As filed with the Securities and Exchange Commission on July 30, 2009
===============================================================================
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, 2009
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File No. 0-19341
BOK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Oklahoma 73-1373454
(State or other jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
Bank of Oklahoma Tower
P.O. Box 2300
Tulsa, Oklahoma 74192
(Address of Principal Executive Offices) (Zip Code)
(918) 588-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_| ?
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 67,674,442 shares of common
stock ($.00006 par value) as of June 30, 2009.
================================================================================
2
BOK Financial Corporation
Form 10-Q
Quarter Ended June 30, 2009
Index
Part I. Financial Information
Item 1. Consolidated Financial Statements - Unaudited 3
Item 2. Management's Discussion and Analysis 28
Six Month Financial Summary - Unaudited 68
Quarterly Financial Summary - Unaudited 69
Quarterly Earnings Trend - Unaudited 71
Item 3. Market Risk 72
Item 4. Controls and Procedures 73
Part II. Other Information
Item 1. Legal Proceedings 74
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 74
Item 4. Submission of Matters to a Vote of Security Holders 75
Item 6. Exhibits 75
Signatures 76
3
------------------------------------------------------- ----- ------------- -- -------------- -- -------------- ---- --------------
Consolidated Statements of Earnings (Unaudited)
(In thousands, except share and per share data)
Three Months Ended June 30, Six Months Ended June 30,
Interest revenue 2009 2008 2009 2008
----------- --- -------------- ---- -------------- ---- --------------
Loans $ 146,269 $ 180,177 $ 292,013 $ 379,561
Taxable securities 80,713 75,959 164,715 148,014
Tax-exempt securities 2,913 2,656 5,563 5,341
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Total securities 83,626 78,615 170,278 153,355
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Trading securities 776 939 1,577 2,016
Funds sold and resell agreements 14 355 44 1,195
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Total interest revenue 230,685 260,086 463,912 536,127
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Interest expense
Deposits 45,103 66,114 97,030 154,261
Borrowed funds 4,370 29,212 10,259 64,579
Subordinated debentures 5,632 5,821 11,198 11,220
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Total interest expense 55,105 101,147 118,487 230,060
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Net interest revenue 175,580 158,939 345,425 306,067
Provision for credit losses 47,120 59,310 92,160 76,881
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Net interest revenue after provision for credit losses 128,460 99,629 253,265 229,186
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Other operating revenue
Brokerage and trading revenue 21,794 (35,462) 46,493 (11,549)
Transaction card revenue 27,533 25,786 52,961 49,344
Trust fees and commissions 16,860 20,940 33,370 41,736
Deposit service charges and fees 28,421 30,199 55,826 57,885
Mortgage banking revenue 19,882 8,203 38,380 16,237
Bank-owned life insurance 2,418 2,658 4,735 5,170
Margin asset fees 68 4,460 135 6,427
Other revenue 6,124 6,965 12,707 12,356
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Total fees and commissions 123,100 63,749 244,607 177,606
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Gain (loss) on sales of assets 973 (1,149) 1,116 (1,145)
Loss on derivatives, net (1,037) (2,961) (2,701) (848)
Gain (loss) on securities, net 6,471 (5,242) 26,579 4,684
Total other-than-temporary impairment losses (1,263) - (55,631) (5,306)
Portion of loss recognized in other comprehensive income 279 - (39,087) -
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Net impairment losses recognized in earnings (1,542) - (16,544) (5,306)
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Total other operating revenue 127,965 54,397 253,057 174,991
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Other operating expense
Personnel 96,191 89,597 188,818 177,703
Business promotion 4,569 5,777 8,997 10,416
Professional fees and services 7,363 6,973 13,875 12,621
Net occupancy and equipment 15,973 15,100 32,231 30,161
Insurance 5,898 2,626 11,536 6,336
FDIC special assessment 11,773 - 11,773 -
Data processing and communications 20,452 19,523 39,758 38,416
Printing, postage and supplies 4,072 4,156 8,643 8,575
Net (gains) losses and expenses of repossessed assets 996 (229) 2,802 149
Amortization of intangible assets 1,686 1,885 3,372 3,810
Mortgage banking costs 9,336 6,054 16,803 11,735
Change in fair value of mortgage servicing rights (7,865) 767 (9,820) 2,529
Visa retrospective responsibility obligation - - - (2,767)
Other expense 5,326 7,039 12,776 12,988
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Total other operating expense 175,770 159,268 341,564 312,672
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Income (loss) before taxes 80,655 (5,242) 164,758 91,505
Federal and state income tax 28,315 (2,862) 57,153 31,588
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Net income (loss) before non-controlling interest 52,340 (2,380) 107,605 59,917
Non-controlling interest income (expense), net (225) 1,219 (458) 1,187
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Net income (loss) attributable to BOK Financial Corp. $ 52,115 $ (1,161) $ 107,147 $ 61,104
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Earnings (loss) per share:
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Basic $ 0.77 $ (0.02) $ 1.59 $ 0.91
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Diluted $ 0.77 $ (0.02) $ 1.58 $ 0.90
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Average shares used in computation:
------------------------------------------------------- ---- ------------ --- -------------- ---- -------------- ---- --------------
Basic 67,344,577 67,452,181 67,330,590 67,327,155
------------------------------------------------------- ---- ------------ --- -------------- ---- -------------- ---- --------------
Diluted 67,448,029 67,452,181 67,417,874 67,690,919
------------------------------------------------------- ---- ------------ --- -------------- ---- -------------- ---- --------------
Dividends declared per share $ 0.24 $ 0.225 $ 0.465 $ 0.425
------------------------------------------------------- ---- ------------ --- -------------- ---- -------------- ---- --------------
See accompanying notes to consolidated financial statements.
4
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Consolidated Balance Sheets
(In Thousands Except Share Data)
June 30, December 31, June 30,
2009 2008 2008
--------------------------------------------------
Assets (Unaudited) (Footnote 1) (Unaudited)
Cash and due from banks $ 470,553 $ 581,133 $ 712,324
Funds sold and resell agreements 112,128 113,809 52,005
Trading securities 84,548 99,601 62,532
Securities:
Available for sale 7,033,090 5,800,691 5,439,524
Available for sale securities pledged to creditors 191,583 590,760 487,078
Investment (fair value: June 30, 2009 - $273,770;
December 31, 2008 - $245,769;
June 30, 2008 - $266,405) 269,844 242,344 245,754
Mortgage trading securities 222,864 399,211 98,269
--------------------------------------------------------------------------------------------------------------------
Total securities 7,717,381 7,033,006 6,270,625
--------------------------------------------------------------------------------------------------------------------
Residential mortgage loans held for sale 326,363 129,246 119,944
Loans 12,069,928 12,876,006 12,518,038
Less reserve for loan losses (263,309) (233,236) (154,018)
--------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 11,806,619 12,642,770 12,364,020
--------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 286,295 277,458 266,435
Accrued revenue receivable 118,718 96,673 159,066
Intangible assets, net 357,838 361,209 365,060
Mortgage servicing rights, net 67,413 42,752 72,103
Real estate and other repossessed assets 75,243 29,179 21,025
Bankers' acceptances 8,260 12,913 16,031
Derivative contracts 462,971 452,604 1,380,876
Cash surrender value of bank-owned life insurance 241,792 237,006 231,527
Receivable on unsettled securities trades 237,200 239,474 39,052
Other assets 394,997 385,815 303,312
--------------------------------------------------------------------------------------------------------------------
Total assets $ 22,768,319 $ 22,734,648 $ 22,435,937
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Liabilities and Shareholders' Equity
Noninterest-bearing demand deposits $ 2,825,179 $ 3,082,379 $ 2,859,160
Interest-bearing deposits:
Transaction 7,091,471 6,562,350 6,743,034
Savings 166,806 154,635 162,138
Time (includes fair value: $520,245 at June 30, 2009;
$632,754 at December 31, 2008; $103,678 at June 30, 2008) 4,571,933 5,183,243 4,361,384
--------------------------------------------------------------------------------------------------------------------
Total deposits 14,655,389 14,982,607 14,125,716
--------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase agreements 2,798,274 3,025,399 3,101,425
Other borrowings 2,152,177 1,522,054 2,153,853
Subordinated debentures 398,465 398,407 398,340
Accrued interest, taxes and expense 119,003 133,220 81,507
Bankers' acceptances 8,260 12,913 16,031
Derivative contracts 445,463 667,034 456,379
Other liabilities 125,126 132,902 140,758
--------------------------------------------------------------------------------------------------------------------
Total liabilities 20,702,157 20,874,536 20,474,009
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Shareholders' equity:
Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued
and outstanding: June 30, 2009 - 70,092,396; December 31, 2008
- 69,884,749; June 30, 2008 - 69,811,531) 4 4 4
Capital surplus 747,624 743,411 738,403
Retained earnings 1,502,993 1,427,057 1,365,456
Treasury stock (shares at cost: June 30, 2009 - 2,417,954;
December 31, 2008 - 2,411,663; June 30, 2008 - 2,323,143) (101,601) (101,329) (97,109)
Accumulated other comprehensive loss (98,448) (222,886) (64,378)
--------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 2,050,572 1,846,257 1,942,376
Non-controlling interest 15,590 13,855 19,552
--------------------------------------------------------------------------------------------------------------------
Total equity 2,066,162 1,860,112 1,961,928
--------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 22,768,319 $ 22,734,648 $ 22,435,937
--------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
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Consolidated Statements of Changes in Equity (Unaudited)
(In Thousands)
Accumulated
Other Total Non-
Common Stock Comprehensive Capital Retained Treasury Stock Shareholders' Controlling Total
----------------- --------------------
Shares Amount Loss Surplus Earnings Shares Amount Equity Interest Equity
------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2007 69,465 $ 4 $ (31,234) $ 722,088 $1,332,954 2,159 $ (88,428) $1,935,384 $ 18,849 $1,954,233
Effect of
implementing FAS 159,
net of income taxes - - - - 62 - - 62 - 62
Comprehensive income:
Net income from BOKF - - - - 61,104 - - 61,104 - 61,104
Non-controlling interest
expense, net - - - - - - - - 1,187 1,187
Other comprehensive
loss, net of tax - - (33,144) - - - - (33,144) - (33,144)
------------------------------------
Comprehensive income 27,960 1,187 29,147
------------------------------------
Treasury stock purchase - - - - - 91 (4,655) (4,655) - (4,655)
Exercise of stock options 347 - - 10,661 - 73 (4,026) 6,635 - 6,635
Tax benefit on exercise
of stock options - - - 1,132 - - - 1,132 - 1,132
Stock-based compensation - - - 4,522 - - - 4,522 - 4,522
Cash dividends on
common stock - - - - (28,664) - - (28,664) - (28,664)
Capital calls, net - - - - - - - - (484) (484)
-----------------------------------------------------------------------------------------------------------------------------------
Balances at
June 30, 2008 69,812 $ 4 $ (64,378) $ 738,403 $1,365,456 2,323 $(97,109) $1,942,376 $ 19,552 $1,961,928
-----------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2008 69,885 $ 4 $(222,886) $ 743,411 $1,427,057 2,412 $ (101,329) $1,846,257 $ 13,855 $1,860,112
Comprehensive income:
Net income from BOKF - - - - 107,147 - - 107,147 - 107,147
Non-controlling interest
expense, net - - - - - - - - (458) (458)
Other comprehensive loss,
net of tax - - 124,438 - - - - 124,438 - 124,438
-----------------------------------
Comprehensive income 231,585 (458) 231,127
-----------------------------------
Exercise of stock options 207 - - 2,048 - 6 (272) 1,776 - 1,776
Tax benefit on exercise
of stock options - - - (585) - - - (585) - (585)
Stock-based compensation - - - 2,750 - - - 2,750 - 2,750
Cash dividends on
common stock - - - - (31,211) - - (31,211) - (31,211)
Capital calls - - - - - - - - 2,193 2,193
-----------------------------------------------------------------------------------------------------------------------------------
Balances at
June 30, 2009 70,092 $ 4 $ (98,448) $ 747,624 $1,502,993 2,418 $( 101,601) $2,050,572 $ 15,590 $2,066,162
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
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Consolidated Statements of Cash Flows (Unaudited)
(In Thousands) Six Months Ended June 30,
---------------------------------------------
2009 2008
---------------------------------------------
Cash Flows From Operating Activities:
Net income before non-controlling interest $ 107,605 $ 59,917
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 92,160 76,881
Change in fair value of mortgage servicing rights (9,820) 2,529
Unrealized losses from derivatives 21,875 44,815
Tax benefit on exercise of stock options 585 (1,132)
Change in bank-owned life insurance (4,786) (1,987)
Stock-based compensation 2,750 5,306
Depreciation and amortization 28,761 26,669
Net (accretion) amortization of securities discounts and premiums 6,119 (7,623)
Realized gains on financial instruments and other assets (40,771) (5,537)
Mortgage loans originated for resale (1,715,763) (312,668)
Proceeds from sale of mortgage loans held for resale 1,539,800 267,175
Capitalized mortgage servicing rights (25,268) (10,339)
Change in trading securities, including mortgage trading securities 157,809 40,269
Change in accrued revenue receivable (22,045) (20,823)
Change in other assets (119,836) (51,427)
Change in accrued interest, taxes and expense (14,217) (42,639)
Change in other liabilities (7,441) 622
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (2,483) 70,008
---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities 35,147 33,792
Proceeds from maturities of available for sale securities 1,290,008 541,500
Purchases of investment securities (62,736) (31,737)
Purchases of available for sale securities (3,593,463) (2,335,268)
Proceeds from sales of available for sale securities 1,710,776 1,470,701
Loans originated or acquired net of principal collected 682,167 (634,746)
Net payments or proceeds on derivative asset contracts 264,564 (77,563)
Net change in other investment assets - 148
Proceeds from disposition of assets 9,939 34,283
Purchases of assets (25,435) (30,582)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 310,967 (1,029,472)
---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net change in demand deposits, transaction deposits and savings accounts 284,092 635,679
Net change in time deposits (605,407) 31,347
Net change in other borrowings 402,998 1,002,583
Net payments or proceeds on derivative liability contracts (301,580) 86,302
Net change in derivative margin accounts (173,102) (867,998)
Change in amount receivable (due) on unsettled security transactions 2,274 (28,981)
Issuance of common and treasury stock, net 1,776 6,635
Tax benefit on exercise of stock options (585) 1,132
Repurchase of common stock - (4,655)
Dividends paid (31,211) (28,664)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (420,745) 833,380
---------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (112,261) (126,084)
Cash and cash equivalents at beginning of period 694,942 890,413
---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 582,681 $ 764,329
---------------------------------------------------------------------------------------------------------------------------
Cash paid for interest $ 141,757 $ 241,655
---------------------------------------------------------------------------------------------------------------------------
Cash paid for taxes $ 70,919 $ 72,561
---------------------------------------------------------------------------------------------------------------------------
Net loans transferred to repossessed real estate and other assets $ 57,119 $ 15,426
---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
7
Notes to Consolidated Financial Statements (Unaudited)
(1) Significant 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. Certain prior period amounts have been reclassified to conform to
current period classification. Previously, the Company reported minority
interest as part of other liabilities. This balance is now reported as part of
total equity on the consolidated balance sheet.
The unaudited consolidated financial statements include accounts of BOK
Financial and its subsidiaries, principally Bank of Oklahoma, N.A. and its
subsidiaries ("BOk"), Bank of Texas, N.A., Bank of Arkansas, N.A., Bank of
Albuquerque, N.A., Colorado State Bank and Trust, N.A., Bank of Arizona, N.A.,
Bank of Kansas City, N.A., and BOSC, Inc.
The financial information should be read in conjunction with BOK Financial's
2008 Form 10-K filed with the Securities and Exchange Commission, which contains
audited financial statements. Amounts presented as of December 31, 2008 have
been derived from BOK Financial's 2008 Form 10-K.
Newly Adopted and Pending Accounting Policies
Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 141, "Business Combinations
(Revised 2007),"("FAS 141R")
FAS 141R replaces FAS 141, "Business Combinations," and applies to all
transactions and other events in which one entity obtains control over one or
more other businesses. FAS 141R requires an acquirer, upon initially obtaining
control of another entity, to recognize the assets, liabilities and any
non-controlling interest in the acquiree at fair value as of the acquisition
date. Contingent consideration is required to be recognized and measured at fair
value on the date of acquisition rather than at a later date when the amount of
that consideration may be determinable beyond a reasonable doubt. This fair
value approach replaces the cost-allocation process required under FAS 141
whereby the cost of an acquisition was allocated to the individual assets
acquired and liabilities assumed based on their estimated fair value. FAS 141R
requires acquirers to expense acquisition-related costs as incurred rather than
allocating such costs to the assets acquired and liabilities assumed, as was
previously the case under FAS 141. Under FAS 141R, the requirements of FAS 146,
"Accounting for Costs Associated with Exit or Disposal Activities," would have
to be met in order to accrue for a restructuring plan in purchase accounting.
Pre-acquisition contingencies are to be recognized at fair value, unless it is a
non-contractual contingency that is not likely to materialize, in which case,
nothing should be recognized in purchase accounting and, instead, that
contingency would be subject to the probable and estimable recognition criteria
of FAS 5, "Accounting for Contingencies." FAS 141R is applicable to the
Company's accounting for business combinations closing on or after January 1,
2009.
Statement of Financial Accounting Standards No. 160,"Non-controlling Interest in
Consolidated Financial Statements - An Amendment of ARB No. 51" ("FAS 160")
The Financial Accounting Standards Board ("FASB") issued FAS 160 during 2007 to
establish accounting and reporting standards for the non-controlling interest in
a subsidiary and for the deconsolidation of a subsidiary. FAS 160 clarifies that
a non-controlling interest in a subsidiary, which is sometimes referred to as
minority interest, is an ownership interest in the consolidated entity that
should be reported as a component of equity in the consolidated financial
statements. Among other requirements, FAS 160 requires consolidated net income
to be reported at amounts that included the amounts attributable to both the
parent and the non-controlling interest. It also requires disclosure, on the
face of the consolidated income statement, of the amounts of consolidated net
income attributable to the parent and to the non-controlling interest. The
Company adopted FAS 160 as of January 1, 2009, and it did not have a significant
impact on the Company's financial statements.
8
Statement of Financial Accounting Standards No. 161, "Disclosure About
Derivative Instruments and Hedging Activities, an Amendment of FASB Statement
No. 133," ("FAS 161")
FAS 161 amends and expands the disclosure requirements of FAS 133 to provide
greater transparency about (i) how and why an entity uses derivative
instruments, (ii) how derivative instruments and related hedge items are
accounted for under FAS 133 and its related interpretations, and (iii) how
derivative instruments and related hedged items affect an entity's financial
position, results of operations and cash flows. To meet those objectives, FAS
161 requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of gains and
losses on derivative instruments and disclosures about credit-risk-related
contingent features in derivative agreements. FAS 161 was effective for the
Company as of January 1, 2009. It did not have a significant impact on the
Company's financial statements.
Financial Accounting Standards Board Staff Position No.FAS 157-4, "Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That are Not Orderly" ("FSP
157-4")
FSP 157-4 was issued April 9, 2009 to provide guidance for determining fair
value when there is no active market or where price inputs represent distressed
sales. It reaffirms the fair value measurement objective of FAS 157 to reflect
how much an asset would be sold for in an orderly transaction under current
market conditions. FSP 157-4 is effective for interim and annual periods ending
after June 15, 2009. Early adoption for interim and annual periods ending after
March 15, 2009 is permitted. FSP 157-4 was adopted as of March 31, 2009. It did
not have a significant impact on the Company's financial statements.
Financial Accounting Standards Board Staff Position No.FAS 115-2 and FAS 124-2
"Recognition and Presentation of Other-Than-Temporary Impairments" ("FSP No.
115-2")
FSP 115-2 was issued April 9, 2009 to provide additional guidance and create
greater clarity and consistency in accounting for impairment losses on
securities. FSP 115-2 replaces the assertion of intent and ability to hold an
impaired debt security until fair value recovers with assertions that the holder
does not intend to sell the security prior to recovery and that it is more
likely than not that the holder will not be required to sell the impaired
security prior to recovery. The full impairment loss is recognized in earnings
if the holder is unable to make these assertions. Otherwise, a credit loss
portion of the impairment is recognized in earnings and the remaining impairment
is recognized in other comprehensive income (equity). Both the full impairment
and credit loss portion are presented on the face of the income statement. FSP
115-2 also requires additional disclosures in interim periods. FAS 115-2 is
effective for interim and annual periods ending after June 15, 2009. Early
adoption for interim and annual periods ending after March 15, 2009 is
permitted. FSP 115-2, which was adopted as of March 31, 2009, reduced the loss
recognized in earnings on debt securities determined to be
other-than-temporarily impaired by $39 million.
FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial
Instruments" ("FSP107-1")
FSP 107-1 enhances consistency in financial reporting by increasing the
frequency of fair value disclosures for any financial instruments that are not
currently reflected on the balance sheet at fair value. Previously, these
disclosures were only required in annual financial statements. FSP 107-1
requires disclosures in interim financial statements that provide qualitative
and quantitative information about fair value estimates. FSP 107-1 is effective
for interim and annual periods ending after June 15, 2009. Early adoption for
interim and annual periods ending after March 15, 2009 is permitted. BOK
Financial adopted FSP 107-1 as of June 30, 2009. It did not have a significant
impact on the Company's financial statements.
Financial Accounting Standards Board Staff Position No. EITF 03-6-1 "Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities" ("FSP No. EITF 03-6-1")
FSP No. EITF 03-6-1 provides that unvested share-based payment awards that
contain non-forfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method. FSP EITF
03-6-1 became effective on January 1, 2009. See additional discussion at Note 8
- Earnings Per Share.
9
Statement of Financial Accounting Standards No. 165, "Subsequent Events" ("FAS
165")
On May 28, 2009, the FASB issued FAS 165 to provide authoritative accounting
guidance on management's assessment of subsequent events. FAS 165 incorporates
existing U.S. auditing literature and clarifies that management is responsible
for evaluating, as of each reporting period, events or transactions that occur
after the balance sheet date through the date that the financial statements are
issued or are available to be issued. FAS 165 is effective for the Company as of
June 30, 2009. Adoption of FAS 165 did not have a significant impact on the
Company's financial statements.
Statement of Financial Accounting Standards No. 166, "Accounting for Transfers
of Financial Assets - an amendment to Statement No. 140," ("FAS 166")
FAS 166 amends FAS 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," to enhance reporting about transfers
of financial assets, including securitizations, and where companies have
continuing exposure to the risks related to transferred financial assets. FAS
166 eliminates the concept of a "qualifying special-purpose entity" and changes
the requirements for derecognizing financial assets. FAS 166 also requires
additional disclosures about all continuing involvements with transferred
financial assets including information about gains and losses resulting from
transfers during the period. FAS 166 will be effective January 1, 2010 and is
not expected to have a significant impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 167, "Amendments to FASB
Interpretation No. 46(R)," ("FAS 167")
FAS 167 amends FIN 46 (Revised December 2003), "Consolidation of Variable
Interest Entities," to change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a company is
required to consolidate an entity is based on, among other things, an entity's
purpose and design and a company's ability to direct the activities of the
entity that most significantly impact the entity's economic performance. FAS 167
requires additional disclosures about the reporting entity's involvement with
variable-interest entities and any significant changes in risk exposure due to
that involvement as well as its affect on the entity's financial statements. FAS
167 will be effective January 1, 2010 and is not expected to have a significant
impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 168, "The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, a Replacement of FASB Statement No. 162," ("FAS 168")
FAS 168 replaces FAS 162, "The Hierarchy of Generally Accepted Accounting
Principles" and establishes the FASB Accounting Standards Codification (the
"Codification") as the source of authoritative accounting principles recognized
by the FASB to be applied by non-governmental entities in the preparation of
financial statements in conformity with generally accepted accounting
principles. Rules and interpretive releases of the SEC under authority of
federal securities laws are also sources of authoritative guidance for SEC
registrants. All guidance contained in the Codification carries an equal level
of authority. All non-grandfathered, non-SEC accounting literature not included
in the Codification is superseded and deemed non-authoritative. FAS 168 will be
effective for the Company's financial statements for periods ending after
September 15, 2009. FAS 168 is not expected have a significant impact on the
Company's financial statements.
10
(2) Securities
Investment Securities
The amortized cost and fair values of investment securities are as follows (in
thousands):
June 30,
-------------------------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------------------------
Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized
-----------------------------------------------------------------------------------------------------------------------------
Cost Value Gain Loss Cost Value Gain Loss
-------------------------------------------------------------------------------------------
Municipal and other tax-exempt $263,393 $267,298 $ 4,357 $(452) $239,145 $259,759 $ 21,392 $(778)
Other debt securities 6,451 6,472 21 - 6,609 6,646 37 -
-----------------------------------------------------------------------------------------------------------------------------
Total $269,844 $273,770 $ 4,378 $(452) $245,754 $266,405 $ 21,429 $ (778)
-----------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of investment securities at June 30, 2009, by
contractual maturity, are as shown in the following table (dollars in
thousands):
Weighted
Less than One to Six to Over Average
One Year Five Years Ten Years Ten Years Total Maturity(2)
------------ -------------- ------------- ------------- ------------- ------------
Municipal and other tax-exempt:
Amortized cost $ 63,101 $ 164,548 $28,009 $ 7,735 $ 263,393 2.76
Fair value 63,481 167,708 28,425 7,684 267,298
Nominal yield(1) 5.39 4.65 5.79 6.38 5.00
Other debt securities:
Amortized cost $ 4,988 $ 1,450 $ - $ 13 $ 6,451 1.01
Fair value 5,004 1,455 - 13 6,472
Nominal yield 3.18 5.13 - - 3.61
------------ -------------- ------------- ------------- ------------- ------------
Total fixed maturity securities:
Amortized cost $ 68,089 $ 165,998 $ 28,009 $ 7,748 $ 269,844 2.71
Fair value 68,485 169,163 28,425 7,697 273,770
Nominal yield 5.23 4.65 5.79 6.37 4.97
------------ -------------- ------------- -------------
Total investment securities:
Amortized cost $ 269,844
Fair value 273,770
Nominal yield 4.97
-------------
(1) Calculated on a taxable equivalent basis using a 39% effective tax rate.
(2) Expected maturities may differ from contractual maturities, because
borrowers may have the right to call or prepay obligations with or without
penalty.
11
Available for Sale Securities
The amortized cost and fair value of available for sale securities are as
follows (in thousands):
June 30,
-----------------------------------------------------------------------------------------------
2009 2008
-----------------------------------------------------------------------------------------------
Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized
----------------------- ------------------------
Cost Value Gain Loss Cost Value Gain Loss
-----------------------------------------------------------------------------------------------
U.S. Treasury $ 6,993 $ 7,073 $ 80 $ - $ 10,982 $ 10,969 $ 20 $ (33)
Municipal and other tax-exempt 42,423 43,009 617 (31) 17,447 17,377 90 (160)
Residential mortgage-backed securities:
U. S. agencies:
FNMA 3,047,648 3,130,098 83,173 (723) 2,098,540 2,090,383 17,128 (25,285)
FHLMC 1,951,564 2,003,808 54,280 (2,036) 1,802,473 1,792,984 9,652 (19,141)
GNMA 447,287 451,516 5,318 (1,089) 60,652 60,059 42 (635)
Other 199,025 204,297 6,302 (1,030) 129,805 128,419 202 (1,588)
---------------------------------------------------------------------------------------------------------------------------------
Total U.S. agencies 5,645,524 5,789,719 149,073 (4,878) 4,091,470 4,071,845 27,024 (46,649)
---------------------------------------------------------------------------------------------------------------------------------
Private issue:
Alt-A loans 357,037 254,424 - (102,613) 415,361 386,783 - (28,578)
Jumbo-A loans 1,090,211 919,888 - (170,323) 1,272,346 1,226,018 381 (46,709)
---------------------------------------------------------------------------------------------------------------------------------
Total private issue 1,447,248 1,174,312 - (272,936) 1,687,707 1,612,801 381 (75,287)
---------------------------------------------------------------------------------------------------------------------------------
Total residential
mortgage-backed securities 7,092,772 6,964,031 149,073 (277,814) 5,779,177 5,684,646 27,405 (121,936)
---------------------------------------------------------------------------------------------------------------------------------
Other debt securities 11,684 11,684 - - 39 39 - -
Federal Reserve Bank stock 32,040 32,040 - - 27,855 27,855 - -
Federal Home Loan Bank stock 115,368 115,368 - - 120,056 120,056 - -
Perpetual preferred stock 19,224 16,317 - (2,907) 32,473 32,210 58 (321)
Equity securities and mutual funds 32,661 35,151 3,014 (524) 29,801 33,450 4,433 (784)
---------------------------------------------------------------------------------------------------------------------------------
Total $7,353,165 $7,224,673 $ 152,784 $(281,276) $ 6,017,830 $5,926,602 $ 32,006 $(123,234)
---------------------------------------------------------------------------------------------------------------------------------
12
The amortized cost and fair values of available for sale securities at June 30,
2009, by contractual maturity, are as shown in the following table (dollars in
thousands):
Less than One to Six to Over Wtd Avg
One Year Five Years Ten Years Ten Years Total Maturity(5)
------------ -------------- ------------- ------------- -------------- -----------
U.S. Treasuries:
Amortized cost $ 6,993 $ - $ - $ - $ 6,993 0.67
Fair value 7,073 - - - 7,073
Nominal yield 2.16 - - - 2.16
Municipal and other tax-exempt:
Amortized cost $ - $ 3,176 $ 16,024 $ 23,223 $ 42,423 16.62
Fair value - 3,318 16,456 23,235 43,009
Nominal yield(1) - 3.99 4.12 0.78 2.28
Other debt securities:
Amortized cost $ - $ 34 $ - $ 11,650 $ 11,684 30.17
Fair value - 34 - 11,650 11,684
Nominal yield(1) - 6.55 - 7.61 7.61
------------ -------------- ------------- ------------- -------------- -----------
Total fixed maturity securities:
Amortized cost $ 6,993 $ 3,210 $ 16,024 $ 34,873 $ 61,101 11.64
Fair value 7,073 3,352 16,456 34,885 61,766
Nominal yield 2.16 4.02 4.12 3.06 3.29
------------ -------------- ------------- -------------
Residential mortgage-backed securities:
Amortized cost $ 7,092,772 (2)
Fair value 6,964,031
Nominal yield(4) 4.65
--------------
Equity securities and mutual funds:
Amortized cost $ 199,293 (3)
Fair value 198,876
Nominal yield 2.63
--------------
Total available-for-sale securities:
Amortized cost $ 7,353,165
Fair value 7,224,673
Nominal yield 4.59
--------------
(1) Calculated on a taxable equivalent basis using a 39% effective tax rate.
(2) The average expected lives of mortgage-backed securities were 3.38 years
based upon current prepayment assumptions.
(3) Primarily restricted common stock of U.S. government agencies and preferred
stock of corporate issuers with no stated maturity.
(4) The nominal yield on mortgage-backed securities is based upon prepayment
assumptions at the purchase date. Actual yields earned may differ
significantly based upon actual prepayments.
(5) Expected maturities may differ from contractual maturities, because
borrowers may have the right to call or prepay obligations with or without
penalty.
Sales of available for sale securities resulted in gains and losses as follows
(in thousands):
Three Months Ended June 30 Six Months Ended June 30,
-------------------------------- ---------------------------------
2009 2008 2009 2008
-- ------------ ---- ----------- --- ------------ --- ------------
Proceeds $ 1,155,995 $ 393,925 $ 1,710,776 $ 1,470,701
Gross realized gains 16,670 2,936 38,896 8,507
Gross realized losses - (2,660) - (5,284)
Related federal and state income
tax expense 5,835 97 13,476 1,994
Gross realized gains for the six months ended June 30, 2008 exclude $6.8 million
gain from the redemption of Visa, Inc. Class B common stock.
Mortgage trading securities are mortgage-backed securities issued by U.S.
government agencies that have been designated as an economic hedge of the
mortgage servicing rights and are separately identified on the balance sheet.
These securities are carried at fair value. Changes in fair value are recognized
in earnings as they occur. As of June 30, 2009, mortgage trading securities are
carried at their $223 million fair value and had a net unrealized gain of $1.4
million. The Company recognized net losses of $10.2 million and $12.3 million on
mortgage trading securities in the second quarter and first half of 2009,
respectively. The Company recognized net losses of $5.5 million and $5.3 million
in the second quarter and first half of 2008, respectively.
13
Temporarily Impaired Securities as of June 30, 2009
(In Thousands)
Less Than 12 Months 12 Months or Longer Total
Number ------------ ------------ ------------ ------------ ------------ ------------
of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Loss Value Loss Value Loss
---------- ------------ ------------ ------------ ------------ ------------ ------------
Investment:
Municipal and other tax exempt 62 $ 32,722 $ 280 $ 8,074 $ 172 $ 40,796 $ 452
Available for sale:
Municipal and other tax-exempt 1 643 31 - - 643 31
Residential mortgage-backed
securities:
U. S. agencies:
FNMA 13 156,381 595 107,048 128 263,429 723
FHLMC 12 325,286 2,036 - - 325,286 2,036
GNMA 4 127,661 1,089 - - 127,661 1,089
Other 4 64,272 1,030 - - 64,272 1,030
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total U.S. agencies 33 673,600 4,750 107,048 128 780,648 4,878
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Private issue:
Alt-A loans 28 - - 254,424 102,613 254,424 102,613
Jumbo-A loans 87 97,380 8,989 822,509 161,334 919,889 170,323
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total private issue 115 97,380 8,989 1,076,933 263,947 1,174,313 272,936
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total residential mortgage-backed
securities 148 770,980 13,739 1,183,981 264,075 1,954,961 277,814
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Perpetual preferred stock 8 7,968 988 8,350 1,919 16,318 2,907
Equity securities and mutual funds 8 2,681 524 38 - 2,719 524
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total available for sale 165 782,272 15,282 1,192,369 265,994 1,974,641 281,276
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total 227 $ 814,994 $ 15,562 $1,200,443 $ 266,166 $2,015,437 $281,728
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Temporarily Impaired Securities as of June 30, 2008
(In Thousands)
Less Than 12 Months 12 Months or Longer Total
Number ------------ ------------ ------------ ------------ ------------ ------------
of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Loss Value Loss Value Loss
---------- ------------ ------------ ------------ ------------ ------------ ------------
Investment:
Municipal and other tax exempt 163 $ 25,444 $ 291 $ 31,332 $ 487 $ 56,776 $ 778
Available for sale:
U.S. Treasury 1 6,949 33 - - 6,949 33
Municipal and other tax-exempt 25 6,807 107 1,692 53 8,499 160
Residential mortgage-backed
securities:
U. S. agencies:
FNMA 140 867,867 19,935 364,189 5,350 1,232,056 25,285
FHLMC 117 295,331 11,398 580,421 7,743 875,752 19,141
GNMA 30 42,405 483 10,246 152 52,651 635
Other 2 47,658 1,588 - - 47,658 1,588
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total U.S. agencies 289 1,253,261 33,404 954,856 13,245 2,208,117 46,649
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Private issue:
Alt-A loans 28 91,328 9,925 295,455 18,653 386,783 28,578
Jumbo-A loans 76 186,560 5,529 938,820 41,180 1,125,380 46,709
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total private issue 104 277,888 15,454 1,234,275 59,833 1,512,163 75,287
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total residential mortgage-backed
securities 393 1,531,149 48,858 2,189,131 73,078 3,720,280 121,936
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Perpetual preferred stock 8 4,982 18 18,214 303 23,196 321
Equity securities and mutual funds 17 - - 10,474 784 10,474 784
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total available for sale 444 1,549,887 49,016 2,219,511 74,218 3,769,398 123,234
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total 607 $ 1,575,331 $ 49,307 $2,250,843 $ 74,705 $3,826,174 $124,012
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
On a quarterly basis, the Company performs separate evaluations of impaired debt
and equity securities to determine if the unrealized losses are temporary.
14
For equity securities, including perpetual preferred stocks, this evaluation
begins with an assessment of management's ability and intent to hold the
securities until fair value recovers. The assessment of the ability and intent
to hold these securities focuses on liquidity needs, asset / liability
management objectives and securities portfolio objectives. Based on the results
of this evaluation, management concluded that as of June 30, 2009, it had both
the intent and ability to hold these equity securities until the fair value
recovers.
For debt securities, management determines whether it intends to sell or if it
is more-likely-than-not that it will be required to sell impaired securities.
This determination considers current and forecasted liquidity requirements,
regulatory and capital requirements and securities portfolio management. The
Company identified $91 million of impaired debt securities that it intends to
sell after June 30, 2009. The current fair value of these securities was below
their amortized costs and the Company recognized $1.3 million in
other-than-temporary impairment ("OTTI") charges on these securities during the
second quarter of 2009.
For all impaired debt securities for which there was no intent or expected
requirement to sell, the evaluation considers all available evidence to assess
whether it is more likely than not that all amounts due would not be collected
according to the security's contractual terms.
Impaired debt securities are divided into two groups, those rated investment
grade by all nationally-recognized rating agencies and those rated below
investment grade by at least one of the nationally-recognized rating agencies.
Impairment of debt securities consistently rated investment grade is considered
temporary unless specific contrary information is identified. None of the debt
securities rated investment grade were considered to be other-than-temporarily
impaired at June 30, 2009.
15
As of June 30, 2009 the composition of the Company's securities portfolio by the
lowest current credit rating assigned by any of the three nationally-recognized
rating agencies is as follows (in thousands):
-------------------------------------------------------------------------------------------------------------------------------
Not Rated or Below
U.S. Govt / GSE (1) AAA - AA A - BBB Investment Grade Total
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value Cost Value
-------------------------------------------------------------------------------------------------------
Held-to-Maturity:
Municipal and other tax-exempt $- $- $53,186 $53,722 $62,278 $62,847 $147,929 $150,729 $263,393 $267,298
Other debt securities - - - - 600 600 5,851 5,872 6,451 6,472
--------------------------------------------------------------------------------------------------------------------------------
Total $- $- $53,186 $53,722 $62,878 $63,447 $153,780 $156,601 $269,844 $273,770
--------------------------------------------------------------------------------------------------------------------------------
Available for Sale:
U.S. Treasury $ 6,993 $ 7,073 $ - $ - $ - $ - $ - $ - $ 6,993 $ 7,073
Municipal and other tax-exempt - - 30,537 31,012 7,231 7,314 4,655 4,683 42,423 43,009
Residential mortgage-backed
securities:
U. S. agencies:
FNMA 3,047,648 3,130,098 - - - - - - 3,047,648 3,130,098
FHLMC 1,951,564 2,003,808 - - - - - - 1,951,564 2,003,808
GNMA 447,287 451,516 - - - - - - 447,287 451,516
Other 199,025 204,297 - - - - - - 199,025 204,297
--------------------------------------------------------------------------------------------------------------------------------
Total U.S. agencies 5,645,524 5,789,719 - - - - - - 5,645,524 5,789,719
--------------------------------------------------------------------------------------------------------------------------------
Private issue:
Alt-A loans - - 46,204 41,290 43,409 32,192 267,424 180,942 357,037 254,424
Jumbo-A loans - - 726,777 633,986 125,146 109,530 238,288 176,372 1,090,211 919,888
--------------------------------------------------------------------------------------------------------------------------------
Total private issue - - 772,981 675,276 168,555 141,722 505,712 357,314 1,447,248 1,174,312
--------------------------------------------------------------------------------------------------------------------------------
Total residential mortgage-backed
securities 5,645,524 5,789,719 772,981 675,276 168,555 141,722 505,712 357,314 7,092,772 6,964,031
--------------------------------------------------------------------------------------------------------------------------------
Other debt securities - - 6,700 6,700 2,400 2,400 2,584 2,584 11,684 11,684
Federal Reserve Bank stock 32,040 32,040 - - - - - - 32,040 32,040
Federal Home Loan Bank
stock 115,368 115,368 - - - - - - 115,368 115,368
Perpetual preferred stock - - - - 19,224 16,317 - - 19,224 16,317
Equity securities and
mutual funds - - - - - - 32,661 35,151 32,661 35,151
--------------------------------------------------------------------------------------------------------------------------------
Total $5,799,925 $5,944,200$810,218 $712,988 $197,410 $ 167,753 $545,612 $399,732 $7,353,165$7,224,673
--------------------------------------------------------------------------------------------------------------------------------
(1) U.S. government and government sponsored enterprises are not rated by the
nationally-recognized rating agencies as these securities are guaranteed
by agencies of the U.S. government or government-sponsored enterprises.
Approximately $506 million of our portfolio of privately issued mortgage-backed
securities (based on amortized cost before impairment charges) was rated below
investment grade by at least one of the nationally-recognized rating agencies.
The aggregate unrealized loss on these securities totaled $148 million. Ratings
by the nationally recognized rating agencies are subjective in nature and
accordingly rating can vary significantly amongst the agencies. Limitations
generally expressed by the rating agencies include statements that ratings do
not predict the specific percentage default likelihood over any given period of
time and that ratings do not opine on expected loss severity of an obligation
should the issuer default. As such, the impairment of securities rated below
investment grade by at least one of the nationally-recognized rating agencies
was evaluated to determine if we expect not to recover the entire amortized cost
basis of the security. This evaluation was based on projections of estimated
cash flows based on individual loans underlying each security using current and
anticipated increases in unemployment and default rates, decreases in housing
prices and increases in loss severity at foreclosure. The primary assumptions
used in this evaluation were:
o Unemployment rates - increasing to 10.5% over the next 12 months, dropping
to 8% for the following 12 months, and holding at 8% thereafter.
o Housing price depreciation - starting with current depreciated housing
prices based on information derived from the Federal Housing Finance Agency
data, decreasing by an additional 10% over the next twelve months and
holding at that level thereafter.
o Loss severity - held constant at 27% of the then-current depreciated
housing price at estimated foreclosure date.
16
o Discount rates - estimated cash flows were discounted at rates that range
from 5.50% to 6.14% based on our current expected yields.
These securities were further evaluated based on the loan-to-value ratio and
credit enhancement coverage ratio, with each of these criteria being given equal
weight in the evaluation.
Adjusted loan-to-value ratio is an estimate of the collateral value available to
support the realizable value of the security. The Company calculates the
adjusted loan-to-value ratio for each security using loan-level data that
comprises each security. The adjusted loan-to-value ratio is the original
loan-to-value ratio adjusted for market-specific home price depreciation and the
credit enhancement on the specific tranche of the security owned by the Company.
The home price depreciation is derived from the Federal Housing Finance Agency
("FHFA"). FHFA provides historical information on home price depreciation at
both the Metropolitan Statistical Area ("MSA") and state level. This information
is matched to each loan to calculate the home price depreciation. Data is
accumulated from the loan level to determine the adjusted loan-to-value ratio
for the security as a whole. The Company believes that an adjusted loan-to-value
ratio above 85% provides evidence that the collateral value may not provide
sufficient cash flows to support our carrying value. The 85% guideline provides
a reasonable cushion for further home price depreciation in future periods
beyond our assumptions of current loss trends for residential real estate loans
and is consistent with underwriting standards used by the Company to originate
new residential mortgage loans. A distribution of the amortized cost (after
recognition of the other-than-temporary impairment) and fair value by adjusted
loan to value ratio is as follows (in thousands):
Adjusted LTV Ratio Amortized Cost Fair Value
---------------------------------------------------
< 70 % $ 44,977 $ 36,349
70 < 75 173,271 119,027
75 < 80 191,193 140,770
80 < 85 85,350 52,204
>= 85 10,921 8,964
---------------------------------------------------
Total $ 505,712 $ 357,314
---------------------------------------------------
OTTI charges have been recognized through earnings on securities with adjusted
loan-to-value ratios in excess of 85%. The remaining impairment represents
unrealized losses attributed to factors other than credit losses and are
recognized in accumulated other comprehensive losses.
Credit enhancement coverage ratio is an estimate of credit enhancement available
to absorb current projected losses within the pool of loans that support the
security. The Company acquires the benefit of credit enhancement by investing in
super-senior tranches for many of our mortgage-backed securities. Subordinated
tranches held by other investors are specifically designed to absorb losses
before the super-senior tranches which effectively doubled the typical credit
support for these types of bonds. Current projected losses consider depreciation
of home prices based on FHFA data, estimated costs and additional losses to
liquidate collateral and delinquency status of the individual loans underlying
the security. Management believes that a credit enhancement coverage ratio below
1.50 provides evidence that current credit enhancement may not provide
sufficient cash flows of the individual loans to support our carrying value at
the security level. The credit enhancement coverage ratio guideline of 1.50
times is based on standard underwriting criteria which consider loans with
coverage ratios of 1.20 to 1.25 times to be well-secured. No impaired securities
rated below investment grade by any one of the nationally-recognized rating
agencies have credit enhancement coverage ratios below 1.50 times.
Additional evidence considered by the Company is the current loan-to-value ratio
and the FICO score of individual borrowers whose loans are still performing
within the collateral pool as forward-looking indicators of possible future
losses that could affect our evaluation.
Based on the results of management's evaluation , the Company recognized $279
thousand of OTTI charges against earnings in the second quarter of 2009 on
certain mortgage-backed securities due to further declines in the projected cash
flows from these securities. OTTI of $7.0 million was recognized in earnings in
the first quarter of 2009 from these same securities.
17
The following represents the composition of net impairment losses recognized in
earnings (in thousands):
Three Months Six Months
Ended Ended
June 30, 2009 June 30, 2009
----------------- ----------------
OTTI related to perpetual preferred stocks $ - $ 8,008
OTTI on debt securities due to change in
intent to sell 1,263 1,263
OTTI on debt securities not intended for sale - 46,360
Less: Portion of OTTI recognized in other
other comprehensive income (279) (39,087)
------------------------------------------------------ ----------------- ----------------
OTTI recognized in earnings related to
credit losses on debt securities not intended
for sale 279 7,273
------------------------------------------------------ ----------------- ----------------
Total OTTI recognized in earnings $ 1,542 $ 16,544
------------------------------------------------------ ----------------- ----------------
The following is a tabular rollforward of the amount of credit-related OTTI
recognized on available-for-sale debt securities in earnings (in thousands):
Three Months Six Months
Ended Ended
June 30, 2009 June 30, 2009
----------------- ----------------
Balance of credit-related OTTI recognized on
available for sale debt securities at April 1, 2009
and January 1, 2009, respectively $ 6,994 $ -
Additions for credit-related OTTI not previously
recognized - 6,994
Additions for increases in credit-related OTTI
previously recognized when there
is no intent to sell and no requirement
to sell before recovery of
amortized cost 279 279
------------------------------------------------------ ----------------- ----------------
Balance of credit-related OTTI recognized on
available for sale debt securities at June 30, 2009 $ 7,273 $ 7,273
------------------------------------------------------ ----------------- ----------------
18
(3) Derivatives
The fair values of derivative contracts at June 30, 2009 are as follows (in
thousands):
Derivatives Gain (Loss) Recognized in Income Statement
--------------------------- -------------------------- ---------------------------------------------------
Three Months ended Six Months ended
Assets Liabilities June 30, 2009 June 30, 2009
--------------------------- -------------------------- ---------------------------- ----------------------
Gain Gain
Brokerage (Loss) Brokerage (Loss)
and on and on
Fair Fair Trading Derivatives, Trading Derivatives,
Notional(1) Value Notional(1) Value Revenue Net Revenue Net
-------------- ------------ ------------ ------------- ------------- -------------- ----------- ----------
Customer Risk
Management Programs:
Interest rate contracts $4,895,898 $131,191 $5,165,943 $136,034 $ 741 $ - $1,680 $ -
Energy contracts 1,141,854 290,974 932,194 294,081 1,485 - 1,314 -
Cattle contracts 20,837 960 14,189 849 131 - 334 -
Foreign exchange contracts 48,644 48,237 47,956 48,237 93 - 174 -
CD options 51,380 4,494 51,380 4,494 - - - -
----------------------- -------------- ------------ ------------ ------------- ------------- -------------- ----------- ----------
Fair value before cash
collateral 6,158,613 475,856 6,211,662 483,695 2,450 - 3,502 -
Less: cash collateral - (17,147) - (38,232) - - - -
----------------------- -------------- ------------ ------------ ------------- ------------- -------------- ----------- ----------
Total Customer Derivatives 6,158,613 458,709 6,211,662 445,463 2,450 - 3,502 -
Interest Rate Risk
Management Programs 438,586 4,262 - - - (4,578) - (8,604)
----------------------- -------------- ------------ ------------ ------------- ------------- -------------- ----------- ----------
Total Derivative Contracts $6,597,199 $462,971 $6,211,662 $445,463 $2,450 $(4,578) $3,502 $(8,604)
----------------------- -------------- ------------ ------------ ------------- ------------- -------------- ----------- ----------
(1) Notional amounts for commodity contracts are converted into
dollar-equivalent amounts based on dollar prices at the inception of the
contract.
Interest Rate Risk Management Programs
BOK Financial uses interest rate swaps in managing its interest rate
sensitivity. Interest rate swaps are generally used to reduce overall asset
sensitivity by converting specific fixed rate liabilities to floating rate based
on LIBOR.
For the quarter ended June 30, 2009 and 2008, net interest revenue was increased
by $3.9 million and $1.7 million, respectively, from the settlement of amounts
receivable or payable on interest rate swaps.
The notional, fair value included in residential mortgage loans held for sale on
the balance sheet and related gain (loss) included in mortgage banking revenue
due to changes in the fair value of derivative contracts not designated as
hedging instruments under FAS 133 (R) related to mortgage loan commitments and
forward contract sales as of June 30, 2009 were (in thousands):
Mortgage Loans Held for Sale
---------------------------- Mortgage
Fair Banking
Notional Value Revenue
--------------- ------------ ------------
Mortgage loan commitments $572,306 $2,252 $(10,853)
Forward sales contracts 561,639 5,085 9,589
-------------------------------- --------------- ------------ ------------
$7,337 $ (1,264)
-------------------------------- --------------- ------------ ------------
19
(4) Mortgage Banking Activities
BOK Financial engages in mortgage banking activities through the BOk Mortgage
Division of BOk. Residential mortgage loans held for sale totaled $326 million
and $120 million, and outstanding mortgage loan commitments totaled $292 million
and $80 million at June 30, 2009 and 2008, respectively. Mortgage loan
commitments are generally outstanding for 60 to 90 days and are subject to both
credit and interest rate risk. Credit risk is managed through underwriting
policies and procedures, including collateral requirements, which are generally
accepted by the secondary loan markets. Exposure to interest rate fluctuations
is partially managed through forward sales of mortgage-backed securities and
forward sales contracts. These latter contracts set the price for loans that
will be delivered in the next 60 to 90 days. As of June 30, 2009, the unrealized
gain recognized on forward sales contracts used to manage the mortgage pipeline
interest rate risk was approximately $5.1 million. Gains on mortgage loans sold,
including capitalized mortgage servicing rights, totaled $21.2 million and $5.5
million in the first half of 2009 and 2008, respectively.
At June 30, 2009, BOK Financial owned the rights to service 61,595 mortgage
loans with outstanding principal balances of $6.9 billion, including $825
million serviced for affiliates. The weighted average interest rate and
remaining term was 5.80% and 287 months, respectively.
For the three and six months ended June 30, 2009, mortgage banking revenue
includes servicing fee income and late charges on loans serviced for others of
$4.8 million and $9.4 million, respectively. For the three and six months ended
June 30, 2008, mortgage banking revenue includes servicing fee income and late
charges on loans serviced for others of $4.3 million and $8.6 million,
respectively.
Activity in capitalized mortgage servicing rights and related valuation
allowance during the six months ending June 30, 2009 is as follows (in
thousands):
Capitalized Mortgage Servicing Rights
------------------------------------------
Purchased Originated Total
--------------- ------------ -------------
Balance at December 31, 2008 $ 6,353 $ 36,399 $ 42,752
Additions, net - 25,268 25,268
Change in fair value due to loan runoff (1,464) (8,963) (10,427)
Change in fair value due to market changes 3,080 6,740 9,820
-------------------------------------------- -- ---------- -- ---------- -- -----------
Balance at June 30, 2009 $ 7,969 $ 59,444 $ 67,413
-------------------------------------------- -- ---------- -- ---------- -- -----------
Changes in the fair value of mortgage servicing rights are included in Other
Operating Expense in the Consolidated Statements of Earnings (Unaudited).
Changes in fair value due to loan runoff are included in mortgage banking costs.
Changes in fair value due to market changes are reported separately. Changes in
fair value due to market changes during the period relate to assets held at the
reporting date.
Fair value is determined by discounting the projected net cash flows.
Significant assumptions used to determine fair value are:
June 30, 2009 December 31, 2008
--------------------- --------------------
Discount rate - risk-free rate plus a market premium 10.51% 9.26%
Prepayment rate - based upon loan interest rate,
original term and loan type 5.2% - 26.2% 8.3% - 38%
Loan servicing costs - annually per loan based upon
loan type $43 - $73 $43 - $73
Escrow earnings rate - indexed to rates paid on deposit
accounts with comparable average life 2.96% 2.08%
20
Stratification of the mortgage loan servicing portfolio and outstanding
principal of loans serviced by interest rate at June 30, 2009 follows (in
thousands):
< 5.51% 5.51% - 6.50% 6.51% - 7.50% > 7.50% Total
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
Fair value $ 32,927 $ 25,435 $ 7,306 $ 1,745 $ 67,413
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
Outstanding principal of loans serviced (1) $ 2,580,000 $2,432,000 $839,000 $155,000 $ 6,006,000
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
(1) Excludes outstanding principal of $825 million for loans serviced for
affiliates and $30 million of mortgage loans for which there are no capitalized
mortgage servicing rights.
(5) Employee Benefits
BOK Financial has sponsored a defined benefit Pension Plan for all employees who
satisfied certain age and service requirements. Pension Plan benefits were
curtailed as of April 1, 2006. The Company recognized periodic pension cost of
$1.2 million during the six months ended June 30, 2009, and none during the same
period of the prior year. The Company made no Pension Plan contributions during
the six months ended June 30, 2009 and June 30, 2008.
Management has been advised that the maximum and minimum allowable contributions
for 2009 are $23 million and $0.4 million, respectively.
(6) Commitments and Contingent Liabilities
As described in previous filings, on April 7, 2008, AXIA and its parent, BOK,
received a Wells notice from the regional office of the SEC in Los Angeles
indicating that the staff was considering recommending that the SEC bring a
civil injunctive action against AXIA and BOK for violations of Section 17(a) of
the Securities Act of 1955, Section 10(b) of the Securities Exchange Act of
1934, Sections 206(1) and (2) of the Investment Advisors Act of 1940, and
Sections 12(b) and 34(b) of the Investment Company Act of 1940. The Staff of the
Securities Exchange Commission has since advised the Company that it does not
intend to recommend the Commission take any action as originally contemplated by
the Wells Notice received by the Company in connection with the Staff's
investigation of BISYS Fund Services Ohio, Inc.
BOSC, Inc. has been joined as a defendant in a punitive class action brought on
behalf of unit holders of SemGroup Energy Partners, LP in the United States
District Court for the Northern District of Oklahoma. The lawsuit is brought
pursuant to Sections 11 and 12(a)(2) of the Securities Act of 1933 against all
of the underwriters of issuances of partnership units in the Initial Public
Offering in July 2007 and in a Secondary Offering in January 2008. BOSC
underwrote $6.25 million of units in the Initial Public Offering. BOSC was not
an underwriter in the Secondary Offering. Counsel for BOSC believes BOSC has
valid defenses to the claims asserted in the litigation and management does not
anticipate any material loss.
As a member of Visa, BOK Financial is obligated for a proportionate share of
certain covered litigation losses incurred by Visa under a retrospective
responsibility plan. A contingent liability was recognized for the Company's
share of Visa's covered litigation liabilities. This contingent liability
totaled $2.1 million at June 30, 2009. During 2008, Visa funded an escrow
account to cover litigation claims, including covered litigation losses under
the retrospective responsibility plan, with proceeds from its initial public
offering and from available cash. BOK Financial recognized a $2.1 million
receivable for its proportionate share of this escrow account.
BOK Financial received 410,562 Visa Class B shares as part of Visa's initial
public offering in the first quarter of 2008. A partial redemption of Class B
shares was completed and the Company received $6.8 million in cash in exchange
for 158,725 Class B shares. The remaining 251,837 Class B shares are convertible
into Visa Class A shares at the later of three years after the date of Visa's
initial public offering or the final settlement of all covered litigation. The
current exchange rate is approximately 0.5824 Class A shares for each Class B
share. However, the Company's Class B shares may be diluted in the future if the
escrow fund is not adequate to cover future covered litigation costs. Therefore,
under currently issued accounting guidance, no value has been currently assigned
to the Class B shares and no value may be assigned until the Class B shares are
converted into a known number of Class A
21
shares.
At June 30, 2009, Cavanal Hill Funds' assets included $1.0 billion of U.S.
Treasury, $1.3 billion of cash management and $634 million of tax-free money
market funds. Assets of these funds consist of highly-rated, short-term
obligations of the U.S. Treasury, corporate issuers and U.S. states and
municipalities. The net asset value of units in these funds was $1.00 at June
30, 2009. An investment in these funds is not insured by the Federal Deposit
Insurance Corporation or guaranteed by BOK Financial or any of its subsidiaries.
BOK Financial may, but is not obligated to purchase assets from these funds to
maintain the net asset value at $1.00.
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.
The Company has evaluated events from the date of the consolidated financial
statements on June 30, 2009 through the issuance of those consolidated financial
statements included in this Quarterly Report on Form 10-Q on July 30, 2009. No
events were identified requiring recognition in and/or disclosure in
consolidated financial statements.
22
(7) Shareholders' Equity
On July 28, 2009, the Board of Directors of BOK Financial Corporation approved a
$0.24 per share quarterly common stock dividend. The quarterly dividend will be
payable on August 28, 2009 to shareholders of record on August 14, 2009.
Dividends declared during the three and six months ended June 30, 2009 were
$0.24 per share and $0.465 per share, respectively. Dividends declared during
the three and six months ended June 30, 2008 were $0.225 per share and $0.425
per share, respectively.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) ("AOCI") includes unrealized gains
and losses on available for sale securities and accumulated gains or losses on
effective cash flow hedges, including hedges of anticipated transactions. Gains
and losses in AOCI are net of deferred income taxes. Accumulated losses on the
rate lock hedge of the 2005 subordinated debenture issuance will be reclassified
into income over the ten-year life of the debt. Unrealized losses on employee
benefit plans were recognized as required by Statement of Financial Accounting
Standards Board No. 158, "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106,
and 132(R)" ("FAS 158"), and will be reclassified into income as Pension Plan
costs.
(In thousands) Unrealized Other Accumulated Unrealized
Gain (Loss) Than (Loss) on (Loss)
On Available Temporary Effective On
For Sale Impairment Cash Flow Employee
Securities Losses Hedges Benefit Plans Total
-------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007 $ (22,775) $ - $ (1,461) $ (6,998) $ (31,234)
Unrealized losses on securities (120,175) - - - (120,175)
Unrealized gains on cash flow hedges - - 139 - 139
Tax benefit (expense) on unrealized gains (losses) 85,433 - (54) - 85,379
Reclassification adjustment for losses realized
and included in net income 5,081 - 161 - 5,242
Reclassification adjustment for tax benefit on
realized losses (3,666) - (63) - (3,729)
-------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2008 $ (56,102) $ - $ (1,278) $ (6,998) $ (64,378)
-------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2008 $ (204,648) $ - $ (1,199) $ (17,039) $(222,886)
Unrealized gains on securities 224,634 15,177 - - 239,811
Other-than-temporary impairment losses on securities - (39,087) - - (39,087)
Tax benefit (expense) on unrealized gains (losses) (78,027) 8,295 - - (69,732)
Reclassification adjustment for (gains) losses
realized and included in net income (10,152) - 117 - (10,035)
Reclassification adjustment for tax expense (benefit)
on realized gains (losses) 3,526 - (45) - 3,481
-------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2009 $ (64,667) $ (15,615) $ (1,127) $ (17,039) $ (98,448)
-------------------------------------------------------------------------------------------------------------------------------
23
(8) Earnings Per Share
Effective January 1, 2009, the Company adopted Financial Accounting Standards
Board Staff Position (FSP) No. EITF 03-6-1, "Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities." FSP
EITF 03-6-1 provides that unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. The Corporation has
determined that its outstanding non-vested stock awards are participating
securities. Accordingly, effective January 1, 2009, earnings per common share is
computed using the two-class method prescribed by FAS 128, "Earnings Per Share."
All previously reported earnings per common share data has been retrospectively
adjusted to conform to the new computation method, the effects of which were not
material.
Three Months Ended Six Months Ended
------------------------------------------------------
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
------------------------------------------------------
Numerator:
Net income $ 52,115 $ (1,161) $ 107,147 $ 61,104
Earnings allocated to participating securities (234) 3 (414) (161)
------------------------------------------------------------------------------------------------------------------------
Numerator for basic earnings per share - income
available to common shareholders 51,881 (1,158) 106,733 60,943
Effect of reallocating undistributed earnings of participating securities - - - -
------------------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share - income available
to common shareholders $ 51,881 $ (1,158) $ 106,733 $ 60,943
------------------------------------------------------------------------------------------------------------------------
Denominator:
Weighted average shares outstanding 67,647,860 67,452,181 67,592,257 67,415,930
Less: Participating securities included in weighted average
shares outstanding (303,283) - (261,667) (88,775)
------------------------------------------------------------------------------------------------------------------------
Denominator for basic earnings per common share 67,344,577 67,452,181 67,330,590 67,327,155
Dilutive effect of employee stock compensation plans (1) 103,452 - 87,284 363,764
------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per common share 67,448,029 67,452,181 67,417,874 67,690,919
------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.77 $ (0.02) $ 1.59 $ 0.91
------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.77 $ (0.02) $ 1.58 $ 0.90
------------------------------------------------------------------------------------------------------------------------
(1) Excludes employee stock options with exercise prices greater
than current market price. 2,497,178 - 3,059,192 278,812
(9) Reportable Segments
Reportable segments reconciliation to the Consolidated Financial Statements for
the six months ended June 30, 2009 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
------------ -- ------------ -- ------------- -- ----------- -- --------------
Total reportable segments $ 241,260 $ 242,007 $ 312,093 $ 54,848 $ 24,675,430
Unallocated items:
Tax-equivalent adjustment 3,897 - - 3,897 -
Funds management and other 100,268 3,716 29,471 48,402 (1,777,698)
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 345,425 $ 245,723 $ 341,564 $ 107,147 $ 22,897,732
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
24
Reportable segments reconciliation to the Consolidated Financial Statements for
the three months ended June 30, 2009 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
------------ -- ------------ -- ------------- -- ----------- -- --------------
Total reportable segments $ 119,489 $ 122,025 $ 155,907 $ 24,729 $ 24,711,251
Unallocated items:
Tax-equivalent adjustment 1,792 - - 1,791 -
Funds management and other 54,299 2,048 19,863 25,595 (2,637,220)
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 175,580 $ 124,073 $ 175,770 $ 52,115 $ 22,074,031
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
Reportable segments reconciliation to the Consolidated Financial Statements for
the six months ended June 30, 2008 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Income Average
Revenue Revenue(1) Expense (Loss) Assets
------------ -- ------------ -- ------------- -- ----------- -- --------------
Total reportable segments $ 251,332 $ 232,204 $ 287,618 $ 91,052 $ 23,039,803
Unallocated items:
Tax-equivalent adjustment 4,238 - - 4,238 -
Funds management and other 50,497 (55,743) 25,054 (34,186) (1,879,652)
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 306,067 $ 176,461 $ 312,672 $ 61,104 $ 21,160,151
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
Reportable segments reconciliation to the Consolidated Financial Statements for
the three months ended June 30, 2008 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Income Average
Revenue Revenue(1) Expense (Loss) Assets
------------ -- ------------ -- ------------- -- ----------- -- --------------
Total reportable segments $ 123,503 $ 121,346 $ 147,626 $ 32,214 $ 23,400,196
Unallocated items:
Tax-equivalent adjustment 2,084 - - 2,084 -
Funds management and other 33,352 (58,746) 11,642 (35,459) (1,791,896)
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 158,939 $ 62,600 $ 159,268 $ (1,161) $ 21,608,300
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
25
(10) Fair Value Measurements
The following table presents the carrying values and estimated fair values of
financial instruments as of June 30, 2009 (dollars in thousands):
Range of Average Estimated
Carrying Contractual Repricing Discount Fair
Value Yields (in years) Rate Value
---------------------------------------------------------------------
Cash and cash equivalents $ 582,681 $ 582,681
Securities 7,801,929 7,805,855
Residential mortgage - held for sale 326,363 - - - 326,363
Loans:
Commercial 6,715,851 0.50 -18.00% 0.44 0.31 - 3.81% 6,657,955
Commercial real estate 2,611,693 1.75 -18.00 1.23 0.47 - 3.81 2,595,892
Residential mortgage 1,833,975 4.00 -12.75 7.07 1.37 - 4.77 1,990,548
Consumer 908,409 2.05 -21.00 1.40 3.81 943,284
----------------------------------------------------------------------------------------------------------------
Total loans 12,069,928 12,187,679
Reserve for loan losses (263,309) -
----------------------------------------------------------------------------------------------------------------
Net loans 11,806,619 12,187,679
Derivative instruments with positive
fair value, net of cash margin 462,971 462,971
Deposits with no stated maturity 10,083,456 10,083,456
Time deposits 4,571,933 0.02 - 10.00 1.92 0.10 - 2.44 4,589,691
Other borrowings 4,950,451 1.20 - 2.92 0.08 0.10 - 0.60 4,802,696
Subordinated debentures 398,465 5.58 4.03 2.09 444,068
Derivative instruments with negative
fair value, net of cash margin 445,463 445,463
----------------------------------------------------------------------------------------------------------------
The fair value of financial assets and liabilities that are measured on a
recurring basis are as follows as of June 30, 2009 (in thousands):
Quoted Prices Significant
in Active Other Significant
Markets for Observable Unobservable
Total Identical Inputs Inputs
Instruments
----------- ---------------- --------------- ----------------
Assets:
Trading securities $84,548 $ 233 $74,365 $9,950
Investment securities 273,770 273,770
Available for sale securities:
U.S. Treasury 7,073 7,073 -
Municipal and other tax-exempt 43,009 20,407 22,602
Mortgage-backed securities 6,964,031 6,964,031
Other debt securities 11,684 34 11,650
Federal Reserve Bank stock 32,040 32,040
Federal Home Loan Bank stock 115,368 115,368
Perpetual preferred stock 16,317 16,317
Equity securities and mutual funds 35,151 13,620 21,531
----------- ---------------- --------------- ----------------
7,224,673 20,693 7,169,728 34,252
Mortgage trading securities 222,864 222,864
Mortgage servicing rights 67,413 67,413 (1)
Derivative contracts 462,971 462,971
Liabilities:
Certificates of deposit 520,245 520,245
Derivative contracts 445,463 445,463
(1) A reconciliation of the beginning and ending fair value of mortgage
servicing rights and disclosures of significant assumptions used to
determine fair value are presented in Note 4, Mortgage Banking
Activities.
26
The fair value of assets and liabilities based on significant other observable
inputs are generally provided to us by third-party pricing services and are
based on one or more of the following:
o Quoted prices for similar, but not identical, assets or liabilities in
active markets;
o Quoted prices for identical or similar assets or liabilities in inactive
markets;
o Inputs other than quoted prices that are observable, such as interest rate
and yield curves, volatilities, prepayment speeds, loss severities, credit
risks and default rates;
o Other inputs derived from or corroborated by observable market inputs.
The underlying methods used by the third-party pricing services are considered
in determining the primary inputs used to determine fair values. Management has
evaluated the methodologies employed by the third-party pricing services and
determined that the results represent prices that would be received to sell
assets or paid to transfer liabilities in orderly transactions in the current
market. A more detailed description of the valuation methodologies used for
assets and liabilities measured at fair value is set forth in the Company's 2008
Form 10-K.
The fair value of certain municipal and other debt securities are based on
significant unobservable inputs. Inputs used to estimate fair value include
limited observed trades, projected cash flows, current credit rating of the
issuers and, when applicable, the insurers of the debt and observed trades of
similar debt. All of these securities are currently paying in accordance with
their respective contractual terms. Losses reported in earnings on these
securities totaled $513 thousand in the second quarter of 2009. At June 30,
2009, fair value equaled amortized cost of these securities.
Certain certificates of deposit were designated as carried at fair value as
permitted by FAS 159. These certificates have been converted from fixed interest
rates to variable interest rates based on LIBOR with interest rate swaps. The
fair value election for these liabilities better represents the economic effect
of these instruments on the Company. At June 30, 2009, the fair value and
contractual principal amount of these certificates was $520 million and $517
million, respectively. Change in the fair value of these certificates of deposit
resulted in an unrealized gain during the first half of 2009 of $5.9 million,
which is included in Gain (Loss) on Derivatives, net on the Consolidated
Statement of Earnings.
Assets measured on a non-recurring basis include pension plan assets, which are
based on quoted prices in active markets for identical instruments, real
property and other assets acquired to satisfy loans, which are based primarily
on comparisons of completed sales of similar assets, and goodwill, which is
based on significant unobservable inputs.
27
(11) Federal and State Income Taxes
The reconciliations of income (loss) attributable to continuing operations at
the U.S. federal statutory tax rate to income tax expense are as follows (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------
2009 2008 2009 2008
------------------------------------------------
Amount:
Federal statutory tax $ 28,229 $ (1,835) $ 57,665 $ 32,027
Tax exempt revenue (1,125) (1,113) (2,250) (2,225)
Effect of state income
taxes, net of federal
benefit 2,091 (78) 4,615 2,438
Utilization of tax credits (378) (296) (757) (592)
Bank-owned life insurance (789) (875) (1,578) (1,750)
Other, net 287 1,335 (542) 1,690
------------------------------------------------------------------------------
Total $ 28,315 $ (2,862) $ 57,153 $ 31,588
------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------
2009 2008 2009 2008
------------------------------------------------
Percent of pretax income:
Federal statutory tax 35% 35% 35% 35%
Tax exempt revenue (1) 21 (1) (2)
Effect of state income
taxes, net of federal
benefit 3 1 3 3
Utilization of tax credits (1) 6 (1) (1)
Bank-owned life insurance (1) 17 (1) (2)
Other, net - (25) - 1
------------------------------------------------------------------------------
Total 35% 55% 35% 34%
------------------------------------------------------------------------------
(12) Financial Instruments with Off-Balance Sheet Risk
BOK Financial is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to manage interest rate risk. Those financial instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in BOK
Financial's Consolidated Balance Sheets. Exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the notional
amount of those instruments.
As of June 30, 2009, outstanding commitments and letters of credit were as
follows (in thousands):
June 30,
2009
--------------
Commitments to extend credit $ 4,925,347
Standby letters of credit 568,961
Commercial letters of credit 13,500
28
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Performance Summary
BOK Financial Corporation ("the Company") reported net income of $52.1 million
or $0.77 per diluted share for the second quarter of 2009. Net income totaled
$55.0 million or $0.81 per diluted share for the first quarter of 2009 and a net
loss of $1.2 million or $0.02 per diluted share was recognized for the second
quarter of 2008. Net income for the six months ended June 30, 2009 totaled
$107.1 million or $1.58 per diluted share compared with net income of $61.1
million or $0.90 per diluted share for the six months ended June 30, 2008. The
second quarter of 2008 was impacted by $87.0 million in pre-tax charges for loan
and energy derivative credit exposure related to the bankruptcy filing by
SemGroup LP and related entities which reduced net income for the second quarter
of 2008 by approximately $57.0 million or $0.84 per diluted share.
In the second quarter of 2009, the Company incurred an $11.8 million pre-tax
charge for a special assessment by the FDIC and recognized net pre-tax gains on
available for sale securities of $15.2 million. In the first quarter of 2009,
the Company recognized net pre-tax gains on available for sale securities of
$7.2 million.
Highlights of the second quarter of 2009 included:
o Net interest revenue totaled $175.6 million, up $5.7 million compared
to the first quarter of 2009. Net interest margin was 3.55% for the
second quarter of 2009, up 8 basis points over the first quarter of
2009 largely due to higher loan yields and lower funding costs.
o Fees and commission revenue totaled $123.1 million for the second
quarter of 2009. Mortgage banking revenue remained at relative high
levels due to increased loan volume driven by government initiatives to
lower national mortgage interest rates.
o Operating expenses totaled $175.8 million, up $10.0 million over the
first quarter of 2009. Increased operating expenses included an $11.8
million FDIC special assessment.
o Combined reserve for credit losses totaled $274 million or 2.27% of
outstanding loans at June 30, 2009, up from $262 million or 2.07% of
outstanding loans at March 31, 2009. Net loans charged off and
provision for credit losses were $34.9 million and $47.1 million,
respectively, for the second quarter of 2009.
o Non-performing assets totaled $446 million or 3.67% of outstanding
loans and repossessed assets at June 30, 2009, $414 million or 3.26% of
outstanding loans and repossessed assets at March 31, 2009.
o Outstanding loan balances were $12.1 billion at June 30, 2009, down
$570 million since March 31, 2009. Commercial, commercial real estate
and consumer loans all decreased during the second quarter due largely
to reduced customer demand.
o Average deposit balances totaled $15.3 billion for the second quarter
of 2009, up $479 million compared with average deposits for the first
quarter of 2009. Total period-end deposits were $14.7 billion at June
30, 2009, down $615 million since March 31, 2009 due to lower time
deposit account balances. Lower time deposit account balances were due
largely to maturities of brokered deposits.
o The Company's tangible common equity ratio and tier 1 common equity
ratio increased to 7.55% and 9.77%, respectively, at June 30, 2009 from
6.84% and 9.58%, respectively, at March 31, 2009 due largely to lower
unrealized losses on securities. The tangible common equity ratio and
tier 1 common equity ratio are non-GAAP measures of capital strength
used by the Company and investors based on shareholders' equity as
defined by generally accepted accounting principles minus intangible
assets and equity that does not benefit common shareholders such as
preferred equity and equity provided by the U.S. Treasury's Troubled
Asset Relief Program ("TARP") Capital Purchase Program. The Company
chose not to participate in the TARP Capital Purchase Program. Tier 1
capital ratios were 9.86% at June 30, 2009 and 9.66% at March 31, 2009.
o The Company paid a cash dividend of $16.2 million or $0.24 per common
share during the second quarter of 2009. On July 28, 2009, the board of
directors declared a cash dividend of $0.24 per common share payable on
or about August 28, 2009 to shareholders of record as of August 14,
2009.
Results of Operations
Net Interest Revenue and Net Interest Margin
Net interest revenue totaled $175.6 million for the second quarter of 2009, up
$16.6 million or 10% over the second quarter of 2008 and $5.7 million over the
first quarter of 2009. The increase in net interest revenue over the second
quarter of 2008 was due primarily to growth in average earning assets.
Improvement in net interest margin also contributed to the growth in net
interest revenue.
Average earning assets for the second quarter of 2009 increased $1.6 billion or
9% compared to the second quarter of 2008, primarily due to a $1.6 billion
increase in average securities. Average available for sale securities, which
consist largely of U.S. government agency issued mortgage-backed securities,
increased $1.4 billion. We purchase securities to supplement earnings,
especially during periods of declining loan demand, and to manage the Company's
interest rate risk. Average loans, net of allowance for loan losses, decreased
$146 million compared to the second quarter of 2008 primarily due to growth in
residential mortgage loans offset by decreases in commercial, commercial real
estate and consumer loans due to reduced customer demand as a result of current
economic conditions.
Growth in average earning assets was funded primarily by a $914 million increase
in average deposits and borrowed funds and a $583 million decrease in average
margin assets held as part of our customer derivatives programs. Average
deposits increased $2.0 billion over the second quarter of 2008, partially
offset by $1.1 billion decrease in average borrowed funds. Average time deposits
increased $1.0 billion compared with the second quarter of 2008. Average demand
deposits increased $549 million and average interest-bearing transaction
accounts increased $434 million over the second quarter of 2008.
Average earning assets for the second quarter of 2009 increased $205 million
compared to the first quarter of 2009, primarily due to a $542 million increase
in average securities, offset by a $402 million decrease in average loans, net
of allowance for loan losses. Growth in average securities was due to both
additional purchases of U.S. government agency issued mortgage-backed securities
and increases in the fair value of securities held by the Company. Average
outstanding loans decreased primarily due to lower outstanding commercial and
consumer loan balances due to reduced customer demand as a result of current
economic conditions. Residential mortgage loans, excluding mortgage loans held
for sale, increased $43 million due to activity stimulated by government
actions to lower mortgage interest rates. Average deposits increased $479
million compared with the first quarter of 2009, including a $319 million
increase in average demand deposits, a $243 million increase in average
interest-bearing transaction accounts, offset by a $91 million decrease in
average time deposits. Average funds purchased, repurchase agreements and other
borrowed funds decreased $452 million from the first quarter of 2009.
Net interest margin was 3.55% for the second quarter of 2009, 3.47% for the
first quarter of 2009 and 3.44% for the second quarter of 2008.
The cost of interest-bearing liabilities was 1.31% for the second quarter of
2009, down 116 basis points from the second quarter of 2008. The cost of
interest bearing deposits decreased 101 basis points to 1.49% and the cost of
funds purchased and other borrowings decreased 157 basis points to 0.86%. The
cost of interest-bearing liabilities for the second quarter of 2009 was also
down 19 basis points from the first quarter of 2009. The cost of
interest-bearing deposits decreased 27 basis points and the cost of funds
purchased and other borrowings decreased 5 basis points. The benefit to the net
interest margin from earning assets funded by non-interest bearing liabilities
was 21 basis points in the second quarter of 2009 compared with 30 basis points
in the second quarter of 2008 and 22 basis points in the preceding quarter.
The tax-equivalent yield on earning assets was 4.65% for the second quarter of
2009, down 96 basis points from the second quarter of 2008. Loan yields
decreased 116 basis points from the second quarter of 2008 to 4.64%. The
securities portfolio yield was 4.54%, down 60 basis points over the second
quarter of 2008. Our securities re-price as cash flow received is reinvested at
current market rates. The resulting change in yield on the securities portfolio
30
occurs more slowly and may not immediately move in the same direction as changes
in market rates. The tax-equivalent yield on earning assets for the second
quarter of 2009 was down 10 basis points from the first quarter of 2009. Yield
on the securities portfolio dropped by 42 basis points while yield on the loan
portfolio increased by 8 basis points.
Management regularly models the effects of changes in interest rates on net
interest revenue. Based on this modeling, we expect net interest revenue to
increase slightly over a one-year forward looking period. However, other factors
such as loan spread compression, deposit product mix, the overall balance sheet
composition and the previously noted widening of the spread between LIBOR and
the federal funds rate may affect this general expectation.
Our overall objective is to manage the Company's balance sheet to be relatively
neutral to changes in interest rates. Approximately two-thirds of our commercial
and commercial real estate loan portfolios are either variable rate or fixed
rate that will re-price within one year. These loans are funded primarily by
deposit accounts that are either non-interest bearing, or that re-price more
slowly than the loans. The result is a balance sheet that would be asset
sensitive, which means that assets generally re-price more quickly than
liabilities. Among the strategies that we use to achieve a relatively
rate-neutral position, we purchase fixed-rate, mortgage-backed securities to
offset the short-term nature of the majority of the Company's funding sources.
The liability-sensitive nature of this strategy provides an offset to the
asset-sensitive characteristics of our loan portfolio. We also use derivative
instruments to manage our interest rate risk. Interest rate swaps with a
combined notional amount of $435 million convert certain fixed rate liabilities
to floating rate based on LIBOR. The purpose of these derivatives is to position
our balance sheet to be relatively neutral to changes in interest rates. Net
interest revenue increased $3.9 million in the second quarter of 2009, $4.3
million in the first quarter of 2009, $1.7 million in the second quarter of 2008
from periodic settlements of these contracts. This increase in net interest
revenue contributed 8 basis points to net interest margin in the second quarter
of 2009, 9 basis points to net interest margin in the first quarter of 2009, and
4 basis points to the second quarter of 2008. These derivative contracts are
carried on the balance sheet at fair value. Changes in the fair value of these
contracts are reported in income as derivatives gains or losses.
The effectiveness of these strategies is reflected in the overall change in net
interest revenue due to changes in interest rates as shown in the following
table and in the interest rate sensitivity projections as shown in the Market
Risk section of this report.
---------------------------------------------------------------------------------------------------------------------
Table 1 - Volume / Rate Analysis
(In thousands)
Three Months Ended Six Months Ended
June 30, 2009 / 2008 June 30, 2009 / 2008
--------------------------------------------------------------------------
Change Due To (1) Change Due To (1)
--------------------------------------------------------------------------
Yield / Yield
Change Volume Rate Change Volume /Rate
--------------------------------------------------------------------------
Tax-equivalent interest revenue:
Securities $ 4,631 $ 14,654 $ (10,023) $ 16,529 $ 29,394 $ (12,865)
Trading securities (284) 503 (787) (698) 1,015 (1,713)
Loans (33,699) 2,303 (36,002) (87,236) 11,212 (98,448)
Funds sold and resell agreements (341) (116) (225) (1,151) (307) (844)
---------------------------------------------------------------------------------------------------------------------
Total (29,693) 17,344 (47,037) (72,556) 41,314 (113,870)
---------------------------------------------------------------------------------------------------------------------
Interest expense:
Transaction deposits (14,393) (2,375) (12,018) (41,151) (6,035) (35,116)
Savings deposits (44) 6 (50) (173) 9 (182)
Time deposits (6,574) 8,180 (14,754) (15,907) 16,633 (32,540)
Federal funds purchased and
repurchase agreements (13,185) (2,309) (10,876) (34,009) (4,656) (29,353)
Other borrowings (11,657) (1,164) (10,493) (20,311) 2,062 (22,373)
Subordinated debentures (189) 9 (198) (22) (58) 36
---------------------------------------------------------------------------------------------------------------------
Total (46,042) 2,347 (48,389) (111,573) 7,955 (119,528)
---------------------------------------------------------------------------------------------------------------------
Tax-equivalent net interest revenue 16,349 14,997 1,352 39,017 33,359 5,658
Change in tax-equivalent adjustment 292 341
---------------------------------------------------------------------------------------------------------------------
Net interest revenue $ 16,641 $ 39,358
---------------------------------------------------------------------------------------------------------------------
(1) Changes attributable to both volume and yield/rate are allocated to both
volume and yield/rate on an equal basis
31
Other Operating Revenue
Other operating revenue was $128 million for the second quarter of 2009 compared
to $54 million for the second quarter of 2008. The second quarter of 2008
included a $60.7 million charge to write down SemGroup LP derivative contracts
as a result of SemGroup LP's bankruptcy filing. Excluding SemGroup LP items,
other operating revenue increased $14.8 million or 12% over the second quarter
of 2008. Excluding SemGroup LP items, fees and commissions revenue increased
$619 thousand or 1% compared with the second quarter of 2008. Net gains on
securities, derivatives and other assets increased $14.2 million over the second
quarter of 2008. Other operating revenue increased $2.9 million over the first
quarter of 2009, including a $1.6 million increase in fees and commissions
revenue and a $1.3 million increase in net gains on securities, derivatives and
other assets.
Fees and commissions revenue
Diversified sources of fees and commissions revenue are a significant part of
our business strategy and represented 41% of total revenue, excluding provision
for credit losses and gains and losses on asset sales, securities and
derivatives, for the second quarter of 2009. 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 penetration into markets outside of
Oklahoma. However, current and future economic conditions, increased competition
and saturation in our existing markets could affect the rate of future
increases.
--------------------------------------------------------- -------------- ------------- ------------ ---------------- ------------
Table 2 - Other Operating Revenue
(In thousands)
Three Months Ended Three Months
June 30, Increase % Increase Ended Increase % Increase
-----------------------
2009 2008 (Decrease) (Decrease) March 31, 2009 (Decrease) (Decrease)
----------- ----------- ----------- ------------ ----------------- ----------- ------------
Brokerage and trading revenue $ 21,794 $ (35,462) $57,256 161% $ 24,699 $ (2,905) (12%)
Transaction card revenue 27,533 25,786 1,747 7% 25,428 2,105 8%
Trust fees and commissions 16,860 20,940 (4,080) (19%) 16,510 350 2%
Deposit service charges and fees 28,421 30,199 (1,778) (6%) 27,405 1,016 4%
Mortgage banking revenue 19,882 8,203 11,679 142% 18,498 1,384 7%
Bank-owned life insurance 2,418 2,658 (240) (9%) 2,317 101 4%
Margin asset fees 68 4,460 (4,392) (98%) 67 1 1%
Other revenue 6,124 6,965 (841) (12%) 6,583 (459) (7%)
------------------------------------- ----------- ----------- ----------- ------------ ----------------- ----------- ------------
Total fees and commissions 123,100 63,749 59,351 93% 121,507 1,593 1%
------------------------------------- ----------- ----------- ----------- ------------ ----------------- ----------- ------------
Gain (loss) on other assets 973 (1,149) 2,122 N/A 143 830 N/A
Gain (loss) on derivatives, net (1,037) (2,961) 1,924 N/A (1,664) 627 N/A
Gain on available for sale securities 16,670 276 16,394 N/A 22,226 (5,556) N/A
Loss on mortgage hedge securities (10,199) (5,518) (4,681) N/A (2,118) (8,081) N/A
------------------------------------- ----------- ----------- ----------- ------------ ----------------- ----------- ------------
Gain (loss) on securities, net 6,471 (5,242) 11,713 N/A 20,108 (13,637) N/A
------------------------------------- ----------- ----------- ----------- ------------ ----------------- ----------- ------------
Total other-than-temporary
impairment (1,263) - (1,263) N/A (54,368) 53,105 N/A
Portion of loss recognized in other
comprehensive income 279 - 279 N/A (39,366) 39,645 N/A
------------------------------------- ----------- ----------- ----------- ------------ ----------------- ----------- ------------
Net impairment losses recognized in
earnings (1,542) - (1,542) N/A (15,002) 13,460 N/A
------------------------------------- ----------- ----------- ----------- ------------ ----------------- ----------- ------------
Total other operating revenue $ 127,965 $ 54,397 $73,568 135% $125,092 $ 2,873 2%
------------------------------------- ----------- ----------- ----------- ------------ ----------------- ----------- ------------
Gain (loss) on change in fair value
of mortgage servicing rights $ 7,865 $ (767) $8,632 N/A $ 1,955 $ 5,910 N/A
------------------------------------- ----------- ----------- ----------- ------------ ----------------- ----------- ------------
Certain percentage increases (decreases) in non-fees and commissions revenue are
not meaningful for comparison purposes based on the nature of the item.
Brokerage and trading revenue, excluding SemGroup LP items, decreased $1.5
million or 7% over the second quarter of 2008. Securities trading increased $2.5
million or 22% over the second quarter of 2008. Increased
32
mortgage lending activity increased the level of securities transactions by our
mortgage banking customers. Customer hedging revenue decreased $4.4 million
compared to the second quarter of 2008. Low commodity prices continued into the
second quarter and reduced the level of customer hedging activity compared to
the second quarter of 2008.
Brokerage and trading revenue decreased $2.9 million compared with the first
quarter of 2009, including a $1.8 million decline in other institutional trading
fees as volatility declined in the second quarter of 2009, a decrease of $1.2
million in investment banking revenue related to non-recurring commercial
syndication fees in the first quarter of 2009 and a $910 thousand reduction in
securities transactions by customers as refinancing activity began to slow in
the second quarter of 2009. Decreases were offset by a $568 thousand increase in
derivative fee income and a $504 thousand increase in retail brokerage fees.
Transaction card revenue depends largely on the volume and amount of
transactions processed, the number of ATM locations and the number of merchants
served. Transaction card revenue increased $1.7 million or 7% over the prior
year primarily due to higher ATM network revenue. Transaction card revenue
increased $2.1 million over the first quarter of 2009, primarily due to a $1.3
million increase in ATM network revenue and $543 thousand increase in check card
revenue.
Trust fees declined $4.1 million or 19% compared to the prior year. In the
second quarter of 2009, approximately $1.0 million of fees related to
administration of the Cavanal Hill Funds and our cash management sweep fund were
voluntarily waived in order to maintain positive yields on these funds in the
current low short-term interest rate environment. The remaining decline is
primarily due to decreases in the fair value of all trust assets administered by
the Company, which is the basis for a significant portion of trust fees and
commissions revenue. The decline in the fair value of trust assets was primarily
due to current market conditions. The fair value of trust assets administered by
the Company totaled $29.2 billion at June 30, 2009 compared to $34.4 billion at
June 30, 2008 and $28.7 billion at March 31, 2009.
Deposit service charges and fees were primarily impacted by a $1.1 million or 6%
decrease in overdraft fees due to lower transaction volumes and a $466 thousand
or 5% decrease in commercial account service charge revenue compared with the
second quarter of 2008. Commercial account service charge revenue decreased
during the second quarter of 2009 due to an increased earnings credit. The
earnings credit, which provides a non-cash method for commercial customers to
avoid incurring charges for deposit services, increases as commercial demand
deposit account balances increase. In the current low interest rate environment
and with the unlimited FDIC insurance coverage on such balances, average
commercial demand deposit account balances were up $549 million over the second
quarter of 2008.
Deposit service charges and fees increased $1.0 million compared to the first
quarter of 2009 primarily due to a $1.8 million increase in overdraft fees,
offset by a decrease of $657 thousand in commercial account service charge
revenue. Overdraft fees are generally lower in the first quarter of each year
due to seasonal factors.
Mortgage banking revenue increased $11.7 million compared to the second quarter
of 2008 and $1.4 million compared to the first quarter of 2009. Revenue from
originating and marketing mortgage loans increased $11.1 and $1.1 million
compared to the second quarter of 2008 and the first quarter of 2009,
respectively. Mortgage loans originated for sale in the secondary market totaled
$1.0 billion for the second quarter of 2009, $709 million for the first quarter
of 2009 and $289 million in the second quarter of 2008. Increase in mortgage
loan originations are primarily due to government initiatives to lower national
mortgage interest rates. Mortgage loan servicing revenue totaled $4.8 million
for the second quarter of 2009, $4.6 million for the first quarter of 2009 and
$4.3 million for the second quarter of 2008. The outstanding principal balance
of mortgage loans serviced for others totaled $6.1 billion at June 30, 2009,
$5.5 billion at March 31, 2009 and $5.1 billion at June 30, 2008. Growth in
mortgage loans serviced for others is due to retaining mortgage servicing rights
from mortgage loans originated. No mortgage loan servicing rights were purchased
in 2008 or 2009.
Margin assets which are held primarily as part of the Company's customer
derivatives programs averaged $179 million for the second quarter of 2009
compared with $762 million for the second quarter of 2008. The decrease in
revenue earned on margin assets is offset by an increase in net interest revenue
due to lower costs to fund the margin assets.
33
Net gains on securities, derivatives and other assets
Mortgage hedge securities held as an economic hedge of the changes in fair value
of mortgage servicing rights are carried at fair value. Changes in fair value of
these securities are recognized in earnings as they occur. For the second
quarter of 2009, losses on mortgage hedge securities of $10.2 million were
partially offset with a gain on the change in the fair value of mortgage
servicing rights of $7.9 million.
The Company recognized $16.7 million of gains on sales of $1.2 billion of
available for sale securities in the second quarter of 2009. These securities
were purchased at deep discounts near the beginning of the recent market
disruption. In general, securities sold were low coupon mortgage-backed
securities. These were replaced with higher coupon securities that will have
superior future yields. The Company intends to sell an additional $91 million of
similar securities after June 30. The current value of these securities was
below their amortized cost and the Company recognized $1.3 million in
other-than-temporary impairment charges on these securities during the second
quarter of 2009.
The Company recognized an additional other-than-temporary impairment loss on
certain mortgage-backed securities of $279 thousand in earnings during the
second quarter of 2009. The Company recognized an other-than-temporary
impairment loss on these mortgage-backed securities of $7.0 million in the first
quarter of 2009. Other-than-temporary impairment of these mortgage-backed
securities was due to declines in the projected cash flows.
The Company also recognized an $8.0 million other-than-temporary impairment in
the first quarter of 2009 on a preferred stock that was downgraded below
investment grade by at least one of the nationally recognized rating agencies.
No other-than-temporary impairment losses were recognized on preferred stocks in
the second quarter of 2009 and no other-than-temporary impairment was recognized
in the second quarter of 2008.
Net gains or losses on derivatives consist of fair value adjustments of all
derivatives used to manage interest rate risk and certain liabilities the
Company has elected to carry at fair value. Derivative instruments generally
consist of interest rate swaps where the Company pays a variable rate based on
LIBOR and receives a fixed rate. The fair value of these swaps generally
decrease in value as interest rates rise resulting in a loss to the Company and
increase in value as interest rates fall resulting in a gain to the Company.
Certain certificates of deposit have been designated as reported at fair value.
This determination is made when the certificates of deposit are issued based on
the Company's intent to swap the interest rate on the certificates from a fixed
rate to a LIBOR-based variable rate. The fair value of these fixed-rate
certificates of deposit generally increases and the Company recognizes a loss as
interest rates fall. The fair value of these fixed-rate certificates of deposit
generally decreases in value and the Company recognizes a gain as interest rates
rise.
34
Other Operating Expense
Other operating expense increased $16.5 million or 10% compared with the second
quarter of last year. Excluding changes in the fair value of mortgage servicing
rights, other operating expense increased $25.1 million or 16%. Personnel
expense increased $6.6 million or 7% compared with the second quarter of 2008
and non-personnel expense, excluding changes in the fair value of mortgage
servicing rights, increased $18.5 million or 27% due largely to a $15.1 million
increase in FDIC assessments.
-------------------------------------------- ----------- ----------- ------------ ------------ ----------- ------------
Table 3 - Other Operating Expense
(In thousands)
Three Months % %
Ended June 30, Increase Increase March 31, Increase Increase
----------------------
2009 2008 (Decrease) (Decrease) 2009 (Decrease) (Decrease)
---------- ----------- ----------- ------------ ------------ ----------- ------------
Regular compensation $ 58,573 $54,024 $ 4,549 8% $54,976 $ 3,597 7%
Incentive compensation:
Cash-based 20,427 19,503 924 5% 20,586 (159) 1%
Stock-based 2,443 2,760 (317) (11%) 1,409 1,034 73%
--------------------------------- ---------- ----------- ----------- ------------ ------------ ----------- ------------
Total incentive compensation 22,870 22,263 607 3% 21,995 875 4%
Employee benefits 14,748 13,310 1,438 11% 15,656 (908) (6%)
--------------------------------- ---------- ----------- ----------- ------------ ------------ ----------- ------------
Total personnel expense 96,191 89,597 6,594 7% 92,627 3,564 4%
Business promotion 4,569 5,777 (1,208) (21%) 4,428 141 3%
Professional fees and services 7,363 6,973 390 6% 6,512 851 13%
Net occupancy and equipment 15,973 15,100 873 6% 16,258 (285) (2%)
Insurance 5,898 2,626 3,272 125% 5,638 260 5%
FDIC special assessment 11,773 - 11,773 N/A - 11,773 N/A
Data processing &
communications 20,452 19,523 929 5% 19,306 1,146 6%
Printing, postage and supplies 4,072 4,156 (84) (2%) 4,571 (499) (11%)
Net (gains) losses on operating
expenses of repossessed assets 996 (229) 1,225 535% 1,806 (810) (45%)
Amortization of intangible
assets 1,686 1,885 (199) (11%) 1,686 - - %
Mortgage banking costs 9,336 6,054 3,282 54% 7,467 1,869 25%
Change in fair value of
mortgage servicing rights (7,865) 767 (8,632) (1,125%) (1,955) (5,910) 302%
Other expense 5,326 7,039 (1,713) (24%) 7,450 (2,124) (29%)
--------------------------------- ---------- ----------- ----------- ------------ ------------ ----------- ------------
Total other operating expense $175,770 $159,268 $ 16,502 10% $165,794 $ 9,976 6%
--------------------------------- ---------- ----------- ----------- ------------ ------------ ----------- ------------
Number of employees
(full-time equivalent) 4,434 4,137 297 7% 4,374 60 1%
--------------------------------- ---------- ----------- ----------- ------------ ------------ ----------- ------------
Personnel expense
Regular compensation expense, which consists of salaries and wages, overtime pay
and temporary personnel costs, increased $4.5 million or 8% over the second
quarter of 2008 primarily due to head count and standard annual merit increases.
Incentive compensation increased $607 thousand or 3% compared to the second
quarter of 2008. Cash-based incentive compensation are either intended to
provide current rewards to employees who generate long-term business
opportunities to the Company based on growth in loans, deposits, customer
relationships and other measurable metrics or intended to compensate employees
with commissions on completed transactions. The increase in cash-based incentive
compensation over the second quarter of 2008 included a $757 thousand increase
in commissions and incentives related to brokerage and trading revenue,
partially offset by net decreases in all other cash-based
35
incentive compensation.
The Company also provides stock-based incentive compensation plans. Stock-based
compensation plans include both equity and liability awards. Compensation
expense related to liability awards increased $101 thousand compared with the
second quarter of 2008 due to changes in the market value of BOK Financial
common stock and other investments. The market value of BOK Financial common
stock increased $4.00 per share in the second quarter of 2009 and increased
$1.22 per share in the second quarter of 2008. Compensation expense for equity
awards decreased $418 thousand compared with the second quarter of 2008. Expense
for equity awards is based on the grant-date fair value of the awards and is
unaffected by subsequent changes in fair value.
Compared to the second quarter of 2008, employee benefit expense increased
primarily due to increased expenses related to payroll taxes, employee
retirement plans and medical insurance costs. Medical insurance costs were up
$531 thousand or 14%. The Company self-insures a portion of its employee health
care coverage and these costs may be volatile.
Personnel expense increased $3.6 million compared with the first quarter of 2009
primarily due to annual merit increases in regular compensation costs and
headcount. The Company generally awards annual merit increases effective April
1st for a majority of its staff.
Non-personnel operating expenses
Non-personnel operating expenses, excluding changes in the fair value of
mortgage servicing rights, increased $18.5 million compared to the second
quarter of 2008 primarily due to the $11.8 million FDIC insurance special
assessment, a $3.2 million increase in regular FDIC insurance premiums related
to previously announced increases in deposit insurance premiums and a $3.3
million increase in mortgage banking costs. Growth in non-personnel operating
expense was partially offset by a $1.2 million decrease in business promotion
expense primarily due to timing. Growth in mortgage banking costs included the
effects of actual loan prepayments on mortgage servicing rights, provision for
losses on mortgage loans sold with recourse and other costs related to increased
production volume. In addition, net losses and operating expenses of repossessed
assets increased $1.2 million compared to the second quarter of 2008. Real
estate and other repossessed assets totaled $75 million at June 30, 2009
compared to $21 million at June 30, 2008.
Non-personnel operating expenses, excluding changes in the fair value of
mortgage servicing rights, increased $12.3 million compared to the first quarter
of 2009 primarily due to the $11.8 million FDIC insurance special assessment and
higher mortgage banking costs. Net losses on repossessed assets decreased by
$810 thousand compared to the first quarter of 2009.
Income Taxes
Income tax expense was $28.3 million or 35% of book taxable income for the
second quarter of 2009 compared with an income tax benefit of $2.9 million or
55% of book taxable loss for the second quarter of 2008 and income tax expense
of $28.8 million or 34% of book taxable income for the first quarter of 2009.
The effective tax rate for the second quarter of 2008 includes adjustments to
estimated income tax expense due to the loss incurred in the second quarter of
2008.
BOK Financial operates in numerous jurisdictions, which requires judgment
regarding the allocation of income, expense and earnings under various laws and
regulations of each of these taxing jurisdictions. Each jurisdiction may audit
our tax returns and may take different positions with respect to these
allocations. The reserve for uncertain tax positions was approximately $13
million at June 30, 2009 and was largely unchanged from December 31, 2008.
36
Lines of Business
BOK Financial operates three principal lines of business: commercial banking,
consumer banking and wealth management. Our principal lines of business have
been re-defined from the previous year to better present the Company's
organization as it has grown in markets outside of Oklahoma. The prior year
information has been revised for consistent presentation. Commercial banking
includes lending, treasury and cash management services and customer risk
management products to small businesses, middle market and larger commercial
customers. Commercial banking also includes the TransFund network. Consumer
banking includes retail lending and deposit services, all mortgage banking
activities and our indirect automobile lending products. Wealth management
provides fiduciary services, brokerage and trading, private financial services
and investment advisory services in all markets.
In addition to its lines of business, BOK Financial has a funds management unit.
The primary purpose of this unit is to manage the Company's overall liquidity
needs and interest rate risk. Each line of business borrows funds from and
provides funds to the funds management unit as needed to support their
operations. Operating results for Funds Management and Other include the effect
of interest rate risk positions and risk management activities, securities gains
and losses including impairment charges, the provision for credit losses in
excess of net loans charged off, tax planning strategies and certain executive
compensation costs that are not attributed to the lines of business. Funds
Management and Other also included the FDIC special assessment charge in the
second quarter of 2009. Regular increases in FDIC insurance assessments are
charged to the business units.
BOK Financial allocates resources and evaluates performance of its lines of
business after allocation of funds, certain indirect expenses, taxes based on
statutory rates, actual net credit losses and capital costs. The cost of funds
borrowed from the funds management unit by the operating lines of business is
transfer priced at rates that approximate market 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 30 days for certain rate-sensitive deposits to five years.
Economic capital is assigned to the business units by a capital allocation model
that reflects management's assessment of risk. This model assigns capital based
upon credit, operating, interest rate and market risk inherent in our business
lines and recognizes the diversification benefits among the units. The level of
assigned economic capital is a combination of the risk taken by each business
line, based on its actual exposures and calibrated to its own loss history where
possible. Average invested capital includes economic capital and amounts we have
invested in the lines of business.
As shown in the following table, net income attributable to our lines of
business decreased $7.5 million or 23% compared to the second quarter of 2008.
The decrease was due primarily to decreased transfer pricing credit provided to
business units in the second quarter of 2009 compared to the second quarter of
2008, lower fee revenue and higher operating costs in certain units. Lower
interest rates decrease the transfer pricing credit provided to business units
that generate lower-costing funds for the Company. This tends to shift revenue
from units that provide funds to the Company, such as consumer banking. Total
net interest revenue (expense) recognized by the Funds Management unit increased
to $1.0 million during the second quarter of 2009 from $(4.0) million in the
second quarter of 2008 due largely to changes in the transfer pricing credit.
Net income of the Funds Management unit was also reduced by the FDIC special
assessment of $11.8 million during the second quarter of 2009. For the second
quarter of 2008, Funds management and other includes the $60.7 million charge to
writedown the SemGroup LP derivatives to estimated fair value.
37
------------------------------------------------------ ------------------------------ ---------------------------
Table 4 - Net Income (Loss) by Line of Business
(In thousands) Three months ended June 30, Six months ended June 30,
2009 2008 2009 2008
------------ ----------------- ------------ --------------
Commercial banking $ 17,719 $ 17,413 $ 32,850 $ 54,162
Consumer banking 5,320 6,709 14,803 18,741
Wealth management 1,690 8,092 7,195 18,148
------------------------------------------------------ ------------ ----------------- ------------ --------------
Subtotal 24,729 32,214 54,848 91,051
Funds management and other 27,386 (33,375) 52,299 (29,947)
------------------------------------------------------ ------------ ----------------- ------------ --------------
Total $ 52,115 ($ 1,161) $107,147 $ 61,104
------------------------------------------------------ ------------ ----------------- ------------ --------------
Commercial Banking
Commercial banking contributed $17.7 million and $17.4 million to consolidated
net income for the second quarters of 2009 and 2008, respectively. Commercial
banking net income was reduced by pre-tax charges for credit losses of $22.2
million in 2009 and $34.6 million in 2008. Credit losses in 2008 included $26.0
million related to SemGroup LLP. Other operating revenue decreased $8.4 million
and net interest revenue decreased $1.5 million.
Table 5 Commercial Banking
(Dollars in Thousands)
Three Months ended June 30, Increase Six Months ended June 30, Increase
-------------- -------------- ------------- --------------
2009 2008 (Decrease) 2009 2008 (Decrease)
-------------- -------------- ------------- ------------- -------------- ------------
NIR (expense) from external sources $ 87,016 $ 114,479 $(27,463) $ 172,615 $ 232,253 $ (59,638)
NIR (expense) from internal sources (13,252) (39,254) 26,002 (25,952) (78,789) 52,837
------------------------------------- -------------- -------------- ------------- ------------- -------------- ------------
Total net interest revenue 73,764 75,225 (1,461) 146,663 153,464 (6,801)
Other operating revenue 33,837 42,258 (8,421) 67,261 75,730 (8,469)
Operating expense 56,506 54,846 1,660 110,239 105,470 4,769
Net loans charged off 22,155 34,602 (12,447) 48,796 40,213 8,583
Gain on financial instruments, net - - - - 4,689 (4,689)
Gain (loss) on repossessed
assets, net 59 464 (405) (1,125) 445 (1,570)
------------------------------------- -------------- -------------- ------------- ------------- -------------- ------------
Income before taxes 28,999 28,499 500 53,764 88,645 (34,881)
Federal and state income tax 11,280 11,086 194 20,914 34,483 (13,569)
------------------------------------- -------------- -------------- ------------- ------------- -------------- ------------
Net income $ 17,719 $ 17,413 $ 306 $ 32,850 $ 54,162 $ (21,312)
------------------------------------- -------------- -------------- ------------- ------------- -------------- ------------
Average assets $12,539,330 $13,002,607 $(463,277) $12,686,690 $12,740,116 $(53,426)
Average loans 9,436,325 9,673,709 (237,384) 9,618,102 9,507,513 110,589
Average deposits 5,234,401 4,495,339 739,062 4,993,078 4,454,800 538,278
Average invested capital 1,037,370 1,076,710 (39,340) 1,056,920 1,109,560 (52,640)
Return on average assets 0.57% 0.54% 3 b.p. 0.55% 0.85% (30 b.p.)
Return on invested capital 6.85 6.50 0.35 6.27 9.82 (3.55)
Efficiency ratio 52.51 46.68 5.83 51.53 46.02 5.51
Net charge-offs (annualized) to
average loans 0.94 1.43 (0.49) 0.96 0.85 0.11
Average earning assets decreased $421 million or 4% primarily due to a $238
million decrease in loans and $196 million decrease in funds sold and resell
agreements. The impact of this decrease was largely offset by improving loan
spreads. Decreases in average earning assets combined with changes in the
internal transfer pricing credit to reduce net interest revenue by $1.5 million.
Other operating revenue decreased $8.4 million compared to the second quarter of
2008, primarily due to declines in energy derivative activity and their
associated fees due to low commodity prices. Operating expenses were up $1.6
million compared to the second quarter of 2008 largely due to increased FDIC
insurance expenses as a result of an increase in deposits balances and the
regular assessment rate. Repossession expenses were also up over the second
quarter of 2008. The increase in net loans charged off was due primarily to
increased losses on commercial real estate loans.
The average outstanding balance of loans attributed to commercial banking was
$9.4 billion for the second quarter of 2009, down $237 million or 2% over the
second quarter of 2008. Energy loans averaged $1.9 billion, an increase of $196
million or 11% over the first quarter of 2008. Commercial real estate loans of
$1.7 billion decreased $16 million or 1% over the first quarter of 2008. Average
commercial and industrial loans of $3.1 billion were down $249 million or 7%
over the second quarter of 2009. Agricultural loans decreased $99 million or 35%
compared to the second quarter of 2008 to $185 million. Small business loans
averaged $1.8 billion, a decrease of $444 million or 20% over the second quarter
of 2008.
Average deposits attributed to commercial banking were $5.2 billion for the
second quarter of 2009, up $739 million or 16% over the second quarter of 2008.
Treasury services balances increased $178 million or 14% and balances attributed
to our commercial and industrial customers increased $506 million or 38%.
Balances attributed to our energy customers increased by $30 million or 8% and
balances associated with our commercial real estate customers increased slightly
by $8 million or 3%. Average balances attributed to our small business customers
declined slightly by $13 million or 1% compared to the second quarter of 2008.
39
Consumer Banking
Consumer banking services are provided through four primary distribution
channels: traditional branches, supermarket branches, the 24-hour ExpressBank
call center and online internet banking. Consumer banking contributed $5.3
million to consolidated net income for the second quarter of 2009, down $1.4
million compared to the second quarter of 2008.
Table 6 Consumer Banking
(Dollars in Thousands)
Three Months ended June 30, Increase Six Months ended June 30, Increase
------------------------------- ----------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
--------------- --------------- ----------- -------------- ------------- -------------
NIR (expense) from external sources $ 12,878 $ 9,144 $ 3,734 $ 25,200 $ 12,020 $ 13,180
NIR (expense) from internal sources 21,463 28,656 (7,193) 46,565 64,217 (17,652)
--------------------------------------- --------------- --------------- ----------- -------------- ------------- -------------
Total net interest revenue 34,341 37,800 (3,459) 71,765 76,237 (4,472)
Other operating revenue 49,632 38,603 11,029 94,917 74,651 20,266
Operating expense 64,759 55,577 9,182 126,388 107,537 18,851
Net loans charged off 8,153 3,562 4,591 13,736 6,412 7,324
Increase (decrease) in fair value of
mortgage service rights 7,865 (767) 8,632 9,820 (2,529) 12,349
Loss on financial instruments, net (10,199) (5,518) (4,681) (12,317) (3,751) (8,566)
Gain (loss) on repossessed assets, net (20) 2 (22) 166 15 151
--------------------------------------- --------------- --------------- ----------- -------------- ------------- -------------
Income before taxes 8,707 10,981 (2,274) 24,227 30,674 (6,447)
Federal and state income tax 3,387 4,272 (885) 9,424 11,933 (2,509)
--------------------------------------- --------------- --------------- ----------- -------------- ------------- -------------
Net income $ 5,320 $ 6,709 ($ 1,389) $ 14,803 $ 18,741 $ (3,938)
--------------------------------------- --------------- --------------- ----------- -------------- ------------- -------------
Average assets $8,766,518 $7,987,610 $778,908 $8,626,205 $7,920,915 $ 705,290
Average loans 2,633,624 2,540,891 92,733 2,635,012 2,478,729 156,283
Average deposits 6,156,665 5,690,423 466,242 6,051,901 5,645,792 406,109
Average invested capital 261,410 231,610 29,800 249,130 213,950 35,180
Return on average assets 0.24% 0.38% (14 bp) 0.34% 0.47% (13 bp)
Return on invested capital 8.16 11.65 (3.49) 11.98 17.62 (5.64)
Efficiency ratio 77.12 72.74 4.38 75.83 71.27 4.56
Net charge-offs (annualized) to
average loans 1.24 0.56 0.68 1.04 0.52 0.52
Mortgage loans funded $ 1,023,272 $ 288,937 $734,335 $ 1,731,833 $545,554 $ 1,186,279
June 30, June 30, Increase
2009 2008 (Decrease)
------------- ------------- --------------
Banking locations 197 193 4
Mortgage loan servicing portfolio $6,082,501 $5,075,285 $1,007,216
Net interest revenue from consumer banking activities decreased $3.5 million or
9% over the second quarter of 2008. Average earning assets increased $328
million or 12% from the second quarter of 2008 due to increases in mortgage
hedge securities held as an economic hedge of our mortgage servicing rights,
loans and funds sold to the funds management unit. The favorable impact of this
growth was offset by a $6.6 million decrease related to lower internal transfer
pricing credit provided to the consumer banking segment for deposits sold to our
funds management unit.
Other operating revenue increased $11.0 million or 29% over the second quarter
of 2008 primarily due to increased mortgage banking revenue. Loan refinancing
volumes were up due to government initiatives to lower national mortgage
interest rates. Operating expenses increased $9.2 million or 17% over the second
quarter of 2008, including a $4.4 million increase in personnel cost due to
branch expansion in Arizona, Colorado and Texas compared to the second quarter
of 2008. Mortgage banking expenses increased $2.7 million due to the effect of
accelerated actual loan repayments on the value of our mortgage servicing
rights. FDIC insurance premiums grew $1.5 million primarily due to increased
deposits balances and FDIC insurance regular assessment rates. In addition,
operating expenses increased due to branch expansion in Arizona, Colorado, and
Texas.
40
Net loans charged off totaled $8.2 million in the second quarter of 2009 and
$3.6 million in the second quarter of 2008. Net indirect automobile loans
charged-off increased $512 thousand and net other consumer loans charged off
increased $775 thousand compared with the second quarter of 2008.
Our Consumer Banking division originates, markets and services conventional and
government-sponsored mortgage loans for all of our geographical markets. During
the second quarter of 2009, $1.0 billion of mortgage loans were funded compared
to $289 million funded in the second quarter of 2008. Approximately 57% of our
mortgage loans funded were in the Oklahoma market 11% in the Texas market and
10% in the Colorado market. Revenue from mortgage loan origination and marketing
activities totaled $15.1 million in the second quarter of 2009 and $3.9 million
in the second quarter of 2008. We also service $6.8 billion of mortgage loans,
including $778 million of loans serviced for affiliated entities. Approximately
95% of the mortgage loans serviced were to borrowers in our primary geographical
market areas. Mortgage loan servicing revenue totaled $4.8 million in the second
quarter of 2009 and $4.3 million in the second quarter of 2008.
Changes in fair value of our mortgage loan servicing rights, net of economic
hedge, decreased consumer banking net income by $2.3 million in the second
quarter of 2009 compared with a decrease in net income of $6.3 million in the
second quarter of 2008. Changes in the fair value of mortgage servicing rights
and securities held as an economic hedge are due to movement in interest rates,
actual and anticipated loan prepayment speeds and related factors.
The interest rate sensitivity of our mortgage servicing rights and securities
held as an economic hedge is modeled over a range of +/- 50 basis points. At
June 30, 2009, a 50 basis point increase in mortgage interest rates is expected
to decrease the fair value of our mortgage servicing rights, net of economic
hedging by $136 thousand. A 50 basis point decrease in mortgage interest rates
is expected to decrease the fair value of our mortgage servicing rights, net of
economic hedging by $4.3 million. Modeling changes in the value of our servicing
rights due to changes in interest rates assumes stable relationships between
mortgage commitment rates and discount rates and assumed prepayment speeds and
actual prepayment speeds. Changes in market conditions can cause variations from
these assumptions. These factors and others may cause changes in the value of
our mortgage servicing rights to differ from our expectations.
Average consumer deposits in the second quarter of 2009 increased $466 million
or 8% over the second quarter of 2008. Average interest-bearing transaction
accounts in the second quarter of 2009 were up $58 million or 2% and average
time deposits were up $335 million or 13% compared to the second quarter of
2008. Average demand deposit accounts in the second quarter of 2009 increased
$73 million or 10% over the second quarter of 2008. Movement of funds among the
various types of consumer deposits was largely based on interest rates and
product features offered.
Wealth Management
Wealth Management contributed consolidated net income of $1.7 million in the
second quarter of 2009 compared to net income of $8.1 million in the second
quarter of 2008. The decrease in net income was due primarily to increased
operating expenses, increased net loans charged off and lower other operating
revenue.
41
Table 7 Wealth Management
(Dollars in Thousands)
Three Months ended June 30, Increase Six Months ended June 30, Increase
------------------------------ ---------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
--------------- -------------- ------------ ------------ -------------- -----------
NIR (expense) from external sources $ 5,661 $ 4,111 $ 1,550 $ 9,506 $ 5,975 $ 3,531
NIR (expense) from internal sources 5,723 6,367 (644) 13,326 15,656 (2,330)
------------------------------------ --------------- -------------- ------------ ------------ -------------- -----------
Total net interest revenue 11,384 10,478 906 22,832 21,631 1,201
Other operating revenue 38,556 40,485 (1,929) 79,829 81,823 (1,994)
Operating expense 42,546 36,902 5,644 84,327 72,542 11,785
Net loans charged off 4,629 809 3,820 6,558 1,204 5,354
Loss on financial instruments, net - (7) 7 - (7) 7
------------------------------------ --------------- -------------- ------------ ------------ -------------- -----------
Income before taxes 2,765 13,245 (10,480) 11,776 29,701 (17,925)
Federal and state income tax 1,075 5,153 (4,078) 4,581 11,553 (6,972)
------------------------------------ --------------- -------------- ------------ ------------ -------------- -----------
Net income $ 1,690 $ 8,092 $ (6,402) $ 7,195 $ 18,148 $ (10,953)
------------------------------------ --------------- -------------- ------------ ------------ -------------- -----------
Average assets $ 3,405,403 $ 2,409,979 $ 995,424 $3,362,535 $ 2,378,772 $983,763
Average loans 1,049,921 914,174 135,747 1,038,787 909,307 129,480
Average deposits 3,024,808 2,006,781 1,018,027 2,977,227 1,955,812 1,021,415
Average invested capital 216,180 202,430 13,750 209,440 195,540 13,900
Return on assets 0.20% 1.35% (115 b.p.) 0.43% 1.53% (110 b.p.)
Return on invested capital 3.14 16.08 (12.94) 6.93 18.66 (11.73)
Efficiency ratio 85.19 72.41 12.78 82.14 70.12 12.02
Net charge-offs (annualized) to
average loans 1.76 0.35 1.41 1.26 0.26 1.00
June 30, June 30, Increase
2009 2008 (Decrease)
Trust assets $29,288,041 $34,433,874 (5,145,833)
Net interest revenue for the second quarter of 2009 increased $906 thousand or
9% compared to second quarter of 2008 due to increases in average earning assets
partially offset by lower internal transfer pricing credit. Earning assets of
the Wealth Management unit consist primarily of funds sold to the Funds
Management unit.
Other operating revenue declined $1.9 million compared to the second quarter of
2008. Declines in trust fees and commissions due to fee waivers and decreases in
the fair value of trust assets were partially offset by increased trading and
brokerage fees. Operating expenses increased $5.6 million compared to the second
quarter of 2008 primarily related to higher personnel costs due to increased
headcount and incentive compensation. Additional staffing has been added to
increase penetration in markets outside of Oklahoma. Growth in non-personnel
expenses was primarily due to increased FDIC insurance premiums as a result of
increased deposit balances and an increase in the FDIC regular assessment rate
in the second quarter of 2009 compared to the second quarter of 2008.
Growth in average assets was largely due to funds sold to the Funds Management
unit. Funds provided by Wealth Management deposits, which are largely sold to
the Funds Management unit, increased primarily due to an increase in
non-traditional deposit products and continued movement of customer funds from
managed money market products that are not on the Company's balance sheet, to
deposits. Average deposits provided by the Wealth Management division increased
$1.0 billion in the second quarter of 2009 compared with the second quarter of
2008. Interest-bearing transaction accounts averaged $1.8 billion for the second
quarter of 2009, an increase of $352 million or 24% over the second quarter of
2008. Average time deposits were $956 million, up $676 million or 242% over last
year.
At June 30, 2009 and 2008, the Wealth Management line of business was
responsible for trust assets with aggregate market values of $29.3 billion and
$34.4 billion, respectively, under various fiduciary arrangements. The decrease
in trust assets was primarily due to general market conditions. We have sole or
joint discretionary authority over $11.0
42
billion of trust assets at June 30, 2009 compared to $13.0 billion of trust
assets at June 30, 2008. The fair value of non-managed assets was $18.2 billion
at June 30, 2009 and $21.4 billion at June 30, 2008. The fair value of assets
held in safekeeping totaled $7.9 billion at June 30, 2009 and $9.3 billion at
June 30, 2008.
Geographical Market Distribution
The Company also secondarily evaluates performance by primary geographical
market. Loans are generally attributed to geographical markets based on the
location of the customer and may not reflect the location of the underlying
collateral. Brokered deposits and other wholesale funds are not attributed to a
geographical market. Funds management and other also include insignificant
results of operations in locations outside our primary geographic regions.
Table 8 Net Income (Loss) by Geographic Region
(In Thousands)
Three Months ended June 30, Six Months ended June 30,
2009 2008 2009 2008
--------------- -------------- ------------- -------------
Oklahoma $ 27,310 $ 9,323 $ 52,355 $ 45,657
Texas 2,276 12,369 9,084 24,550
New Mexico 1,453 3,931 4,064 8,525
Arkansas 2,628 2,588 6,336 4,827
Colorado 436 3,336 (1,437) 6,316
Arizona (10,987) 238 (17,443) 793
Kansas / Missouri 1,652 1,113 3,392 1,602
------------------------------------------------------ --------------- -------------- ------------- -------------
Subtotal 24,768 32,898 56,351 92,270
Funds management and other 27,347 (34,059) 50,796 (31,166)
------------------------------------------------------ --------------- -------------- ------------- -------------
Total $ 52,115 $( 1,161) $107,147 $ 61,104
------------------------------------------------------ --------------- -------------- ------------- -------------
43
Oklahoma Market
Oklahoma is a significant market to the Company. Our Oklahoma offices are
located primarily in the Tulsa and Oklahoma City metropolitan areas. For the
second quarter of 2009, approximately 51% of our average loans, 52% of our
average deposits and 52% of our consolidated net income is attributed to the
Oklahoma market. In addition, all of our mortgage servicing activity and 76% of
our trust assets are attributed to the Oklahoma market.
Table 9 Oklahoma
(Dollars in Thousands)
Three Months ended June 30, Increase Six Months ended June 30, Increase
------------------------------- -----------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
---------------- -------------- ------------ -------------- -------------- ------------
Net interest revenue $ 60,127 $ 57,040 $ 3,087 $ 121,948 $ 118,687 $ 3,261
Other operating revenue 87,792 87,017 775 163,786 165,964 (2,178)
Operating expense 93,842 88,133 5,709 184,583 170,208 14,375
Net loans charged off 7,067 34,718 (27,651) 13,173 38,488 (25,315)
Increase (decrease) in fair value of
mortgage service rights 7,865 (767) 8,632 9,820 (2,529) 12,349
Gain (loss) on financial instruments, net (10,199) (5,524) (4,675) (12,317) 932 (13,249)
Gain (loss) on repossessed assets, net 20 344 (324) 206 368 (162)
--------------------------------------- ---------------- -------------- ------------ -------------- -------------- ------------
Income before taxes 44,696 15,259 29,437 85,687 74,726 10,961
Federal and state income tax 17,386 5,936 11,450 33,332 29,069 4,263
--------------------------------------- ---------------- -------------- ------------ -------------- -------------- ------------
Net income $ 27,310 $ 9,323 $ 17,987 $ 52,355 $ 45,657 $ 6,698
--------------------------------------- ---------------- -------------- ------------ -------------- -------------- ------------
Average assets $13,425,256 $13,087,964 $ 337,292 $13,484,048 $12,905,304 $ 578,744
Average loans 6,305,435 6,463,506 (158,071) 6,391,762 6,411,051 (19,289)
Average deposits 7,940,597 6,551,924 1,388,673 7,754,242 6,478,410 1,275,832
Average invested capital 807,930 777,070 30,860 818,740 795,410 23,330
Return on average assets 0.82% 0.31% 51 bp 0.78% 0.71% 7 bp
Return on invested capital 13.56 4.83 8.73 12.90 11.54 1.36
Efficiency ratio 63.44 61.18 2.26 64.60 59.80 4.80
Net charge-offs (annualized) to
average loans 0.45 2.15 (1.70) 0.41 1.20 (0.79)
Oklahoma net income in the second quarter of 2008 was reduced by a $26.0 million
pre-tax charge-off of SemGroup, LP, loans. Excluding this charge, net income
generated in the Oklahoma market increased $574 thousand over the second quarter
of 2008 primarily due to increased net interest revenue offset by increased
operating expenses primarily due to increased FDIC insurance premiums.
Net interest revenue increased $3.1 million or 5% compared to the second quarter
of 2008. Net interest revenue was impacted by a decline in average loans of $158
million compared to the second quarter of 2008, offset by improving interest
spreads on loans. Strong deposit growth of $1.4 billion compared to the second
quarter of 2008 was largely offset by lower internal funds transfer credit
provided for deposits sold to the Funds Management unit.
Other operating revenue increased $775 thousand primarily due to increased
mortgage banking revenue related to government initiatives to lower national
mortgage rates and transaction card revenues, offset by lower trust fees,
brokerage and trading revenue and deposit service fees and charges.
Operating expenses increased primarily due to increased FDIC premiums as a
result of increased deposit balances and regular assessment rate in the second
quarter of 2009. In addition, mortgage banking costs and personnel costs were
higher.
Changes in the fair value of mortgage servicing rights, net of changes in the
fair value of financial instruments,
44
decreased pre-tax income by $2.3 million in the second quarter of 2009 and $6.3
million in the second quarter of 2008.
Excluding $26.0 million charged off in the first quarter of 2008 related to
SemGroup, LP, net loans charged off increased by $848 thousand.
Average deposits in the Oklahoma market for the second quarter of 2009 increased
$1.4 billion over the second quarter of 2008. The increase came primarily from
commercial and wealth management units, including trust, broker/dealer and
private banking. Consumer banking also contributed to deposit growth.
Texas Market
Texas is our second largest market. Our Texas offices are located primarily in
Dallas, Fort Worth and Houston metropolitan areas. Approximately 30% of our
average loans, 24% of our average deposits and 4% of our consolidated net income
is attributed to the Texas market.
Table 10 Texas
(Dollars in Thousands)
Three Months ended June 30, Increase Six Months Ended June 30, Increase
------------------------------ ----------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
--------------- -------------- ------------ -------------- ------------- ------------
Net interest revenue $ 33,751 $ 37,930 $ (4,179) $ 68,588 $ 74,843 $ (6,255)
Other operating revenue 10,264 11,972 (1,708) 23,591 22,281 1,310
Operating expense 34,106 29,599 4,507 66,197 55,787 10,410
Net loans charged off 6,278 1,099 5,179 11,722 3,076 8,646
Gain (loss) on repossessed assets, net (75) 122 (197) (67) 98 (165)
---------------------------------------- --------------- -------------- ------------ -------------- ------------- ------------
Income before taxes 3,556 19,326 (15,770) 14,193 38,359 (24,166)
Federal and state income tax 1,280 6,957 (5,677) 5,109 13,809 (8,700)
---------------------------------------- --------------- -------------- ------------ -------------- ------------- ------------
Net income $ 2,276 $ 12,369 $(10,093) $ 9,084 $ 24,550 $ (15,466)
---------------------------------------- --------------- -------------- ------------ -------------- ------------- ------------
Average assets $ 5,800,944 $5,222,814 $578,130 $ 5,775,332 $5,076,487 $ 698,845
Average loans 3,694,715 3,588,761 105,954 3,767,884 3,471,868 296,016
Average deposits 3,619,200 3,313,169 306,031 3,506,710 3,221,912 284,798
Average invested capital 549,550 544,170 5,380 548,300 540,490 7,810
Return on average assets 0.16% 0.95% (79 bp) 0.32% 0.97% (65 bp)
Return on invested capital 1.66 9.14 (7.48) 3.34 9.13 (5.79)
Efficiency ratio 77.49 59.31 18.18 71.81 57.44 14.37
Net charge-offs (annualized) to
average loans 0.68 0.12 0.56 0.62 0.18 0.44
Net income in the Texas market decreased by $10.1 million compared to the second
quarter of 2008 primarily due to increased net loans charged off and operating
expenses and decreased net interest revenue.
Net interest revenue decreased $4.2 million or 11% compared to the second
quarter of 2008. Average outstanding loans increased $106 million or 3% over the
second quarter of 2008. Average deposits increased $306 million. The benefit of
an increase in average loans and deposits was largely offset by the reduced
benefit from funds sold to the funds management unit.
Other operating revenue declined $1.7 million or 14% compared to the second
quarter of 2008 primarily due to declines in energy derivative activity and
their associated fees due to low commodity prices compared to the second quarter
of 2008 and losses on mortgage loans not yet sold due to declining interest
rates, offset by increased gains on mortgages sold during the second quarter of
2009 compared to the second quarter of 2008 due to increased loan refinancing
activity. Operating expenses increased $4.5 million or 15% over the second
quarter of last year primarily due to higher personnel costs and the FDIC
insurance premiums due to increased deposit balances and
45
assessment rate.
Net loans charged off increased $5.2 million to 0.68% of average loans, compared
to 0.12% of average loans for the second quarter of 2009.
Other Markets
For the second quarter of 2009, net income attributable to our New Mexico market
totaled $1.5 million or 3% of consolidated net income, down from $3.9 million in
the second quarter of 2008. The decrease in net income attributed to New Mexico
resulted primarily from lower net interest revenue due to lower internal funds
transfer credit provided for deposits sold to the Funds Management unit.
For the second quarter of 2009, net income in the Arkansas market increased $40
thousand over the second quarter to $2.6 million. Increased securities trading
revenue at our Little Rock office was primarily offset by higher personnel
costs. Average deposits in our Arkansas market were up $79 million or 120% over
the second quarter of 2008 due primarily to commercial banking deposits.
Consumer and Wealth Management deposits also increased over the second quarter
of 2008.
For the second quarter of 2009, net income in the Colorado market decreased $2.9
million compared to the second quarter of 2008. The decrease was primarily due
to increases in net loans charged off and the FDIC insurance premiums in the
second quarter of 2009. Average loans increased $146 million over the second
quarter of 2008 and average deposits increased $102 million.
We incurred a net loss of $11.0 million in the Arizona market in the second
quarter of 2009 compared with net income of $238 thousand in the second quarter
of 2008. The loss was primarily due to an increase in net commercial real estate
loans charged off of $14.3 million compared to the second quarter of 2008 and
increased operating expenses related to the opening of 3 branch locations in the
first quarter of 2009. Approximately $5.4 million of loans charged off in the
second quarter of 2009 relate to loans in the Tucson market which the Company is
no longer operating. Average loans declined $25.9 million compared to the second
quarter of 2008 and average deposits grew by $51.5 million compared to the
second quarter of 2008. The positive deposit growth was offset by lower internal
funds transfer credit provided for deposits sold to the Funds Management unit.
Consistent with plans when we first acquired Valley Commerce Bank in Phoenix,
the Company's objective is to focus on growth in commercial and small business
lending in the Arizona market. We currently have approximately $17 million of
goodwill in the Arizona market. The majority of this goodwill is attributed to
commercial banking. Future goodwill impairment analysis will depend largely on
our ability to meet these growth projections.
We continue to grow in the Kansas City market. Net income for the second quarter
of 2009 increased $539 thousand or 48% over the second quarter of 2008 due
largely to growth in other operating revenue. Total average deposits increased
$173 million over the second quarter of 2008.
46
Table 11 New Mexico
(Dollars in Thousands)
Three Months ended June 30, Increase Six Months ended June 30, Increase
------------------------------- ----------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
---------------- -------------- ----------- -------------- ------------- -----------
Net interest revenue $ 8,320 $ 10,066 $(1,746) $ 16,788 $ 20,642 $ (3,854)
Other operating revenue 5,549 6,298 (749) 11,919 12,136 (217)
Operating expense 10,046 8,905 1,141 19,182 17,627 1,555
Net loans charged off 1,444 1,025 419 1,949 1,194 755
Gain (loss) on repossessed assets, net - - - (925) (5) (920)
--------------------------------------- ---------------- -------------- ----------- -------------- ------------- -----------
Income before taxes 2,379 6,434 (4,055) 6,651 13,952 (7,301)
Federal and state income tax 926 2,503 (1,577) 2,587 5,427 (2,840)
--------------------------------------- ---------------- -------------- ----------- -------------- ------------- -----------
Net income $ 1,453 $ 3,931 $(2,478) $ 4,064 $ 8,525 $ (4,461)
--------------------------------------- ---------------- -------------- ----------- -------------- ------------- -----------
Average assets $ 1,809,355 $1,759,045 $50,310 $ 1,781,718 $1,767,388 $ 14,330
Average loans 832,214 839,536 (7,322) 829,815 847,355 (17,540)
Average deposits 1,151,349 1,027,233 124,116 1,132,838 1,036,428 96,410
Average invested capital 100,960 114,860 (13,900) 100,760 118,190 (17,430)
Return on average assets 0.32% 0.90% (58 bp) 0.46% 0.97% (51 bp)
Return on invested capital 5.77 13.76 (7.99) 8.13 14.51 (6.38)
Efficiency ratio 72.43 54.42 18.01 66.82 53.78 13.04
Net charge-offs (annualized) to
average loans 0.69 0.49 0.20 0.47 0.28 0.19
Table 12 Arkansas
(Dollars in Thousands)
Three Months ended June 30, Increase Six Months ended June 30, Increase
------------------------------- -----------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
----------------- ------------- ------------ ---------------- ------------ -----------
Net interest revenue $ 3,022 $ 2,797 $ 225 $ 5,975 $ 5,504 $ 471
Other operating revenue 9,156 7,377 1,779 20,196 14,683 5,513
Operating expense 7,031 5,157 1,874 13,969 10,903 3,066
Net loans charged off 845 781 64 1,831 1,384 447
Loss on repossessed assets, net - - - (1) - (1)
------------------------------------- ----------------- ------------- ------------ ---------------- ------------ -----------
Income before taxes 4,302 4,236 66 10,370 7,900 2,470
Federal and state income tax 1,674 1,648 26 4,034 3,073 961
------------------------------------- ----------------- ------------- ------------ ---------------- ------------ -----------
Net income $ 2,628 $ 2,588 $ 40 $ 6,336 $ 4,827 $ 1,509
------------------------------------- ----------------- ------------- ------------ ---------------- ------------ -----------
Average assets $ 505,461 $ 474,753 $30,708 $ 505,047 $ 465,611 $ 39,436
Average loans 422,855 437,654 (14,799) 429,057 429,044 13
Average deposits 145,550 66,306 79,244 142,781 65,202 77,579
Average invested capital 35,660 34,240 1,420 34,010 30,610 3,400
Return on average assets 2.09% 2.19% (10 bp) 2.52% 2.08% 44 bp
Return on invested capital 29.56 30.40 (0.84) 37.57 31.71 5.86
Efficiency ratio 57.74 50.69 7.05 53.38 54.01 (0.63)
Net charge-offs (annualized) to
average loans 0.80 0.71 0.09 0.85 0.65 0.20
47
Table 13 Colorado
(Dollars in Thousands)
Three Months ended June 30, Increase Six Months ended June 30, Increase
------------------------------- ----------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
--------------- --------------- ----------- -------------- ------------- -----------
Net interest revenue $ 9,376 $ 8,655 $ 721 $ 18,454 $ 18,026 $ 428
Other operating revenue 4,093 4,725 (632) 9,262 8,622 640
Operating expense 10,200 7,904 2,296 19,236 15,773 3,463
Net loans charged off 2,888 17 2,871 10,889 538 10,351
Gain on repossessed assets, net 333 - 333 57 - 57
--------------------------------------- --------------- --------------- ----------- -------------- ------------- -----------
Income before taxes 714 5,459 (4,745) (2,352) 10,337 (12,689)
Federal and state income tax 278 2,123 (1,845) (915) 4,021 (4,936)
--------------------------------------- --------------- --------------- ----------- -------------- ------------- -----------
Net income $ 436 $ 3,336 $(2,900) $ (1,437) $ 6,316 $ (7,753)
--------------------------------------- --------------- --------------- ----------- -------------- ------------- -----------
Average assets $ 2,010,030 $1,819,416 $ 190,614 $2,013,557 $1,844,732 $168,825
Average loans 962,455 816,695 145,760 969,583 808,163 161,420
Average deposits 1,169,336 1,066,988 102,348 1,155,557 1,087,289 68,268
Average invested capital 161,660 162,290 (630) 144,660 148,810 (4,150)
Return on average assets 0.09% 0.74% (65 bp) -0.14% 0.69% (83 bp)
Return on invested capital 1.08 8.27 (7.19) -2.00 8.54 (10.54)
Efficiency ratio 74.08 59.07 15.01 69.40 59.19 10.21
Net charge-offs (annualized) to
average loans 1.19 0.01 1.18 2.24 0.13 2.11
Table 14 Arizona
(Dollars in Thousands)
Three Months ended June 30, Increase Six Months ended June 30, Increase
------------------------------ ---------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
--------------- -------------- ------------ -------------- ------------ -----------
Net interest revenue $ 2,922 $ 4,959 $(2,037) $ 5,769 $ 9,853 $ (4,084)
Other operating revenue 105 385 (280) 1,149 757 392
Operating expense 4,556 3,625 931 8,942 7,170 1,772
Net loans charged off 16,214 1,329 14,885 26,295 2,143 24,152
Gains (losses) on repossessed assets, net (239) - (239) (229) - (229)
---------------------------------------- --------------- -------------- ------------ -------------- ------------ -----------
Income before taxes (17,982) 390 (18,372) (28,548) 1,297 (29,845)
Federal and state income tax (6,995) 152 (7,147) (11,105) 504 (11,609)
---------------------------------------- --------------- -------------- ------------ -------------- ------------ -----------
Net income (loss) $ (10,987) $ 238 $ (11,225) $ (17,443) $ 793 $(18,236)
---------------------------------------- --------------- -------------- ------------ -------------- ------------ -----------
Average assets $ 665,372 $ 643,029 $ 22,343 $ 659,749 $ 619,986 $ 39,763
Average loans 577,234 603,101 (25,867) 582,320 580,515 1,805
Average deposits 182,403 130,929 51,474 164,539 131,060 33,479
Average invested capital 84,600 78,780 5,820 86,280 76,910 9,370
Return on average assets -6.62% 0.15% (677 bp) -5.30% 0.26% (556 bp)
Return on invested capital -52.09 1.22 (53.31) -40.77 2.07 (42.84)
Efficiency ratio 150.51 67.83 82.68 129.26 67.58 61.68
Net charge-offs (annualized) to
average loans 10.98 0.88 10.10 8.91 0.74 8.17
48
Table 15 Kansas / Missouri
(Dollars in Thousands)
Three Months ended June 30, Increase Six Months ended June 30, Increase
------------------------------ ----------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
---------------- ------------- ------------ -------------- ------------- -----------
Net interest revenue $ 1,964 $ 1,970 $ (6) $ 3,686 $ 3,625 $ 61
Other operating revenue 4,747 3,298 1,449 10,547 6,964 3,583
Operating expense 3,806 3,441 365 7,948 6,961 987
Net loans charged off 201 5 196 733 1,006 (273)
--------------------------------------- ---------------- ------------- ------------ -------------- ------------- -----------
Income before taxes 2,704 1,822 882 5,552 2,622 2,930
Federal and state income tax 1,052 709 343 2,160 1,020 1,140
--------------------------------------- ---------------- ------------- ------------ -------------- ------------- -----------
Net income $ 1,652 $ 1,113 $ 539 $ 3,392 $ 1,602 $ 1,790
--------------------------------------- ---------------- ------------- ------------ -------------- ------------- -----------
Average assets $ 494,514 $ 382,737 $111,777 $ 452,754 $ 350,657 $102,097
Average loans 324,773 369,368 (44,595) 318,403 338,281 (19,878)
Average deposits 207,438 34,214 173,224 165,534 35,073 130,461
Average invested capital 25,170 30,590 (5,420) 23,850 29,220 (5,370)
Return on average assets 1.34% 1.17% 17 bp 1.50% 0.92% 58 bp
Return on invested capital 26.33 14.63 11.70 28.68 11.03 17.65
Efficiency ratio 56.71 65.32 (8.61) 55.84 65.74 (9.90)
Net charge-offs (annualized) to
average loans 0.25 0.01 0.24 0.46 0.59 (0.13)
Financial Condition
Securities
BOK Financial maintains a securities portfolio to support its interest rate risk
management strategies, enhance profitability, provide liquidity and comply with
regulatory requirements. Securities are classified as held for investment,
available for sale or trading. See Note 2 to the consolidated financial
statements for the composition of the securities portfolio as of June 30, 2009.
Investment securities, which consist primarily of Oklahoma municipal bonds, are
carried at cost and adjusted for amortization of premiums or accretion of
discounts. At June 30, 2009, investment securities were carried at $270 million
and had a fair value of $274 million.
Available for sale securities, which may be sold prior to maturity, are carried
at fair value. Unrealized gains or losses, less deferred taxes, are recorded as
accumulated other comprehensive income in shareholders' equity. The amortized
cost of available for sale securities totaled $7.4 billion at June 30, 2009, up
$100 million compared with March 31, 2009. Mortgage-backed securities
represented 97% of total available for sale securities. The Company holds no
debt securities of corporate issuers or mortgage-backed securities holding pools
of commercial real estate loans.
A 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
expected duration of the mortgage-backed securities portfolio was approximately
1.9 years at June 30, 2009. Management estimates that the expected duration
would extend to approximately 2.8 years assuming an immediate 300 basis point
upward rate shock. The effect of falling interest rates from current low levels
is not expected to be significant.
Mortgage-backed securities also have credit risk from delinquency or default of
the underlying loans. The Company mitigates this risk by primarily investing in
securities issued by U.S. government agencies. Principal and interest
49
payments on the underlying loans are either fully or partially guaranteed. At
June 30, 2009, approximately $5.6 billion of the Company's mortgage-backed
securities, based on amortized cost, were issued by U.S. government agencies.
The fair value of these mortgage-backed securities totaled $5.8 billion at June
30, 2009. The Company also holds amortized cost of $1.4 billion in
mortgage-backed securities privately issued by publicly-owned financial
institutions. The fair value of our portfolio of privately issued
mortgage-backed securities totaled $1.2 billion at June 30, 2009.
The Company's portfolio of mortgage-backed securities originated by private
issuers consists primarily of $1.1 billion of Jumbo-A mortgage loans and $357
million of Alt-A mortgage loans. Jumbo-A mortgage loans generally meet
government agency underwriting standards, but have loan balances that exceed
agency maximums. Alt-A mortgage loans generally do not have sufficient
documentation to meet government agency underwriting standards. Credit risk on
mortgage-backed securities originated by private issuers is mitigated by
investment in senior tranches with additional collateral support. None of these
securities are backed by sub-prime mortgage loans, collateralized debt
obligations or collateralized loan obligations. Approximately 89% of these
securities, including all Alt-A mortgage-backed securities originated in 2007
and 2006, are credit enhanced with additional collateral support. Approximately
85% of our Alt-A mortgage-backed securities represents pools of fixed-rate
mortgage loans. None of the adjustable rate mortgages are payment option ARMs.
Our portfolio of available for sale securities also included preferred stocks
issued by six financial institutions. These stocks were originally purchased for
$46 million and had a June 30, 2009 carrying value of $24 million. Our carrying
value of these stocks was reduced by $22 million of other-than-temporary
impairment charges in prior quarters. At June 30, 2009, the aggregate fair value
of these securities was $30 million.
During the second quarter of 2009, preferred shares with a carrying value of
$5.2 million and fair value of $14 million were converted to common shares by
one of the issuing financial institutions. These shares are now included in
equity securities and mutual funds. The current carrying value and aggregate
fair value of the remaining preferred stocks was $19 million and $16 million,
respectively, at June 30, 2009. The aggregate unrealized loss on these preferred
stocks decreased by $5.4 million in the second quarter of 2009 and no additional
other-than-temporary impairments were recorded. These preferred stocks have
certain debt-like features such as a quarterly dividend based on LIBOR. However,
the issuers of these stocks have no obligation to redeem them. Management
believes that the fair value of these securities will recover to our carrying
value as spreads to LIBOR return to a range of 400 basis points to 500 basis
points over a 24-month to 36-month period beginning June 30, 2008, the most
recent date that the fair value of these securities equaled our carrying value.
On a quarterly basis, the Company performs separate evaluations on debt and
equity securities to determine if the unrealized losses are temporary as more
fully described in Note 2 to the financial statements. The Company intends to
sell certain U.S. government agency issued residential mortgage-backed
securities after June 30, 2009. The current fair value of these securities was
below their amortized costs and the Company recognized $1.3 million in
other-than-temporary impairment charges on these securities in the second
quarter of 2009. In addition, the Company recognized a $279 thousand
other-than-temporary impairment charge against earnings in the second quarter of
2009 related to certain residential mortgage-backed securities that the Company
does not intend to sell due to further declines in the projected cash flows of
these securities. Other-than-temporary impairment of $7.0 million was recognized
in earnings in the first quarter of 2009 from these same securities.
Certain government agency issued residential mortgage-backed securities,
identified as mortgage trading securities, have been designated as economic
hedges of mortgage servicing rights. These securities are carried at fair value
with changes in fair value recognized in current period income. These securities
are held with the intent that gains or losses will offset changes in the fair
value of mortgage servicing rights.
The Company also maintains a separate trading portfolio. Trading portfolio
securities, which are also carried at fair value with changes in fair value
recognized in current period income, are acquired and held with the intent to
sell at a profit to the Company.
Bank-Owned Life Insurance
The Company has approximately $242 million of bank-owned life insurance at June
30, 2009. This investment is expected to provide a long-term source of earnings
to support existing employee benefit programs. Approximately
50
$208 million is
held in separate accounts. The Company's separate account holdings are invested
in diversified portfolios of investment-grade fixed income securities and cash
equivalents, including U.S. Treasury and Agency securities, mortgage-backed
securities, corporate debt, asset-backed and CMBS securities. The portfolios are
managed by unaffiliated professional managers within parameters established in
the portfolio's investment guidelines. The cash surrender value of certain life
insurance policies is further supported by a stable value wrap, which protects
against changes in the fair value of the investments. At June 30, 2009, the cash
surrender value represented by the underlying fair value of investments held in
separate accounts was approximately $211 million. As the underlying fair value
of the investments held in a separate account at June 30, 2009 exceeded the net
book value of the investments, no cash surrender value was supported by the
stable value wrap. The stable value wrap is provided by a well-rated, domestic
financial institution. The remaining cash surrender value of $30 million
primarily represented the cash surrender value of policies held in general
accounts and other amounts due from various insurance companies.
Loans
The aggregate loan portfolio before allowance for loan losses totaled $12.1
billion at June 30, 2009, a $570 million decrease since March 31, 2009.
---------------------------------------------------------------------------------------------------------------------
Table 16 - Loans
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2009 2009 2008 2008 2008
---------------------------------------------------------------------------------
Commercial:
Energy $ 2,203,558 $ 2,329,237 $ 2,311,813 $ 2,099,996 $ 1,895,050
Services 1,884,097 1,962,297 2,038,451 1,975,604 1,848,360
Wholesale/retail 1,027,532 1,133,275 1,165,099 1,199,216 1,226,875
Manufacturing 496,496 514,748 497,957 519,485 542,019
Healthcare 765,285 747,299 777,154 778,819 747,434
Agriculture 157,759 193,863 197,629 229,447 253,198
Other commercial and industrial 181,124 220,811 423,500 471,235 525,637
---------------------------------------------------------------------------------------------------------------------
Total commercial 6,715,851 7,101,530 7,411,603 7,273,802 7,038,573
---------------------------------------------------------------------------------------------------------------------
Commercial real estate:
Construction and land development 818,837 879,368 926,226 968,522 1,021,135
Retail 413,789 424,565 371,228 375,929 378,241
Office 490,044 486,065 459,357 470,383 422,558
Multifamily 306,175 344,227 316,596 268,614 251,325
Industrial 129,239 150,488 149,367 151,187 180,358
Other real estate loans 453,609 447,368 478,474 479,357 573,880
---------------------------------------------------------------------------------------------------------------------
Total commercial real estate 2,611,693 2,732,081 2,701,248 2,713,992 2,827,497
---------------------------------------------------------------------------------------------------------------------
Residential mortgage:
Permanent mortgage 1,362,505 1,339,957 1,273,275 1,193,488 1,130,417
Home equity 471,470 479,993 479,299 476,465 477,180
---------------------------------------------------------------------------------------------------------------------
Total residential mortgage 1,833,975 1,819,950 1,752,574 1,669,953 1,607,597
---------------------------------------------------------------------------------------------------------------------
Consumer:
Indirect automobile 582,380 650,370 692,615 721,390 735,098
Other consumer 326,029 335,985 317,966 300,833 309,273
---------------------------------------------------------------------------------------------------------------------
Total consumer 908,409 986,355 1,010,581 1,022,223 1,044,371
---------------------------------------------------------------------------------------------------------------------
Total $ 12,069,928 $ 12,639,916 $ 12,876,006 $ 12,679,970 $ 12,518,038
---------------------------------------------------------------------------------------------------------------------
51
The decline in outstanding loan balances was broadly distributed among the
various segments of the portfolio and across geographic markets. Generally, the
decline in outstanding loan balances was due to reduced customer demand in
response to current economic conditions, normal repayment trends and management
decisions to mitigate credit risk by exiting certain loan types and
relationships. A breakdown by geographical market follows:
---------------------------------------------------------------------------------------------------------------------
Table 17 - Loans by Principal Market Area
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2009 2009 2008 2008 2008
---------------------------------------------------------------------------------
Oklahoma:
Commercial $ 2,918,478 $ 3,119,362 $ 3,356,520 $ 3,368,823 $ 3,228,179
Commercial real estate 855,742 881,620 843,576 827,357 875,546
Residential mortgage 1,249,104 1,234,417 1,196,924 1,134,066 1,099,277
Consumer 521,431 562,021 579,809 580,211 601,184
---------------------------------------------------------------------------------
Total Oklahoma $ 5,544,755 $ 5,797,420 $ 5,976,829 $ 5,910,457 $ 5,804,186
---------------------------------------------------------------------------------
Texas:
Commercial $ 2,182,756 $ 2,277,186 $ 2,353,860 $ 2,205,169 $ 2,166,925
Commercial real estate 741,199 816,830 825,769 853,653 889,364
Residential mortgage 345,780 337,044 315,438 307,655 299,996
Consumer 196,752 214,134 212,820 214,133 204,081
---------------------------------------------------------------------------------
Total Texas $ 3,466,487 $ 3,645,194 $ 3,707,887 $ 3,580,610 $ 3,560,366
---------------------------------------------------------------------------------
New Mexico:
Commercial $ 380,378 $ 393,180 $ 418,732 $ 442,644 $ 451,225
Commercial real estate 313,190 315,511 286,574 281,061 271,177
Residential mortgage 90,944 99,805 98,018 95,165 89,469
Consumer 18,826 19,900 18,616 18,296 16,977
---------------------------------------------------------------------------------
Total New Mexico $ 803,338 $ 828,396 $ 821,940 $ 837,166 $ 828,848
---------------------------------------------------------------------------------
Arkansas:
Commercial $ 97,676 $ 99,955 $ 103,446 $ 104,630 $ 96,775
Commercial real estate 133,026 133,227 134,015 127,925 124,049
Residential mortgage 19,015 17,145 16,875 16,941 19,527
Consumer 152,620 168,971 175,647 183,543 197,979
---------------------------------------------------------------------------------
Total Arkansas $ 402,337 $ 419,298 $ 429,983 $ 433,039 $ 438,330
---------------------------------------------------------------------------------
Colorado:
Commercial $ 595,858 $ 675,223 $ 660,546 $ 598,519 $ 489,844
Commercial real estate 269,923 267,035 261,820 266,739 276,062
Residential mortgage 58,557 59,120 53,875 49,676 38,517
Consumer 14,097 14,599 16,141 18,328 16,367
---------------------------------------------------------------------------------
Total Colorado $ 938,435 $ 1,015,977 $ 992,382 $ 933,262 $ 820,790
---------------------------------------------------------------------------------
Arizona:
Commercial $ 215,540 $ 211,953 $ 211,356 $ 213,861 $ 207,173
Commercial real estate 262,607 285,841 319,525 326,615 351,058
Residential mortgage 58,265 61,605 62,123 58,800 53,321
Consumer 3,229 5,261 6,075 5,551 5,315
---------------------------------------------------------------------------------
Total Arizona $ 539,641 $ 564,660 $ 599,079 $ 604,827 $ 616,867
---------------------------------------------------------------------------------
Kansas / Missouri:
Commercial $ 325,165 $ 324,671 $ 307,143 $ 340,156 $ 398,452
Commercial real estate 36,006 32,017 29,969 30,642 40,241
Residential mortgage 12,310 10,814 9,321 7,650 7,490
Consumer 1,454 1,469 1,473 2,161 2,468
---------------------------------------------------------------------------------
Total Kansas / Missouri $ 374,935 $ 368,971 $ 347,906 $ 380,609 $ 448,651
---------------------------------------------------------------------------------
Total BOK Financial loans $ 12,069,928 $ 12,639,916 $ 12,876,006 $ 12,679,970 $ 12,518,038
---------------------------------------------------------------------------------
52
Commercial
The commercial loan portfolio decreased $386 million during the second quarter
of 2009 to $6.7 billion at June 30, 2009. The decrease in outstanding commercial
loans was primarily due to decreases of $126 million in energy sector loans and
$106 million in wholesale/retail sector loans. Commercial loan origination
activity has slowed to less than amounts necessary to offset normal repayment
trends in the portfolio. Additionally, committed amounts on certain
collateral-dependent commercial loans have been reduced due to lower collateral
values. This required partial repayment of the outstanding balances. The
commercial sector of our loan portfolio is distributed as follows (in
thousands):
Table 18 - Commercial Loans by Principal Market Area
Kansas/
Oklahoma Texas New Mexico Arkansas Colorado Arizona Missouri Total
------------ ------------ ------------ ---------- ---------- ---------- ------------ ------------
Energy $1,053,660 $778,239 $ 5,984 $ 1,602 $357,380 $ - $ 6,693 $2,203,558
Services 553,804 658,955 243,305 28,482 149,569 142,416 107,566 1,884,097
Wholesale/retail 517,829 296,226 60,867 50,484 28,294 35,950 37,882 1,027,532
Manufacturing 283,339 132,412 46,237 1,575 18,747 9,445 4,741 496,496
Healthcare 402,665 285,885 9,614 14,627 28,844 22,951 699 765,285
Agriculture 27,385 3,153 299 36 243 - 126,643 157,759
Other commercial
And industrial 79,796 27,886 14,072 870 12,781 4,778 40,941 181,124
----------------------------- ------------ ------------ ------------ ---------- ---------- ---------- ------------ ------------
Total commercial loans $2,918,478 $2,182,756 $380,378 $ 97,676 $595,858 $215,540 $325,165 $6,715,851
----------------------------- ------------ ------------ ------------ ---------- ---------- ---------- ------------ ------------
Energy loans totaled $2.2 billion or 18% of total loans. Outstanding energy
loans decreased $126 million during the second quarter of 2009 primarily due to
low customer loan demand as a result of low commodity prices which has led to
curtailed exploration and production of oil and gas reserves and reduced
collateral value available to support outstanding balances. Approximately $1.9
billion of energy loans were to oil and gas producers, down from $2.0 billion at
March 31, 2009. 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 $149 million of loans to
borrowers that provide services to the energy industry, $96 million of loans to
borrowers engaged in wholesale or retail energy sales and $55 million of loans
to borrowers that manufacture equipment for the energy industry.
The services sector of the loan portfolio totaled $1.9 billion or 16% of total
loans and consists of a large number of loans to a variety of businesses,
including communications, gaming and transportation services. Outstanding loans
to the service sector of the loan portfolio decreased $78 million during the
second quarter of 2009 due to reduced loan demand as a result of general
economic conditions. Approximately $1.1 billion of the services category is made
up of loans with individual balances of less than $10 million.
BOK Financial participates in shared national credits when appropriate to obtain
or maintain business relationships with local customers. Shared national credits
are defined by banking regulators as credits of more than $20 million and with
three or more non-affiliated banks as participants. At June 30, 2009, the
outstanding principal balance of these loans totaled $1.7 billion. Substantially
all of these loans are to borrowers with local market relationships. BOK
Financial serves as the agent lender in approximately 22% of its shared national
credits, based on dollars committed. The Company's lending policies generally
avoid loans in which we do not have the opportunity to maintain or achieve other
business relationships with the customer.
53
Commercial Real Estate
Commercial real estate loans totaled $2.6 billion or 21% of the loan portfolio
at June 30, 2009. Over the past five years, the percentage of commercial real
estate loans to our total loan portfolio ranged from 20% to 23%. The outstanding
balance of commercial real estate loans decreased $120 million from the previous
quarter end. The commercial real estate sector of our loan portfolio is
distributed as follows (in thousands):
Table 19 - Commercial Real Estate Loans by Principal Market Area
Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/ Total
Missouri
------------ ------------- ------------ ----------- ----------- ----------- ---------- -------------
Construction and
land development $ 232,922 $ 196,318 $ 83,342 $ 20,724 $163,295 $ 115,235 $7,001 $ 818,837
Retail 149,747 115,144 50,709 19,130 14,514 49,399 15,146 413,789
Office 152,540 143,782 73,985 14,008 57,393 46,064 2,272 490,044
Multifamily 90,117 119,004 19,532 54,667 6,200 10,287 6,368 306,175
Industrial 63,979 33,672 21,102 752 1,474 8,185 75 129,239
Other real estate loans 166,437 133,279 64,520 23,745 27,047 33,437 5,144 453,609
-------------------------- ------------ ------------- ------------ ----------- ----------- ----------- ---------- -------------
Total commercial
real estate loans $ 855,742 $ 741,199 $ 313,190 $ 133,026 $269,923 $ 262,607 $36,006 $2,611,693
-------------------------- ------------ ------------- ------------ ----------- ----------- ----------- ---------- -------------
Construction and land development loans decreased $61 million from March 31,
2009 to $819 million at June 30, 2009 due to payments, transfers to other real
estate owned and charge-offs. This sector of the loan portfolio is expected to
continue to decrease as construction projects currently in process are
completed.
Loans secured by multifamily residential properties decreased $38 million, loans
secured by industrial properties decreased $21 million and loans secured by
retail facilities decreased $11 million. Decrease in these sectors of the loan
portfolio was largely due to normal payoff of outstanding loan balances.
Residential Mortgage and Consumer
Residential mortgage loans totaled $1.8 billion, up $14 million since March 31,
2009. Permanent 1-4 family mortgage loans increased $23 million and home equity
loans decreased $9 million. We have no concentration in sub-prime residential
mortgage loans and our mortgage loan portfolio does not include payment option
adjustable rate mortgage loans or adjustable rate mortgage loans with initial
rates that are below market. Our portfolio of permanent 1-4 family mortgage
loans includes $114 million of community development loans. Approximately $1.2
billion of our residential mortgage loans portfolio is attributed to borrowers
in Oklahoma and $346 million to borrowers in Texas.
At June 30, 2009, consumer loans included $582 million of indirect automobile
loans. Approximately $358 million of these loans were purchased from dealers in
Oklahoma and $147 million were purchased from dealers in Arkansas. The remaining
$77 million were purchased from dealers in Texas. Indirect automobile loans
decreased $68 million since March 31, 2009, primarily due to the
previously-disclosed decision by the Company to exit the business in the first
quarter of 2009 in favor of a customer-focused direct lending approach.
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 $569 million at June
30, 2009. 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.
Approximately $2.2 million of the outstanding standby letters of credit were
issued on behalf of customers whose loans are non-performing at June 30, 2009.
54
The Company also has off-balance sheet commitments for residential mortgage
loans sold with full or partial recourse. These loans consist of first lien,
fixed rate residential mortgage loans originated under various community
development programs and sold to U.S. government agencies. These loans were
underwritten to standards approved by the agencies, including full
documentation. However, these loans have a higher risk of delinquency and losses
given default than traditional residential mortgage loans. A separate recourse
reserve is maintained as part of other liabilities. At June 30, 2009, the
principal balance of loans sold subject to recourse obligations totaled $346
million, down from $379 million at March 31, 2009. Substantially all of these
loans are to borrowers in our primary markets including $243 million to
borrowers in Oklahoma, $39 million to borrowers in Arkansas, $19 million to
borrowers in New Mexico, $17 million to borrowers in Texas and $14 million to
borrowers in the Kansas City area. The separate reserve for these off-balance
sheet commitments was $10.8 million at June 30, 2009. Approximately 4.30% of the
loans sold with recourse with an outstanding principal balance of $15 million
were either delinquent more than 90 days, in bankruptcy or in foreclosure, and
6% were past due 30 to 90 days. The provision for credit losses on loans sold
with recourse, which is included in mortgage banking costs, was $3.3 million for
the second quarter of 2009. Net losses charged against the reserve totaled $1.8
million for the second quarter of 2009.
Derivatives with Credit Risk
The Company offers programs that permit its customers to hedge various risks,
including fluctuations in energy, cattle and other agricultural product prices,
interest rates and foreign exchange rates, or to take positions in derivative
contracts. Each of these programs work essentially the same way. Derivative
contracts are executed between the customers and BOK Financial. Offsetting
contracts are executed between the Company and selected counterparties to
minimize the risk to us of changes in commodity prices, interest rates or
foreign exchange rates. The counterparty contracts are identical to the customer
contracts, except for a fixed pricing spread or a fee paid to us as compensation
for administrative costs, credit risk and profit.
The customer derivative programs create credit risk for potential amounts due to
the Company from its customers and from the counterparties. Customer credit risk
is monitored through existing credit policies and procedures. The effects of
changes in commodity prices, interest rates or foreign exchange rates are
evaluated across a range of possible options to determine the maximum exposure
we are willing to have individually to any customer. Customers may also be
required to provide margin collateral to further limit our credit risk.
Counterparty credit risk is evaluated through existing policies and procedures.
This evaluation considers the total relationship between BOK Financial and each
of the counterparties. Individual limits are established by management, approved
by Credit Administration and reviewed by the Asset / Liability Committee. Margin
collateral is required if the exposure between the Company and any counterparty
exceeds established limits. Based on declines in the counterparties' credit
ratings, these limits are reduced and additional margin collateral is required.
A deterioration of the credit standing of one or more of the customers or
counterparties to these contracts may result in BOK Financial recognizing a loss
as the fair value of the affected contracts may no longer move in tandem with
the offsetting contracts. This occurs if the credit standing of the customer or
counterparty deteriorated such that either the fair value of underlying
collateral no longer supported the contract or the customer or counterparty's
ability to provide margin collateral was impaired.
Derivative contracts are carried at fair value. At June 30, 2009, the fair
values of derivative contracts reported as assets under these programs totaled
$476 million, down from $627 million at March 31, 2009 due primarily to cash
settlements and reduced transaction volumes. At June 30, 2009, derivative
contracts carried as assets included primarily energy contracts with fair values
of $291 million, interest rate contracts with fair values of $131 million, and
foreign exchange contracts with fair values of $48 million. The aggregate net
fair values of derivative contracts reported as liabilities totaled $484
million.
At June 30, 2009, total derivative assets were reduced by $17 million of cash
collateral received from counterparties and total derivative liabilities were
reduced by $38 million of cash collateral paid to counterparties related to
instruments executed with the same counterparty under a master netting agreement
as permitted by generally accepted accounting principles.
A table showing the fair value of derivative assets and liabilities, net of cash
margin, is presented in Note 3 to the Consolidated Financial Statements
(Unaudited).
55
The fair value of derivative contracts reported as assets under these programs,
net of cash margin held by the Company, by category of debtor at June 30, 2009
was (in thousands):
Table 20 - Fair Value of Derivative Contracts
Energy companies $ 163,406
Customers 170,382
Banks 87,118
Exchanges 33,228
Other 4,575
---------------------------------------------------------------- -------------
Fair value of customer hedge asset derivative contracts, net $ 458,709
---------------------------------------------------------------- -------------
The largest net amount due from a single counterparty, a domestic subsidiary of
a major energy company, at June 30, 2009 was $164 million. This amount was
offset by $140 million in letters of credit issued by multiple independent
financial institutions.
Our customer derivative program also introduces liquidity and capital risk. We
are required to provide cash margin to certain counterparties when the net
negative fair value of the contracts exceeds established limits. Also, changes
in commodity prices affect the amount of regulatory capital we are required to
hold as support for the fair value of our derivative assets. These risks are
modeled as part of the management of these programs. Based on current prices, a
decrease in market prices to the equivalent of $25 per barrel of oil would
increase the fair value of derivative assets by $612 million, with dealer
counterparties comprising the bulk of the assets. An increase in prices to the
equivalent $65 per barrel of oil would increase the fair value of derivative
assets by $9 million as current prices move away from the fixed prices embedded
in our existing contracts. Further increases in prices to the equivalent of $115
per barrel of oil would increase the fair value of our derivative assets by $304
million with lending customers comprising the bulk of the assets.
56
Summary of Loan Loss Experience
BOK Financial maintains separate reserves for loan losses and reserves for
off-balance sheet credit risk. The combined allowance for loan losses and
reserve for off-balance sheet credit losses totaled $274 million or 2.27% of
outstanding loans at June 30, 2009 and 78% of non-accruing loans at June 30,
2009. The allowance for loan losses was $263 million and the reserve for
off-balance sheet credit losses was $11 million. At March 31, 2009, the combined
allowance for loan losses and reserve for off-balance sheet credit losses
totaled $262 million or 2.07% of outstanding loans and 77% of non-accruing loans
at March 31, 2009.
------------------------------------------------------------------------------------------------------------------------------
Table 21 - Summary of Loan Loss Experience
(In thousands)
Three Months Ended
----------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
2009 2009 2008 2008 2008
----------------------------------------------------------------------------------
Reserve for loan losses:
Beginning balance $ 251,002 $ 233,236 $ 186,516 $ 154,018 $ 136,584
Loans charged off:
Commercial 9,135 15,791 25,837 11,393 33,502
Commercial real estate 17,186 10,215 573 14,394 2,572
Residential mortgage 5,373 1,765 2,476 2,865 1,068
Consumer 5,715 6,764 6,795 5,274 4,384
------------------------------------------------------------------------------------------------------------------------------
Total 37,409 34,535 35,681 33,926 41,526
------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 692 356 220 11,882 842
Commercial real estate 83 41 7 175 98
Residential mortgage 179 214 122 65 121
Consumer 1,518 2,053 1,673 1,590 1,474
------------------------------------------------------------------------------------------------------------------------------
Total 2,472 2,664 2,022 13,712 2,535
------------------------------------------------------------------------------------------------------------------------------
Net loans charged off 34,937 31,871 33,659 20,214 38,991
Provision for loan losses 47,244 49,637 80,379 52,712 56,425
------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 263,309 $ 251,002 $ 233,236 $ 186,516 $ 154,018
------------------------------------------------------------------------------------------------------------------------------
Reserve for off-balance sheet credit losses:
Beginning balance $ 10,569 $ 15,166 $ 22,544 $ 22,545 $ 19,660
Provision for off-balance sheet credit losses (124) (4,597) (7,378) (1) 2,885
------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 10,445 $ 10,569 $ 15,166 $ 22,544 $ 22,545
------------------------------------------------------------------------------------------------------------------------------
Total provision for credit losses $ 47,120 $ 45,040 $ 73,001 $ 52,711 $ 59,310
------------------------------------------------------------------------------------------------------------------------------
Reserve for loan losses to loans outstanding
at period-end 2.18% 1.99% 1.81% 1.47% 1.23%
Net charge-offs (annualized)
to average loans 1.13 1.00 1.05 0.64 1.26
Total provision for credit losses (annualized)
to average loans 1.52 1.41 2.28 1.67 1.91
Recoveries to gross charge-offs 6.61 7.71 5.67 40.42 6.10
Reserve for loan losses as a multiple of
net charge-offs (annualized) 1.88x 1.97x 1.73x 2.31x 0.99x
Reserve for off-balance sheet credit losses to
off-balance sheet credit commitments 0.19% 0.19% 0.27% 0.38% 0.36%
Combined reserves for credit losses to loans
outstanding at period-end 2.27 2.07 1.93 1.65 1.41
------------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses
Adequacy of the allowance for loan losses is assessed by management based on an
ongoing quarterly evaluation of the probable estimated losses inherent in the
portfolio. The allowance consists of specific reserves attributed to impaired
loans, general reserves based on migration factors and non-specific reserves
based on general economic, risk concentration and related factors.
Specific reserves for impaired loans are determined by evaluation of estimated
future cash flows, collateral value or historical statistics. Loans are
considered to be impaired when it is probable that the Company will not be able
to collect all amounts due according to the contractual terms of the loan
agreement. This is substantially the same
57
criteria used to determine when a loan should be placed on non-accrual status.
Generally all non-accruing commercial and commercial real estate loans are
considered impaired. Substantially all impaired loans are collateralized.
Collateral includes real property, inventory, accounts receivable, operating
equipment, interests in mineral rights, and other property. Collateral may also
include personal guaranties by borrowers and related parties.
Delinquency status is not a significant consideration in the evaluation of
impairment or risk-grading of commercial or commercial real estate loans. These
evaluations are based on an assessment of the borrowers' paying capacity and
attempt to identify changes in credit risk before payments become delinquent.
Changes in the delinquency trends of residential mortgage loans and consumer
loans may indicate increases or decreases in expected losses.
Impaired loans are charged-off when the loan balance or a portion of the loan
balance is no longer supported by the paying capacity of the borrower based on
an evaluation of available cash resources or collateral value. No reserves are
attributed to the remaining balance of loans that have been charged-down to
amounts management expects to recover. Impaired loans totaled $328 million at
June 30, 2009 and $309 million at March 31, 2009. At June 30, 2009, $229 million
of impaired loans had $34 million of specific reserves and $99 million had no
specific reserves. Impaired loans with a gross outstanding principal balance of
$207 million have been charged down to an estimated recoverable balance of $99
million. Cumulative life-to-date charge-offs of loans identified as impaired at
June 30, 2009 totaled $108 million, including $19 million charged off in the
second quarter of 2009. At March 31, 2009, $233 million of impaired loans had
$19 million of specific reserves and $76 million had no specific reserves.
General reserves for unimpaired loans are based on migration models. Separate
migration models are used to determine general reserves for commercial and
commercial real estate loans, residential mortgage loans, and consumer loans.
All commercial and commercial real estate loans are risk-graded based on an
evaluation of the borrowers' ability to repay the loans. Migration factors are
determined for each risk-grade to determine the inherent loss based on
historical trends. We use an eight-quarter aggregate accumulation of net losses
as a basis for the migration factors. Greater emphasis is placed on losses
incurred in more recent periods. The higher of current loss factors based on
migration trends or a minimum migration factor based upon long-term history is
assigned to each risk grade. The general reserve for residential mortgage loans
is based on an eight-quarter average percent of loss. The general reserve for
consumer loans is based on an eight-quarter average percent of loss with
separate migration factors determined by major product line, such as indirect
automobile loans and direct consumer loans. The aggregate amount of general
reserves determined by migration factors for all unimpaired loans totaled $204
million at June 30, 2009.
Nonspecific reserves are maintained for risks beyond factors specific to a
particular loan or identified by the migration models. These factors include
trends in the economy in our primary lending areas, conditions in certain
industries where we have a concentration and overall growth in the loan
portfolio. In addition, migration factors used to determine general reserves
based on historical losses are inherently backward-looking. Evaluation of
nonspecific factors considers the effect of the duration of the business cycle
on migration factors. Nonspecific factors also considered regulatory examination
results and other relevant factors. Aggregate of nonspecific reserves totaled
$25 million at June 30, 2009.
The provision for credit losses is the amount necessary to maintain the
allowance for loan losses at an amount determined by management to be adequate
based on its evaluation. The provision for credit losses totaled $47.1 million
for the second quarter of 2009, $45.0 million for the first quarter of 2009, and
$59.3 million for the second quarter of 2008. Provision for the second quarter
of 2008 included $26.3 million for SemGroup credit losses. Factors considered in
determining the provision for credit losses for the second quarter of 2009
included trends of net charge-offs, nonperforming loans and risk grading. These
trends generally have indicated increasing credit risk, though the
rate of increase slowed in the second quarter of 2009.
Net Loans Charged-Off
Loans are charged off against the allowance for loan losses when the loan
balance or a portion of the loan balance is no longer covered by the paying
capacity of the borrower based on an evaluation of available cash resources and
collateral value. Collateral values are generally evaluated annually, or more
frequently for certain collateral types or collateral located in certain
distressed markets. Loans are evaluated quarterly and charge-offs are taken in
the quarter in which the loss is identified.
Net loans charged off during the second quarter of 2009 totaled $34.9 million
compared to $31.9 million in the
58
previous quarter and $39.0 million in the second quarter of 2008. Loans
charged-off in the second quarter of 2008 included $26.0 million for SemGroup.
The ratio of net loans charged off to average outstanding loans was 1.13% for
the second quarter of 2009 compared with 1.00% for the first quarter of 2009 and
1.26% for the second quarter of 2008. Gross loans charged off in the second
quarter of 2009 increased to $37.4 million from $34.5 million in the first
quarter of 2009. Recoveries of loans previously charged off were $2.5 million,
largely unchanged from the previous quarter.
Net loans charged off by category and principal market area during the second
quarter of 2009 is as follows (in thousands):
Table 22 - Net Loans Charged Off
Oklahoma Texas Colorado Arkansas New Arizona Kansas/ Total
Mexico Missouri
------------ --------- ---------- ----------- --------- --------- ----------- ---------
Commercial $2,329 $1,327 $1,722 $ (47) $ 760 $2,164 $ 188 8,443
Commercial real estate 672 1,249 1,064 259 413 13,433 13 17,103
Residential mortgage 2,511 2,048 - (3) 41 597 - 5,194
Consumer 1,680 1,559 102 636 200 20 - 4,197
---------------------------- ------------ --------- ---------- ----------- --------- --------- ----------- ---------
Total net loans charged off $ 7,192 $ 6,183 $ 2,888 $ 845 $ 1,414 $16,214 $ 201 $34,937
---------------------------- ------------ --------- ---------- ----------- --------- --------- ----------- ---------
Net commercial loans charged off during the second quarter of 2009 included $5.7
million from the services sector of the loan portfolio and $1.7 million from the
wholesale / retail sector of the loan portfolio. Commercial real estate loans
charged off during the second quarter of 2009 comprised 49% of total net
charge-offs and included $9.4 million in the land and residential construction
sector of the loan portfolio, primarily in the Arizona market.
Consumer loan net charge-offs, which includes indirect auto loan and deposit
account overdraft losses, totaled $4.2 million for the second quarter of 2009,
down $514 thousand from the previous quarter. Net charge-offs of indirect auto
loans totaled $2.2 million for the second quarter of 2009 and $3.0 million for
the first quarter of 2009.
The Company considers the credit risk from loan commitments and letters of
credit in its evaluation of the adequacy of the reserve for loan losses. A
separate reserve for off-balance sheet credit risk is maintained. Table 21
presents the trend of reserves for off-balance sheet credit losses and the
relationship between the reserve and loan commitments. The provision for credit
losses included the combined charge to expense for both the reserve for loan
losses and the reserve for off-balance sheet credit losses. All losses incurred
from lending activities will ultimately be reflected in charge-offs against the
reserve for loan losses following funds advanced against outstanding commitments
and after the exhaustion of collection efforts.
59
Nonperforming Assets
----------------------------------------------------------------------------------------------------------------------
Table 23 - Nonperforming Assets
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2009 2009 2008 2008 2008
-----------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 126,510 $ 128,501 $ 134,846 $ 105,757 $ 69,679
Commercial real estate 189,586 175,487 137,279 78,235 60,456
Residential mortgage 35,860 34,182 27,387 27,075 17,861
Consumer 1,037 1,065 561 758 611
----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 352,993 339,235 300,073 211,825 148,607
Renegotiated loans (3) 17,479 13,623 13,039 12,326 11,840
----------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 370,472 352,858 313,112 224,151 160,447
Other nonperforming assets 75,243 61,383 29,179 28,088 21,025
----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 445,715 $ 414,241 $ 342,291 $ 252,239 $ 181,472
----------------------------------------------------------------------------------------------------------------------
Nonaccrual loans by principal market:
Oklahoma $ 108,490 $ 105,536 $ 108,367 $ 87,885 $ 57,155
Texas 51,582 55,225 42,934 29,141 20,860
New Mexico 29,640 18,046 16,016 12,293 9,838
Arkansas 3,888 4,078 3,263 3,386 2,924
Colorado (4) 45,794 38,567 32,415 20,980 23,812
Arizona 106,076 111,772 80,994 54,832 33,482
Kansas / Missouri 7,523 6,011 16,084 3,308 536
----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans $ 352,993 $ 339,235 $ 300,073 $ 211,825 $ 148,607
----------------------------------------------------------------------------------------------------------------------
Nonaccrual loans by loan portfolio sector:
Commercial:
Energy $ 53,842 $ 49,618 $ 49,364 $ 49,839 $ 12,342
Manufacturing 16,975 18,248 7,343 6,479 6,731
Wholesale / retail 10,983 8,650 18,773 7,806 3,735
Agriculture 105 115 680 755 811
Services 24,713 30,226 36,873 26,581 30,080
Healthcare 14,222 14,288 12,118 3,300 3,791
Other 5,670 7,356 9,695 10,997 12,189
----------------------------------------------------------------------------------------------------------------------
Total commercial 126,510 128,501 134,846 105,757 69,679
Commercial real estate:
Land development and construction 97,425 99,922 76,082 53,624 45,291
Retail 17,474 9,893 15,625 13,011 7,591
Office 27,685 23,305 7,637 3,022 3,304
Multifamily 27,827 27,198 24,950 896 896
Industrial 527 575 6,287 390 396
Other commercial real estate 18,648 14,594 6,698 7,292 2,978
----------------------------------------------------------------------------------------------------------------------
Total commercial real estate 189,586 175,487 137,279 78,235 60,456
Residential mortgage:
Permanent mortgage 34,149 32,848 26,233 26,401 17,039
Home equity 1,711 1,334 1,154 674 822
----------------------------------------------------------------------------------------------------------------------
Total residential mortgage 35,860 34,182 27,387 27,075 17,861
Consumer 1,037 1,065 561 758 611
----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans $ 352,993 $ 339,235 $ 300,073 $ 211,825 $ 148,607
----------------------------------------------------------------------------------------------------------------------
Ratios:
Reserve for loan losses to nonperforming loans 71.07% 71.13% 74.49% 83.21% 95.99%
Nonperforming loans to period-end loans 3.07 2.79 2.43 1.77 1.28
----------------------------------------------------------------------------------------------------------------------
Loans past due (90 days or more) (1) $ 32,443 $ 46,123 (2) $ 19,123 $ 20,213 $ 10,683
----------------------------------------------------------------------------------------------------------------------
(1) Includes residential mortgages guaranteed
by agencies of the U.S. Government. $ 1,337 $ 395 $ 872 $ 1,210 $ 1,015
(2) Includes a $23 million loan that was paid
current after March 31, 2009.
(3) Includes residential mortgages guaranteed
by agencies of the U.S. Government.
These loans have been modified to extend
payment terms and/or reduce interest
rates to current market. 11,079 10,514 10,396 9,604 8,638
(4) Includes loans subject to First United
Bank sellers escrow. 8,305 11,287 13,181 13,262 11,973
----------------------------------------------------------------------------------------------------------------------
60
Non-performing assets totaled $446 million or 3.67% of outstanding loans and
repossessed assets at June 30, 2009, up $31 million since March 31, 2009. In
addition to $353 million of non-accruing loans, non-performing assets included
$17 million of restructured residential mortgage loans and $75 million of real
estate and other repossessed assets. Non-performing assets included $11 million
of restructured residential mortgage loans guaranteed by agencies of the U.S.
government and $8 million of loans and repossessed assets acquired with First
United Bank in the second quarter of 2007. The Company will be reimbursed by the
sellers up to $5.3 million for any losses incurred during a three-year period
after the June 2007 acquisition date.
The distribution of non-accruing loans among our various markets was:
Table 24 - Non-Accruing Loans by Principal Market
(In thousands)
June 30, 2009 March 31, 2009 Change
--------------------------- --------------------------- ---------------------------
% of % of % of
outstanding outstanding outstanding
Amount loans Amount loans Amount loans
-------------------------------------------------------------------------------------
Oklahoma $108,490 1.96% $105,536 1.82% $ 2,954 14 bp
Texas 51,582 1.49 55,225 1.52 (3,643) (3)
New Mexico 29,640 3.69 18,046 2.18 11,594 151
Arkansas 3,888 0.97 4,078 0.97 (190) -
Colorado 45,794 4.88 38,567 3.80 7,227 108
Arizona 106,076 19.66 111,772 19.79 (5,696) (13)
Kansas / Missouri 7,523 2.01 6,011 1.63 1,512 38
----------------------------------------------------------------------------------------------------------
Total $352,993 2.92% $339,235 2.68% 13,758 24 bp
----------------------------------------------------------------------------------------------------------
Non-accruing loans newly identified in the second quarter of 2009 totaled $72
million. Cash payments received during the second quarter on non-accruing loans
totaled $9 million, $27 million of non-accruing loans were charged-off and $20
million of non-accruing loans were transferred to real estate owned and other
repossessed assets.
The majority of non-accruing loans continued to be in the Oklahoma and Arizona
markets. Non-accruing loans in the Oklahoma market included $47 million of
commercial energy loans related to SemGroup. Non-accruing loans in the Arizona
market consisted primarily of commercial real estate loans. Growth in
non-accruing loans during the second quarter was concentrated primarily in the
New Mexico market due primarily to one retail commercial real estate loan and
the Colorado market due primarily to one other commercial real estate loan.
Non-accruing loans in the Arizona market decreased due primarily to commercial
real estate loans charged-off or transferred to other real estate owned.
Non-accruing commercial loans totaled $127 million or 1.88% at June 30, 2009 and
$129 million or 1.81% of total commercial loans at March 31, 2009. Non-accruing
commercial loans decreased by $2.0 million during the second quarter of 2009.
The distribution of non-accruing commercial loans among our various markets was:
Table 25 - Non-Accruing Commercial Loans by Principal Market
(Dollars in thousands)
June 30, 2009 March 31, 2009 Change
-------------------------- -------------------------- --------------------------
% of % of % of
outstanding outstanding outstanding
Amount loans Amount loans Amount loans
------------- ------------ --- ------------ ------------- -- ------------- ------------
Oklahoma (1) $ 69,088 2.37% $ 67,846 2.17% $ 1,242 20 bp
Texas 34,384 1.58 36,387 1.60 (2,003) (2)
New Mexico 7,737 2.03 5,357 1.36 2,380 67
Arkansas 702 0.72 621 0.62 81 10
Colorado 12,849 2.16 14,554 2.16 (1,705) -
Arizona 532 0.25 3,335 1.57 (2,803) (132)
Kansas / Missouri 1,218 0.37 400 0.12 818 25
---------------------- ------------- ------------ --- ------------ ------------- -- ------------- ------------
Total commercial $ 126,510 1.88% $ 128,500 1.81% $ (1,990) 7 bp
---------------------- ------------- ------------ --- ------------ ------------- -- ------------- ------------
(1) Includes $47 million related to SemGroup. Subsequent to June 30, 2009,
SemGroup loans with a face amount of $25 million were sold for $13.2
million. Proceeds of this sale will reduce non-accruing energy loans in
the Oklahoma market in the third quarter.
61
Approximately $54 million of non-accruing commercial loans are in the energy
sector of the portfolio, including $47 million due from SemGroup. This amount
represents one-third of our pre-bankruptcy amounts due from SemGroup.
Non-accruing energy sector loans increased $4.2 million over the first quarter
of 2009. In addition, $25 million of non-accruing commercial loans are in the
services sector of the loan portfolio. Approximately 1.31% or $25 million of all
loans in the services sector of the portfolio was non-accruing at June 30, 2009,
a $5.5 million decrease over the first quarter of 2009. Non-accruing loans to
the manufacturing sector of the portfolio totaled $17 million or 3.42% of all
loans to the manufacturing sector at June 30, 2009. Non-accruing loans to the
wholesale / retail sector of the loan portfolio increased $2.3 million from
March 31, 2009 to $11 million or 1.07% of all loans in the wholesale /retail
sector of the loan portfolio.
Non-accruing commercial real estate loans are largely concentrated in the
Arizona market. Approximately $100 million or 53% of total non-accruing
commercial real estate loans are in Arizona. Total non-accruing commercial real
estate loans increased $14 million during the second quarter of 2009. The
increase included a $7.5 million net increase in non-accruing loans secured by
retail facilities, primarily related to one borrower in the Arizona market.
Non-accruing loans secured by office buildings increased $4.4 million, primarily
related to one borrower in the New Mexico market. Other commercial real estate
increased $4.1 million primarily related to one borrower in the Colorado market.
Non-accruing residential construction and land development loans experienced a
net decrease of $2.5 million which consisted primarily of a $6.2 million
increase in the Colorado market offset by a $6.0 million decrease in the Arizona
market and a $3.3 million decrease in the Texas market. Decreases in
non-accruing residential construction and land development loans were primarily
related to charge-offs and transfers to other real estate owned. The
distribution of non-accruing commercial real estate loans among our various
markets was:
Table 26 - Non-Accruing Commercial Real Estate Loans by Principal Market
(Dollars in thousands)
June 30, 2009 March 31, 2009 Change
-------------------------- -------------------------- --------------------------
Amount % of Amount % of Amount % of
outstanding outstanding outstanding
loans loans loans
------------- ------------ --- ------------ ------------- -- ------------- ------------
Oklahoma $ 27,913 3.26% $ 26,408 3.00% $ 1,505 26 bp
Texas 5,031 0.68 7,545 0.92 (2,514) (24)
New Mexico 18,328 5.85 9,976 3.16 8,352 269
Arkansas 1,566 1.18 2,286 1.72 (720) (54)
Colorado 31,588 11.70 23,183 8.68 8,405 302
Arizona 100,160 38.14 102,064 35.71 (1,904) 243
Kansas / Missouri 5,000 13.89 4,024 12.57 976 132
------------------------------ ------------- ------------ --- ------------ ------------- -- ------------- ------------
Total commercial real estate $ 189,586 7.26% $ 175,486 6.42% $14,100 84 bp
------------------------------ ------------- ------------ --- ------------ ------------- -- ------------- ------------
Non-accruing residential mortgage loans primarily consist of permanent
residential mortgage loans which totaled $34 million or 2.51% of outstanding
residential mortgage loans at June 30, 2009, a $1.3 million increase over March
31, 2009. In addition, non-accruing home equity loans totaled $1.7 million or
0.36% of total home equity loans. The distribution of non-accruing residential
mortgage loans among our various markets was:
Table 27 - Non-Accruing Residential Mortgage Loans by Principal Market
(Dollars in thousands)
June 30, 2009 March 31, 2009 Change
-------------------------- --------------------------- --------------------------
Amount % of Amount % of Amount % of
outstanding outstanding outstanding
loans loans loans
------------ ------------- -- ------------- ------------- -- ------------ -------------
Oklahoma $11,270 0.90% $10,819 0.88% $ 451 2 bp
Texas 11,699 3.38 10,826 3.21 873 17
New Mexico 3,493 3.84 2,680 2.69 813 115
Arkansas 1,498 7.88 1,083 6.32 415 156
Colorado 1,357 2.32 830 1.40 527 92
Arizona 5,238 8.99 6,358 10.32 (1,120) (133)
Kansas / Missouri 1,305 10.60 1,586 14.67 (281) (407)
---------------------------------- ------------ ------------- -- ------------- ------------- -- ------------ -------------
Total residential mortgage loans $35,860 1.96% $34,182 1.88% $1,678 8 bp
---------------------------------- ------------ ------------- -- ------------- ------------- -- ------------ -------------
62
In addition to non-accruing residential mortgage and consumer loans, payments of
residential mortgage loans and consumer loans may be delinquent. The composition
of residential mortgage and consumer loans past due is included in the following
table. Residential mortgage loans past due 90 days or more decreased $2.2
million during the second quarter and consumer loans past due less than 90 days
were relatively unchanged. Consumer loans past due 30 to 89 days increased $5.8
million including an increase indirect automobile loans 30 to 89 days past due
from $17.1 million at March 31, 2009 to $20.1 million at June 30, 2009. Other
consumer loans 30 to 89 days past due increased to $5.1 million at June 30, 2009
compared with $2.3 million at March 31, 2009.
--------------------------------------------------------------------------
Table 28 - Residential Mortgage and Consumer Loans Past Due
(In Thousands)
June 30, 2009 March 31, 2009
----------------------- -----------------------
90 Days 30 to 89 90 Days 30 to 89
or More Days or More Days
----------- ----------- ----------- -----------
Residential mortgage $ 2,933 $27,079 $ 5,148 $27,970
Consumer 760 25,219 893 19,433
Real estate and other repossessed assets totaled $75 million at June 30, 2009,
up from $61 million at March 31, 2009. Real estate and other repossessed assets
included $43 million of 1-4 family residential properties and residential land
development properties, $17 million of developed commercial real estate
properties, $7 million of equipment, $5 million of undeveloped land and $2
million of automobiles. The distribution of real estate owned and other
repossessed assets among our various markets included $25 million in Arizona,
$17 million in Texas, $8 million in New Mexico, $7 million in Kansas City, $6
million in Arkansas, $6 million in Oklahoma and $5 million in Colorado.
Our loan review process also identified loans that possess more than the normal
amount of risk due to deterioration in the financial condition of the borrower
or the value of the collateral. Because the borrowers are still performing in
accordance with the original terms of the loan agreements, and no loss of
principal or interest is anticipated, these loans were not included in
Non-performing Assets. Known information does, however, cause management concern
as to the borrowers' ability to comply with current repayment terms. These
potential problem loans totaled $220 million at June 30, 2009 and $132 million
at March 31, 2009. The current composition of potential problem loans by primary
industry included real estate - $82 million, energy production - $60 million,
manufacturing - $13 million, services - $28 million and wholesale/retail - $16
million. Potential problem real estate loans included $43 million of residential
development loans on properties primarily located in Texas and Colorado and $16
million of loans secured by office buildings primarily located in Arizona.
Growth in potential problem loans during the second quarter included $60 million
of energy production loans. Although energy production loans remain well
secured, collateral coverage on certain loans has fallen below limits set by
Company policy. These loans have been identified for enhanced attention by
management.
Loans to energy producers and borrowers related to the energy industry are the
largest portion of our commercial loan portfolio. In addition, energy production
and related industries have a significant impact on the economy in our primary
markets. BOK Financial has always been an energy lender and this continues to be
an area of expertise. As part of our evaluation of credit quality, we analyze
rigorous stress tests over a range of commodity prices and take proactive steps
to mitigate risk when appropriate.
Liquidity and Capital
Subsidiary Banks
Deposits and borrowed funds are the primary sources of liquidity for the
subsidiary banks. For the second quarter of 2009, approximately 66% of our
funding was provided by average deposit accounts, 18% from average borrowed
funds, 2% from average long-term subordinated debt and 9% from shareholders'
equity. Our funding sources primarily include deposits and borrowings from the
Federal Home Loan Banks and other banks, and may include issuance of qualifying
debt under the U.S. Treasury Liquidity Guarantee Program ("TLGP"). These funding
sources provide adequate liquidity to meet our operating needs.
63
Deposit accounts represent our largest 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
sales and customer service program, free checking and online bill paying
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. We also acquire brokered deposits when
the cost of funds is advantageous to other funding sources.
Average deposits totaled $15.3 billion at June 30, 2009 and represented
approximately 66% of total average liabilities and capital for the second
quarter of 2009, compared with $14.8 billion and 65% of total average
liabilities and capital for the first quarter of 2009.
Average deposits increased $479 million over the first quarter of 2009. Average
interest-bearing transaction deposit accounts continued to grow in the second
quarter of 2009, up $160 million over the first quarter of 2009. Average demand
deposits increased $319 million over the first quarter of 2009. Average time
deposits decreased $91 million over the first quarter of 2009.
Growth in our average interest-bearing transaction deposit accounts over the
first quarter of 2009 included $485 million of commercial deposits, $210 million
of consumer banking deposits and $96 million of wealth management deposits.
Average brokered deposits and other non-core deposits decreased $294 million.
Average commercial banking deposits were up $485 million, including an increase
of $378 million from our commercial banking units and $95 million from our
treasury services unit. Average consumer banking deposits increased $210 million
across all of our geographical markets, including $75 million in Texas and $61
million in Oklahoma. Average wealth management time deposits increased $96
million over the first quarter of 2009, including $54 million of additional
deposits generated by our broker / dealer network and $41 million generated by
our trust division.
Brokered deposits and other non-core deposits averaged $913 million in the
second quarter of 2009, down $313 million from the first quarter of 2009.
Brokered deposits totaled $36 million at June 30, 2009 compared to $447 million
at March 31, 2009. Brokered deposits were largely added in 2008 to remix
wholesale funding sources in order to provide more available overnight liquidity
and are being replaced by other deposit products as they mature.
The distribution of deposit accounts among our principal markets is shown in the
following table.
64
---------------------------------------------------------------------------------------------------------------------
Table 29 - Deposits by Principal Market Area
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2009 2009 2008 2008 2008
---------------------------------------------------------------------------------
Oklahoma:
Demand $ 1,451,057 $ 1,651,111 $ 1,683,374 $ 1,681,325 $ 1,455,997
Interest-bearing:
Transaction 4,374,089 4,089,838 4,117,729 4,151,430 3,997,136
Savings 94,048 95,827 86,476 86,900 90,100
Time 2,033,312 2,876,313 3,104,933 3,036,297 2,672,401
---------------------------------------------------------------------------------
Total interest-bearing 6,501,449 7,061,978 7,309,138 7,274,627 6,759,637
---------------------------------------------------------------------------------
Total Oklahoma $ 7,952,506 $ 8,713,089 $ 8,992,512 $ 8,955,952 $ 8,215,634
---------------------------------------------------------------------------------
Texas:
Demand $ 1,002,266 $ 1,021,424 $ 1,067,456 $ 956,846 $ 1,046,651
Interest-bearing:
Transaction 1,660,642 1,527,399 1,460,576 1,543,974 1,713,131
Savings 33,992 33,867 32,071 32,400 33,207
Time 1,035,919 1,054,632 857,416 794,911 723,146
---------------------------------------------------------------------------------
Total interest-bearing 2,730,553 2,615,898 2,350,063 2,371,285 2,469,484
---------------------------------------------------------------------------------
Total Texas $ 3,732,819 $ 3,637,322 $ 3,417,519 $ 3,328,131 $ 3,516,135
---------------------------------------------------------------------------------
New Mexico:
Demand $ 175,033 $ 180,308 $ 155,345 $ 176,477 $ 168,621
Interest-bearing:
Transaction 434,498 401,000 397,382 376,941 417,607
Savings 18,255 17,858 16,289 16,316 16,432
Time 542,388 561,300 522,894 475,560 445,505
---------------------------------------------------------------------------------
Total interest-bearing 995,141 980,158 936,565 868,817 879,544
---------------------------------------------------------------------------------
Total New Mexico $ 1,170,174 $ 1,160,466 $ 1,091,910 $ 1,045,294 $ 1,048,165
---------------------------------------------------------------------------------
Arkansas:
Demand $ 17,261 $ 16,503 $ 16,293 $ 23,565 $ 21,142
Interest-bearing:
Transaction 73,972 63,924 38,566 19,146 24,524
Savings 1,031 1,100 1,083 865 895
Time 162,505 150,015 75,579 47,684 39,305
---------------------------------------------------------------------------------
Total interest-bearing 237,508 215,039 115,228 67,695 64,724
---------------------------------------------------------------------------------
Total Arkansas $ 254,769 $ 231,542 $ 131,521 $ 91,260 $ 85,866
---------------------------------------------------------------------------------
Colorado:
Demand $ 113,895 $ 111,048 $ 116,637 $ 115,677 $ 109,697
Interest-bearing:
Transaction 445,521 466,276 480,113 440,888 507,260
Savings 18,144 18,905 17,660 19,300 20,245
Time 579,709 584,971 532,475 428,872 423,014
---------------------------------------------------------------------------------
Total interest-bearing 1,043,374 1,070,152 1,030,248 889,060 950,519
---------------------------------------------------------------------------------
Total Colorado $ 1,157,269 $ 1,181,200 $ 1,146,885 $ 1,004,737 $ 1,060,216
---------------------------------------------------------------------------------
Arizona:
Demand $ 55,975 $ 54,362 $ 39,424 $ 45,725 $ 49,895
Interest-bearing:
Transaction 89,842 66,809 56,985 64,463 73,034
Savings 1,282 970 1,014 1,033 1,233
Time 59,775 54,923 34,290 14,433 6,364
---------------------------------------------------------------------------------
Total interest-bearing 150,899 122,702 92,289 79,929 80,631
---------------------------------------------------------------------------------
Total Arizona $ 206,874 $ 177,064 $ 131,713 $ 125,654 $ 130,526
---------------------------------------------------------------------------------
Kansas / Missouri:
Demand $ 9,692 $ 16,140 $ 3,850 $ 5,548 $ 7,157
Interest-bearing:
Transaction 12,907 11,976 10,999 9,780 10,342
Savings 54 117 42 33 26
Time 158,325 141,505 55,656 19,794 51,649
---------------------------------------------------------------------------------
Total interest-bearing 171,286 153,598 66,697 29,607 62,017
---------------------------------------------------------------------------------
Total Kansas / Missouri $ 180,978 $ 169,738 $ 70,547 $ 35,155 $ 69,174
---------------------------------------------------------------------------------
Total BOK Financial deposits $ 14,655,389 $ 15,270,421 $ 14,982,607 $ 14,586,183 $ 14,125,716
---------------------------------------------------------------------------------
65
In addition to deposits, subsidiary bank liquidity is provided primarily by
federal funds purchased, securities repurchase agreements and Federal Home Loan
Bank borrowings. Federal funds purchased consist primarily of unsecured,
overnight funds acquired from other financial institutions. Funds are primarily
purchased from bankers' banks and Federal Home Loan banks from across the
country. The largest single source of Federal funds purchased totaled $250
million at June 30, 2009. Securities repurchase agreements generally mature
within 90 days and are secured by certain available for sale securities. Federal
Home Loan Bank borrowings are generally short term and are secured by a blanket
pledge of eligible collateral (generally unencumbered U.S. Treasury and
mortgage-backed securities, 1-4 family mortgage loans and multifamily mortgage
loans). At June 30, 2009, the outstanding balance of federal funds purchased
totaled $1.5 billion, securities repurchase agreements totaled $727 million and
Federal Home Loan Bank borrowings totaled $1.2 billion.
The Company participates in the U.S. Treasury Liquidity Guarantee Program
("TLGP"), which expanded insurance coverage to certain qualifying debt issued by
eligible financial institutions. In general, senior unsecured debt newly issued
on or before June 30, 2009 will be fully protected by the FDIC through the
earlier of the maturity of the debt or June 30, 2012. Subsequently, the FDIC
approved a limited four-month extension of the Debt Guarantee Program under the
TLGP. Participating insured depository institutions may issue qualifying senior
unsecured debt no later than October 31, 2009. The FDIC guarantee of qualifying
debt expires on the earliest of the opt-out date, the mandatory conversion date,
the stated maturity date or December 31, 2012. Collectively, our subsidiary
banks may issue up to $1.8 billion of TLGP protected debt. No TLGP guaranteed
debt was issued by our subsidiary banks.
In 2008, the subsidiary banks began borrowing funds under the Federal Reserve
Bank Term Auction Facility program. This is a temporary program which allows
banks that are in generally sound financial condition to bid for funds. Funds
are borrowed for either 28 or 84 days and are secured by a pledge of eligible
collateral. Funds borrowed under this program totaled $1.1 billion at June 30,
2009.
At June 30, 2009, the estimated unused credit available to the subsidiary banks
from our traditional sources and within our internal policy limits was
approximately $5.6 billion.
Parent Company
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 year plus profits for the two preceding years. Dividends are
further restricted by minimum capital requirements. Based on the most
restrictive limitations, the subsidiary banks could declare up to $183 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 $22 million under this policy. Further losses or increases in
required regulatory capital at the subsidiary banks could affect their ability
to pay dividends to the parent company.
On July 21, 2008, the Company entered into a $188 million, unsecured revolving
credit agreement with George B. Kaiser, its Chairman and principal shareholder.
Interest on the outstanding balance is based on one-month LIBOR plus 125 basis
points and is payable quarterly. Additional interest in the form of a facility
fee is paid quarterly on the unused portion of the commitment at 25 basis
points. This agreement has no restrictive covenants. The credit agreement
matures in December of 2010. No amounts were outstanding under this credit
agreement as of June 30, 2009.
Equity capital for BOK Financial was $2.1 billion at June 30, 2009, up $119
million from March 31, 2009. Net income less cash dividend paid increased equity
$37 million. Accumulated other comprehensive losses decreased $82 million during
the second quarter of 2009 primarily due to a $82 million decrease in net
unrealized losses on available for sale securities. Capital is managed to
maximize long-term value to the shareholders. Factors considered in managing
capital include projections of future earnings, asset growth and acquisition
strategies, and regulatory and debt covenant requirements. Capital management
may include subordinated debt issuance, share repurchase and stock and cash
dividends. On July 28, 2009, the Company's board of directors declared a cash
dividend of $0.24 per common share payable on or about August 28, 2009 to
shareholders of record as of August 14, 2009.
66
BOK Financial is the largest commercial bank, based on asset size, that elected
not to participate in the TARP Capital Purchase Program. The decision not to
participate in TARP was based on an evaluation of our capital needs in both the
current environment and in several capital stress environments. We considered
capital requirements for organic growth and potential acquisitions, the cost of
TARP capital and a defined exit strategy when the cost of TARP capital increases
substantially at the end of year five. We also considered reasonable capital and
liquidity support from our majority shareholder.
On April 26, 2005, the Board of Directors authorized a share repurchase program,
which replaced a previously authorized program. The maximum of two million
common shares may be repurchased. The specific timing and amount of shares
repurchased will vary based on market conditions, securities law limitations and
other factors. Repurchases may be made over time in open market or privately
negotiated transactions. The repurchase program may be suspended or discontinued
at any time without prior notice. Since this program began, 784,073 shares have
been repurchased by the Company for $38.7 million. No shares were repurchased in
the second quarter of 2009.
BOK Financial and subsidiary banks are subject to various capital requirements
administered by federal agencies. Failure to meet minimum capital requirements
can result in certain mandatory and possibly additional discretionary actions by
regulators that could have a material impact on operations. These capital
requirements include quantitative measures of assets, liabilities, and
off-balance sheet items. The capital standards are also subject to qualitative
judgments by the regulators.
For a banking institution to qualify as well capitalized, its Tier 1, Total and
Leverage capital ratios must be at least 6%, 10% and 5%, respectively. All of
the Company's banking subsidiaries exceeded the regulatory definitions of well
capitalized. The capital ratios for BOK Financial on a consolidated basis are
presented in the following table.
----------------------------------------------------------------------------------------------------------------------
Table 30 - Capital Ratios June 30, March 31, Dec. 31, Sept. 30, June 30,
2009 2009 2008 2008 2008
---------------------------------------------------------------------------
Average total equity to average assets 8.70% 8.35% 8.57% 8.92% 9.28%
Tangible common equity ratio 7.55 6.84 6.64 7.16 7.15
Tier 1 common equity ratio 9.77 9.58 9.32 9.20 8.82
Risk-based capital:
Tier 1 capital 9.86 9.66 9.40 9.31 8.92
Total capital 13.34 13.08 12.81 12.62 12.00
Leverage 7.97 7.85 7.89 7.94 7.83
----------------------------------------------------------------------------------------------------------------------
Capital resources of financial institutions are also regularly measured by the
tangible common equity ratio and tier 1 common equity ratio. Tangible common
equity is shareholders' equity as defined by generally accepted accounting
principles in the United States of America ("GAAP") less intangible assets and
equity which does not benefit common shareholders. Equity that does not benefit
common shareholders includes preferred equity and equity provided by the U.S.
Treasury's TARP program. Tier 1 common equity is tier 1 equity as defined by
banking regulations, adjusted for other comprehensive income (loss) and equity
which does not benefit common shareholders. These non-GAAP measures are valuable
indicators of a financial institution's capital strength since they eliminate
intangible assets from shareholders' equity and retains the effect of unrealized
losses on securities and other components of accumulated other comprehensive
income (loss) in shareholders' equity. At June 30, 2009, BOK Financial's
tangible common shareholders' equity ratio was 7.55% and tier 1 common equity
ratio was 9.77%.
67
The following table provides a reconciliation of the non-GAAP measures with
financial measures defined by GAAP.
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Table 31 - Non-GAAP Measures June 30, March 31, Dec. 31, Sept. 30, June 30,
(Dollars in thousands) 2009 2009 2008 2008 2008
------------- ---------------- -------------- -------------- ---------------
Tangible common equity ratio:
Total shareholders' equity $ 2,050,572 $ 1,931,300 $1,846,257 $ 1,940,503 $ 1,942,376
Less: Intangible assets, net 357,838 359,523 361,209 363,177 365,060
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Tangible common equity 1,692,734 1,571,777 1,485,048 1,577,326 1,577,316
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Total assets 22,767,983 23,333,442 22,734,648 22,377,802 22,435,937
Less: Intangible assets, net 357,838 359,523 361,209 363,177 365,060
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Tangible assets $22,410,145 $22,973,919 $22,373,439 $22,014,625 $22,070,877
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Tangible common equity ratio 7.55% 6.84% 6.64% 7.16% 7.15%
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Tier 1 common equity ratio:
Tier 1 capital $1,807,705 $1,773,576 $1,728,926 $1,707,390 $1,665,448
Less: Non-controlling interest 15,590 14,751 13,855 19,205 19,552
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Tier 1 common equity 1,792,115 1,758,825 1,715,071 1,688,185 1,645,896
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Risk weighted assets 18,338,540 18,355,862 18,401,051 18,347,504 18,665,121
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Tier 1 common equity ratio 9.77% 9.58% 9.32% 9.20% 8.82%
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Off-Balance Sheet Arrangements
During the third quarter of 2007, Bank of Oklahoma agreed to guarantee rents
totaling $28.4 million over 10 years to the City of Tulsa ("City") as owner of a
building immediately adjacent to the bank's main office. These rents are due for
space rented by third-party tenants in the building as of the date of the
agreement. All guaranteed space has been rented since the date of the agreement.
In return for this guarantee, Bank of Oklahoma will receive 80% of net rent as
defined in an agreement with the City over the next 10 years from space in the
same building that was vacant as of the date of the agreement. The maximum
amount that Bank of Oklahoma may receive under this agreement is $4.5 million.
The fair value of this agreement at inception was zero and no asset or liability
is currently recognized in the Company's financial statements.
68
-------------------------------------------------------------------------------------------------------------------------------
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, 2009 June 30, 2008
------------------------------------------ ---------------------------------------
Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate
-------------------------------------------------------------------------------------
Assets
Taxable securities (3) $ 7,340,756 $ 164,715 4.69% $ 5,825,599 $ 148,014 5.08%
Tax-exempt securities (3) 268,935 8,182 6.14 261,904 8,354 6.40
-------------------------------------------------------------------------------------------------------------------------------
Total securities (3) 7,609,691 172,897 4.75 6,087,503 156,368 5.14
-------------------------------------------------------------------------------------------------------------------------------
Trading securities 112,464 2,002 3.59 74,507 2,700 7.27
Funds sold and resell agreements 39,929 44 0.22 76,589 1,195 3.13
Residential mortgage loans held for sale 233,800 5,593 4.82 96,175 2,379 4.96
Loans (2) 12,602,894 287,273 4.60 12,257,970 377,723 6.18
Less reserve for loan losses 269,490 - - 138,277 - -
-------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 12,333,404 287,273 4.70 12,119,693 377,723 6.25
-------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 20,329,288 467,809 4.70 18,454,467 540,365 5.87
-------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,568,444 2,705,684
-------------------------------------------------------------------------------------------------------------------------------
Total assets $ 22,897,732 $ 21,160,151
-------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 6,733,076 28,779 0.86% $ 7,595,724 69,930 1.85%
Savings deposits 163,698 213 0.26 158,375 386 0.49
Time deposits 5,169,267 68,038 2.65 4,150,654 83,945 4.06
-------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 12,066,041 97,030 1.62 11,904,753 154,261 2.60
-------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 2,438,851 4,820 0.40 3,093,946 38,829 2.52
Other borrowings 2,054,759 5,439 0.53 1,803,962 25,750 2.86
Subordinated debentures 398,440 11,198 5.67 398,288 11,220 5.65
-------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 16,958,091 118,487 1.41 17,200,949 230,060 2.68
-------------------------------------------------------------------------------------------------------------------------------
Demand deposits 3,024,925 1,286,552
Other liabilities 953,375 687,681
Shareholders' equity 1,961,341 1,984,969
-------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 22,897,732 $ 21,160,151
-------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (3) 349,322 3.29% 310,305 3.19%
Tax-Equivalent Net Interest Revenue
To Earning Assets (3) 3.51 3.37
Less tax-equivalent adjustment (1) 3,897 4,238
-------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 345,425 306,067
Provision for credit losses 92,160 76,881
Other operating revenue 253,057 174,991
Other operating expense 341,564 312,672
-------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 164,758 91,505
Federal and state income tax 57,153 31,588
Non-controlling interest income
(expense), net (458) 1,187
-------------------------------------------------------------------------------------------------------------------------------
Net Income $ 107,147 $ 61,104
-------------------------------------------------------------------------------------------------------------------------------
Earnings Per Average Common Share Equivalent:
Net Income:
Basic $ 1.59 $ 0.91
-------------------------------------------------------------------------------------------------------------------------------
Diluted $ 1.58 $ 0.90
-------------------------------------------------------------------------------------------------------------------------------
(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.
69
-----------------------------------------------------------------------------------------------------------------------------
Quarterly Financial Summary - Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share
Data)
Three Months Ended
-------------------------------------------------------------------------------------
June 30, 2009 March 31, 2009
------------------------------------------- ------------------------------------
Average Revenue/ Yield / Average Revenue/ Yield /
Balance Expense(1) Rate Balance Expense(1) Rate
-------------------------------------------------------------------------------------
Assets
Taxable securities (3) $ 7,594,355 $ 80,711 4.50% $ 7,084,340 $ 84,004 4.90%
Tax-exempt securities (3) 285,078 4,044 5.69 252,612 4,138 6.64
-----------------------------------------------------------------------------------------------------------------------------
Total securities (3) 7,879,433 84,755 4.54 7,336,952 88,142 4.96
-----------------------------------------------------------------------------------------------------------------------------
Trading securities 112,960 983 3.49 111,962 1,019 3.69
Funds sold and resell agreements 29,277 14 0.19 50,701 30 0.24
Residential mortgage loans held for sale 286,077 3,215 4.51 201,135 2,378 4.79
Loans (2) 12,403,050 143,510 4.64 12,784,765 143,763 4.56
Less reserve for loan losses 273,335 - - 252,734 - -
-----------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 12,129,715 143,510 4.75 12,532,031 143,763 4.65
-----------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 20,437,462 232,477 4.65 20,232,781 235,332 4.75
-----------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,636,569 2,710,588
-----------------------------------------------------------------------------------------------------------------------------
Total assets $ 23,074,031 $ 22,943,369
-----------------------------------------------------------------------------------------------------------------------------
Liabilities and equity
Transaction deposits $ 6,854,003 $ 13,362 0.78% $ 6,610,805 $ 15,417 0.95%
Savings deposits 167,813 104 0.25 159,537 109 0.28
Time deposits 5,123,947 31,637 2.48 5,215,091 36,401 2.83
-----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 12,145,763 45,103 1.49 11,985,433 51,927 1.76
-----------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 2,316,990 1,995 0.35 2,562,066 2,825 0.45
Other borrowings 1,951,699 2,375 0.49 2,158,963 3,064 0.58
Subordinated debentures 398,456 5,632 5.67 398,425 5,566 5.67
-----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 16,812,908 55,105 1.31 17,104,887 63,382 1.50
-----------------------------------------------------------------------------------------------------------------------------
Demand deposits 3,183,338 2,864,751
Other liabilities 1,071,121 1,058,216
Total equity 2,006,664 1,915,515
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 23,074,031 $ 22,943,369
-----------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (3) $ 177,372 3.34% $ 171,950 3.25%
Tax-Equivalent Net Interest Revenue
To Earning Assets (3) 3.55 3.47
Less tax-equivalent adjustment (1) 1,792 2,105
-----------------------------------------------------------------------------------------------------------------------------
Net interest revenue 175,580 169,845
Provision for credit losses 47,120 45,040
Other operating revenue 127,965 125,092
Other operating expense 175,770 165,794
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 80,655 84,103
Federal and state income tax 28,315 28,838
Non-controlling interest income
(expense), net (225) (233)
-----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 52,115 $ 55,032
-----------------------------------------------------------------------------------------------------------------------------
Earnings Per Average Common Share Equivalent:
Net income (loss):
Basic $ 0.77 $ 0.81
-----------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.77 $ 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.
70
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended
-------------------------------------------------------------------------------------------------------------------------
December 31, 2008 September 30, 2008 June 30, 2008
-------------------------------------------------------------------------------------------------------------------------
Average Revenue/ Yield / Average Revenue/ Yield / Average Revenue/ Yield /
Balance Expense(1) Rate Balance Expense(1) Rate Balance Expense(1) Rate
-------------------------------------------------------------------------------------------------------------------------
$ 6,634,035 $ 87,317 5.12% $ 6,056,909 $ 78,030 5.09% $ 6,026,769 $ 75,959 5.08%
255,693 4,133 6.43 254,803 4,166 6.64 259,410 4,165 6.46
-------------------------------------------------------------------------------------------------------------------------
6,889,728 91,450 5.17 6,311,712 82,196 5.15 6,286,179 80,124 5.14
-------------------------------------------------------------------------------------------------------------------------
78,840 1,298 6.55 66,419 937 5.61 74,058 1,267 6.88
48,246 92 0.76 79,862 290 1.44 72,444 355 1.97
121,184 1,683 5.52 116,533 1,743 5.95 105,925 1,394 5.29
12,826,696 169,700 5.26 12,596,823 180,119 5.69 12,421,086 179,030 5.80
209,319 - - 182,844 - - 145,524 - -
-------------------------------------------------------------------------------------------------------------------------
12,617,377 169,700 5.35 12,413,979 180,119 5.77 12,275,562 179,030 5.87
-------------------------------------------------------------------------------------------------------------------------
19,755,375 264,223 5.28 18,988,505 265,285 5.55 18,814,168 262,170 5.61
-------------------------------------------------------------------------------------------------------------------------
2,516,276 2,832,658 2,794,132
-------------------------------------------------------------------------------------------------------------------------
$ 22,271,651 $ 21,821,163 $ 21,608,300
-------------------------------------------------------------------------------------------------------------------------
$ 6,116,465 $ 23,161 1.51% $ 6,565,935 $ 28,312 1.72% $ 6,420,291 $ 27,755 1.74%
155,784 143 0.37 159,856 147 0.37 159,798 148 0.37
5,109,303 42,090 3.28 4,792,366 40,810 3.39 4,076,167 38,211 3.77
-------------------------------------------------------------------------------------------------------------------------
11,381,552 65,394 2.29 11,518,157 69,269 2.39 10,656,256 66,114 2.50
-------------------------------------------------------------------------------------------------------------------------
3,095,054 7,289 0.94 3,061,186 15,253 1.98 3,126,110 15,180 1.95
1,986,857 7,541 1.51 1,390,233 8,935 2.56 2,267,076 14,032 2.49
398,392 5,489 5.48 398,361 5,553 5.55 398,336 5,821 5.88
-------------------------------------------------------------------------------------------------------------------------
16,861,855 85,713 2.02 16,367,937 99,010 2.41 16,447,778 101,147 2.47
-------------------------------------------------------------------------------------------------------------------------
2,712,384 2,739,209 2,634,038
788,530 767,832 521,867
1,908,882 1,946,185 2,004,617
-------------------------------------------------------------------------------------------------------------------------
$ 22,271,651 $ 21,821,163 $ 21,608,300
-------------------------------------------------------------------------------------------------------------------------
$ 178,510 3.26% $ 166,275 3.14% $ 161,023 3.14%
3.05
3.57 3.48 3.44
2,063 1,927 2,084
-------------------------------------------------------------------------------------------------------------------------
176,447 164,348 158,939
73,001 52,711 59,310
121,447 132,286 54,397
185,442 164,290 159,268
-------------------------------------------------------------------------------------------------------------------------
39,451 79,633 (5,242)
10,363 22,958 (2,862)
6,355 10 1,219
-------------------------------------------------------------------------------------------------------------------------
$ 35,443 $ 56,685 $ (1,161)
-------------------------------------------------------------------------------------------------------------------------
$ 0.53 $ 0.84 $ (0.02)
-------------------------------------------------------------------------------------------------------------------------
$ 0.52 $ 0.84 $ (0.02)
-------------------------------------------------------------------------------------------------------------------------
71
---------------------------------------------------- -- ------------- --- -------------- -- -------------- ---- --------------------
Quarterly Earnings Trends -- Unaudited
(In thousands, except share and per share data)
Three Months Ended
----------------------------------------------------------------------------
June 30, March 31, Dec.31, Sept. 30, June 30,
2009 2009 2008 2008 2008
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Interest revenue $ 230,685 233,227 $ 262,160 $ 263,358 $ 260,086
Interest expense 55,105 63,382 85,713 99,010 101,147
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Net interest revenue 175,580 169,845 176,447 164,348 158,939
Provision for credit losses 47,120 45,040 73,001 52,711 59,310
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Net interest revenue after provision for credit losses 128,460 124,805 103,446 111,637 99,629
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Other operating revenue
Brokerage and trading revenue 21,794 24,699 23,507 30,846 (35,462)
Transaction card revenue 27,533 25,428 25,177 25,632 25,786
Trust fees and commissions 16,860 16,510 17,143 20,100 20,940
Deposit service charges and fees 28,421 27,405 29,239 30,404 30,199
Mortgage banking revenue 19,882 18,498 7,217 7,145 8,203
Bank-owned life insurance 2,418 2,317 2,682 2,829 2,658
Margin asset fees 68 67 187 1,934 4,460
Other revenue 6,124 6,583 5,778 7,768 6,965
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Total fees and commissions 123,100 121,507 110,930 126,658 63,749
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Gain (loss) on sales of assets 973 143 (7,420) (841) (1,149)
Gain (loss) on derivatives, net (1,037) (1,664) (2,219) 4,366 (2,961)
Gain (loss) on securities, net 6,471 20,108 20,156 2,103 (5,242)
Total other-than-temporary impairment losses (1,263) (54,368) - - -
Portion of loss recognized in other comprehensive income 279 (39,366) - - -
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Net impairment losses recognized in earnings (1,542) (15,002) - - -
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Total other operating revenue 127,965 125,092 121,447 132,286 54,397
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Other operating expense
Personnel 96,191 92,627 87,695 87,549 89,597
Business promotion 4,569 4,428 7,283 5,837 5,777
Professional fees and services 7,363 6,512 7,923 6,501 6,973
Net occupancy and equipment 15,973 16,258 14,901 15,570 15,100
Insurance 5,898 5,638 3,216 2,436 2,626
FDIC special assessment 11,773 - - - -
Data processing and communications 20,452 19,306 19,720 19,911 19,523
Printing, postage and supplies 4,072 4,571 3,823 4,035 4,156
Net (gains) losses and expenses of repossessed assets 996 1,806 1,006 (136) (229)
Amortization of intangible assets 1,686 1,686 1,967 1,884 1,885
Mortgage banking costs 9,336 7,467 4,967 5,811 6,054
Change in fair value of mortgage servicing rights (7,865) (1,955) 26,432 5,554 767
Visa retrospective responsibility obligation - - (1,700) 1,700 -
Other expense 5,326 7,450 8,209 7,638 7,039
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Total other operating expense 175,770 165,794 185,442 164,290 159,268
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Income (loss) before taxes 80,655 84,103 39,451 79,633 (5,242)
Federal and state income tax 28,315 28,838 10,363 22,958 (2,862)
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Net income (loss) before non-controlling interest 52,340 55,265 29,088 56,675 (2,380)
Non-controlling interest income (expense), net (225) (233) 6,355 10 1,219
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Net income (loss) attributable to BOK Financial Corp.$ 52,115 $ 55,032 $ 35,443 $ 56,685 (1,161)
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Earnings (loss) per share:
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Basic $ 0.77 0.81 $ 0.53 $ 0.84 $ (0.02)
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Diluted $ 0.77 0.81 $ 0.52 $ 0.84 $ (0.02)
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------
Average shares used in computation:
---------------------------------------------------- -- ----------- --- ------------- -- ------------ -- ------------ -- -----------
Basic 67,344,577 67,315,986 67,294,069 67,263,317 67,452,181
---------------------------------------------------- -- ----------- --- ------------- -- ------------ -- ------------ -- -----------
Diluted 67,448,029 67,387,102 67,456,267 67,432,444 67,452,181
---------------------------------------------------- -- ----------- --- ------------- -- ------------ -- ------------ -- -----------
72
Market Risk
Market risk is a broad term for the risk of economic loss due to adverse changes
in the fair value of a financial instrument. These changes may be the result of
various factors, including interest rates, foreign exchange prices, commodity
prices or equity prices. Financial instruments that are subject to market risk
can be classified either as held for trading or held for purposes other than
trading. Market risk excludes changes in fair value due to credit of the
individual issuers of financial instruments.
BOK Financial is subject to market risk primarily through the effect of changes
in interest rates on both its assets held for purposes other than trading and
trading assets. The effects of other changes, such as foreign exchange rates,
commodity prices or equity prices do not pose significant market risk to BOK
Financial. BOK Financial has no material investments in assets that are affected
by changes in foreign exchange rates or equity prices. Energy and agricultural
product derivative contracts, which are affected by changes in commodity prices,
are matched against offsetting contracts as previously discussed.
Responsibility for managing market risk rests with the Asset / Liability
Committee that operates under policy guidelines established by the Board of
Directors. The acceptable negative variation in net interest revenue, net income
or economic value of equity due to a specified basis point increase or decrease
in interest rates is generally limited by these guidelines to +/- 10%. These
guidelines also set maximum levels for short-term borrowings, short-term assets,
public funds, and brokered deposits, and establish minimum levels for un-pledged
assets, among other things. Compliance with these guidelines is reviewed
monthly.
Interest Rate Risk - Other than Trading
As previously noted in the Net Interest Revenue section of this report,
management has implemented strategies to manage the Company's balance sheet to
be relatively neutral to changes in interest rates over a twelve month period.
The effectiveness of these strategies in managing the overall interest rate risk
is evaluated through the use of an asset/liability model. BOK Financial performs
a sensitivity analysis to identify more dynamic interest rate risk exposures,
including embedded option positions, on net interest revenue, net income and
economic value of equity. A simulation model is used to estimate the effect of
changes in interest rates over the next 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 assumes a sustained
parallel 200 basis point increase and the second assumes a sustained parallel
100 basis point decrease in interest rates. Management historically evaluated
interest rate sensitivity for a sustained 200 basis point decrease in interest
rates. However, the results of a 200 basis point decrease in interest rates in
the current low-rate environment are not meaningful. The Company also performs a
sensitivity analysis based on a "most likely" interest rate scenario, which
includes non-parallel shifts in interest rates. An independent source is used to
determine the most likely interest rate scenario.
The Company's primary interest rate exposures included the Federal Funds rate,
which affects short-term borrowings, 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 25 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 - Consumer Banking section of this report.
The simulations used to manage market risk are based on numerous assumptions
regarding the effects of changes in interest rates on the timing and extent of
re-pricing characteristics, future cash flows and customer behavior. These
assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net interest revenue, net income or economic value of equity
or precisely predict the impact of higher or lower interest rates on net
interest revenue, net income or economic value of equity. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes, market conditions and management strategies, among other factors.
73
Interest Rate Sensitivity
(Dollars in Thousands)
200 bp Increase 100 bp Decrease Most Likely
-------------------------- --------------------------- -------------------------
2009 2008 2009 2008 2009 2008
------------- ------------ ------------ -------------- ------------ ------------
Anticipated impact over the
next twelve months on
net interest revenue $ (12,159) $(17,132) $ (20,541) $ 7,392 $ 993 $(1,386)
(1.5)% (1.1)% (2.8)% 0.4% 0.1% (0.2)%
-------------------------------- --------------- ------------ --- ----------- -------------- -- ----------- ------------
Trading Activities
BOK Financial enters into trading activities both as an intermediary for
customers and for its own account. As an intermediary, BOK Financial will take
positions in securities, generally mortgage-backed securities, government agency
securities, and municipal bonds. These securities are purchased for resale to
customers, which include individuals, corporations, foundations and financial
institutions. BOK Financial will also take trading positions in U.S. Treasury
securities, mortgage-backed securities, municipal bonds and financial futures
for its own account. These positions are taken with the objective of generating
trading profits. Both of these activities involve interest rate risk.
A variety of methods are used to manage the interest rate risk of trading
activities. These methods include daily marking of all positions to market
value, independent verification of inventory pricing, and position limits for
each trading activity. Hedges in either the futures or cash markets may be used
to reduce the risk associated with some trading programs.
Management uses a Value at Risk ("VAR") methodology to measure the market risk
inherent in its trading activities. VAR is calculated based upon historical
simulations over the past five years using a variance / covariance matrix of
interest rate changes. It represents an amount of market loss that is likely to
be exceeded only one out of every 100 two-week periods. Trading positions are
managed within guidelines approved by the Board of Directors. These guidelines
limit the VAR to $3.6 million. At June 30, 2009, the VAR was $2.1 million. The
greatest value at risk during the second quarter of 2009 was $2.6 million.
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.
74
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.
PART II. Other Information
Item 1. Legal Proceedings
See discussion of legal proceedings at footnote 6 to the consolidated
financial statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases made by
or on behalf of the Company or any "affiliated purchaser" (as defined in Rule
10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company's common
stock during the three months ended June 30, 2009.
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
Total Number Average Price Total Number of Shares Purchased Maximum Number of Shares
of Shares Paid per as Part of Publicly Announced that May Yet Be Purchased
Period Purchased (2) Share Plans or Programs (1) Under the Plans
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
April 1, 2009 to 617 $41.62 - 1,215,927
April 30, 2009
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
May 1, 2009 to - - - 1,215,927
May 31, 2009
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
June 1, 2009 to - - - 1,215,927
June 30, 2009
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
Total 617 -
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
(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, 2009, the Company had
repurchased 784,073 shares under the new plan.
(2) The Company routinely repurchases mature shares from employees to
cover the exercise price and taxes in connection with employee stock
option exercises.
75
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on April 28, 2009 (the "Annual
Meeting"). At the Annual Meeting, shareholders voted on three matters: (i) to
fix the number of directors to be elected at sixteen (16) and to elect sixteen
(16) persons as directors for a term of one year or until their successors have
been elected and qualified, (ii) to approve the 2009 Omnibus Incentive Plan, and
(iii) to ratify the selection of Ernst & Young LLP as the Company's independent
auditor for the fiscal year ending December 31, 2009. The shareholders approved
these matters by the following votes, respectively:
(i) Election of sixteen (16) directors for a term of one year:
Votes
Withheld/
Votes For Against
----------------- -----------------
Gregory S. Allen 62,157,280 209,846
C. Fred Ball, Jr. 59,235,084 3,132,042
Sharon J. Bell 62,291,870 75,256
Peter C. Boylan III 62,301,422 65,704
Chester Cadieux III 56,832,362 5,534,764
Joseph W. Craft III 57,092,032 5,275,094
William E. Durrett 62,292,592 74,534
John W. Gibson 62,310,623 56,503
David F. Griffin 62,311,347 55,779
V. Burns Hargis 62,241,646 125,480
E. Carey Joullian IV 56,391,836 5,975,290
George B. Kaiser 58,772,376 3,594,750
Robert J. LaFortune 62,292,417 74,709
Stanley A. Lybarger 59,272,684 3,094,442
Steven J. Malcolm 59,630,840 2,736,286
E. C. Richards 62,311,079 56,047
Votes
Withheld/ Exceptions /
Votes For Against Abstain
(ii) Approval of the 2009 Omnibus Incentive Plan 50,823,724 3,238,294 8,305,108
Votes
Withheld/ Exceptions /
Votes For Against Abstain
(iii) Ratification of Ernst & Young LLP as the independent
auditor for the year ending December 31, 2009 62,181,605 85,094 100,427
Item 6. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Items 1A, 3 and 5 are not applicable and have been omitted.
76
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: July 30, 2009 /s/ Steven E. Nell
--------------------------- ---------------------------------
Steven E. Nell
Executive Vice President and
Chief Financial Officer
/s/ John C. Morrow
---------------------------------
John C. Morrow
Senior Vice President and
Chief Accounting Officer