan management fees, which provide 19% of total trust fees,
increased $359 thousand or 10%. Trust fees and commissions increased $144
thousand or 3% annualized over the first quarter of 2008. The fair value of all
trust assets totaled $35.5 billion at March 31, 2008 or 3% more than the fair
value of all trust relationships at June 30, 2008.
Deposit service charges and fees totaled $30.2 million for the second quarter of
2008, up $3.4 million or 13% over the second quarter of 2007. Commercial deposit
account fees were up $2.6 million or 38% over the same period of 2007 due to a
decrease in earnings credit available to commercial deposit customers and an
increase in service charges to partially offset higher deposit insurance costs.
The earnings credit, which provides a non-cash method for commercial customers
to avoid incurring charges for deposit services, decreases when interest rates
fall. Overdraft fees grew $840 thousand or 5%. Service charges on retail
accounts decreased $53 thousand or 4% due to service-charge free deposit
products. Deposit service charges increased $2.5 million compared with the first
quarter of 2008. Overdraft fees were up $1.5 million. Overdraft fees are
generally lower in the first quarter of each year due to seasonal factors.
Commercial deposit account fees were up $1.0 million.
6
Mortgage banking revenue was up $3.2 million or 78% compared with 2007.
Servicing revenue totaled $4.3 million for both the second quarters of 2008 and
2007. The outstanding principal balance of mortgage loans serviced for other
totaled $5.0 billion at June 30, 2008 and $4.8 billion at June 30, 2007. Net
gains on mortgage loans sold totaled $2.9 million, up $3.2 million over the
second quarter of 2007. Mortgage loans originated totaled $362 million for the
second quarter of 2008, up 15% over the same period in 2007.
Margin asset fees totaled $4.5 million in the second quarter of 2008 and $969
thousand in the second quarter of 2007. Margin assets which are held primarily
as part of the Company's customer derivatives programs averaged $762 million for
the second quarter of 2008, compared with $96 million for the second quarter of
2007. The increase in revenue earned on margin assets is offset by a decrease in
net interest revenue due to the costs to fund the margin assets.
Securities and derivatives
Net gains and losses on securities consisted of the following:
Three Months Ended
June 30 March 31 June 30
2008 2008 2007
---- ---- ----
Gain (loss) on portfolio securities $ 276 $2,947 $( 580)
Gain on Visa, Inc. IPO securities - 6,788 -
Other than temporary impairment of
equity securities - (5,306) -
Gain (loss) on mortgage hedge securities (5,518) 191 (5,682)
----- ------ -----
Net gain (loss) on securities $(5,242) $4,620 $(6,262)
===== ===== =====
BOK Financial recognized net losses of $5.2 million on securities for the second
quarter of 2008, net losses on securities of $6.3 million for the second quarter
of 2007 and net gains on securities of $4.6 million for the first quarter of
2008. Mortgage hedge securities held as an economic hedge of the changes in fair
value of mortgage servicing rights are carried at fair value. Changes in fair
value of these securities are recognized in earnings as they occur. During the
first quarter of 2008, the Company recorded a $5.3 million pre-tax
other-than-temporary-impairment charge to recognize the decrease in fair value
of its holdings of variable-rate perpetual preferred stock issued by seven major
banks and brokerage houses. The Company also recognized a $6.8 million gain from
the partial redemption of Visa, Inc. Class B shares as part of Visa's initial
public offering. The Company sold certain available for sale securities during
the first quarter of 2008 at a $2.9 million gain to reduce prepayment risk in
response to falling interest rates.
Net losses on derivatives totaled $3.0 million for the second quarter of 2008
and $183 thousand for the second quarter of 2007. Net gains or losses on
derivatives consist of fair value adjustments of all derivatives used to manage
interest rate risk and the related hedged assets and liabilities when
adjustments are permitted by generally accepted accounting principles.
Derivative instruments generally consist of interest rate swaps where the
Company pays a variable rate based on LIBOR and receives a fixed rate. These
swaps generally decrease in value as interest rates rise and increase in value
as interest rates fall.
The Company adopted Statement of Financial Accounting Standards No. 159, Fair
Value Option ("FAS 159") effective January 1, 2008. FAS 159 provides an option
to measure eligible financial assets and financial liabilities at fair value.
Certain certificates of deposit that were either currently designated as hedged
or had previously been designated as hedged, but no longer met the correlation
requirements of Statement of Financial Accounting Standards No. 133 were
designated as being reported at fair value when FAS 159 was first adopted. In
addition, certain certificates of deposit issued subsequent to the adoption of
FAS 159 have been designated as reported at fair value. This determination is
made when the certificates of deposit are issued based on the Company's intent
to swap the interest rate on the certificates from a fixed rate to a LIBOR-based
variable rate.
7
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Table 2 - Other Operating Revenue
(In thousands)
Three Months Ended
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June 30, March 31, Dec. 31, Sept. 30, June 30,
2008 2008 2007 2007 2007
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Brokerage and trading revenue $ (35,462) $ 23,913 $ 20,402 $ 15,541 $ 13,317
Transaction card revenue 25,786 23,558 23,512 23,812 22,917
Trust fees and commissions 20,940 20,796 20,145 19,633 19,458
Deposit service charges and fees 30,199 27,686 29,938 27,885 26,797
Mortgage banking revenue 7,198 7,217 6,912 5,809 4,034
Bank-owned life insurance 2,658 2,512 2,614 2,520 2,525
Margin asset fees 4,460 1,967 2,012 1,061 969
Other revenue 7,824 6,215 7,819 7,456 6,947
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Total fees and commissions 63,603 113,864 113,354 103,717 96,964
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Gain (loss) on sales of assets 216 (35) (1,316) 42 (348)
Gain (loss) on securities, net (5,242) 4,620 (6,251) 4,748 (6,262)
Gain (loss) on derivatives, net (2,961) 2,113 1,529 865 (183)
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Total other operating revenue $ 55,616 $ 120,562 $ 107,316 $ 109,372 $ 90,171
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Other Operating Expense
Other operating expense for the second quarter of 2008 totaled $159.3 million,
up $25.1 million or 19% over the second quarter of 2007. Changes in the fair
value of mortgage servicing rights increased other operating expense $5.8
million. Personnel costs increased $9.5 million or 12% due largely to incentive
compensation costs. Non-personnel expenses, excluding changes in the fair value
of mortgage servicing rights, increased $9.8 million or 17% due largely to
higher deposit insurance costs and losses on mortgage loans sold with recourse.
Personnel expense
Personnel expense totaled $89.6 million for the second quarter of 2008 and $80.1
million for the second quarter of 2007. Regular compensation, which consists of
salaries and wages, overtime pay and temporary personnel cost totaled $54.0
million, up $2.2 million or 4% over the second quarter of 2007. The increase in
regular compensation expense was due primarily to an increase in average regular
compensation per full time equivalent employee. Average staffing levels were up
1% over the second quarter of last year.
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Table 3 - Personnel Expense
(Dollars in thousands)
Three Months Ended
----------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
2008 2008 2007 2007 2007
----------------------------------------------------------------------------------
Regular compensation $ 54,024 $ 52,576 $ 52,316 $ 53,592 $ 51,821
Incentive compensation:
Cash-based 19,503 19,287 19,568 15,559 12,485
Stock-based 2,760 2,272 1,794 2,345 3,097
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Total incentive compensation 22,263 21,559 21,362 17,904 15,582
Employee benefits 13,310 13,971 10,834 11,816 12,651
Workforce reduction costs, net - - - 2,499 -
---------------------------------------------------------------------------------------------------------------------
Total personnel expense $ 89,597 $ 88,106 $ 84,512 $ 85,811 $ 80,054
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Number of employees
(full-time equivalent) 4,137 4,135 4,110 4,299 4,093
---------------------------------------------------------------------------------------------------------------------
Incentive compensation increased $6.7 million or 43% to $22.3 million. Expense
for cash-based incentive compensation plans increased $7.0 million or 56%. These
plans are either intended to provide current rewards to employees who generate
long-term business opportunities to the Company based on growth in loans,
deposits, customer relationships and other measurable metrics or intended to
compensate employees with commissions on completed transactions. The increase in
cash-based incentive compensation over the second quarter of 2007 included a
$3.7 million increase in commissions related to brokerage and trading revenue.
8
The Company also provides stock-based incentive compensation plans. Stock-based
compensation plans include both equity and liability awards. Compensation
expense related to liability awards decreased $262 thousand compared with the
second quarter of 2007. This decrease reflected changes in the market value of
BOK Financial common stock. The market value of BOK Financial common stock
increased $1.22 per share in the second quarter of 2008 and increased $3.89 per
share in the second quarter of 2007. Compensation expense for equity awards
decreased $75 thousand or 5% compared with the second quarter of 2007. Expense
for equity awards is based on the grant-date fair value of the awards and is
unaffected by subsequent changes in fair value.
Employee benefit expense totaled $13.3 million, a $659 thousand or 5% increase
over 2007. Medical insurance costs were down $378 thousand or 9%. The Company
self-insures a portion of its employee health care coverage.
Data processing and communications expense
Data processing and communications expense totaled $19.5 million, up $1.1
million or 6% over the second quarter of 2007. This expense consists of two
broad categories, data processing systems and transaction card processing. Data
processing costs increased $674 thousand or 6% due to growth in processing
volumes and acquisitions during 2007. Transaction card processing costs
increased $447 thousand or 6% due to growth in processing volume.
Other operating expenses
Occupancy and equipment expenses totaled $15.1 million for the second quarter of
2008, up $1.2 million or 9% over 2007. Growth in occupancy expense was due to 24
new branch locations added in the past year, including 16 added from bank
acquisitions during the second quarter of 2007. Insurance expense increased $1.9
million compared to the second quarter of 2007 due to an increase in FDIC
insurance premiums. A one-time credit granted to eligible depository
institutions by the Federal Deposit Insurance Reform Act of 2005 to offset
deposit insurance premiums was largely used in 2007.
Mortgage banking costs included a $3.4 million increase in provision for losses
on residential mortgage loans sold with recourse. The Company's obligation to
repurchase these loans is more-fully discussed in the Loan Commitments section
of this report.
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Table 4 - Other Operating Expense
(In thousands)
Three Months Ended
----------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
2008 2008 2007 2007 2007
----------------------------------------------------------------------------------
Personnel $ 89,597 $ 88,106 $ 84,512 $ 85,811 $ 80,054
Business promotion 5,777 4,639 6,528 5,399 5,391
Professional fees and services 6,973 5,648 6,209 5,749 5,963
Net occupancy and equipment 15,100 15,061 15,466 14,752 13,860
Insurance 2,626 3,710 843 759 693
Data processing & communications 19,523 18,893 19,086 18,271 18,402
Printing, postage and supplies 4,156 4,419 4,221 4,201 4,179
Net (gains) losses and operating
expenses of repossessed assets (229) 378 120 172 192
Amortization of intangible assets 1,885 1,925 2,382 2,397 1,443
Mortgage banking costs 6,054 5,681 4,225 3,877 2,485
Change in fair value of mortgage
servicing rights 767 1,762 3,344 3,446 (5,061)
Visa retrospective responsibility
obligation - (2,767) 2,767 - -
Other expense 7,039 5,949 8,024 6,184 6,530
---------------------------------------------------------------------------------------------------------------------
Total other operating expense $ 159,268 $ 153,404 $ 157,727 $ 151,018 $ 134,131
---------------------------------------------------------------------------------------------------------------------
Income Taxes
Income tax benefit was $2.9 million or 71% of book taxable loss for the second
quarter of 2008 compared with $29.3 million or 35% of book taxable income for
the second quarter of 2007 and $34.4 million or 36% of book taxable income for
the first quarter of 2008. The effective tax rate for the second quarter of 2008
includes adjustments to estimated income tax expense due to the loss incurred in
the second quarter.
9
BOK Financial operates in numerous jurisdictions, which requires judgment
regarding the allocation of income, expense and earnings under various laws and
regulations of each of these taxing jurisdictions. Each jurisdiction may audit
our tax returns and may take different positions with respect to these
allocations. The reserve for uncertain tax positions was largely unchanged from
December 31, 2007.
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. Operating results for Funds Management and Other include the effect
of interest rate risk positions and risk management activities, the provision
for credit losses, tax-exempt income and tax credits and certain executive
compensation costs that are not attributed to the lines of business.
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. Return on economic capital
excludes amortization of intangible assets.
10
------------------------------------------------------ -------------------------------- --------------------------------
Table 5 - Net Income by Line of Business
(In thousands) Three months ended June 30, Six months ended June 30,
2008 2007 2008 2007
---------------- --------------- ---------------- ---------------
Regional banking $ 22,532 $ 24,332 $ 41,780 $ 49,055
Oklahoma corporate banking (37,860) 19,039 (17,405) 37,060
Mortgage banking (3,515) 122 (4,492) 168
Oklahoma consumer banking 7,635 9,079 16,882 18,540
Wealth management 9,554 6,672 19,895 14,048
------------------------------------------------------ ---------------- --------------- ---------------- ---------------
Subtotal (1,654) 59,244 56,660 118,871
Funds management and other 493 (5,381) 4,444 (12,215)
------------------------------------------------------ ---------------- --------------- ---------------- ---------------
Total $ (1,161) $ 53,863 $ 61,104 $106,656
------------------------------------------------------ ---------------- --------------- ---------------- ---------------
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, this Division has
specialized groups that serve customers in the energy, agriculture, healthcare
and banking/finance industries, and includes the TransFund network. The Oklahoma
Corporate Banking Division incurred a net loss of $37.9 million for the second
quarter of 2008 due to its credit exposure from one customer, SemGroup, which
declared bankruptcy in mid July 2008. Losses on loans and derivative contracts
with SemGroup reduced the Oklahoma Corporate Banking Division's net income for
the second quarter of 2008 by $53.0 million. This Division contributed $19.0
million to consolidated net income in the second quarter of 2007 and $20.4
million to consolidated net income in the first quarter of 2008. Excluding
SemGroup losses, the Oklahoma Corporate Banking Division's net income for the
second quarter of 2008 was $15.1 million.
Net interest revenue decreased $4.0 million or 10%. Average earnings assets
attributed to this division increased $93 million or 2% over 2007 to $4.7
billion. Average loans decreased $33 million or 1% to $4.4 billion. Average
commercial loans decreased $152 million or 6%. The decrease in average
commercial loans was partially offset by a $70 million increase in average
consumer loans, primarily indirect automobile loans, and a $50 million increase
in average real estate loans. Average funds provided to the funds management
unit by the Oklahoma Corporate Banking Division increased $122 million. Average
deposits attributed to the Oklahoma Corporate Banking Division increased $206
million or 10% due primarily to growth in treasury services Eurodollar deposit
products.
Operating revenue decreased $57.6 million due primarily to a $60.7 million
charge for the decrease in the fair value of derivative contracts with SemGroup.
Operating revenue was up $3.1 million or 13% excluding this charge. Operating
revenue provided by TransFund increased $1.4 million or 15% and service charges
on commercial deposit accounts were up $1.1 million or 21%. Operating expenses,
which consist primarily of personnel and data processing costs, increased $2.8
million or 10%.
Net loans charged off by the Oklahoma Corporate Banking Division totaled $32.3
million in the second quarter of 2008, which included a $26.0 million charge off
of SemGroup loans. Excluding SemGroup, net loans charged off in the second
quarter of 2008 totaled $6.3 million or 0.54% of average loans. Net loans
charged off totaled $3.3 million or 0.30% of average loans for the second
quarter of 2007 and $2.2 million or 0.18% of average loans for the first quarter
of 2008.
11
Table 6 - Oklahoma Corporate Banking
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2008 2007 2008 2007
------------- --- ------------- -- -------------- -- -------------
NIR (expense) from external sources $ 49,464 $ 62,907 $ 101,875 $ 122,679
NIR (expense) from internal sources (14,335) (23,731) (30,511) (45,903)
------------- ------------- -------------- -------------
Net interest revenue 35,129 39,176 71,364 76,776
Other operating revenue (34,183) 23,454 (10,304) 44,454
Operating expense 30,980 28,156 60,132 55,911
Gains on financial instruments, net - - 4,689 -
Net loans charged off 32,271 3,313 34,443 4,644
Net income (loss) (37,860) 19,039 (17,405) 37,060
Average assets $ 6,135,980 $ 5,785,263 $ 6,118,107 $ 5,748,197
Average economic capital 461,840 405,160 434,280 413,010
Return on assets (2.48)% 1.32% (0.57)% 1.30%
Return on economic capital (32.97)% 18.85% (8.06)% 18.10%
Efficiency ratio NM 44.96% 98.48% 46.12%
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 and
BOSC's retail brokerage division. Consumer banking services are offered through
35 locations in Tulsa, 32 locations in Oklahoma City and 16 locations throughout
the state.
The Oklahoma Consumer Banking Division contributed net income of $7.6 million
for the second quarter of 2008, compared to net income of $9.1 million for the
second quarter of 2007. Net interest revenue decreased $2.8 million or 15% over
2007 due primarily to deposit spread compression. Average loans attributed to
the Oklahoma Consumer Banking Division in 2008 increased $19 million or 7%
compared with 2007. Average deposits provided by the Oklahoma Consumer Banking
Division grew $136 million or 5% to $3.0 billion. Average demand deposits were
up $36 million or 10% over 2007. Interest bearing deposits increased $100
million or 4%, including a $229 million or 21% increase in interest bearing
transaction accounts and a $129 million or 9% decrease in time deposits. Other
operating revenue was up $1.5 million or 8% over 2007 largely from check card
revenue and overdraft fees. Operating expenses increased $1.5 million or 7% over
2007, including a $546 thousand or 7% increase in personnel expense and a $946
thousand or 7% increase in non-personnel expense. Net loans charged-off, which
consist primarily of overdrawn deposit accounts, totaled $402 thousand for the
second quarter of 2008 and $801 thousand for the second quarter of 2007.
12
Table 7 - Oklahoma Consumer Banking
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2008 2007 2008 2007
------------- ------------- -------------- -------------
NIR (expense) from external sources $ (11,537) $ (16,740) $ (26,395) $ (33,891)
NIR (expense) from internal sources 27,265 35,224 58,814 70,439
------------- ------------- -------------- -------------
Net interest revenue 15,728 18,484 32,419 36,548
Other operating revenue 20,876 19,329 39,942 37,208
Operating expense 23,699 22,207 45,361 42,382
Gains on financial instruments, net - - 1,576 -
Net loans charged off 402 801 963 1,062
Net income 7,635 9,079 16,882 18,540
Average assets $ 3,036,095 $ 2,905,822 $ 3,013,375 $ 2,917,365
Average economic capital 58,230 66,370 59,930 65,820
Return on assets 1.01% 1.25% 1.13% 1.28%
Return on economic capital 52.74% 54.87% 56.65% 56.80%
Efficiency ratio 64.74% 58.73% 62.69% 57.46%
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.
BOk Mortgage incurred a net loss of $3.5 million in the second quarter of 2008
compared to net income of $122 thousand in the second quarter of 2007. Changes
in the fair value of mortgage servicing rights, net of hedging activity, reduced
net income $3.8 million in 2008 and $379 thousand in 2007. In addition, an
increase in the provision for off-balance sheet credit risk on mortgage loans
sold with recourse reduced net income $2.1 million in the second quarter of
2008.
Mortgage banking activities consisted primarily 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 Mortgage Banking Division
also holds a permanent portfolio of $447 million of residential mortgage loans
which generated net income of $473 thousand in the second quarter of 2008.
Loan Production Sector
Pre-tax loss from loan production totaled $1.8 million for the second quarter of
2008 compared with pre-tax income of $331 thousand for the second quarter of
2007. Loan production revenue totaled $3.9 million in second quarter of 2008,
including $5.9 million of capitalized mortgage servicing rights, partially
offset by net losses on mortgage loans sold. Loan production revenue totaled
$4.1 million in second quarter of 2007. Capitalized mortgage servicing rights
totaled $3.6 million for the second quarter of 2007. The average initial fair
value of servicing rights on mortgage loans funded was 1.61% for 2008 and 1.46%
for 2007. Mortgage loans funded totaled $362 million in second quarter of 2008
and $315 million in the second quarter of 2007. Approximately 60% and 17% of the
loans funded during the second quarter of 2008 were in Oklahoma and Texas,
respectively. The pipeline of mortgage loan applications totaled $517 million at
June 30, 2008, compared to $525 million at March 31, 2008 and $306 million at
June 30, 2007. Operating expenses, excluding direct loan production costs which
are recognized as part of the gain or loss on loans sold, totaled $6.8 million
in 2008 and $3.9 million in 2007. The increase in operating expenses was due to
a $3.4 million increase in provision for losses on loans sold with recourse.
Loan Servicing Sector
The loan servicing sector had a pre-tax loss of $5.1 million for the second
quarter of 2008 compared with a pre-tax loss of $552 thousand for the second
quarter of 2007. The increase in net loss from loan servicing during the second
quarter of 2008 was due to ineffectiveness of our economic hedging. We
recognized a net pre-tax loss of $6.3 million in the second quarter of 2008 and
a net pre-tax loss of $620 thousand in 2007 from changes in the value of
mortgage servicing rights and economic hedging activities. The fair value of
securities designated as an economic hedge decreased $5.5 million during the
second quarter of 2008, which was largely expected based on changes in market
interest rates for mortgage-backed securities. However, changes in mortgage
commitment rates, prepayment speed assumptions, discount
13
rates and other estimates of future activities decreased the fair value of
mortgage servicing rights recognized in earnings by $767 thousand in the second
quarter of 2008, which was unexpected. Factors which caused the fair value of
our servicing rights to not increase as expected included an increase in
prepayment speed of our servicing rights relative to national averages and a
decrease in short-term interest rates relative to mortgage commitment rates.
During the second quarter of 2007, economic hedge activity produced net losses
of $5.7 million, which largely offset that quarter's increase in the fair value
of servicing rights of $5.1 million.
Servicing revenue, including revenue on loans serviced for affiliates, totaled
$4.8 million in second quarter of 2008 compared to $4.4 million in the same
period of 2007. The average outstanding balance of loans serviced, including
loans serviced for affiliates, was $5.7 billion during the second quarter of
2008 compared to $5.2 billion during 2007. Servicing revenue per outstanding
loan principal was 34 basis points in 2008 compared with 34 basis points in
2007. Servicing costs totaled $1.8 million for the second quarter of 2008 and
$2.0 million for the second quarter of 2007. At June 30, 2008, the total number
of loans serviced by BOk Mortgage was 58,021. Serviced loans delinquent 90 days
or more or in process of foreclosure totaled 620 or 1.07%; 366 of these loans
are in Oklahoma, 71 are in Arkansas, 51 are in Kansas / Missouri and 38 are in
Texas.
The fair value of mortgage servicing rights decreased $3.4 million during the
second quarter of 2008 and $3.2 million during the second quarter of 2007 due to
actual runoff of the underlying loans serviced. This reduction in fair value is
included in mortgage banking costs in the Consolidated Statement of Earnings.
Table 8 - Mortgage Banking
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2008 2007 2008 2007
------------- ------------- -------------- -------------
NIR (expense) from external sources $ 11,584 $ 8,529 $ 23,236 $ 16,344
NIR (expense) from internal sources (8,406) (7,591) (17,527) (14,543)
------------- ------------- -------------- -------------
Net interest revenue 3,178 938 5,709 1,801
Capitalized mortgage servicing rights 5,909 3,566 10,314 5,915
Other operating revenue 2,043 5,654 5,718 10,594
Operating expense 10,444 9,215 20,859 16,314
Change in fair value of mortgage servicing
rights 767 (5,061) 2,529 (3,897)
Losses on financial instruments, net (5,518) (5,681) (5,327) (5,428)
Net loans charged off 81 122 306 191
Net income (loss) (3,515) 122 (4,492) 168
Average assets $ 887,397 $ 684,483 $ 886,431 $ 653,332
Average economic capital 32,250 23,890 28,820 25,090
Return on assets (1.59)% 0.07% (1.02)% 0.05%
Return on economic capital (43.84)% 2.05% (31.34)% 1.35%
Efficiency ratio 93.84% 90.72% 95.94% 89.10%
BOK Financial designated a portion of its securities portfolio as an economic
hedge against the risk of changes in the fair value of its mortgage servicing
rights. These securities, which are identified as mortgage trading securities
are carried at fair value. Changes in fair value are recognized in earnings as
they occur. Additionally, mortgage-related 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. No special hedge accounting treatment is applicable to
either the mortgage servicing rights or the financial instruments designated as
an economic hedge.
Our 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.
14
At June 30, 2008, financial instruments with a fair value of $98.3 million and
an unrealized loss of $1.9 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 June 30, 2008, the
pre-tax results of this modeling on reported earnings were:
Table 9 - Interest Rate Sensitivity - Mortgage Servicing
(Dollars in Thousands)
50 bp increase 50 bp decrease
Anticipated change in:
Fair value of mortgage servicing rights $ 2,560 $ (3,724)
Fair value of hedging instruments (2,661) 2,671
----------------- ----------------
Net $ (101) $ (1,053)
----------------- ----------------
Table 9 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 the fair value of our servicing rights $2.6 million while a
50 basis point decrease is expected to reduce the fair value $3.7 million. This
considers that there is an upper limit to appreciation in the value of servicing
rights as rates rise due to the contractual repayment terms of the loans and
other factors. This is much less of a limit of the speed at which mortgage loans
may prepay in a declining rate environment.
Modeling changes in the value of 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 the assumed loan prepayment speeds
and actual prepayments of our loans. Changes in market conditions can increase
or decrease the discount spread over benchmark rates expected by investors in
mortgage servicing rights and actual prepayments may increase or decrease due to
factors other than changes in interest rates. These factors and others may cause
changes in the value of our mortgage servicing rights to differ from our
expectations.
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 and Cavanal Hill Investment
Management, Inc., an SEC-registered investment advisor. Cavanal Hill changed its
name from AXIA Investment Management, Inc. on June 20, 2008. 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. Trust services are
provided primarily to clients throughout Oklahoma, Texas and New Mexico.
Additionally, trust services include a nationally competitive, self-directed
401-(k) program and administrative and advisory services to the American
Performance family of mutual funds. Brokerage and trading activities within the
wealth management line of business consists of retail sales of mutual funds,
securities, and annuities, institutional sales of securities and derivatives,
bond underwriting and other financial advisory services and customer risk
management programs.
Wealth Management contributed net income of $9.6 million in the second quarter
of 2008. This compared to net income of $6.7 million in the second quarter of
2007. Growth in net income was due primarily to increased revenue from trading
and institutional securities sales.
Trust and private financial services provided $3.8 million of net income in the
second quarter of 2008, down $1.8 million from the second quarter of 2007. Trust
fees and commissions for the Wealth Management line of business totaled $18.1
million, up $1.2 million or 7% increase over last year. At June 30, 2008 and
2007, the Wealth Management line of business was responsible for trust assets
with aggregate market values of $31.4 billion and $30.8 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 $11.9
billion of trust assets at June 30, 2008 compared to $11.4 billion of trust
assets at June 30, 2007. The fair value of non-managed assets decreased $414
million to $11.8 billion at June 30, 2008. Assets held in safekeeping totaled
$7.7 billion at June 30, 2008. Operating expenses attributed to trust and
private financial services totaled $19.0 million for the second quarter of 2008
and $16.9 million for the second quarter of 2007. Personnel costs increased $1.1
million or 10% due primarily to staffing increases in the Arizona and Kansas
City markets. Non-personnel costs increased $962 thousand or 15% due to
increased legal, data processing and safekeeping costs.
Brokerage and trading activities provided $5.8 million of net income in 2008
compared to $1.1 million in 2007. Operating revenue increased $14.5 million due
to brokerage and trading revenue and fees earned on margin assets. Brokerage and
trading revenue increased $9.5 million due primarily to institutional securities
sales, customer derivative revenue and retail brokerage fees. In addition, fees
on margin assets were up $3.2 million, largely offset by a decrease
15
in net interest revenue for the cost to fund margin assets. Operating expenses,
which consist primarily of compensation expense increased $4.0 million or 34%.
Incentive compensation expense which is directly related to revenue growth was
up $4.0 million.
Table 10 - Wealth Management
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2008 2007 2008 2007
------------- ------------- -------------- -------------
NIR (expense) from external sources $ 7,911 $ 3,480 $ 10,905 $ 8,005
NIR (expense) from internal sources (4,170) 4,608 (335) 8,894
------------- ------------- -------------- -------------
Net interest revenue 3,741 8,088 10,570 16,899
Other operating revenue 47,527 31,957 91,408 62,490
Operating expense 34,816 28,746 68,211 56,004
Net loans charged off 807 393 1,199 407
Net income 9,554 6,672 19,895 14,048
Average assets $ 2,773,578 $ 1,774,525 $ 2,633,307 $ 1,733,099
Average economic capital 163,410 160,850 153,310 163,750
Return on assets 1.39% 1.51% 1.52% 1.63%
Return on economic capital 23.52% 16.64% 26.10% 17.30%
Efficiency ratio 67.91% 71.78% 66.89% 70.54%
Regional Banking
Regional banking consists primarily of the commercial and consumer banking
services provided by Bank of Texas, Bank of Albuquerque, Bank of Arkansas,
Colorado State Bank and Trust, Bank of Arizona and Bank of Kansas City in their
respective markets. It also includes fiduciary services provided by Colorado
State Bank and Trust. Small businesses and middle-market corporations are the
regional banks' primary customer focus. Regional banking contributed net income
of $22.5 million during the second quarter of 2008. This compares with net
income of $24.3 million during the second quarter of 2007. Net income for the
second quarter of 2008 from operations in Texas and Colorado decreased $1.4
million and $1.0 million, respectively, from the previous year. In addition net
income from our Arizona banking operations decreased $628 thousand. Net income
for the second quarter of 2008 from banking operations in New Mexico and Kansas
City was up $860 thousand and $361 thousand, respectively, over the same period
of 2007.
Decrease in net income provided by Texas operations was due primarily to higher
operating costs and an increase in net loans charged-off. Net interest revenue
increased $811 thousand or 2%. Average earning assets increased $572 million,
including a $505 million or 18% increase in average loans. Average loans totaled
$3.4 billion for the second quarter of 2008 and $2.8 billion for the second
quarter of 2007. Average corporate banking loans increased $72 million or 4% to
$1.9 billion. Growth in the average outstanding balances of middle market and
indirect automobile loans was partially offset by reductions in the average
outstanding balances of energy loans. Average community banking loans totaled
$1.2 billion, up $368 million compared with the second quarter of 2007.
Community banking loans were up in Dallas, Houston and Fort Worth. Average
consumer loans increased $40 million or 62% over the second quarter of 2007,
primarily in the Fort Worth market. Average deposits totaled $3.1 billion for
the second quarter of 2008 and $2.8 billion for the second quarter of 2007.
Average corporate banking deposits were down $187 million or 14% to $615
million. Average community banking deposits increased $265 million to $1.3
billion, primarily in the Fort Worth market. Average consumer banking deposits
totaled $1.1 billion for the second quarter of 2008, up $168 million or 18%.
Consumer deposit growth was also primarily in the Fort Worth market. Growth in
average loans and deposits in the Fort Worth market includes Worth National
Bank, which was acquired on May 31, 2007.
Other operating revenue in the Texas market increased $1.6 million or 23% over
2007 due primarily to a $1.0 million increase in deposit fees. Operating
expenses were up $3.1 million or 13%, including a $1.0 million or 8% increase in
personnel costs and a $2.1 million increase in non-personnel expense. Net loans
charged off totaled $987 thousand or 0.12% of average loans for the second
quarter of 2008 compared with a $609 thousand net recovery in 2007.
Net income decreased at our Colorado operations $1.0 million or 25% due
primarily to increased operating expenses. Other operating revenue increased
$838 thousand or 27% due primarily to growth in trust fees and deposit service
charges. Trust fees and commissions totaled $2.8 million for the second quarter
of 2008, up $248 thousand over the second quarter of 2007. The fair value of
trust assets overseen by Colorado State Bank and Trust was $3.0 billion at June
30, 2008 up 4% from June 30, 2007. Deposit fees totaled $593 thousand for the
second quarter of 2008 and $296
16
thousand for the second quarter of 2007. Operating expenses in Colorado
increased $2.5 million or 35% over the second quarter of last year. Personnel
expenses were up $781 thousand and non-personnel operating expenses were up $1.7
million. Growth in operating expenses included additional expenses from the
First United acquisition late in the second quarter of 2007, including a $254
thousand increase in intangible asset amortization.
Average earning assets attributed to our Colorado operations increased $186
million or 13% to $1.7 billion. Securities and funds sold to the funds
management unit increased $69 million. Average loans totaled $811 million for
the second quarter of 2008, up $118 million or 17% over 2007. Average energy
loans in the Colorado market increased $29 million or 11%. Commercial real
estate loans were up $63 million or 34%, including commercial real estate loans
acquired with First United Bank in the second quarter of 2007. Average deposits
increased $164 million or 18% to $1.1 billion, including consumer deposit growth
of $26 million or 5% and wealth management deposit growth of $120 million or
46%.
Net income in New Mexico totaled $5.9 million for the second quarter of 2008, up
$860 thousand or 17% over the same quarter of 2007. Net interest revenue
increased $861 thousand or 7% and operating revenue was up $208 thousand or 5%.
Average loans increased $51 million or 7% to $786 million for the second quarter
of 2008. Average deposits were $956 million for the second quarter of 2008 and
$1.0 billion for 2007. Operating expenses increased $66 thousand or 1% over the
second quarter of 2007. Personnel costs in New Mexico increased $164 thousand or
5% and non-personnel operating expense decreased $98 thousand.
Net income from banking operations in Arizona decreased $628 thousand due
primarily to an increase in net loans charged-off. Net loss for the second
quarter of 2008 totaled $148 thousand compared with net income of $480 thousand
for the second quarter of 2007. Net loans charged-off were $1.3 million or 0.84%
of average loans for the second quarter of 2008, up from $1 thousand in the
second quarter of 2007. Net interest revenue grew $134 thousand. Average loans
increased $130 million to $632 million. Small business and middle market
commercial loans increased $105 million compared to the second quarter of 2007.
Average commercial real estate loans decreased $13 million or 7% in Phoenix and
increased $40 million or 25% in Tucson. Other operating revenue increased $97
thousand and operating expenses decreased $68 thousand or 2%.
Net income from banking operations in the Kansas City market was up $361
thousand compared with the second quarter of 2007. Net interest revenue
increased $904 thousand and other operating revenue was up $948 thousand.
Average loans increased $200 million to $406 million due primarily to growth in
commercial loans. Average deposits were up $36 million to $89 million. Operating
expenses for the second quarter of 2008 totaled $3.2 million, up $571 thousand
over the second quarter of 2007. Net loans charged off were $690 thousand or
0.68% of average loans for the second quarter of 2008, up from $1 thousand in
the second quarter of 2007.
17
Table 11 - Bank of Texas
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2008 2007 2008 2007
------------- ------------- -------------- -------------
NIR (expense) from external sources $ 44,485 $ 45,929 $ 89,447 $ 91,237
NIR (expense) from internal sources (5,228) (7,483) (12,218) (14,683)
------------- ------------- -------------- -------------
Net interest revenue 39,257 38,446 77,229 76,554
Other operating revenue 8,417 6,852 16,014 13,137
Operating expense 26,979 23,873 54,211 45,583
Gains on financial instruments, net - - 258 -
Net loans charged off (recovered) 987 (609) 2,894 536
Net income 12,692 14,057 23,356 27,841
Average assets $ 4,795,919 $ 4,102,189 $ 4,705,447 $ 4,029,689
Average economic capital 247,030 296,580 231,200 207,010
Average invested capital 498,910 463,660 483,090 458,890
Return on assets 1.06% 1.37% 1.00% 1.39%
Return on economic capital 20.66% 19.01% 20.32% 27.12%
Return on average invested capital 10.23% 12.16% 9.72% 12.23%
Efficiency ratio 56.59% 52.70% 58.14% 50.82%
Table 12 - Bank of Albuquerque
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2008 2007 2008 2007
------------- ------------- -------------- -------------
NIR (expense) from external sources $ 16,803 $ 18,735 $ 33,891 $ 36,446
NIR (expense) from internal sources (2,751) (5,544) (6,939) (10,770)
------------- ------------- -------------- -------------
Net interest revenue 14,052 13,191 26,952 25,676
Other operating revenue 4,568 4,360 8,807 8,286
Operating expense 7,863 7,797 15,811 15,111
Gains on financial instruments, net - - 190 -
Net loans charged off 1,025 1,428 1,137 1,559
Net income 5,947 5,087 11,607 10,565
Average assets $ 2,393,109 $ 1,616,356 $ 2,101,474 $ 1,577,580
Average economic capital 101,380 89,430 96,830 88,510
Average invested capital 120,470 108,520 115,920 107,600
Return on assets 1.00% 1.26% 1.11% 1.35%
Return on economic capital 23.59% 22.82% 24.11% 24.07%
Return on average invested capital 19.85% 18.80% 20.14% 19.80%
Efficiency ratio 42.23% 44.42% 44.22% 44.49%
18
Table 13 - Bank of Arkansas
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2008 2007 2008 2007
------------- ------------- -------------- -------------
NIR (expense) from external sources $ 4,137 $ 4,196 $ 8,425 $ 7,637
NIR (expense) from internal sources (1,101) (1,726) (2,629) (3,117)
------------- ------------- -------------- -------------
Net interest revenue 3,036 2,470 5,796 4,520
Other operating revenue 288 310 643 644
Operating expense 1,158 1,098 2,221 2,139
Gains on financial instruments, net - - 7 -
Net loans charged off 782 264 1,356 406
Net income 846 867 1,753 1,599
Average assets $ 426,386 $ 333,995 $ 419,108 $ 308,324
Average economic capital 26,090 19,430 22,220 18,280
Average invested capital 26,090 19,430 22,220 18,280
Return on assets 0.80% 1.04% 0.84% 1.05%
Return on economic capital 13.04% 17.90% 15.87% 17.64%
Return on average invested capital 13.04% 17.90% 15.87% 17.64%
Efficiency ratio 34.84% 39.50% 34.49% 41.42%
Table 14 - Colorado State Bank and Trust
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2008 2007 2008 2007
------------- ------------- -------------- -------------
NIR (expense) from external sources $ 14,873 $ 17,734 $ 31,805 $ 35,143
NIR (expense) from internal sources (4,233) (7,123) (9,794) (14,154)
------------- ------------- -------------- -------------
Net interest revenue 10,640 10,611 22,011 20,989
Other operating revenue 3,995 3,157 7,744 6,344
Operating expense 9,727 7,197 20,235 13,944
Gains on financial instruments, net - - 66 -
Net loans charged off 17 7 434 81
Net income 3,004 4,011 5,626 8,131
Average assets $ 1,865,368 $ 1,594,657 $ 1,888,792 $ 1,576,326
Average economic capital 111,620 78,030 110,430 80,170
Average invested capital 166,920 133,330 165,720 135,470
Return on assets 0.65% 1.01% 0.60% 1.04%
Return on economic capital 10.82% 20.62% 10.25% 20.45%
Return on average invested capital 7.24% 12.07% 6.83% 12.10%
Efficiency ratio 66.46% 52.27% 68.01% 51.02%
19
Table 15 - Bank of Arizona
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2008 2007 2008 2007
------------- ------------- -------------- -------------
NIR (expense) from external sources $ 8,175 $ 10,185 $ 16,965 $ 19,743
NIR (expense) from internal sources (3,119) (5,263) (6,986) (10,246)
------------- ------------- -------------- -------------
Net interest revenue 5,056 4,922 9,979 9,497
Other operating revenue 281 184 557 368
Operating expense 4,251 4,319 8,325 7,955
Net loans charged off 1,329 1 2,143 1
Net income (loss) (148) 480 42 1,166
Average assets $ 638,673 $ 576,311 $ 616,571 $ 564,516
Average economic capital 63,910 50,320 61,550 47,270
Average invested capital 80,560 66,970 78,200 63,920
Return on assets (0.09)% 0.33% 0.01% 0.42%
Return on economic capital (0.93)% 3.83% 0.14% 4.97%
Return on average invested capital (0.74)% 2.87% 0.11% 3.68%
Efficiency ratio 79.65% 84.59% 79.01% 80.64%
Table 16 - Bank of Kansas City
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2008 2007 2008 2007
------------- ------------- -------------- -------------
NIR (expense) from external sources $ 4,812 $ 4,023 $ 9,762 $ 8,300
NIR (expense) from internal sources (2,342) (2,457) (5,080) (5,283)
------------- ------------- -------------- -------------
Net interest revenue 2,470 1,566 4,682 3,017
Other operating revenue 1,703 755 2,448 1,210
Operating expense 3,170 2,599 5,744 4,629
Net loans charged off 690 1 2,376 2
Net income (loss) 191 (170) (604) (247)
Average assets $ 460,542 $ 258,100 $ 429,155 $ 257,776
Average economic capital 26,690 13,330 26,390 6,520
Average invested capital 26,690 13,330 26,390 6,520
Return on assets 0.17% (0.26)% (0.28)% (0.19)%
Return on economic capital 2.88% (5.12)% (4.60)% (7.64)%
Return on average invested capital 2.88% (5.12)% (4.60)% (7.64)%
Efficiency ratio 75.96% 111.98% 80.56% 109.51%
Financial Condition
Securities
Investment securities, which consist primarily of Oklahoma municipal bonds, are
carried at cost and adjusted for amortization of premiums or accretion of
discounts. At June 30, 2008, investment securities were carried at $246 million
and had a fair value of $243 million. 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. The amortized
cost of available for sale securities totaled $6.0 billion at June 30, 2008, up
$337 million compared with March 31, 2008. Mortgage-backed securities
represented 97% of total available for sale securities.
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
20
making an investment and throughout the life of the security. The expected
duration of the mortgage-backed securities portfolio was approximately 2.9 years
at June 30, 2008. Management estimates that the expected duration would extend
to approximately 3.3 years assuming a 300 basis point immediate rate shock.
Mortgage-backed securities also have credit risk from delinquency or default of
the underlying loans. The Company mitigates this risk by primarily investing in
securities issued by U.S. government agencies. Principal and interest payments
on the underlying loans are either fully or partially guaranteed. Credit risk on
mortgage-backed securities originated by private issuers is mitigated by
investment in senior tranches with additional collateral support.
The Company has invested $46 million in variable rate perpetual preferred stocks
issued by seven major banks and brokerage houses. Although these issuers remain
rated investment grade by the major rating agencies and all scheduled dividend
payments have been made, the fair values of these stocks declined to $32 million
at as of June 30, 2008. Cumulative other-than-temporary impairment charges of
$14 million have been recognized. The fair value of these securities has
decreased an additional $5.1 million since June 30, 2008.
Net unrealized losses on available for sale securities totaled $91 million at
June 30, 2008 compared with net unrealized losses of $28 million at March 31,
2008. The aggregate gross amount of unrealized losses at June 30, 2008 totaled
$123 million. Management evaluated the securities with unrealized losses to
determine if we believe that the losses were temporary. This evaluation
considered factors such as causes of the unrealized losses and prospects for
recovery over various interest rate scenarios and time periods. The portfolio
does not hold any securities backed by sub-prime mortgage loans, collateralized
debt obligations or collateralized loan obligations. Approximately $416 million
of Alt-A mortgage-backed securities were held at June 30, 2008 with a total
unrealized loss of $29 million. Approximately 82% of the Alt-A backed
securities, including all Alt-A mortgage-backed securities originated in 2006
and 2007, are AAA rated and are credit enhanced with additional collateral
support. Approximately 86% of all of our Alt-A mortgage-backed securities
represent pools of fixed-rate mortgage loans. Management does not believe that
any of the unrealized losses were due to credit concerns. We also considered our
intent and ability to either hold or sell the securities. It is our belief,
based on currently available information and our evaluation, that the unrealized
losses in these securities were temporary.
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 portfolio. Trading portfolio
securities, which are also carried at fair value with changes in fair value
recognized in current period income, are acquired and held with the intent to
sell at a profit to the Company.
Loans
The aggregate loan portfolio before allowance for loan losses totaled $12.6
billion at June 30, 2008, a $250 million or 8% annualized increase since March
31, 2008. Loan growth was broadly distributed among the various segments of the
portfolio and across all geographic markets.
21
---------------------------------------------------------------------------------------------------------------------
Table 17 - Loans
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2008 2008 2007 2007 2007
---------------------------------------------------------------------------------
Commercial:
Energy $ 1,895,050 $ 1,966,996 $ 1,954,967 $ 1,852,681 $ 1,842,888
Services 1,848,360 1,784,723 1,721,143 1,671,291 1,686,650
Wholesale/retail 1,226,875 1,206,224 1,081,172 1,039,855 1,017,486
Manufacturing 542,019 542,297 493,185 536,631 596,002
Healthcare 747,434 733,086 680,294 648,871 606,965
Agriculture 253,198 248,345 236,860 259,904 313,247
Other commercial and industrial 525,637 475,187 569,884 501,128 485,594
---------------------------------------------------------------------------------------------------------------------
Total commercial 7,038,573 6,956,858 6,737,505 6,510,361 6,548,832
---------------------------------------------------------------------------------------------------------------------
Commercial real estate:
Construction and land development 1,021,135 1,066,096 1,004,547 975,764 916,526
Multifamily 251,325 236,787 214,388 234,182 221,069
Other real estate loans 1,555,037 1,529,041 1,531,537 1,575,089 1,654,385
---------------------------------------------------------------------------------------------------------------------
Total commercial real estate 2,827,497 2,831,924 2,750,472 2,785,035 2,791,980
---------------------------------------------------------------------------------------------------------------------
Residential mortgage:
Secured by 1-4 family residential
properties 1,607,597 1,529,769 1,531,296 1,497,568 1,399,637
Residential mortgages held for sale 119,944 91,905 76,677 73,488 116,257
---------------------------------------------------------------------------------------------------------------------
Total residential mortgage 1,727,541 1,621,674 1,607,973 1,571,056 1,515,894
---------------------------------------------------------------------------------------------------------------------
Consumer:
Indirect automobile 735,098 685,803 625,203 592,207 554,150
Other consumer 309,273 291,401 296,094 292,505 288,526
---------------------------------------------------------------------------------------------------------------------
Total consumer 1,044,371 977,204 921,297 884,712 842,676
---------------------------------------------------------------------------------------------------------------------
Total $ 12,637,982 $ 12,387,660 $ 12,017,247 $ 11,751,164 $ 11,699,382
---------------------------------------------------------------------------------------------------------------------
The commercial loan portfolio increased $82 million during the second quarter of
2008 to $7.0 billion at June 30, 2008. Energy loans totaled $1.9 billion or 15%
of total loans. Outstanding energy loans decreased $72 million during the second
quarter of 2008, including a $46 million decrease in net outstanding balances
and a $26 million charge off of SemGroup loans. Approximately $1.6 billion of
energy loans was to oil and gas producers, down from $1.7 billion at March 31,
2008. 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 energy category
of our loan portfolio is distributed $1.0 billion in Oklahoma, $576 million in
Texas and $295 million in Colorado.
The services sector of the loan portfolio totaled $1.8 billion or 15% of total
loans and consists of a large number of loans to a variety of businesses,
including communications, gaming and transportation services. Approximately $1.3
billion of the services category is made up of loans with individual balances of
less than $10 million. Approximately $703 million of the outstanding balance of
services loans is attributed to Texas, $558 million to Oklahoma, $238 million to
New Mexico, $134 million to Arizona and $104 million to Colorado.
Other notable loan concentrations by primary industry of the borrowers are
presented in Table 17.
BOK Financial participates in shared national credits when appropriate to obtain
or maintain business relationships with local customers. Shared national credits
are defined by banking regulators as credits of more than $20 million and with
three or more non-affiliated banks as participants. At June 30, 2008, the
outstanding principal balance of these loans totaled $1.7 billion. Substantially
all of these loans are to borrowers with local market relationships. BOK
Financial serves as the agent lender in approximately 24% of its shared national
credits, based on dollars committed. The Company's lending policies generally
avoid loans in which we do not have the opportunity to maintain or achieve other
business relationships with the customer.
Commercial real estate loans totaled $2.8 billion or 22% of the loan portfolio
at June 30, 2008. Over the past five years, the percentage of commercial real
estate loans to our total loan portfolio ranged from 20% to 23%. The outstanding
balance of commercial real estate loans decreased $4 million or 1% annualized
from the previous quarter end. Construction and land development loans decreased
$45 million to $1.0 billion. Loans secured by multifamily
22
residential property increased $15 million and loans secured by other commercial
real estate increased $26 million.
Loans secured by land, residential lots and construction totaled $1.0 billion at
June 30, 2008. Approximately $265 million of these loans are attributed to the
Oklahoma market, $299 million to the Texas market, $180 million to the Colorado
market and $173 million to the Arizona market. Other commercial real estate
loans totaled $1.6 billion at June 30, 2008. The geographic distribution of
these loans included $547 million in Oklahoma, $484 million in Texas, $186
million in New Mexico, $162 million in Arizona and $87 million in Colorado. The
major components of other commercial real estate loans were retail facilities -
$378 million, office buildings - $423 million and industrial facilities - $180
million.
Residential mortgage loans, excluding loans held for sale, totaled $1.6 billion,
up $78 million since March 31, 2008. At June 30, 2008, residential mortgage
loans included $477 million of home equity loans, $520 million of loans held for
business relationship purposes, $447 million of adjustable rate mortgages and
$138 million of loans held for community development. Loans held for business
relationship purposes increased $57 million and adjustable rate mortgage loans
increased $22 million since March 31, 2008. We have no concentration in
sub-prime residential mortgage loans. Our portfolio of adjustable rate mortgage
loans is generally underwritten to prime standards and does not include loans
with initial rates that are below market.
At June 30, 2008, consumer loans included $735 million of indirect automobile
loans. Approximately $476 million of these loans were purchased from dealers in
Oklahoma and $181 million were purchased from dealers in Arkansas. The remaining
$78 million were purchased from dealers in Texas. Indirect automobile loans grew
$49 million since March 31, 2008, including $27 million in Texas, $15 million in
Oklahoma and $7 million in Arkansas. Approximately 7% of the outstanding balance
at June 30, 2008 is considered near-prime, which is defined as loans to
borrowers that had poor credit in the past but have re-established credit over a
period of time. We generally do not originate sub-prime indirect automobile
loans.
23
---------------------------------------------------------------------------------------------------------------------
Table 18 - Loans by Principal Market Area
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2008 2008 2007 2007 2007
---------------------------------------------------------------------------------
Oklahoma:
Commercial $ 3,228,179 $ 3,248,424 $ 3,219,176 $ 3,113,412 $ 3,317,877
Commercial real estate 875,546 940,686 890,703 875,135 897,838
Residential mortgage 1,099,277 1,080,882 1,080,483 1,058,142 971,692
Residential mortgage held for sale 119,944 91,905 76,677 73,488 112,596
Consumer 601,184 586,695 576,070 562,631 540,986
---------------------------------------------------------------------------------
Total Oklahoma $ 5,924,130 $ 5,948,592 $ 5,843,109 $ 5,682,808 $ 5,840,989
---------------------------------------------------------------------------------
Texas:
Commercial $ 2,166,925 $ 2,124,192 $ 1,985,645 $ 1,941,731 $ 1,856,049
Commercial real estate 889,364 838,781 846,303 913,910 888,118
Residential mortgage 299,996 262,305 275,533 266,850 263,344
Consumer 204,081 168,949 142,958 133,391 135,659
---------------------------------------------------------------------------------
Total Texas $ 3,560,366 $ 3,394,227 $ 3,250,439 $ 3,255,882 $ 3,143,170
---------------------------------------------------------------------------------
New Mexico:
Commercial $ 451,225 $ 472,543 $ 473,262 $ 446,573 $ 434,394
Commercial real estate 271,177 258,731 252,884 256,994 263,342
Residential mortgage 89,469 85,834 84,336 83,274 81,521
Consumer 16,977 14,977 16,105 15,769 13,225
---------------------------------------------------------------------------------
Total New Mexico $ 828,848 $ 832,085 $ 826,587 $ 802,610 $ 792,482
---------------------------------------------------------------------------------
Arkansas:
Commercial $ 96,775 $ 100,489 $ 106,328 $ 117,993 $ 103,534
Commercial real estate 124,049 130,956 124,317 107,588 102,537
Residential mortgage 19,527 16,621 16,393 18,411 22,508
Consumer 197,979 180,551 163,626 148,404 129,431
---------------------------------------------------------------------------------
Total Arkansas $ 438,330 $ 428,617 $ 410,664 $ 392,396 $ 358,010
---------------------------------------------------------------------------------
Colorado:
Commercial $ 489,844 $ 486,525 $ 490,373 $ 491,204 $ 480,097
Commercial real estate 276,062 261,099 252,537 247,802 274,610
Residential mortgage 38,517 31,011 26,556 26,322 18,516
Consumer 16,367 17,552 16,457 18,623 18,470
---------------------------------------------------------------------------------
Total Colorado $ 820,790 $ 796,187 $ 785,923 $ 783,951 $ 791,693
---------------------------------------------------------------------------------
Arizona:
Commercial $ 207,173 $ 174,360 $ 157,341 $ 147,103 $ 124,765
Commercial real estate 351,058 361,567 342,673 349,840 326,951
Residential mortgage 53,321 50,719 46,269 43,510 43,192
Consumer 5,315 6,815 5,522 5,491 4,683
---------------------------------------------------------------------------------
Total Arizona $ 616,867 $ 593,461 $ 551,805 $ 545,944 $ 499,591
---------------------------------------------------------------------------------
Kansas / Missouri:
Commercial $ 398,452 $ 350,325 $ 305,380 $ 252,345 $ 232,116
Commercial real estate 40,241 40,104 41,055 33,766 38,584
Residential mortgage 7,490 2,397 1,726 1,059 2,525
Consumer 2,468 1,665 559 403 222
---------------------------------------------------------------------------------
Total Kansas / Missouri $ 448,651 $ 394,491 $ 348,720 $ 287,573 $ 273,447
---------------------------------------------------------------------------------
Total BOK Financial loans $ 12,637,982 $ 12,387,660 $ 12,017,247 $ 11,751,164 $ 11,699,382
---------------------------------------------------------------------------------
Loan Commitments
BOK Financial enters into certain off-balance sheet arrangements in the normal
course of business. These arrangements included loan commitments which totaled
$5.6 billion and standby letters of credit which totaled $626 million at June
30, 2008. 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
24
represent future cash requirements. Standby letters of credit issued on behalf
of customers whose loans are non-performing totaled approximately $14 million.
The Company also has off-balance sheet commitments for residential mortgage
loans sold with full or partial recourse. These loans consist of first lien,
fixed rate residential mortgage loans originated under various community
development programs and sold to U.S. government agencies. These loans were
underwritten to standards approved by the agencies, including full documentation
and focused primarily on first-time homebuyers. However, these loans have a
higher risk of delinquency and losses given default than traditional residential
mortgage loans. A separate recourse reserve is maintained as part of other
liabilities. At June 30, 2008, the principal balance of loans sold subject to
recourse obligations totaled $400 million. Approximately $15 million of these
loans were originated in 2008, $107 million in 2007 and $89 million in 2006.
Substantially all of these loans are to borrowers in our primary markets
including $281 million to borrowers in Oklahoma, $45 million to borrowers in
Arkansas, $23 million to borrowers in New Mexico, $19 million to borrowers in
the Kansas City area and $17 million to borrowers in Texas. These programs to
originate and sell mortgage loans with recourse were discontinued in the first
quarter of 2008.
We maintain a separate reserve for this off-balance commitment which totaled
$7.5 million at June 30, 2008. Approximately 2.12% of the loans sold with
recourse with an outstanding principal balance of $8.7 million were either
delinquent more than 90 days, in bankruptcy or in foreclosure. The provision for
credit losses on loans sold with recourse, which is included in mortgage banking
costs, was $2.9 million for the second quarter of 2008. Net losses charged
against the reserve totaled $1.3 million for the second quarter of 2008.
Derivatives with Credit Risk
The Company offers programs that permit its customers to hedge various risks,
including fluctuations in energy, cattle and other agricultural product prices,
interest rates and foreign exchange rates, or to take positions in derivative
contracts. Each of these programs work essentially the same way. Derivative
contracts are executed between the customers and 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.
Our customer energy hedging program is an integral part of our energy lending.
This program allows customers that either produce, purchase, store or transport
oil and natural gas to hedge their commodity price risk. We believe that a
customer's prudent hedging strategy reduces our overall credit exposure.
Generally, the fair value of customer contracts will increase or decrease in
direct relation to the fair value of their oil or natural gas reserves or their
obligations to acquire or deliver energy products. For example, the amount a
customer owes us to settle an energy contract may increase as market prices for
that commodity increase. The market price for the oil or natural gas owned by
that customer will also increase as the market prices for that commodity
increase. This relationship is one way our customer energy derivative contracts
remain well-secured as energy prices change.
The customer derivative programs create credit risk for potential amounts due to
the Company from its customers and from the counterparties. Customer credit risk
is monitored through existing credit policies and procedures. The effects of
changes in commodity prices, interest rates or foreign exchange rates are
evaluated across a range of possible options to determine the maximum exposure
we are willing to have individually to any customer. Customers may also be
required to provide margin collateral to further limit our credit risk.
Counterparty credit risk is evaluated through existing policies and procedures.
This evaluation considers the total relationship between BOK Financial and each
of the counterparties. Individual limits are established by management, approved
by Credit Administration and reviewed by the Asset / Liability Committee. Margin
collateral is required if the exposure between the Company and any counterparty
exceeds established limits. Based on declines in the counterparties' credit
ratings, 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 occurs if the credit standing of the customer or
counterparty deteriorated such that either the fair value of underlying
collateral no longer supported the contract or the customer or counterparty's
ability to provide margin collateral was impaired. At June 30, 2008, the fair
value of derivative contracts with SemGroup was reduced to approximately $37
million and a charge of $61 million was recognized because of their bankruptcy
filing on July 22, 2008 and the estimated value of the underlying collateral no
longer supported the contracts.
At June 30, 2008, the fair values of derivative contracts reported as assets
under these programs totaled $1.4 billion. This included energy contracts with
fair values of $1.3 billion, interest rate contracts with fair values of $73
million,
25
agricultural product contracts with fair values of $12 million and foreign
exchange contracts with fair values of $18 million. The aggregate net fair
values of derivative contracts reported as liabilities totaled $1.4 billion. As
of January 1, 2008, the Company adopted FASB Staff Position FIN 39-1 which
permits offsetting of cash collateral against the fair value of derivative
instruments executed with the same counterparty under a master netting
agreement. The aggregate net fair value of derivative liabilities at June 30,
2008 was $455 million after offsetting $990 million of cash collateral.
Approximately $1.3 billion or 98% of the fair value of asset energy contracts
was with customers. Approximately $989 million of the fair value of the asset
energy contracts are with energy producing customers. Credit risk of these
contracts is backed by energy production owned by these customers. Approximately
$252 million or 20% of the fair value of energy contracts, including $37 million
of contracts with SemGroup, are with customers which store or transport energy
products. Contracts with the five largest non-energy producing customers,
including SemGroup, total approximately $222 million. Credit risk of these
contracts is backed by physical product and other collateral, including cash
margin held by the Company and letters of credit issued by third-party banks for
the benefit of the Company. The remaining 2% of the fair value of asset energy
contracts was with dealer counterparties, consisting primarily of highly-rated
financial institutions and energy companies. The maximum net exposure to any
single customer totaled $129 million at June 30, 2008.
At July 31, 2008, the fair value of derivative contracts reported as assets
under our customer hedging programs totaled $748 million, down $631 million from
$1.4 billion at June 30, 2008 due primarily to decreases in energy prices and
contractual cash settlements. At July 31, 2008, the fair value of derivative
liabilities totaled $843 million, down $602 million from $1.4 billion at June
30, 2008. The decrease in the fair value of derivative liabilities reduced our
obligation to place cash margin collateral with our counterparties. Cash margin
collateral placed by us to secure our obligations to dealer counterparties
decreased $564 million during July to $426 million at July 31, 2008. The loss in
fair value of SemGroup contracts, net of gains on amounts owed to energy dealers
on related contracts, decreased $14.7 million during July 2008 due to decreases
in energy prices. This reduction in net loss increases brokerage and trading
revenue in the third quarter. However, the net loss on SemGroup contracts is
subject to further changes during the third quarter until the settlement prices
on open contracts become fixed. At July 31, 2008, approximately $160 million of
the fair value of energy contracts are with customers which store or transport
energy products. Contracts with the five largest non-energy producing customers,
including SemGroup, total approximately $151 million. The maximum net exposure
to any single customer totaled $95 million at July 31, 2008.
Summary of Loan Loss Experience
BOK Financial maintains separate reserves for loan losses and reserves for
off-balance sheet credit risk. Combined, these reserves totaled $177 million or
1.41% of outstanding loans at June 30, 2008 and $156 million or 1.27% of
outstanding loans at March 31, 2008.
The reserve for loan losses, which is available to absorb losses inherent in the
loan portfolio, totaled $154 million at June 30, 2008 compared with $137 million
at March 31, 2008. These amounts represented 1.23% and 1.11% of outstanding
loans, excluding loans held for sale, at June 30, 2008 and March 31, 2008,
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
96% of outstanding balance of nonperforming loans at June 30, 2008 compared to
123% at March 31, 2008. Net loans charged off during the second quarter of 2008
totaled $39.0 million compared to $8.9 million in the previous quarter and $5.8
million in the second quarter of 2007. Charge-offs of SemGroup loans were $26.0
million. The ratio of net loans charged off to average outstanding loans was
1.26% for the second quarter of 2008 compared with 0.29% in first quarter of
2008. Net commercial loan charge-offs, excluding SemGroup and net commercial
real estate loan charge-offs increased $2.9 million and $924 thousand,
respectively, compared with the previous quarter. Subsequent to June 30, 2008,
the Company recovered $11.1 million on two loans charged off in previous years.
These recoveries will increase the allowance for loan losses in the third
quarter of 2008.
Consumer loan net charge-offs, which includes indirect auto loan and deposit
account overdraft losses, totaled $2.9 million for the second quarter of 2008,
up $168 thousand over the previous quarter. Net charge-offs of indirect auto
loans totaled $1.7 million for the second quarter of 2008 and $1.6 million for
the first quarter of 2008. Net indirect auto loans charged off were $950
thousand in the Oklahoma market, $692 thousand in the Arkansas market and $56
thousand in the Texas market. Approximately 1.95% of the indirect automobile
loan portfolio is past due 30 days or more, including 2.03% in Oklahoma, 2.03%
in Arkansas and 1.27% in Texas. At March 31, 2008, approximately 1.96% of the
indirect automobile loan portfolio was past due 30 days or more.
The Company considers the 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 19
presents the trend of reserves for off-balance sheet credit losses and the
relationship between the reserve and loan commitments. The
26
relationship between the combined reserve for credit losses and outstanding
loans is also presented for comparison with peer banks and others who have not
adopted the 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.
------------------------------------------------------------------------------------------------------------------------------
Table 19 - Summary of Loan Loss Experience
(In thousands)
Three Months Ended
----------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
2008 2008 2007 2007 2007
----------------------------------------------------------------------------------
Reserve for loan losses:
Beginning balance $ 136,584 $ 126,677 $ 121,932 $ 119,759 $ 114,371
Loans charged off:
Commercial 33,502 4,244 2,731 3,072 5,454
Commercial real estate 2,572 1,602 1,369 339 57
Residential mortgage 1,068 814 891 394 300
Consumer 4,384 4,418 3,939 3,684 3,000
------------------------------------------------------------------------------------------------------------------------------
Total 41,526 11,078 8,930 7,489 8,811
------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 842 435 242 1,172 1,649
Commercial real estate 98 52 2 30 37
Residential mortgage 121 58 19 86 15
Consumer 1,474 1,676 1,321 1,332 1,338
------------------------------------------------------------------------------------------------------------------------------
Total 2,535 2,221 1,584 2,620 3,039
------------------------------------------------------------------------------------------------------------------------------
Net loans charged off 38,991 8,857 7,346 4,869 5,772
Provision for loan losses 56,425 18,764 12,091 7,104 7,570
Adjustments due to acquisitions - - - (62) 3,590
------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 154,018 $ 136,584 $ 126,677 $ 121,932 $ 119,759
------------------------------------------------------------------------------------------------------------------------------
Reserve for off-balance sheet credit losses:
Beginning balance $ 19,660 $ 20,853 $ 19,744 $ 19,647 $ 19,397
Provision for off-balance sheet credit losses 2,885 (1,193) 1,109 97 250
------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 22,545 $ 19,660 $ 20,853 $ 19,744 $ 19,647
------------------------------------------------------------------------------------------------------------------------------
Total provision for credit losses $ 59,310 $ 17,571 $ 13,200 $ 7,201 $ 7,820
------------------------------------------------------------------------------------------------------------------------------
Reserve for loan losses to loans outstanding
at period-end (1) 1.23% 1.11% 1.06% 1.04% 1.03%
Net charge-offs (annualized)
to average loans (1) 1.26 0.29 0.25 0.17 0.21
Total provision for credit losses (annualized)
to average loans (1) 1.91 0.58 0.45 0.25 0.28
Recoveries to gross charge-offs 6.10 20.05 17.74 34.98 34.49
Reserve for loan losses as a multiple of net
charge-offs (annualized) 0.99x 3.86x 4.31x 6.26x 5.19x
Reserve for off-balance sheet credit losses to
off-balance sheet credit commitments 0.36% 0.32% 0.35% 0.33% 0.33%
Combined reserves for credit losses to loans
outstanding at period-end (1) 1.41 1.27 1.24 1.21 1.20
------------------------------------------------------------------------------------------------------------------------------
(1) Excludes residential mortgage loans held for sale.
Specific impairment reserves are determined through evaluation of estimated
future cash flows and collateral value. At June 30, 2008, specific impairment
reserves totaled $11.0 million on total impaired loans of $139 million. Specific
impairment reserves were $5.2 million on total impaired loans of $90 million at
March 31, 2008.
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. The range of
nonspecific reserves for general economic factors includes their effect on our
commercial, residential mortgage and consumer loan portfolios. Nonspecific
reserves attributed to general economic conditions increased in the second
quarter of 2008. Weakness in the economy became more apparent due to rising
materials, food and energy prices along with continued weakness in residential
real estate markets.
The provision for credit losses totaled $59.3 million for the second quarter of
2008, $17.6 million for the first quarter of 2008 and $7.8 million for the
second quarter of 2007. The second quarter of 2008 provision included $26.3
million directly related to the Company's loans and loan commitments to
SemGroup. Other factors considered in determining
27
the provision for credit losses included trends in net losses and nonperforming
loans, the application of statistical migration factors to loan growth and
concentrations in commercial real estate and residential homebuilder loans. In
addition, the outstanding balances of criticized and classified loans and
potential problem loans increased.
Nonperforming Assets
Information regarding nonperforming assets, which totaled $181 million at June
30, 2008 and $126 million at March 31, 2008, is presented in Table 20.
Nonperforming assets included nonaccrual and renegotiated loans and excluded
loans 90 days or more past due but still accruing interest. Total nonperforming
assets were 1.45% of period-end loans and repossessed assets at June 30, 2008,
up from 1.02% at March 31, 2008. At June 30, 2008, nonperforming assets excluded
$47 million of amounts due from SemGroup under derivative contracts and
outstanding letters of credit that have not been funded. Amounts due under the
derivative contracts will be reclassified as loans and reported as nonperforming
if not paid on their contractual settlement dates, primarily in the third
quarter of 2008. If all amounts due from SemGroup had been reported as loans at
June 30, 2008, nonperforming assets and nonperforming assets as a percent of
period-end loans and repossessed assets would have been $229 million and 1.82%,
respectively.
Nonaccrual loans totaled $149 million at June 30, 2008 and $99 million at March
31, 2008. Newly identified nonaccrual loans totaled $100 million during the
second quarter, including $38 million of loans to SemGroup. Newly identified
nonaccrual loans also included $24 million of loans to residential homebuilders
and $12 million to a mortgage lender. Nonaccrual loans decreased $33 million for
loans charged off and foreclosed, including $26 million of loans to SemGroup,
and $16 million for cash payments received. The net increase in nonaccrual loans
to SemGroup during the second quarter of 2008 totaled $12 million. Approximately
$12 million of nonaccrual loans are subject to the First United Bank sellers'
escrow.
Nonaccrual commercial loans totaled $70 million at June 30, 2008 and $42 million
at March 31, 2008. In addition to $12 million of nonaccrual loans to SemGroup
and a $12 million nonaccrual loan to a mortgage lender, nonaccrual commercial
loans consisted primarily of loans in the services and manufacturing sectors of
the portfolio. None of the other nonaccrual commercial loans exceeded $10
million. Approximately $40 million of nonaccrual commercial loans are to
borrowers in the Oklahoma market, $6 million are in the Texas market, $17
million are in the Colorado market and $4 million are in the New Mexico market.
Nonaccrual commercial real estate loans totaled $60 million at June 30, 2008 and
$40 million at March 31, 2008. Approximately $45 million are loans secured by
land and residential lots and construction, including $30 million in Arizona ($7
million in Tucson and $23 million in Phoenix), $6 million in Texas and $5
million in Colorado. Other significant nonaccrual commercial real estate loans
included $5.3 million of retail facilities in New Mexico.
In addition to nonaccrual loans, nonperforming assets included $12 million of
renegotiated loans and $21 million of real estate and other repossessed assets.
Renegotiated loans consisted of residential mortgage loans and indirect
automobile loans whose original terms have been modified. Approximately $8.6
million of renegotiated loans are residential mortgage loans guaranteed by
agencies of the U.S. government. Real estate and other repossessed assets
included $8 million of single family residential properties, $5 million of land
and single family lots and construction, $3 million of manufacturing facilities
and $2 million of automobiles. The geographic distribution of real estate and
other repossessed assets included $6 million in Oklahoma, $3 million in New
Mexico, $3 million in Colorado, $4 million in Arkansas, $3 million in Texas and
$2 million in Arizona. Approximately $1.7 million of real estate and other
repossessed assets are subject to the First United Bank sellers' escrow.
28
----------------------------------------------------------------------------------------------------------------------
Table 20 - Nonperforming Assets
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2008 2008 2007 2007 2007
-----------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 69,679 $ 41,966 $ 42,981 $ 21,168 $ 20,456
Commercial real estate 60,456 40,399 25,319 11,355 19,470
Residential mortgage 17,861 15,960 15,272 11,469 11,418
Consumer 611 812 718 705 675
----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 148,607 99,137 84,290 44,697 52,019
Renegotiated loans (3) 11,840 11,850 10,394 10,752 10,113
----------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 160,447 110,987 94,684 55,449 62,132
Other nonperforming assets 21,025 15,112 9,475 10,627 7,664
----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 181,472 $ 126,099 $ 104,159 $ 66,076 $ 69,796
----------------------------------------------------------------------------------------------------------------------
Nonaccrual loans by principal market:
Oklahoma $ 57,155 $ 52,211 $ 47,977 $ 24,628 $ 26,529
Texas 20,860 8,157 4,983 4,921 6,176
New Mexico 9,838 7,497 11,118 6,542 7,025
Arkansas 2,924 2,866 1,635 843 816
Colorado (4) 23,812 8,101 9,222 5,688 8,067
Arizona 33,482 18,811 9,355 2,075 3,406
Kansas / Missouri 536 1,494 - - -
----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans $ 148,607 $ 99,137 $ 84,290 $ 44,697 $ 52,019
----------------------------------------------------------------------------------------------------------------------
Nonaccrual loans by loan portfolio sector:
Commercial:
Energy $ 12,342 $ 475 $ 529 $ 536 $ 542
Manufacturing 6,731 9,274 9,915 8,858 8,705
Wholesale / retail 3,735 3,868 3,792 3,850 2,838
Agriculture 811 1,848 380 540 769
Services 30,080 23,849 25,468 5,987 6,843
Healthcare 3,791 2,079 2,301 963 509
Other 12,189 573 596 434 250
----------------------------------------------------------------------------------------------------------------------
Total commercial 69,679 41,966 42,981 21,168 20,456
Commercial real estate:
Land development and construction 45,291 29,439 13,466 7,289 9,333
Multifamily 896 1,906 3,998 1,238 2,233
Other commercial real estate 14,269 9,054 7,855 2,828 7,904
----------------------------------------------------------------------------------------------------------------------
Total commercial real estate 60,456 40,399 25,319 11,355 19,470
Residential mortgage 17,861 15,960 15,272 11,469 11,418
Consumer 611 812 718 705 675
----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans $ 148,607 $ 99,137 $ 84,290 $ 44,697 $ 52,019
----------------------------------------------------------------------------------------------------------------------
Ratios:
Reserve for loan losses to nonperforming loans 95.99% 123.06% 133.79% 219.90% 192.75%
Nonperforming loans to period-end loans (1) 1.28 0.90 0.79 0.47 0.54
----------------------------------------------------------------------------------------------------------------------
Loans past due (90 days) (2) $ 10,683 $ 11,266 $ 5,575 $ 3,986 $ 4,215
----------------------------------------------------------------------------------------------------------------------
(1) Excludes residential mortgage loans held for sale.
(2) Includes residential mortgages guaranteed
by agencies of the U.S. Government. $ 1,015 $ 788 $ 1,017 $ 1,806 $ 2,028
(3) Includes residential mortgages guaranteed
by agencies of the U.S. Government.
These loans have been modified to extend
payment terms and/or reduce interest 8,638 8,386 7,550 7,083 6,430
rates to current market.
(4) Includes loans subject to First United
Bank sellers escrow. 11,973 8,101 8,412 4,677 6,944
----------------------------------------------------------------------------------------------------------------------
The loan review process also identified loans that possess more than the normal
amount of risk due to deterioration in the financial condition of the borrower
or the value of the collateral. Because the borrowers are still performing in
accordance with the original terms of the loan agreements, and no loss of
principal or interest is anticipated, these loans were not included in
Nonperforming Assets. Known information does, however, cause management concern
as to the borrowers' ability to comply with current repayment terms. These
potential problem loans totaled $40 million at June 30, 2008 and $31 million at
March 31, 2008. The current composition of potential problem loans by primary
industry included real estate - $16 million, healthcare - $9 million and
services - $10 million. Potential problem real estate loans consisted primarily
of loans to residential builders in the Arizona market of $12 million.
29
Deposits
Deposit accounts represent our largest funding source. Average deposits
represented approximately 62% of total liabilities and capital for the second
quarter of 2008, down from 67% for the second quarter of 2007 and 64% for the
first quarter of 2008. The decrease in average deposits relative to other
funding sources is due largely to the structuring of our balance sheet to be
relatively neutral to changes in interest rates. Other borrowed funds increased
to fund an increase in average securities to implement this interest rate risk
management strategy and an increase in margin assets. In addition, competition
has increased the cost of deposits compared to other funding sources in many of
our markets.
Average deposits totaled $13.3 billion for the second quarter of 2008, a $915
million or 7% increase over the second quarter of 2007. Average deposits
increased $198 million or 6% annualized compared with the first quarter of 2008.
Interest-bearing transaction deposit accounts continued to grow in the second
quarter of 2008, up $1.3 billion or 20% over the second quarter of 2007 and $244
million or 13% annualized over the first quarter of 2008. Time deposits
decreased $431 million or 10% from the second quarter of 2007 and $149 million
or 14% annualized from the first quarter of 2008. Average demand deposits
increased $41 million or 3% over the second quarter of 2007 and $100 million
over the first quarter of 2008.
Core deposits, which we define as deposits of less than $100,000, excluding
public funds and brokered deposits, averaged $6.5 billion for the second quarter
of 2008, $6.4 billion for the second quarter of 2007 and $6.5 billion for the
first quarter of 2008. Accounts with balances in excess of $100,000 averaged
$5.5 billion for the second quarter of 2008, $4.7 billion for the second quarter
of 2007 and $5.4 billion, for the first quarter of 2008.
Average commercial banking deposits totaled $4.5 billion for the second quarter
of 2008, up $297 million or 7% over the second quarter of last year. The average
balance of commercial banking deposits for the second quarter of 2007 was $4.3
billion. Commercial deposit growth was primarily centered in Oklahoma and Texas.
Consumer deposits averaged $5.6 billion for the second quarter of 2008, up $312
million or 6% over 2007. Average consumer deposit account balances increased
$136 million or 5% in Oklahoma and $169 million or 18% in Texas, including
deposits acquired with Worth National Bank in the second quarter of 2007. Wealth
management deposit accounts averaged $2.0 billion for the second quarter of
2008, a $416 million or 27% increase over 2007. Approximately $294 million of
the increase was in the Oklahoma market. The remaining increase was primarily in
Colorado.
The distribution of deposit accounts among our principal markets is shown in
Table 21.
30
---------------------------------------------------------------------------------------------------------------------
Table 21 - Deposits by Principal Market Area
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2008 2008 2007 2007 2007
---------------------------------------------------------------------------------
Oklahoma:
Demand $ 1,003,516 $ 999,214 $ 936,160 $ 717,478 $ 876,671
Interest-bearing:
Transaction 4,449,617 4,124,046 3,935,909 3,473,547 3,470,896
Savings 90,100 88,141 80,467 83,139 88,133
Time 2,672,401 2,230,110 2,426,822 2,725,992 2,798,719
---------------------------------------------------------------------------------
Total interest-bearing 7,212,118 6,442,297 6,443,198 6,282,678 6,357,748
---------------------------------------------------------------------------------
Total Oklahoma $ 8,215,634 $ 7,441,511 $ 7,379,358 $ 7,000,156 $ 7,234,419
---------------------------------------------------------------------------------
Texas:
Demand $ 734,730 $ 651,781 $ 738,105 $ 597,534 $ 626,193
Interest-bearing:
Transaction 2,025,052 1,996,784 2,050,872 1,978,920 2,019,311
Savings 33,207 32,191 34,618 35,310 36,989
Time 723,146 759,892 800,460 893,018 804,877
---------------------------------------------------------------------------------
Total interest-bearing 2,781,405 2,788,867 2,885,950 2,907,248 2,861,177
---------------------------------------------------------------------------------
Total Texas $ 3,516,135 $ 3,440,648 $ 3,624,055 $ 3,504,782 $ 3,487,370
---------------------------------------------------------------------------------
New Mexico:
Demand $ 99,605 $ 103,329 $ 93,923 $ 109,854 $ 113,579
Interest-bearing:
Transaction 486,623 492,096 490,227 479,204 521,154
Savings 16,432 16,141 15,146 16,437 17,662
Time 445,505 455,861 486,868 512,497 500,443
---------------------------------------------------------------------------------
Total interest-bearing 948,560 964,098 992,241 1,008,138 1,039,259
---------------------------------------------------------------------------------
Total New Mexico $ 1,048,165 $ 1,067,427 $ 1,086,164 $ 1,117,992 $ 1,152,838
---------------------------------------------------------------------------------
Arkansas:
Demand $ 15,322 $ 16,661 $ 9,755 $ 10,225 $ 11,030
Interest-bearing:
Transaction 30,344 25,923 22,519 22,401 22,096
Savings 895 945 883 993 1,011
Time 39,305 39,803 40,692 43,401 46,597
---------------------------------------------------------------------------------
Total interest-bearing 70,544 66,671 64,094 66,795 69,704
---------------------------------------------------------------------------------
Total Arkansas $ 85,866 $ 83,332 $ 73,849 $ 77,020 $ 80,734
---------------------------------------------------------------------------------
Colorado:
Demand $ 65,647 $ 51,901 $ 60,250 $ 42,194 $ 42,006
Interest-bearing:
Transaction 551,310 577,454 504,116 432,188 426,031
Savings 20,245 22,233 23,806 27,143 35,152
Time 423,014 455,262 539,523 608,962 549,676
---------------------------------------------------------------------------------
Total interest-bearing 994,569 1,054,949 1,067,445 1,068,293 1,010,859
---------------------------------------------------------------------------------
Total Colorado $ 1,060,216 $ 1,106,850 $ 1,127,695 $ 1,110,487 $ 1,052,865
---------------------------------------------------------------------------------
Arizona:
Demand $ 28,196 $ 28,592 $ 29,807 $ 25,295 $ 31,196
Interest-bearing:
Transaction 94,733 102,564 82,682 98,611 74,892
Savings 1,233 878 1,435 1,269 1,233
Time 6,364 8,395 11,603 13,314 11,563
---------------------------------------------------------------------------------
Total interest-bearing 102,330 111,837 95,720 113,194 87,688
---------------------------------------------------------------------------------
Total Arizona $ 130,526 $ 140,429 $ 125,527 $ 138,489 $ 118,884
---------------------------------------------------------------------------------
Kansas / Missouri:
Demand $ 4,923 $ 5,341 $ 7,946 $ 7,849 $ 1,081
Interest-bearing:
Transaction 12,576 9,993 10,014 3,169 1,356
Savings 26 92 13 15 12
Time 51,649 33,837 24,670 23,119 32,695
---------------------------------------------------------------------------------
Total interest-bearing 64,251 43,922 34,697 26,303 34,063
---------------------------------------------------------------------------------
Total Kansas / Missouri $ 69,174 $ 49,263 $ 42,643 $ 34,152 $ 35,144
---------------------------------------------------------------------------------
Total BOK Financial deposits $ 14,125,716 $ 13,329,460 $ 13,459,291 $ 12,983,078 $ 13,162,254
---------------------------------------------------------------------------------
31
Borrowings and Capital
At June 30, 2008, BOK Financial (parent company) had a $188 million unsecured
revolving line of credit with certain commercial banks that matures in December
2010. The outstanding principal balance of this credit agreement was $50
million. Interest is based upon a base rate or LIBOR plus a defined margin
determined by the Company's credit rating. This margin ranged from 0.375% to
1.125% or a base rate. At June 30, 2008, the margin applicable to borrowings
against this line was 0.375%. The base rate was defined as the greater of the
daily federal funds rate plus 0.5% or the SunTrust Bank prime rate. Interest was
generally paid monthly. Facility fees were 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 included 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 required BOK Financial and
subsidiary banks to maintain minimum capital levels and established maximum
nonperforming asset levels. BOK Financial met all of the restrictive covenants
at June 30, 2008. Subsequent to June 30, all amounts due under this credit
agreement were paid and the agreement was terminated at the request of the
Company.
On July 21, 2008, the Company entered into a $188 million, unsecured revolving
credit agreement with George B. Kaiser, its Chairman and principal shareholder.
Interest on the outstanding balance is based on one-month LIBOR plus 125 basis
points and is payable quarterly. Additional interest in the form of a facility
fee is paid quarterly on the unused portion of the commitment at 25 basis
points. This agreement has no restrictive covenants, which provides greater
flexibility to fund the needs of BOK Financial and its subsidiaries.
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 $67 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 $18 million
under this policy.
Equity capital for BOK Financial decreased $50.2 million to $1.9 billion during
the second quarter of 2008. Cumulative retained earnings decreased $16.4 million
due to a $1.2 million net loss and $15.2 million of cash dividends paid.
Accumulated other comprehensive losses increased $38.7 million during the second
quarter of 2008 due primarily to an increase in net unrealized losses on
available for sale securities. Employee stock option transactions increased
equity capital $4.8 million.
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. The maximum of two million
common shares may be repurchased. The specific timing and amount of shares
repurchased will vary based on market conditions, securities law limitations and
other factors. Repurchases may be made over time in open market or privately
negotiated transactions. The repurchase program may be suspended or discontinued
at any time without prior notice. Since this program began, 709,073 shares have
been repurchased by the Company for $35.4 million. No shares were repurchased in
the second quarter of 2008. In addition, the Company initiated a 10b5-1 stock
repurchase plan in the second quarter of 2008. This plan has subsequently been
terminated.
BOK Financial and subsidiary banks are subject to various capital requirements
administered by federal agencies. Failure to meet minimum capital requirements
can result in certain mandatory and possibly additional discretionary actions by
regulators that could have a material impact on operations. These capital
requirements include quantitative measures of assets, liabilities, and
off-balance sheet items. The capital standards are also subject to qualitative
judgments by the regulators.
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 definitions of well
capitalized at June 30, 2008, except Bank of Arizona. The total capital ratio
for Bank of Arizona at June 30, 2008 was 9.83%. Subsequently, $4 million of
additional capital was contributed, which brought its total capital ratio to
11.48%. The capital ratios for BOK Financial on a consolidated basis are
presented in Table 22.
32
--------------------------------------------------------------------------------------------------------------------
Table 22 - Capital Ratios June 30, March 31, Dec. 31, Sept. 30, June 30,
2008 2008 2007 2007 2007
--------------------------------------------------------------------------
Average shareholders' equity
to average assets 9.19% 9.69% 9.48% 9.42% 9.65%
Tangible capital ratio 7.15% 7.83% 7.72% 7.67% 7.50%
Risk-based capital:
Tier 1 capital 8.86 9.38 9.38 9.30 9.12
Total capital 11.90 12.48 12.54 12.53 12.36
Leverage 7.95 8.23 8.20 8.17 8.30
Off-Balance Sheet Arrangements
During the third quarter of 2007, Bank of Oklahoma agreed to guarantee rents
totaling $28.4 million over 10 years to the City of Tulsa ("City") as owner of a
building immediately adjacent to the bank's main office. These rents are due for
space rented by third-party tenants in the building as of the date of the
agreement. All guaranteed space has been rented since the date of the agreement.
At June 30, 2008, rent payments of $26.7 million remain subject to this guaranty
agreement. In return for this guarantee, Bank of Oklahoma will receive 80% of
net rent as defined in an agreement with the City over the next 10 years from
space in the same building that was vacant as of the date of the agreement. The
maximum amount that Bank of Oklahoma may receive under this agreement is $4.5
million. The fair value of this agreement at inception was zero and no asset or
liability is currently recognized in the Company's financial statements.
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. Market risk excludes changes in fair value due to credit of the
individual issuers of financial instruments.
BOK Financial is subject to market risk primarily through the effect of changes
in interest rates on both its assets held for purposes other than trading and
trading assets. The effects of other changes, such as foreign exchange rates,
commodity prices or equity prices do not pose significant market risk to BOK
Financial. BOK Financial has no material investments in assets that are affected
by changes in foreign exchange rates or equity prices. Energy and agricultural
product derivative contracts, which are affected by changes in commodity prices,
are matched against offsetting contracts as previously discussed.
Responsibility for managing market risk rests with the Asset / Liability
Committee that operates under policy guidelines established by the Board of
Directors. The acceptable negative variation in net interest revenue, net income
or economic value of equity due to a specified basis point increase or decrease
in interest rates is generally limited by these guidelines to +/- 10%. These
guidelines also set maximum levels for short-term borrowings, short-term assets,
public funds, and brokered deposits, and establish minimum levels for un-pledged
assets, among other things. Compliance with these guidelines is reviewed
monthly.
Interest Rate Risk - Other than Trading
As previously noted in the Net Interest Revenue section of this report,
management has implemented strategies to manage the Company's balance sheet to
be relatively neutral to changes in interest rates over a twelve month period.
The effectiveness of these strategies in managing the overall interest rate risk
is evaluated through the use of an asset/liability model. BOK Financial performs
a sensitivity analysis to identify more dynamic interest rate risk exposures,
including embedded option positions, on net interest revenue, net income and
economic value of equity. A simulation model is used to estimate the effect of
changes in interest rates over the next twelve 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 assumes a
sustained parallel 200 basis point increase and the second assumes a sustained
parallel 100 basis point decrease in interest rates. Management historically
evaluated interest rate sensitivity for a sustained 200 basis point decrease in
interest rates. However, the results of a 200 basis point decrease in interest
rates in the current low-rate environment are not meaningful. The Company 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,
33
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 23 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
re-pricing characteristics, future cash flows and customer behavior. These
assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net interest revenue, net income or economic value of equity
or precisely predict the impact of higher or lower interest rates on net
interest revenue, net income or economic value of equity. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes, market conditions and management strategies, among other factors.
Table 23 - Interest Rate Sensitivity
(Dollars in Thousands)
200 bp Increase 100 bp Decrease Most Likely
-------------------------- --------------------------- -------------------------
2008 2007 2008 2007 2008 2007
------------- ------------ ------------ -------------- ------------ ------------
Anticipated impact over the
next twelve months on
net interest revenue $(17,132) $ (3,335) $ 7,392 *** $ (1,386) $ 567
(1.1)% (0.6)% 0.4% *** (0.2)% 0.1%
-------------------------------- --------------- ------------ --- ----------- -------------- -- ----------- ------------
***A 100 basis point decrease was not computed in 2007. A 200 basis point
decrease in interest rates was expected to increase net interest revenue by $1.4
million or 0.2%.
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
limit the VAR to $1.8 million. At June 30, 2008, the VAR was $1.2 million. The
greatest value at risk during the second quarter of 2008 was $1.8 million.
34
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.
35
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Consolidated Statements of Earnings (Unaudited)
(In Thousands Except Share and Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
----------- --- -------------- ---- -------------- ---- --------------
Interest Revenue
Loans $ 180,177 $ 224,215 $ 379,561 $ 437,040
Taxable securities 75,959 60,223 148,014 117,817
Tax-exempt securities 2,656 2,922 5,341 5,950
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Total securities 78,615 63,145 153,355 123,767
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Trading securities 939 401 2,016 865
Funds sold and resell agreements 355 924 1,195 1,589
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Total interest revenue 260,086 288,685 536,127 563,261
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Interest Expense
Deposits 66,114 102,059 154,261 199,931
Borrowed funds 29,212 44,889 64,579 87,552
Subordinated debentures 5,821 6,824 11,220 12,027
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Total interest expense 101,147 153,772 230,060 299,510
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Net Interest Revenue 158,939 134,913 306,067 263,751
Provision for Credit Losses 59,310 7,820 76,881 14,320
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Net Interest Revenue After Provision for Credit Losses 99,629 127,093 229,186 249,431
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Other Operating Revenue
Brokerage and trading revenue (35,462) 13,317 (11,549) 26,599
Transaction card revenue 25,786 22,917 49,344 43,101
Trust fees and commissions 20,940 19,458 41,736 38,453
Deposit service charges and fees 30,199 26,797 57,885 51,395
Mortgage banking revenue 7,198 4,034 14,415 9,554
Bank-owned life insurance 2,658 2,525 5,170 4,924
Margin asset fees 4,460 969 6,427 1,727
Other revenue 7,824 6,947 14,039 12,798
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Total fees and commissions 63,603 96,964 177,467 188,551
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Gain (loss) on sales of assets 216 (348) 181 346
Loss on securities, net (5,242) (6,262) (622) (6,825)
Loss on derivatives, net (2,961) (183) (848) (112)
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Total other operating revenue 55,616 90,171 176,178 181,960
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Other Operating Expense
Personnel 89,597 80,054 177,703 158,382
Business promotion 5,777 5,391 10,416 9,961
Professional fees and services 6,973 5,963 12,621 10,837
Net occupancy and equipment 15,100 13,860 30,161 27,066
Insurance 2,626 693 6,336 1,415
Data processing and communications 19,523 18,402 38,416 35,376
Printing, postage and supplies 4,156 4,179 8,575 8,148
Net losses and operating expenses of repossessed assets (229) 192 149 399
Amortization of intangible assets 1,885 1,443 3,810 2,579
Mortgage banking costs 6,054 2,485 11,734 5,009
Change in fair value of mortgage servicing rights 767 (5,061) 2,529 (3,897)
Visa retrospective responsibility obligation - - (2,767) -
Other expense 7,039 6,530 12,989 10,967
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Total other operating expense 159,268 134,131 312,672 266,242
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Income (Loss) Before Taxes (4,023) 83,133 92,692 165,149
Federal and state income tax (2,862) 29,270 31,588 58,493
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Net Income (Loss) $ (1,161) $ 53,863 $ 61,104 $ 106,656
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Earnings Per Share:
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Basic $ (0.02) $ 0.80 $ 0.91 $ 1.59
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Diluted $ (0.02) $ 0.80 $ 0.90 $ 1.58
------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- --------------
Average Shares Used in Computation:
------------------------------------------------------ --- ------------ --- -------------- ---- -------------- ---- --------------
Basic 67,452,181 67,116,902 67,246,250 67,099,752
------------------------------------------------------ --- ------------ --- -------------- ---- -------------- ---- --------------
Diluted 67,452,181 67,606,330 67,610,014 67,589,146
------------------------------------------------------ --- ------------ --- -------------- ---- -------------- ---- --------------
Dividends Declared per Share $ 0.225 $ 0.20 $ 0.425 $ 0.35
------------------------------------------------------ --- ------------ --- -------------- ---- -------------- ---- --------------
See accompanying notes to consolidated financial statements.
36
--------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
(In Thousands Except Share Data)
June 30, December 31, June 30,
2008 2007 2007
--------------------------------------------------
(Unaudited) (Footnote 1) (Unaudited)
Assets
Cash and due from banks $ 712,324 $ 717,259 $ 596,827
Funds sold and resell agreements 52,005 173,154 50,635
Trading securities 62,532 45,724 30,977
Securities:
Available for sale 5,439,524 5,323,001 4,699,735
Available for sale securities pledged to creditors 487,078 327,539 339,231
Investment (fair value: June 30, 2008 - $242,828;
December 31, 2007 - $248,788;
June 30, 2007 - $257,455) 245,754 247,949 265,507
Mortgage trading securities 98,269 154,701 133,967
--------------------------------------------------------------------------------------------------------------------
Total securities 6,270,625 6,053,190 5,438,440
--------------------------------------------------------------------------------------------------------------------
Loans 12,637,982 12,017,247 11,699,382
Less reserve for loan losses (154,018) (126,677) (119,759)
--------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 12,483,964 11,890,570 11,579,623
--------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 266,435 258,786 241,579
Accrued revenue receivable 159,066 138,243 160,595
Intangible assets, net 365,060 368,353 377,957
Mortgage servicing rights, net 72,103 70,009 74,067
Real estate and other repossessed assets 21,025 9,475 7,664
Bankers' acceptances 16,031 1,780 31,702
Derivative contracts 1,380,876 502,446 264,845
Cash surrender value of bank-owned life insurance 231,527 229,540 224,250
Receivable on unsettled securities trades 39,052 10,071 -
Other assets 303,312 199,101 202,075
--------------------------------------------------------------------------------------------------------------------
Total assets $ 22,435,937 $ 20,667,701 $ 19,281,236
--------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Noninterest-bearing demand deposits $ 1,951,939 $ 1,875,946 $ 1,701,756
Interest-bearing deposits:
Transaction 7,650,255 7,096,339 6,508,677
Savings 162,138 156,368 207,251
Time (includes $103,678 at fair value at June 30, 2008) 4,361,384 4,330,638 4,744,570
--------------------------------------------------------------------------------------------------------------------
Total deposits 14,125,716 13,459,291 13,162,254
--------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase agreements 3,101,425 3,225,131 2,317,846
Other borrowings 2,153,853 1,027,564 888,362
Subordinated debentures 398,340 398,273 547,896
Accrued interest, taxes and expense 81,507 124,029 104,224
Bankers' acceptances 16,031 1,780 31,702
Due on unsettled security transactions - - 71,838
Derivative contracts 456,379 341,677 217,140
Other liabilities 160,310 154,572 144,066
--------------------------------------------------------------------------------------------------------------------
Total liabilities 20,493,561 18,732,317 17,485,328
--------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock ($.00006 par value; 2,500,000,000
shares authorized; shares issued and outstanding:
June 30, 2008 - 69,811,531; December 31, 2007
- 69,465,154; June 30, 2007 - 69,025,829) 4 4 4
Capital surplus 738,403 722,088 703,683
Retained earnings 1,365,456 1,332,954 1,248,829
Treasury stock (shares at cost: June 30, 2008 - 2,323,143;
December 31, 2007 - 2,158,774;
June 30, 2007 - 1,745,722) (97,109) (88,428) (67,081)
Accumulated other comprehensive loss (64,378) (31,234) (89,527)
--------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,942,376 1,935,384 1,795,908
--------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 22,435,937 $ 20,667,701 $ 19,281,236
--------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
37
---------------------------------------------------------------------------------------------------------
Consolidated Statements of Changes in
Shareholders' Equity (Unaudited)
(In Thousands)
Accumulated
Other
Common Stock Comprehensive Capital Retained Treasury Stock
----------------- --------------------
Shares Amount Loss Surplus Earnings Shares Amount Total
----------------------------------------------------------------------------------
Balances at
December 31, 2006 68,705 $ 4 $ (73,444) $688,861 $1,166,994 1,637 $ (61,393) $1,721,022
Effect of implementing FAS
157, net of income taxes - - - - (679) - - (679)
Effect of
implementing FIN 48 - - - - (609) - - (609)
Comprehensive income:
Net income - - - - 106,656 - - 106,656
Other comprehensive
income, net of tax (1) - - (16,083) - - - - (16,083)
tax (1)
----------
Comprehensive income 90,573
----------
Treasury stock purchase - - - - - 44 (2,223) (2,223)
Exercise of stock options 321 - - 9,571 - 65 (3,465) 6,106
Tax benefit on
exercise of stock options - - - 1,423 - - - 1,423
Stock-based compensation - - - 3,828 - - - 3,828
Cash dividends on
common stock - - - - (23,533) - - (23,533)
---------------------------------------------------------------------------------------------------------
Balances at
June 30, 2007 69,026 $ 4 $ (89,527) $ 703,683 $1,248,829 1,746 $(67,081) $1,795,908
---------------------------------------------------------------------------------------------------------
Balances at
December 31, 2007 69,465 $ 4 $ (31,234) $ 722,088 $1,332,954 2,159 $(88,428) $1,935,384
Effect of
implementing FAS
159, net of income taxes - - - - 62 - - 62
Comprehensive income:
Net income - - - - 61,104 - - 61,104
Other comprehensive
income, net of tax (1) - - (33,144) - - - - (33,144)
income, net of
-----------
Comprehensive income 27,960
-----------
Treasury stock purchase - - - - - 91 (4,655) (4,655)
Exercise of stock options 347 - - 10,661 - 73 (4,026) 6,635
Tax benefit on exercise
of stock options - - - 1,132 - - - 1,132
Stock-based compensation - - - 4,522 - - - 4,522
Cash dividends on
common stock - - - - (28,664) - - (28,664)
---------------------------------------------------------------------------------------------------------
Balances at
June 30, 2008 69,812 $ 4 $ (64,378) $ 738,403 $1,365,456 2,323 $(97,109) $1,942,376
---------------------------------------------------------------------------------------------------------
(1) June 30, 2008 June 30, 2007
------------- -------------
Changes in other comprehensive loss:
Unrealized losses on securities $ (120,274) $ (32,306)
Unrealized gains on cash flow hedges 184 658
Tax benefit (expense) on unrealized gains
(losses) 85,433 11,143
Reclassification adjustment for losses
realized and included in net income 5,242 6,825
Reclassification adjustment for tax
benefit on realized losses (3,729) (2,403)
------------------------------------
Net change in other comprehensive loss $ (33,144) $ (16,083)
------------------------------------
See accompanying notes to consolidated financial statements.
38
---------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands) Six Months Ended June 30,
---------------------------------------------
2008 2007
---------------------------------------------
Cash Flows From Operating Activities:
Net income $ 61,104 $ 106,656
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 76,881 14,320
Change in fair value of mortgage servicing rights 2,529 (3,897)
Unrealized losses (gains) from derivatives 44,815 (3,332)
Tax benefit on exercise of stock options (1,132) (1,423)
Change in bank-owned life insurance (1,987) (12,020)
Stock-based compensation 5,306 4,936
Depreciation and amortization 26,669 18,448
Net (accretion) amortization of securities discounts and premiums (7,623) 474
Net (gain) loss on sale of assets (5,537) 660
Mortgage loans originated for resale (312,668) (242,089)
Proceeds from sale of mortgage loans held for resale 267,175 227,007
Change in trading securities, including mortgage trading securities 40,269 35,683
Change in accrued revenue receivable (20,823) (53,071)
Change in other assets (51,427) 31,918
Change in accrued interest, taxes and expense (42,639) (528)
Change in other liabilities (565) (53,114)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 80,347 70,628
---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities 33,792 39,775
Proceeds from maturities of available for sale securities 541,500 595,664
Purchases of investment securities (31,737) (56,670)
Purchases of available for sale securities (2,335,268) (1,483,082)
Proceeds from sales of available for sale securities 1,470,701 495,026
Loans originated or acquired net of principal collected (634,746) (575,558)
Proceeds from derivative asset contracts (77,563) (21,391)
Net change in other investment assets 148 11,694
Proceeds from disposition of assets 34,283 45,593
Purchases of assets (40,921) (37,503)
Cash and equivalents of subsidiaries and branches acquired and sold, net - (47,258)
---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,039,811) (1,033,710)
---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net change in demand deposits, transaction deposits and savings accounts 635,679 149,644
Net change in time deposits 31,347 124,439
Net change in other borrowings 1,002,583 254,606
Payments on derivative liability contracts 86,302 27,503
Net change in derivative margin accounts (867,998) 62,221
Change in amount receivable (due) on unsettled security transactions (28,981) (35,582)
Issuance of common and treasury stock, net 6,635 6,102
Issuance of subordinated debenture, net - 248,618
Tax benefit on exercise of stock options 1,132 1,423
Repurchase of common stock (4,655) (2,223)
Dividends paid (28,664) (23,533)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 833,380 813,218
---------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (126,084) (149,864)
Cash and cash equivalents at beginning of period 890,413 797,326
---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 764,329 $ 647,462
---------------------------------------------------------------------------------------------------------------------------
Cash paid for interest $ 241,655 $ 294,475
---------------------------------------------------------------------------------------------------------------------------
Cash paid for taxes $ 72,561 $ 53,590
---------------------------------------------------------------------------------------------------------------------------
Net loans transferred to repossessed real estate and other assets $ 15,426 $ 4,082
---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
39
Notes to Consolidated Financial Statements (Unaudited)
(1) Accounting Policies
Basis of Presentation
The unaudited consolidated financial statements of BOK Financial Corporation
("BOK Financial" or "the Company") have been prepared in accordance with
accounting principles for interim financial information generally accepted in
the United States and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
The unaudited consolidated financial statements include accounts of BOK
Financial and its subsidiaries, principally Bank of Oklahoma, N.A. and its
subsidiaries ("BOk"), Bank of Texas, N.A., Bank of Arkansas, N.A., Bank of
Albuquerque, N.A., Colorado State Bank and Trust, N.A., Bank of Arizona, N.A.,
Bank of Kansas City, N.A., and BOSC, Inc. Certain prior period amounts have been
reclassified to conform to current period classification.
The financial information should be read in conjunction with BOK Financial's
2007 Form 10-K filed with the Securities and Exchange Commission, which contains
audited financial statements. Amounts presented as of December 31, 2007 have
been derived from BOK Financial's 2007 Form 10-K.
Newly Adopted and Pending Accounting Policies
The Company adopted Statement of Financial Accounting Standards No. 159, Fair
Value Option ("FAS 159") effective January 1, 2008. FAS 159 provides an option
to measure eligible financial assets and financial liabilities at fair value.
Certain certificates of deposit that were either currently designated as hedged
or had previously been designated as hedged, but no longer met the correlation
requirements of Statement of Financial Accounting Standards No. 133 were
designated as being reported at fair value. Adoption of FAS 159 increased
opening retained earnings for the first quarter of 2008 by $62 thousand.
Interest expense on certificates of deposit carried at fair value is based on
the instruments' contractual interest rates and outstanding principal balances.
As of January 1, 2008, the Company adopted Financial Accounting Standards Board
Staff Position FIN 39-1, which permits offsetting of cash collateral against the
fair value of derivative instruments executed with the same counterparty under a
master netting agreement. The total amount of derivative assets and liabilities
at June 30, 2008 was reduced by $10 million and $990 million, respectively, of
cash collateral.
Statement of Financial Accounting Standards No. 160, "Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB Statement No. 51," ("FAS
160") amends Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial
Statements," to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. FAS 160 clarifies that a non-controlling interest in a subsidiary,
which is sometimes referred to as minority interest, is an ownership interest in
the consolidated entity that should be reported as a component of equity in the
consolidated financial statements. Among other requirements, FAS 160 requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. It also
requires disclosure, on the face of the consolidated income statement, of the
amounts of consolidated net income attributable to the parent and to the
non-controlling interest. FAS 160 is effective for the Company on January 1,
2009 and is not expected to have a significant impact on the Company's financial
statements.
Statement of Financial Accounting Standards No. 161, "Disclosures About
Derivative Instruments and Hedging Activities, an Amendment of FASB Statement
No. 133," ("FAS 161") amends and expands the disclosure requirements of FAS 133,
"Accounting for Derivative Instruments and Hedging Activities," to provide
greater transparency about (i) how and why an entity uses derivative
instruments, (ii) how derivative instruments and related hedge items are
accounted for under SFAS 133 and its related interpretations, and (iii) how
derivative instruments and related hedged items affect an entity's financial
position, results of operations and cash flows. To meet those objectives, FAS
161 requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of gains and
losses on derivative instruments and disclosures about credit-risk-related
contingent features in derivative agreements. FAS 161 is effective for the
Company on January 1, 2009 and is not expected to have a significant impact on
the Company's financial statements.
40
(2) Fair Value Measurements
Fair value measurements as of June 30, 2008 are as follows (in thousands):
Quoted Prices Significant
in Active Other Significant
Markets for Observable Unobservable
Total Identical Inputs Inputs
Instruments
----------- ---------------- --------------- ----------------
Assets:
Trading securities $62,532 $ 13,829 $48,703
Available for sale securities 5,926,602 36,936 5,889,666
Mortgage trading securities 98,269 98,269
Mortgage servicing rights 72,103 72,103 (1)
Derivative contracts 1,380,876 1,344,256 36,620 (2)
Liabilities:
Certificates of deposit 203,580 203,580
Derivative contracts 1,446,425 1,446,425
(1) A reconciliation of the beginning and ending fair value of mortgage
servicing rights and disclosures of significant assumptions used to
determine fair value are presented in Note 4, Mortgage Banking
Activities.
(2) The fair value of derivative contracts with SemGroup, LP was based
largely on significant unobservable inputs. On July 22, 2008, SemGroup
and 24 related entities filed for bankruptcy protection. BOK Financial
assessed a range of values for derivative contracts with SemGroup using
information currently available, including information provided by a
nationally recognized financial advisor to SemGroup. The range
considered both the value of SemGroup as a reorganized entity (going
concern value) and its liquidation value. The fair value of derivative
contracts was based on the lower end of the range of values. The fair
value of derivative contracts with SemGroup totaled $88.2 million at
March 31, 2008 and $97.3 million at June 30, 2008 based on significant
observable inputs. At June 30, 2008, the fair value of these contracts
was written down by $60.7 million to $36.6 million based on significant
unobservable inputs.
The fair value of assets and liabilities based on significant other observable
inputs are generally provided to us by third-party pricing services and are
based on one or more of the following:
o Quoted prices for similar, but not identical, assets or liabilities in
active markets;
o Quoted prices for identical or similar assets or liabilities in
inactive markets;
o Inputs other than quoted prices that are observable, such as interest
rate and yield curves, volatilities, prepayment speeds, loss
severities, credit risks and default rates;
o Other inputs derived from or corroborated by observable market inputs.
The underlying methods used by the third-party pricing services are considered
in determining the primary inputs used to determine fair values.
No significant fair value measurements of significant assets or liabilities
measured on a non-recurring basis were made during the first half of 2008.
Assets measured on a non-recurring basis include pension plan assets, which are
based on quoted prices in active markets for identical instruments, real
property and other assets acquired to satisfy loans, which are based primarily
on comparisons of completed sales of similar assets, and goodwill, which is
based on significant unobservable inputs.
Certain certificates of deposit were designated as carried at fair value as
permitted by FAS 159. These certificates have been converted from fixed interest
rates to variable interest rates based on LIBOR with interest rate swaps. The
fair value election for these liabilities better represents the economic effect
of these instruments on the Company. At June 30, 2008, the fair value and
contractual principal amount of these certificates was $204 million and $205
million, respectively. Change in the fair value of these certificates of deposit
resulted in an unrealized gain during the second quarter and first half of 2008
of $2.2 million and $601 thousand, respectively, which is included in Gain
(Loss) on Derivatives, net on the Consolidated Statement of Earnings.
41
(3) Derivatives
The fair values of derivative contracts at June 30, 2008 are as follows (in
thousands):
Assets Liabilities
----------- --- ------------
Customer Risk Management Programs:
Interest rate contracts $73,168 $73,296
Energy contracts 1,281,937 1,337,368
Agriculture contracts 12,054 11,949
Foreign exchange contracts 17,994 17,994
CD options 4,163 4,163
--------------------------------------------- ----------- --- ------------
Fair value before cash collateral 1,389,316 1,444,770
Less: cash collateral (10,000) (990,046)
--------------------------------------------- ----------- --- ------------
Total Customer Derivatives 1,379,316 454,724
Interest Rate Risk Management Programs 1,560 1,655
--------------------------------------------- ----------- --- ------------
Total Derivative Contracts $1,380,876 $456,379
--------------------------------------------- ----------- --- ------------
As of January 1, 2008, the Company adopted Financial Accounting Standards Board
Staff Position FIN 39-1, which permits offsetting of cash collateral against the
fair value of derivative instruments executed with the same counterparty under a
master netting agreement. The total amount of derivative assets and liabilities
at June 30, 2008 were reduced by $10 million and $990 million, respectively, of
cash collateral.
42
(4) Mortgage Banking Activities
At June 30, 2008, BOK Financial owned the rights to service 58,021 mortgage
loans with outstanding principal balances of $5.7 billion, including $648
million serviced for affiliates. The weighted average interest rate and
remaining term was 6.15% and 281 months, respectively.
For the three and six months ended June 30, 2008, mortgage banking revenue
includes servicing fee income of $4.3 million and $8.6 million, respectively.
For the three and six months ended June 30, 2007, mortgage banking revenue
includes servicing fee income of $4.3 million and $8.5 million, respectively.
Activity in capitalized mortgage servicing rights and related valuation
allowance during the six months ending June 30, 2008 is as follows (in
thousands):
Capitalized Mortgage Servicing Rights
------------------------------------------
Purchased Originated Total
--------------- ------------ -------------
Balance at December 31, 2007 $ 13,906 $ 56,103 $ 70,009
Additions, net - 10,314 10,314
Change in fair value due to loan runoff (1,174) (4,517) (5,691)
Change in fair value due to market changes (509) (2,020) (2,529)
-------------------------------------------- -- ---------- -- ---------- -- -----------
Balance at June 30, 2008 $ 12,223 $ 59,880 $ 72,103
-------------------------------------------- -- ---------- -- ---------- -- -----------
Fair value is determined by discounting the projected net cash flows.
Significant assumptions used to determine fair value are:
June 30, 2008 December 31, 2007
--------------------- --------------------
Discount rate - risk-free rate plus a market premium 9.86% 10.02%
Prepayment rate - based upon loan interest rate,
original term and loan type 5.3% - 14.0% 6.8% - 15.2%
Loan servicing costs - annually per loan based upon
loan type $43 - $73 $43 - $70
Escrow earnings rate - indexed to rates paid on deposit
accounts with comparable average life 4.28% 5.01%
Stratification of the mortgage loan servicing portfolio and outstanding
principal of loans serviced by interest rate at June 30, 2008 follows (in
thousands):
< 5.51% 5.51% - 6.50% 6.51% - 7.50% > 7.50% Total
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
Fair value $ 13,387 $ 41,391 $ 14,305 $ 3,020 $ 72,103
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
Outstanding principal of loans serviced (1)$ 984,400 $2,824,100 $ 1,007,000 $186,500 $5,002,000
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
(1) Excludes outstanding principal of $648 million for loans serviced for
affiliates and $37 million of mortgage loans for which there are no
capitalized mortgage servicing rights.
43
(5) Disposal of Available for Sale Securities
Sales of available for sale securities resulted in gains and losses as follows
(in thousands):
Six Months Ended June 30,
-------------------------------------
2008 2007
-------------- ----------------
Proceeds $ 1,470,701 $ 495,026
Gross realized gains 8,507 1,015
Gross realized losses (5,284) (2,412)
Related federal and state income
tax expense (benefit) 1,098 (495)
(6) Employee Benefits
BOK Financial has sponsored a defined benefit Pension Plan for all employees who
satisfied certain age and service requirements. Pension Plan benefits were
curtailed as of April 1, 2006. The Company recognized no periodic pension cost
and made no Pension Plan contributions during the six months ended June 30, 2008
and June 30, 2007.
Management has been advised that no minimum contribution will be required for
2008. The maximum allowable contribution for 2008 has not yet been determined.
(7) Shareholders' Equity
On July 29, 2008, the Board of Directors of BOK Financial Corporation approved a
$0.225 per share quarterly common stock dividend. The quarterly dividend will be
payable on or about August 29, 2008 to shareholders of record on August 15,
2008.
Dividends declared during the three and six month periods ended June 30, 2008
were $0.225 per share and $0.425 per share, respectively. Dividends declared
during the three and six month periods ended June 30, 2007 were $0.20 per share
and $0.35 per share, respectively.
44
(8) Earnings Per Share
The following table presents the computation of basic and diluted earnings per
share (dollars in thousands, except share data):
Three Months Ended Six Months Ended
-----------------------------------------------------
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
-----------------------------------------------------
Numerator:
Net income (loss) $ (1,161) $ 53,863 $ 61,104 $ 106,656
---------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share - weighted
average shares 67,452,181 67,116,902 67,246,250 67,099,752
Effect of dilutive potential common shares:
Employee stock compensation plans (1) - 489,428 363,764 489,394
---------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 67,452,181 67,606,330 67,610,014 67,589,146
---------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ (0.02) $ 0.80 $ 0.91 $ 1.59
---------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ (0.02) $ 0.80 $ 0.90 $ 1.58
---------------------------------------------------------------------------------------------------------------
(1) Excludes employee stock options with exercise
prices greater than current market price. - 850,926 278,812 811,184
(9) Reportable Segments
Reportable segments reconciliation to the Consolidated Financial Statements for
the six months ended June 30, 2008 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Income Average
Revenue Revenue(1) Expense Assets
------------ -- ------------ -- ------------- -- ----------- -- --------------
Total reportable segments $ 266,711 $ 173,291 $ 303,639 $ 56,660 $ 22,811,767
Unallocated items:
Tax-equivalent adjustment 4,238 - - 4,238 -
Funds management and other 35,118 4,357 9,033 206 (1,651,616)
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 306,067 $ 177,648 $ 312,672 $ 61,104 $ 21,160,151
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
Reportable segments reconciliation to the Consolidated Financial Statements for
the three months ended June 30, 2008 is as follows (in thousands):
Net Other Other Net
Interest Operating Operating Income Average
Revenue Revenue(1) Expense (Loss) Assets
------------ -- ------------ -- ------------- -- ----------- -- --------------
Total reportable segments $ 132,287 $ 61,424 $ 153,854 $ (1,654) $ 23,413,047
Unallocated items:
Tax-equivalent adjustment 2,084 - - 2,084 -
Funds management and other 24,568 2,395 5,414 (1,591) (1,804,747)
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 158,939 $ 63,819 $ 159,268 $ (1,161) $ 21,608,300
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
45
Reportable segments reconciliation to the Consolidated Financial Statements for
the six months ended June 30, 2007 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Income Average
Revenue Revenue(1) Expense Assets
------------ -- ------------ -- ------------- -- ----------- -- --------------
Total reportable segments $ 272,277 $ 190,650 $ 256,075 $ 118,871 $ 19,366,204
Unallocated items:
Tax-equivalent adjustment 4,154 - - 4,154 -
Funds management and other (12,680) (1,753) 10,167 (16,369) (1,081,888)
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 263,751 $ 188,897 $ 266,242 $ 106,656 $ 18,284,316
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
Reportable segments reconciliation to the Consolidated Financial Statements for
the three months ended June 30, 2007 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Income Average
Revenue Revenue(1) Expense Assets
------------ -- ------------ -- ------------- -- ----------- -- --------------
Total reportable segments $ 137,892 $ 99,578 $ 130,146 $ 59,244 $ 19,631,701
Unallocated items:
Tax-equivalent adjustment 2,069 - - 2,069 -
Funds management and other (5,048) (2,962) 3,985 (7,450) (1,073,631)
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 134,913 $ 96,616 $ 134,131 $ 53,863 $ 18,558,070
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
(10) Contingent Liabilities
In September 2006, BISYS settled the SEC's two-year investigation of BISYS Fund
Services Ohio, Inc. ("BISYS") marketing assistance agreements with 27 different
families of mutual funds, including a BISYS marketing arrangement with AXIA
which had been terminated effective January 1, 2004. In the SEC settlement,
BISYS consented to an order in which the SEC determined that BISYS had
"willfully aided and abetted and caused" the 27 investment advisors to (i)
violate provisions of the Investment Advisors Act of 1940 that prohibit
fraudulent conduct; (ii) violate provisions of 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 (iii) violate provisions of the 1940
Act that require the disclosure and inclusion of all distribution arrangements
and expenses in the fund's 12b-1 fee plan ("the SEC BYSIS Order"). AXIA was one
of the 27 advisors and the AP Funds one of the 27 mutual fund families to which
the SEC referred in its BISYS Order. On October 10, 2006, the Examinations
Division of the Securities and Exchange Commission (the "SEC") conducted an
examination of AXIA. The examination was concluded in July 2007 with no action
taken by the Examinations Division. In August 2007, AXIA settled all claims
relating to the BISYS marketing arrangements with the AP Funds for $2.2 million
and the AP Funds regard the matter as fully concluded. The settlement with the
AP Funds is not binding on the SEC.
On April 7, 2008, AXIA and its parent, BOK, received a Wells notice from the
regional office of the SEC in Los Angeles indicating that the staff is
considering recommending that the SEC bring a civil injunctive action against
AXIA and BOK for violations of Section 17(a) of the Securities Act of 1955,
Section 10(b) of the Securities Exchange Act of 1934, Sections 206(1) and (2) of
the Investment Advisors Act of 1940, and Sections 12(b) and 34(b) of the
Investment Company Act of 1940. BOK and AXIA have been cooperating fully with
the SEC in connection with these matters that arose prior to December 31, 2003.
BOK and AXIA are not bound by the SEC BISYS Order and disagree with the SEC
position as it relates to BOK and AXIA. On May 27, 2008, BOK and AXIA responded
to the Wells notice denying the SEC position. On June 26, 2008, BOK and AXIA
representatives met with SEC Staff. Nothing further has occurred as of this
time.
46
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.
During the fourth quarter of 2007, Visa announced that it had recognized
liabilities related to antitrust litigation with American Express and Discover
and that it was subject to other litigation. As a member of Visa, BOK Financial
is obligated for a proportionate share of losses incurred by Visa. A contingent
liability was recognized for the Company's share of Visa's litigation
liabilities.
During the first quarter of 2008, Visa completed its initial public offering and
funded a $3.0 billion escrow account for litigation claims including claims by
American Express and Discover. BOK Financial recognized a receivable for its
proportionate share of this escrow account, which equals the contingent
liability previously recognized.
In addition, during the first quarter of 2008 BOK Financial received 410,562
Visa Class B shares. A partial redemption of Class B shares was completed and
the Company received $6.8 million in cash in exchange for 158,725 Class B
shares. The remaining 251,837 Class B shares are convertible into Visa Class A
shares at the later of three years after the date of Visa's initial public
offering or the final settlement of all covered litigation. The current exchange
rate is approximately 0.71 Class A share for each Class B share. However, the
Company's Class B shares may be diluted in the future if the escrow fund is not
adequate to cover future covered litigation costs. Therefore, under currently
issued accounting guidance no value has been currently assigned to the Class B
shares and no value may be assigned until the Class B shares are converted into
a known number of Class A shares.
(11) Federal and State Income Taxes
The reconciliations of income (loss) attributable to continuing operations at
the U.S. federal statutory tax rate to income tax expense are as follows (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------
2008 2007 2008 2007
------------------------------------------------
Amount:
Federal statutory tax $ (1,408) $ 29,097 $ 32,442 $ 57,802
Tax exempt revenue (1,113) (1,037) (2,225) (2,080)
Effect of state income
taxes, net of federal (78) 1,728 2,438 3,456
benefit
Utilization of tax credits (296) (290) (592) (580)
Bank-owned life insurance (875) (841) (1,750) (1,668)
Other, net 908 613 1,275 1,563
-----------------------------------------------------------------------------
Total $ (2,862) $ 29,270 $ 31,588 $ 58,493
-----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------
2008 2007 2008 2007
-----------------------------------------------
Percent of pretax income:
Federal statutory tax 35% 35% 35% 35%
Tax exempt revenue 28 (1) (2) (1)
Effect of state income
taxes, net of federal 2 1 3 1
benefit
Utilization of tax credits 7 - (1) -
Bank-owned life insurance 22 (1) (2) (1)
Other, net (23) 1 1 1
-----------------------------------------------------------------------------
Total 71% 35% 34% 35%
-----------------------------------------------------------------------------
47
(12) 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 June 30, 2008, outstanding commitments and letters of credit were as
follows (in thousands):
June 30,
2008
--------------
Commitments to extend credit $ 5,600,714
Standby letters of credit 625,554
Commercial letters of credit 10,723
(13) Related Parties
On July 21, 2008, the Company entered into a $188 million, unsecured revolving
credit agreement with George B. Kaiser, its Chairman and principal shareholder.
Interest on the outstanding balance is based on one-month LIBOR plus 125 basis
points and is payable quarterly. Additional interest in the form of a facility
fee is paid quarterly on the unused portion of the commitment at 25 basis
points. This agreement has no restrictive covenants.
48
-------------------------------------------------------------------------------------------------------------------------------
Six Month Financial Summary - Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share Data)
Six Months Ended
-------------------------------------------------------------------------------------
June 30, 2008 June 30, 2007
------------------------------------------ ---------------------------------------
Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate
-------------------------------------------------------------------------------------
Assets
Taxable securities (3) $ 5,825,599 $ 148,014 5.08% $ 4,908,738 $ 117,839 4.86%
Tax-exempt securities (3) 261,904 8,354 6.40 338,834 9,415 5.90
-------------------------------------------------------------------------------------------------------------------------------
Total securities (3) 6,087,503 156,368 5.14 5,247,572 127,254 4.90
-------------------------------------------------------------------------------------------------------------------------------
Trading securities 74,507 2,700 7.27 31,264 1,000 6.45
Funds sold and resell agreements 76,589 1,195 3.13 61,397 1,589 5.22
Loans (2) 12,354,145 380,102 6.17 11,116,881 437,572 7.94
Less reserve for loan losses 138,277 - - 115,809 - -
-------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 12,215,868 380,102 6.24 11,001,072 437,572 8.02
-------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 18,454,467 540,365 5.87 16,341,305 567,415 7.01
-------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,705,684 1,943,011
-------------------------------------------------------------------------------------------------------------------------------
Total assets $ 21,160,151 $ 18,284,316
-------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 7,595,724 69,930 1.85% $ 6,257,933 94,609 3.05%
Savings deposits 158,375 386 0.49 150,952 741 0.99
Time deposits 4,150,654 83,945 4.06 4,463,961 104,581 4.72
-------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 11,904,753 154,261 2.60 10,872,846 199,931 3.71
-------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 3,093,946 38,829 2.52 2,633,821 66,694 5.11
Other borrowings 1,803,962 25,750 2.86 767,634 20,858 5.48
Subordinated debentures 398,288 11,220 5.65 354,657 12,027 6.84
-------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 17,200,949 230,060 2.68 14,628,958 299,510 4.13
-------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,286,552 1,346,620
Other liabilities 687,681 542,505
Shareholders' equity 1,984,969 1,766,233
-------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 21,160,151 $ 18,284,316
-------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (3) 310,305 3.19% 267,905 2.88%
Tax-Equivalent Net Interest Revenue
To Earning Assets (3) 3.37 3.31
Less tax-equivalent adjustment (1) 4,238 4,154
-------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 306,067 263,751
Provision for credit losses 76,881 14,320
Other operating revenue 176,178 181,960
Other operating expense 312,672 266,242
-------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 92,692 165,149
Federal and state income tax 31,588 58,493
-------------------------------------------------------------------------------------------------------------------------------
Net Income $ 61,104 $ 106,656
-------------------------------------------------------------------------------------------------------------------------------
Earnings Per Average Common Share Equivalent:
Net Income:
Basic $ 0.91 $ 1.59
-------------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.90 $ 1.58
-------------------------------------------------------------------------------------------------------------------------------
(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.
49
------------------------------------------------------------------------------------------------------------------------------
Quarterly Financial Summary - Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share
Data)
Three Months Ended
-------------------------------------------------------------------------------------
June 30, 2008 March 31, 2008
------------------------------------------ -------------------------------------
Average Revenue/ Yield / Average Revenue/ Yield /
Balance Expense(1) Rate Balance Expense(1) Rate
-------------------------------------------------------------------------------------
Assets
Taxable securities (3) $ 6,026,769 $ 75,959 5.08% $ 5,624,430 $ 72,055 5.11%
Tax-exempt securities (3) 259,410 4,165 6.46 264,398 4,189 6.38
------------------------------------------------------------------------------------------------------------------------------
Total securities (3) 6,286,179 80,124 5.14 5,888,828 76,244 5.17
------------------------------------------------------------------------------------------------------------------------------
Trading securities 74,058 1,267 6.88 74,957 1,433 7.69
Funds sold and resell agreements 72,444 355 1.97 80,735 840 4.18
Loans (2) 12,527,011 180,424 5.79 12,181,279 199,678 6.59
Less reserve for loan losses 145,524 - - 131,709 - -
------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 12,381,487 180,424 5.86 12,049,570 199,678 6.66
------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 18,814,168 262,170 5.61 18,094,090 278,195 6.17
------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,794,132 2,402,963
------------------------------------------------------------------------------------------------------------------------------
Total assets $ 21,608,300 $ 20,497,053
------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 7,717,777 $ 27,755 1.45% $ 7,473,670 $ 42,175 2.27%
Savings deposits 159,798 148 0.37 156,953 238 0.61
Time deposits 4,076,167 38,211 3.77 4,225,141 45,734 4.35
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 11,953,742 66,114 2.22 11,855,764 88,147 2.99
------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 3,126,110 15,180 1.95 3,061,783 23,649 3.11
Other borrowings 2,267,076 14,032 2.49 1,340,846 11,718 3.51
Subordinated debentures 398,336 5,821 5.88 398,241 5,399 5.45
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 17,745,264 101,147 2.29 16,656,634 128,913 3.11
------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,336,552 1,236,552
Other liabilities 541,693 618,721
Shareholders' equity 1,984,791 1,985,146
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 21,608,300 $ 20,497,053
------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (3) $ 161,023 3.32% $ 149,282 3.06%
Tax-Equivalent Net Interest Revenue
To Earning Assets (3) 3.44 3.31
Less tax-equivalent adjustment (1) 2,084 2,154
------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 158,939 147,128
Provision for credit losses 59,310 17,571
Other operating revenue 55,616 120,562
Other operating expense 159,268 153,404
------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes (4,023) 96,715
Federal and state income tax (2,862) 34,450
------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (1,161) $ 62,265
------------------------------------------------------------------------------------------------------------------------------
Earnings Per Average Common Share Equivalent:
Net income (loss):
Basic $ (0.02) $ 0.93
------------------------------------------------------------------------------------------------------------------------------
Diluted $ (0.02) $ 0.92
------------------------------------------------------------------------------------------------------------------------------
(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.
50
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended
-------------------------------------------------------------------------------------------------------------------------
December 31, 2007 September 30, 2007 June 30, 2007
-------------------------------------------------------------------------------------------------------------------------
Average Revenue/ Yield / Average Revenue/ Yield / Average Revenue/ Yield /
Balance Expense(1) Rate Balance Expense(1) Rate Balance Expense(1) Rate
-------------------------------------------------------------------------------------------------------------------------
$ 5,633,173 $ 68,670 4.86% $ 5,206,482 $ 62,531 4.84% $ 5,014,231 $ 60,176 4.85%
328,900 5,990 7.19 360,710 5,820 6.44 354,956 4,681 5.81
-------------------------------------------------------------------------------------------------------------------------
5,962,073 74,660 4.99 5,567,192 68,351 4.95 5,369,187 64,857 4.90
-------------------------------------------------------------------------------------------------------------------------
29,303 489 6.62 24,413 459 7.46 32,897 481 5.86
86,948 1,303 5.95 101,281 1,588 6.22 67,057 924 5.53
11,806,242 223,146 7.50 11,709,638 232,446 7.88 11,338,140 224,492 7.94
125,996 - - 123,059 - - 118,505 - -
-------------------------------------------------------------------------------------------------------------------------
11,680,246 223,146 7.58 11,586,579 232,446 7.96 11,219,635 224,492 8.03
-------------------------------------------------------------------------------------------------------------------------
17,758,570 299,598 6.70 17,279,465 302,844 6.99 16,688,776 290,754 7.00
-------------------------------------------------------------------------------------------------------------------------
2,224,045 2,056,910 1,869,294
-------------------------------------------------------------------------------------------------------------------------
$ 19,982,615 $ 19,336,375 $ 18,558,070
-------------------------------------------------------------------------------------------------------------------------
$ 7,016,136 $ 49,358 2.79% $ 6,683,056 $ 50,650 3.01% $ 6,414,014 $ 48,242 3.02%
160,170 348 0.86 200,362 410 0.81 158,718 377 0.95
4,544,802 53,613 4.68 4,798,812 58,436 4.83 4,507,053 53,440 4.76
-------------------------------------------------------------------------------------------------------------------------
11,721,108 103,319 3.50 11,682,230 109,496 3.72 11,079,785 102,059 3.69
-------------------------------------------------------------------------------------------------------------------------
3,158,153 35,169 4.42 2,603,372 32,484 4.95 2,627,230 33,129 5.06
936,353 11,611 4.92 880,894 11,789 5.31 866,096 11,760 5.45
398,109 5,708 5.69 471,458 7,166 6.03 410,883 6,824 6.66
-------------------------------------------------------------------------------------------------------------------------
16,213,723 155,807 3.81 15,637,954 160,935 4.08 14,983,994 153,772 4.12
-------------------------------------------------------------------------------------------------------------------------
1,293,419 1,300,280 1,295,930
580,574 577,161 487,400
1,894,899 1,820,980 1,790,746
-------------------------------------------------------------------------------------------------------------------------
$ 19,982,615 $ 19,336,375 $ 18,558,070
-------------------------------------------------------------------------------------------------------------------------
$ 143,791 2.89% $ 141,909 2.91% $ 136,982 2.88%
3.22 3.27 3.31
2,502 2,464 2,069
-------------------------------------------------------------------------------------------------------------------------
141,289 139,445 134,913
13,200 7,201 7,820
107,316 109,372 90,171
157,727 151,018 134,131
-------------------------------------------------------------------------------------------------------------------------
77,678 90,598 83,133
26,518 30,750 29,270
-------------------------------------------------------------------------------------------------------------------------
$ 51,160 $ 59,848 $ 53,863
-------------------------------------------------------------------------------------------------------------------------
$ 0.76 $ 0.89 $ 0.80
-------------------------------------------------------------------------------------------------------------------------
$ 0.76 $ 0.89 $ 0.80
-------------------------------------------------------------------------------------------------------------------------
51
PART II. Other Information
Item 1. Legal Proceedings
See discussion of legal proceedings at footnote 10 to the consolidated financial
statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases made by or on
behalf of the Company or any "affiliated purchaser" (as defined in Rule
10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company's common
stock during the three months ended March 31, 2008.
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
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
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
April 1, 2008 to 11,618 $59.06 - 1,290,927
April 30, 2008
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
May 1, 2008 to May 21,220 $59.40 - 1,290,927
31, 2008
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
June 1, 2008 to 2,895 $54.00 - 1,290,927
June 30, 2008
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
Total 35,733
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
(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 June 30, 2008,
the Company had repurchased 709,073 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.
52
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on April 29, 2008 (the "Annual
Meeting"). At the Annual Meeting, shareholders voted on three matters: (i) to
fix the number of directors to be elected at eighteen (18) and to elect eighteen
(18) persons as directors for a term of one year or until their successors have
been elected and qualified, (ii) to approve the Amended and Restated 2003
Executive Incentive Plan, and (iii) to ratify the selection of Ernst & Young LLP
as the Company's independent auditor for the fiscal year ending December 31,
2008. The shareholders approved these matters by the following votes,
respectively:
(i) Election of eighteen (18) directors for a term of one year:
Votes
Withheld/
Votes For Against
---------------- -----------------
Gregory S. Allen 58,881,316 5,603,901
C. Fred Ball, Jr. 61,869,319 2,615,898
Sharon J. Bell 64,365,872 119,345
Peter C. Boylan III 64,200,721 284,496
Chester Cadieux III 59,296,607 5,188,610
Joseph W. Craft III 64,382,600 102,617
William E. Durrett 64,361,940 123,277
John W. Gibson 64,457,758 27,459
David F. Griffin 64,469,262 15,955
V. Burns Hargis 64,319,913 165,303
E. Carey Joullian IV 59,299,019 5,186,198
George B. Kaiser 61,772,014 2,713,202
Thomas L. Kivisto 58,805,718 5,679,499
Robert J. LaFortune 64,361,941 123,276
Stanley A. Lybarger 61,899,839 2,585,377
Steven J. Malcolm 62,166,183 2,319,034
Paula Marshall 58,378,455 6,106,762
E. C. Richards 64,466,665 18,552
Votes
Withheld/ Exceptions /
Votes For Against Abstain
(ii) Approval of the Amended and Restated 2003 Executive
Incentive Plan 57,852,637 2,946,537 3,876,212
Votes
Withheld/ Exceptions /
Votes For Against Abstain
(iii) Ratification of Ernst & Young LLP as the independent
auditor for the year ending December 31, 2008 64,543,595 122,560 9,232
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 1A, 3 and 5 are not applicable and have been omitted.
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: August 8, 2008 /s/ Steven E. Nell
------------------------------- -------------------------------
Steven E. Nell
Executive Vice President and
Chief Financial Officer
/s/ John C. Morrow
------------------------------
John C. Morrow
Senior Vice President and
Chief Accounting Officer