As filed with the Securities and Exchange Commission on August 9, 2006
==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File No. 0-19341
BOK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Oklahoma 73-1373454
(State or other jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
Bank of Oklahoma Tower
P.O. Box 2300
Tulsa, Oklahoma 74192
(Address of Principal Executive Offices) (Zip Code)
(918) 588-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 66,850,046 shares of common
stock ($.00006 par value) as of July 31, 2006.
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2
BOK Financial Corporation
Form 10-Q
Quarter Ended June 30, 2006
Index
Part I. Financial Information
Management's Discussion and Analysis (Item 2) 2
Market Risk (Item 3) 26
Controls and Procedures (Item 4) 28
Consolidated Financial Statements - Unaudited (Item 1) 29
Six Month Financial Summary - Unaudited (Item 2) 39
Quarterly Financial Summary - Unaudited (Item 2) 40
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
Item 4. Submission of Matters to a Vote of Security Holders 43
Item 6. Exhibits 43
Signatures 44
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Performance Summary
BOK Financial Corporation ("BOK Financial" or the "Company") reported net income
of $55.0 million, or $0.82 per diluted share for the second quarter of 2006,
compared with $50.5 million, or $0.75 per diluted share for the second quarter
of 2005. The annualized returns on average assets and shareholders' equity were
1.33% and 14.03%, respectively for 2006, compared with returns of 1.31% and
14.05%, respectively for 2005. Net income for the second quarter of 2005
included gains of $3.8 million or $0.06 per diluted share from sales of the
Company's interest in an Oklahoma City office building and on the sale of
certain mortgage loans which were not part of the Company's ongoing mortgage
banking business.
Highlights of the quarter included:
o Outstanding loans at June 30, 2006 grew $1.3 billion or 15% since June 30,
2005, including $593 million since March 31, 2006
o Average deposits increased 14% from the second quarter of 2005, exceeding
average loan growth by $284 million
o Stable net interest margin
o Fee revenues increased 8% compared with the second quarter of 2005
o Operating expense increase managed at a 6% level compared with the second
quarter of 2005
o Near historical low non-performing loans; strong allowance for loan losses
Net interest revenue grew $8.6 million or 8% over 2005. Average outstanding loan
balances increased $1.1 billion or 14% and average deposits increased $1.4
billion or 14%. Fees and commission revenue increased $6.9 million, or 8% over
the second quarter of 2005. Transaction card revenue and trust revenue grew $2.0
million and $1.5 million, respectively. Other revenue increased $2.8 million,
including $1.6 million from fees earned on margin assets.
Operating expenses increased $6.8 million or 6% over the second quarter of 2005,
excluding changes in the value of mortgage servicing rights. Personnel costs
increased $7.0 million due largely to a $4.5 million increase in salaries and
wages and a $2.7 million increase in incentive compensation. The fair value of
mortgage servicing rights increased $3.6 million during the second quarter of
2006 due to rising interest rates. At the same time, rising interest rates
decreased the value of securities held as an economic hedge of mortgage
servicing rights $2.5 million for a net gain of $1.1 million.
3
Non-performing loans totaled $31 million or 0.32% of outstanding loans at June
30, 2006 compared with $41 million or 0.48 % of outstanding loans at June 30,
2005. The combined allowance for loan losses and reserve for off-balance sheet
credit losses totaled $126 million or 1.30% of outstanding loans, excluding
mortgage loans held for sale, at June 30, 2006 and $127 million or 1.50% of
outstanding loans at June 30, 2005. The provision for credit losses was $3.8
million for the second quarter of 2006 and $2.0 million for the same period last
year.
Net income for the first half of 2006 totaled $109.7 million, up $7.2 million or
7% over 2005. Net interest revenue grew $18.3 million or 8% due primarily to a
$1.2 billion increase in average loans. Fee income increased $17.9 million or
11%. All categories of fee income increased over 2005 except mortgage banking
revenue which decreased $144 thousand or 1%. Other revenue grew $6.2 million or
40% due primarily to a $3.5 million increase in fees on margin assets. Operating
expenses increased $23.5 million or 10%, excluding changes in the value of
mortgage servicing rights due to a $19.8 million increase in personnel costs.
Appreciation in the value of mortgage servicing rights, net of losses on
economic hedges, provided $4.0 million of net income in the first half of 2006.
The Company is establishing a new regional bank in Kansas City. Initial
operations are expected to begin in the fourth quarter of 2006, subject to
regulatory approval.
Results of Operations
Net Interest Revenue
Tax-equivalent net interest revenue increased to $122.7 million for the second
quarter of 2006 from $113.8 million for 2005, due primarily to a $1.1 billion or
14% increase in average outstanding loan principal. Average loan growth was
funded by a $1.4 billion or 14% increase in average deposits. The excess of
average deposits over average loans of $284 million reduced other borrowings,
generally a higher-costing source of funds. Table 1 shows the effects on net
interest revenue of changes in average balances and interest rates for the
various types of earning assets and interest-bearing liabilities.
Net interest margin, the ratio of tax-equivalent net interest revenue to average
earning assets was 3.40% for the second quarter of 2006, compared with 3.45% for
the second quarter of 2005 and 3.39% for the first quarter of 2006. Yields on
average earning assets continued to trend upwards due to rising market interest
rates. The yield on average earning assets was 6.71%, up 103 basis points
compared with the second quarter of 2005 and 29 basis points over the preceding
quarter. The yield on average outstanding loans was 7.68%, up 128 basis points
over the second quarter of 2005 and 33 basis points over the first quarter of
2006. The tax-equivalent yield on securities was 4.77% for the second quarter of
2006, compared with 4.36% for the second quarter of 2005 and 4.64% for the first
quarter of 2006.
Rates paid on average interest-bearing liabilities during the second quarter of
2006 increased 115 basis points over the second quarter of 2005 and 30 basis
points over the preceding quarter. Rates paid on interest-bearing deposit
accounts, which increased 96 basis points over 2005, continued to lag behind the
increases in loan yields. The cost of other interest-bearing funds increased 187
basis points compared with the same period last year and 47 basis points from
the preceding quarter. Increased non-interest bearing funds and changes in the
mix of funding sources added 42 basis points to the net interest margin in
second quarter of 2006 compared with 35 basis points for 2005 and 40 basis
points for the first quarter of 2006.
Our overall objective is to manage the Company's balance sheet to be essentially
neutral to changes in interest rates. Approximately 71% of our commercial loan
portfolio is either variable rate or fixed rate that will reprice within one
year. These loans are funded primarily by deposit accounts that are either
non-interest bearing, or that reprice more slowly than the loans. The result is
a balance sheet that would be asset sensitive, which means that assets generally
reprice more quickly than liabilities. Among the strategies that we use to
achieve a rate-neutral position, we purchase fixed-rate, mortgage-backed
securities to offset the short-term nature of the majority of the Company's
funding sources. The expected duration of these securities is approximately 3.1
years based on a range of interest rate and prepayment assumptions. The
liability-sensitive nature of this strategy provides an offset to the
asset-sensitive characteristics of our loan portfolio.
We also use derivative instruments to manage our interest rate risk. We have
interest rate swaps with a combined notional amount of $807 million that convert
fixed rate liabilities to floating rate based on LIBOR. The purpose of these
derivatives, which generally have been designated as fair value hedges, is to
position our balance sheet to be neutral to changes in interest rates. We also
have interest rate swaps with a notional amount of $100 million that convert
prime-based loans to fixed rate. The purpose of these derivatives, which have
been designated as cash flow hedges, also
4
is to position our balance sheet to be neutral to changes in interest rates.
The effectiveness of these strategies is reflected in the overall change in net
interest revenue due to changes in interest rates as shown in Table 1 and in the
interest rate sensitivity projections as shown in 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, 2006 / 2005 June 30, 2006 / 2005
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Change Due To (1) Change Due To (1)
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Yield / Yield
Change Volume Rate Change Volume /Rate
--------------------------------------------------------------------------
Tax-equivalent interest revenue:
Securities $ 6,032 $ 898 $ 5,134 $ 12,344 $ 3,788 $ 8,556
Trading securities 122 158 (36) 140 143 (3)
Loans 48,096 19,847 28,249 95,238 39,765 55,473
Funds sold and resell agreements 251 109 142 326 20 306
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Total 54,501 21,012 33,489 108,048 43,716 64,332
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Interest expense:
Transaction deposits 18,826 5,266 13,560 36,326 11,900 24,426
Savings deposits 68 (27) 95 149 (33) 182
Time deposits 13,299 4,870 8,429 24,958 9,167 15,791
Federal funds purchased and
repurchase agreements 9,932 (407) 10,339 18,225 (132) 18,357
Other borrowings 1,458 (2,371) 3,829 4,786 (3,088) 7,874
Subordinated debentures 1,950 1,468 482 4,638 3,744 894
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Total 45,533 8,799 36,734 89,082 21,558 67,524
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Tax-equivalent net interest revenue 8,968 12,213 (3,245) 18,966 22,158 (3,192)
Change in tax-equivalent adjustment (395) (661)
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Net interest revenue $ 8,573 $ 18,305
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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 $3.7 million compared with the second quarter
of last year. Fees and commission revenue increased $6.9 million or 8%. Growth
in fees and commissions revenue was offset by a $4.8 million net increase in
losses on securities sales and a $5.9 million decrease in gains on sales of
other assets.
Diversified sources of fees and commission revenue are a significant part of our
business strategy and represented 44% of total revenue, excluding gains and
losses on asset sales, securities and derivatives, for the second quarter of
2006. We believe that a variety of fee revenue sources provide an offset to
changes in interest rates, values in the equity markets, commodity prices and
consumer spending, all of which can be volatile. We expect continued growth in
other operating revenue through offering new products and services and by
expanding into new markets. However, increased competition and saturation in our
existing markets could affect the rate of future increases.
Fees and commissions revenue
Transaction card revenue increased $2.0 million or 11%. Check card revenue
increased $1.1 million or 27% while merchant discount fees increased $227
thousand or 4%. Transaction volumes provided the increased revenue. Growth in
check card revenue was distributed among Oklahoma, New Mexico and Texas markets.
Increased merchant discount fees were centered primarily in Oklahoma. ATM
network revenue also increased $680 thousand or 9% over the second quarter of
2005.
Trust fees and commissions increased $1.5 million or 9% for the second quarter
of 2006. The fair value of all trust assets, which is the basis for a
significant portion of trust fees, increased to $28.7 billion at June 30, 2006
compared with $26.0 billion at June 30, 2005. Personal trust management fees
increased $890 thousand or 18% while revenue from the
5
management of oil and gas properties and other real estate increased $254
thousand or 16%. In addition, net fees from mutual fund advisory and
administrative services were up $397 thousand or 12%. Trust activities in the
Oklahoma and Colorado markets provided $13.0 million and $2.4 million,
respectively, of total trust fees and commissions during the second quarter of
2006. Trust revenue grew $920 thousand or 8% in the Oklahoma market and $382
thousand or 19% in the Colorado market.
Brokerage and trading revenue increased $1.0 million or 10%. Customer hedging
revenue increased $967 thousand or 51% to $2.9 million. Volatility in the energy
markets prompted our energy customers to more actively hedge their gas and oil
production. Revenue from securities trading activities decreased $279 thousand,
or 5%. Most of the decrease in trading revenue is attributed to increased
competition in the broker dealer or securities brokerage market and lower demand
caused by the flattening yield curve in the securities market. Revenue from
retail brokerage activities increased $336 thousand, or 10% over the same period
of 2005.
Service charges on deposit accounts increased $1.0 million or 4% over the second
quarter of 2005. Overdraft fees grew $1.4 million or 8% due to increased volume.
Account service charge revenue decreased $213 thousand or 3%. This decrease
reflected the change in earnings credit available to commercial deposit
customers. The earnings credit, which provides a non-cash method for commercial
customers to avoid incurring charges for deposit services, increases when
interest rates rise.
Mortgage banking revenue, which is discussed more fully in the Line of Business
- Mortgage Banking section of this report decreased $1.4 million, or 16%
compared with 2005. Net gains on mortgage loans sold totaled $3.0 million, down
$1.5 million from the second quarter of 2005. Servicing revenue totaled $4.2
million for the second quarter of 2006, a 3% increase over the same period last
year.
Other operating revenue included $2.9 million of fees earned on margin assets in
the second quarter of 2006 and $1.3 million in the second quarter of 2005.
Margin assets, which are held primarily as part of the Company's customer
derivatives programs, averaged $260 million for the second quarter of 2006,
compared with $204 million for the second quarter of 2005. The increase in
average margin assets reflected growth in the fair value of liability derivative
contracts due primarily to increased volatility in energy markets. Fees earned
on average margin assets increased to 4.44% in the second quarter of 2006 from
2.55% in the second quarter of 2005. Fee rates earned on margin assets are
generally consistent with short-term interest rates.
Fees and commissions revenue for the first half of 2006 totaled $183.6 million,
a $17.9 million or 11% increase over 2005. Transaction card revenue increased
$3.9 million or 11% due to volume increases in merchant discounts and debit card
transactions. Trust fees and commissions increased $3.4 million or 11% due to
increase in asset values and business growth. Other revenue increased $6.2
million or 40%, including $3.5 million from margin account fees.
Securities and derivatives
BOK Financial recognized net losses of $2.6 million on securities for the second
quarter of 2006, including net losses of $2.5 million on securities held as an
economic hedge of mortgage servicing rights. Securities held as an economic
hedge of the mortgage servicing rights are separately identified on the balance
sheet as "mortgage trading securities." Mortgage trading securities are carried
at fair value; changes in fair value are recognized in earnings as they occur.
The Company's use of securities as an economic hedge of mortgage servicing
rights is more-fully discussed in the Line of Business - Mortgage Banking
section of this report. During the second quarter of 2005, BOK Financial
recognized net gains on securities of $2.3 million, including $3.2 million of
gains on sales of securities held as an economic hedge of mortgage servicing
rights.
Net losses on derivatives totaled $172 thousand for the second quarter of 2006,
compared with net losses of $311 thousand in 2005. Net losses in 2006 consisted
of fair value adjustments of derivatives used to manage interest rate risk and
related hedged liabilities. Net losses on derivatives in the second quarter of
2005 included $498 thousand of net losses from fair value adjustments of
derivatives used to manage interest rate risk and related hedged liabilities,
partially offset by a gain of $186 thousand from fair value adjustments of
derivative contracts held as economic hedges of mortgage servicing rights.
6
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Table 2 - Other Operating Revenue
(In thousands)
Three Months Ended
-------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
2006 2006 2005 2005 2005
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Brokerage and trading revenue $ 11,427 $ 12,010 $ 11,116 $ 11,366 $ 10,404
Transaction card revenue 19,951 18,508 18,988 18,526 17,979
Trust fees and commissions 17,751 17,945 16,536 16,376 16,259
Deposit service charges and fees 26,341 23,986 25,222 25,619 25,347
Mortgage banking revenue 7,195 6,789 7,018 9,535 8,550
Other revenue 10,931 10,811 10,067 9,490 8,160
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Total fees and commissions 93,596 90,049 88,947 90,912 86,699
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Gain on sales of assets 39 918 71 81 5,937
Gain (loss) on securities, net (2,583) (1,221) (1,780) (4,744) 2,266
Gain (loss) on derivatives, net (172) (309) 106 606 (311)
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Total other operating revenue $ 90,880 $ 89,437 $ 87,344 $ 86,855 $ 94,591
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Other Operating Expense
Other operating expense for the second quarter of 2006 totaled $122.1 million, a
$3.9 million, or 3% decrease from 2005. The decrease in other operating expenses
resulted from changes in the value of mortgage servicing rights. Appreciation of
mortgage servicing rights during the second quarter of 2006 reduced operating
expenses $3.6 million. Depreciation in the value of mortgage servicing rights
required an impairment charge of $7.1 million in the second quarter of 2005.
Operating expenses increased $6.8 million or 6% over the second quarter or 2005,
excluding changes in the value of mortgage servicing due to higher personnel
expense.
Personnel expense
Personnel expense totaled $72.4 million for the second quarter of 2006 compared
with $65.3 million for the second quarter of 2005.
Regular compensation expense which consists primarily of salaries and wages
totaled $45.5 million for the second quarter of 2006, up $4.4 million or 11%
over 2005. The increase in regular compensation expense was due to a 7% increase
in average regular compensation per full-time equivalent employee and a 4%
increase in average staffing. Growth in average compensation per full-time
equivalent employee reflects the cost of hiring top talent as we expand in
various markets.
Incentive compensation expense includes the recognized costs of cash-based
commissions, bonus and incentive programs, stock-based compensation plans and
deferred compensation plans. Stock-based compensation plans include both equity
and liability awards.
Incentive compensation expense totaled $15.5 million for the second quarter of
2006, an increase of $2.7 million or 21% over 2005. Second quarter 2006 expense
for the Company's various cash-based incentive programs totaled $12.7 million,
up $2.6 million over last year. These programs consist primarily of
formula-based plans that determine incentive amounts based on pre-established
growth criteria. Compensation expense for stock-based compensation plans totaled
$2.8 million for both the second quarters of 2006 and 2005. Compensation expense
for stock-based compensation plans accounted for as equity awards totaled $1.6
million in the second quarter of 2006, compared with $1.4 million in the second
quarter of 2005. Expense for these awards is determined by the awards'
grant-date fair value and is not affected by subsequent changes in the market
value of BOK Financial common stock. Compensation expense for stock-based
compensation plans accounted for as liability awards totaled $1.2 million in the
second quarter of 2006, compared with $1.4 million in 2005. Expense for these
liability awards is based on current fair value, including current period
changes due to the market value of BOK Financial common stock.
Employee benefit expenses totaled $11.4 million for both the second quarters of
2006 and 2005. Pension expense decreased $1.8 million due to the curtailment of
pension plan benefits as of April 1, 2006. The reduction in pension expense was
largely offset by a $1.3 million increase in the cost of enhanced employee
thrift plan benefits.
7
Data processing and communications expense
Data processing and communication expenses decreased $224 thousand, or 1%
compared to 2005. This expense consists of two broad categories, data processing
systems and transaction card processing. Data processing systems costs decreased
$517 thousand, or 5% compared with the first quarter of 2005. The Company
negotiated cost reductions on its primary data processing contract during the
quarter in exchange for a three-year contract extension. The benefit of these
cost reductions will be recognized over the remaining contract term. Transaction
card processing costs increased $293 thousand or 5% due to volume growth in
check card and merchant discount revenue.
Other operating expenses
Business promotion expenses totaled $4.8 million for the second quarter of 2006,
a $932 thousand or 24% increase over 2005. Promotional activities focused on
consumer banking growth in Oklahoma and in the regional banking markets.
Mortgage banking expense decreased $548 thousand or 16%. Costs associated with
loan origination and sales activities totaled $384 thousand in the second
quarter of 2006 and $423 thousand in the second quarter of 2005. Mortgage
banking expense also included changes in the fair value of mortgage servicing
rights due to runoff of the underlying loans. Fair value of mortgage servicing
rights decreased $2.5 million in the second quarter of 2006 due to loan runoff.
Amortization expense, which also considers the runoff of underlying loans,
totaled $3.0 million in the second quarter of 2005.
Year to date operating expenses totaled $239.5 million, up 5% over 2005. Changes
in the fair value of mortgage servicing rights decreased operating expenses
$10.7 million in 2006 and increased operating expenses $1.5 million in 2005.
Excluding changes in the value of mortgage servicing rights, operating expenses
were $23.5 million or 10% higher for the first half of 2006. Personnel costs
were up $19.8 million or 16%. Salaries and wages increased $10.0 million or 13%
due to a 7% increase in average salaries per employee and a 5% increase in the
average number of employees. Incentive compensation expense was up $9.1 million
or 42%. Cash-based incentive programs increased $5.0 million based on
performance measured against pre-established criteria. Stock-based incentive
compensation increased $4.1 million.
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Table 3 - Other Operating Expense
(In thousands)
Three Months Ended
----------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
2006 2006 2005 2005 2005
----------------------------------------------------------------------------------
Personnel $ 72,369 $ 71,232 $ 68,666 $ 66,533 $ 65,333
Business promotion 4,802 4,803 5,170 4,494 3,870
Professional fees and services 4,362 3,914 4,534 3,951 4,492
Net occupancy and equipment 13,199 13,026 12,864 12,587 12,650
Data processing & communications 16,157 16,995 18,054 17,492 16,381
Printing, postage and supplies 4,001 3,905 3,976 3,846 3,629
Net (gains) losses and operating
expenses of repossessed assets 54 219 335 (387) 316
Amortization of intangible assets 1,359 1,370 1,797 1,801 1,808
Mortgage banking costs 2,839 3,087 3,294 4,268 3,387
Change in fair value of mortgage
servicing rights (3,613) (7,081) - - -
Provision (recovery) for
impairment of mortgage servicing rights - - (708) (4,671) 7,088
Other expense 6,598 5,909 5,921 7,120 7,056
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Total other operating expense $ 122,127 $ 117,379 $ 123,903 $ 117,034 $ 126,010
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Income Taxes
Income tax expense was $31.1 million, compared with $28.6 million for the second
quarter of 2005. This represented 36% of book taxable income for both periods.
8
Lines of Business
BOK Financial operates five principal lines of business: Oklahoma corporate
banking, Oklahoma consumer banking, mortgage banking, wealth management, and
regional banking. Mortgage banking activities include loan origination and
servicing across all markets served by the Company. Wealth management provides
brokerage and trading, private financial services and investment advisory
services in all markets. It also provides fiduciary services in all markets
except Colorado. Fiduciary services in Colorado are included in regional
banking. Regional banking consists primarily of corporate and consumer banking
activities in the respective local markets. In addition to its lines of
business, BOK Financial has a funds management unit. The primary purpose of this
unit is to manage the Company's overall liquidity needs and interest rate risk.
Each line of business borrows funds from and provides funds to the funds
management unit as needed to support their operations.
BOK Financial allocates resources and evaluates performance of its lines of
business after allocation of funds, certain indirect expenses, taxes and capital
costs. The cost of funds borrowed from the funds management unit by the
operating lines of business is transfer priced at rates that approximate market
for funds with similar duration. Market is generally based on the applicable
LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of
transfer-pricing funds that support assets of the operating lines of business
tends to insulate them from interest rate risk.
The value of funds provided by the operating lines of business to the funds
management unit is based on applicable Federal Home Loan Bank advance rates.
Deposit accounts with indeterminate maturities, such as demand deposit accounts
and interest-bearing transaction accounts, are transfer-priced at a rolling
average based on expected duration of the accounts. The expected duration ranges
from 90 days for certain rate-sensitive deposits to five years.
Economic capital is assigned to the business units by a capital allocation model
that reflects management's assessment of risk. This model assigns capital based
upon credit, operating, interest rate and market risk inherent in our business
lines and recognizes the diversification benefits among the units. The level of
assigned economic capital is a combination of the risk taken by each business
line, based on its actual exposures and calibrated to its own loss history where
possible. Additional capital is assigned to the regional banking line of
business based on our investment in those entities.
Consolidated net income provided by the Regional Banking Division continued to
increase due largely to asset growth. Also, performance by business units that
generate deposits for the Company, such as the Oklahoma consumer banking unit
continued to improve due primarily to internal funds pricing credits. The
increased value of deposits when short-term interest rates are rising is
reflected in the internal transfer pricing credit. The increase in internal
transfer pricing credit is offset through the funds management unit.
-------------------------------------------- -------------------------------- --------------------------------
Table 4 - Net Income by Line of Business
(In thousands) Three months ended June 30, Six months ended June 30,
2006 2005 2006 2005
---------------- --------------- ---------------- ---------------
Regional banking $ 22,731 $ 20,172 $ 45,505 $ 37,316
Oklahoma corporate banking 20,267 23,081 38,425 40,828
Mortgage banking 1,341 (473) 4,485 1,757
Oklahoma consumer banking 8,545 6,314 17,012 10,908
Wealth management 6,128 5,476 13,377 10,980
Funds management and other (4,028) (4,105) (9,072) 731
-------------------------------------------- ---------------- --------------- ---------------- ---------------
Total $ 54,984 $ 50,465 $109,732 $102,520
-------------------------------------------- ---------------- --------------- ---------------- ---------------
Oklahoma Corporate Banking
The Oklahoma Corporate Banking Division provides loan and lease financing and
treasury and cash management services to businesses throughout Oklahoma and
certain relationships in surrounding states. In addition to serving the banking
needs of small businesses, middle market and larger customers, the Oklahoma
Corporate Banking Division has specialized groups that serve customers in the
energy, agriculture, healthcare and banking/finance industries, and includes
TransFund, our electronic funds transfer network. The Oklahoma Corporate Banking
Division contributed $20.3 million or 37% to consolidated net income for the
second quarter of 2006. This compares to $23.1 million or 46% of consolidated
net income for 2005. Net income provided by the Oklahoma Corporate Banking
Division in the second quarter of 2005 included $2.9 million from the after-tax
gain on the sale of the Company's interest in an Oklahoma City office building.
Growth in net income provided by this division, excluding the prior year's gain
on asset sale, came primarily from loan and deposit growth. Average loans
attributed to the Oklahoma Corporate Banking Division were
9
$4.3 billion for the second quarter of 2006, compared with $3.9 billion for the
second quarter of 2005. Deposits attributed to Oklahoma Corporate Banking
averaged $1.6 billion for the second quarter of 2006, up 10% over last year.
Increased average loans and deposits combined to increase net interest revenue
$2.9 million or 8%. In addition, other operating revenue increased $1.8 million
or 8% due to growth in merchant discount and ATM processing fees. Operating
expenses increased $4.0 million or 16%. Personnel expense increased $1.3 million
or 16% due to growth in both regular salaries and incentive compensation. In
addition, allocations for shared services increased $2.0 million.
Table 5 - Oklahoma Corporate Banking
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- --- ------------- -- -------------- -- -------------
NIR (expense) from external sources $ 63,647 $ 50,588 $ 123,509 $ 95,288
NIR (expense) from internal sources (25,740) (15,534) (48,589) (27,837)
------------- ------------- -------------- -------------
Net interest revenue 37,907 35,054 74,920 67,451
Other operating revenue 23,507 21,682 45,275 46,216
Gain on sale of assets - 4,708 - 4,708
Operating expense 28,105 24,126 56,333 51,058
Net loans charged off / (recovered) 252 (458) 1,087 483
Net income 20,267 23,081 38,425 40,828
Average assets $5,173,904 $ 4,592,757 $5,170,713 $4,539,426
Average economic capital 401,170 320,170 384,780 325,960
Return on assets 1.57% 2.02% 1.50% 1.81%
Return on economic capital 20.26% 28.92% 20.14% 25.26%
Efficiency ratio 45.76% 42.52% 46.87% 43.13%
Oklahoma Consumer Banking
The Oklahoma Consumer Banking Division provides a full line of deposit, loan and
fee-based services to customers throughout Oklahoma through four major
distribution channels: traditional branches, supermarket branches, the 24-hour
ExpressBank call center and the Internet. Additionally, the division is a
significant referral source for the Bank of Oklahoma Mortgage Division ("BOk
Mortgage") and the retail brokerage division of BOSC, Inc., a registered broker
/ dealer. Consumer banking activities outside of Oklahoma are included in the
Regional Banking division. The Oklahoma Consumer Banking Division contributed
$8.5 million or 16% to consolidated net income for the second quarter of 2006.
This compares to $6.3 million or 13% of consolidated net income for 2005. Net
interest revenue, which consisted primarily of credits for funds provided to the
funds management unit increased $3.9 million or 29%. Average deposits attributed
to this Division increased $193 million, or 7% compared with last year. The
value to the Company of these lower-costing retail deposits continues to
increase as short-term interest rates rise. Operating revenue increased $1.4
million or 8% over last year. Overdraft charges increased $755 thousand or 6%
and check card fees increased $721 thousand or 26%. Operating expenses increased
$1.8 million or 10% due primarily to growth in personnel and business promotion
expenses.
10
Table 6 - Oklahoma Consumer Banking
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- ------------- -------------- -------------
NIR (expense) from external sources $ (14,853) $ (10,089) $ (28,291) $ (19,194)
NIR (expense) from internal sources 31,978 23,340 61,437 44,451
------------- ------------- -------------- -------------
Net interest revenue 17,125 13,251 33,146 25,257
Other operating revenue 18,139 16,736 35,393 31,449
Operating expense 20,511 18,667 39,844 37,567
Net loans charged off 775 913 907 1,154
Net income 8,545 6,314 17,012 10,908
Average assets $ 2,818,034 $ 2,621,189 $ 2,793,626 $ 2,598,940
Average economic capital 61,430 55,400 57,730 53,420
Return on assets 1.22% 0.97% 1.23% 0.85%
Return on economic capital 55.79% 45.71% 59.42% 41.18%
Efficiency ratio 58.16% 62.25% 58.13% 66.25%
Mortgage Banking
BOK Financial engages in mortgage banking activities through the BOk Mortgage
Division of Bank of Oklahoma. These activities include the origination,
marketing and servicing of conventional and government-sponsored mortgage loans.
Mortgage banking activities contributed $1.3 million or 2% to consolidated net
income in the second quarter of 2006, compared with a net loss of $473 thousand
in 2005.
Mortgage banking activities consisted of two sectors, loan production and loan
servicing. The loan production sector generally performs best when mortgage
rates are relatively low and loan origination volumes are high. Conversely, the
loan servicing sector generally performs best when mortgage rates are relatively
high and prepayments are low. The general trend has been toward higher mortgage
loan commitment rates, especially in the first half of 2006.
Loan Production Sector
Loan production revenue totaled $3.4 million for the second quarter of 2006,
including $3.3 million of capitalized mortgage servicing rights and a $174
thousand net gain on loans sold. Loan production revenue totaled $5.1 million
for the second quarter of 2005, including $4.6 million of capitalized mortgage
servicing rights. Mortgage loans funded in the second quarter of 2006 totaled
$243 million, including $215 million of loans funded for resale and $28 million
of loans funded for retention by affiliates. Mortgage loans funded in the same
period of 2005 totaled $247 million, including $185 million of loans funded for
resale and $62 million of loans funded for retention by affiliates.
Approximately 70% of the loans funded during the second quarter of 2006 were to
borrowers in Oklahoma. Loan production activities resulted in net pre-tax income
of $696 thousand for the second quarter of 2006 and pre-tax income of $1.8
million for the second quarter of 2005. The pipeline of mortgage loan
applications totaled $276 million at June 30, 2006, compared to $268 million at
March 31, 2006 and $292 million at June 30, 2005.
Loan Servicing Sector
The loan servicing sector had net pre-tax income of $1.3 million for the second
quarter of 2006 compared to a pre-tax loss of $3.9 million for the same period
of 2005. The fair value of mortgage servicing rights increased in 2006 but
decreased during 2005 due to changes in mortgage commitment rates.
A 36 basis point increase in average mortgage commitment rates since March 31,
2006 resulted in a $3.6 million increase in the value of mortgage servicing
rights. Rising mortgage commitment rates, along with other market factors,
reduced anticipated prepayment speeds and increased the discount rate used to
value the servicing rights. At the same time, losses of $2.5 million were
recognized from decreases in the fair value of financial instruments held as an
economic hedge of the value of the servicing rights.
During the second quarter of 2005, an impairment provision of $7.1 million was
recognized. A 50 basis point decrease in mortgage interest rates during this
period reduced the fair value of the servicing rights. The impairment provision
was partially offset by net gains of $3.4 million on financial instruments
designated as economic hedges.
11
Servicing revenue, which is included in mortgage banking revenue on the
Consolidated Statements of Earnings, totaled $4.2 million in the second quarter
of 2006 compared with $4.1 million in 2005. The average outstanding balance of
loans serviced for others was $4.5 billion during 2006 compared to $3.8 billion
during 2005. On March 31, 2006, the Company paid $6.8 million to acquire the
rights to service approximately $480 million of mortgage loans. Substantially
all of these loans are to borrowers in our primary market areas. Annualized
servicing revenue per outstanding loan principal decreased to 37 basis points
for the second quarter of 2006, compared with 43 basis points last year.
In addition to changes in the fair value of mortgage servicing rights due to
anticipated prepayments and other factors, the fair value of mortgage servicing
rights decreased $2.5 million during the second quarter of 2006 due to runoff of
the underlying loans serviced. This reduction in fair value is included in
mortgage banking costs in the Consolidated Statements of Earnings. Prior to
adoption of FAS 156 in the first quarter of 2006, mortgage servicing rights were
amortized in proportion to projected cash flows over the estimated life of the
loans serviced. Projected cash flows considered both actual and estimated runoff
of the underlying loans serviced. Amortization expense recognized in mortgage
banking costs during the second quarter of 2005 totaled $3.0 million. The
decrease in expense related to the runoff of loans serviced primarily reflects
lower loan prepayment speeds.
Table 7 - Mortgage Banking
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- ------------- -------------- -------------
NIR (expense) from external sources $ 5,624 $ 5,098 $ 10,406 $ 10,094
NIR (expense) from internal sources (4,683) (3,585) (8,914) (7,151)
------------- ------------- -------------- -------------
Net interest revenue 941 1,513 1,492 2,943
Capitalized mortgage servicing rights 3,333 4,556 6,168 6,537
Other operating revenue 4,391 4,851 8,754 9,298
Gain on sale of assets - 1,232 - 1,232
Operating expense 7,328 9,160 14,997 16,871
Change in fair value of mortgage servicing
rights 3,613 - 10,694 -
Provision for impairment of mortgage
servicing rights - 7,088 - 1,464
Gains (losses) on financial instruments, net (2,533) 3,404 (4,394) 1,328
Net income (loss) 1,341 (473) 4,485 1,757
Average assets $ 498,495 $ 542,797 $ 472,610 $ 529,298
Average economic capital 23,410 21,390 23,860 22,980
Return on assets 1.08% (0.35)% 1.91% 0.67%
Return on economic capital 22.98% (8.87)% 37.91% 15.42%
Efficiency ratio 84.57% 75.38% 91.37% 84.31%
BOK Financial designates a portion of its securities portfolio as an economic
hedge against the risk of loss on its mortgage servicing rights. Mortgage-backed
securities and U.S. government agency debentures are designated as "mortgage
trading securities" when prepayment risks exceed certain levels. Additionally,
interest rate derivative contracts may also be designated as an economic hedge
of the risk of loss on mortgage servicing rights. Because the fair values of
these instruments are expected to vary inversely to the fair value of the
servicing rights, they are expected to partially offset risk. These financial
instruments are carried at fair value. Changes in fair value are recognized in
current period income. No special hedge accounting treatment is applicable to
either the mortgage servicing rights or the financial instruments designated as
an economic hedge.
This hedging strategy presents certain risks. A well-developed market determines
the fair value for the securities and derivatives, however there is no
comparable market for mortgage servicing rights. Therefore, the computed change
in value of the servicing rights for a specified change in interest rates may
not correlate to the change in value of the securities.
At June 30, 2006, financial instruments with a fair value of $83 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, 2006, the pre-tax results of this modeling
on reported earnings were:
12
Table 8 - Interest Rate Sensitivity - Mortgage Servicing
(Dollars in Thousands)
50 bp increase 50 bp decrease
Anticipated change in:
Fair value of mortgage servicing rights $ 2,796 $ (3,744)
Fair value of hedging instruments (2,823) 3,085
----------------- ----------------
Net $ (27) $ (659)
----------------- ----------------
Table 8 shows the non-linear effect of changes in mortgage commitment rates on
the value of mortgage servicing rights. A 50 basis point increase in rates is
expected to increase value by $2.8 million while a 50 basis point decrease is
expected to reduce value by $3.7 million. This considers that there is an upper
limit to appreciation in the value of servicing rights as rates rise due to the
contractual repayment terms of the loans and other factors. There is much less
of a limit on the speed at which mortgage loans may prepay in a declining rate
environment.
Wealth Management
BOK Financial provides a wide range of financial services through its wealth
management line of business, including trust and private financial services, and
brokerage and trading activities. This line of business includes the activities
of BOSC, Inc., a registered broker / dealer. Trust and private financial
services includes sales of institutional, investment and retirement products,
loans and other services to affluent individuals, businesses, not-for-profit
organizations, and governmental agencies. Wealth management services are
provided primarily to clients throughout Oklahoma, Texas and New Mexico.
Additionally, trust services include a nationally competitive, self-directed
401-(k) program and administrative and advisory services to the American
Performance family of mutual funds. Brokerage and trading activities within the
wealth management line of business consist of retail sales of mutual funds,
securities, and annuities, institutional sales of securities and derivatives,
bond underwriting and other financial advisory services. Customer hedging
programs are included in the Wealth Management Division.
Wealth Management contributed $6.1 million or 11% to consolidated net income for
the second quarter of 2006. This compared to $5.5 million or 11% of consolidated
net income for 2005.
Trust and private financial services provided $5.6 million of net income in
2006, an 18% increase over 2005. At June 30, 2006 and 2005, the wealth
management line of business was responsible for trust assets with aggregate
market values of $26.2 billion and $23.8 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 $9.7 billion of trust assets
at June 30, 2006, compared with $8.6 billion at June 30, 2005.
Brokerage and trading activities provided $567 thousand of total net income in
the second quarter of 2006 compared to $872 thousand provided in same period of
2005. A reduction in income from trading activities was partially offset by
growth in net income from our customer hedging programs.
Table 9 - Wealth Management
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- ------------- -------------- -------------
NIR (expense) from external sources $ 3,012 $ 3,010 $ 5,476 $ 5,611
NIR (expense) from internal sources 3,660 2,711 7,698 5,438
------------- ------------- -------------- -------------
Net interest revenue 6,672 5,721 13,174 11,049
Other operating revenue 29,555 26,554 60,105 53,252
Operating expense 26,045 23,149 51,236 46,130
Net income 6,128 5,476 13,377 10,980
Average assets $ 1,913,243 $ 1,709,268 $ 1,894,992 $ 1,584,700
Average economic capital 126,720 119,870 122,890 115,310
Return on assets 1.28% 1.29% 1.42% 1.40%
Return on economic capital 19.40% 18.32% 21.95% 19.20%
Efficiency ratio 71.89% 71.72% 69.92% 71.74%
13
Regional Banking
Regional Banking consists primarily of the corporate and commercial banking
services provided by Bank of Texas, Bank of Albuquerque, Bank of Arkansas,
Colorado State Bank and Trust, and Bank of Arizona in their respective markets.
They also include fiduciary services provided by Colorado State Bank and Trust.
Small businesses and middle-market corporations are Regional Banking's primary
customer focus. Regional Banking contributed $22.7 million or 41% to
consolidated net income during the second quarter of 2006. This compares with
$20.2 million or 40% of consolidated net income for the same period in 2005.
Growth in net income contributed by the regional banks came primarily from
operations in Colorado. Net income from Colorado operations increased $1.1
million or 50% compared with the same period of 2005. In addition, net income
for 2006 in Texas and Arizona increased $559 thousand and $444 thousand,
respectively.
Net income from operations in Colorado was $3.4 million for the second quarter
of 2006, compared with $2.3 million for the second quarter of 2005. Net interest
revenue increased $2.2 million or 33% due primarily to a $422 million increase
in average earning assets. Average loans increased $105 million while average
funds sold to the funds management unit increased $282 million. The growth in
earning assets was funded primarily by a $281 million increase in
interest-bearing deposits and $101 million of borrowings from the funds
management unit. Other operating revenue grew $400 thousand or 15% due primarily
to trust fees and commissions. At June 30, 2006 and 2005, Colorado regional
banking was responsible for trust assets with aggregate fair values of $2.5
billion and $2.2 billion, respectively under various fiduciary arrangements. We
have sole or joint discretionary authority over $955 million of trust assets at
June 30, 2006, compared with $860 million at June 30, 2005. Operating expenses
also increased 15% due to personnel costs and allocations of shared support
services.
Net income from Texas operations totaled $12.8 million for the second quarter of
2006, up $559 thousand over last year. Net interest revenue grew $3.6 million or
11%. Average earning assets increased $513 million, or 19% from the second
quarter of 2005. This increase resulted from a $438 million increase in average
loans and a $113 million increase in securities. The growth in average earning
assets was funded primarily by a $396 million increase in average deposits and a
$114 million increase in funds borrowed from the funds management unit.
Operating revenue increased $330 thousand due to deposit service charges and
check card revenue. Operating expenses increased $2.2 million or 12% due to a
$1.0 million or 10% increase in personnel costs and higher allocations for
shared services.
The increase in net income from New Mexico operations was also based largely on
a $671 thousand increase in net interest revenue. Average earning assets
decreased $93 million. Average loans increased $8 million while funds sold to
the funds management unit decreased $100 million. Average deposits in the New
Mexico market increased $133 million, including $110 million of consumer banking
deposits. Average funds borrowed from external sources decreased $201 million as
the Company centralized borrowings from external sources in the funds management
unit. Other operating income increased $264 thousand or 7% due primarily to
growth in transaction card revenue.
We continue to expand operations in the Arizona market since the acquisition of
Bank of Arizona in the second quarter of 2005. Outstanding loans attributed to
the Arizona market averaged $270 million for the second quarter of 2006, up $131
million from the second quarter of 2005's average of $139 million. Loan growth
included $47 million in our recently-opened Tucson loan production office.
Average deposits increased $7 million to $121 million. Loan growth was funded by
borrowings from the funds management unit.
14
Table 10 - Bank of Texas
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- ------------- -------------- -------------
NIR (expense) from external sources $ 41,190 $ 34,841 $ 80,200 $ 67,626
NIR (expense) from internal sources (5,345) (2,590) (9,526) (4,600)
------------- ------------- -------------- -------------
Net interest revenue 35,845 32,251 70,674 63,026
Other operating revenue 6,529 6,199 12,659 11,432
Operating expense 20,819 18,661 41,101 37,752
Net loans charged off 1,789 1,255 2,190 1,373
Net income 12,848 12,289 26,027 23,228
Average assets $ 3,610,316 $ 3,099,892 $ 3,578,237 $ 3,114,209
Average economic capital 247,010 166,940 229,220 166,920
Average invested capital 414,090 334,020 396,300 334,010
Return on assets 1.43% 1.59% 1.47% 1.50%
Return on economic capital 20.86% 29.53% 22.90% 28.06%
Return on average invested capital 12.44% 14.76% 13.24% 14.02%
Efficiency ratio 49.13% 48.53% 49.32% 50.70%
Table 11 - Bank of Albuquerque
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- ------------- -------------- -------------
NIR (expense) from external sources $ 15,992 $ 13,945 $ 31,665 $ 27,041
NIR (expense) from internal sources (4,126) (2,750) (8,011) (5,139)
------------- ------------- -------------- -------------
Net interest revenue 11,866 11,195 23,654 21,902
Other operating revenue 4,149 3,885 8,079 7,243
Operating expense 6,609 6,608 13,681 13,355
Net loans charged off 692 275 751 423
Net income 5,341 5,009 10,588 9,391
Average assets $ 1,446,500 $ 1,536,954 $ 1,459,371 $ 1,571,119
Average economic capital 75,080 84,630 75,410 79,440
Average invested capital 94,170 103,720 94,500 98,530
Return on assets 1.48% 1.31% 1.46% 1.21%
Return on economic capital 28.53% 23.74% 28.31% 23.84%
Return on average invested capital 22.75% 19.37% 22.59% 19.22%
Efficiency ratio 41.27% 43.82% 43.11% 45.82%
15
Table 12 - Bank of Arkansas
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- ------------- -------------- -------------
NIR (expense) from external sources $ 2,616 $ 2,510 $ 4,905 $ 5,448
NIR (expense) from internal sources (819) (842) (1,538) (1,584)
------------- ------------- -------------- -------------
Net interest revenue 1,797 1,668 3,367 3,864
Other operating revenue 275 292 529 554
Operating expense 870 843 1,727 1,719
Net loans charged off / (recovered) (70) 13 (28) 23
Net income 776 686 1,341 1,647
Average assets $ 188,922 $ 248,209 $ 192,477 $ 253,006
Average economic capital 15,680 10,460 14,650 10,640
Average invested capital 15,680 10,460 14,650 10,640
Return on assets 1.65% 1.11% 1.40% 1.31%
Return on economic capital 19.85% 26.31% 18.46% 31.22%
Return on average invested capital 19.85% 26.31% 18.46% 31.22%
Efficiency ratio 41.99% 43.01% 44.33% 38.91%
Table 13 - Colorado State Bank and Trust
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- ------------- -------------- -------------
NIR (expense) from external sources $ 12,870 $ 8,330 $ 24,420 $ 15,686
NIR (expense) from internal sources (3,929) (1,629) (6,954) (2,942)
------------- ------------- -------------- -------------
Net interest revenue 8,941 6,701 17,466 12,744
Other operating revenue 3,007 2,607 6,042 4,886
Operating expense 6,401 5,589 12,362 10,987
Net loans charged off (5) 23 (51) 1,651
Net income 3,392 2,258 6,841 3,050
Average assets $ 1,151,708 $ 726,730 $ 1,095,054 $ 697,852
Average economic capital 69,080 46,870 65,420 43,060
Average invested capital 111,060 88,860 107,410 85,050
Return on assets 1.18% 1.25% 1.26% 0.88%
Return on economic capital 19.69% 19.32% 21.09% 14.28%
Return on average invested capital 12.25% 10.19% 12.84% 7.23%
Efficiency ratio 53.57% 60.05% 52.59% 62.32%
16
Table 14 - Bank of Arizona
(Dollars in Thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
------------- ------------- -------------- -------------
NIR (expense) from external sources $ 6,076 $ 2,464 $ 10,760 $ ***
NIR (expense) from internal sources (2,441) (401) (4,030) ***
------------- ------------- -------------- -------------
Net interest revenue 3,635 2,063 6,730 ***
Other operating revenue 122 375 287 ***
Operating expense 3,206 2,530 5,757 ***
Net loans charged off / (recovered) (2) 21 2 ***
Net income 374 (70) 708 ***
Average assets $ 366,609 $ 209,947 $ 331,081 $ ***
Average economic capital 23,560 16,127 20,280 ***
Average invested capital 40,210 32,777 36,930 ***
Return on assets 0.41% (0.13)% 0.43% ***
Return on economic capital 6.37% (1.74)% 7.04% ***
Return on average invested capital 3.73% (0.86)% 3.87% ***
Efficiency ratio 85.33% 103.77% 82.04% ***
*** Data not applicable due to acquisition of Bank of Arizona in April 2005.
Financial Condition
Securities
Securities are classified as either held for investment, available for sale or
trading based upon asset/liability management strategies, liquidity and
profitability objectives and regulatory requirements. Investment securities,
which consist primarily of Oklahoma municipal bonds, are carried at cost and
adjusted for amortization of premiums or accretion of discounts. Management has
the ability and intent to hold these securities until they mature. Available for
sale securities, which may be sold prior to maturity, are carried at fair value.
Unrealized gains or losses, less deferred taxes, are recorded as accumulated
other comprehensive income in shareholders' equity. Certain mortgage-backed
securities, identified as mortgage trading securities, have been designated as
economic hedges of mortgage servicing rights. These securities are carried at
fair value with changes in fair value recognized in current period income. These
securities are held with the intent that gains or losses will offset changes in
the fair value of mortgage servicing rights. The Company also maintains a
separate trading securities portfolio. Trading portfolio securities, which are
also carried at fair value with changes in fair value recognized in current
period income, are acquired and held with the intent to sell at a profit.
The amortized cost of available for sale securities totaled $4.9 billion at both
June 30, 2006 and March 31, 2006. Mortgage-backed securities continued to
represent substantially all available for sale securities. As previously
discussed in the Net Interest Revenue section of this report, we hold mortgage
backed securities as part of our overall interest rate risk management strategy.
Management restricted growth in the securities portfolio during the second
quarter of 2006 in anticipation of an investment of up to $200 million in
bank-owned life insurance in the third quarter of 2006.
The primary risk of holding mortgage-backed securities comes from extension
during periods of rising interest rates or prepayment during periods of falling
interest rates. We evaluate this risk through extensive modeling of risk both
before making an investment and throughout the life of the security. The
effective duration of the mortgage-backed securities portfolio was approximately
3.1 years at June 30, 2006 and 2.8 years at March 31, 2006. Management estimates
that the effective duration of the mortgage-backed securities portfolio would
extend to 3.3 years assuming a 300 basis point immediate rate shock.
Net unrealized losses on available for sale securities totaled $187 million at
June 30, 2006 compared with net unrealized losses of $148 million at March 31,
2006. The increase in net unrealized losses during the quarter was due primarily
to rising interest rates. The aggregate gross amount of unrealized losses at
June 30, 2006 totaled $201 million. We evaluated the securities with unrealized
losses to determine if the losses were temporary. This evaluation considered
factors such as causes of the unrealized losses and prospects for recovery over
various interest rate scenarios and time periods. Management does not believe
that any of the unrealized losses are due to credit quality concerns. We also
considered our intent and ability to either hold or sell the securities. It is
our belief, based on currently available
17
information and our evaluation, that the unrealized losses in these securities
are temporary.
Loans
The aggregate loan portfolio at June 30, 2006 totaled $9.8 billion, a $593
million increase since March 31, 2006. Net loan growth accelerated to a 26%
annualized rate during the second quarter of 2006. Commercial loans increased
$300 million and commercial real estate loans grew $218 million.
---------------------------------------------------------------------------------------------------------------------
Table 15 - Loans
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2006 2006 2005 2005 2005
---------------------------------------------------------------------------------
Commercial:
Energy $ 1,514,353 $ 1,367,400 $ 1,399,417 $ 1,350,835 $ 1,278,885
Services 1,405,060 1,358,194 1,425,821 1,419,342 1,340,411
Wholesale/retail 879,203 850,013 793,032 804,628 777,440
Manufacturing 541,592 519,100 514,792 484,662 483,211
Healthcare 546,595 534,091 520,309 476,616 434,132
Agriculture 292,022 284,277 291,858 238,950 244,687
Other commercial and industrial 360,493 325,746 354,706 292,657 301,013
---------------------------------------------------------------------------------------------------------------------
Total commercial 5,539,318 5,238,821 5,299,935 5,067,690 4,859,779
---------------------------------------------------------------------------------------------------------------------
Commercial real estate:
Construction and land development 789,991 686,400 638,366 605,457 542,049
Multifamily 228,781 205,755 204,620 225,074 237,904
Other real estate loans 1,304,164 1,212,805 1,146,916 1,142,093 1,081,906
---------------------------------------------------------------------------------------------------------------------
Total commercial real estate 2,322,936 2,104,960 1,989,902 1,972,624 1,861,859
---------------------------------------------------------------------------------------------------------------------
Residential mortgage:
Secured by 1-4 family
residential properties 1,211,448 1,177,337 1,169,331 1,166,559 1,151,674
Residential mortgages held for sale 54,026 40,299 51,666 46,306 74,410
---------------------------------------------------------------------------------------------------------------------
Total residential mortgage 1,265,474 1,217,636 1,220,997 1,212,865 1,226,084
---------------------------------------------------------------------------------------------------------------------
Consumer 666,740 640,542 629,144 630,389 566,958
---------------------------------------------------------------------------------------------------------------------
Total $ 9,794,468 $ 9,201,959 $ 9,139,978 $ 8,883,568 $ 8,514,680
---------------------------------------------------------------------------------------------------------------------
The commercial loan portfolio totaled $5.5 billion at June 30, 2006, up $300
million during the second quarter of 2006. Energy loans totaled $1.5 billion or
15% of total loans. Outstanding energy loans increased $147 million, or 43%
annualized, during the second quarter of 2006 after decreasing $32 million
during the preceding quarter. Growth in energy loans during the second quarter
reflected an expectation that the range of energy prices will remain near or
exceed current levels. Approximately $1.2 billion of loans in the energy
portfolio was to oil and gas producers. The amount of credit available to these
customers generally depends on a percentage of the value of their proven energy
reserves based on anticipated prices. The energy category also included loans to
borrowers involved in the transportation and sale of oil and gas and to
borrowers that manufacture equipment or provide other services to the energy
industry.
The services sector of the portfolio totaled $1.4 billion, or 14% of the
Company's total outstanding loans. Loans in this sector of the portfolio
increased $47 million or 14% annualized since March 31, 2006. The services
sector consists of a large number of loans to a variety of businesses, including
communications, gaming and transportation services. Approximately $960 million
of the services sector is made up of loans with balances of less than $10
million.
Other notable loan concentrations by primary industry of the borrowers are
presented in Table 15.
BOK Financial participates in shared national credits when appropriate to obtain
or maintain business relationships with local customers. Shared national credits
are defined by banking regulators as credits of more than $20 million and with
three or more non-affiliated banks as participants. The outstanding principal
balances of these loans totaled $1.2 billion at both June 30, 2006 and March 31,
2006. Substantially all of these loans were to borrowers with local market
18
relationships. BOK Financial serves as the agent lender in approximately 31% of
the shared national credits, based on dollars committed. Our lending policies
generally avoid loans in which we do not have the opportunity to maintain or
achieve other business relationships with the customer.
Commercial real estate loans totaled $2.3 billion or 24% of the loan portfolio
at June 30, 2006. The outstanding balance of commercial real estate loans
increased $218 million, or 41% annualized since March 31, 2006. Construction and
land development loans totaled $790 million, up $104 million over March 31,
2006. Construction and land development included $608 million of loans secured
by single family residential lots and premises. The major components of other
commercial real estate loans were office buildings - $464 million and retail
facilities - $352 million.
Residential mortgage loans, excluding mortgage loans held for sale, included
$360 million of home equity loans, $406 million of loans held for business
relationship purposes, $236 million of adjustable rate mortgages and $178
million of loans held for community development. Consumer loans included $396
million of indirect automobile loans, up $25 million since March 31, 2006.
Approximately $350 million of these loans were purchased from dealers in
Oklahoma. Growth during the quarter included $16 million from indirect lending
activities in Arkansas and $13 million in Oklahoma.
Table 16 presents the distribution of the major loan categories among our
primary market areas.
19
---------------------------------------------------------------------------------------------------------------------
Table 16 - Loans by Principal Market Area
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2006 2006 2005 2005 2005
---------------------------------------------------------------------------------
Oklahoma:
Commercial $ 3,212,851 $ 3,074,406 $ 3,159,683 $ 3,101,209 $ 3,026,311
Commercial real estate 1,019,815 936,030 862,700 890,737 856,617
Residential mortgage 855,087 847,848 842,757 839,344 827,431
Residential mortgage held for sale 54,026 40,299 51,666 46,306 74,410
Consumer 479,508 468,920 466,180 472,899 425,318
---------------------------------------------------------------------------------
Total Oklahoma $ 5,621,287 $ 5,367,503 $ 5,382,986 $ 5,350,495 $ 5,210,087
---------------------------------------------------------------------------------
Texas:
Commercial $ 1,548,545 $ 1,420,860 $ 1,356,611 $ 1,294,606 $ 1,182,307
Commercial real estate 669,698 604,413 569,921 537,576 509,472
Residential mortgage 212,987 200,957 199,726 196,593 196,457
Consumer 84,212 87,669 89,017 89,329 90,245
---------------------------------------------------------------------------------
Total Texas $ 2,515,442 $ 2,313,899 $ 2,215,275 $ 2,118,104 $ 1,978,481
---------------------------------------------------------------------------------
New Mexico:
Commercial $ 334,984 $ 348,930 $ 383,325 $ 354,087 $ 340,378
Commercial real estate 237,020 228,955 232,564 223,236 219,175
Residential mortgage 73,281 68,810 65,784 65,203 63,821
Consumer 13,404 13,820 15,137 15,195 15,813
---------------------------------------------------------------------------------
Total Albuquerque $ 658,689 $ 660,515 $ 696,810 $ 657,721 $ 639,187
---------------------------------------------------------------------------------
Arkansas:
Commercial $ 80,539 $ 74,423 $ 79,719 $ 54,703 $ 54,703
Commercial real estate 87,080 80,529 75,483 85,600 76,803
Residential mortgage 15,067 13,069 13,044 12,097 11,674
Consumer 51,166 33,548 25,659 20,397 4,560
---------------------------------------------------------------------------------
Total Northwest Arkansas $ 233,852 $ 201,569 $ 193,905 $ 172,797 $ 147,740
---------------------------------------------------------------------------------
Colorado:
Commercial $ 299,380 $ 267,928 $ 270,108 $ 219,208 $ 210,142
Commercial real estate 155,453 134,771 133,537 132,741 125,120
Residential mortgage 21,113 20,383 21,918 26,186 27,292
Consumer 31,939 31,487 27,871 26,126 27,996
---------------------------------------------------------------------------------
Total Colorado $ 507,885 $ 454,569 $ 453,434 $ 404,261 $ 390,550
---------------------------------------------------------------------------------
Arizona:
Commercial $ 63,019 $ 52,274 $ 50,489 $ 43,877 $ 45,938
Commercial real estate 153,870 120,262 115,697 102,734 74,672
Residential mortgage 33,913 26,270 26,102 27,136 24,999
Consumer 6,511 5,098 5,280 6,443 3,026
---------------------------------------------------------------------------------
Total Arizona $ 257,313 $ 203,904 $ 197,568 $ 180,190 $ 148,635
---------------------------------------------------------------------------------
Total BOK Financial loans $ 9,794,468 $ 9,201,959 $ 9,139,978 $ 8,883,568 $ 8,514,680
---------------------------------------------------------------------------------
Loan Commitments
BOK Financial enters into certain off-balance sheet arrangements in the normal
course of business. These arrangements included loan commitments which totaled
$4.9 billion and standby letters of credit which totaled $481 million at June
30, 2006. Loan commitments may be unconditional obligations to provide financing
or conditional obligations that depend on the borrower's financial condition,
collateral value or other factors. Standby letters of credit are unconditional
commitments to guarantee the performance of our customer to a third party. Since
some of these commitments are expected to expire before being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
20
Derivatives with Credit Risk
BOK Financial offers programs that permit its customers to hedge various risks,
including fluctuations in energy and cattle prices, interest rates and foreign
exchange rates, or to take positions in derivative contracts. Each of these
programs work essentially the same way. Derivative contracts are executed
between the customers and BOK Financial. Offsetting contracts are executed
between the Company and selected counterparties to minimize the risk to us of
changes in commodity prices, interest rates, or foreign exchange rates. The
counterparty contracts are identical to the customer contracts, except for a
fixed pricing spread or a fee paid to us as compensation for administrative
costs, credit risk and profit.
These programs create credit risk for potential amounts due from customers and
from the counterparties. Customer credit risk is monitored through existing
credit policies and procedures. The effects of changes in commodity prices,
interest rates or foreign exchange rates are evaluated across a range of
possible options to determine the maximum exposure we are willing to have
individually to any customer. Customers may also be required to provide margin
collateral to further limit our credit risk.
Counterparty credit risk is evaluated through existing policies and procedures.
This evaluation considers the total relationship between BOK Financial and each
of the counterparties. Individual limits are established by management, approved
by Credit Administration and reviewed by the Asset / Liability Committee. Margin
collateral is required if the exposure between the Company and any counterparty
exceeds established limits. Based on declines in the counterparties' credit
rating, these limits are reduced and additional margin collateral is required.
A deterioration of the credit standing of one or more of the customers or
counterparties to these contracts may result in BOK Financial recognizing a loss
as the fair value of the affected contracts may no longer move in tandem with
the offsetting contracts. This could occur if the credit standing of the
customer or counterparty deteriorated such that either the fair value of
underlying collateral no longer supported the contract or the counterparty's
ability to provide margin collateral was impaired.
Derivative contracts are carried at fair value. At June 30, 2006, the fair value
of derivative contracts reported as assets under these programs totaled $414
million. This included energy contracts with fair values of $365 million,
interest rate contracts with fair values of $29 million and foreign exchange
contracts with fair values of $17 million. The aggregate fair values of
derivative contracts reported as liabilities under these programs totaled $416
million. At March 31, 2006, the fair values of assets and liabilities reported
under these programs totaled $401 million and $402 million, respectively.
Approximately 96% of the fair value of asset contracts was with customers. The
credit risk of these contracts is generally backed by energy production. The
remaining 4% was with counterparties. The maximum net exposure to any single
customer or counterparty totaled $89 million.
Summary of Loan Loss Experience
The reserve for loan losses, which is available to absorb losses inherent in the
loan portfolio, totaled $105 million at June 30, 2006, compared with $104
million at March 31, 2006 and $109 million at June 30, 2005. These amounts
represented 1.07%, 1.14% and 1.29% of outstanding loans, excluding loans held
for sale, at June 30, 2006, March 31, 2006 and June 30, 2005, respectively.
Losses on loans held for sale, principally mortgage loans accumulated for
placement into security pools, are charged to earnings through adjustment in the
carrying value. The reserve for loan losses also represented 337% of the
outstanding balance of nonperforming loans at June 30, 2006, compared with 323%
at March 31, 2006 and 269% at June 30, 2005. Nonperforming loans totaled $31
million at June 30, 2006, compared with $32 million at March 31, 2006 and $41
million at June 30, 2005. Net loans charged off during the second quarter of
2006 totaled $3.8 million, up from $1.6 million in the first quarter of 2006 and
$2.3 million for the second quarter of 2005.
The Company considers credit risk from loan commitments and letters of credit in
its evaluation of the adequacy of the reserve for loan losses. A separate
reserve for off-balance sheet credit risk is maintained. Table 17 presents the
trend of reserves for off-balance sheet credit losses and the relationship
between the reserve and loan commitments. The relationship between the combined
reserve for credit losses and outstanding loans is also presented to facilitate
comparison with peer banks and others who have not adopted this preferred
presentation. The provision for credit losses included the combined charge to
expense for both the reserve for loan losses and the reserve for off-balance
sheet credit losses. All losses incurred from lending activities will ultimately
be reflected in charge-offs against the reserve for loan
21
losses following funds advanced against outstanding commitments and after the
exhaustion of collection efforts. The reserve for off-balance sheet credit
losses would decrease and the reserve for loan losses would increase as
outstanding commitments are funded.
------------------------------------------------------------------------------------------------------------------------------
Table 17 - Summary of Loan Loss Experience
(In thousands)
Three Months Ended
----------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
2006 2006 2005 2005 2005
----------------------------------------------------------------------------------
Reserve for loan losses:
Beginning balance $ 104,143 $ 103,876 $ 109,621 $ 108,884 $ 108,958
Loans charged off:
Commercial 2,523 1,242 5,772 819 1,641
Commercial real estate - - 84 730 90
Residential mortgage 363 207 226 382 423
Consumer 2,995 2,700 3,497 3,380 2,890
------------------------------------------------------------------------------------------------------------------------------
Total 5,881 4,149 9,579 5,311 5,044
------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 720 847 826 711 1,435
Commercial real estate 6 40 8 7 73
Residential mortgage 20 97 133 21 16
Consumer 1,339 1,580 1,197 1,238 1,233
------------------------------------------------------------------------------------------------------------------------------
Total 2,085 2,564 2,164 1,977 2,757
------------------------------------------------------------------------------------------------------------------------------
Net loans charged off 3,796 1,585 7,415 3,334 2,287
Provision for loan losses 4,178 1,852 1,670 4,071 1,142
Additions due to acquisitions - - - - 1,071
------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 104,525 $ 104,143 $ 103,876 $ 109,621 $ 108,884
------------------------------------------------------------------------------------------------------------------------------
Reserve for off-balance sheet credit
losses:
Beginning balance $ 22,122 $ 20,574 $ 17,794 $ 17,889 $ 16,984
Provision for off-balance sheet credit losses (383) 1,548 2,780 (95) 873
Additions due to acquisitions - - - - 32
------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 21,739 $ 22,122 $ 20,574 $ 17,794 $ 17,889
------------------------------------------------------------------------------------------------------------------------------
Total provision for credit losses $ 3,795 $ 3,400 $ 4,450 $ 3,976 $ 2,015
------------------------------------------------------------------------------------------------------------------------------
Reserve for loan losses to loans
outstanding at period-end (1) 1. 07% 1.14% 1.14% 1.24% 1.29%
Net charge-offs (annualized)
to average loans (1) 0.16 0.07 0.33 0.16 0.11
Total provision for credit losses
(annualized) to average loans (1) 0.16 0.15 0.20 0.19 0.10
Recoveries to gross charge-offs 35.45 61.80 22.59 37.22 54.66
Reserve for loan losses as a multiple of
net charge-offs (annualized) 6.88x 16.43x 3.50x 8.22x 11.90x
Reserve for off-balance sheet credit losses to
off-balance sheet credit commitments 0.41% 0.36% 0.42% 0.41% 0.42%
Combined reserves for credit losses to loans
outstanding at period-end (1) 1.30 1.38 1.37 1.44 1.50
------------------------------------------------------------------------------------------------------------------------------
(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, 2006, specific impairment
reserves totaled $3.3 million on total impaired loans of $27 million. Required
specific impairment reserves decreased $1.7 million from March 31, 2006.
Nonspecific reserves are maintained for risks beyond factors specific to an
individual loan or those identified through migration analysis. A range of
potential losses is determined for each risk factor identified. At June 30,
2006, the ranges of potential losses for the more significant factors were:
General economic conditions - $4.6 million to $8.0 million
Concentration in large loans - $1.0 million to $2.0 million
The provision for credit losses totaled $3.8 million for the second quarter of
2006, compared with $3.4 million for the first quarter of 2006 and $2.0 for the
second quarter of 2005. Factors considered in determining the provision for
credit
22
losses included an increase in net losses during the quarter, partially offset
by decreases in the outstanding balances of classified, criticized and
non-performing loans.
Nonperforming Assets
Information regarding nonperforming assets, which totaled $39 million at June
30, 2006 and $40 million at March 31, 2006, is presented in Table 18.
Nonperforming assets included non-accrual loans and excluded loans 90 days or
more past due but still accruing interest. Non-accrual loans totaled $31 million
at June 30, 2006 and $32 million at March 31, 2006. Newly identified
non-accruing loans totaled $5 million during the second quarter of 2006.
Non-accruing loans decreased $3 million for loans charged off or foreclosed, and
$3 million for cash payments received. The increase in non-accruing consumer
loans during the second quarter of 2006 included a single $3.6 million loan that
was originated for personal investment purposes. Management does not believe the
increase indicates a change in the trend of level of non-accruing consumer
loans.
----------------------------------------------------------------------------------------------------------------------
Table 18 - Nonperforming Assets
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2006 2006 2005 2005 2005
-----------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 15,087 $ 17,073 $ 11,673 $ 17,920 $ 21,173
Commercial real estate 4,369 6,444 5,370 10,422 11,722
Residential mortgage 7,604 8,057 7,347 8,531 7,154
Consumer 3,916 655 772 480 478
----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 30,976 32,229 25,162 37,353 40,527
Other nonperforming assets 8,257 8,196 8,476 5,069 5,062
----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 39,233 $ 40,425 $ 33,638 $ 42,422 $ 45,589
----------------------------------------------------------------------------------------------------------------------
Ratios:
Reserve for loan losses to nonaccrual loans 337.44% 323.13% 412.83% 293.48% 268.67%
Combined reserves for credit
losses to nonaccrual loans 407.62 391.77 494.60 341.11 312.81
Nonaccrual loans to period-end loans (2) 0.32 0.35 0.28 0.42 0.48
----------------------------------------------------------------------------------------------------------------------
Loans past due (90 days) (1) $ 9,630 $ 3,919 $ 8,708 $ 10,027 $ 7,125
----------------------------------------------------------------------------------------------------------------------
(1) Includes residential mortgages guaranteed
by agencies of the U.S.Government. $ 2,310 $ 1,595 $ 2,021 $ 3,646 $ 3,713
(2) Excludes residential mortgage loans held for sale.
----------------------------------------------------------------------------------------------------------------------
The loan review process also identifies loans that possess more than the normal
amount of risk due to deterioration in the financial condition of the borrower
or the value of the collateral. Because the borrowers are still performing in
accordance with the original terms of the loan agreements, and no loss of
principal or interest is anticipated, these loans were not included in
Nonperforming Assets. Known information does, however, cause management concerns
as to the borrowers' ability to comply with current repayment terms. These
potential problem loans totaled $23 million at both June 30, 2006 and March 31,
2006. The current composition of potential problem loans by primary industry
included healthcare - $12 million, services - $7 million and real estate - $2
million.
Deposits
Deposit accounts represent our primary funding source. We compete for retail and
commercial deposits by offering a broad range of products and services and
focusing on customer convenience. Retail deposit growth is supported through our
Perfect Banking program, free checking and on-line Billpay services, an
extensive network of branch locations and ATMs and a 24-hour Express Bank call
center. Commercial deposit growth is supported by offering treasury management
and lockbox services.
23
Total deposits averaged $11.2 billion for the second quarter of 2006, up $71
million, or 3% annualized compared with average deposits in the first quarter of
2006. Average deposits attributed to consumer banking increased $91 million,
including $49 million in Oklahoma, $26 million in New Mexico and $15 million in
Texas, and average deposits attributed to wealth management increased $56
million, including $43 million in Colorado. The growth in consumer and wealth
management deposits resulted from promotional and incentive programs across the
Company. In addition, average deposits attributed to mortgage banking, which
consisted primarily of escrow funds, increased $24 million. Growth in average
consumer, wealth management and mortgage banking deposits was partially offset
by a $62 million decrease in average commercial banking deposits, including $35
million in Oklahoma and $32 million in Texas. Average deposits attributed to the
Company's funds management activities decreased $29 million due to lower public
funds and brokered deposits.
Core deposits, which we define as deposits of less than $100,000, excluding
public funds and brokered deposits, averaged $5.5 billion for the second quarter
of 2006, an annualized increase of 5%. Average core deposits comprised 49% of
total deposits for the second quarter of 2006. Deposit accounts with balances in
excess of $100,000 increased at a 3% annualized rate to $4.6 billion or 41% of
total average deposits for both the second and the first quarters of 2006.
The distribution of deposit accounts among our principal markets is shown in
Table 19.
24
---------------------------------------------------------------------------------------------------------------------
Table 19 - Deposits by Principal Market Area
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2006 2006 2005 2005 2005
---------------------------------------------------------------------------------
Oklahoma:
Demand $ 908,034 $ 950,582 $ 1,003,284 $ 959,169 $ 1,028,640
Interest-bearing:
Transaction 2,732,312 2,937,228 3,002,610 2,411,175 2,367,511
Savings 88,218 93,093 85,837 86,220 89,972
Time 2,662,770 2,623,352 2,564,337 2,728,224 2,450,730
---------------------------------------------------------------------------------
Total interest-bearing 5,483,300 5,653,673 5,652,784 5,225,619 4,908,213
---------------------------------------------------------------------------------
Total Oklahoma $ 6,391,334 $ 6,604,255 $ 6,656,068 $ 6,184,788 $ 5,936,853
---------------------------------------------------------------------------------
Texas:
Demand $ 638,157 $ 551,411 $ 615,732 $ 533,475 $ 478,855
Interest-bearing:
Transaction 1,530,491 1,455,856 1,535,570 1,299,279 1,292,938
Savings 26,370 27,827 27,398 29,620 29,635
Time 717,027 726,530 735,731 633,785 606,528
---------------------------------------------------------------------------------
Total interest-bearing 2,273,888 2,210,213 2,298,699 1,962,684 1,929,101
---------------------------------------------------------------------------------
Total Texas $ 2,912,045 $ 2,761,624 $ 2,914,431 $ 2,496,159 $ 2,407,956
---------------------------------------------------------------------------------
New Mexico:
Demand $ 147,307 $ 159,125 $ 129,289 $ 155,517 $ 139,107
Interest-bearing:
Transaction 410,166 408,160 381,099 338,706 306,230
Savings 16,860 17,805 17,839 17,614 17,875
Time 494,426 483,428 453,314 454,561 449,180
---------------------------------------------------------------------------------
Total interest-bearing 921,452 909,393 852,252 810,881 773,285
---------------------------------------------------------------------------------
Total New Mexico $ 1,068,759 $ 1,068,518 $ 981,541 $ 966,398 $ 912,392
---------------------------------------------------------------------------------
Arkansas:
Demand $ 11,521 $ 11,629 $ 10,429 $ 13,772 $ 10,890
Interest-bearing:
Transaction 20,577 26,675 22,354 23,335 24,816
Savings 1,072 1,051 1,058 1,268 1,284
Time 69,418 73,082 75,034 81,510 83,388
---------------------------------------------------------------------------------
Total interest-bearing 91,067 100,808 98,446 106,113 109,488
---------------------------------------------------------------------------------
Total Arkansas $ 102,588 $ 112,437 $ 108,875 $ 119,885 $ 120,378
---------------------------------------------------------------------------------
Colorado:
Demand $ 45,214 $ 56,419 $ 61,647 $ 51,978 $ 32,044
Interest-bearing:
Transaction 245,504 258,801 258,668 216,718 228,881
Savings 13,786 16,315 17,772 16,568 16,791
Time 379,239 309,068 264,020 221,753 117,130
---------------------------------------------------------------------------------
Total interest-bearing 638,529 584,184 540,460 455,039 362,802
---------------------------------------------------------------------------------
Total Colorado $ 683,743 $ 640,603 $ 602,107 $ 507,017 $ 394,846
---------------------------------------------------------------------------------
Arizona:
Demand $ 73,696 $ 55,421 $ 45,567 $ 42,784 $ 60,412
Interest-bearing:
Transaction 67,841 57,400 56,994 71,510 56,624
Savings 2,702 3,380 4,111 3,862 4,771
Time 4,077 4,608 5,624 6,802 6,574
---------------------------------------------------------------------------------
Total interest-bearing 74,620 65,388 66,729 82,174 67,969
---------------------------------------------------------------------------------
Total Arizona $ 148,316 $ 120,809 $ 112,296 $ 124,958 $ 128,381
---------------------------------------------------------------------------------
Total BOK Financial deposits $ 11,306,785 $ 11,308,246 $ 11,375,318 $ 10,399,205 $ 9,900,806
---------------------------------------------------------------------------------
25
Borrowings and Capital
BOK Financial (parent company) has a $100 million unsecured revolving line of
credit with certain banks that expires in December 2010. There was no
outstanding principal balance on this credit agreement at June 30, 2006.
Interest is based on LIBOR plus a defined margin that is determined by the
Company's credit rating or a base rate. This margin ranges from 0.375% to
1.125%. The margin currently applicable to borrowings against this line is
0.500%. The base rate is defined as the greater of the daily federal funds rate
plus 0.500% or the SunTrust Bank prime rate. Interest is generally paid monthly.
Facility fees are paid quarterly on the unused portion of the commitment at
rates that range from 0.100% to 0.250% based on the Company's credit rating.
This credit agreement includes certain restrictive covenants that limit the
Company's ability to borrow additional funds, to make investments and to pay
cash dividends on common stock. These covenants also require BOK Financial and
subsidiary banks to maintain minimum capital levels and to exceed minimum net
worth ratios. BOK Financial met all of the restrictive covenants at June 30,
2006.
The primary source of liquidity for BOK Financial is dividends from subsidiary
banks, which are limited by various banking regulations to net profits, as
defined, for the preceding two years. Dividends are further restricted by
minimum capital requirements. Based on the most restrictive limitations, the
subsidiary banks could declare up to $233 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 $166
million under this policy.
Equity capital for BOK Financial totaled $1.6 billion at June 30, 2006, up $18
million during the quarter. Retained earnings, net income less cash dividends,
provided $45 million of the increase. Growth in capital from retained earnings
was partially offset by a $25 million increase in accumulated other
comprehensive losses due primarily to net unrealized losses on available for
sale securities and $5 million of treasury stock purchases. The remaining
increase in capital during the second quarter of 2006 resulted primarily from
activity in employee stock options.
Capital is managed to maximize long-term value to the shareholders. Factors
considered in managing capital include projections of future earnings, asset
growth and acquisition strategies, and regulatory and debt covenant
requirements. Capital management may include subordinated debt issuance, share
repurchase and stock and cash dividends.
On April 26, 2005, the Board of Directors authorized a share repurchase program,
which replaced a previously authorized program. 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 programs may be suspended or
discontinued at any time without prior notice. During the second quarter of
2006, the Company repurchased 108,322 common shares at an average price of
$48.56 per share. The Company may repurchase 1.8 million common shares in the
future under this program.
Cash dividends of $10.0 million or $0.15 per common share were paid during the
second quarter of 2006. On July 25, 2006 the Board of Directors approved a
quarterly cash dividend of $0.15 per common share. The dividend will be payable
on or about August 31, 2006 to shareholders of record on August 14, 2006.
BOK Financial and its subsidiary banks are subject to various capital
requirements administered by federal agencies. Failure to meet minimum capital
requirements can result in certain mandatory and possibly additional
discretionary actions by regulators that could have material impact on
operations. These capital requirements include quantitative measures of assets,
liabilities, and off-balance sheet items. The capital standards are also subject
to qualitative judgments by the regulators.
For a banking institution to qualify as well capitalized, its Tier 1, Total and
Leverage capital ratios must be at least 6%, 10% and 5%, respectively. All of
the Company's banking subsidiaries exceeded the regulatory definition of well
capitalized. The capital ratios for BOK Financial on a consolidated basis are
presented in Table 20.
26
--------------------------------------------------------------------------------------------------------------------
Table 20 - Capital Ratios June 30, March 31, Dec. 31, Sept. 30, June 30,
2006 2006 2005 2005 2005
--------------------------------------------------------------------------
Average shareholders' equity
to average assets 9.49% 9.51% 9.30% 9.54% 9.56%
Risk-based capital:
Tier 1 capital 10.00 10.16 9.84 9.71 9.84
Total capital 12.14 12.41 12.10 12.04 12.54
Leverage 8.74 8.60 8.30 8.01 8.08
Off-Balance Sheet Arrangements
During 2002, BOK Financial agreed to a limited price guarantee on a portion of
the common shares issued to purchase Bank of Tanglewood. Any holder of BOK
Financial common shares issued in this acquisition may annually make a claim for
the excess of the guaranteed price over the actual sales price of any shares
sold during a 60-day period after each of the first five anniversary dates after
October 25, 2002. The maximum annual number of shares subject to this guarantee
is 210,069. The price guarantee is non-transferable and non-cumulative. BOK
Financial may elect, in its sole discretion, to issue additional shares of
common stock or to pay cash to satisfy any obligation under the price guaranty.
The Company will have no obligation to issue additional common shares or pay
cash to satisfy any benchmark price protection obligation if the market value
per share of BOK Financial common stock remains above the highest benchmark
price of $42.53. The closing price of BOK Financial common stock on June 30,
2006 was $49.67 per share.
Market Risk
Market risk is a broad term for the risk of economic loss due to adverse changes
in the fair value of a financial instrument. These changes may be the result of
various factors, including interest rates, foreign exchange prices, commodity
prices or equity prices. Financial instruments that are subject to market risk
can be classified either as held for trading or held for purposes other than
trading.
BOK Financial is subject to market risk primarily through the effect of changes
in interest rates on both its assets held for purposes other than trading and
trading assets. The effects of other changes, such as foreign exchange rates,
commodity prices or equity prices do not pose significant market risk to BOK
Financial. BOK Financial has no material investments in assets that are affected
by changes in foreign exchange rates or equity prices. Energy derivative
contracts, which are affected by changes in commodity prices, are matched
against offsetting contracts as previously discussed.
Responsibility for managing market risk rests with the Asset / Liability
Committee that operates under policy guidelines established by the Board of
Directors. The acceptable negative variation in net interest revenue, net income
or economic value of equity due to a specified basis point increase or decrease
in interest rates is generally limited by these guidelines to +/- 10%. These
guidelines also set maximum levels for short-term borrowings, short-term assets,
public funds, and brokered deposits, and establish minimum levels for unpledged
assets, among other things. Compliance with these guidelines is reviewed
monthly.
Interest Rate Risk - Other than Trading
BOK Financial has a large portion of its earning assets in variable rate loans
and a large portion of its liabilities in demand deposit accounts and interest
bearing transaction accounts. Changes in interest rates affect earning assets
more rapidly than interest bearing liabilities in the short term. Management has
adopted several strategies to position the balance sheet to be neutral to
interest rate changes. As previously noted in the Net Interest Revenue section
of this report, management acquires securities that are funded by borrowings in
the capital markets. The average duration of these securities is expected to be
approximately 3.1 years based on a range of interest rate and prepayment
assumptions.
BOK Financial also uses interest rate swaps in managing its interest rate
sensitivity. These products are generally used to more closely match interest on
certain variable-rate loans with funding sources and long-term certificates of
deposit with earning assets. During the second quarter of 2006, net interest
revenue was reduced by $2.1 million from periodic settlements of these
contracts. Net interest revenue was decreased by $187 thousand from periodic
settlements of these contracts in the second quarter of 2005. These contracts
are carried on the balance sheet at fair value and changes in fair
27
value are reported in income as derivatives gains or losses. A net loss of $173
thousand was recognized in the second quarter of 2006 compared to a net loss of
$ 498 thousand in same period of 2005 from adjustments of these swaps and hedged
liabilities to fair value. Credit risk from interest rate swaps is closely
monitored as part of our overall process of managing credit exposure to other
financial institutions.
The effectiveness of these strategies in managing the overall interest rate risk
is evaluated through the use of an asset/liability model. BOK Financial performs
a sensitivity analysis to identify more dynamic interest rate risk exposures,
including embedded option positions, on net interest revenue, net income and
economic value of equity. A simulation model is used to estimate the effect of
changes in interest rates over the next 12 and 24 months based on eight interest
rate scenarios. Two specified interest rate scenarios are used to evaluate
interest rate risk against policy guidelines. The first scenario assumes a
sustained parallel 200 basis point increase and the second assumes a sustained
parallel 200 basis point decrease in interest rates. The Company also performs a
sensitivity analysis based on a "most likely" interest rate scenario, which
includes non-parallel shifts in interest rates. An independent source is used to
determine the most likely interest rate scenario.
The Company's primary interest rate exposures included the Federal Funds rate,
which affects short-term borrowings, and the prime lending rate and LIBOR, which
are the basis for much of the variable-rate loan pricing. Additionally, mortgage
rates directly affect the prepayment speeds for mortgage-backed securities and
mortgage servicing rights. Derivative financial instruments and other financial
instruments used for purposes other than trading are included in this
simulation. The model incorporates assumptions regarding the effects of changes
in interest rates and account balances on indeterminable maturity deposits based
on a combination of historical analysis and expected behavior. The impact of
planned growth and new business activities is factored into the simulation
model. The effects of changes in interest rates on the value of mortgage
servicing rights are excluded from Table 21 due to the extreme volatility over
such a large rate range. The effects of interest rate changes on the value of
mortgage servicing rights and securities identified as economic hedges are
presented in the Lines of Business - Mortgage Banking section of this report.
The simulations used to manage market risk are based on numerous assumptions
regarding the effects of changes in interest rates on the timing and extent of
repricing characteristics, future cash flows and customer behavior. These
assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net interest revenue, net income or economic value of equity
or precisely predict the impact of higher or lower interest rates on net
interest revenue, net income or economic value of equity. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes, market conditions and management strategies, among other factors.
Table 21 - Interest Rate Sensitivity
(Dollars in Thousands)
200 bp Increase 200 bp Decrease Most Likely
-------------------------- --------------------------- -------------------------
2006 2005 2006 2005 2006 2005
------------- ------------ ------------ -------------- ------------ ------------
Anticipated impact over the
next twelve months on
net interest revenue $ (4,269) $ 8,363 $ 6,052 *** $ (501) $ 4,726
(0.8)% 1.8% 1.1% *** (0.1)% 1.0%
-------------------------------- --------------- ------------ --- ----------- -------------- -- ----------- ------------
***A 200 basis point decrease was not computed in 2005 due to low market
interest rates.
Trading Activities
BOK Financial enters into trading activities both as an intermediary for
customers and for its own account. As an intermediary, BOK Financial will take
positions in securities, generally mortgage-backed securities, government agency
securities, and municipal bonds. These securities are purchased for resale to
customers, which include individuals, corporations, foundations and financial
institutions. BOK Financial will also take trading positions in U.S. Treasury
securities, mortgage-backed securities, municipal bonds and financial futures
for its own account. These positions are taken with the objective of generating
trading profits. Both of these activities involve interest rate risk.
A variety of methods are used to manage the interest rate risk of trading
activities. These methods include daily marking of all positions to market
value, independent verification of inventory pricing, and position limits for
each trading activity. Hedges in either the futures or cash markets may be used
to reduce the risk associated with some trading programs.
28
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, 2006, the VAR was $557 thousand. The
greatest VAR during the quarter was $650 thousand.
Controls and Procedures
As required by Rule 13a-15(b), BOK Financial's management, including the Chief
Executive Officer and Chief Financial Officer, conducted an evaluation as of the
end of the period covered by their report, of the effectiveness of the Company's
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures were effective as
of the end of the period covered by this report. As required by Rule 13a-15(d),
BOK Financial's management, including the Chief Executive Officer and Chief
Financial Officer, also conducted an evaluation of the Company's internal
controls over financial reporting to determine whether any changes occurred
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting. Based on that evaluation, there has been no such change
during the quarter covered by this report.
Forward-Looking Statements
This report contains forward-looking statements that are based on management's
beliefs, assumptions, current expectations, estimates, and projections about BOK
Financial, the financial services industry and the economy in general. Words
such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans,"
"projects," variations of such words and similar expressions are intended to
identify such forward-looking statements. Management judgments relating to and
discussion of the provision and reserve for loan losses involve judgments as to
expected events and are inherently forward-looking statements. Assessments that
BOK Financial's acquisitions and other growth endeavors will be profitable are
necessary statements of belief as to the outcome of future events, based in part
on information provided by others that BOK Financial has not independently
verified. These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions that are difficult to predict with
regard to timing, extent, likelihood and degree of occurrence. Therefore, actual
results and outcomes may materially differ from what is expressed, implied, or
forecasted in such forward-looking statements. Internal and external factors
that might cause such a difference include, but are not limited to: (1) the
ability to fully realize expected cost savings from mergers within the expected
time frames, (2) the ability of other companies on which BOK Financial relies to
provide goods and services in a timely and accurate manner, (3) changes in
interest rates and interest rate relationships, (4) demand for products and
services, (5) the degree of competition by traditional and nontraditional
competitors, (6) changes in banking regulations, tax laws, prices, levies, and
assessments, (7) the impact of technological advances and (8) trends in customer
behavior as well as their ability to repay loans. BOK Financial and its
affiliates undertake no obligation to update, amend, or clarify forward-looking
statements, whether as a result of new information, future events or otherwise.
29
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Consolidated Statements of Earnings (Unaudited)
(In Thousands Except Share and Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
----------- --- -------------- ---- -------------- ---- ------------
Interest Revenue
Loans $ 180,999 $ 132,966 $ 346,926 $ 251,776
Taxable securities 56,632 51,276 111,678 100,632
Tax-exempt securities 2,173 1,782 4,382 3,575
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Total securities 58,805 53,058 116,060 104,207
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Trading securities 229 154 393 335
Funds sold and resell agreements 407 156 646 320
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Total interest revenue 240,440 186,334 464,025 356,638
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Interest Expense
Deposits 80,026 47,833 152,880 91,447
Borrowed funds 34,378 22,988 62,868 39,857
Subordinated debentures 4,930 2,980 9,845 5,207
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Total interest expense 119,334 73,801 225,593 136,511
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Net Interest Revenue 121,106 112,533 238,432 220,127
Provision for Credit Losses 3,795 2,015 7,195 4,015
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Net Interest Revenue After Provision for Credit Losses 117,311 110,518 231,237 216,112
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Other Operating Revenue
Brokerage and trading revenue 11,427 10,404 23,437 21,740
Transaction card revenue 19,951 17,979 38,459 34,522
Trust fees and commissions 17,751 16,259 35,696 32,275
Deposit service charges and fees 26,341 25,347 50,327 47,520
Mortgage banking revenue 7,195 8,550 13,984 14,128
Other revenue 10,931 8,160 21,742 15,557
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Total fees and commissions 93,596 86,699 183,645 165,742
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Gain on sales of assets 39 5,937 957 6,909
Gain (loss) on securities, net (2,583) 2,266 (3,804) (371)
Gain (loss) on derivatives, net (172) (311) (481) 467
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Total other operating revenue 90,880 94,591 180,317 172,747
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Other Operating Expense
Personnel 72,369 65,333 143,601 123,772
Business promotion 4,802 3,870 9,605 8,300
Professional fees and services 4,362 4,492 8,276 8,111
Net occupancy and equipment 13,199 12,650 26,225 24,744
Data processing and communications 16,157 16,381 33,152 31,480
Printing, postage and supplies 4,001 3,629 7,906 7,244
Net losses and operating expenses of repossessed assets 54 316 273 624
Amortization of intangible assets 1,359 1,808 2,729 3,345
Mortgage banking costs 2,839 3,387 5,926 7,000
Change in fair value of mortgage servicing rights (3,613) - (10,694) -
Provision for impairment of mortgage servicing rights - 7,088 - 1,464
Other expense 6,598 7,056 12,507 12,085
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Total other operating expense 122,127 126,010 239,506 228,169
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Income Before Taxes 86,064 79,099 172,048 160,690
Federal and state income tax 31,080 28,634 62,316 58,170
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Net Income $ 54,984 $ 50,465 $ 109,732 $ 102,520
--------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------
Earnings Per Share:
Basic $ 0.82 $ 0.79 $ 1.64 $ 1.66
Diluted $ 0.82 $ 0.75 $ 1.63 $ 1.53
Average Shares Used in Computation:
Basic 66,775,117 63,779,343 66,745,422 61,618,602
Diluted 67,317,681 66,986,428 67,289,335 66,967,146
--------------------------------------------------------- --- ------------ --- -------------- ---- -------------- ---- ------------
See accompanying notes to consolidated financial statements.
30
--------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
(In Thousands Except Share Data)
June 30, December 31, June 30,
2006 2005 2005
--------------------------------------------------
(Unaudited) (Unaudited)
Assets
Cash and due from banks $ 618,064 $ 684,857 $ 653,047
Funds sold and resell agreements 25,469 14,465 27,176
Trading securities 25,702 18,633 10,588
Securities:
Available for sale 4,728,434 4,821,575 4,311,759
Available for sale securities pledged to creditors - - 576,207
Investment (fair value: June 30, 2006 - $217,319;
December 31, 2005 - $243,406;
June 30, 2005 - $218,181) 223,411 245,125 220,401
Mortgage trading securities 82,983 - -
--------------------------------------------------------------------------------------------------------------------
Total securities 5,034,828 5,066,700 5,108,367
--------------------------------------------------------------------------------------------------------------------
Loans 9,794,468 9,139,978 8,514,680
Less reserve for loan losses (104,525) (103,876) (108,885)
--------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 9,689,943 9,036,102 8,405,795
--------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 177,142 179,627 174,526
Accrued revenue receivable 100,138 99,874 82,868
Intangible assets, net 260,293 263,022 260,279
Mortgage servicing rights, net 73,103 54,097 46,200
Real estate and other repossessed assets 8,257 8,476 5,062
Bankers' acceptances 30,430 33,001 40,949
Derivative contracts 414,367 452,878 271,692
Other assets 466,349 415,337 367,603
--------------------------------------------------------------------------------------------------------------------
Total assets $ 16,924,085 $ 16,327,069 $ 15,454,152
--------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Noninterest-bearing demand deposits $ 1,823,929 $ 1,865,948 $ 1,749,948
Interest-bearing deposits:
Transaction 5,006,891 5,257,295 4,277,000
Savings 149,008 154,015 160,328
Time 4,326,957 4,098,060 3,713,530
--------------------------------------------------------------------------------------------------------------------
Total deposits 11,306,785 11,375,318 9,900,806
--------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase agreements 2,342,339 1,337,911 2,123,589
Other borrowings 727,726 1,054,298 1,059,694
Subordinated debentures 290,522 295,964 297,882
Accrued interest, taxes and expense 74,580 92,219 66,026
Bankers' acceptances 30,430 33,001 40,949
Due on unsettled security transactions 3,335 8,429 99,664
Derivative contracts 437,182 466,669 281,314
Other liabilities 128,176 124,106 103,253
--------------------------------------------------------------------------------------------------------------------
Total liabilities 15,341,075 14,787,915 13,973,177
--------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock ($.00006 par value; 2,500,000,000 shares authorized;
shares issued and outstanding: June 30, 2006 - 68,291,976;
December 31, 2005 - 67,904,533; June 30, 2005 - 67,556,168) 4 4 4
Capital surplus 670,662 656,579 642,605
Retained earnings 1,083,819 990,422 904,757
Treasury stock (shares at cost: June 30, 2006 - 1,451,735;
December 31, 2005 - 1,202,125; June 30, 2005 - 1,101,838) (51,780) (40,040) (35,354)
Accumulated other comprehensive loss (119,695) (67,811) (31,037)
--------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,583,010 1,539,154 1,480,975
--------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 16,924,085 $ 16,327,069 $ 15,454,152
--------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
31
---------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Changes in
Shareholders' Equity (Unaudited)
(In Thousands)
Accumulated
Other
Preferred Stock Common Stock Comprehensive Capital Retained Treasury Stock
------------------------------------ --------------------
Shares Amount Shares Amount Loss Surplus Earnings Shares Amount Total
----------------------------------------------------------------------------------------------------
Balances at
December 31, 2004 249,975 $ 12 60,421 $ 4 $ (11,625) $631,747 $809,261 998 $(30,905)$1,398,494
Comprehensive income:
Net income - - - - - - 102,520 - - 102,520
Other comprehensive
income, net of tax (1) - - - - (19,412) - - - - (19,412)
----------
Comprehensive income 83,108
----------
Treasury stock purchase - - - - - - - 60 (2,439) (2,439)
Exercise of stock options - - 214 - - 5,242 - 44 (2,010) 3,232
Conversion of preferred
stock to common (249,975) (12) 6,921 - - 12 - - - -
Tax benefit on exercise of
stock options - - - - - 1,005 - - - 1,005
Stock-based compensation - - - - - 4,599 - - - 4,599
Cash dividends on:
Preferred stock - - - - - - (375) - - (375)
Common stock - - - - - - (6,649) - - (6,649)
---------------------------------------------------------------------------------------------------------------------------
Balances at
June 30, 2005 - $ - 67,556 $ 4 $ (31,037) $ 642,605 $ 904,757 1,102 $(35,354)$1,480,975
---------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2005 - $ - 67,905 $ 4 $ (67,811) $ 656,579 $ 990,422 1,202 $(40,040)$1,539,154
Effect of implementing
FAS 156, net of
income taxes - - - - - - 383 - - 383
Comprehensive income:
Net income - - - - - - 109,732 - - 109,732
Other comprehensive
income, net of tax (1) - - - - (51,884) - - - - (51,884)
----------
Comprehensive income 57,848
----------
Treasury stock purchase - - - - - - - 169 (8,019) (8,019)
Exercise of stock options - - 387 - - 9,423 - 81 (3,721) 5,702
Tax benefit on exercise of
stock options - - - - - 1,518 - - - 1,518
Stock-based compensation - - - - - 3,142 - - - 3,142
Cash dividends on
common stock - - - - - - (16,718) - - (16,718)
---------------------------------------------------------------------------------------------------------------------------
Balances at
June 30, 2006 - $ - 68,292 $ 4 $ (119,695) $ 670,662 $1,083,819 1,452 $(51,780)$1,583,010
---------------------------------------------------------------------------------------------------------------------------
(1) June 30, 2006 June 30, 2005
------------- -------------
Changes in other comprehensive loss:
Unrealized losses on securities $ (84,970) $ (29,291)
Unrealized losses on cash flow hedges (183) (1,507)
Tax benefit on unrealized losses 30,843 11,149
Reclassification adjustment for losses
realized and included in net income 3,804 371
Reclassification adjustment for tax
benefit on realized losses (1,378) (134)
-------------------------------
Net change in other comprehensive loss $ (51,884) $ (19,412)
-------------------------------
See accompanying notes to consolidated financial statements.
32
---------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Six Months Ended June 30,
---------------------------------------------
2006 2005
---------------------------------------------
Cash Flows From Operating Activities:
Net income $ 109,732 $ 102,520
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses 7,195 4,015
Change in fair value of mortgage servicing rights (10,694) -
Provision for mortgage servicing rights impairment - 1,464
Unrealized losses from derivatives 5,710 6,405
Tax benefit on exercise of stock options (1,518) 1,005
Stock-based compensation 4,958 1,392
Depreciation and amortization 19,671 21,709
Net accretion of securities discounts and premiums (4,908) (390)
Net gain on sale of assets (2,643) (12,682)
Mortgage loans originated for resale (360,820) (336,291)
Proceeds from sale of mortgage loans held for resale 374,165 286,895
Change in trading securities, including mortgage trading securities (75,060) (896)
Change in accrued revenue receivable (264) (3,224)
Change in other assets (18,612) (17,901)
Change in accrued interest, taxes and expense (17,639) (5,036)
Change in other liabilities 2,188 (6,769)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 31,461 42,216
---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities 39,405 36,969
Proceeds from maturities of available for sale securities 258,666 484,713
Purchases of investment securities (18,240) (36,279)
Purchases of available for sale securities (408,732) (1,780,288)
Proceeds from sales of investment securities 447 -
Proceeds from sales of available for sale securities 142,073 969,184
Loans originated or acquired net of principal collected (735,081) (612,790)
Proceeds from (payments on) derivative asset contracts (28,228) 2,661
Net change in other investment assets 978 31,442
Proceeds from disposition of assets 77,469 83,664
Purchases of assets (24,848) (21,310)
Cash and cash equivalents of subsidiaries and branches acquired and sold, net - (29,093)
---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (696,091) (871,127)
---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net change in demand deposits, transaction deposits and savings accounts (297,430) 156,730
Net change in time deposits 233,133 71,138
Net change in other borrowings 677,856 707,776
Pay down of other borrowings - (95,000)
Issuance of subordinated debenture - 147,855
Proceeds from (payments on) derivative liability contracts 27,305 (8,145)
Net change in derivative margin accounts (9,412) (152,617)
Change in amount receivable (due) on unsettled security transactions (5,094) 156,537
Issuance of preferred, common and treasury stock, net 5,702 3,232
Tax benefit on exercise of stock options 1,518 -
Repurchase of common stock (8,019) (2,439)
Dividends paid (16,718) (7,024)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 608,841 978,043
---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (55,789) 149,132
Cash and cash equivalents at beginning of period 699,322 531,091
---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 643,533 $ 680,223
---------------------------------------------------------------------------------------------------------------------------
Cash paid for interest $ 224,281 $ 134,720
---------------------------------------------------------------------------------------------------------------------------
Cash paid for taxes $ 61,868 $ 54,334
---------------------------------------------------------------------------------------------------------------------------
Net loans transferred to repossessed real estate and other assets $ 3,195 $ 4,494
---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
33
Notes to Consolidated Financial Statements (Unaudited)
(1) Accounting Policies
Basis of Presentation
The unaudited consolidated financial statements of BOK Financial Corporation
("BOK Financial" or "the Company") have been prepared in accordance with
accounting principles for interim financial information generally accepted in
the United States and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
The unaudited consolidated financial statements include accounts of BOK
Financial and its subsidiaries, principally Bank of Oklahoma, N.A. and its
subsidiaries ("BOk"), Bank of Texas, N.A., Bank of Arkansas, N.A., Bank of
Albuquerque, N.A. Colorado State Bank and Trust, N.A., Bank of Arizona, N.A.,
and BOSC, Inc. Certain prior period amounts have been reclassified to conform to
current period classification. Reclassification affecting the Consolidated
Balance Sheet as of December 31, 2005 included an increase in other assets from
$341 million to $415 million and accrued interest, taxes and expenses from $18
million to $92 million. This reclassification consistently presents deferred tax
assets for all periods presented.
The financial information should be read in conjunction with BOK Financial's
2005 Form 10-K filed with the Securities and Exchange Commission, which contains
audited financial statements.
Newly Adopted and Pending Accounting Policies
BOK Financial adopted Statement of Financial Accounting Standards No. 123-R,
"Share-Based Payments" ("FAS 123-R") as of January 1, 2006. FAS 123-R requires
companies to recognize in income statements the grant-date fair value of stock
options and other equity-based compensation issued to employees. Share-based
payments that will settle in equity instruments are measured at grant-date fair
value and not remeasured for subsequent changes in fair value. FAS 123-R also
requires that share-based payments that meet specified criteria to be classified
as liability awards and carried at current fair value. Fair value of liability
awards are remeasured at each balance sheet date until the award is settled. BOK
Financial had previously adopted the preferred income statement recognition
methods of the original FAS 123 retroactively to its effective date of December
15, 1994. The adoption of FAS 123-R did not significantly affect the Company's
financial statements.
Stock options outstanding at June 30, 2006 totaled 3,810,282, including 869,564
of vested options and 2,940,718 of unvested options. Management expects that
approximately 2.9 million of the unvested options will vest according to their
contractual terms. The weighted average exercise prices of vested and unvested
options are $25.53 and $40.27, respectively.
The intrinsic value of options exercised during the second quarter and first
half of 2006 was $1.5 million and $5.9 million, respectively. The intrinsic
value of options exercised during the second quarter and first half of 2005 was
$2.2 million and $4.5 million, respectively. The Company received cash proceeds
from stock options exercised of $1.1 million and $5.7 million, respectively, in
the second quarter and first half of 2006. The Company received cash proceeds
from stock options exercised of $1.3 million and $3.2 million, respectively, in
the second quarter and first half of 2005.
Stock options are generally awarded annually. The determination of the persons
to whom stock options will be awarded and the number of options awarded will be
made prior to, and the exercise price of the options will be set at the closing
price on, the second business Friday in January.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 156, "Accounting for Servicing of Financial Assets"
("FAS 156") during the first quarter of 2006. FAS 156 permitted companies that
service financial assets to elect to carry servicing rights at either fair value
or at the lower of amortized cost or fair value. Previously, generally accepted
accounting principles required servicing rights to be carried at the lower of
amortized cost or fair value. FAS 156 is effective for fiscal years that begin
after September 15, 2006. Early adoption is permitted as of the beginning of an
entity's fiscal year, provided that the entity has not
34
yet issued any financial statements for that year.
FAS 156 also permitted companies that service financial assets to reclassify
securities designated as an economic hedge of the servicing rights from the
available for sale classification to trading without tainting management's
classification of the remaining available for sale securities portfolio.
Effective January 1, 2006, BOK Financial designated all mortgage loan servicing
rights to be carried at fair value. An adjustment to initially record servicing
rights at fair value increased retained earnings by $351 thousand, net of income
taxes. Additionally, certain specifically-identified securities that had been
designated as economic hedges of the mortgage servicing rights were reclassified
from available for sale to trading. These securities are identified as "mortgage
trading securities" and are separate from the Company's normal securities
trading activities. An adjustment to initially record these securities at fair
value increased retained earnings by $32 thousand, net of income taxes.
See Note 3 - Mortgage Banking Activities for additional disclosures required by
FAS 156.
The Financial Accounting Standards Board issued FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" ("FIN 48"), in June 2006. FIN 48
requires that an uncertain tax position must be more likely than not of being
upheld upon audit by the taxing authority for the benefit to be recognized. The
benefit of uncertain tax positions that do not meet this criterion may not be
recognized. In addition, FIN 48 requires that the amount of tax benefit that may
be recognized for uncertain positions that meet the recognition criterion shall
consider the amounts and probabilities of outcomes that could be realized upon
settlement.
FIN 48 is effective for fiscal years beginning after December 15, 2006.
Management is in the process of determining the effect, if any, the adoption of
FIN 48 will have on the financial statements.
(2) Derivatives
The fair values of derivative contracts at June 30, 2006 are as follows (in
thousands):
Assets Liabilities
----------------------------
Customer Risk Management Programs:
Interest rate contracts $29,212 $30,700
Energy contracts 365,481 365,134
Cattle contracts 2,723 2,723
Foreign exchange contracts 16,948 16,948
--------------------------------------------- ----------- --- ------------
Total Customer Derivatives 414,364 415,505
Interest Rate Risk Management Programs:
Interest rate contracts 3 21,677
--------------------------------------------- ----------- --- ------------
Total Derivative Contracts $414,367 $437,182
--------------------------------------------- ----------- --- ------------
(3) Mortgage Banking Activities
BOK Financial implemented Statement of Financial Accounting Standards No. 156,
"Accounting for Servicing of Financial Assets" in the first quarter of 2006. An
initial adjustment of the mortgage servicing rights to fair value of
approximately $351 thousand, net of income taxes, was recognized as an increase
to retained earnings in the same period. Also upon implementation of FAS 156,
certain securities designated as an economic hedge of mortgage servicing rights
were transferred from the available for sale classification to trading.
Approximately $32 thousand was transferred from accumulated other comprehensive
income to retained earnings for the net of tax effect of this reclassification.
At June 30, 2006, BOK Financial owned the rights to service 56,686 mortgage
loans with outstanding principal balances of $5.0 billion, including $462
million serviced for affiliates. The weighted average interest rate and
remaining term was 6.12% and 276 months, respectively.
On March 31, 2006, the Company paid approximately $6.8 million to acquire the
rights to service approximately
35
$480 million of mortgage loans. Substantially all of these loans are to
borrowers in our primary market areas.
For the three and six months ended June 30, 2006, mortgage banking revenue
includes servicing fee income of $4.2 million and $8.3 million, respectively.
For the three and six months ended June 30, 2005, mortgage banking revenue
includes servicing fee income of $4.1 million and $8.2 million, respectively.
Activity in capitalized mortgage servicing rights and related valuation
allowance during the six months ending June 30, 2006 is as follows (in
thousands):
Capitalized Mortgage Servicing Rights
---------------------------------------------
Valuation
Purchased Originated Total Allowance Net
---------------- ------------ --------------- ------------- ---------------
Balance at
December 31, 2005 $ 8,606 $ 52,905 $ 61,511 $ (7,414) $ 54,097
Adoption of FAS 156 effective
January 1, 2006 (117) (6,747) (6,864) 7,414 550
Additions, net 6,773 6,168 12,941 - 12,941
Change in fair value due to loan runoff (1,154) (4,025) (5,179) - (5,179)
Change in fair value due to market
changes 1,813 8,881 10,694 - 10,694
---------------------------------------- -- ---------- --- ---------- -- ---------- -- ------------- --- -----------
Balance at June 30, 2006 (1) $ 15,921 $ 57,182 $ 73,103 $ - $ 73,103
---------------------------------------- -- ---------- --- ---------- -- ---------- -- ------------- --- -----------
(1) Excludes approximately $913,000 of loan servicing rights on mortgage loans
originated prior to the adoption of FAS 122.
Fair value is determined by discounting the projected net cash flows.
Significant assumptions used to determine fair value are:
June 30, 2006 December 31, 2005
------------------- ---------------------
Discount rate - risk-free rate plus a market premium 10.03% 10.85%
-------------
Prepayment rate - based upon loan interest rate,
---------------
original term and loan type 6.60% -18.80% 10.42% - 20.38%
Loan servicing costs - annually per loan based upon
--------------------
loan type $43 - $58 $35 - $46
Escrow earnings rate - indexed to rates paid on deposit
--------------------
accounts with comparable average life 6.09% 5.21%
Stratification of the mortgage loan servicing portfolio and outstanding
principal of loans serviced by interest rate at June 30, 2006 follows (in
thousands):
< 5.51% 5.51% - 6.50% 6.51% - 7.50% => 7.50% Total
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
Fair value $ 17,806 $ 37,143 $ 14,083 $ 4,071 $ 73,103
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
Outstanding principal of loans serviced(1) $1,098,200 $ 2,211,800 $ 889,100 $ 247,100 $ 4,446,200
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
(1) Excludes outstanding principal of $462 million for loans serviced for
affiliates and $58 million of mortgage loans for which there are no capitalized
mortgage servicing rights.
36
(4) 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,
----------------------------------
2006 2005
-------------- ---------------
Proceeds $ 142,073 $ 969,184
Gross realized gains 705 4,768
Gross realized losses (115) (5,139)
Related federal and state income
tax expense (benefit) 214 (134)
(5) Employee Benefits
BOK Financial has sponsored a defined benefit Pension Plan for all employees who
satisfied certain age and service requirements. During the fourth quarter of
2005, the Company modified the Pension Plan to curtail benefit accruals
effective April 1, 2006. During the first half of 2006 and 2005, net periodic
pension cost was approximately $1.8 million and $3.2 million, respectively.
During the second quarter of 2006, the Company made Pension Plan contributions
totaling $2.8 million, which funded the remaining maximum contribution for 2005
permitted under applicable regulations. The Company made no other Pension Plan
contributions during the first half of 2006.
Management has been advised that no minimum contribution will be required for
2006. Due to the curtailment, the maximum allowable contribution for 2006 has
not yet been determined.
(6) Shareholders' Equity
On July 25, 2006, the Board of Directors of BOK Financial Corporation approved a
$0.15 per share quarterly common stock dividend. The quarterly dividend will be
payable on or about August 31, 2006 to shareholders of record on August 14,
2006.
37
(7) Earnings Per Share
The following table presents the computation of basic and diluted earnings per
share (dollars in thousands, except share data):
Three Months Ended Six Months Ended
-----------------------------------------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
-----------------------------------------------------
Numerator:
Net income $ 54,984 $ 50,465 $ 109,732 $ 102,520
Preferred stock dividends - - - (375)
---------------------------------------------------------------------------------------------------------------
Numerator for basic earnings per share - income
available to common shareholders 54,984 50,465 109,732 102,145
---------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock dividends - - - 375
---------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share - income available
to common shareholders after assumed conversion $ 54,984 $ 50,465 $ 109,732 $ 102,520
---------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share - weighted
average shares 66,775,117 63,779,343 66,745,422 61,618,602
Effect of dilutive securities:
Employee stock compensation plans (1) 542,564 621,341 543,913 607,313
Convertible preferred stock - 2,585,744 - 4,741,231
---------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 542,564 3,207,085 543,913 5,348,544
---------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 67,317,681 66,986,428 67,289,335 66,967,146
---------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.82 $ 0.79 $ 1.64 $ 1.66
---------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.82 $ 0.75 $ 1.63 $ 1.53
---------------------------------------------------------------------------------------------------------------
(1) Excludes employee stock options with exercise
prices greater than current market price. 136,813 897,170 867,761 877,184
(8) Reportable Segments
Reportable segments reconciliation to the Consolidated Financial Statements for
the six months ended June 30, 2006 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
--------------------------------------------- -- ----------- -- --------------
Total reportable segments $ 244,623 $ 183,291 $ 226,344 $ 118,804 $ 16,988,161
Unallocated items:
Tax-equivalent adjustment 3,162 - - 3,162 -
Funds management and other (9,353) 1,311 13,162 (12,234) (549,984)
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 238,432 $ 184,602 $ 239,506 $ 109,732 $ 16,438,177
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
38
Reportable segments reconciliation to the Consolidated Financial Statements for
the six months ended June 30, 2005 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
------------ -- ------------ -- ------------- -- ----------- -- --------------
Total reportable segments $ 210,207 $ 177,153 $ 219,958 $ 101,325 $ 15,027,425
Unallocated items:
Tax-equivalent adjustment 2,501 - - 2,501 -
Funds management and other 7,419 (4,502) 8,211 (1,306) (44,748)
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 220,127 $ 172,651 $ 228,169 $ 102,520 $ 14,982,677
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
(9) Contingent Liabilities
In the ordinary course of business, BOK Financial and its subsidiaries are
subject to legal actions and complaints. Management believes, based upon the
opinion of counsel, that the actions and liability or loss, if any, resulting
from the final outcomes of the proceedings, will not be material in the
aggregate.
(10) Financial Instruments with Off-Balance Sheet Risk
BOK Financial is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to manage interest rate risk. Those financial instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in BOK
Financial's Consolidated Balance Sheets. Exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the notional
amount of those instruments.
As of June 30, 2006, outstanding commitments and letters of credit were as
follows (in thousands):
June 30,
2006
--------------
Commitments to extend credit $ 4,851,643
Standby letters of credit 481,284
Commercial letters of credit 12,318
Commitments to purchase securities 44,289
39
-------------------------------------------------------------------------------------------------------------------------------
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, 2006 June 30, 2005
------------------------------------------ ---------------------------------------
Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate
-------------------------------------------------------------------------------------
Assets
Taxable securities (3) $ 4,822,591 $ 111,678 4.68 % $ 4,730,054 $ 100,631 4.32%
Tax-exempt securities (3) 267,746 6,950 5.35 216,460 5,653 5.27
-------------------------------------------------------------------------------------------------------------------------------
Total securities (3) 5,090,337 118,628 4.71 4,946,514 106,284 4.36
-------------------------------------------------------------------------------------------------------------------------------
Trading securities 20,216 496 4.95 14,407 356 4.98
Funds sold and resell agreements 26,645 646 4.89 25,562 320 2.52
Loans (2) 9,319,358 347,417 7.52 8,153,378 252,179 6.24
Less reserve for loan losses 105,756 - - 111,300 - -
-------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 9,213,602 347,417 7.60 8,042,078 252,179 6.32
-------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 14,350,800 467,187 6.57 13,028,561 359,139 5.57
-------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,087,377 1,954,116
-------------------------------------------------------------------------------------------------------------------------------
Total assets $16,438,177 $14,982,677
-------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 5,340,281 66,004 2.49% $4,123,291 29,678 1.45%
Savings deposits 154,370 683 0.89 162,871 534 0.66
Time deposits 4,191,737 86,193 4.15 3,697,867 61,235 3.34
-------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 9,686,388 152,880 3.18 7,984,029 91,447 2.31
-------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 1,926,164 44,179 4.63 1,933,438 25,954 2.71
Other borrowings 783,106 18,689 4.81 943,135 13,903 2.97
Subordinated debentures 294,124 9,845 6.75 175,531 5,207 5.98
-------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 12,689,782 225,593 3.58 11,036,133 136,511 2.49
-------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,480,087 1,740,263
Other liabilities 708,299 780,363
Shareholders' equity 1,560,009 1,425,918
-------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity$16,438,177 $14,982,677
-------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (3) 241,594 2.99% 222,628 3.08%
Tax-Equivalent Net Interest Revenue
To Earning Assets (3) 3.40 3.45
Less tax-equivalent adjustment (1) 3,162 2,501
-------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 238,432 220,127
Provision for credit losses 7,195 4,015
Other operating revenue 180,317 172,747
Other operating expense 239,506 228,169
-------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 172,048 160,690
Federal and state income tax 62,316 58,170
-------------------------------------------------------------------------------------------------------------------------------
Net Income $ 109,732 $ 102,520
-------------------------------------------------------------------------------------------------------------------------------
Earnings Per Average Common Share Equivalent:
Net Income:
Basic $ 1.64 $ 1.66
-------------------------------------------------------------------------------------------------------------------------------
Diluted $ 1.63 $ 1.53
-------------------------------------------------------------------------------------------------------------------------------
(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.
40
------------------------------------------------------------------------------------------------------------------------------
Quarterly Financial Summary - Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share Data)
Three Months Ended
-------------------------------------------------------------------------------------
June 30, 2006 March 31, 2006
------------------------------------------ -------------------------------------
Average Revenue/ Yield / Average Revenue/ Yield /
Balance Expense(1) Rate Balance Expense(1) Rate
-------------------------------------------------------------------------------------
Assets
Taxable securities (3) $ 4,783,280 $ 56,632 4.75% $ 4,862,313 $ 55,046 4.60%
Tax-exempt securities (3) 273,305 3,485 5.12 262,124 3,465 5.36
------------------------------------------------------------------------------------------------------------------------------
Total securities (3) 5,056,585 60,117 4.77 5,124,437 58,511 4.64
------------------------------------------------------------------------------------------------------------------------------
Trading securities 23,672 287 4.86 16,722 209 5.07
Funds sold and resell agreements 32,048 407 5.09 21,181 239 4.58
Loans (2) 9,472,309 181,269 7.68 9,164,706 166,148 7.35
Less reserve for loan losses 106,048 - - 105,135 - -
------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 9,366,261 181,269 7.76 9,059,571 166,148 7.44
------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 14,478,566 242,080 6.71 14,221,911 225,107 6.42
------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,085,724 2,048,328
------------------------------------------------------------------------------------------------------------------------------
Total assets $ 16,564,290 $ 16,270,239
------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 5,353,413 $ 34,875 2.61% $ 5,327,004 $ 31,129 2.37%
Savings deposits 153,200 353 0.92 155,554 330 0.86
Time deposits 4,220,204 44,798 4.26 4,162,952 41,395 4.03
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 9,726,817 80,026 3.30 9,645,510 72,854 3.06
------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 2,118,211 25,696 4.87 1,731,983 18,483 4.33
Other borrowings 684,431 8,682 5.09 882,878 10,007 4.60
Subordinated debentures 292,474 4,930 6.76 295,792 4,915 6.74
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 12,821,933 119,334 3.73 12,556,163 106,259 3.43
------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,474,835 1,485,398
Other liabilities 695,418 680,897
Shareholders' equity 1,572,104 1,547,781
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity$ 16,564,290 $ 16,270,239
------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (3) $ 122,746 2.98% $ 118,848 2.99%
Tax-Equivalent Net Interest Revenue
To Earning Assets (3) 3.40 3.39
Less tax-equivalent adjustment (1) 1,640 1,522
------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 121,106 117,326
Provision for credit losses 3,795 3,400
Other operating revenue 90,880 89,437
Other operating expense 122,127 117,379
------------------------------------------------------------------------------------------------------------------------------
Income before taxes 86,064 85,984
Federal and state income tax 31,080 31,236
------------------------------------------------------------------------------------------------------------------------------
Net Income $ 54,984 $ 54,748
------------------------------------------------------------------------------------------------------------------------------
Earnings Per Average Common Share Equivalent:
Net income:
Basic $ 0.82 $ 0.82
------------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.82 $ 0.81
------------------------------------------------------------------------------------------------------------------------------
(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.
41
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended
-------------------------------------------------------------------------------------------------------------------------
December 31, 2005 September 30, 2005 June 30, 2005
-------------------------------------------------------------------------------------------------------------------------
Average Revenue/ Yield / Average Revenue/ Yield / Average Revenue/ Yield /
Balance Expense(1) Rate Balance Expense(1) Rate Balance Expense(1) Rate
-------------------------------------------------------------------------------------------------------------------------
$ 4,816,263 $ 53,375 4.44% $ 4,800,698 $ 51,946 4.28% $ 4,831,186 $ 51,275 4.32%
243,521 3,046 5.05 231,097 2,888 4.96 215,360 2,810 5.23
-------------------------------------------------------------------------------------------------------------------------
5,059,784 56,421 4.47 5,031,795 54,834 4.31 5,046,546 54,085 4.36
-------------------------------------------------------------------------------------------------------------------------
20,595 243 4.68 14,560 171 4.66 11,639 165 5.69
57,656 581 4.00 44,882 386 3.41 21,170 156 2.96
9,005,546 158,387 6.98 8,635,732 144,954 6.66 8,341,490 133,173 6.40
108,998 - - 109,840 - - 111,056 - -
-------------------------------------------------------------------------------------------------------------------------
8,896,548 158,387 7.06 8,525,892 144,954 6.75 8,230,434 133,173 6.49
-------------------------------------------------------------------------------------------------------------------------
14,034,583 215,632 6.12 13,617,129 200,345 5.83 13,309,789 187,579 5.68
-------------------------------------------------------------------------------------------------------------------------
2,168,128 1,970,746 1,750,686
-------------------------------------------------------------------------------------------------------------------------
$ 16,202,711 $ 15,587,875 $ 15,060,475
-------------------------------------------------------------------------------------------------------------------------
$ 4,821,627 $ 24,075 1.98% $ 4,533,912 $ 18,968 1.66% $ 4,323,513 $ 16,049 1.49%
154,316 292 0.75 157,772 280 0.70 166,426 285 0.69
4,216,625 40,083 3.77 3,958,948 35,255 3.53 3,710,338 31,499 3.41
-------------------------------------------------------------------------------------------------------------------------
9,192,568 64,450 2.78 8,650,632 54,503 2.50 8,200,277 47,833 2.34
-------------------------------------------------------------------------------------------------------------------------
1,812,752 17,914 3.92 2,067,432 17,738 3.40 2,160,031 15,764 2.93
1,049,635 10,807 4.08 1,047,423 9,510 3.60 914,968 7,224 3.17
296,021 4,683 6.28 297,284 4,477 5.97 200,038 2,980 5.98
-------------------------------------------------------------------------------------------------------------------------
12,350,976 97,854 3.14 12,062,771 86,228 2.84 11,475,314 73,801 2.58
-------------------------------------------------------------------------------------------------------------------------
1,530,504 1,424,102 1,586,248
814,192 613,667 558,655
1,507,039 1,487,335 1,440,258
-------------------------------------------------------------------------------------------------------------------------
$ 16,202,711 $ 15,587,875 $ 15,060,475
-------------------------------------------------------------------------------------------------------------------------
$ 117,778 2.98% $ 114,117 2.99% $ 113,778 3.10%
3.05
3.34 3.32 3.45
1,392 1,289 1,245
-------------------------------------------------------------------------------------------------------------------------
116,386 112,828 112,533
4,450 3,976 2,015
87,344 86,855 94,591
123,903 117,034 126,010
-------------------------------------------------------------------------------------------------------------------------
75,377 78,673 79,099
27,219 27,846 28,634
-------------------------------------------------------------------------------------------------------------------------
$ 48,158 $ 50,827 $ 50,465
-------------------------------------------------------------------------------------------------------------------------
$ 0.72 $ 0.77 $ 0.79
-------------------------------------------------------------------------------------------------------------------------
$ 0.72 $ 0.76 $ 0.75
-------------------------------------------------------------------------------------------------------------------------
42
PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases made by or on
behalf of the Company or any "affiliated purchaser" (as defined in Rule
10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company's common
stock during the three months ended June 30, 2006.
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
Total Number Average Price Total Number of Shares Purchased Maximum Number of Shares
of Shares Paid per Share as Part of Publicly Announced that May Yet Be Purchased
Period Purchased (2) Plans or Programs (1) Under the Plans
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
April 1, 2006 to 8,895 $48.46 6,604 1,901,988
April 30, 2006
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
May 1, 2006 to 61,686 $48.95 58,191 1,843,797
May 31, 2006
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
June 1, 2006 to 50,090 $48.07 43,527 1,800,270
June 30, 2006
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
Total 120,671 108,322
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
(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, 2006,
the Company had repurchased 199,730 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.
43
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on April 25, 2006 (the "Annual
Meeting"). At the Annual Meeting, shareholders voted on two matters: (i) to fix
the number of directors to be elected at nineteen (18) and to elect eighteen
(18) persons as directors for a term of one year or until their successors have
been elected and qualified, and (ii) to amend the BOKF 2003 Stock Option Plan.
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 64,199,569 102,587
C. Fred Ball, Jr. 61,078,269 3,223,887
Sharon J. Bell 63,888,560 413,596
Peter C. Boylan III 64,188,718 113,438
Chester Cadieux III 60,263,729 4,038,427
Paula Marshall-Chapman 59,540,599 4,761,557
William E. Durrett 63,907,437 394,719
Robert G. Greer 61,079,534 3,222,622
David F. Griffin 64,199,969 102,187
V. Burns Hargis 61,080,025 3,222,131
E. Carey Joullian IV 60,096,178 4,205,978
George B. Kaiser 61,528,070 2,774,086
Judith Z. Kishner 64,193,314 108,842
Thomas L. Kivisto 64,199,769 102,387
David L. Kyle 63,742,235 559,921
Robert J. LaFortune 63,907,325 394,831
Stanley A. Lybarger 61,080,035 3,222,121
Steven J. Malcolm 63,800,107 502,049
Votes
Withheld/ Exceptions /
Votes For Against Abstain
----------------- ----------------- -----------------
(ii) Amendment of the BOKF 2003 Stock Option Plan 56,641,364 1,004,674 873,268
Item 6. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Items 1, 3 and 5 are not applicable and have been omitted.
44
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 9, 2006 /s/ Steven E. Nell
------------------------ ----------------------------------
Steven E. Nell
Executive Vice President and
Chief Financial Officer
/s/ John C. Morrow
-----------------------------------
John C. Morrow
Senior Vice President and Director
of Financial Accounting & Reporting
<