As filed with the Securities and Exchange Commission on November 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 September 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: 66,556,728 shares of common stock ($.00006 par value) as of October 31, 2005. ===============================================================================
2 BOK Financial Corporation Form 10-Q Quarter Ended September 30, 2005 Index Part I. Financial Information Management's Discussion and Analysis (Item 2) 2 Market Risk (Item 3) 26 Controls and Procedures (Item 4) 28 Consolidated Financial Statements - Unaudited (Item 1) 29 Nine Month Financial Summary - Unaudited (Item 2) 39 Quarterly Financial Summary - Unaudited (Item 2) 40 Part II. Other Information Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42 Item 6. Exhibits 42 Signatures 43 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 $50.8 million, or $0.76 per diluted share for the third quarter of 2005, compared with $47.8 million, or $0.72 per diluted share for the third quarter of 2004. The annualized returns on average assets and shareholders' equity were 1.29% and 13.56%, respectively for the third quarter of 2005, compared with returns of 1.37% and 14.67%, respectively for the same period in 2004. Return on average assets decreased due to increases in the fair value of derivatives and related margin assets. These assets increased $693 million with no commensurate increase in net income. The increase in net income was attributed primarily to growth in fees and commission revenue and a reduction in the provision for credit losses. Revenue growth was partially offset by increased operating expenses. Net interest revenue increased $4.4 million or 4% over the third quarter of 2004 due primarily to loan growth. Average outstanding loan balances for the third quarter of 2005 increased $979 million or 13% compared with the same period of 2004. This loan growth was funded primarily with short-term borrowings. Growth in short-term borrowings as a funding source and pricing spread compression for loans and deposits reduced the Company's net interest margin to 3.32% for the third quarter of 2005. Fees and commissions revenue increased $12.1 million or 15% due primarily to growth in mortgage banking revenue, transaction card revenue, and fees earned on margin assets. The provision for credit losses decreased $1.0 million compared to the third quarter of the previous year. Operating expenses, excluding the provision for impairment of mortgage servicing rights increased $13.4 million or 12% due primarily to growth in personnel costs. The increase in operating expenses includes $1.9 million for Bank of Arizona, which was acquired in the second quarter of 2005. The value of mortgage servicing rights appreciated due to a 50 basis point increase in mortgage commitment rates since the start of the third quarter, which resulted in a $4.7 million recovery of impaired servicing rights. The increased value of servicing rights during the third quarter of 2005 was more than offset by losses on financial instruments held as an economic hedge of the servicing rights. The provision for mortgage servicing rights, net of gains or losses on hedge securities was $376 thousand in the third quarter of 2005 compared with $3.8 million in the third quarter of 2004. Year-to-date net income for 2005 totaled $153.3 million or $2.29 per diluted share compared with net income of $132.5 million or $1.99 per diluted share for the first nine months of 2004. The increase in net income was attributed primarily to a $16.2 million increase in net interest revenue and a $21.9 million increase in fees and commission revenue, combined with an $8.0 million reduction in the provision for credit losses. Operating expenses, excluding provision for mortgage servicing rights, increased $17.5 million.
3 Results of Operations Net Interest Revenue Tax-equivalent net interest revenue totaled $114.1 million for the third quarter of 2005 compared with $109.5 million for 2004. The 4% growth in net interest revenue was due primarily to a $1.2 billion increase in average earning assets. Growth in average earning assets included a $979 million, or 13%, increase in loans and a $164 million increase in securities. Growth in earning assets was funded primarily by a $609 million, or 42% increase in short-term borrowings and a $423 million, or 4% growth in deposits. Net interest margin, the ratio of tax-equivalent net interest revenue to average earning assets was 3.32% for the third quarter of 2005, compared with 3.45% for the second quarter of 2005 and 3.50% for the third quarter of 2004. 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 5.83%, up 15 basis points compared with the second quarter of 2005 and 78 basis points over the third quarter of 2004. Average loan yields were 6.66%, an increase of 26 basis points over the preceding quarter of 2005 and 125 basis points over the third quarter of 2004. The tax-equivalent yield on securities was 4.31% for the third quarter of 2005, 4.36% for the second quarter of 2005 and 4.39% for the third quarter of 2004. Rates paid on average interest-bearing liabilities during the third quarter of 2005 increased 26 basis points over the preceding quarter of 2005 and 98 basis points over the same period of 2004. The cost of interest-bearing deposits increased 16 basis points to 2.50% compared with the second quarter of 2005 while the cost of short-term borrowings increased 47 basis points. Growth in short-term borrowings as a funding source limited the growth in net interest revenue and reduced net interest margin for the third quarter. Short-term borrowings comprised 20% of all funding sources during the second and third quarters of 2005, compared with 18% for the third quarter of 2004. This shift in funding sources resulted from a $673 million increase in average loans over the second and third quarters of 2005 and reduced net interest margin by eight basis points. The lending relationships generally are the foundation for sales of other financial products and services. Rapid loan growth during the third quarter of 2005 was funded with short-term borrowings which have been more readily accessible than deposits. Although this strategy reduces net interest margin, the resulting relationship growth is expected to enhance long-term value for the Company. Cash margin balances are required to be placed with various parties as part of the Company's customer derivatives business. Margin assets, which are included in other assets, averaged $296 million during the third quarter of 2005, compared with $204 million in the second quarter of 2005 and $96 million in the third quarter of 2004. Fees earned on these assets totaled $2.4 million in the third quarter of 2005, $1.3 million in the second quarter of 2005, and $231 thousand in the third quarter of 2004. These fees are reported as other operating revenue. Fees from customer derivatives have generated significant revenue growth, but the associated growth in margin assets has reduced net interest margin by three basis points. The Company's overall objective is to manage the 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. Derivative instruments are also used to manage interest rate risk. Interest rate swaps with a combined notional amount of $642 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
4 rates as shown in Table 1 and in the interest rate sensitivity projections as shown in the 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. <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 1 - Volume / Rate Analysis (In thousands) Three Months Ended Nine Months Ended September 30, 2005 / 2004 September 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 $ 1,036 $ 1,939 $ (903) $ 4,713 $ 4,158 $ 555 Trading securities 94 (3) 97 5 (114) 119 Loans 40,773 15,055 25,718 99,640 32,445 67,195 Funds sold and resell agreements 295 135 160 523 271 252 - --------------------------------------------------------------------------------------------------------------------- Total 42,198 17,126 25,072 104,881 36,760 68,121 - --------------------------------------------------------------------------------------------------------------------- Interest expense: Transaction deposits 9,688 1,995 7,693 23,908 3,462 20,446 Savings deposits 14 (19) 33 70 (54) 124 Time deposits 7,588 2,064 5,524 18,135 5,363 12,772 Federal funds purchased and repurchase agreements 12,690 3,685 9,005 30,949 6,222 24,727 Other borrowings 4,895 316 4,579 11,409 (539) 11,948 Subordinated debentures 2,711 1,935 776 3,852 2,624 1,228 - --------------------------------------------------------------------------------------------------------------------- Total 37,586 9,976 27,610 88,323 17,078 71,245 - --------------------------------------------------------------------------------------------------------------------- Tax-equivalent net interest revenue 4,612 7,150 (2,538) 16,558 19,682 (3,124) Change in tax-equivalent adjustment (169) (384) - --------------------------------------------------------------------------------------------------------------------- Net interest revenue $ 4,443 $ 16,174 - --------------------------------------------------------------------------------------------------------------------- (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 $5.8 million compared with the third quarter of 2004 due primarily to growth in fees and commission revenue. Fees and commission revenue increased $12.1 million or 15%. Diversified sources of fees and commission revenue are a significant part of the Company's business strategy and represented 45% of total revenue, excluding gains and losses on securities, derivatives and asset sales, for the third quarter of 2005. 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. Growth in fees and commissions revenue was partially offset by net losses on securities and derivative instruments. These losses were primarily incurred on securities held as an economic hedge against changes in value of mortgage servicing rights. Fees and commissions revenue Brokerage and trading revenue increased $1.2 million or 11%. Revenue from securities trading activities grew $845 thousand, or 15% due to fixed-income securities trading volumes. The remainder of the increase came from customer hedging revenue. Transaction card revenue increased $1.8 million or 11% due to growth in check card revenue and merchant discount fees. Check card fees increased 32% to $4.1 million. All markets contributed to this growth. Merchant discount fees increased 14% to $6.7 million due primarily to growth in Oklahoma. Trust fees increased $1.3 million or 9% for the third 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 $27.6 billion at September 30, 2005 compared with $23.3 billion at September 30, 2004.
5 Service charges on deposit accounts grew $1.3 million or 5% compared with the third quarter of 2004. Overdraft fees grew 17% or $2.5 million. The volume of overdraft items processed continued to increase during the third quarter. Additionally, the per item overdraft charge was increased during the second quarter of 2005. Account service charge revenue decreased $1.1 million or 11%. 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. Mortgage banking revenue, which is discussed more fully in the Line of Business - - Mortgage Banking section of this report, increased $2.9 million, or 44%, compared with the third quarter of 2004. Net gains on mortgage loans sold increased $3.2 million due to an increase in the volume of loans funded and sold. Servicing revenue decreased $279 thousand due to a decrease in the average outstanding balance of loans serviced. Other revenue for the third quarter of 2005 included $2.0 million of the fees earned on margin accounts. BOK Financial is required to deposit margin funds with other institutions as part of its customer derivatives and trading programs. Margin deposits, which are included in other assets, averaged $296 million for the third quarter of 2005 compared with $96 million for the third quarter of 2004. Securities and derivatives BOK Financial recorded net losses of $4.1 million on securities and derivatives for the third quarter of 2005. These amounts included net losses of $5.0 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 further discussed in the Line of Business - Mortgage Banking section of this report. Net losses recognized during the third quarter of 2005 included $2.0 million of other than temporary impairment of securities management intends to sell. During the third quarter of 2004, BOK Financial recognized net gains on securities and derivatives of $2.2 million, including net gains of $2.1 million on securities held as economic hedges. Year-to-date operating revenue summary Year to date other operating revenue for 2005 increased $29.4 million, or 13%. This increase included a $21.9 million increase in fees and commission revenue and a $7.5 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. The increase in other revenue included $3.0 million of fees on margin 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.
6 <TABLE> - -------------------------------------------------------------------------------------------------------------------------- Table 2 - Other Operating Revenue (In thousands) Three Months Ended ------------------------------------------------------------------------------- Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2005 2005 2005 2004 2004 ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Brokerage and trading revenue $ 11,366 $ 10,404 $ 11,336 $ 9,721 $ 10,209 Transaction card revenue 18,526 17,979 16,543 16,598 16,677 Trust fees and commissions 16,376 16,259 16,016 14,793 15,091 Service charges and fees on deposit accounts 25,619 25,347 22,173 23,337 24,292 Mortgage banking revenue 9,535 8,550 5,578 6,284 6,606 Leasing revenue 667 669 673 648 723 Other revenue 8,823 7,491 6,724 6,450 5,243 - -------------------------------------------------------------------------------------------------------------------------- Total fees and commissions 90,912 86,699 79,043 77,831 78,841 - -------------------------------------------------------------------------------------------------------------------------- Gain on sales of assets 81 5,937 972 90 78 Gain (loss) on securities, net (4,744) 2,266 (2,637) 967 2,673 Gain (loss) on derivatives, net 606 (311) 778 (174) (506) - -------------------------------------------------------------------------------------------------------------------------- Total other operating revenue $ 86,855 $ 94,591 $ 78,156 $ 78,714 $ 81,086 - -------------------------------------------------------------------------------------------------------------------------- </TABLE> Other Operating Expense Other operating expense for the third quarter of 2005 totaled $117.0 million, up $2.8 million or 2% from the same period of 2004. The increase in operating expenses was largely offset by a $10.6 million reduction in the provision for impairment of mortgage servicing rights. Operating expenses, excluding the provision for mortgage servicing rights increased $13.4 million, or 12%. Personnel expenses increased $6.0 million, or 10%, data processing expenses increased $2.6 million, or 17%, and other expense increased $2.7 million, or 65%. Operating expenses for the third quarter of 2005 included $1.9 million for Bank of Arizona, which was acquired on April 7, 2005. Personnel expense Personnel expense totaled $66.5 million for the third quarter of 2005 compared with $60.5 million for the third quarter of 2004. Regular compensation expense totaled $42.3 million, a $5.1 million, or 14% increase over 2004. The increase in regular compensation expense was due to a 7% increase in average regular compensation per full-time equivalent employee and a 193 person increase in average staffing. Incentive compensation decreased $330 thousand to $13.8 million. Stock-based compensation expense decreased $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. Other incentive compensation expenses increased $1.3 million due to increases in the Oklahoma consumer banking and regional banking lines of business. Employee benefit expenses increased $1.2 million, or 13% to $10.4 million. Employee insurance costs increased $446 thousand, or 14% due primarily to growth in medical claims. The Company self-insures a portion of its employee healthcare 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 $2.6 million, or 17% compared to 2004. This expense consists of two broad categories, data processing systems and transaction card processing. Transaction card processing costs increased $1.1 million or 19% due to growth in processing volumes. Data processing systems costs increased $1.5 million, or 16% due primarily to higher communications expenses, software amortization and maintenance costs.
7 Other expenses Other expenses for the third quarter of 2005 totaled $6.7 million, a $2.7 million increase over the same period of 2004. Recruiting expenses, which includes bonuses, relocation costs, agency fees and related expenses, increased $1.9 million as the Company continued expansion in regional markets, wealth management and executive management. Year-to-date operating expense summary Operating expenses for the nine months of 2005 totaled $345.2 million, up 5% compared with the same period of 2004. Operating expenses for 2005 included $3.6 million for Bank of Arizona, and 2004 included a charge of $4.1 million for the cost of appreciated securities contributed to the BOK Charitable Foundation. Personnel costs increased $11.8 million, or 7%. This increase included $12 million, or 11% of regular compensation expense and $4.9 million of employee benefit costs, partially offset by a $5.1 million decrease in incentive compensation expense. <TABLE> - ---------------------------------------------------------------------------------------------------------------------- Table 3 - Other Operating Expense (In thousands) Three Months Ended ---------------------------------------------------------------------------------- Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2005 2005 2005 2004 2004 ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Personnel $ 66,533 $ 65,333 $ 58,439 $ 62,118 $ 60,524 Business promotion 4,494 3,870 4,430 4,766 3,671 Contribution of stock to BOK Charitable Foundation - - - 1,436 - Professional fees and services 3,951 4,492 3,619 3,936 3,658 Net occupancy and equipment 12,587 12,650 12,094 11,973 11,733 Data processing & communications 17,492 16,381 15,099 15,196 14,918 Printing, postage and supplies 3,846 3,629 3,615 3,817 3,770 Amortization of intangible assets 1,801 1,808 1,537 1,888 1,991 Mortgage banking costs 4,268 3,387 3,613 3,929 3,962 Provision (recovery) for impairment of mortgage servicing rights (4,671) 7,088 (5,624) (305) 5,900 Other expense 6,733 7,372 5,337 2,828 4,075 - --------------------------------------------------------------------------------------------------------------------- Total other operating expense $ 117,034 $ 126,010 $ 102,159 $ 111,582 $ 114,202 - --------------------------------------------------------------------------------------------------------------------- </TABLE> Income Taxes Income tax expense was $27.8 million or 35% of book taxable income for the third quarter of 2005, compared with $22.5 million for 2004. Year to date, income tax expense was $86.0 million, or 36% of book taxable income for 2005 and $68.8 million, or 34% 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 includes brokerage and trading, private financial services and investment advisory services in all markets. It also includes fiduciary services in all markets except Colorado. Fiduciary services at Colorado State Bank and Trust are included in regional banking. Regional banking consist primarily of corporate and consumer banking activities in the respective markets outside of Oklahoma. 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. Operating results for funds management and other reflect the effect of changes in interest rates on the Company, differences between the provision for credit losses and net charge-offs, and other revenue and expense not attributed to the lines of business.
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 cash flow characteristics. 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 insulates 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 our business lines and recognizes the diversification benefits among the units. The level of assigned economic capital is a combination of the risk taken by each business line based on its actual exposures and calibrated to its own loss history where possible. Additional capital is assigned to the regional banking line of business based on the Company's investment in those entities. <TABLE> - ------------------------------------------------------ -------------------------------- -------------------------------- Table 4 - Net Income by Line of Business (In thousands) Three months ended Sept. 30, Nine months ended Sept. 30, 2005 2004 2005 2004 ---------------- --------------- ---------------- --------------- <S> <C> <C> <C> <C> Oklahoma corporate banking $ 20,393 $ 18,414 $ 58,402 $ 49,434 Regional banking 20,483 14,560 55,790 42,191 Mortgage banking 405 (735) 2,379 1,421 Oklahoma consumer banking 7,515 1,683 17,277 6,452 Wealth management 4,913 4,184 13,491 10,336 Funds management and other (2,882) 9,676 6,008 22,633 - ----------------------------- ---------------- --------------- ---------------- --------------- Total $ 50,827 $ 47,782 $153,347 $132,467 - ----------------------------- ---------------- --------------- ---------------- --------------- </TABLE>
9 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 $20.4 million or 40% to consolidated net income for the third quarter of 2005. This compares to $18.4 million or 39% of consolidated net income for the same period of 2004. Average assets increased $159 million or 4% due primarily to loan growth. Credit quality continued to improve as reflected in a $1.1 million decrease in net loans charged-off compared with the third quarter of 2004. Operating revenue and operating expenses both increased due to transaction card volumes. <TABLE> Table 5 - Oklahoma Corporate Banking (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 ------------- --- ------------- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 51,924 $ 37,423 $ 139,945 $ 108,359 NIR (expense) from internal sources (17,678) (6,184) (42,516) (16,239) ------------- ------------- -------------- ------------- Total net interest revenue 34,246 31,239 97,429 92,120 Other operating revenue 24,146 21,780 68,164 64,775 Gain on sale of assets - - 4,708 - Operating expense 24,625 21,409 74,693 70,611 Net loans charged off 390 1,470 22 5,376 Net income 20,393 18,414 58,402 49,434 Average assets $ 4,514,058 $ 4,355,546 $ 4,534,088 $ 4,357,804 Average economic capital 339,280 306,000 317,450 317,810 Return on assets 1.79% 1.68% 1.72% 1.52% Return on economic capital 23.85% 23.94% 24.60% 20.78% Efficiency ratio 42.17% 40.38% 43.86% 45.01% </TABLE>
10 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 $7.5 million, or 15%, to consolidated net income for the third quarter of 2005. This compares to $1.7 million, or 4%, of consolidated net income in 2004. Net interest revenue increased $4.5 million due largely to an increase in transfer pricing credit to business units that provide lower-costing funds to the Company. Additionally, average deposits attributed to the Oklahoma Consumer Banking Division for the third quarter of 2005 increased $134 million, or 5% to $2.7 billion compared with the third quarter of 2004. Deposit fees provided much of the growth in other operating revenue. <TABLE> Table 6 - Oklahoma Consumer Banking (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 ------------- --- ------------- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ (6,288) $ (4,958) $ (17,563) $ (13,418) NIR (expense) from internal sources 22,517 16,703 62,488 46,840 ------------- ------------- -------------- ------------- Total net interest revenue 16,229 11,745 44,925 33,422 Other operating revenue 17,530 14,885 49,025 41,901 Operating expense 20,471 21,981 62,681 59,599 Net loans charged off 991 1,897 2,994 5,165 Net income 7,515 1,683 17,277 6,452 Average assets $ 2,918,195 $ 2,707,268 $ 2,938,837 $ 2,721,290 Average economic capital 66,160 67,200 71,270 62,120 Return on assets 1.02% 0.25% 0.79% 0.32% Return on economic capital 45.06% 9.96% 32.41% 13.87% Efficiency ratio 60.64% 82.54% 66.72% 79.12% </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 loans. Consolidated mortgage banking revenue, which is included in other operating revenue, increased $2.9 million, or 44% compared with the third quarter of 2004. Mortgage banking activities contributed $405 thousand for the third quarter of 2005 compared with a net loss of $735 thousand in 2004. 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 increasing and prepayments are low. Mortgage loan commitment rates increased 50 basis points during the third quarter of 2005. This increase in commitment rates increased the value of mortgage loan servicing rights due to lower expected prepayment speeds. Loan Production Sector Loan production revenue totaled $5.8 million for the third quarter of 2005, including $5.8 million of capitalized mortgage servicing rights, compared to loan production revenue of $2.8 million in 2004, including $2.5 million of capitalized mortgage servicing rights. The increase in loan production revenue was due to increased volume of loans funded and sold. Mortgage loans funded in the third quarter of 2005 totaled $247 million compared with $139 million in 2004. Approximately 70% of the loans funded during 2005 were to borrowers in Oklahoma. Pre-tax income from loan production totaled $2.1 million for the third quarter of 2005 compared with $1.2 million for the third quarter of 2004. The pipeline of mortgage loan applications totaled $290 million at September 30, 2005, compared with $292 million at June 30, 2005 and $230 million at September 30, 2004.
11 Loan Servicing Sector The loan servicing sector had a pre-tax loss of $1.7 million for the third quarter of 2005 compared with a pre-tax loss of $3.0 million for the same period of 2004. A 50 basis point increase in mortgage interest rates during the third quarter of 2005 increased the value of servicing rights. This resulted in a $4.7 million reversal of the allowance for impairment of mortgage servicing rights. This reversal was more than offset by $5.0 million of losses on financial instruments held as an economic hedge of the value of the servicing rights. During the third quarter of 2004, the provision for impairment of servicing rights was increased by $5.9 million. Net gains of $2.1 million were recognized on financial instruments designated as an economic hedge. Servicing revenue totaled $4.2 million in the third 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 $3.9 billion during the third quarter of 2005 compared to $4.4 billion during 2004. Annualized servicing revenue per outstanding loan principal was 42 basis points in the third quarter of 2005, compared with 45 basis points for the third quarter of 2004. Amortization of mortgage servicing rights, which is included in operating expense, was $3.8 million in 2005 compared to $3.4 million in 2004. Amortization expense is determined in proportion to the estimated future cash flows that will be generated by the mortgage servicing rights. <TABLE> Table 7 - Mortgage Banking (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 ------------- --- ------------- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 5,177 $ 5,573 $ 15,344 $ 16,882 NIR (expense) from internal sources (3,722) (2,677) (10,913) (8,347) ------------- ------------- -------------- ------------- Total net interest revenue 1,455 2,896 4,431 8,535 Capitalized mortgage servicing rights 5,849 2,538 12,386 8,793 Other operating revenue 4,184 5,460 14,058 16,838 Gain on sale of assets - - 1,232 - Operating expense 10,248 8,252 27,373 27,150 Provision (recovery) for impairment of mortgage servicing rights (4,671) 5,900 (3,207) (1,262) Gains (losses) on financial instruments, net (5,047) 2,149 (3,719) (5,731) Net income (loss) 405 (735) 2,379 1,421 Average assets $ 541,151 $ 574,786 $ 542,326 $ 565,167 Average economic capital 22,340 25,350 24,260 27,410 Return on assets 0.30% (0.51)% 0.59% 0.34% Return on economic capital 7.20% (11.53)% 13.11% 6.92% Efficiency ratio 89.21% (75.75)% 85.26% 79.46% </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.
12 At September 30, 2005, financial instruments with a fair value of $92 million were held for the economic hedge program. The interest rate sensitivity of the mortgage servicing rights and securities held as a hedge is modeled over a range of +/- 50 basis points. At September 30, 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 $ 3,589 $ (6,213) Fair value of hedging instruments (3,375) 3,862 ----------------- ---------------- Net $ 214 $ (2,351) ----------------- ---------------- Table 8 shows the non-linear effect of changes in mortgage commitment rates on the value of mortgage servicing rights. A 50 basis point increase in rates is expected to increase value by $3.6 million while a 50 basis point decrease is expected to reduce value by $6.2 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. The fair value of mortgage servicing rights increased $4.7 million during the third quarter of 2005 compared with an expected increase of $6.0 million. Although mortgage commitment rates increased 50 basis points during the quarter, appreciation in the value of servicing rights was less than expected due to an increase in housing sales which is one of the factors considered in estimating future prepayment speeds. 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 consist 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 $4.9 million or 10% to consolidated net income for the third quarter of 2005. This compared to $4.2 million or 9% of consolidated net income for the same period of 2004. Trust and private financial services provided $4.5 million of net income in the third quarter of 2005, a 22% increase over 2004. At September 30, 2005 and 2004, the wealth management line of business was responsible for trust assets with aggregate market values of $25.2 billion and $21.4 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 $10.0 billion of trust assets at September 30, 2005 compared to $8.5 billion of trust assets at September 30, 2004. Trust assets managed by Colorado State Bank and Trust totaled $2.4 billion at September 30, 2005 compared with $1.9 billion at September 30, 2004. Brokerage and trading activities provided $462 thousand of net income in the third quarter of 2005 compared to net income of $525 thousand in the third quarter of 2004. Total brokerage and trading revenue, net of interest costs to carry margin assets increased $800 thousand or 8%. Operating expenses increased $707 thousand, including a $482 thousand increase in personnel costs.
13 <TABLE> Table 9 - Wealth Management (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 ------------- --- ------------- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 1,604 $ 896 $ 3,832 $ 2,970 NIR (expense) from internal sources 2,682 2,397 8,521 6,220 ------------- ------------- -------------- ------------- Total net interest revenue 4,286 3,293 12,353 9,190 Other operating revenue 25,126 23,591 75,426 70,711 Operating expense 21,372 20,004 65,482 62,918 Net income 4,913 4,184 13,491 10,336 Average assets $ 1,445,733 $ 1,030,882 $ 1,523,626 $ 1,059,777 Average economic capital 128,620 69,470 108,340 70,950 Return on assets 1.35% 1.61% 1.18% 1.30% Return on economic capital 15.15% 23.96% 16.65% 19.46% Efficiency ratio 72.66% 74.41% 74.60% 78.74% </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. It also includes fiduciary services provided by Colorado State Bank and Trust. Small businesses and middle-market corporations are Regional Banking's primary customer focus. Regional Banking contributed $20.5 million or 40% to consolidated net income during the third quarter of 2005. This compares with $14.6 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, New Mexico and Colorado. Net income for the third quarter of 2005 in Texas and New Mexico increased $2.2 million and $1.3 million, respectively. Growth in net income from Texas operations resulted primarily from an increase in net interest revenue. Average earning assets increased $256 million. Average loans increased $347 million, or 20% while securities and funds sold to the funds management unit decreased $91 million. Average deposits increased $137 million, or 6%. The increase in net income from New Mexico operations was also based largely on an increase in net interest revenue. Average earning assets decreased $80 million, or 5%. However, the mix of earning assets improved. Average loans increased $64 million or 11% while funds sold to the funds management unit decreased $139 million. Average deposits in the New Mexico market increased $71 million or 8%. Colorado State Bank and Trust provided net income of $882 thousand to the third quarter of 2005 compared with a net loss of $1.3 million for the same period of 2004. Earnings growth was provided primarily by net interest revenue which increased $4.0 million. Average assets increased $149 million, or 22%. Funds sold to the funds management unit increased $117 million due primarily to deposit growth. Average loans increased $26 million, or 7%. Bank of Arizona incurred a net loss of $334 thousand for the third quarter of 2005. Operating expenses included $258 thousand of core deposit intangible asset amortization. The Company's policy is to amortize core deposit intangible assets over the expected life of the acquired deposits using an accelerated method. The weighted average life of the acquired deposits is approximately five years. Operating expenses also included $152 thousand of recruiting expenses.
14 <TABLE> Table 10 - Bank of Texas (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 ------------- --- ------------- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 37,574 $ 31,400 $ 107,769 $ 88,733 NIR (expense) from internal sources (2,996) (1,261) (7,300) (3,614) ------------- ------------- -------------- ------------- Total net interest revenue 34,578 30,139 100,469 85,119 Other operating revenue 6,172 5,603 17,806 16,696 Operating expense 19,653 17,570 60,594 53,719 Net loans charged off 503 990 1,876 3,502 Net income 13,389 11,165 36,561 29,014 Average assets $ 3,298,673 $ 3,086,161 $ 3,328,361 $ 3,107,050 Average economic capital 176,360 158,080 174,080 165,850 Average invested capital 343,450 325,160 341,160 332,940 Return on assets 1.61% 1.44% 1.47% 1.25% Return on economic capital 30.12% 28.10% 28.08% 23.37% Return on average invested capital 15.47% 13.66% 14.33% 11.64% Efficiency ratio 48.23% 49.16% 51.23% 52.76% </TABLE> <TABLE> Table 11 - Bank of Albuquerque (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 ------------- --- ------------- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 15,065 $ 12,064 $ 42,449 $ 33,844 NIR (expense) from internal sources (2,839) (1,269) (7,285) (3,334) ------------- ------------- -------------- ------------- Total net interest revenue 12,226 10,795 35,164 30,510 Other operating revenue 4,567 3,864 12,850 10,883 Operating expense 7,614 7,680 22,997 23,218 Net loans charged off 407 301 828 1,146 Net income 5,360 4,081 14,780 10,405 Average assets $ 1,645,963 $ 1,621,976 $ 1,634,236 $ 1,629,700 Average economic capital 75,000 64,270 71,790 68,390 Average invested capital 94,090 83,360 90,880 87,480 Return on assets 1.29% 1.00% 1.21% 0.85% Return on economic capital 28.35% 25.26% 27.53% 20.32% Return on average invested capital 22.60% 19.48% 21.74% 15.89% Efficiency ratio 45.34% 52.39% 47.90% 56.09% </TABLE>
15 <TABLE> Table 12 - Bank of Arkansas (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 ------------- --- ------------- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 3,082 $ 2,102 $ 8,877 $ 6,570 NIR (expense) from internal sources (1,082) (526) (2,743) (1,468) ------------- ------------- -------------- ------------- Total net interest revenue 2,000 1,576 6,134 5,102 Other operating revenue 903 378 1,679 1,022 Operating expense 967 978 2,961 2,950 Net loans charged off (5) 25 18 (29) Net income 1,186 581 2,954 1,957 Average assets $ 267,751 $ 266,951 $ 267,702 $ 269,931 Average economic capital 11,010 11,680 11,720 11,590 Average invested capital 11,010 11,680 11,720 11,590 Return on assets 1.76% 0.87% 1.48% 0.97% Return on economic capital 42.74% 19.79% 33.70% 22.55% Return on average invested capital 42.74% 19.79% 33.70% 22.55% Efficiency ratio 33.31% 50.05% 37.90% 48.17% </TABLE> <TABLE> Table 13 - Colorado State Bank and Trust (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 ------------- --- ------------- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 9,281 $ 6,194 $ 24,906 $ 16,743 NIR (expense) from internal sources (3,279) (4,144) (8,385) (5,060) ------------- ------------- -------------- ------------- Total net interest revenue 6,002 2,050 16,521 11,683 Other operating revenue 2,421 1,969 7,420 6,233 Operating expense 6,138 6,050 17,697 16,466 Net loans charged off 840 (8) 2,491 116 Net income (loss) 882 (1,267) 2,293 815 Average assets $ 810,933 $ 662,429 $ 829,057 $ 671,323 Average economic capital 50,090 35,310 44,260 27,500 Average invested capital 92,070 77,290 86,240 69,480 Return on assets 0.43% (0.76)% 0.37% 0.16% Return on economic capital 6.99% (14.27)% 6.93% 3.96% Return on average invested capital 3.80% (6.52)% 3.55% 1.57% Efficiency ratio 72.87% 150.53% 73.92% 91.91% </TABLE>
16 Table 14 - Bank of Arizona *** (Dollars in Thousands) Three months Nine months ended ended Sept. 30, 2005 Sept. 30, 2005 ---------------- ----------------- NIR (expense) from external sources $ 3,557 $ 6,523 NIR (expense) from internal sources (1,338) (2,333) ------------- ----------------- Total net interest revenue 2,219 4,190 Other operating revenue 324 670 Operating expense 3,230 6,285 Net loans charged off 2 23 Net income (loss) (334) (798) Average assets $ 117,387 $ 95,899 Average economic capital 14,390 6,330 Average invested capital 31,040 22,980 Return on assets (1.13)% (1.11)% Return on economic capital (9.21)% (16.86)% Return on average invested capital (4.27)% (4.64)% Efficiency ratio 127.02% 129.32% *** 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 September 30, 2005 and June 30, 2005 totaled $4.9 billion. 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 its 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 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 September 30, 2005 and June 30, 2005. The Company recognized a $2.0 million other-than-temporary impairment in the third quarter of 2005 on available for sale securities it intends to sell. Remaining net unrealized losses on available for sale securities totaled $71 million at September 30, 2005 compared with $46 million at June 30, 2005. The increase in net unrealized losses was due primarily to rising interest rates. The aggregate gross amount of unrealized losses at September 30, 2005 totaled $74 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.
17 Loans The aggregate loan portfolio at September 30, 2005 totaled $8.9 billion, a $369 million or 17% annualized increase since June 30, 2005. <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 15 - Loans (In thousands) Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2005 2005 2005 2004 2004 --------------------------------------------------------------------------------- Commercial: <S> <C> <C> <C> <C> <C> Energy $ 1,350,835 $ 1,278,885 $ 1,174,498 $ 1,223,195 $ 1,097,191 Manufacturing 484,662 483,211 468,615 484,423 479,866 Wholesale/retail 804,628 777,440 696,066 699,318 737,235 Agriculture 238,950 244,687 263,382 262,436 262,171 Healthcare 476,616 434,132 441,651 424,257 464,560 Services 1,419,342 1,340,411 1,263,527 1,190,814 1,180,324 Other commercial and industrial 292,657 301,013 283,107 291,393 277,102 - --------------------------------------------------------------------------------------------------------------------- Total commercial 5,067,690 4,859,779 4,590,846 4,575,836 4,498,449 - --------------------------------------------------------------------------------------------------------------------- Commercial real estate: Construction and land development 605,457 542,049 518,137 457,399 467,396 Multifamily 225,074 237,904 224,533 231,985 236,240 Other real estate loans 1,142,093 1,081,906 975,115 931,726 917,488 - --------------------------------------------------------------------------------------------------------------------- Total commercial real estate 1,972,624 1,861,859 1,717,785 1,621,110 1,621,124 - --------------------------------------------------------------------------------------------------------------------- Residential mortgage: Secured by 1-4 family residential properties 1,166,559 1,151,674 1,215,022 1,198,918 1,120,761 Residential mortgages held for sale 46,306 74,410 44,429 40,262 82,053 - --------------------------------------------------------------------------------------------------------------------- Total residential mortgage 1,212,865 1,226,084 1,259,451 1,239,180 1,202,814 - --------------------------------------------------------------------------------------------------------------------- Consumer 630,389 566,958 517,884 492,841 461,779 - --------------------------------------------------------------------------------------------------------------------- Total $ 8,883,568 $ 8,514,680 $ 8,085,966 $ 7,928,967 $ 7,784,166 - --------------------------------------------------------------------------------------------------------------------- </TABLE> The commercial loan portfolio increased $208 million during the third quarter of 2005. The energy portion of the portfolio increased $72 million. Energy loans totaled $1.4 billion or 15% of total loans at September 30, 2005. Approximately $1.1 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 current prices. This portion of the energy loan portfolio provided much of the quarter's loan growth. Exploration and acquisition activities have increased based on the expectation that the markets have set a higher 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 16% of the total loan portfolio and consists of loans to a variety of businesses. Approximately $1.0 billion of the services category consists of loans with outstanding balances less than $10 million. Agriculture included $200 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 September 30, 2005, the outstanding principal balance of these loans totaled $1.1 billion. Substantially all of these loans are to borrowers with local market relationships. BOK Financial serves as the agent lender in approximately 29% of its shared national credits, based on dollars committed. The Company's lending policies generally avoid loans in which we do not have the opportunity to maintain or achieve other business relationships with the customer. Commercial real estate loans totaled $2.0 billion or 22% of the loan portfolio at September 30, 2005. The outstanding balance of commercial real estate loans increased $111 million since June 30, 2005, an annualized growth rate of 24%. Construction and land development included $480 million for single family residential lots and premises, up $64 million, or 15% since June 30, 2005. This growth resulted from expanded builder loans. The major components of other commercial real estate loans were retail facilities - $323 million and office buildings - $461 million. Commercial real estate loans secured by office buildings increased $41 million, or 10%, during the quarter.
18 Residential mortgage loans, excluding loans held for sale, included $347 million of home equity loans, $369 million of loans held in conjunction with business relationships, $236 million of adjustable rate mortgages and $183 million of loans held for community development. Consumer loans included $348 million of indirect automobile loans. Indirect automobile loans grew $61 million during the third quarter due to increased demand. Substantially all of these loans were purchased from dealers in Oklahoma, although the Company began indirect automobile lending activities in Arkansas during the third quarter of 2005. Table 16 presents the distribution of the major loan categories among our primary market areas. <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 16 - Loans by Principal Market Area (In thousands) Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2005 2005 2005 2004 2004 --------------------------------------------------------------------------------- Oklahoma: <S> <C> <C> <C> <C> <C> Commercial $ 3,101,209 $ 3,026,311 $ 2,871,566 $ 2,847,470 $ 2,914,917 Commercial real estate 890,737 856,617 791,816 744,724 746,444 Residential mortgage 839,344 827,431 936,375 901,648 819,537 Residential mortgage held for sale 46,306 74,410 44,429 40,262 82,053 Consumer 472,899 425,318 389,571 367,947 343,680 --------------------------------------------------------------------------------- Total Oklahoma $ 5,350,495 $ 5,210,087 $ 5,033,757 $ 4,902,051 $ 4,906,631 --------------------------------------------------------------------------------- Texas: Commercial $ 1,294,606 $ 1,182,307 $ 1,135,509 $ 1,120,069 $ 994,335 Commercial real estate 537,576 509,472 477,487 459,067 467,935 Residential mortgage 196,593 196,457 177,919 191,296 195,393 Consumer 89,329 90,245 85,626 86,732 87,371 --------------------------------------------------------------------------------- Total Texas $ 2,118,104 $ 1,978,481 $ 1,876,541 $ 1,857,164 $ 1,745,034 --------------------------------------------------------------------------------- Albuquerque: Commercial $ 354,087 $ 340,378 $ 325,069 $ 354,904 $ 331,027 Commercial real estate 223,236 219,175 218,357 196,832 195,390 Residential mortgage 65,203 63,821 62,015 63,043 64,105 Consumer 15,195 15,813 12,306 13,260 11,687 --------------------------------------------------------------------------------- Total Albuquerque $ 657,721 $ 639,187 $ 617,747 $ 628,039 $ 602,209 --------------------------------------------------------------------------------- Northwest Arkansas: Commercial $ 54,703 $ 54,703 $ 51,026 $ 61,934 $ 64,789 Commercial real estate 85,600 76,803 75,024 74,478 69,075 Residential mortgage 12,097 11,674 10,771 11,238 9,022 Consumer 20,397 4,560 3,599 3,858 4,998 --------------------------------------------------------------------------------- Total Northwest Arkansas $ 172,797 $ 147,740 $ 140,420 $ 151,508 $ 147,884 --------------------------------------------------------------------------------- Colorado: Commercial $ 219,208 $ 210,142 $ 207,676 $ 191,459 $ 193,381 Commercial real estate 132,741 125,120 120,844 118,134 142,280 Residential mortgage 26,186 27,292 27,942 31,693 32,704 Consumer 26,126 27,996 26,782 21,044 14,043 --------------------------------------------------------------------------------- Total Colorado $ 404,261 $ 390,550 $ 383,244 $ 362,330 $ 382,408 --------------------------------------------------------------------------------- Arizona: Commercial $ 43,877 $ 45,938 $ - $ - $ - Commercial real estate 102,734 74,672 34,257 27,875 - Residential mortgage 27,136 24,999 - - - Consumer 6,443 3,026 - - - --------------------------------------------------------------------------------- Total Arizona $ 180,190 $ 148,635 $ 34,257 $ 27,875 $ - --------------------------------------------------------------------------------- Total BOK Financial loans $ 8,883,568 $ 8,514,680 $ 8,085,966 $ 7,928,967 $ 7,784,166 --------------------------------------------------------------------------------- </TABLE>
19 Loan Commitments BOK Financial enters into certain off-balance sheet arrangements in the normal course of business. These arrangements included loan commitments which totaled $3.9 billion and standby letters of credit which totaled $524 million at September 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 our customer to a third party. Since some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. 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 Financial. Offsetting contracts are executed between the Company and selected counterparties to minimize the risk to us of changes in commodity prices, interest rates, or foreign exchange rates. The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or a fee paid to BOk as compensation for administrative costs, credit risk and profit. These programs create credit risk for potential amounts due to the Company from its customers and from the counterparties. Customer credit risk is monitored through existing credit policies and procedures. The effects of changes in commodity prices, interest rates or foreign exchange rates are evaluated across a range of possible options to determine the maximum exposure we are willing to have individually to any customer. Customers may also be required to provide margin collateral to further limit our credit risk. Counterparty credit risk is evaluated through existing policies and procedures. This evaluation considers the total relationship between BOK Financial and each of the counterparties. Individual limits are established by management, approved by Credit, and reviewed by the Asset / Liability Committee. Margin collateral is required if the exposure between the Company and any counterparty exceeds established limits. Based on declines in the counterparties' credit rating, these limits are reduced and additional margin collateral is required. A deterioration of the credit standing of one or more of the 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 September 30, 2005, the fair value of derivative contracts reported as assets under these programs totaled $644 million. This included energy contracts with fair values of $614 million, interest rate contracts with fair values of $15 million and foreign exchange contracts with fair values of $12 million. The aggregate fair values of related derivative contracts reported as liabilities totaled $648 million. Approximately 95% of the fair value of net asset contracts was with customers. The credit risk of these contracts is generally backed by energy production. The remaining 5% was with counterparties, consisting primarily of highly rated financial institutions and energy companies. The maximum net exposure to any single customer or counterparty totaled $114 million. The Company's policy had been to carry all derivative contracts at fair value on a gross asset / gross liability basis. Changes in energy prices during the third quarter of 2005 caused significant increases in the fair values of both derivative assets and liabilities. The potential impact of these increases on regulatory capital ratios caused the Company to adopt FASB Interpretation No. 39, "Offsetting Amounts Related to Certain Contracts" ("FIN 39"). FIN 39 permits reporting derivative assets and liabilities on a net by counterparty basis provided certain specified criteria are met. These criteria require written bilateral netting agreements between the Company and each of its counterparties that create a single legal claim or obligation to pay or receive the net amount in settlement of the individual derivative contracts. Derivative contracts for prior periods have been reclassified for consistent presentation.
20 Summary of Loan Loss Experience The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $110 million at September 30, 2005, $109 million at June 30, 2005 and $114 million at September 30, 2004. These amounts represented 1.24%, 1.29% and 1.48% of outstanding loans, excluding loans held for sale, at September 30, 2005, June 30, 2005, and September 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 293% of the outstanding balance of nonperforming loans at September 30, 2005, compared with 269% at June 30, 2005 and 220% at September 30, 2005. Net loans charged off during the third quarter of 2005 totaled $3.3 million, compared with $2.3 million for the second quarter of 2005 and $4.8 million for the same period in 2004. Credit risk from loan commitments and letters of credit are considered in the evaluation of the adequacy of the reserve for loan losses. A separate reserve for off-balance sheet credit risk is maintained and is included in other liabilities within the balance sheet. 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.
21 <TABLE> - ------------------------------------------------------------------------------------------------------------------------------ Table 17 - Summary of Loan Loss Experience (In thousands) Three Months Ended ---------------------------------------------------------------------------------- Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2005 2005 2005 2004 2004 ---------------------------------------------------------------------------------- Reserve for loan losses: <S> <C> <C> <C> <C> <C> Beginning balance $ 108,885 $ 108,958 $ 108,618 $ 113,719 $ 114,704 Loans charged off: Commercial 819 1,641 1,438 4,195 2,712 Commercial real estate 730 90 1,715 100 254 Residential mortgage 382 423 181 493 392 Consumer 3,380 2,890 2,490 3,384 3,521 - ------------------------------------------------------------------------------------------------------------------------------ Total 5,311 5,044 5,824 8,172 6,879 - ------------------------------------------------------------------------------------------------------------------------------ Recoveries of loans previously charged off: Commercial 711 1,435 1,099 533 811 Commercial real estate 7 73 29 9 - Residential mortgage 21 16 10 11 125 Consumer 1,238 1,233 1,508 1,189 1,163 - ------------------------------------------------------------------------------------------------------------------------------ Total 1,977 2,757 2,646 1,742 2,099 - ------------------------------------------------------------------------------------------------------------------------------ Net loans charged off 3,334 2,287 3,178 6,430 4,780 Provision for loan losses 4,071 1,142 3,518 1,329 3,795 Additions due to acquisitions - 1,072 - - - - ------------------------------------------------------------------------------------------------------------------------------ Ending balance $ 109,622 $ 108,885 $ 108,958 $ 108,618 $ 113,719 - ------------------------------------------------------------------------------------------------------------------------------ Reserve for off-balance sheet credit losses: Beginning balance $ 17,889 $ 16,984 $ 18,502 $ 15,392 $ 14,201 Provision for off-balance sheet credit losses (95) 873 (1,518) 3,110 1,191 Additions due to acquisitions - 32 - - - - ------------------------------------------------------------------------------------------------------------------------------ Ending balance $ 17,794 $ 17,889 $ 16,984 $ 18,502 $ 15,392 - ------------------------------------------------------------------------------------------------------------------------------ Total provision for credit losses $ 3,976 $ 2,015 $ 2,000 $ 4,439 $ 4,986 - ------------------------------------------------------------------------------------------------------------------------------ Reserve for loan losses to loans outstanding at period-end (1) 1.24% 1.29% 1.35% 1.38% 1.48% Net charge-offs (annualized) to average loans (1) 0.16 0.11 0.16 0.33 0.25 Total provision for credit losses (annualized) to average loans (1) 0.19 0.10 0.10 0.23 0.26 Recoveries to gross charge-offs 37.22 54.66 45.43 21.32 30.51 Reserve for loan losses as a multiple of net charge-offs (annualized) 8.22x 11.90x 8.57x 4.22x 5.95x Reserve for off-balance sheet credit losses to off-balance sheet credit commitments 0.41% 0.42% 0.41% 0.48% 0.42% Combined reserves for credit losses to loans outstanding at period-end (1) 1.44 1.50 1.57 1.61 1.68 - ------------------------------------------------------------------------------------------------------------------------------ (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 September 30, 2005, specific impairment reserves totaled $6.5 million on total impaired loans of $28 million. Nonspecific reserves are maintained for risks beyond factors specific to an individual loan or those identified through migration analysis. A range of potential losses is determined for each risk factor identified. At September 30, 2005, the ranges of potential losses for the more significant factors were: General economic conditions - $9.0 million to $14.7 million Concentration in large loans - $1.7 million to $ 3.4 million The provision for credit losses totaled $4.0 million for the third quarter of 2005, compared with $2.0 million for the second quarter of 2005 and $5.0 million for the third quarter of 2004. Factors considered in determining the provision for credit losses included an increase in net losses incurred during the third quarter, concerns about the effect of changes in interest rates and energy prices on the commercial real estate and commercial loan portfolios and potential disruption to the economy from recent storms in the Gulf coast, including Houston. These factors were partially offset by reductions in the outstanding balances of criticized and classified loans and the number of past due, nonperforming and
22 potential problem loans. Nonperforming Assets Information regarding nonperforming assets, which totaled $42 million at September 30, 2005 and $46 million at June 30, 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 $37 million at September 30, 2005 and $41 million at June 30, 2005. Newly identified nonaccruing loans totaled $4.7 million during the third quarter of 2005. Nonaccruing loans decreased $2.0 million from a loan that was returned to accrual status after a period of satisfactory performance, $1.5 million for loans charged off or foreclosed, and $4.7 million for cash payments received. <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 18 - Nonperforming Assets (In thousands) Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2005 2005 2005 2004 2004 ---------------------------------------------------------------------- Nonaccrual loans: <S> <C> <C> <C> <C> <C> Commercial $ 17,920 $ 21,173 $ 29,116 $ 33,195 $ 36,526 Commercial real estate 10,422 11,722 12,671 10,144 8,293 Residential mortgage 8,531 7,154 7,533 8,612 6,228 Consumer 480 478 483 709 729 - --------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 37,353 40,527 49,803 52,660 51,776 Other nonperforming assets 5,069 5,062 3,187 3,763 6,038 - --------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 42,422 $ 45,589 $ 52,990 $ 56,423 $ 57,814 - --------------------------------------------------------------------------------------------------------------------- Ratios: Reserve for loan losses to nonaccrual loans 293.48% 268.67% 218.78% 206.26% 219.64% Combined reserves for credit losses to nonaccrual loans 341.11 312.81 252.88 241.40 249.36 Nonaccrual loans to period-end loans (2) 0.42 0.48 0.62 0.67 0.67 - --------------------------------------------------------------------------------------------------------------------- Loans past due (90 days) (1) $ 10,027 $ 7,125 $ 6,782 $ 7,649 $ 9,173 - --------------------------------------------------------------------------------------------------------------------- (1) Includes residential mortgages guaranteed by agencies of the U.S. Government. $ 3,646 $ 3,713 $ 2,650 $ 2,308 $ 2,354 (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. Potential problem loans totaled $30 million at September 30, 2005 and $38 million at June 30, 2005. The reduction in potential problem loans during the quarter was due primarily to the payoff of a $7.6 million credit. The current composition of potential problem loans by primary industry included healthcare - $9 million, real estate - $6 million, services - $5 million and energy - $4 million. 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 $288 million, a 12% annualized rate for third quarter of 2005. Core deposits, excluding public funds and brokered deposits, grew at an annualized rate of 9%. Average core deposits comprised 52% of total deposits for both the third and second quarters of 2005. Deposit accounts with balances in excess of $100,000 represented 39% and 38% of total deposits for the third quarter and second quarter of 2005, respectively. Average deposits in excess of
23 $100,000 increased at a 15% annualized rate for the third quarter of 2005. Average brokered time deposits totaled $384 million for the third quarter of 2005, compared with $302 million for the preceding quarter. The Company increased brokered time deposits by $210 million during the third quarter of 2005. The weighted average fixed-rate cost of these deposits was 4.02%. Interest rate swaps, which have been designated as fair value hedges, convert the cost of these deposits to floating rate approximately equal to 30-day LIBOR. The distribution of deposit accounts among principal markets is shown in Table 19.
24 <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 19 - Deposits by Principal Market Area (In thousands) Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2005 2005 2005 2004 2004 --------------------------------------------------------------------------------- Oklahoma: <S> <C> <C> <C> <C> <C> Demand $ 959,169 $ 1,028,640 $ 1,091,132 $ 1,095,228 $ 1,045,981 Interest-bearing: Transaction 2,411,175 2,367,511 2,235,950 2,291,089 2,167,279 Savings 86,220 89,972 93,655 87,597 92,275 Time 2,728,224 2,450,730 2,511,465 2,505,849 2,543,292 --------------------------------------------------------------------------------- Total interest-bearing 5,225,619 4,908,213 4,841,070 4,884,535 4,802,846 --------------------------------------------------------------------------------- Total Oklahoma $ 6,184,788 $ 5,936,853 $ 5,932,202 $ 5,979,763 $ 5,848,827 --------------------------------------------------------------------------------- Texas: Demand $ 533,475 $ 478,855 $ 628,043 $ 617,808 $ 587,181 Interest-bearing: Transaction 1,299,279 1,292,938 1,111,808 1,119,893 1,118,960 Savings 29,620 29,635 30,695 30,331 32,244 Time 633,785 606,528 601,397 571,993 581,017 --------------------------------------------------------------------------------- Total interest-bearing 1,962,684 1,929,101 1,743,900 1,722,217 1,732,221 --------------------------------------------------------------------------------- Total Texas $ 2,496,159 $ 2,407,956 $ 2,371,943 $ 2,340,025 $ 2,319,402 --------------------------------------------------------------------------------- Albuquerque: Demand $ 155,517 $ 139,107 $ 133,309 $ 136,599 $ 146,163 Interest-bearing: Transaction 338,706 306,230 314,067 320,118 345,851 Savings 17,614 17,875 18,428 17,885 18,102 Time 454,561 449,180 434,131 411,939 385,139 --------------------------------------------------------------------------------- Total interest-bearing 810,881 773,285 766,626 749,942 749,092 --------------------------------------------------------------------------------- Total Albuquerque $ 966,398 $ 912,392 $ 899,935 $ 886,541 $ 895,255 --------------------------------------------------------------------------------- Northwest Arkansas: Demand $ 13,772 $ 10,890 $ 14,922 $ 14,489 $ 15,242 Interest-bearing: Transaction 23,335 24,816 23,555 26,882 24,462 Savings 1,268 1,284 1,405 1,434 1,302 Time 81,510 83,388 88,031 99,677 107,576 --------------------------------------------------------------------------------- Total interest-bearing 106,113 109,488 112,991 127,993 133,340 --------------------------------------------------------------------------------- Total Northwest Arkansas $ 119,885 $ 120,378 $ 127,913 $ 142,482 $ 148,582 --------------------------------------------------------------------------------- Colorado: Demand $ 51,978 $ 32,044 $ 73,383 $ 62,995 $ 61,865 Interest-bearing: Transaction 216,718 228,881 220,618 189,106 203,349 Savings 16,568 16,791 22,140 19,092 19,085 Time 221,753 117,130 86,406 54,394 43,076 --------------------------------------------------------------------------------- Total interest-bearing 455,039 362,802 329,164 262,592 265,510 --------------------------------------------------------------------------------- Total Colorado $ 507,017 $ 394,846 $ 402,547 $ 325,587 $ 327,375 --------------------------------------------------------------------------------- Arizona: Demand $ 42,784 $ 60,412 $ - $ - $ - Interest-bearing: Transaction 71,510 56,624 - - - Savings 3,862 4,771 - - - Time 6,802 6,574 - - - --------------------------------------------------------------------------------- Total interest-bearing 82,174 67,969 - - - --------------------------------------------------------------------------------- Total Arizona $ 124,958 $ 128,381 $ - $ - $ - --------------------------------------------------------------------------------- Total BOK Financial deposits $ 10,399,205 $ 9,900,806 $ 9,734,540 $ 9,674,398 $ 9,539,441 --------------------------------------------------------------------------------- </TABLE>
25 Borrowings and Capital 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 was paid off during the second quarter of 2005 with the proceeds of a $150 million subordinated debt. Interest is based on LIBOR plus a defined margin that is determined by the principal balance outstanding and our 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 its subsidiary banks to maintain minimum capital levels and to exceed minimum net worth ratios. BOK Financial met all of the restrictive covenants at September 30, 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 collectively could declare up to $147 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 $83 million under this policy. The maximum amount of dividends that could be declared under this policy decreased $37 million compared with June 30, 2005. The decreased dividend capacity reflected additional capital required to support the Company's loan and derivative asset growth during the third quarter. Shareholders' equity for BOK Financial totaled $1.5 billion at September 30, 2005, an increase of $33 million since June 30, 2005. Net income provided $51 million to this increase. Shareholders' equity decreased $15 million due to net unrealized losses on available for sale securities. A cash dividend of $6.6 million or $0.10 per common share was paid during the third 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. 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 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 Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2005 2005 2005 2004 2004 -------------------------------------------------------------------------- Average shareholders' equity <S> <C> <C> <C> <C> <C> to average assets 9.54% 9.36% 9.70% 9.38% 9.36% Risk-based capital: Tier 1 capital 9.71 9.84 10.19 10.02 9.82 Total capital 12.04 12.54 11.78 11.67 11.56 Leverage 8.01 8.08 8.36 7.94 7.81 </TABLE>
26 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 September 30, 2005 was $48.17 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 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 third quarter of 2005 net interest revenue decreased $367 thousand from periodic settlements of these contracts. These contracts are carried on the balance sheet at fair value and changes in fair value are reported in income as derivatives gains or losses. A net gain of $967 thousand was recognized in 2005 compared to a net loss of $506 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 our overall process of managing credit exposure to other financial institutions.
27 The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model. BOK Financial performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions on net interest revenue, net income and economic value of equity. A simulation model is used to estimate the effect of changes in interest rates over the next twelve and 24 months based on eight interest rate scenarios. Two specified interest rate scenarios are used to evaluate interest rate risk against policy guidelines. The first assumes a sustained parallel 200 basis point increase and the second assumes a sustained parallel 200 basis point decrease in interest rates. An independent source is used to determine the most likely interest rate scenario. The Company's primary interest rate exposures included the Federal Funds rate, which affects short-term borrowings, and the prime lending rate and LIBOR, which are the basis for much of the variable-rate loan pricing. Additionally, mortgage rates directly affect the prepayment speeds for mortgage-backed securities and mortgage servicing rights. Derivative financial instruments and other financial instruments used for purposes other than trading are included in this simulation. The model incorporates assumptions regarding the effects of changes in interest rates and account balances on indeterminable maturity deposits based on a combination of historical analysis and expected behavior. The impact of planned growth and new business activities is factored into the simulation model. The effects of changes in interest rates on the value of mortgage servicing rights are excluded from Table 21 due to the extreme volatility over such a large rate range. The effects of interest rate changes on the value of mortgage servicing rights and securities identified as economic hedges are presented in the Lines of Business - Mortgage Banking section of this report. The simulations used to manage market risk are based on numerous assumptions regarding the effects of changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest revenue, net income or economic value of equity or precisely predict the impact of higher or lower interest rates on net interest revenue, net income or economic value of equity. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, market conditions and management strategies, among other factors. <TABLE> Table 21 - Interest Rate Sensitivity (Dollars in Thousands) Increase Decrease -------------------------- --------------------------- ------------------------- 200 bp 200 bp Most Likely -------------------------- --------------------------- ------------------------- 2005 2004 2005 2004 2005 2004 ------------- ------------ ------------ -------------- ------------ ------------ Anticipated impact over the next twelve months on <S> <C> <C> <C> <C> <C> net interest revenue $ 9,378 $ 7,635 $ (5,426) *** $ 7,917 $ 4,791 1.9% 1.7% (1.1)% *** 1.6% 1.1% - ----------------------------------------------------------------------------------------------------------------------- ***A 200 basis point decrease was not computed in 2004 due to low market interest rates. </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.
28 Management uses a Value at Risk ("VAR") methodology to measure the market risk inherent in its trading activities. VAR is calculated based upon historical simulations over the past five years using a variance / covariance matrix of interest rate changes. It represents an amount of market loss that is likely to be exceeded only one out of every 100 two-week periods. Trading positions are managed within guidelines approved by the Board of Directors. These guidelines limit the VAR to $1.6 million. At September 30, 2005, the VAR was $342 thousand. The greatest value at risk during the quarter was $1.4 million. Controls and Procedures As required by Rule 13a-15(b), BOK Financial's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by their report, of the effectiveness of the company's disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13a-15(d), BOK Financial's management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the company's internal controls over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the company's internal controls over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report. Forward-Looking Statements This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates, and projections about BOK Financial, the financial services industry and the economy in general. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the provision and reserve for loan losses involve judgments as to expected events and are inherently forward-looking statements. Assessments that BOK Financial's acquisitions and other growth endeavors will be profitable are necessary statements of belief as to the outcome of future events, based in part on information provided by others that BOK Financial has not independently verified. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied, or forecasted in such forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to: (1) the ability to fully realize expected cost savings from mergers within the expected time frames, (2) the ability of other companies on which BOK Financial relies to provide goods and services in a timely and accurate manner, (3) changes in interest rates and interest rate relationships, (4) demand for products and services, (5) the degree of competition by traditional and nontraditional competitors, (6) changes in banking regulations, tax laws, prices, levies, and assessments, (7) the impact of technological advances and (8) trends in customer behavior as well as their ability to repay loans. BOK Financial and its affiliates undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events or otherwise.
29 <TABLE> - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Earnings (Unaudited) (In Thousands Except Share and Per Share Data) Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 -------------------------------------------------------------------- Interest Revenue <S> <C> <C> <C> <C> Loans $ 144,747 $ 104,092 396,523 297,358 Taxable securities 51,946 50,847 152,578 147,684 Tax-exempt securities 1,833 1,861 5,408 5,499 - ----------------------------------------------------------------------------------------------------------------------------------- Total securities 53,779 52,708 157,986 153,183 - ----------------------------------------------------------------------------------------------------------------------------------- Trading 144 136 479 473 securities Funds sold and resell agreements 386 91 706 183 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest revenue 199,056 157,027 555,694 451,197 - ----------------------------------------------------------------------------------------------------------------------------------- Interest Expense Deposits 54,503 37,213 145,950 103,837 Borrowed funds 27,248 9,663 67,105 24,747 Subordinated debentures 4,477 1,766 9,684 5,832 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest expense 86,228 48,642 222,739 134,416 - ----------------------------------------------------------------------------------------------------------------------------------- Net Interest Revenue 112,828 108,385 332,955 316,781 Provision for Credit Losses 3,976 4,986 7,991 16,000 - ----------------------------------------------------------------------------------------------------------------------------------- Net Interest Revenue After Provision for Credit Losses 108,852 103,399 324,964 300,781 - ----------------------------------------------------------------------------------------------------------------------------------- Other Operating Revenue Brokerage and trading revenue 11,366 10,209 33,106 31,386 Transaction card revenue 18,526 16,677 53,048 48,218 Trust fees and commissions 16,376 15,091 48,651 42,739 Service charges and fees on deposit accounts 25,619 24,292 73,139 70,375 Mortgage banking revenue 9,535 6,606 23,663 21,905 Leasing revenue 667 723 2,009 2,470 Other revenue 8,823 5,243 23,038 17,641 - ----------------------------------------------------------------------------------------------------------------------------------- Total fees and commissions 90,912 78,841 256,654 234,734 - ----------------------------------------------------------------------------------------------------------------------------------- Gain on sales of assets 81 78 6,990 797 Gain (loss) on securities, net (4,744) 2,673 (5,115) (4,055) Gain (loss) on derivatives, net 606 (506) 1,073 (1,300) - ----------------------------------------------------------------------------------------------------------------------------------- Total other operating revenue 86,855 81,086 259,602 230,176 - ----------------------------------------------------------------------------------------------------------------------------------- Other Operating Expense Personnel 66,533 60,524 190,305 178,543 Business promotion 4,494 3,671 12,794 10,852 Contribution of stock to BOK Charitable Foundation - - - 4,125 Professional fees and services 3,951 3,658 12,062 11,551 Net occupancy and equipment 12,587 11,733 37,331 35,316 Data processing and communications 17,492 14,918 48,972 44,829 Printing, postage and supplies 3,846 3,770 11,090 10,217 Amortization of intangible assets 1,801 1,991 5,146 6,250 Mortgage banking costs 4,268 3,962 11,268 14,238 Provision (recovery) for impairment of mortgage servicing rights (4,671) 5,900 (3,207) (1,262) Other expense 6,733 4,075 19,442 14,983 - ----------------------------------------------------------------------------------------------------------------------------------- Total other operating expense 117,034 114,202 345,203 329,642 - ----------------------------------------------------------------------------------------------------------------------------------- Income Before Taxes 78,673 70,283 239,363 201,315 Federal and state income tax 27,846 22,501 86,016 68,848 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income $ 50,827 $ 47,782 $ 153,347 $ 132,467 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings Per Share: - ----------------------------------------------------------------------------------------------------------------------------------- Basic $ 0.77 $ 0.79 $ 2.42 $ 2.21 - ----------------------------------------------------------------------------------------------------------------------------------- Diluted $ 0.76 $ 0.72 $ 2.29 $ 1.99 - ----------------------------------------------------------------------------------------------------------------------------------- Average Shares Used in Computation: - ----------------------------------------------------------------------------------------------------------------------------------- Basic 66,427,447 59,197,676 63,239,165 59,132,074 - ----------------------------------------------------------------------------------------------------------------------------------- Diluted 67,105,539 66,802,600 67,013,525 66,722,933 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements.
30 <TABLE> - -------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets (In Thousands Except Share Data) September 30, December 31, September 30, 2005 2004 2004 -------------------------------------------------- (Unaudited) (Unaudited) Assets <S> <C> <C> <C> Cash and due from banks $ 564,987 $ 503,715 $ 521,697 Funds sold and resell agreements 49,475 27,376 49,674 Trading securities 38,032 9,692 12,742 Securities: Available for sale 4,455,980 4,080,696 4,146,873 Available for sale securities pledged to creditors 368,118 512,494 548,637 Investment (fair value: September 30, 2005 - $240,179; December 31, 2004 - $222,636; September 30, 2004 - $221,350) 243,161 221,094 218,886 - -------------------------------------------------------------------------------------------------------------------- Total securities 5,067,259 4,814,284 4,914,396 - -------------------------------------------------------------------------------------------------------------------- Loans 8,883,568 7,928,967 7,784,166 Less reserve for loan losses (109,622) (108,618) (113,719) - -------------------------------------------------------------------------------------------------------------------- Loans, net of reserve 8,773,946 7,820,349 7,670,447 - -------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 177,084 172,643 171,617 Accrued revenue receivable 88,721 79,644 71,982 Intangible assets, net 258,478 242,594 244,483 Mortgage servicing rights, net 52,872 45,678 46,227 Real estate and other repossessed assets 5,069 3,763 6,038 Bankers' acceptances 40,170 31,799 24,105 Receivable on unsettled security transactions - 56,873 22,589 Derivative contracts 643,703 380,051 150,817 Other assets 579,806 206,953 217,550 - -------------------------------------------------------------------------------------------------------------------- Total assets $ 16,339,602 $ 14,395,414 $ 14,124,364 - -------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Noninterest-bearing demand deposits $ 1,756,695 $ 1,927,119 $ 1,856,432 Interest-bearing deposits: Transaction 4,360,723 3,947,088 3,859,901 Savings 155,152 156,339 163,008 Time 4,126,635 3,643,852 3,660,100 - -------------------------------------------------------------------------------------------------------------------- Total deposits 10,399,205 9,674,398 9,539,441 - -------------------------------------------------------------------------------------------------------------------- Funds purchased and repurchase agreements 2,173,791 1,555,507 1,717,639 Other borrowings 1,051,228 1,015,000 1,022,347 Subordinated debentures 296,401 151,594 153,121 Accrued interest, taxes and expense 70,667 71,062 57,228 Bankers' acceptances 40,170 31,799 24,105 Due on unsettled security transactions 11,198 - - Derivative contracts 661,253 387,292 156,467 Other liabilities 122,147 110,268 97,357 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 14,826,060 12,996,920 12,767,705 - -------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Preferred stock - 12 12 Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: September 30, 2005 - 67,648,551; December 31, 2004 - 60,420,811; September 30, 2004 - 60,186,377) 4 4 4 Capital surplus 646,737 631,747 624,257 Retained earnings 948,928 809,261 763,081 Treasury stock (shares at cost: September 30, 2005 - 1,127,624; December 31, 2004 - 998,393; September 30, 2004 - 950,206) (36,561) (30,905) (28,714) Accumulated other comprehensive loss (45,566) (11,625) (1,981) - -------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,513,542 1,398,494 1,356,659 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 16,339,602 $ 14,395,414 $ 14,124,364 - -------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements.
31 <TABLE> - --------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (In Thousands) Accumulated Other Preferred Stock Common Stock Comprehensive Treasury Stock ------------------------------------ Income Capital Retained -------------------- Shares Amount Shares Amount (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 - - - - - - 132,467 - - 132,467 Other comprehensive income, net of tax (1) - - - - (10,440) - - - - (10,440) ---------- Comprehensive income 122,027 ---------- Exercise of stock options - - 381 - - 6,427 - 74 (3,184) 3,243 Conversion of preferred stock to common (13) - - - - - - - - - Tax benefit on exercise of stock options - - - - - 4,117 - - - 4,117 Stock-based compensation - - - - - 181 - - - 181 Cash dividends on preferred stock - - - - - - (1,500) - - (1,500) Dividends paid in shares of common stock: Common stock - - 1,749 - - 66,938 (65,938) 27 (1,039) (39) - --------------------------------------------------------------------------------------------------------------------------- Balances at September 30, 2004 249,987 $ 12 60,186 $ 4 $ (1,981) $624,257 $763,081 950 $(28,714) $1,356,659 - --------------------------------------------------------------------------------------------------------------------------- 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 - - - - - - 153,347 - - 153,347 Other comprehensive income, net of tax (1) - - - - (33,941) - - - - (33,941) ---------- Comprehensive income 119,406 ---------- Treasury stock purchase - - - - - - - 60 (2,439) (2,439) Exercise of stock options - - 307 - - 7,022 - 70 (3,217) 3,805 Conversion of preferred stock to common (249,975) (12) 6,921 - - 12 - - - - Tax benefit on exercise of stock options - - - - - 1,878 - - - 1,878 Stock-based compensation - - - - - 6,078 - - - 6,078 Cash dividends on: Preferred stock - - - - - - (375) - - (375) Common stock - - - - - - (13,305) - - (13,305) - --------------------------------------------------------------------------------------------------------------------------- Balances at September 30, 2005 - $ - 67,649 $ 4 $(45,566)$ 646,737 $ 948,928 1,128 $(36,561) $1,513,542 - --------------------------------------------------------------------------------------------------------------------------- </TABLE> (1) September 30, 2005 September 30, 2004 Changes in other comprehensive income: Unrealized losses on securities $ (56,048) $ (21,211) Unrealized losses on cash flow hedges (2,046) - Tax benefit on unrealized losses 20,876 8,293 Reclassification adjustment for losses realized and included in net income 5,115 4,055 Reclassification adjustment for tax benefit on realized losses (1,838) (1,577) -------------------------------------- Net change in other comprehensive income (loss) $ (33,941) $ (10,440) -------------------------------------- See accompanying notes to consolidated financial statements.
32 <TABLE> - -------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flows (Unaudited) (In Thousands) Nine Months Ended Sept. 30, -------------------------------------- 2005 2004 -------------------------------------- Cash Flows From Operating Activities: <S> <C> <C> Net income $ 153,347 $ 132,467 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 7,991 16,000 Recovery for mortgage servicing rights impairment (3,207) (1,262) Unrealized losses from derivatives 12,085 4,568 Stock-based compensation 3,817 7,708 Tax benefit on exercise of stock options 1,878 4,117 Depreciation and amortization 33,658 36,439 Net accretion of securities discounts and premiums (1,013) (1,753) Net gain on sale of assets (14,108) (4,822) Mortgage loans originated for resale (584,780) (496,770) Proceeds from sale of mortgage loans held for resale 569,728 509,223 Change in trading securities (28,340) (4,919) Change in accrued revenue receivable (9,077) 2,998 Change in other assets (9,238) (33,500) Change in accrued interest, taxes and expense (395) (28,181) Change in other liabilities (29,855) 36,093 - -------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 102,491 178,406 - -------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Proceeds from maturities of investment securities 50,956 57,009 Proceeds from maturities of available for sale securities 764,647 714,693 Purchases of investment securities (73,269) (88,016) Purchases of available for sale securities (2,167,719) (2,901,008) Proceeds from sales of available for sale securities 1,110,707 1,969,077 Loans originated or acquired net of principal collected (1,016,092) (379,988) Proceeds from (payments on) derivative asset contracts 4,857 (20,335) Net change in other investment assets 32,541 6,157 Proceeds from disposition of assets 86,453 62,273 Purchases of assets (36,748) (25,700) Cash and cash equivalents of subsidiaries and branches acquired and sold, net (29,093) - - -------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (1,272,760) (605,838) - -------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net change in demand deposits, transaction deposits and savings accounts 242,024 34,204 Net change in time deposits 486,471 285,374 Net change in other borrowings 749,514 113,668 Pay down of other borrowings (95,000) - Issuance of subordinated debenture 147,855 - Proceeds from (payments on) derivative liability contracts (10,321) 21,192 Net change in derivative margin accounts (322,660) (70,403) Change in amount receivable (due) on unsettled security transactions 68,071 (30,848) Issuance of preferred, common and treasury stock, net 3,805 3,243 Repurchase of common stock (2,439) - Dividends paid (13,680) (1,539) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,253,640 354,891 - -------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents 83,371 (72,541) Cash and cash equivalents at beginning of period 531,091 643,912 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 614,462 $ 571,371 - -------------------------------------------------------------------------------------------------------------------- Cash paid for interest $ 218,974 $ 137,839 - -------------------------------------------------------------------------------------------------------------------- Cash paid for taxes $ 81,065 $ 63,553 - -------------------------------------------------------------------------------------------------------------------- Net loans transferred to repossessed real estate and other assets $ 6,138 $ 4,654 - -------------------------------------------------------------------------------------------------------------------- Payment of dividends in common stock $ - $ 65,899 - -------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements.
33 Notes to Consolidated Financial Statements (Unaudited) (1) Accounting Policies Basis of Presentation The unaudited consolidated financial statements of BOK Financial Corporation ("BOK Financial") 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. An 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 ---------------- As of August 15, 2005, Valley Commerce Bank was 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.
34 (3) Derivatives The fair values of derivative contracts at September 30, 2005 are as follows (in thousands): Assets Liabilities ----------------------------- Customer Risk Management Programs: Interest rate contracts $14,556 $15,569 Energy contracts 614,112 617,183 Cattle contracts 2,707 2,714 Foreign exchange contracts 12,328 12,328 - --------------------------------------------------------------------------- Total Customer Derivatives 643,703 647,794 Interest Rate Risk Management Programs: Interest rate contracts - 13,459 - --------------------------------------------------------------------------- Total Derivative Contracts $ 643,703 $661,253 - --------------------------------------------------------------------------- (4) Mortgage Banking Activities At September 30, 2005, BOK Financial owned the rights to service 54,407 mortgage loans with outstanding principal balances of $4.5 billion, including $453 million serviced for affiliates. The weighted average interest rate and remaining term was 6.15% and 274 months, respectively. Activity in capitalized mortgage servicing rights and related valuation allowance during the nine months ending September 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 - 13,977 13,977 - 13,977 Amortization expense (2,211) (7,779) (9,990) - (9,990) Recovery for impairment - - - 3,207 3,207 - ------------------------------- --- ---------- -- ---------- -- ---------- -- -------------- -- ----------- Balance at Sept. 30, 2005 $ 9,183 $ 54,254 $ 63,437 $ (10,565) $ 52,872 - ------------------------------- --- ---------- -- ---------- -- ---------- -- -------------- -- ----------- Estimated fair value of mortgage servicing rights (1) $ 8,292 $ 45,116 $ 53,408 - $ 53,408 - ------------------------------- --- ---------- -- ---------- -- ---------- -- -------------- -- ----------- </TABLE> (1) Excludes approximately $986,000 of loan servicing rights on mortgage loans originated prior to the adoption of FAS 122. Stratification of the mortgage loan servicing portfolio and outstanding principal of loans serviced by interest rate at September 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 $ 15,700 $ 29,206 $ 14,262 $ 4,269 $ 63,437 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- Fair value $ 13,883 $ 24,277 $ 11,506 $ 3,742 $ 53,408 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- Impairment (2) $ 1,968 $ 4,930 $ 2,757 $ 910 $ 10,565 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- Outstanding principal of loans serviced (1)$ 1,029,700 $ 1,778,600 $ 878,900 $286,100 $3,973,300 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- </TABLE> (1) Excludes outstanding principal of $453 million for loans serviced for affiliates and $70 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.
35 (5) Disposal of Available for Sale Securities Sales of available for sale securities resulted in gains and losses as follows (in thousands): Nine Months Ended Sept. 30, ---------------------------------- 2005 2004 -------------- --------------- Proceeds $ 1,110,707 $ 1,969,077 Gross realized gains 4,750 8,206 Gross realized losses (9,865) (12,261) Related federal and state income tax benefit (1,838) (1,577) (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 Sept. 30, Nine Months Ended Sept. 30, --------------------------------------------------------------------- 2005 2004 2005 2004 --------------------------------------------------------------------- <S> <C> <C> <C> <C> Service cost $ 1,744 $ 1,563 $ 5,232 $ 4,803 Interest cost 632 579 1,896 1,737 Expected return on plan assets (1,053) (912) (3,159) (2,726) Amortization of prior service cost 15 15 45 45 Amortization of net (gain) loss 274 265 822 795 - -------------------------------------------------------------------------------------------------------------- Net periodic pension cost $ 1,612 $ 1,510 $ 4,836 $ 4,654 - -------------------------------------------------------------------------------------------------------------- </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. During the third quarter of 2005, the Company made contributions totaling $5.0 million applicable to 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 October 25, 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 November 30, 2005 to shareholders of record on November 14, 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.
36 (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 Nine Months Ended ----------------------------------------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2005 2004 2005 2004 ----------------------------------------------------- Numerator: <S> <C> <C> <C> <C> Net income $ 50,827 $ 47,782 $ 153,347 $ 132,467 Preferred stock dividends - (750) (375) (1,500) - --------------------------------------------------------------------------------------------------------------- Numerator for basic earnings per share - income available to common shareholders 50,827 47,032 152,972 130,967 - --------------------------------------------------------------------------------------------------------------- Effect of dilutive securities: Preferred stock dividends - 750 375 1,500 - --------------------------------------------------------------------------------------------------------------- Numerator for diluted earnings per share - income available to common shareholders after assumed conversion $ 50,827 $ 47,782 $ 153,347 $ 132,467 - --------------------------------------------------------------------------------------------------------------- Denominator: Denominator for basic earnings per share - weighted average shares 66,427,447 59,197,676 63,239,165 59,132,074 Effect of dilutive securities: Employee stock compensation plans (1) 678,092 681,408 630,906 652,130 Convertible preferred stock - 6,921,021 3,143,454 6,921,182 Tanglewood market value guarantee - 2,495 - 17,547 - --------------------------------------------------------------------------------------------------------------- Dilutive potential common shares 678,092 7,604,924 3,774,360 7,590,859 - --------------------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 67,105,539 66,802,600 67,013,525 66,722,933 - --------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 0.77 $ 0.79 $ 2.42 $ 2.21 - --------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 0.76 $ 0.72 $ 2.29 $ 1.99 - --------------------------------------------------------------------------------------------------------------- (1) Excludes employee stock options with exercise prices greater than current market price. 819,444 - 857,937 - </TABLE>
37 (9) Reportable Segments Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2005 is as follows (in thousands): <TABLE> Net Other Other Interest Operating Operating Net Income Average Revenue Revenue(1) Expense Assets ------------ -- ------------ -- ------------- -- ----------- -- -------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 321,616 $ 265,424 $ 337,556 $ 147,339 $ 15,694,132 Unallocated items: Tax-equivalent adjustment 3,790 - - 3,790 - Funds management 17,307 (915) 5,130 2,283 1,681,326 All others (including eliminations), net (9,758) (865) 2,517 (65) (2,450,545) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 332,955 $ 263,644 $ 345,203 $ 153,347 $ 14,924,913 ============ == ============ == ============= == =========== == ============== </TABLE> (1) Excluding financial instruments gains/(losses). Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2004 is as follows (in thousands): <TABLE> Net Other Other Interest Operating Operating Net Income Average Revenue Revenue(1) Expense Assets ------------ -- ------------ -- ------------- -- ----------- -- -------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 275,681 $ 237,852 $ 315,369 $ 109,834 $ 14,382,042 Unallocated items: Tax-equivalent adjustment 3,406 - - 3,406 - Funds management 45,412 (2,417) 8,996 14,586 1,549,998 All others (including eliminations), net (7,718) 96 5,277 4,641 (2,326,880) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 316,781 $ 235,531 $ 329,642 $ 132,467 $ 13,605,160 ============ == ============ == ============= == =========== == ============== </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.
38 (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 September 30, 2005, outstanding commitments and letters of credit were as follows (in thousands): September 30, 2005 -------------- Commitments to extend credit $ 3,856,992 Standby letters of credit 523,623 Commercial letters of credit 8,213 Commitments to purchase securities 62,850 (12) Subsequent Events The Company has reached an agreement with the City of Tulsa to secure naming and certain other rights to Tulsa's new arena, to be known as the BOK Center. The Company will pay $11 million in annual installments over 20 years for the rights. The first installment of $625 thousand is due within 30 days of the agreement's execution date. The remaining installments are due in amounts ranging from $475 thousand to $625 thousand, beginning on or before January 3, 2009. The Company may, at its sole discretion, accelerate one or more annual installments and pay a discounted amount. The discounted amount shall be the present value of the installment discounted at the average yield of 20-year U.S. Treasury bonds.
39 <TABLE> - ------------------------------------------------------------------------------------------------------------------------------ Nine Month Financial Summary - Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands, Except Per Share Data) Nine Months Ended ------------------------------------------------------------------------------------ September 30, 2005 September 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) $ 4,754,020 $ 152,578 4.31% $ 4,638,290 $ 147,684 4.26% Tax-exempt securities (3) 221,392 8,540 5.16 203,182 8,721 5.73 - ------------------------------------------------------------------------------------------------------------------------------ Total securities (3) 4,975,412 161,118 4.34 4,841,472 156,405 4.32 - ------------------------------------------------------------------------------------------------------------------------------ Trading securities 14,506 527 4.86 17,978 522 3.88 Funds sold and resell agreements 32,073 706 2.94 15,898 183 1.54 Loans (2) 8,315,930 397,133 6.38 7,566,848 297,493 5.25 Less reserve for loan losses 110,823 - - 116,172 - - - ------------------------------------------------------------------------------------------------------------------------------ Loans, net of reserve 8,205,107 397,133 6.47 7,450,676 297,493 5.33 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets (3) 13,227,098 559,484 5.66 12,326,024 454,603 4.93 - ------------------------------------------------------------------------------------------------------------------------------ Cash and other assets 1,697,815 1,279,136 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 14,924,913 $ 13,605,160 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities And Shareholders' Equity Transaction deposits $ 4,261,669 48,646 1.53% $ 3,870,507 24,738 0.85% Savings deposits 161,153 814 0.68 172,629 744 0.58 Time deposits 3,785,850 96,490 3.41 3,558,320 78,355 2.94 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 8,208,672 145,950 2.38 7,601,456 103,837 1.82 - ------------------------------------------------------------------------------------------------------------------------------ Funds purchased and repurchase agreements 1,978,594 43,692 2.95 1,566,234 12,743 1.09 Other borrowings 978,280 23,413 3.20 1,007,762 12,004 1.59 Subordinated debenture 216,561 9,684 5.98 153,099 5,832 5.09 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 11,382,107 222,739 2.62 10,328,551 134,416 1.74 - ------------------------------------------------------------------------------------------------------------------------------ Demand deposits 1,633,718 1,761,020 Other liabilities 462,472 241,681 Shareholders' equity 1,446,616 1,273,908 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 14,924,913 $ 13,605,160 - ------------------------------------------------------------------------------------------------------------------------------ Tax-Equivalent Net Interest Revenue (3) 336,745 3.04% 320,187 3.19% Tax-Equivalent Net Interest Revenue To Earning Assets (3) 3.41 3.47 Less tax-equivalent adjustment (1) 3,790 3,406 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Revenue 332,955 316,781 Provision for credit losses 7,991 16,000 Other operating revenue 259,602 230,176 Other operating expense 345,203 329,642 - ------------------------------------------------------------------------------------------------------------------------------ Income Before Taxes 239,363 201,315 Federal and state income tax 86,016 68,848 - ------------------------------------------------------------------------------------------------------------------------------ Net Income $ 153,347 $ 132,467 - ------------------------------------------------------------------------------------------------------------------------------ Earnings Per Average Common Share Equivalent: Net Income: Basic $ 2.42 $ 2.21 - ------------------------------------------------------------------------------------------------------------------------------ Diluted $ 2.29 $ 1.99 - ------------------------------------------------------------------------------------------------------------------------------ </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.
40 <TABLE> - ------------------------------------------------------------------------------------------------------------------------------ Quarterly Financial Summary - Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands, Except Per Share Data) Three Months Ended ------------------------------------------------------------------------------------- September 30, 2005 June 30, 2005 ------------------------------------------ ------------------------------------- Average Revenue/ Yield / Average Revenue/ Yield / Balance Expense(1) Rate Balance Expense(1) Rate ------------------------------------------------------------------------------------- Assets <S> <C> <C> <C> <C> <C> <C> <C> Taxable securities (3) $ 4,800,698 $ 51,946 4.28% $ 4,831,186 $ 51,275 4.32% Tax-exempt securities (3) 231,097 2,888 4.96 215,360 2,810 5.23 - ------------------------------------------------------------------------------------------------------------------------------ Total securities (3) 5,031,795 54,834 4.31 5,046,546 54,085 4.36 - ------------------------------------------------------------------------------------------------------------------------------ Trading securities 14,560 171 4.66 11,639 165 5.69 Funds sold and resell agreements 44,882 386 3.41 21,170 156 2.96 Loans (2) 8,635,732 144,954 6.66 8,341,490 133,173 6.40 Less reserve for loan losses 109,840 - - 111,056 - - - ------------------------------------------------------------------------------------------------------------------------------ Loans, net of reserve 8,525,892 144,954 6.75 8,230,434 133,173 6.49 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets (3) 13,617,129 200,345 5.83 13,309,789 187,579 5.68 - ------------------------------------------------------------------------------------------------------------------------------ Cash and other assets 1,970,746 2,084,745 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 15,587,875 $ 15,394,534 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities And Shareholders' Equity Transaction deposits $ 4,533,912 $ 18,968 1.66% $ 4,323,513 $ 16,049 1.49% Savings deposits 157,772 280 0.70 166,426 285 0.69 Time deposits 3,958,948 35,255 3.53 3,710,338 31,499 3.41 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 8,650,632 54,503 2.50 8,200,277 47,833 2.34 - ------------------------------------------------------------------------------------------------------------------------------ Funds purchased and repurchase agreements 2,067,432 17,738 3.40 2,160,031 15,764 2.93 Other borrowings 1,047,423 9,510 3.60 914,968 7,224 3.17 Subordinated debenture 297,284 4,477 5.97 200,038 2,980 5.98 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 12,062,771 86,228 2.84 11,475,314 73,801 2.58 - ------------------------------------------------------------------------------------------------------------------------------ Demand deposits 1,424,102 1,586,248 Other liabilities 613,667 892,714 Shareholders' equity 1,487,335 1,440,258 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 15,587,875 $ 15,394,534 - ------------------------------------------------------------------------------------------------------------------------------ Tax-Equivalent Net Interest Revenue (3) $ 114,117 2.99% $ 113,778 3.10% Tax-Equivalent Net Interest Revenue To Earning Assets (3) 3.32 3.45 Less tax-equivalent adjustment (1) 1,289 1,245 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Revenue 112,828 112,533 Provision for credit losses 3,976 2,015 Other operating revenue 86,855 94,591 Other operating expense 117,034 126,010 - ------------------------------------------------------------------------------------------------------------------------------ Income before taxes 78,673 79,099 Federal and state income tax 27,846 28,634 - ------------------------------------------------------------------------------------------------------------------------------ Net Income $ 50,827 $ 50,465 - ------------------------------------------------------------------------------------------------------------------------------ Earnings Per Average Common Share Equivalent: Net income: Basic $ 0.77 $ 0.79 - ------------------------------------------------------------------------------------------------------------------------------ Diluted $ 0.76 $ 0.75 - ------------------------------------------------------------------------------------------------------------------------------ </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.
41 <TABLE> - ------------------------------------------------------------------------------------------------------------------------- Three Months Ended - ------------------------------------------------------------------------------------------------------------------------- March 31, 2005 December 31, 2004 September 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> $ 4,628,233 $ 49,356 4.32% $ 4,709,193 $ 50,200 4.25% $ 4,652,435 $ 50,847 4.34% 217,571 2,843 5.30 219,873 2,951 5.37 215,190 2,951 5.46 - ------------------------------------------------------------------------------------------------------------------------- 4,845,804 52,199 4.36 4,929,066 53,151 4.30 4,867,625 53,798 4.39 - ------------------------------------------------------------------------------------------------------------------------- 17,205 191 4.50 10,208 107 4.17 14,956 77 2.05 30,003 164 2.22 31,994 170 2.11 23,334 91 1.55 7,963,177 119,006 6.06 7,873,974 111,292 5.62 7,656,588 104,181 5.41 111,955 - - 114,106 - - 115,504 - - - ------------------------------------------------------------------------------------------------------------------------- 7,851,222 119,006 6.15 7,759,868 111,292 5.71 7,541,084 104,181 5.50 - ------------------------------------------------------------------------------------------------------------------------- 12,744,234 171,560 5.46 12,731,136 164,720 5.15 12,446,999 158,147 5.05 - ------------------------------------------------------------------------------------------------------------------------- 1,808,680 1,858,345 1,399,982 - ------------------------------------------------------------------------------------------------------------------------- $ 14,552,914 $ 14,589,481 $ 13,846,981 - ------------------------------------------------------------------------------------------------------------------------- $ 3,920,844 $ 13,629 1.41% $ 3,841,742 $ 10,779 1.12% $ 3,931,166 $ 9,280 0.94% 159,276 249 0.63 160,404 231 0.57 169,398 266 0.62 3,685,257 29,736 3.27 3,662,455 29,586 3.21 3,712,161 27,667 2.97 - ------------------------------------------------------------------------------------------------------------------------- 7,765,377 43,614 2.28 7,664,601 40,596 2.11 7,812,725 37,213 1.89 - ------------------------------------------------------------------------------------------------------------------------- 1,704,327 10,190 2.42 1,747,391 8,397 1.91 1,458,245 5,048 1.38 971,616 6,679 2.79 1,005,679 5,703 2.26 1,003,050 4,615 1.83 150,752 2,227 5.99 152,634 1,929 5.03 152,333 1,766 4.61 - ------------------------------------------------------------------------------------------------------------------------- 10,592,072 62,710 2.40 10,570,305 56,625 2.13 10,426,353 48,642 1.86 - ------------------------------------------------------------------------------------------------------------------------- 1,895,989 1,938,205 1,839,311 653,434 712,981 285,807 1,411,419 1,367,990 1,295,510 - ------------------------------------------------------------------------------------------------------------------------- $ 14,552,914 $ 14,589,481 $ 13,846,981 - ------------------------------------------------------------------------------------------------------------------------- $ 108,850 3.06% $ 108,095 3.02% $ 109,505 3.19% 3.46 3.38 3.50 1,256 1,633 1,120 - ------------------------------------------------------------------------------------------------------------------------- 107,594 106,462 108,385 2,000 4,439 4,986 78,156 78,714 81,086 102,159 111,582 114,202 - ------------------------------------------------------------------------------------------------------------------------- 81,591 69,155 70,283 29,536 22,599 22,501 - ------------------------------------------------------------------------------------------------------------------------- $ 52,055 $ 46,556 $ 47,782 - ------------------------------------------------------------------------------------------------------------------------- $ 0.87 $ 0.78 $ 0.79 - ------------------------------------------------------------------------------------------------------------------------- $ 0.78 $ 0.70 $ 0.72 - ------------------------------------------------------------------------------------------------------------------------- </TABLE>
42 PART II. Other Information Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table provides information with respect to purchases made by or on behalf of the Company or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company's common stock during the three months ended September 30, 2005. <TABLE> - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- Total Number Average Price Total Number of Shares Purchased Maximum Number of Shares of Shares Paid per Share as Part of Publicly Announced that May Yet Be Purchased Period Purchased (2) Plans or Programs (1) Under the Plans - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- <S> <C> <C> <C> <C> July 1, 2005 to 7,258 $ 47.36 - 1,970,000 July 31, 2005 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- August 1, 2005 to 6,188 $ 45.99 - 1,970,000 August 31, 2005 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- September 1, 2005 to 12,340 $ 47.64 - 1,970,000 September 30, 2005 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- Total 25,786 - - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- </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 September 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.
43 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BOK FINANCIAL CORPORATION (Registrant) Date: November 9, 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