As filed with the Securities and Exchange Commission on August 9, 2005 ============================================================================== 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, 2005 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ______________ Commission File No. 0-19341 BOK FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Oklahoma 73-1373454 (State or other jurisdiction (IRS Employer of Incorporation or Organization) Identification No.) Bank of Oklahoma Tower P.O. Box 2300 Tulsa, Oklahoma 74192 (Address of Principal Executive Offices) (Zip Code) (918) 588-6000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_| Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: 66,476,278 shares of common stock ($.00006 par value) as of July 31, 2005. ===============================================================================
2 BOK Financial Corporation Form 10-Q Quarter Ended June 30, 2005 Index Part I. Financial Information Management's Discussion and Analysis (Item 2) 2 Market Risk (Item 3) 24 Controls and Procedures (Item 4) 26 Consolidated Financial Statements - Unaudited (Item 1) 27 Six Month Financial Summary - Unaudited (Item 2) 37 Quarterly Financial Summary - Unaudited (Item 2) 38 Part II. Other Information Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40 Item 6. Exhibits 40 Signatures 41 Management's Discussion and Analysis of Financial Condition and Results of Operations Performance Summary BOK Financial Corporation ("BOK Financial" or the "Company") reported net income of $50.5 million, or $0.75 per diluted share for the second quarter of 2005, compared with $45.5 million, or $0.68 per diluted share for the second quarter of 2004. The annualized returns on average assets and shareholders' equity were 1.31% and 14.05%, respectively, for the second quarter of 2005, compared with returns of 1.32% and 14.36%, respectively, for the same period in 2004. The increase in net income was attributed primarily to growth in net interest revenue and fees and commission revenue and a reduction in the provision for credit losses. Revenue growth was partially offset by increased operating expenses and lowered value of mortgage servicing rights. The Company also recognized pre-tax gains of $5.9 million on sales of its interest in an office building and a portfolio of residential mortgage loans. Net interest revenue increased $7.3 million or 7% over the second quarter of 2004 due primarily to loan growth. Average outstanding loan balances for the second quarter of 2005 increased $793 million or 11% compared with the same period of 2004. Fees and commissions revenue increased $6.7 million or 8% due primarily to trust fees. The provision for credit losses decreased $2.0 million compared to the second quarter of the previous year due to continued strong credit quality. Operating expenses, excluding the provision for impairment of mortgage servicing rights increased $9.1 million or 8% due primarily to growth in personnel costs. The value of mortgage servicing rights depreciated due to a 50 basis point decrease in mortgage commitment rates since the start of the second quarter. The reduced value of servicing rights, net of gains or losses recognized on financial instruments held as an economic hedge, resulted in a $3.7 million decrease in pre-tax income for the second quarter of 2005 compared with a $752 thousand increase for the same period of 2004. The Company issued $150 million of 10-year subordinated debt through its lead banking subsidiary, Bank of Oklahoma, and completed the acquisition of Valley Commerce Bank in Phoenix, Arizona during the second quarter of 2005. Proceeds of the subordinated debt provided additional capital to support future growth and permitted repayment of short-term borrowings. Valley Commerce, which was acquired for $32 million cash, added $93 million in loans and $110 million in deposits. Effective August 12, 2005, Valley Commerce Bank will be renamed Bank of Arizona, N.A. Year-to-date net income for 2005 totaled $102.5 million or $1.53 per diluted share compared with net income of $84.7 million or $1.27 per diluted share for the first six months of 2004. The increase in net income was attributed primarily to an $11.7 million increase in net interest revenue and a $9.8 million increase in fees and commission revenue, combined with a $7.0 million reduction in the provision for credit losses.
3 Results of Operations Net Interest Revenue Tax-equivalent net interest revenue totaled $113.8 million for the second quarter of 2005 compared with $106.3 million for 2004. The increase was due primarily to a $886 million increase in average earning assets. The growth in average earning assets included a $793 million, or 11%, increase in loans and a $179 million increase in securities. Growth in average earning assets was funded primarily by a $594 million increase in short-term borrowings and a $389 million increase in deposits. Table 2 shows the effects on net interest revenue of changes in average balances and interest rates for the various types of earning assets and interest-bearing liabilities. Net interest margin, the ratio of tax-equivalent net interest revenue to average earning assets, was 3.45% for the second quarter of 2005, compared with 3.46% for both the second quarter of 2004 and the first quarter of 2005. Net interest margin for the first quarter of 2005 included a 4 basis point benefit from the collection of foregone interest on a non-performing loan and fees related to a large loan transaction. Yields on average earning assets continued to trend upwards due to the effect of rising short-term interest rates. The yield on average earning assets was 5.68%, up 83 basis points compared with the second quarter of 2004 and 22 basis points over the first quarter of 2005. Average loan yields were 6.40%, an increase of 126 basis points over the second quarter of 2004 and 34 basis points over the preceding quarter. The tax-equivalent yield on securities was 4.36% for the second quarter of 2005, compared with 4.30% for the second quarter of 2004 and 4.36% for the first quarter of 2005. Rates paid on average interest-bearing liabilities during the second quarter of 2005 increased 92 basis points over the same period of 2004 and 18 basis points over the preceding quarter. Increases in rates paid on deposit accounts continued to lag behind the increases in loan yields. The cost of interest bearing deposits was 2.34% for the second quarter of 2005, up 55 basis points from the same period in 2004 and 6 basis points from the preceding quarter. The benefit provided by non-interest bearing funding sources, primarily demand deposits, was 35 basis points for the second quarter of 2005, compared with 27 basis points for the second quarter of 2004 and 40 basis points for the first quarter of 2005, due primarily to a decrease in average demand deposit account balances. The decrease in demand deposit accounts included funds transferred to interest-bearing transaction accounts during the second quarter of 2005. The overall objective is to position the Company's balance sheet to be essentially neutral to changes in interest rate. A large portion of the commercial loan portfolio is either variable rate or fixed rate that will reprice within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that reprice more slowly than the loans. The result is a balance sheet that is asset sensitive, which means that assets generally reprice more quickly than liabilities. Among the strategies used to achieve a rate-neutral position, the Company purchases fixed-rate, mortgage-backed securities and funds them with short-term borrowings. The effective duration of these securities is expected to be approximately 2.8 years based on a range of interest rate and prepayment assumptions. The funds borrowed to purchase these securities generally reprice within 90 days. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of the loan portfolio. Short-term interest rates have increased more than long-term interest rates. The yield curve resulting from these rate changes has flattened. Although the Company's policy is to position the balance sheet to be essentially neutral to rate changes, the flattened yield curve, along with competitive pressure on loan and deposit pricing, may reduce the net interest margin. Derivative instruments are also used to manage interest rate risk. Interest rate swaps with a combined notional amount of $432 million convert fixed rate liabilities to floating rate based on LIBOR. The purpose of these derivatives, which generally have been designated as fair value hedges, is to reduce the asset-sensitive nature of the balance sheet. Interest rate swaps with a notional amount of $100 million convert prime-based loans to fixed rate. The purpose of these derivatives, which have been designated as cash flow hedges, also is to reduce the asset-sensitive nature of the balance sheet. The effectiveness of these strategies is reflected in the overall change in net interest revenue due to changes in interest rates as shown in Table 1 and in the interest rate sensitivity projections as shown in Market Risk section of this report. Changes in net interest revenue due to changes in interest rates, pricing spreads and the timing of when assets and liabilities reprice are all captured in the Yield/Rate column in Table 1.
4 <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 1 - Volume / Rate Analysis (In thousands) Three Months Ended Six Months Ended June 30, 2005 / 2004 June 30, 2005 / 2004 -------------------------------------------------------------------------- Change Due To (1) Change Due To (1) -------------------------------------------------------------------------- Yield / Yield Change Volume Rate Change Volume /Rate -------------------------------------------------------------------------- Tax-equivalent interest revenue: <S> <C> <C> <C> <C> <C> <C> Securities $ 1,880 $ 1,187 $ 693 $ 3,677 $ 2,266 $ 1,411 Trading securities (54) (139) 85 (89) (122) 33 Loans 36,728 11,565 25,163 58,867 17,569 41,298 Funds sold and resell agreements 103 26 77 228 135 93 - --------------------------------------------------------------------------------------------------------------------- Total 38,657 12,639 26,018 62,683 19,848 42,835 - --------------------------------------------------------------------------------------------------------------------- Interest expense: Transaction deposits 8,174 1,354 6,820 14,220 1,552 12,668 Savings deposits 50 (11) 61 56 (35) 91 Time deposits 5,802 1,180 4,622 10,547 3,302 7,245 Federal funds purchased and repurchase agreements 12,033 2,891 9,142 18,259 2,823 15,436 Other borrowings 3,848 (522) 4,370 6,514 (760) 7,274 Subordinated debentures 1,250 622 628 1,141 613 528 - --------------------------------------------------------------------------------------------------------------------- Total 31,157 5,514 25,643 50,737 7,495 43,242 - --------------------------------------------------------------------------------------------------------------------- Tax-equivalent net interest revenue 7,500 7,125 375 11,946 12,353 (407) Change in tax-equivalent adjustment (156) (215) - --------------------------------------------------------------------------------------------------------------------- Net interest revenue $ 7,344 $ 11,731 - --------------------------------------------------------------------------------------------------------------------- (1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis. </TABLE> Other Operating Revenue Other operating revenue increased $25.3 million compared with the second quarter of 2004 due primarily to a $12.8 million increase in net gains or losses on securities and derivatives and a $5.9 million increase in gains on asset sales. Fees and commission revenue, which is included in other operating revenue, increased $6.7 million or 8%. Diversified sources of fees and commission revenue are a significant part of the Company's business strategy and represented 43% of total revenue, excluding gains and losses on securities, derivatives and asset sales, for both the second quarters of 2005 and 2004. The Company believes 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 and can directly or indirectly affect income. Fees and commissions revenue Trust fees increased $2.3 million or 17% for the second quarter of 2005. The fair value of all trust relationships managed by the Company, which is the basis for a significant portion of trust fees increased to $26.0 billion at June 30, 2005 compared with $22.9 billion at June 30, 2004. Service charges on deposit accounts grew $1.4 million or 6% compared with the second quarter of 2004. Overdraft fees grew 18% or $2.5 million. The volume of overdraft items processed increased during the second quarter after declining in the previous two quarters. Additionally, the per item overdraft charge was increased during the second quarter of 2005. The increase in overdraft fees was partially offset by a $1.1 million or 13% decrease in service charge revenue. This decrease reflected an increase in earnings credit available to commercial deposit customers. The earnings credit, which provides a non-cash method for commercial customers to pay for deposit services, increases when interest rates rise. Transaction card revenue increased $1.2 million or 7% due to growth in check card revenue. Continued growth in transaction volume provided the increase.
5 Other revenue for the second quarter of 2005 included $1.4 million from fees earned on margin accounts. The Bank of Oklahoma is required to deposit margin funds with other institutions as part of its derivatives and trading programs. Margin deposits, which are included in other assets, averaged $204 million for the second quarter of 2005 compared with $61 million for the second quarter of 2004. Mortgage banking revenue, which is discussed more fully in the Line of Business - - Mortgage Banking section of this report increased $995 thousand, or 13% compared with the second quarter of 2004. Net gains on mortgage loans sold increased $1.4 million. Servicing revenue decreased $413 thousand due to a decrease in the average outstanding balance of loans serviced. Brokerage and trading revenue decreased $762 thousand or 7%. Revenue from securities trading activities decreased $3.2 million or 46% due to reduced fixed-income securities trading volumes. This reduction was largely offset by increases in customer hedging revenue and retail brokerage sales. Customer hedging revenue increased $2.0 million. Volatility in the energy markets prompted energy customers to more actively hedge their gas and oil production. Revenue from retail sales of mutual funds, annuities and similar products increased $446 thousand. Securities and derivatives BOK Financial recorded net gains of $2.0 million on securities and derivatives for the second quarter of 2005. These amounts included net gains of $3.4 million on financial instruments held as economic hedges of the mortgage servicing rights. The Company's use of securities as an economic hedge of mortgage servicing rights is more-fully discussed in the Line of Business - Mortgage Banking section of this report. During the second quarter of 2004, BOK Financial recognized net losses on securities and derivatives of $10.8 million, including net losses of $10.1 million on securities held as economic hedges. Gain on sales of assets The Company realized net gains of $5.9 million during the second quarter of 2005 from sales of assets. A gain of $4.7 million resulted from the sale of its interest in an Oklahoma City office building. A net gain of $1.2 million was recognized from the sale of $118 million of loans from the residential mortgage loan portfolio. In addition to a cash premium received on the sale, the Company retained both the right to service the loans and a recourse obligation to the purchaser in case of default by the borrowers. Year-to-date operating revenue summary Year to date other operating revenue for 2005 increased $23.7 million, or 16%. This increase included a $9.9 million increase in fees and commission revenue and a $13.8 million increase in net gains on securities, derivatives and asset sales. The increase in fees and commission revenue was due primarily from growth in trust fees and transaction card revenue and reflected the growth in trust assets managed by the Company and card processing volumes.
6 <TABLE> - -------------------------------------------------------------------------------------------------------------------------- Table 2 - Other Operating Revenue (In thousands) Three Months Ended ------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, 2005 2005 2004 2004 2004 ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Brokerage and trading revenue $ 10,404 $ 11,336 $ 9,721 $ 10,209 $ 11,166 Transaction card revenue 17,979 16,543 16,598 16,677 16,817 Trust fees and commissions 16,259 16,016 14,793 15,091 13,939 Service charges and fees on deposit accounts 25,347 22,173 23,337 24,292 23,928 Mortgage banking revenue 8,550 5,578 6,284 6,606 7,555 Leasing revenue 669 673 648 723 860 Other revenue 7,491 6,724 6,450 5,243 5,774 - -------------------------------------------------------------------------------------------------------------------------- Total fees and commissions 86,699 79,043 77,831 78,841 80,039 - -------------------------------------------------------------------------------------------------------------------------- Gain on sales of assets 5,937 972 90 78 35 Gain (loss) on securities, net 2,266 (2,637) 967 2,673 (11,005) Gain (loss) on derivatives, net (311) 778 (174) (506) 201 - -------------------------------------------------------------------------------------------------------------------------- Total other operating revenue $ 94,591 $ 78,156 $ 78,714 $ 81,086 $ 69,270 - -------------------------------------------------------------------------------------------------------------------------- </TABLE> Other Operating Expense Other operating expense for the second quarter of 2005 totaled $126.0 million, up $27.0 million, or 27% from the same period of 2004. This increase resulted primarily from an $18.0 million increase in the provision for impairment of mortgage servicing rights. Additionally, operating expenses for the second quarter of 2005 included $1.6 million for Bank of Arizona, which was acquired on April 7, 2005. Personnel expense Personnel expense totaled $65.3 million for the second quarter of 2005 compared with $59.8 million for the second quarter of 2004. The increase in personnel expense included $1.1 million from expansion into the Phoenix market. Regular compensation expense totaled $41.0 million, a $4.7 million, or 13% increase over 2004. The increase in regular compensation expense was due to an 8% increase in average regular compensation per full-time equivalent employee and a 5% increase in average staffing. Incentive compensation decreased $1.1 million, or 8% to $12.9 million. Stock-based compensation expense increased $1.7 million. Much of this expense is related to stock-based compensation that is recognized as liability awards. Compensation expense for these awards is based on the excess of the fair value of BOK Financial common stock over a set exercise price. Incentive compensation expense for these awards varies directly with changes in the fair value of BOKF's common stock, which increased during the quarter. Other incentive compensation expenses decreased $3.1 million due to reductions in the Oklahoma corporate banking and wealth management lines of business. Employee benefit expenses increased $1.9 million, or 20% to $11.4 million. Employee insurance costs increased $802 thousand, or 28% due primarily to growth in medical claims. The Company self-insures a portion of its employee health care coverage. The remaining increase in employee benefit expenses resulted primarily from payroll taxes and retirement benefits. Data processing and communications expense Data processing and communication expenses increased $1.1 million, or 7% compared to 2004. This expense consists of two broad categories, data processing systems and transaction card processing. Transaction card processing costs increased $485 thousand or 8% due to growth in processing volumes. Data processing systems costs increased $626 thousand, or 7% due primarily to higher software amortization and maintenance costs.
7 Other expenses Other expenses for the second quarter of 2005 totaled $7.4 million, a $1.8 million increase over the same period of 2004. Recruiting expenses increased $1.2 million as the Company continued expansion in regional markets, trust and executive management. Year-to-date operating expense summary Operating expenses for the first half of 2005 totaled $228.2 million compared with $215.4 million for the first half of 2004. Provision for impairment of mortgage servicing rights increased $8.6 million due to changes in mortgage loan commitment rates and related prepayment speeds. Operating expenses for the first half of 2004 included a charge of $4.1 million for the cost of appreciated securities contributed to the BOK Charitable Foundation. Personnel costs increased $5.8 million, or 5%. This increase included $6.9 million, or 9% of regular compensation expense and $3.7 million of employee benefit costs, partially offset by a $4.8 million decrease in incentive compensation expense. <TABLE> - ---------------------------------------------------------------------------------------------------------------------- Table 3 - Other Operating Expense (In thousands) Three Months Ended ---------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, 2005 2005 2004 2004 2004 ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Personnel $ 65,333 $ 58,439 $ 62,118 $ 60,524 $ 59,810 Business promotion 3,870 4,430 4,766 3,671 3,831 Contribution of stock to BOK Charitable Foundation - - 1,436 - - Professional fees and services 4,492 3,619 3,936 3,658 3,994 Net occupancy and equipment 12,650 12,094 11,973 11,733 11,732 Data processing & communications 16,381 15,099 15,196 14,918 15,270 Printing, postage and supplies 3,629 3,615 3,817 3,770 3,130 Amortization of intangible assets 1,808 1,537 1,888 1,991 2,121 Mortgage banking costs 3,387 3,613 3,929 3,962 4,433 Provision (recovery) for impairment of mortgage servicing rights 7,088 (5,624) (305) 5,900 (10,865) Other expense 7,372 5,337 2,828 4,075 5,536 - --------------------------------------------------------------------------------------------------------------------- Total other operating expense $ 126,010 $ 102,159 $ 111,582 $ 114,202 $ 98,992 - --------------------------------------------------------------------------------------------------------------------- </TABLE> Income Taxes Income tax expense was $28.6 million for the second quarter of 2005, compared with $25.9 million for 2004. This represented 36% of book taxable income for both quarters. Year to date, income tax expense was $58.2 million, or 36% of book taxable income for 2005 and $46.3 million, or 35% for 2004. Income tax expense for 2004 was reduced by $1.2 million from the contribution of appreciated securities to the BOk Charitable Foundation. Lines of Business BOK Financial operates five principal lines of business: Oklahoma corporate banking, Oklahoma consumer banking, mortgage banking, wealth management, and regional banking. Mortgage banking activities include loan origination and servicing across all markets served by the Company. Wealth management provides brokerage and trading, private financial services and investment advisory services in all markets. It also provides fiduciary services in all markets except Colorado. Fiduciary services, which were a core business of Colorado State Bank and Trust, are included in regional banking. Regional banking consist primarily of corporate and consumer banking activities in the respective local markets. In addition to its lines of business, BOK Financial has a funds management unit. The primary purpose of this unit is to manage the overall liquidity needs and interest rate risk of the company. Each line of business borrows funds from and provides funds to the funds management unit as needed to support their operations.
8 BOK Financial allocates resources and evaluates performance of its lines of business after allocation of funds, certain indirect expenses, taxes and capital costs. The cost of funds borrowed from the funds management unit by the operating lines of business is transfer priced at rates that approximate market for funds with similar duration. Market is generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of transfer-pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk. The value of funds provided by the operating lines of business to the funds management unit is based on applicable Federal Home Loan Bank advance rates. Deposit accounts with indeterminate maturities, such as demand deposit accounts and interest-bearing transaction accounts, are transfer-priced at a rolling average based on expected duration of the accounts. The expected duration ranges from 90 days for certain rate-sensitive deposits to five years. Economic capital is assigned to the business units by a third-party developed 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 the 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 loss history where possible. Additional capital is assigned to the regional banking line of business based on the Company's investment in those entities. <TABLE> - ------------------------------------------------------ -------------------------------- -------------------------------- Table 4 - Net Income by Line of Business (In thousands) Three months ended June 30, Six months ended June 30, 2005 2004 2005 2004 ---------------- --------------- ---------------- --------------- <S> <C> <C> <C> <C> Oklahoma corporate banking $ 22,257 $ 16,146 $ 38,816 $ 31,523 Regional banking 18,261 13,530 35,307 27,631 Mortgage banking (309) 1,803 1,974 2,156 Oklahoma consumer banking 5,420 2,780 9,762 4,769 Wealth management 3,408 3,047 7,771 5,648 Funds management and other 1,428 8,227 8,890 12,958 - ------------------------------------------------------ ---------------- --------------- ---------------- --------------- Total $ 50,465 $ 45,533 $102,520 $ 84,685 - ------------------------------------------------------ ---------------- --------------- ---------------- --------------- </TABLE> Oklahoma Corporate Banking The Oklahoma Corporate Banking Division provides loan and lease financing and treasury and cash management services to businesses throughout Oklahoma and certain relationships in surrounding states. In addition to serving the banking needs of small businesses, middle market and larger customers, the Oklahoma Corporate Banking Division has specialized groups that serve customers in the energy, agriculture, healthcare and banking/finance industries, and includes the TransFund network. The Oklahoma Corporate Banking Division contributed $22.3 million or 44% to consolidated net income for the second quarter of 2005. This compares to $16.1 million or 35% of consolidated net income for the same period of 2004. Net income provided by this division included $2.9 million from the after-tax benefit from the sale of an interest in an Oklahoma City office building. Average assets increased $460 million or 10% due primarily to loan growth. A reduction in net loan charge-offs improved Oklahoma Corporate Banking's performance by $1.9 million. This improvement in credit quality also reduced economic capital allocated to this unit.
9 <TABLE> Table 5 - Oklahoma Corporate Banking (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 ------------- --- ------------- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 46,993 $ 35,524 $ 88,021 $ 70,936 NIR (expense) from internal sources (14,044) (4,884) (24,838) (10,055) ------------- ------------- -------------- ------------- Total net interest revenue 32,949 30,640 63,183 60,881 Other operating revenue 23,316 22,581 45,339 43,819 Gain on sale of assets 4,708 - 4,708 - Operating expense 25,311 25,652 50,068 49,202 Net loans charged off / (recovered) (765) 1,141 (368) 3,906 Net income 22,257 16,146 38,816 31,523 Average assets $ 5,037,883 $ 4,578,000 $ 5,110,494 $ 4,613,452 Average economic capital 311,310 322,780 310,410 324,660 Return on assets 1.77% 1.42% 1.53% 1.37% Return on economic capital 28.68% 20.12% 25.22% 19.53% Efficiency ratio 41.51% 48.20% 44.22% 46.99% </TABLE> Oklahoma Consumer Banking The Oklahoma Consumer Banking Division provides a full line of deposit, loan and fee-based services to customers throughout Oklahoma through four major distribution channels: traditional branches, supermarket branches, the 24-hour ExpressBank call center and the Internet. Additionally, the division is a significant referral source for the Bank of Oklahoma Mortgage Division ("BOk Mortgage") and BOSC's retail brokerage division. The Consumer Banking Division contributed $5.4 million or 11% to consolidated net income for the second quarter of 2005. This compares to $2.8 million or 6% of consolidated net income in 2004. Net interest revenue increased $4.0 million due largely to an increase in transfer pricing credit to business units that provide lower-costing funds to the Company. <TABLE> Table 6 - Oklahoma Consumer Banking (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 ------------- --- ------------- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ (5,882) $ (4,379) $ (11,275) $ (8,460) NIR (expense) from internal sources 20,901 15,356 39,971 30,137 ------------- ------------- -------------- ------------- Total net interest revenue 15,019 10,977 28,696 21,677 Other operating revenue 16,760 14,088 31,495 27,016 Operating expense 21,689 19,035 42,210 37,618 Net loans charged off 1,219 1,479 2,003 3,268 Net income 5,420 2,780 9,762 4,769 Average assets $ 2,880,292 $ 2,678,563 $ 2,897,552 $ 2,693,245 Average economic capital 64,260 67,380 68,970 64,835 Return on assets 0.75% 0.42% 0.68% 0.36% Return on economic capital 33.83% 16.59% 28.54% 14.79% Efficiency ratio 68.25% 75.94% 70.13% 77.26% </TABLE> Mortgage Banking BOK Financial engages in mortgage banking activities through the BOk Mortgage Division of Bank of Oklahoma. These activities include the origination, marketing and servicing of conventional and government-sponsored mortgage
10 loans. Consolidated mortgage banking revenue, which is included in other operating revenue, increased $995 thousand, or 13% compared with the second quarter of 2004. Mortgage banking activities incurred a net loss of $309 thousand for the second quarter of 2005 compared with net income of $1.8 million in 2004. Net income for the second quarter of 2005 included $753 thousand from the sale of mortgage loans from the residential loan portfolio. Mortgage banking activities consisted of two sectors, loan production and loan servicing. The loan production sector generally performs best when mortgage rates are relatively low and loan origination volumes are high. Conversely, the loan servicing sector generally performs best when mortgage rates are relatively high and prepayments are low. Mortgage loan commitment rates fell 50 basis points during the second quarter of 2005. This decrease in commitment rates improved the pricing of loans sold during the quarter and increased the amount of loan applications in process at quarter end. It also reduced the value of mortgage loan servicing rights due to higher expected prepayment speeds. Loan Production Sector Loan production revenue totaled $5.1 million for the second quarter of 2005, including $4.6 million of capitalized mortgage servicing rights, compared to loan production revenue of $4.3 million in 2004, including $3.6 million of capitalized mortgage servicing rights. The increase in loan production revenue was due to improved pricing of loans sold. Mortgage loans funded in the second quarter of 2005 totaled $185 million compared with $197 million in 2004. Approximately 69% of the loans funded during 2005 were to borrowers in Oklahoma. Pre-tax income from loan production totaled $1.8 million for the second quarter of 2005 compared with $2.5 million for the second quarter of 2004. The pipeline of mortgage loan applications totaled $292 million at June 30, 2005, compared to $250 million at March 31, 2005 and $232 million at June 30, 2004. Loan Servicing Sector The loan servicing sector had a pre-tax loss of $3.9 million for the second quarter of 2005 compared with pre-tax income of $307 thousand for the same period of 2004. A 50 basis point decrease in mortgage interest rates during the second quarter of 2005 reduced the value of servicing rights. This resulted in a $7.1 million provision for impairment of mortgage servicing rights. This provision was partially offset by $3.4 million of gains on financial instruments held as an economic hedge of the value of the servicing rights. During the second quarter of 2004, the allowance for impairment of servicing rights was decreased by $10.9 million. Net losses of $10.1 million were recognized on financial instruments designated as an economic hedge. Servicing revenue totaled $4.1 million in the second quarter of 2005 compared with $4.5 million in 2004. The decrease in servicing revenue was due primarily to a lower outstanding principal balance of loans serviced. The average outstanding balance of loans serviced was $3.7 billion during the second quarter of 2005 compared to $4.0 billion during 2004. The decrease in loans serviced reflected both the continued refinancing of mortgage loans and curtailment of purchases of mortgage loan servicing. Annualized servicing revenue per outstanding loan principal was 44 basis points in the second quarter of 2005, compared with 45 basis points in 2004. Amortization of mortgage servicing rights, which is included in operating expense, was $3.0 million in 2005 compared to $3.8 million in 2004. Amortization expense is determined in proportion to the estimated future cash flows that will be generated by the mortgage servicing rights. The reduction in amortization expense reflected an expectation of lower loan prepayment speeds.
11 <TABLE> Table 7 - Mortgage Banking (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 ------------- --- ------------- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 5,149 $ 5,524 $ 10,167 $ 11,309 NIR (expense) from internal sources (3,614) (2,618) (7,191) (5,670) ------------- ------------- -------------- ------------- Total net interest revenue 1,535 2,906 2,976 5,639 Capitalized mortgage servicing rights 4,556 3,559 6,537 6,255 Other operating revenue 5,231 4,651 9,874 11,378 Gain on sale of assets 1,232 - 1,232 - Operating expense 9,292 8,926 17,125 18,898 Provision (recovery) for impairment of mortgage servicing rights 7,088 (10,865) 1,464 (7,162) Gains (losses) on financial instruments, net 3,404 (10,113) 1,328 (7,880) Net income (loss) (309) 1,803 1,974 2,156 Average assets $ 532,855 $ 586,587 $ 539,976 $ 584,405 Average economic capital 21,390 24,430 22,980 27,590 Return on assets (0.23)% 1.24% 0.74% 0.74% Return on economic capital (5.79)% 29.68% 17.32% 15.71% Efficiency ratio 74.02% 80.30% 83.05% 81.20% </TABLE> BOK Financial designates a portion of its securities portfolio as an economic hedge against the risk of loss on its mortgage servicing rights. Mortgage-backed securities and U.S. government agency debentures are acquired and held as available for sale when prepayment risks exceed certain levels. Additionally, interest rate derivative contracts may also be designated as an economic hedge of the risk of loss on mortgage servicing rights. Because the fair values of these instruments are expected to vary inversely to the fair value of the servicing rights, they are expected to partially offset risk. However, no special hedge accounting treatment is applicable to either the mortgage servicing rights or the financial instruments designated as an economic hedge. Securities may be sold and gains or losses realized when necessary to offset the impairment provision of the mortgage servicing rights. Derivative contracts used to hedge mortgage servicing rights are carried at fair value with changes in fair value recognized in earnings. This hedging strategy presents certain risks. A well-developed market determines the fair value for the securities and derivatives, however there is no comparable market for mortgage servicing rights. Therefore, the computed change in value of the servicing rights for a specified change in interest rates may not correlate to the change in value of the securities. At June 30, 2005, financial instruments with a fair value of $151 million were held for the economic hedge program. The interest rate sensitivity of the mortgage servicing rights and securities held as a hedge is modeled over a range of +/- 50 basis points. At June 30, 2005, the pre-tax results of this modeling on reported earnings were: Table 8 - Interest Rate Sensitivity - Mortgage Servicing (Dollars in Thousands) 50 bp increase 50 bp decrease Anticipated change in: Fair value of mortgage servicing rights $ 5,988 $ (10,368) Fair value of hedging securities (5,061) 5,696 ----------------- ---------------- Net $ 927 $ (4,672) ----------------- ---------------- Table 8 shows the non-linear effect of changes in mortgage commitment rates on the value of mortgage servicing rights. A 50 basis point increase in rates is expected to increase value by $6.0 million while a 50 basis point decrease is expected to reduce value by $10.4 million. This considers that there is an upper limit to the appreciation in the value of servicing rights as rates rise due to the contractual repayment terms of the loans and other factors. There is much less of a limit on the speed at which mortgage loans may prepay in a declining rate environment.
12 Wealth Management BOK Financial provides a wide range of financial services through its wealth management line of business, including trust and private financial services, and brokerage and trading activities. This line of business includes the activities of BOSC, Inc., a registered broker / dealer. Trust and private financial services includes sales of institutional, investment and retirement products, loans and other services to affluent individuals, businesses, not-for-profit organizations, and governmental agencies. Trust services are provided primarily to clients throughout Oklahoma, Texas and New Mexico. Additionally, trust services include a nationally competitive, self-directed 401(k) program and administrative and advisory services to the American Performance family of mutual funds. Brokerage and trading activities within the wealth management line of business consists of retail sales of mutual funds, securities, and annuities, institutional sales of securities and derivatives, bond underwriting and other financial advisory services. Wealth management contributed $3.4 million or 7% to consolidated net income for the second quarter of 2005. This compared to $3.0 million or 7% of consolidated net income for the same period of 2004. Trust and private financial services provided $3.5 million of net income in the second quarter of 2005, a 57% increase over 2004. At June 30, 2005 and 2004, the wealth management line of business was responsible for trust assets with aggregate market values of $24 billion and $21 billion, respectively, under various fiduciary arrangements. The growth in trust assets reflected increased market value of assets managed in addition to new business generated during the year. The Company has sole or joint discretionary authority over $8.6 billion of trust assets at June 30, 2005 compared to $7.6 billion of trust assets at June 30, 2004. Brokerage and trading activities incurred a net loss of $97 thousand in the second quarter of 2005 compared to net income of $813 thousand in the second quarter of 2004. Trading revenue decreased $1.1 million due primarily to reduced fixed-income securities trading volumes. This revenue reduction was largely offset by increases in customer hedging revenue and retail sales. <TABLE> Table 9 - Wealth Management (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 ------------- --- ------------- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 1,173 $ 1,035 $ 2,228 $ 2,074 NIR (expense) from internal sources 3,052 2,014 5,839 3,823 ------------- ------------- -------------- ------------- Total net interest revenue 4,225 3,049 8,067 5,897 Other operating revenue 23,744 24,095 48,979 46,296 Operating expense 22,225 22,179 44,110 42,914 Net income 3,408 3,047 7,771 5,648 Average assets $ 749,605 $ 727,525 $ 751,373 $ 741,823 Average economic capital 119,870 72,120 115,310 73,120 Return on assets 1.82% 1.68% 2.09% 1.53% Return on economic capital 11.40% 16.99% 13.59% 15.53% Efficiency ratio 79.46% 81.71% 77.32% 82.22% </TABLE> Regional Banking Regional Banking consists primarily of the corporate and commercial banking services provided by Bank of Texas, Bank of Albuquerque, Bank of Arkansas, Colorado State Bank and Trust and Bank of Arizona in their respective markets. They also include fiduciary services provided by Colorado State Bank and Trust. Small businesses and middle-market corporations are Regional Banking primary customer focus. Regional Banking contributed $18.3 million or 36% to consolidated net income during the second quarter of 2005. This compares with $13.5 million or 30% of consolidated net income for the same period in 2004. Growth in net income contributed by the regional banks came primarily from operations in Texas and New Mexico. Net income for 2005 in Texas and New Mexico increased $3.2 million and $1.7 million, respectively.
13 Growth in net income from Texas operations resulted primarily from an increase in net interest revenue. Average earning assets increased $166 million. Average loans increased $267 million, or 15% while funds sold to the funds management unit decreased $88 million. Average deposits increased $99 million, or 4%. The increase in net income from New Mexico operations was also based largely on an increase in net interest revenue. Average earning assets decreased $15 million, or 1%. However, the mix of earning assets improved. Average loans increased $71 million or 13% while funds sold to the funds management unit decreased $87 million. Average deposits in the New Mexico market increased $67 million or 8%. In addition, the Company continued expansion efforts in Colorado. A new office which offers trust products was opened in Salt Lake City during the second quarter of 2005 and additional commercial lending staff was added. The conversion of Bank of Arizona's data processing systems is scheduled for the third quarter of 2005. This conversion will increase the scope of products and services offered in the Phoenix market. Bank of Arizona operating expenses included $266 thousand of amortization of intangible assets. The Company's policy is to amortize core deposit intangible assets over the expected life of the acquired deposits using an accelerated amortization method. The weighted average life of the acquired deposits is approximately five years. <TABLE> Table 10 - Bank of Texas (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 ------------- --- ------------- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 36,157 $ 28,793 $ 70,195 $ 57,333 NIR (expense) from internal sources (2,308) (1,114) (4,304) (2,353) ------------- ------------- -------------- ------------- Total net interest revenue 33,849 27,679 65,891 54,980 Other operating revenue 6,298 5,410 11,634 11,093 Operating expense 21,388 18,163 40,941 36,149 Net loans charged off 1,255 1,934 1,373 2,512 Net income 11,658 8,489 23,172 17,849 Average assets $ 3,269,560 $ 3,047,820 $ 3,268,985 $ 3,065,271 Average economic capital 166,940 160,580 166,920 164,450 Average invested capital 334,020 327,660 334,010 331,540 Return on assets 1.43% 1.12% 1.43% 1.17% Return on economic capital 28.01% 21.26% 27.99% 21.83% Return on average invested capital 14.00% 10.42% 14.00% 10.83% Efficiency ratio 53.27% 54.89% 52.81% 54.71% </TABLE> <TABLE> Table 11 - Bank of Albuquerque (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 ------------- --- ------------- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 14,153 $ 10,791 $ 27,384 $ 21,780 NIR (expense) from internal sources (2,440) (1,024) (4,446) (2,065) ------------- ------------- -------------- ------------- Total net interest revenue 11,713 9,767 22,938 19,715 Other operating revenue 4,427 3,674 8,283 7,019 Operating expense 7,856 7,934 15,383 15,538 Net loans charged off 277 297 421 845 Net income 4,892 3,182 9,420 6,324 Average assets $ 1,678,024 $ 1,607,715 $ 1,657,690 $ 1,614,252 Average economic capital 84,630 63,690 79,440 66,190 Average invested capital 103,720 82,780 98,530 85,280 Return on assets 1.17% 0.80% 1.15% 0.79% Return on economic capital 23.19% 20.09% 23.91% 19.21% Return on average invested capital 18.92% 15.46% 19.28% 14.91% Efficiency ratio 48.67% 59.03% 49.27% 58.12% </TABLE>
14 <TABLE> Table 12 - Bank of Arkansas (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 ------------- --- ------------- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 2,700 $ 2,272 $ 5,795 $ 4,468 NIR (expense) from internal sources (890) (408) (1,661) (942) ------------- ------------- -------------- ------------- Total net interest revenue 1,810 1,864 4,134 3,526 Other operating revenue 401 354 776 644 Operating expense 996 1,094 1,994 1,972 Net loans charged off 13 (46) 23 (54) Net income 735 715 1,768 1,376 Average assets $ 270,038 $ 264,334 $ 267,799 $ 263,971 Average economic capital 10,460 11,040 10,640 11,650 Average invested capital 10,460 11,040 10,640 11,650 Return on assets 1.09% 1.09% 1.33% 1.05% Return on economic capital 28.18% 26.05% 33.51% 23.75% Return on average invested capital 28.18% 26.05% 33.51% 23.75% Efficiency ratio 45.05% 49.32% 40.61% 47.29% </TABLE> <TABLE> Table 13 - Colorado State Bank and Trust (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 ------------- --- ------------- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 8,310 $ 4,401 $ 15,625 $ 10,549 NIR (expense) from internal sources (2,716) 684 (5,106) (916) ------------- ------------- -------------- ------------- Total net interest revenue 5,594 5,085 10,519 9,633 Other operating revenue 2,645 2,259 4,999 4,264 Operating expense 5,941 5,399 11,559 10,416 Net loans charged off 23 124 1,651 124 Net income 1,391 1,144 1,411 2,082 Average assets $ 779,137 $ 655,514 $ 792,809 $ 653,535 Average economic capital 46,870 35,090 43,060 25,700 Average invested capital 88,860 77,070 85,050 67,690 Return on assets 0.72% 0.70% 0.36% 0.64% Return on economic capital 11.90% 13.11% 6.61% 16.29% Return on average invested capital 6.28% 5.97% 3.35% 6.19% Efficiency ratio 72.11% 73.52% 74.49% 74.95% </TABLE>
15 Table 14 - Bank of Arizona (Dollars in Thousands) Three months ended June 30, 2005 ---------------- NIR (expense) from external sources $ 2,419 NIR (expense) from internal sources (794) ------------- Total net interest revenue 1,625 Other operating revenue 344 Operating expense 2,626 Net loans charged off 21 Net income (loss) (415) Average assets $ 111,760 Average economic capital 16,127 Average invested capital 32,777 Return on assets (1.49)% Return on economic capital (10.32)% Return on average invested capital (5.08)% Efficiency ratio 133.37% *** Bank of Arizona was acquired in April 2005. Financial Condition Securities Securities are classified as either held for investment or available for sale based upon asset/liability management strategies, liquidity and profitability objectives and regulatory requirements. Investment securities, which consist primarily of Oklahoma municipal bonds, are carried at cost and adjusted for amortization of premiums or accretion of discounts. Management has the ability and intent to hold these securities until they mature. Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, less deferred taxes, are recorded as accumulated other comprehensive income in shareholders' equity. The amortized cost of available for sale securities at June 30, 2005 totaled $4.9 billion compared with $4.7 billion at March 31, 2005. Mortgage-backed securities continued to represent substantially all available for sale securities. As previously discussed in the Net Interest Revenue section of this report, the Company holds mortgage backed securities as part of an overall interest rate risk management strategy. The primary risk of holding mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. The Company evaluates 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 2.8 years at June 30, 2005 and 3.2 years at March 31, 2005. Net unrealized losses on available for sale securities totaled $46 million at June 30, 2005 compared with $80 million at March 31, 2005. The decrease in net unrealized losses was due primarily to falling interest rates. The aggregate gross amount of unrealized losses at June 30, 2005 totaled $52 million. Management evaluated the securities with unrealized losses to determine if the losses were temporary. This evaluation considered factors such as causes of the unrealized losses and prospects for recovery over various interest rate scenarios and time periods. It is believed, based on currently available information and the Company's evaluation, that the unrealized losses in these securities were temporary.
16 Loans The aggregate loan portfolio at June 30, 2005 totaled $8.5 billion, a $429 million or 21% annualized increase since March 31, 2005. <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 15 - Loans (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2005 2005 2004 2004 2004 --------------------------------------------------------------------------------- Commercial: <S> <C> <C> <C> <C> <C> Energy $ 1,278,312 $ 1,174,498 $ 1,223,195 $ 1,097,191 $ 1,079,746 Manufacturing 482,261 468,615 484,423 479,866 485,657 Wholesale/retail 770,220 696,066 699,318 737,235 697,761 Agriculture 244,687 263,382 262,436 262,171 232,445 Services 1,739,669 1,705,178 1,615,071 1,644,884 1,488,963 Other commercial and industrial 298,772 283,107 291,393 277,102 349,129 - --------------------------------------------------------------------------------------------------------------------- Total commercial 4,813,921 4,590,846 4,575,836 4,498,449 4,333,701 - --------------------------------------------------------------------------------------------------------------------- Commercial real estate: Construction and land development 586,828 518,137 457,399 467,396 436,727 Multifamily 237,904 224,533 231,985 236,240 245,731 Other real estate loans 1,085,803 975,115 931,726 917,488 907,084 - --------------------------------------------------------------------------------------------------------------------- Total commercial real estate 1,910,535 1,717,785 1,621,110 1,621,124 1,589,542 - --------------------------------------------------------------------------------------------------------------------- Residential mortgage: Secured by 1-4 family residential properties 1,150,651 1,215,022 1,198,918 1,120,761 1,080,399 Residential mortgages held for sale 74,410 44,429 40,262 82,053 79,034 - --------------------------------------------------------------------------------------------------------------------- Total residential mortgage 1,225,061 1,259,451 1,239,180 1,202,814 1,159,433 - --------------------------------------------------------------------------------------------------------------------- Consumer 565,163 517,884 492,841 461,779 442,424 - --------------------------------------------------------------------------------------------------------------------- Total $ 8,514,680 $ 8,085,966 $ 7,928,967 $ 7,784,166 $ 7,525,100 - --------------------------------------------------------------------------------------------------------------------- </TABLE> The commercial loan portfolio increased $223 million during the second quarter of 2005. Much of this increase was focused in the energy portion of the portfolio, which increased $104 million, or 8%. Energy loans totaled $1.3 billion or 15% of total loans at June 30, 2005. Approximately $1.0 billion was to oil and gas producers. The amount of credit available to these customers generally depends on the value of their proven energy reserves based on anticipated prices. This portion of the energy loan portfolio provided much of the quarter's loan growth. Exploration and acquisition activities have increased. Management believes that the increased activity included an expectation that the markets have set a new floor for energy prices. The energy category also included loans to borrowers involved in the transportation and sale of oil and gas and to borrowers that manufacture equipment or provide other services to the energy industry. Services comprised 20% of the total loan portfolio and included $278 million of loans to nursing homes and $156 million of loans to medical facilities. Agriculture included $205 million of loans to the cattle industry. Other notable loan concentrations by primary industry of the borrowers are presented in Table 15. BOK Financial participates in shared national credits when appropriate to obtain or maintain business relationships with local customers. Shared national credits are defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants. At June 30, 2005, the outstanding principal balance of these loans totaled $1.0 billion. Substantially all is to borrowers with local market relationships. BOK Financial is the agent lender in approximately 22% of its shared national credit relationships. The Company's lending policies generally avoid loans in which there is no opportunity to maintain or achieve other business relationships with the customer. Commercial real estate loans totaled $1.9 billion or 22% of the loan portfolio at June 30, 2005. The outstanding balance of commercial real estate loans increased $193 million since March 31, 2005. Construction and land development included $416 million for single family residential lots and premises, up $19 million, or 5% since March 31, 2005. This growth resulted from expanded builder loans, primarily in Arizona. The major components of other commercial real estate loans were retail facilities at $334 million and office buildings at $420 million. Commercial real estate loans secured by office buildings increased $43 million, or 11%, during the quarter.
17 Residential mortgage loans, excluding loans held for sale, included $341 million of home equity loans, $319 million of loans held in conjunction with business relationships, $235 million of adjustable rate mortgages and $184 million of loans held for community development. Community development loans decreased $132 million during the second quarter of 2005 due primarily to the sale of $118 million of such loans. Consumer loans included $286 million of indirect automobile loans. Substantially all of these loans were purchased from dealers in Oklahoma. Table 16 presents the distribution of the major loan categories among primary market areas. <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 16 - Loans by Principal Market Area (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2005 2005 2004 2004 2004 --------------------------------------------------------------------------------- Oklahoma: <S> <C> <C> <C> <C> <C> Commercial $ 3,026,311 $ 2,871,566 $ 2,847,470 $ 2,914,917 $ 2,843,013 Commercial real estate 856,617 791,816 744,724 746,444 795,145 Residential mortgage 827,431 936,375 901,648 819,537 770,749 Residential mortgage held for sale 74,410 44,429 40,262 82,053 79,034 Consumer 425,318 389,571 367,947 343,680 336,057 --------------------------------------------------------------------------------- Total Oklahoma $ 5,210,087 $ 5,033,757 $ 4,902,051 $ 4,906,631 $ 4,823,998 --------------------------------------------------------------------------------- Texas: Commercial $ 1,182,307 $ 1,135,509 $ 1,120,069 $ 994,335 $ 939,471 Commercial real estate 509,472 477,487 459,067 467,935 453,724 Residential mortgage 196,457 177,919 191,296 195,393 194,760 Consumer 90,245 85,626 86,732 87,371 85,742 --------------------------------------------------------------------------------- Total Texas $ 1,978,481 $ 1,876,541 $ 1,857,164 $ 1,745,034 $ 1,673,697 --------------------------------------------------------------------------------- Albuquerque: Commercial $ 340,378 $ 325,069 $ 354,904 $ 331,027 $ 317,647 Commercial real estate 219,175 218,357 196,832 195,390 175,537 Residential mortgage 63,821 62,015 63,043 64,105 65,184 Consumer 15,813 12,306 13,260 11,687 11,251 --------------------------------------------------------------------------------- Total Albuquerque $ 639,187 $ 617,747 $ 628,039 $ 602,209 $ 569,619 --------------------------------------------------------------------------------- Northwest Arkansas: Commercial $ 54,703 $ 51,026 $ 61,934 $ 64,789 $ 61,252 Commercial real estate 76,803 75,024 74,478 69,075 65,980 Residential mortgage 11,674 10,771 11,238 9,022 9,289 Consumer 4,560 3,599 3,858 4,998 3,018 --------------------------------------------------------------------------------- Total Northwest Arkansas $ 147,740 $ 140,420 $ 151,508 $ 147,884 $ 139,539 --------------------------------------------------------------------------------- Colorado: Commercial $ 210,142 $ 207,676 $ 191,459 $ 193,381 $ 172,318 Commercial real estate 125,120 120,844 118,134 142,280 99,156 Residential mortgage 27,292 27,942 31,693 32,704 40,417 Consumer 27,996 26,782 21,044 14,043 6,356 --------------------------------------------------------------------------------- Total Colorado $ 390,550 $ 383,244 $ 362,330 $ 382,408 $ 318,247 --------------------------------------------------------------------------------- Arizona: Commercial $ 80 $ - $ - $ - $ - Commercial real estate 123,348 34,257 27,875 - - Residential mortgage 23,976 - - - - Consumer 1,231 - - - - --------------------------------------------------------------------------------- Total Arizona $ 148,635 $ 34,257 $ 27,875 $ - $ - --------------------------------------------------------------------------------- Total BOK Financial loans $ 8,514,680 $ 8,085,966 $ 7,928,967 $ 7,784,166 $ 7,525,100 --------------------------------------------------------------------------------- </TABLE>
18 Loan Commitments BOK Financial enters into certain off-balance sheet arrangements in the normal course of business. These arrangements included loan commitments which totaled $3.8 billion and standby letters of credit which totaled $470 million at June 30, 2005. 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 a customer to a third party. Since some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Derivatives with Credit Risk BOK Financial offers programs that permit its customers to hedge various risks, including fluctuations in energy and cattle prices, interest rates and foreign exchange rates. Each of these programs work essentially the same way. Derivative contracts are executed between the customers and BOk. Offsetting contracts are executed between BOk and selected counterparties to minimize the risk 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 BOk as compensation for administrative costs, credit risk and profit. These programs create credit risk for potential amounts due to BOk 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 limit the maximum exposures to individual customers. Customers may also be required to provide margin collateral to further limit the Company's 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 and approved by the Asset / Liability Committee. Margin collateral is required if the exposure between BOk and any counterparty exceeds established limits. Based on declines in the counterparties' credit rating, these limits are reduced and additional margin collateral is required. A deterioration of the credit standing of one or more of the counterparties to these contracts may result in BOK Financial recognizing a loss as the fair value of the affected contracts may no longer move in tandem with the offsetting contracts. This could occur if the credit standing of the counterparty deteriorated such that either the fair value of underlying collateral no longer supported the contract or the counterparty's ability to provide margin collateral was impaired. Derivative contracts are carried at fair value. At June 30, 2005, the fair value of derivative contracts reported as assets under these programs totaled $690 million. This included energy contracts with fair values of $664 million, interest rate contracts with fair values of $13 million and foreign exchange contracts with fairs value of $11 million. The aggregate fair values of related derivative contracts reported as liabilities totaled $691 million. At March 31, 2005, the fair values of assets and liabilities reported under these programs totaled $720 million and $722 million, respectively. Approximately 68% of the fair value of asset contracts was with customers. The credit risk of these contracts is generally backed by energy production. The remaining 32% was with counterparties. The maximum net exposure to any single customer or counterparty totaled $82 million. Summary of Loan Loss Experience The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $109 million at June 30, 2005 and March 31, 2005, compared with $115 million at June 30, 2004. These amounts represented 1.29%, 1.35% and 1.54% of outstanding loans, excluding loans held for sale, at June 30, 2005, March 31, 2005, and June 30, 2004, respectively. Losses on loans held for sale, principally mortgage loans accumulated for placement into security pools, are charged to earnings through adjustment in the carrying value. The reserve for loan losses also represented 269% of the outstanding balance of nonperforming loans at June 30, 2005, compared with 219% at March 31, 2005 and 199% at June 30, 2005. Net loans charged off during the second quarter of 2005 totaled $2.3 million, down from $4.9 million for the same period in 2004.
19 Credit risk from loan commitments and letters of credit are considered in the evaluation of the adequacy of reserves. A separate reserve for off-balance sheet credit risk is maintained. Table 17 presents the trend of reserves for off-balance sheet credit losses and the relationship between the reserve and loan commitments. The relationship between the combined reserve for credit losses and outstanding loans is also presented to facilitate comparison with peer banks and others who have not adopted this preferred presentation. The provision for credit losses included the combined charge to expense for both the reserve for loan losses and the reserve for off-balance sheet credit losses. All losses incurred from lending activities will ultimately be reflected in charge-offs against the reserve for loan losses. Losses on outstanding commitments would occur after the commitment is funded and collection efforts are exhausted. <TABLE> - ------------------------------------------------------------------------------------------------------------------------------ Table 17 - Summary of Loan Loss Experience (In thousands) Three Months Ended ---------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, 2005 2005 2004 2004 2004 ---------------------------------------------------------------------------------- Reserve for loan losses: <S> <C> <C> <C> <C> <C> Beginning balance $ 108,958 $ 108,618 $ 113,719 $ 114,704 $ 114,988 Loans charged off: Commercial 1,641 1,438 4,195 2,712 2,826 Commercial real estate 90 1,715 100 254 617 Residential mortgage 423 181 493 392 231 Consumer 2,890 2,490 3,384 3,521 2,998 - ------------------------------------------------------------------------------------------------------------------------------ Total 5,044 5,824 8,172 6,879 6,672 - ------------------------------------------------------------------------------------------------------------------------------ Recoveries of loans previously charged off: Commercial 1,435 1,099 533 811 359 Commercial real estate 73 29 9 - 4 Residential mortgage 16 10 11 125 87 Consumer 1,233 1,508 1,189 1,163 1,302 - ------------------------------------------------------------------------------------------------------------------------------ Total 2,757 2,646 1,742 2,099 1,752 - ------------------------------------------------------------------------------------------------------------------------------ Net loans charged off 2,287 3,178 6,430 4,780 4,920 Provision for loan losses 1,142 3,518 1,329 3,795 4,636 Additions due to acquisitions 1,072 - - - - - ------------------------------------------------------------------------------------------------------------------------------ Ending balance $ 108,885 $ 108,958 $ 108,618 $ 113,719 $ 114,704 - ------------------------------------------------------------------------------------------------------------------------------ Reserve for off-balance sheet credit losses: Beginning balance $ 16,984 $ 18,502 $ 15,392 $ 14,201 $ 14,850 Provision for off-balance sheet credit losses 873 (1,518) 3,110 1,191 (649) Additions due to acquisitions 32 - - - - - ------------------------------------------------------------------------------------------------------------------------------ Ending balance $ 17,889 $ 16,984 $ 18,502 $ 15,392 $ 14,201 - ------------------------------------------------------------------------------------------------------------------------------ Total provision for credit losses $ 2,015 $ 2,000 $ 4,439 $ 4,986 $ 3,987 - ------------------------------------------------------------------------------------------------------------------------------ Reserve for loan losses to loans outstanding at period-end (1) 1.29% 1.35% 1.38% 1.48% 1.54% Net charge-offs (annualized) to average loans (1) 0.11 0.16 0.33 0.25 0.26 Total provision for credit losses (annualized) to average loans (1) 0.10 0.10 0.23 0.26 0.21 Recoveries to gross charge-offs 54.66 45.43 21.32 30.51 26.26 Reserve for loan losses as a multiple of net charge-offs (annualized) 11.90x 8.57x 4.22x 5.95x 5.83x Reserve for off-balance sheet credit losses to off-balance sheet credit commitments 0.42% 0.41% 0.48% 0.42% 0.39% Combined reserves for credit losses to loans outstanding at period-end (1) 1.50 1.57 1.61 1.68 1.73 - ------------------------------------------------------------------------------------------------------------------------------ (1) Excludes residential mortgage loans held for sale. </TABLE> Specific impairment reserves are determined through evaluation of estimated future cash flows and collateral value. At June 30, 2005, specific impairment reserves totaled $5.4 million on total impaired loans of $32 million.
20 Nonspecific reserves are maintained for risks beyond factors specific to an individual loan or those identified through migration analysis. A range of potential losses is determined for each risk factor identified. At June 30, 2005, the ranges of potential losses for the more significant factors were: General economic conditions - $8.6 million to $12.7 million Concentration in large loans - $1.6 million to $ 3.2 million The provision for credit losses totaled $2.0 million for the second quarter of 2005, compared with $2.0 million for the first quarter of 2005 and $4.0 million for the second quarter of 2004. Factors considered in determining the provision for credit losses included a reduction in the outstanding balances of criticized and classified loans, a reduction in the number of past due and nonperforming loans, and a reduction in net losses incurred. These factors were partially offset by concerns about the effect of changes in interest rates and energy prices on the commercial real estate and commercial loan portfolios, and increased concentration in loans to residential home builders. Nonperforming Assets Information regarding nonperforming assets, which totaled $46 million at June 30, 2005 and $53 million at March 31, 2005 is presented in Table 18. Nonperforming assets included nonaccrual and renegotiated loans and excluded loans 90 days or more past due but still accruing interest. Nonaccrual loans totaled $41 million at June 30, 2005 and $50 million at March 31, 2005. Newly identified nonaccruing loans totaled $3.9 million during the second quarter of 2005. Nonaccruing loans decreased $7.7 million from a loan that was returned to accruing status after a period of satisfactory performance, $3.0 million for loans charged off or foreclosed, and $2.3 million for cash payments received. <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 18 - Nonperforming Assets (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2005 2005 2004 2004 2004 ---------------------------------------------------------------------- Nonaccrual loans: <S> <C> <C> <C> <C> <C> Commercial $ 21,173 $ 29,116 $ 33,195 $ 36,526 $ 38,264 Commercial real estate 11,722 12,671 10,144 8,293 10,208 Residential mortgage 7,154 7,533 8,612 6,228 8,346 Consumer 478 483 709 729 792 - --------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 40,527 49,803 52,660 51,776 57,610 Other nonperforming assets 5,062 3,187 3,763 6,038 4,776 - --------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 45,589 $ 52,990 $ 56,423 $ 57,814 $ 62,386 - --------------------------------------------------------------------------------------------------------------------- Ratios: Reserve for loan losses to nonaccrual loans 268.67% 218.78% 206.26% 219.64% 199.10% Combined reserves for credit losses to nonaccrual loans 312.81 252.88 241.40 249.36 223.75 Nonaccrual loans to period-end loans (2) 0.48 0.62 0.67 0.67 0.77 - --------------------------------------------------------------------------------------------------------------------- Loans past due (90 days) (1) $ 7,125 $ 6,782 $ 7,649 $ 9,173 $ 10,280 - --------------------------------------------------------------------------------------------------------------------- (1) Includes residential mortgages guaranteed by agencies of the U.S. Government. $ 3,713 $ 2,650 $ 2,308 $ 2,354 $ 3,226 (2) Excludes residential mortgage loans held for sale. - --------------------------------------------------------------------------------------------------------------------- </TABLE> The loan review process also identified loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrower or the value of the collateral. Because the borrowers are still performing in accordance with the original terms of the loan agreements, and no loss of principal or interest is anticipated, these loans were not included in Nonperforming Assets. Known information, however, causes management concerns as to the borrowers' ability to comply with current repayment terms. These potential problem loans totaled $38 million at June 30, 2005 and $41 million at March 31, 2005. The current composition of potential problem loans by primary industry included healthcare - $11 million, manufacturing - $9 million, real estate - $6 million, services - $5 million and energy - $4 million.
21 Deposits Deposit accounts represent the Company's primary funding source. The Company competes 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 the Perfect Banking program, free checking and on-line Billpay services, an extensive network of branch locations and ATMs and a 24-hour Express Bank call center. Commercial deposit growth is supported by offering treasury management and lockbox services. Average deposits grew at a 1% annualized rate for second quarter of 2005, excluding $110 million of average deposits acquired from Bank of Arizona. Core deposits, excluding public funds and brokered deposits, grew at an annualized rate of 3%. Average core deposits comprised 52% of total deposits for both the second and first quarters of 2005. Deposit accounts with balances in excess of $100,000 represented 37% and 36% of total deposits for the second quarters of 2005 and 2004, respectively. Average interest-bearing transaction accounts increased $403 million compared with the preceding quarter. Much of this increase was offset by a $310 million decrease in average demand deposit accounts. Certain demand deposit account balances were transferred to interest-bearing transaction accounts during the second quarter to better manage the Company's reserve position. This transfer reduced demand deposits and increased interest-bearing transaction accounts by $129 million in Oklahoma, $197 million in Texas, and $25 million in Colorado. The distribution of deposit accounts among principal markets is shown in Table 19.
22 <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 19 - Deposits by Principal Market Area (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2005 2005 2004 2004 2004 --------------------------------------------------------------------------------- Oklahoma: <S> <C> <C> <C> <C> <C> Demand $ 1,028,640 $ 1,091,132 $ 1,095,228 $ 1,045,981 $ 1,069,823 Interest-bearing: Transaction 2,367,511 2,235,950 2,291,089 2,167,279 2,229,366 Savings 89,972 93,655 87,597 92,275 96,091 Time 2,450,730 2,511,465 2,505,849 2,543,292 2,615,179 --------------------------------------------------------------------------------- Total interest-bearing 4,908,213 4,841,070 4,884,535 4,802,846 4,940,636 --------------------------------------------------------------------------------- Total Oklahoma $ 5,936,853 $ 5,932,202 $ 5,979,763 $ 5,848,827 $ 6,010,459 --------------------------------------------------------------------------------- Texas: Demand $ 478,855 $ 628,043 $ 617,808 $ 587,181 $ 578,727 Interest-bearing: Transaction 1,292,938 1,111,808 1,119,893 1,118,960 1,124,279 Savings 29,635 30,695 30,331 32,244 34,370 Time 606,528 601,397 571,993 581,017 548,001 --------------------------------------------------------------------------------- Total interest-bearing 1,929,101 1,743,900 1,722,217 1,732,221 1,706,650 --------------------------------------------------------------------------------- Total Texas $ 2,407,956 $ 2,371,943 $ 2,340,025 $ 2,319,402 $ 2,285,377 --------------------------------------------------------------------------------- Albuquerque: Demand $ 139,107 $ 133,309 $ 136,599 $ 146,163 $ 135,648 Interest-bearing: Transaction 306,230 314,067 320,118 345,851 350,453 Savings 17,875 18,428 17,885 18,102 19,153 Time 449,180 434,131 411,939 385,139 353,650 --------------------------------------------------------------------------------- Total interest-bearing 773,285 766,626 749,942 749,092 723,256 --------------------------------------------------------------------------------- Total Albuquerque $ 912,392 $ 899,935 $ 886,541 $ 895,255 $ 858,904 --------------------------------------------------------------------------------- Northwest Arkansas: Demand $ 10,890 $ 14,922 $ 14,489 $ 15,242 $ 11,816 Interest-bearing: Transaction 24,816 23,555 26,882 24,462 21,929 Savings 1,284 1,405 1,434 1,302 1,191 Time 83,388 88,031 99,677 107,576 112,634 --------------------------------------------------------------------------------- Total interest-bearing 109,488 112,991 127,993 133,340 135,754 --------------------------------------------------------------------------------- Total Northwest Arkansas $ 120,378 $ 127,913 $ 142,482 $ 148,582 $ 147,570 --------------------------------------------------------------------------------- Colorado: Demand $ 32,044 $ 73,383 $ 62,995 $ 61,865 $ 81,478 Interest-bearing: Transaction 228,881 220,618 189,106 203,349 166,139 Savings 16,791 22,140 19,092 19,085 19,021 Time 117,130 86,406 54,394 43,076 41,361 --------------------------------------------------------------------------------- Total interest-bearing 362,802 329,164 262,592 265,510 226,521 --------------------------------------------------------------------------------- Total Colorado $ 394,846 $ 402,547 $ 325,587 $ 327,375 $ 307,999 --------------------------------------------------------------------------------- Arizona: Demand $ 60,412 $ - $ - $ - $ - Interest-bearing: Transaction 56,624 - - - - Savings 4,771 - - - - Time 6,574 - - - - --------------------------------------------------------------------------------- Total interest-bearing 67,969 - - - - --------------------------------------------------------------------------------- Total Colorado $ 128,381 $ - $ - $ - $ - --------------------------------------------------------------------------------- Total BOK Financial deposits $ 9,900,806 $ 9,734,540 $ 9,674,398 $ 9,539,441 $ 9,610,309 --------------------------------------------------------------------------------- </TABLE>
23 Borrowings and Capital Parent Company BOK Financial (parent company) has a $125 million unsecured revolving line of credit with certain banks that matures in December 2006. The outstanding principal balance of this credit agreement of $95 million was paid off during the second quarter of 2005. Interest is based on LIBOR plus a defined margin that is determined by the principal balance outstanding and the Company's credit rating or a base rate. The base rate is defined as the greater of the daily federal funds rate plus 0.5% or the prime rate. A fee of 20 basis points is assessed on the unused committed balance. This credit agreement includes certain restrictive covenants that limit the Company's ability to borrow additional funds and to pay cash dividends on common stock. These covenants also require BOK Financial and subsidiary banks to maintain minimum capital levels and to exceed minimum net worth ratios. BOK Financial met all of the restrictive covenants at June 30, 2005. The primary source of liquidity for BOK Financial is dividends from subsidiary banks, which are limited by various banking regulations to net profits, as defined, for the preceding two years. Dividends are further restricted by minimum capital requirements. Based on the most restrictive limitations, the subsidiary banks could declare up to $175 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 $120 million under this policy. Shareholders' equity for BOK Financial totaled $1.5 billion at June 30, 2005, an increase of $66 million since March 31, 2005. Net income provided $50 million to this increase and a reduction in net unrealized losses on available for sale securities increased shareholders' equity by $20 million. A cash dividend of $6.6 million or $0.10 per common share was paid during the second quarter of 2005. The remaining increase in capital during the first quarter of 2005 resulted primarily from activity in employee stock options. On April 26, 2005, the Board of Directors authorized a share repurchase program, which replaced a previously authorized program. The maximum of two million common shares may be repurchased. The specific timing and amount of shares repurchased will vary based on market conditions, securities law limitations and other factors. Repurchases may be made over time in open market or privately negotiated transactions. The repurchase programs may be suspended or discontinued at any time without prior notice. All of the Company's Series A Preferred Stock were converted into shares of BOK Financial common stock during the second quarter of 2005. Common shares issued totaled 6,920,666. BOK Financial and subsidiary banks are subject to various capital requirements administered by federal agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that could have a material impact on operations. These capital requirements include quantitative measures of assets, liabilities, and off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulators. The capital ratios for BOK Financial are presented in Table 20. <TABLE> - -------------------------------------------------------------------------------------------------------------------- Table 20 - Capital Ratios June 30, March 31, Dec. 31, Sept. 30, June 30, 2005 2005 2004 2004 2004 -------------------------------------------------------------------------- Average shareholders' equity <S> <C> <C> <C> <C> <C> to average assets 9.36% 9.70% 9.38% 9.20% 9.19% Risk-based capital: Tier 1 capital 9.85 10.19 10.02 9.82 9.82 Total capital 12.55 11.78 11.67 11.56 11.93 Leverage 8.07 8.36 7.94 7.81 7.52 </TABLE> Subsidiary Banks Bank of Oklahoma issued $150 million of 10-year, fixed rate subordinated debt during the second quarter of 2005. The cost of the subordinated debt, including issuance discounts and hedge loss is 5.43%. The proceeds of this debt were used to repay $95 million of BOK Financial's unsecured revolving line of credit.
24 Off-Balance Sheet Arrangements During 2002, BOK Financial issued shares of common stock and options to purchase additional shares with a fair value of $65 million for its purchase of Bank of Tanglewood. In addition, BOK Financial agreed to a limited price guarantee on a portion of the shares issued in this purchase. Pursuant to this guarantee, any holder of BOK Financial common shares issued in this acquisition may annually make a claim for the excess of the guaranteed price and the actual sales price of any shares sold during a 60-day period after each of the first five anniversary dates after October 25, 2002. The maximum annual number of shares subject to this guarantee is 210,069. BOK Financial may elect, in its sole discretion, to issue additional shares of common stock or to pay cash to satisfy any obligation under the price guaranty. The Company will have no obligation to issue additional common shares or pay cash to satisfy any benchmark price protection obligation if the market value per share of BOK Financial common stock remains above the highest benchmark price of $42.53. The closing price of BOK Financial common stock on June 30, 2005 was $46.12 per share. Market Risk Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange prices, commodity prices or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading. BOK Financial is subject to market risk primarily through the effect of changes in interest rates on both its assets held for purposes other than trading and trading assets. The effects of other changes, such as foreign exchange rates, commodity prices or equity prices do not pose significant market risk to BOK Financial. BOK Financial has no material investments in assets that are affected by changes in foreign exchange rates or equity prices. Energy derivative contracts, which are affected by changes in commodity prices, are matched against offsetting contracts as previously discussed. Responsibility for managing market risk rests with the Asset / Liability Committee that operates under policy guidelines established by the Board of Directors. The acceptable negative variation in net interest revenue, net income or economic value of equity due to a specified basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 10%. These guidelines also set maximum levels for short-term borrowings, short-term assets, public funds, and brokered deposits, and establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is reviewed monthly. Interest Rate Risk - Other than Trading BOK Financial has a large portion of its earning assets in variable rate loans and a large portion of its liabilities in demand deposit accounts and interest bearing transaction accounts. Changes in interest rates affect earning assets more rapidly than interest bearing liabilities in the short term. Management has adopted several strategies to reduce this interest rate sensitivity. As previously noted in the Net Interest Revenue section of this report, management acquires securities that are funded by borrowings in the capital markets. These securities have an expected duration of 2.8 years while the related funds borrowed have an average duration of 90 days. BOK Financial also uses interest rate swaps in managing its interest rate sensitivity. These products are generally used to more closely match interest on certain fixed-rate loans with funding sources and long-term certificates of deposit with earning assets. During the second quarter of 2005 net interest revenue decreased $187 thousand from periodic settlements of these contracts. These contracts are carried on the balance sheet at fair value and changes in fair value are reporting in income as derivatives gains or losses. A net loss of $311 thousand was recognized in 2005 compared to a net gain of $201 thousand in 2004 from adjustments of these swaps and hedged liabilities to fair value. Credit risk from these swaps is closely monitored as part of the overall process of managing credit exposure to other financial institutions. The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model. BOK Financial performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions, on net interest revenue, net income and economic value of equity. A simulation model is used to estimate the effect of changes in interest rates over the next twelve months based on eight
25 interest rate scenarios. Three specified interest rate scenarios are used to evaluate interest rate risk. Two "shock test" scenarios, first assuming a sustained parallel 200 basis point increase and second assuming a sustained parallel 100 basis point decrease in interest rates, are used to evaluate interest rate risk against policy guidelines. Management historically evaluated interest rate sensitivity for a sustained 200 basis point decrease in rates. However, these results are not meaningful in the current low-rate environment. Additionally, interest rate risk is evaluated against a "most likely" rate scenario. An independent source is used to determine the most likely interest rate scenario. The Company's primary interest rate exposures included the Federal Funds rate, which affects short-term borrowings, and the prime lending rate and LIBOR, which are the basis for much of the variable-rate loan pricing. Additionally, mortgage rates directly affect the prepayment speeds for mortgage-backed securities and mortgage servicing rights. Derivative financial instruments and other financial instruments used for purposes other than trading are included in this simulation. The model incorporates assumptions regarding the effects of changes in interest rates and account balances on indeterminable maturity deposits based on a combination of historical analysis and expected behavior. The impact of planned growth and new business activities is factored into the simulation model. The effects of changes in interest rates on the value of mortgage servicing rights are excluded from Table 21 due to the extreme volatility over such a large rate range. The effects of interest rate changes on the value of mortgage servicing rights and securities identified as economic hedges are presented in the Lines of Business - Mortgage Banking section of this report. The simulations used to manage market risk are based on numerous assumptions regarding the effects of changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest revenue, net income or economic value of equity or precisely predict the impact of higher or lower interest rates on net interest revenue, net income or economic value of equity. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, market conditions and management strategies, among other factors. <TABLE> Table 21 - Interest Rate Sensitivity (Dollars in Thousands) Increase Decrease -------------------------- --------------------------- ------------------------- 200 bp 100 bp Most Likely -------------------------- --------------------------- ------------------------- 2005 2004 2005 2004 2005 2004 ------------- ------------ ------------ -------------- ------------ ------------ Anticipated impact over the next twelve months on <S> <C> <C> <C> <C> <C> <C> net interest revenue $ 8,363 $ 9,477 $ (4,124) $ (4,915) $ 4,726 $ 7,750 1.8% 2.2% (0.9)% (1.2)% 1.0% 1.8% - -------------------------------- --------------- ------------ --- ----------- -------------- -- ----------- ------------ </TABLE> Trading Activities BOK Financial enters into trading activities both as an intermediary for customers and for its own account. As an intermediary, BOK Financial will take positions in securities, generally mortgage-backed securities, government agency securities, and municipal bonds. These securities are purchased for resale to customers, which include individuals, corporations, foundations and financial institutions. BOK Financial will also take trading positions in U.S. Treasury securities, mortgage-backed securities, municipal bonds and financial futures for its own account. These positions are taken with the objective of generating trading profits. Both of these activities involve interest rate risk. A variety of methods are used to manage the interest rate risk of trading activities. These methods include daily marking of all positions to market value, independent verification of inventory pricing, and position limits for each trading activity. Hedges in either the futures or cash markets may be used to reduce the risk associated with some trading programs. The Risk Management Department monitors trading activity daily and reports to senior management and the Risk Oversight and Audit Committee of the BOK Financial Board of Directors any exceptions to trading position limits and risk management policy exceptions. Management uses a Value at Risk ("VAR") methodology to measure the market risk inherent in its trading activities. VAR is calculated based upon historical simulations over the past five years using a variance / covariance matrix of interest rate changes. It represents an amount of market loss that is likely to be exceeded only one out of every 100 two-week periods. Trading positions are managed within guidelines approved by the Board of Directors. These
26 guidelines limit the VAR to $1.6 million. At June 30, 2005, the VAR was $65 thousand. The greatest value at risk during the quarter was $736 thousand. Controls and Procedures As required by Rule 13a-15(b), BOK Financial's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by their report, of the effectiveness of the company's disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13a-15(d), BOK Financial's management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the company's internal controls over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the company's internal controls over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report. Forward-Looking Statements This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates, and projections about BOK Financial, the financial services industry and the economy in general. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the provision and reserve for loan losses and valuation of mortgage servicing rights involve judgments as to expected events and are inherently forward-looking statements. Assessments that BOK Financial's acquisitions and other growth endeavors will be profitable are necessary statements of belief as to the outcome of future events, based in part on information provided by others that BOK Financial has not independently verified. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied, or forecasted in such forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to: (1) the ability to fully realize expected cost savings from mergers within the expected time frames, (2) the ability of other companies on which BOK Financial relies to provide goods and services in a timely and accurate manner, (3) changes in interest rates and interest rate relationships, (4) demand for products and services, (5) the degree of competition by traditional and nontraditional competitors, (6) changes in banking regulations, tax laws, prices, levies, and assessments, (7) the impact of technological advances and (8) trends in customer behavior as well as their ability to repay loans. BOK Financial and its affiliates undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events or otherwise.
27 <TABLE> - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------ Consolidated Statements of Earnings (Unaudited) (In Thousands Except Share and Per Share Data) Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 -------------------------------------------------------------------- Interest Revenue <S> <C> <C> <C> <C> Loans $ 132,966 $ 96,440 251,776 193,266 Taxable securities 51,276 49,321 100,632 96,837 Tax-exempt securities 1,782 1,818 3,575 3,638 - ----------------------------------------------------------------------------------------------------------------------------------- Total securities 53,058 51,139 104,207 100,475 - ----------------------------------------------------------------------------------------------------------------------------------- Trading securities 154 201 335 337 Funds sold and resell agreements 156 53 320 92 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest revenue 186,334 147,833 356,638 294,170 - ----------------------------------------------------------------------------------------------------------------------------------- Interest Expense Deposits 47,833 33,807 91,447 66,624 Borrowed funds 22,988 7,107 39,857 15,084 Subordinated debentures 2,980 1,730 5,207 4,066 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest expense 73,801 42,644 136,511 85,774 - ---------------------------------------------------------------------------------------------------------------------------------- Net Interest Revenue 112,533 105,189 220,127 208,396 Provision for Credit Losses 2,015 3,987 4,015 11,014 - ---------------------------------------------------------------------------------------------------------------------------------- Net Interest Revenue After Provision for Credit Losses 110,518 101,202 216,112 197,382 - ---------------------------------------------------------------------------------------------------------------------------------- Other Operating Revenue Brokerage and trading revenue 10,404 11,166 21,740 21,177 Transaction card revenue 17,979 16,817 34,522 31,541 Trust fees and commissions 16,259 13,939 32,275 27,648 Service charges and fees on deposit accounts 25,347 23,928 47,520 46,083 Mortgage banking revenue 8,550 7,555 14,128 15,299 Leasing revenue 669 860 1,342 1,747 Other revenue 7,491 5,774 14,215 12,398 - ---------------------------------------------------------------------------------------------------------------------------------- Total fees and commissions 86,699 80,039 165,742 155,893 - ---------------------------------------------------------------------------------------------------------------------------------- Gain on sales of assets 5,937 35 6,909 719 Gain (loss) on securities, net 2,266 (11,005) (371) (6,728) Gain (loss) on derivatives, net (311) 201 467 (794) - ---------------------------------------------------------------------------------------------------------------------------------- Total other operating revenue 94,591 69,270 172,747 149,090 - ---------------------------------------------------------------------------------------------------------------------------------- Other Operating Expense Personnel 65,333 59,810 123,772 118,019 Business promotion 3,870 3,831 8,300 7,181 Contribution of stock to BOK Charitable Foundation - - - 4,125 Professional fees and services 4,492 3,994 8,111 7,893 Net occupancy and equipment 12,650 11,732 24,744 23,583 Data processing and communications 16,381 15,270 31,480 29,911 Printing, postage and supplies 3,629 3,130 7,244 6,447 Amortization of intangible assets 1,808 2,121 3,345 4,259 Mortgage banking costs 3,387 4,433 7,000 10,276 Provision (recovery) for impairment of mortgage servicing rights 7,088 (10,865) 1,464 (7,162) Other expense 7,372 5,536 12,709 10,908 - ---------------------------------------------------------------------------------------------------------------------------------- Total other operating expense 126,010 98,992 228,169 215,440 - ---------------------------------------------------------------------------------------------------------------------------------- Income Before Taxes 79,099 71,480 160,690 131,032 Federal and state income tax 28,634 25,947 58,170 46,347 - ---------------------------------------------------------------------------------------------------------------------------------- Net Income $ 50,465 $ 45,533 102,520 $84,685 - ---------------------------------------------------------------------------------------------------------------------------------- Earnings Per Share: - ---------------------------------------------------------------------------------------------------------------------------------- Basic $ 0.79 $ 0.76 $ 1.66 $ 1.42 - ---------------------------------------------------------------------------------------------------------------------------------- Diluted $ 0.75 $ 0.68 $ 1.53 $ 1.27 - ---------------------------------------------------------------------------------------------------------------------------------- Average Shares Used in Computation: - ---------------------------------------------------------------------------------------------------------------------------------- Basic 63,779,343 59,146,624 61,618,602 59,098,913 - ---------------------------------------------------------------------------------------------------------------------------------- Diluted 66,986,428 66,719,734 66,967,146 66,688,766 - ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements.
28 <TABLE> - -------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets (In Thousands Except Share Data) June 30, December 31, June 30, 2005 2004 2004 -------------------------------------------------- (Unaudited) (Unaudited) Assets <S> <C> <C> <C> Cash and due from banks $ 653,047 $ 503,715 $ 574,549 Funds sold and resell agreements 27,176 27,376 148,035 Trading securities 10,588 9,692 15,133 Securities: Available for sale 4,311,759 4,080,696 3,925,068 Available for sale securities pledged to creditors 576,207 512,494 646,959 Investment (fair value: June 30, 2005 - $218,181; December 31, 2004 - $222,636; June 30, 2004 - $205,998) 220,401 221,094 205,933 - -------------------------------------------------------------------------------------------------------------------- Total securities 5,108,367 4,814,284 4,777,960 - -------------------------------------------------------------------------------------------------------------------- Loans 8,514,680 7,928,967 7,525,100 Less reserve for loan losses (108,885) (108,618) (114,704) - -------------------------------------------------------------------------------------------------------------------- Loans, net of reserve 8,405,795 7,820,349 7,410,396 - -------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 174,526 172,643 173,798 Accrued revenue receivable 82,868 79,644 76,422 Intangible assets, net 260,279 242,594 246,539 Mortgage servicing rights, net 46,200 45,678 53,000 Real estate and other repossessed assets 5,062 3,763 4,776 Bankers' acceptances 40,949 31,799 18,783 Receivable on unsettled security transactions - 56,873 8,018 Derivative contracts 690,015 380,051 294,900 Other assets 367,603 206,953 199,888 - -------------------------------------------------------------------------------------------------------------------- Total assets $ 15,872,475 $ 14,395,414 $ 14,002,197 - -------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Noninterest-bearing demand deposits $ 1,749,948 $ 1,927,119 $ 1,877,492 Interest-bearing deposits: Transaction 4,277,000 3,947,088 3,892,166 Savings 160,328 156,339 169,826 Time 3,713,530 3,643,852 3,670,825 - -------------------------------------------------------------------------------------------------------------------- Total deposits 9,900,806 9,674,398 9,610,309 - -------------------------------------------------------------------------------------------------------------------- Funds purchased and repurchase agreements 2,123,589 1,555,507 1,497,685 Other borrowings 1,059,694 1,015,000 1,016,327 Subordinated debentures 297,882 151,594 151,538 Accrued interest, taxes and expense 66,026 71,062 49,692 Bankers' acceptances 40,949 31,799 18,783 Due on unsettled security transactions 99,664 - - Derivative contracts 699,637 387,292 307,102 Other liabilities 103,253 110,268 91,686 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 14,391,500 12,996,920 12,743,122 - -------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Preferred stock - 12 12 Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: June 30, 2005 - 67,556,168; December 31, 2004 - 60,420,811; June 30, 2004 - 60,095,270) 4 4 4 Capital surplus 642,605 631,747 618,866 Retained earnings 904,757 809,261 716,049 Treasury stock (shares at cost: June 30, 2005 - 1,101,838; December 31, 2004 - 998,393; June 30, 2004 - 932,223) (35,354) (30,905) (27,892) Accumulated other comprehensive loss (31,037) (11,625) (47,964) - -------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,480,975 1,398,494 1,259,075 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 15,872,475 $ 14,395,414 $ 14,002,197 - -------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements.
29 <TABLE> - --------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (In Thousands) Accumulated Preferred Stock Common Stock Other Treasury Stock ------------------------------------ Comprehensive Capital Retained -------------------- Shares Amount Shares Amount Income(Loss) Surplus Earnings Shares Amount Total --------------------------------------------------------------------------------------------------------- Balances at <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> December 31, 2003 250,000 $ 12 58,056 $ 4 $ 8,459 $546,594 $698,052 849 $(24,491) $1,228,630 Comprehensive income: Net income - - - - - - 84,685 - - 84,685 Other comprehensive income, net of tax (1) - - - - (56,423) - - - - (56,423) ---------- Comprehensive income 28,262 ---------- Exercise of stock options - - 290 - - 4,813 - 56 (2,362) 2,451 Conversion of preferred stock to common (13) - - - - - - - - - Tax benefit on exercise of stock options - - - - - 1,263 - - - 1,263 Stock-based compensation - - - - - (742) - - - (742) Cash dividends on preferred stock - - - - - - (750) - - (750) Dividends paid in shares of common stock: Common stock - - 1,749 - - 66,938 (65,938) 27 (1,039) (39) - ---------------------------------------------------------------------------------------------------------------------------------- Balances at June 30, 2004 249,987 $ 12 60,095 $ 4 $ (47,964) $618,866 $716,049 932 $(27,892) $1,259,075 - ---------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2004 249,975 $ 12 60,421 $ 4 $ (11,625) $631,747 $809,261 998 $(30,905) $1,398,494 Comprehensive income: Net income - - - - - - 102,520 - - 102,520 Other comprehensive income, net of tax (1) - - - - (19,412) - - - - (19,412) ---------- Comprehensive income 83,108 ---------- Treasury stock purchase - - - - - - - 60 (2,439) (2,439) Exercise of stock options - - 214 - - 5,242 - 44 (2,010) 3,232 Conversion of preferred stock to common (249,975) (12) 6,921 - - 12 - - - - Tax benefit on exercise of stock options - - - - - 1,005 - - - 1,005 Stock-based compensation - - - - - 4,599 - - - 4,599 Cash dividends on: Preferred stock - - - - - - (375) - - (375) Common stock - - - - - - (6,649) - - (6,649) - ---------------------------------------------------------------------------------------------------------------------------------- Balances at June 30, 2005 - $ - 67,556 $ 4 $ (31,037) $ 642,605 $ 904,757 1,102 $(35,354) $1,480,975 - ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> (1) June 30, 2005 June 30, 2004 ------------- ------------- Changes in other comprehensive income: Unrealized losses on securities $ (29,291) $ (94,126) Unrealized losses on cash flow hedges (1,507) - Tax benefit on unrealized losses 11,149 33,592 Reclassification adjustment for losses realized and included in net income 371 6,728 Reclassification adjustment for tax benefit on realized losses (134) (2,617) ------------------------------- Net change in other comprehensive income (loss) $ (19,412) $ (56,423) ------------------------------- See accompanying notes to consolidated financial statements.
30 <TABLE> - -------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flows (Unaudited) (In Thousands) Six Months Ended June 30, -------------------------------------- 2005 2004 -------------------------------------- Cash Flows From Operating Activities: <S> <C> <C> Net income $ 102,520 $ 84,685 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 4,015 11,014 Provision (recovery) for mortgage servicing rights impairment 1,464 (7,162) Unrealized losses from derivatives 6,405 12,894 Stock-based compensation 1,392 3,667 Tax benefit on exercise of stock options 1,005 1,263 Depreciation and amortization 21,709 25,376 Net (accretion) amortization of securities discounts and premiums (390) (3,164) Net (gain) loss on sale of assets (12,682) 68 Mortgage loans originated for resale (336,291) (355,981) Proceeds from sale of mortgage loans held for resale 286,895 371,224 Change in trading securities (896) (7,310) Change in accrued revenue receivable (3,224) (1,442) Change in other assets (17,901) (22,502) Change in accrued interest, taxes and expense (5,036) (35,717) Change in other liabilities (6,769) 8,477 - -------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 42,216 85,390 - -------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Proceeds from maturities of investment securities 36,969 39,696 Proceeds from maturities of available for sale securities 484,713 556,393 Purchases of investment securities (36,279) (57,797) Purchases of available for sale securities (1,780,288) (2,188,475) Proceeds from sales of available for sale securities 969,184 1,484,216 Loans originated or acquired net of principal collected (612,790) (118,164) Proceeds from (payments on) derivative asset contracts 2,661 (82,039) Net change in other investment assets 31,442 4,525 Proceeds from disposition of assets 83,664 59,250 Purchases of assets (21,310) (16,897) Cash and cash equivalents of subsidiaries and branches acquired and sold, net (29,093) - - -------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (871,127) (319,292) - -------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net change in demand deposits, transaction deposits and savings accounts 156,730 94,347 Net change in time deposits 71,138 296,099 Net change in other borrowings 707,776 (112,306) Pay down of other borrowings (95,000) - Issuance of subordinated debenture 147,855 - Proceeds from (payments on) derivative liability contracts (8,145) 81,121 Net change in derivative margin accounts (152,617) (32,072) Change in amount receivable (due) on unsettled security transactions 156,537 (16,277) Issuance of preferred, common and treasury stock, net 3,232 2,451 Repurchase of common stock (2,439) - Dividends paid (7,024) (789) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 978,043 312,574 - -------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents 149,132 78,672 Cash and cash equivalents at beginning of period 531,091 643,912 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 680,223 $ 722,584 - -------------------------------------------------------------------------------------------------------------------- Cash paid for interest $ 134,720 $ 87,400 - -------------------------------------------------------------------------------------------------------------------- Cash paid for taxes $ 54,334 $ 44,586 - -------------------------------------------------------------------------------------------------------------------- Net loans transferred to repossessed real estate and other assets $ 4,494 $ 2,219 - -------------------------------------------------------------------------------------------------------------------- Payment of dividends in common stock $ - $ 65,899 </TABLE> See accompanying notes to consolidated financial statements.
31 Notes to Consolidated Financial Statements (Unaudited) (1) Accounting Policies Basis of Presentation The unaudited consolidated financial statements of BOK Financial Corporation ("BOK Financial") have been prepared in accordance with accounting principles for interim financial information generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The unaudited consolidated financial statements include the accounts of BOK Financial and its subsidiaries, principally Bank of Oklahoma, N.A. and its subsidiaries ("BOk"), Bank of Texas, N.A., Bank of Arkansas, N.A., Bank of Albuquerque, N.A., Colorado State Bank and Trust, N.A., Bank of Arizona, N.A., and BOSC, Inc. Certain prior period amounts have been reclassified to conform to current period classifications. The financial information should be read in conjunction with BOK Financial's 2004 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. (2) Acquisitions BOK Financial acquired all of the outstanding common stock of Valley Commerce Bancorp, Ltd. ("VCB") for $32.0 million in cash effective April 6, 2005. VCB and its wholly-owned subsidiary, Valley Commerce Bank, had total assets of $143 million, including loans of $93 million, total deposits of $110 million, and total shareholders' equity of $12.7 million. A preliminary allocation of the purchase price to the net assets acquired is as follows (in thousands): Cash and cash equivalents $ 2,921 Securities 35,355 Loans 92,821 Less reserve for loan losses (1,072) ---------------- Loans, net of reserve 91,749 Premises and equipment, net 500 Core deposit premium 4,380 Other assets 10,834 ---------------- Total assets acquired 145,739 ---------------- Deposits 110,217 Other borrowings 18,155 Other liabilities 2,003 ---------------- Net assets acquired 15,364 Less purchase price 32,014 ---------------- Goodwill $ 16,650 ---------------- Effective August 12, 2005, Valley Commerce Bank will be renamed Bank of Arizona, N.A. Statement of Position 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer" ("SOP 03-3") was issued by the American Institute of Certified Public Accountants and is effective for loans acquired in fiscal years beginning after December 15, 2004. SOP 03-3 addresses accounting for differences between contractual cash flows and expected cash flows from loans or securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. The Company has recorded its acquisition of Valley Commerce in accordance with SOP 03-3 and other applicable accounting standards. We are continuing to review industry trends and regulatory guidance in the application of SOP 03-3, but do not expect any material adjustment to the reserve for loan losses.
32 (3) Derivatives The fair values of derivative contracts at June 30, 2005 were (in thousands): Assets Liabilities ---------------------------- Customer Risk Management Programs: Interest rate contracts $13,047 $13,544 Energy contracts 664,066 664,961 Cattle contracts 893 570 Foreign exchange contracts 11,496 11,496 - -------------------------------------------------------------------------- Total Customer Derivatives 689,502 690,571 Interest Rate Risk Management Programs: Interest rate risk management 513 9,066 - -------------------------------------------------------------------------- Total Derivative Contracts $ 690,015 $699,637 - -------------------------------------------------------------------------- (4) Mortgage Banking Activities At June 30, 2005, BOK Financial owned the rights to service 54,911 mortgage loans with outstanding principal balances of $4.5 billion, including $628 million serviced for affiliates. The weighted average interest rate and remaining term was 6.19% and 272 months, respectively. Activity in capitalized mortgage servicing rights and related valuation allowance during the six months ending June 30, 2005 is as follows (in thousands): <TABLE> Capitalized Mortgage Servicing Rights --------------------------------------------------------------------------- Valuation Purchased Originated Total Allowance Net --------------------------------------------------------------------------- Balance at <S> <C> <C> <C> <C> <C> December 31, 2004 $ 11,394 $ 48,056 $ 59,450 $ (13,772) $ 45,678 Additions, net - 8,128 8,128 - 8,128 Amortization expense (1,510) (4,632) (6,142) - (6,142) Provision for impairment - - - (1,464) (1,464) - ----------------------------------------------------------------------------------------------------------- Balance at June 30, 2005 $ 9,884 $ 51,552 $ 61,436 $ (15,236) $ 46,200 - ----------------------------------------------------------------------------------------------------------- Estimated fair value of mortgage servicing rights (1) $ 7,973 $ 38,524 $ 46,497 - $ 46,497 - ----------------------------------------------------------------------------------------------------------- (1) Excludes approximately $921,000 of loan servicing rights on mortgage loans originated prior to the adoption of FAS 122. </TABLE> Stratification of the mortgage loan servicing portfolio and outstanding principal of loans serviced by interest rate at June 30, 2005 follows (in thousands): <TABLE> < 5.51% 5.51% - 6.50% 6.51% - 7.50% => 7.50% Total <S> <C> <C> <C> <C> <C> Cost less accumulated amortization $ 14,497 $ 27,808 $ 14,638 $ 4,493 $ 61,436 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- Fair value $ 12,533 $ 20,467 $ 9,692 $ 3,805 $ 46,497 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- Impairment (2) $ 2,116 $ 7,087 $ 4,948 $ 1,085 $ 15,236 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- Outstanding principal of loans serviced (1)$ 972,900 $ 1,627,500 $ 869,400 $ 303,000 $ 3,772,800 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- (1) Excludes outstanding principal of $628 million for loans serviced for affiliates and $75 million of mortgage loans for which there are no capitalized mortgage servicing rights. (2) Impairment is determined by both an interest rate and loan type stratification. </TABLE>
33 (5) Disposal of Available for Sale Securities Sales of available for sale securities resulted in gains and losses as follows (in thousands): Six Months Ended June 30, ---------------------------------- 2005 2004 -------------- --------------- Proceeds $ 969,184 $ 1,484,216 Gross realized gains 4,768 5,123 Gross realized losses (5,139) 11,851 Related federal and state income tax benefit (134) (2,617) (6) Employee Benefits BOK Financial sponsors a defined benefit Pension Plan for all employees who satisfy certain age and service requirements. The following table presents components of net periodic pension cost (dollars in thousands): <TABLE> Three Months Ended June 30, Six Months Ended June 30, --------------------------------------------------------------------- 2005 2004 2005 2004 --------------------------------------------------------------------- <S> <C> <C> <C> <C> Service cost $ 1,744 $ 1,563 $ 3,488 $ 3,240 Interest cost 632 579 1,264 1,158 Expected return on plan assets (1,053) (912) (2,106) (1,814) Amortization of prior service cost 15 15 30 30 Amortization of net (gain) loss 274 265 548 530 - -------------------------------------------------------------------------------------------------------------- Net periodic pension cost $ 1,612 $ 1,510 $ 3,224 $ 3,144 - -------------------------------------------------------------------------------------------------------------- </TABLE> During the second quarter of 2005, the Company made Pension Plan contributions totaling $1.3 million, which funded the remaining maximum contribution for 2004 permitted under applicable regulations. The Company made no other Pension Plan contributions during the first half of 2005. Management has been advised that no minimum contribution will be required for 2005. The maximum allowable contribution is expected to be approximately $8.5 million. (7) Shareholders' Equity On July 26, 2005, the Board of Directors of BOK Financial Corporation approved a $0.10 per share quarterly common stock dividend. The quarterly dividend will be payable on or about August 31, 2005 to shareholders of record on August 12, 2005. During the second quarter of 2005, all outstanding shares of Series A Preferred Stock were converted into shares of BOK Financial common stock. A total of 6,920,666 shares of BOK Financial common stock were issued.
34 (8) Earnings Per Share The following table presents the computation of basic and diluted earnings per share (dollars in thousands, except share data): <TABLE> Three Months Ended Six Months Ended ----------------------------------------------------- June 30, June 30, June 30, June 30, 2005 2004 2005 2004 ----------------------------------------------------- Numerator: <S> <C> <C> <C> <C> Net income $ 50,465 $ 45,533 $ 102,520 $ 84,685 Preferred stock dividends - (375) (375) (750) - --------------------------------------------------------------------------------------------------------------- Numerator for basic earnings per share - income available to common shareholders 50,465 45,158 102,145 83,935 - --------------------------------------------------------------------------------------------------------------- Effect of dilutive securities: Preferred stock dividends - 375 375 750 - --------------------------------------------------------------------------------------------------------------- Numerator for diluted earnings per share - income available to common shareholders after assumed conversion $ 50,465 $ 45,533 $ 102,520 $ 84,685 - --------------------------------------------------------------------------------------------------------------- Denominator: Denominator for basic earnings per share - weighted average shares 63,779,343 59,146,624 61,618,602 59,098,913 Effect of dilutive securities: Employee stock compensation plans (1) 621,341 620,203 607,313 637,490 Convertible preferred stock 2,585,744 6,927,178 4,741,231 6,927,289 Tanglewood market value guarantee - 25,729 - 25,074 - --------------------------------------------------------------------------------------------------------------- Dilutive potential common shares 3,207,085 7,573,110 5,348,544 7,589,853 - --------------------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 66,986,428 66,719,734 66,967,146 66,688,766 - --------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 0.79 $ 0.76 $ 1.66 $ 1.42 - --------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 0.75 $ 0.68 $ 1.53 $ 1.27 - --------------------------------------------------------------------------------------------------------------- <FN> (1) Excludes employee stock options with exercise prices greater than current market price. 897,170 - 877,184 - </FN> </TABLE>
35 (9) Reportable Segments Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2005 is as follows (in thousands): <TABLE> Net Other Other Interest Operating Operating Net Average Revenue Revenue(1) Expense Income Assets ---------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 208,375 $ 174,202 $ 227,909 $ 93,630 $ 15,425,553 Unallocated items: Tax-equivalent adjustment 2,501 - - 2,501 - Funds management 14,412 (611) 1,395 4,197 1,638,074 All others (including eliminations), net (5,161) (940) (1,135) 2,192 (2,080,950) ---------------------------------------------------------------------------- BOK Financial consolidated $ 220,127 $ 172,651 $ 228,169 $ 102,520 $ 14,982,677 ============================================================================ </TABLE> (1) Excluding financial instruments gains/(losses). Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2004 is as follows (in thousands): <TABLE> Net Other Other Interest Operating Operating Net Average Revenue Revenue(1) Expense Income Assets --------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 181,948 $ 157,784 $ 205,545 $ 71,727 $ 14,229,954 Unallocated items: Tax-equivalent adjustment 2,286 - - 2,286 - Funds management 31,629 (1,217) 3,169 11,738 1,522,003 All others (including eliminations), (7,467) 45 6,726 (1,066) (2,034,594) net --------------------------------------------------------------------------- BOK Financial consolidated $ 208,396 $ 156,612 $ 215,440 $ 84,685 $ 13,717,363 =========================================================================== </TABLE> (1) Excluding financial instruments gains/(losses). (10) Contingent Liabilities In the ordinary course of business, BOK Financial and its subsidiaries are subject to legal actions and complaints. Management believes, based upon the opinion of counsel, that the actions and liability or loss, if any, resulting from the final outcomes of the proceedings, will not be material in the aggregate.
36 (11) 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, 2005, outstanding commitments and letters of credit were as follows (in thousands): June 30, 2005 -------------- Commitments to extend credit $ 3,761,084 Standby letters of credit 469,877 Commercial letters of credit 9,763 Commitments to purchase securities 58,480
37 <TABLE> - ------------------------------------------------------------------------------------------------------------------------------ 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, 2005 June 30, 2004 ----------------------------------------- -------------------------------------- Average Revenue/ Yield Average Revenue/ Yield Balance Expense(1) /Rate Balance Expense(1) /Rate ------------------------------------------------------------------------------------ Assets <S> <C> <C> <C> <C> <C> <C> Taxable securities (3) $ 4,730,054 $ 100,631 4.32% $ 4,631,025 $ 96,837 4.22% Tax-exempt securities (3) 216,460 5,653 5.27 197,094 5,770 5.89 - ------------------------------------------------------------------------------------------------------------------------------ Total securities (3) 4,946,514 106,284 4.36 4,828,119 102,607 4.29 - ------------------------------------------------------------------------------------------------------------------------------ Trading securities 14,407 356 4.98 19,506 445 4.59 Funds sold and resell agreements 25,562 320 2.52 12,140 92 1.52 Loans (2) 8,153,378 252,179 6.24 7,521,485 193,312 5.17 Less reserve for loan losses 111,300 - - 117,701 - - - ------------------------------------------------------------------------------------------------------------------------------ Loans, net of reserve 8,042,078 252,179 6.32 7,403,784 193,312 5.25 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets (3) 13,028,561 359,139 5.57 12,263,549 296,456 4.87 - ------------------------------------------------------------------------------------------------------------------------------ Cash and other assets 1,954,116 1,453,814 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 14,982,677 $ 13,717,363 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities And Shareholders' Equity Transaction deposits $ 4,123,291 29,678 1.45% $ 3,839,843 15,458 0.81% Savings deposits 162,871 534 0.66 174,262 478 0.55 Time deposits 3,697,867 61,235 3.34 3,480,555 50,688 2.93 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 7,984,029 91,447 2.31 7,494,660 66,624 1.79 - ------------------------------------------------------------------------------------------------------------------------------ Funds purchased and repurchase agreements 1,933,438 25,954 2.71 1,620,822 7,695 0.95 Other borrowings 943,135 13,903 2.97 1,010,143 7,389 1.47 Subordinated debenture 175,531 5,207 5.98 153,487 4,066 5.33 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 11,036,133 136,511 2.49 10,279,112 85,774 1.68 - ------------------------------------------------------------------------------------------------------------------------------ Demand deposits 1,740,263 1,721,443 Other liabilities 780,363 453,820 Shareholders' equity 1,425,918 1,262,988 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 14,982,677 $ 13,717,363 - ------------------------------------------------------------------------------------------------------------------------------ Tax-Equivalent Net Interest Revenue (3) 222,628 3.08% 210,682 3.19% Tax-Equivalent Net Interest Revenue To Earning Assets (3) 3.45 3.46 Less tax-equivalent adjustment (1) 2,501 2,286 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Revenue 220,127 208,396 Provision for credit losses 4,015 11,014 Other operating revenue 172,747 149,090 Other operating expense 228,169 215,440 - ------------------------------------------------------------------------------------------------------------------------------ Income Before Taxes 160,690 131,032 Federal and state income tax 58,170 46,347 - ------------------------------------------------------------------------------------------------------------------------------ Net Income $ 102,520 $ 84,685 - ------------------------------------------------------------------------------------------------------------------------------ Earnings Per Average Common Share Equivalent: Net Income: Basic $ 1.66 $ 1.42 - ------------------------------------------------------------------------------------------------------------------------------ Diluted $ 1.53 $ 1.27 - ------------------------------------------------------------------------------------------------------------------------------ </TABLE> (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.
38 <TABLE> - ------------------------------------------------------------------------------------------------------------------------------ Quarterly Financial Summary - Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands, Except Per Share Data) Three Months Ended ------------------------------------------------------------------------------------- June 30, 2005 March 31, 2005 ------------------------------------------ ------------------------------------- Average Revenue/ Yield / Average Revenue/ Yield / Balance Expense(1) Rate Balance Expense(1) Rate ------------------------------------------------------------------------------------- Assets <S> <C> <C> <C> <C> <C> <C> Taxable securities (3) $ 4,831,186 $ 51,275 4.32% $ 4,628,233 $ 49,356 4.32% Tax-exempt securities (3) 215,360 2,810 5.23 217,571 2,843 5.30 - ------------------------------------------------------------------------------------------------------------------------------ Total securities (3) 5,046,546 54,085 4.36 4,845,804 52,199 4.36 - ------------------------------------------------------------------------------------------------------------------------------ Trading securities 11,639 165 5.69 17,205 191 4.50 Funds sold and resell agreements 21,170 156 2.96 30,003 164 2.22 Loans (2) 8,341,490 133,173 6.40 7,963,177 119,006 6.06 Less reserve for loan losses 111,056 - - 111,955 - - - ------------------------------------------------------------------------------------------------------------------------------ Loans, net of reserve 8,230,434 133,173 6.49 7,851,222 119,006 6.15 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets (3) 13,309,789 187,579 5.68 12,744,234 171,560 5.46 - ------------------------------------------------------------------------------------------------------------------------------ Cash and other assets 2,084,745 1,808,680 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 15,394,534 $ 14,552,914 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities And Shareholders' Equity Transaction deposits $ 4,323,513 $ 16,049 1.49% $ 3,920,844 $ 13,629 1.41% Savings deposits 166,426 285 0.69 159,276 249 0.63 Time deposits 3,710,338 31,499 3.41 3,685,257 29,736 3.27 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 8,200,277 47,833 2.34 7,765,377 43,614 2.28 - ------------------------------------------------------------------------------------------------------------------------------ Funds purchased and repurchase agreements 2,160,031 15,764 2.93 1,704,327 10,190 2.42 Other borrowings 914,968 7,224 3.17 971,616 6,679 2.79 Subordinated debenture 200,038 2,980 5.98 150,752 2,227 5.99 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 11,475,314 73,801 2.58 10,592,072 62,710 2.40 - ------------------------------------------------------------------------------------------------------------------------------ Demand deposits 1,586,248 1,895,989 Other liabilities 892,714 653,434 Shareholders' equity 1,440,258 1,411,419 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' $ 15,394,534 $ 14,552,914 equity - ------------------------------------------------------------------------------------------------------------------------------ Tax-Equivalent Net Interest Revenue (3) $ 113,778 3.10% $ 108,850 3.06% Tax-Equivalent Net Interest Revenue To Earning Assets (3) 3.45 3.46 Less tax-equivalent adjustment (1) 1,245 1,256 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Revenue 112,533 107,594 Provision for credit losses 2,015 2,000 Other operating revenue 94,591 78,156 Other operating expense 126,010 102,159 - ------------------------------------------------------------------------------------------------------------------------------ Income before taxes 79,099 81,591 Federal and state income tax 28,634 29,536 - ------------------------------------------------------------------------------------------------------------------------------ Net Income $ 50,465 $ 52,055 - ------------------------------------------------------------------------------------------------------------------------------ Earnings Per Average Common Share Equivalent: Net income: Basic $ 0.79 $ 0.87 - ------------------------------------------------------------------------------------------------------------------------------ Diluted $ 0.75 $ 0.78 - ------------------------------------------------------------------------------------------------------------------------------ </TABLE> (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.
39 <TABLE> - ------------------------------------------------------------------------------------------------------------------------- Three Months Ended - ------------------------------------------------------------------------------------------------------------------------- December 31, 2004 September 30, 2004 June 30, 2004 - ------------------------------------------------------------------------------------------------------------------------- Average Revenue/ Yield / Average Revenue/ Yield / Average Revenue/ Yield / Balance Expense(1) Rate Balance Expense(1) Rate Balance Expense(1) Rate - ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> $ 4,709,193 $ 50,200 4.25% $ 4,652,435 $ 50,847 4.34% $ 4,667,360 $ 49,321 4.24% 219,873 2,951 5.37 215,190 2,951 5.46 200,380 2,884 5.79 - ------------------------------------------------------------------------------------------------------------------------- 4,929,066 53,151 4.30 4,867,625 53,798 4.39 4,867,740 52,205 4.30 - ------------------------------------------------------------------------------------------------------------------------- 10,208 107 4.17 14,956 77 2.05 23,513 219 3.75 31,994 170 2.11 23,334 91 1.55 16,284 53 1.31 7,873,974 111,292 5.62 7,656,588 104,181 5.41 7,548,257 96,445 5.14 114,106 - - 115,504 - - 117,109 - - - ------------------------------------------------------------------------------------------------------------------------- 7,759,868 111,292 5.71 7,541,084 104,181 5.50 7,431,148 96,445 5.22 - ------------------------------------------------------------------------------------------------------------------------- 12,731,136 164,720 5.15 12,446,999 158,147 5.05 12,338,685 148,922 4.85 - ------------------------------------------------------------------------------------------------------------------------- 1,858,345 1,630,890 1,529,841 - ------------------------------------------------------------------------------------------------------------------------- $ 14,589,481 $ 14,077,889 $ 13,868,526 - ------------------------------------------------------------------------------------------------------------------------- $ 3,841,742 $ 10,779 1.12% $ 3,931,166 $ 9,280 0.94% $ 3,859,706 $ 7,875 0.82% 160,404 231 0.57 169,398 266 0.62 173,566 235 0.54 3,662,455 29,586 3.21 3,712,161 27,667 2.97 3,565,324 25,697 2.90 - ------------------------------------------------------------------------------------------------------------------------- 7,664,601 40,596 2.11 7,812,725 37,213 1.89 7,598,596 33,807 1.79 - ------------------------------------------------------------------------------------------------------------------------- 1,747,391 8,397 1.91 1,458,245 5,048 1.38 1,565,922 3,731 0.96 1,005,679 5,703 2.26 1,003,050 4,615 1.83 1,009,871 3,376 1.34 152,634 1,929 5.03 152,333 1,766 4.61 152,799 1,730 4.55 - ------------------------------------------------------------------------------------------------------------------------- 10,570,305 56,625 2.13 10,426,353 48,642 1.86 10,327,188 42,644 1.66 - ------------------------------------------------------------------------------------------------------------------------- 1,938,205 1,839,311 1,799,249 712,981 516,715 466,981 1,367,990 1,295,510 1,275,108 - ------------------------------------------------------------------------------------------------------------------------- $ 14,589,481 $ 14,077,889 $ 13,868,526 - ------------------------------------------------------------------------------------------------------------------------- $ 108,095 3.02% $ 109,505 3.19% $ 106,278 3.19% 3.38 3.50 3.46 1,633 1,120 1,089 - ------------------------------------------------------------------------------------------------------------------------- 106,462 108,385 105,189 4,439 4,986 3,987 78,714 81,086 69,270 111,582 114,202 98,992 - ------------------------------------------------------------------------------------------------------------------------- 69,155 70,283 71,480 22,599 22,501 25,947 - ------------------------------------------------------------------------------------------------------------------------- $ 46,556 $ 47,782 $ 45,533 - ------------------------------------------------------------------------------------------------------------------------- $ 0.78 $ 0.79 $ 0.76 - ------------------------------------------------------------------------------------------------------------------------- $ 0.70 $ 0.72 $ 0.68 - ------------------------------------------------------------------------------------------------------------------------- </TABLE>
40 PART II. Other Information Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table provides information with respect to purchases made by or on behalf of the Company or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company's common stock during the three months ended June 30, 2005. <TABLE> - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- 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 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- <S> <C> <C> <C> <C> April 1, 2005 to 30,504 $ 41.69 30,000 1,970,000 April 30, 2005 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- - May 1, 2005 to 15,128 $ 43.47 1,970,000 May 31, 2005 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- - June 1, 2005 to 2,658 $ 45.02 1,970,000 June 30, 2005 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- Total 48,290 30,000 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- </TABLE> (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, 2005, the Company had repurchased 30,000 shares under the new plan. (2) The Company routinely repurchases mature shares from employees to cover the exercise price and taxes in connection with employee stock option exercises. Item 6. Exhibits 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Items 1, 3, 4, and 5 are not applicable and have been omitted.
41 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BOK FINANCIAL CORPORATION (Registrant) Date: August 9, 2005 /s/ Steven E. Nell --------------------------- --------------------------------- Steven E. Nell Executive Vice President and Chief Financial Officer /s/ John C. Morrow --------------------------------- John C. Morrow Senior Vice President and Director of Financial Accounting & Reporting