As filed with the Securities and Exchange Commission on May 10, 2007 ============================================================================= UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2007 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ______________ Commission File No. 0-19341 BOK FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Oklahoma 73-1373454 (State or other jurisdiction (IRS Employer of Incorporation or Organization) Identification No.) Bank of Oklahoma Tower P.O. Box 2300 Tulsa, Oklahoma 74192 (Address of Principal Executive Offices) (Zip Code) (918) 588-6000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes|X| No|_| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes|_| No|X| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 67,225,437 shares of common stock ($.00006 par value) as of April 30, 2007. ==============================================================================
2 BOK Financial Corporation Form 10-Q Quarter Ended March 31, 2007 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 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 reported earnings of $52.8 million or $0.78 per diluted share for the first quarter of 2007, compared with net income of $54.7 million or $0.81 per diluted share for the first quarter of 2006. The annualized returns on average assets and shareholders' equity were 1.19% and 12.29%, respectively for the first quarter of 2007, compared with returns of 1.36% and 14.35%, respectively for 2006. Net income for the first quarter of 2006 included $3.3 million or $0.05 per share from net appreciation in the value of mortgage servicing rights due to a significant increase in mortgage commitment rates. Highlights of the quarter included: o Average outstanding loans increased 19% and average deposits increased 8% over the first quarter of 2006. o Net interest revenue grew $11.5 million or 10% over last year's first quarter, 15% annualized over the fourth quarter of 2006. o Net interest margin was 3.32%, up from 3.25% for the fourth quarter of last year. o Non-accruing loans and annualized net charge-offs continued to be near historic lows. Increased provision for loan losses is based largely on loan growth; exposure to sub-prime mortgage loans is minimal. o Fees and commission revenue increased $2.1 million or 2% over the first quarter of 2006; decreased $2.9 million over the preceding quarter. o Other operating expenses increased $6.9 million or 6% over the first quarter of 2006, excluding changes in the fair value of mortgage servicing rights. o Debt ratings were upgraded by Moody's Investor Service to A-2/Stable Outlook for BOK Financial and A-1/Stable Outlook for Bank of Oklahoma. o An agreement was reached to acquire Texas-based, Worth Bancorporation, Inc. for approximately $127 million in cash. As of December 31, 2006, Worth had total assets of $390 million, net loans of $272 million, total deposits of $345 million and five branches in the Fort Worth market. Net interest revenue grew $11.5 million or 10% over the first quarter of 2006. Average outstanding loan balances increased $1.7 billion or 19% and average deposits increased $931 million or 8%. Net interest margin was 3.32% for the first quarter of 2007 compared with 3.39% for the first quarter of 2006 and 3.25% for the fourth quarter of 2006. The aggregate net loan yield was 8.02%, up from 7.44% for the first quarter of 2006 and unchanged from the preceding quarter. The cost of interest-bearing funds was 4.14% for the first quarter of 2007 compared with 3.43% for the first quarter of 2006 and 4.10% for the fourth quarter of 2006. Non-accruing loans totaled $31 million or 0.28 % of outstanding loans at March 31, 2007 compared with $32 million or 0.35 % of outstanding loans at March 31, 2006 and $26 million or 0.24% at December 31, 2006. The combined
3 allowance for loan losses and reserve for off-balance sheet credit losses totaled $134 million or 1.21% of outstanding loans at March 31, 2007, $126 million or 1.38% of outstanding loans at March 31, 2006 and $130 million or 1.22% at December 31, 2006. The provision for credit losses was $6.5 million for the first quarter of 2007, $3.4 million for the same period last year and $6.0 million for the fourth quarter of 2006. Fees and commission revenue increased $2.1 million or 2% over the first quarter of 2006. Revenue from bank-owned life insurance totaled $2.4 million for the first quarter of 2007 compared with $63 thousand in 2006. Other revenue decreased $3.2 million due primarily to fees earned on margin asset balances. Transaction card revenue and trust fees grew $1.7 million or 9% and $1.1 million or 6%, respectively, over the first quarter of 2006. Operating expenses increased $6.9 million or 6% over the first quarter of 2006, excluding changes in the value of mortgage servicing. Personnel costs increased $7.5 million due largely to a $5.1 million increase in salaries and wages. All other operating expenses declined by a net $609 thousand or 1% compared with the first quarter of 2006. The fair value of mortgage servicing rights decreased $1.2 million during the first quarter of 2007. At the same time, the fair value of securities held as an economic hedge of mortgage servicing rights increased $254 thousand for a net pre-tax loss of $910 thousand. Rising interest rates and slowing prepayment speeds during the first quarter of 2006 increased the fair value of mortgage servicing rights $7.1 million and decreased the fair value of securities designated as an economic hedge $1.9 million for a net pre-tax gain of $5.2 million. Results of Operations Net Interest Revenue Tax-equivalent net interest revenue increased to $130.9 million for the first quarter of 2007 from $118.8 million for the same period of 2006, due primarily to a $1.7 billion or 19% increase in average outstanding loan principal. Average loan growth was funded by a $931 million or 8% increase in average deposits and a $696 million increase in borrowed funds. Table 1 shows the effects on net interest revenue of changes in average balances and interest rates for the various types of earning assets and interest-bearing liabilities. Net interest margin, the ratio of tax-equivalent net interest revenue to average earning assets was 3.32% for the first quarter of 2007, compared with 3.39% for the first quarter of 2006 and 3.25% for the fourth quarter of 2006. Yields on average earning assets continued to trend upwards due to rising market interest rates. The yield on average earning assets was 7.02%, up 60 basis points compared with the first quarter of 2006 and 9 basis points over the preceding quarter. The yield on average outstanding loans was 8.02%, up 58 basis points over the first quarter of 2006 and unchanged from the fourth quarter of 2006. The weighted average spread of our commercial loan portfolio over LIBOR funding sources was approximately 245 basis points for the first quarter of 2007 compared with approximately 265 basis points for the first quarter of 2006 and 250 basis points for the fourth quarter of 2006. The tax-equivalent yield on securities was 4.93% for the first quarter of 2007 compared with 4.64% for the first quarter of 2006 and 4.74% for the fourth quarter of 2006. Rates paid on average interest-bearing liabilities during the first quarter of 2007 increased 71 basis points over the first quarter of 2006 and 4 basis points over the preceding quarter. Rates paid on interest-bearing deposit accounts increased 66 basis points over the first quarter of 2006 and 5 basis points over the fourth quarter of 2006. The cost of other interest-bearing funds increased 73 basis points compared with the same period last year and were unchanged from the preceding quarter at 5.38%. Non-interest bearing funds and changes in the mix of funding sources added 44 basis points to the net interest margin in the first quarter of 2007 compared with 40 basis points for the first quarter of 2006 and 42 basis points for the fourth quarter of 2006. Our overall objective is to manage the Company's balance sheet to be essentially neutral to changes in interest rates. Approximately 69% of our commercial loan portfolio is either variable rate or fixed rate that will reprice within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that reprice more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally reprice more quickly than liabilities. To help achieve a rate-neutral position, we purchase fixed-rate, mortgage-backed securities, which are funded with short-term wholesale funds. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. The expected duration of these securities is approximately 2.5 years based on a range of interest rate and prepayment assumptions. We also use derivative instruments to manage our interest rate risk. Interest rate swaps with a combined notional amount of $807 million convert fixed rate liabilities to floating rate based on LIBOR. The purpose of these derivatives,
4 which include interest rate swaps designated as fair value hedges, is to position our balance sheet to be neutral to changes in interest rates. Subsequent to March 31, 2007, we terminated a $150 million notional amount interest rate swap to bring the rate sensitivity of our balance sheet closer to a neutral position. This swap had been designated as a fair value hedge of long-term, fixed rate debt. The $1.4 million fair value adjustment will be recognized as a reduction of interest expense over the remaining life of the debt. We also have interest rate swaps with a notional amount of $100 million that convert prime-based loans to fixed rate. The purpose of these derivatives, which have been designated as cash flow hedges, is to position our balance sheet to be neutral to changes in interest rates. The effectiveness of these strategies is reflected in the overall change in net interest revenue due to changes in interest rates as shown in Table 1 and in the interest rate sensitivity projections as shown in the Market Risk section of this report. <TABLE> - ------------------------------------------------------------------------------ Table 1 - Volume / Rate Analysis (In thousands) Three Months Ended March 31, 2007 / 2006 ----------------------------------- Change Due To (1) ----------------------------------- Yield / Change Volume Rate ----------------------------------- Tax-equivalent interest revenue: <S> <C> <C> <C> Securities $ 3,886 $ 357 $ 3,529 Trading securities 310 194 116 Loans 46,932 32,573 14,359 Funds sold and resell agreements 426 401 25 - ------------------------------------------------------------------------------ Total 51,554 33,525 18,029 - ------------------------------------------------------------------------------ Interest expense: Transaction deposits 15,238 5,197 10,041 Savings deposits 34 (29) 63 Time deposits 9,746 2,769 6,977 Federal funds purchased and repurchase agreements 15,082 10,622 4,460 Other borrowings (909) (2,680) 1,771 Subordinated debentures 288 34 254 - ------------------------------------------------------------------------------ Total 39,479 15,913 23,566 - ------------------------------------------------------------------------------ Tax-equivalent net interest revenue 12,075 17,612 (5,537) Change in tax-equivalent adjustment (563) - ------------------------------------------------------------------------------ Net interest revenue $ 11,512 - ------------------------------------------------------------------------------ (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 $2.8 million compared with the first quarter of last year. Fees and commission revenue increased $2.1 million or 2%. The remaining increase of $691 thousand was due to changes in gains or losses on assets sold, securities and derivatives. Diversified sources of fees and commission revenue are a significant part of our business strategy and represented 42% of total revenue, excluding gains and losses on asset sales, securities and derivatives, for the first quarter of 2007. We believe that a variety of fee revenue sources provide an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. Fees and commissions revenue Transaction card revenue increased $1.7 million or 9%. ATM network revenue increased $1.2 million or 16% while check card revenue increased $833 thousand or 19% over the first quarter of 2006. Merchant discount fees decreased $385 thousand or 6% compared with the first quarter of 2006. Much of the decrease in merchant discount fees resulted from the loss of one customer's business and was largely offset by a corresponding decrease in transaction processing
5 costs. Trust fees and commissions increased $1.1 million or 6% for the first quarter of 2007. The fair value of all trust relationships, which is the basis for a significant portion of trust fees increased to $33.3 billion at March 31, 2007 compared with $29.1 billion at March 31, 2006. Personal trust management fees, which provide 34% of total trust fees and commissions increased $607 thousand or 10%. Employee benefit plan management fees, which provide 20% of total trust fees, grew $460 thousand or 14%. Net fees from mutual fund advisory and administrative services increased $238 thousand or 6%. Revenue from the management of oil and gas properties and other real estate, which provide 11% of total trust revenue, were unchanged from the first quarter of 2006. Trust activities in the Oklahoma, Colorado and Texas markets provided $13.4 million, $2.6 million and $1.7 million, respectively, of total trust fees and commissions during the first quarter of 2007. Trust revenue grew $167 thousand or 1% in the Oklahoma market, $191 thousand or 8% in the Colorado market and $201 thousand or 13% in the Texas market. Brokerage and trading revenue decreased $74 thousand or 1%. Customer hedging revenue increased $798 thousand or 23% to $4.3 million. Volatility in the energy markets prompted our energy customers to more actively hedge their gas and oil production. Revenue from securities trading activities decreased $677 thousand or 13%. Much of the decrease in trading revenue is attributed to lower demand caused by the flattened yield curve and the effect of disruptions in mortgage lending on customers that purchase securities and derivatives from us to hedge their loan production. Revenue from retail brokerage activities increased $704 thousand or 21% over the same period of 2006. Investment banking fees were down $899 thousand or 67% due to the timing of transaction closings. Deposit service charges and fees increased $612 thousand or 3% over the first quarter of 2006. Overdraft fees grew $732 thousand or 5% due to increased volume and commercial account fees increased $224 thousand or 3%. Growth in fee revenue was partially offset by a $344 thousand or 20% decrease in service charges on retail accounts due to service-charge free deposit products. Mortgage banking revenue, which is discussed more fully in the Line of Business - - Mortgage Banking section of this report decreased $249 thousand or 4% compared with 2006. Servicing revenue totaled $4.2 million for the first quarter of 2007, up $200 thousand or 5% over the same period last year. Net gains on mortgage loans sold totaled $2.3 million, down $449 thousand from the first quarter of 2006. Changes in the cash surrender value of life insurance provided revenue of $2.4 million in the first quarter of 2007 and $63 thousand in the first quarter of 2006. The Company made a $202 million investment in bank-owned life insurance during the third quarter of 2006. Other operating revenue included $758 thousand of fees earned on margin assets in the first quarter of 2007 and $2.5 million in the first quarter of 2006. Margin assets which are held primarily as part of the Company's customer derivatives programs averaged $94 million for the first quarter of 2007, compared with $249 million for the first quarter of 2006. Fees earned on average margin assets decreased to 3.28% in the first quarter of 2007 from 4.13% in the first quarter of 2006. Securities and derivatives BOK Financial recognized net losses of $563 thousand on securities for the first quarter of 2007, including a $315 thousand other than temporary impairment charge against a security sold shortly after quarter end. Net gains on securities held as an economic hedge of mortgage servicing rights totaled $254 thousand. Securities held as an economic hedge of the mortgage servicing rights are separately identified on the balance sheet as "mortgage trading securities". Mortgage trading securities are carried at fair value; changes in fair value are recognized in earnings as they occur. The Company's use of securities as an economic hedge of mortgage servicing rights is more-fully discussed in the Line of Business - Mortgage Banking section of this report. During the first quarter of 2006, BOK Financial recognized net losses of $1.9 million on securities held as an economic hedge of mortgage servicing rights and net gains of $640 thousand on other securities.
6 Net gains on derivatives totaled $71 thousand for the first quarter of 2007, compared with net losses of $309 thousand in 2006. Net gains or losses on derivatives consist of fair value adjustments of derivatives used to manage interest rate risk and the related hedged liabilities. <TABLE> - -------------------------------------------------------------------------------------------------------------------------- Table 2 - Other Operating Revenue (In thousands) Three Months Ended ------------------------------------------------------------------------------- March 31, Dec. 31, Sept. 30, June 30, March 31, 2007 2006 2006 2006 2006 ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Brokerage and trading revenue $ 13,282 $ 14,382 $ 13,078 $ 12,597 $ 13,356 Transaction card revenue 20,184 20,224 19,939 19,951 18,508 Trust fees and commissions 18,995 18,240 17,101 17,751 17,945 Deposit service charges and fees 24,598 25,787 26,322 26,341 23,986 Mortgage banking revenue 6,540 6,077 6,935 7,195 6,789 Bank-owned life insurance 2,399 2,346 117 32 63 Other revenue 5,990 7,799 9,519 10,037 9,279 - -------------------------------------------------------------------------------------------------------------------------- Total fees and commissions 91,988 94,855 93,011 93,904 89,926 - -------------------------------------------------------------------------------------------------------------------------- Gain (loss) on sales of assets 694 252 475 (269) 1,041 Gain (loss) on securities, net (563) (864) 3,718 (2,583) (1,221) Gain (loss) on derivatives, net 71 (520) 379 (172) (309) - -------------------------------------------------------------------------------------------------------------------------- Total other operating revenue $ 92,190 $ 93,723 $ 97,583 $ 90,880 $ 89,437 - -------------------------------------------------------------------------------------------------------------------------- </TABLE> Other Operating Expense Other operating expense for the first quarter of 2007 totaled $132.5 million, a $15.1 million increase from 2006. The increase in other operating expenses resulted largely from changes in the value of mortgage servicing rights. Depreciation of the fair value of mortgage servicing rights during the first quarter of 2007 increased operating expenses $1.2 million. Appreciation in the value of mortgage servicing rights decreased operating expense by $7.1 million in the first quarter of 2006. Excluding changes in the value of mortgage servicing rights, operating expenses increased $6.9 million or 6% over the first quarter or 2006 due to higher personnel expense. Personnel expense Personnel expense totaled $78.7 million for the first quarter of 2007 compared with $71.2 million for the first quarter of 2006. Regular compensation expense which consists primarily of salaries and wages totaled $49.1 million for the first quarter of 2007, up $5.1 million or 12% increase over 2006. The increase in regular compensation expense was due to a 8% increase in average regular compensation per full-time equivalent employee and a 4% increase in average staffing. Growth in average compensation per full-time equivalent employee reflects the cost of hiring top talent to support expansion in the regional markets, product development, and technology. Incentive compensation expense includes the recognized costs of cash-based commissions, bonus and incentive programs, stock-based compensation plans and deferred compensation plans. Stock-based compensation plans include both equity and liability awards. Incentive compensation expense totaled $17.0 million for the first quarter of 2007, an increase of $1.8 million or 12% over 2006. First quarter 2007 expense for the Company's various cash-based incentive programs totaled $15.4 million, up $2.8 million over last year. These programs consist primarily of formula-based plans that determine incentive amounts based on pre-established growth criteria. Compensation expense for stock-based compensation plans totaled $1.6 million for the first quarter of 2007 and $2.6 million for the first quarter of 2006. Compensation expense for stock-based compensation plans accounted for as equity awards totaled $2.2 million in the first quarter of 2007, compared with $1.5 million in the first quarter of 2006. Expense for these awards is determined by the award's grant-date fair value and is not affected by subsequent changes in the market value of BOK Financial common stock. Compensation expense for stock-based compensation plans accounted for as liability awards was a net credit of $637 thousand for the first quarter of 2007, compared with $1.1 million expense in 2006. Expense for these liability awards is based on current fair value, including current period changes due to the market value of BOK Financial common stock. The market value of BOK Financial common stock decreased from $54.98 per share at December 31, 2006 to $49.53 per share at March 31, 2007.
7 Employee benefit expenses totaled $12.6 million for the first quarter of 2007 and $12.0 million for the first quarter of 2006. The increase in benefit costs included $963 thousand due to payroll taxes, partially offset by a $575 thousand decrease in employee insurance costs. Data processing and communications expense Data processing and communication expenses were unchanged from the first quarter of 2006. This expense consists of two broad categories, data processing systems and transaction card processing. Data processing systems costs increased $350 thousand, or 3% compared with the first quarter of 2006. Transaction card processing costs decreased $371 thousand or 6%, consistent with the decrease in merchant discount revenue. <TABLE> - ---------------------------------------------------------------------------------------------------------------------- Table 3 - Other Operating Expense (In thousands) Three Months Ended ---------------------------------------------------------------------------------- March 31, Dec. 31, Sept. 30, June 30, March 31, 2007 2006 2006 2006 2006 ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Personnel $ 78,729 $ 78,054 $ 74,605 $ 72,369 $ 71,232 Business promotion 4,570 5,345 4,401 4,802 4,803 Professional fees and services 4,874 4,734 4,734 4,362 3,914 Net occupancy and equipment 13,206 12,741 13,222 13,199 13,026 Data processing & communications 16,974 16,843 16,931 16,157 16,995 Printing, postage and supplies 3,969 3,774 4,182 4,001 3,905 Net losses and operating expenses of repossessed assets 207 167 34 54 219 Amortization of intangible assets 1,136 1,299 1,299 1,359 1,370 Mortgage banking costs 2,944 3,034 2,869 2,839 3,087 Change in fair value of mortgage servicing rights 1,164 (236) 7,921 (3,613) (7,081) Other expense 4,739 8,236 8,612 6,598 5,909 - --------------------------------------------------------------------------------------------------------------------- Total other operating expense $ 132,512 $ 133,991 $ 138,810 $ 122,127 $ 117,379 - --------------------------------------------------------------------------------------------------------------------- </TABLE> Income Taxes Income tax expense was $29.2 million or 36% of book taxable income, compared with $31.2 million or 36% of book taxable income for the first quarter of 2006. We adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48") on January 1, 2007. FIN 48 established recognition and measurement standards and expanded disclosure requirements for uncertain tax positions. Retained earnings at the beginning of the first quarter were reduced by $609 thousand based on the provisions of FIN 48. Lines of Business BOK Financial operates five principal lines of business: Oklahoma corporate banking, Oklahoma consumer banking, mortgage banking, wealth management, and regional banking. Mortgage banking activities include loan origination and servicing across all markets served by the Company. Wealth management provides brokerage and trading, private financial services and investment advisory services in all markets. It also provides fiduciary services in all markets except Colorado. Fiduciary services in Colorado are included in regional banking. Regional banking consists primarily of corporate and consumer banking activities in the respective local markets. In addition to its lines of business, BOK Financial has a funds management unit. The primary purpose of this unit is to manage the Company's overall liquidity needs and interest rate risk. Each line of business borrows funds from and provides funds to the funds management unit as needed to support their operations. Operating results for Funds Management and Other include the effect of interest rate risk positions and risk management activities, the provision for credit losses, tax-exempt income and tax credits and certain executive compensation costs that are not attributed to the lines of business. BOK Financial allocates resources and evaluates performance of its lines of business after allocation of funds, certain indirect expenses, taxes and capital costs. The cost of funds borrowed from the funds management unit by the operating
8 lines of business is transfer priced at rates that approximate market for funds with similar duration. Market is generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of transfer-pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk. The value of funds provided by the operating lines of business to the funds management unit is based on applicable Federal Home Loan Bank advance rates. Deposit accounts with indeterminate maturities, such as demand deposit accounts and interest-bearing transaction accounts, are transfer-priced at a rolling average based on expected duration of the accounts. The expected duration ranges from 90 days for certain rate-sensitive deposits to five years. Economic capital is assigned to the business units by a capital allocation model that reflects management's assessment of risk. This model assigns capital based upon credit, operating, interest rate and market risk inherent in our business lines and recognizes the diversification benefits among the units. The level of assigned economic capital is a combination of the risk taken by each business line, based on its actual exposures and calibrated to its own loss history where possible. Additional capital is assigned to the regional banking line of business based on our investment in those entities. Consolidated net income provided by the regional banking unit continued to increase due largely to asset growth. Also, performance by business units that generate deposits for the Company, such as the Oklahoma consumer banking unit and the regional banking unit continued to improve due primarily to internal funds pricing credits. Rising short-term interest rates increased the internal transfer pricing credit provided to units that generate lower-costing funds for the Company. Losses in Funds Management and Other was due primarily to the transfer pricing credit provided to operating units that generate lower-costing funds for the Company and the provision for credit losses in excess of actual net charge-offs during the quarter. The Mortgage Banking unit's contribution to consolidated net income decreased due to changes in the net fair value of mortgage servicing rights. During the first quarter of 2007, activities in the Kansas City market were transferred from Oklahoma Corporate Banking to Regional Banking. Operating results for the first quarter of 2006 have been restated for this change. <TABLE> - -------------------------------------------- -------------------------------- Table 4 - Net Income by Line of Business (In thousands) Three months ended March 31, 2007 2006 ---------------- --------------- <S> <C> <C> Regional banking $ 24,905 $ 22,298 Oklahoma corporate banking 18,045 18,098 Mortgage banking 46 3,144 Oklahoma consumer banking 9,461 8,467 Wealth management 7,355 7,759 - -------------------------------------------- ---------------- --------------- Subtotal 59,812 59,766 Funds management and other (7,019) (5,018) - -------------------------------------------- ---------------- --------------- Total $ 52,793 $ 54,748 - -------------------------------------------- ---------------- --------------- </TABLE> Oklahoma Corporate Banking The Oklahoma Corporate Banking Division provides loan and lease financing and treasury and cash management services to businesses throughout Oklahoma and certain relationships in surrounding states. In addition to serving the banking needs of small businesses, middle market and larger customers, the Oklahoma Corporate Banking Division has specialized groups that serve customers in the energy, agriculture, healthcare and banking/finance industries, and includes TransFund, our electronic funds transfer network. The Oklahoma Corporate Banking Division contributed $18.0 million or 34% to consolidated net income for the first quarter of 2007. This compares to $18.1 million or 33% of consolidated net income for 2006. Average loans attributed to the Oklahoma Corporate Banking Division were $4.4 billion for the first quarter of 2007, compared with $4.1 billion for the first quarter of 2006. Deposits attributed to Oklahoma Corporate Banking averaged $2.1 billion for the first quarter of 2007, up 19% over last year. Increased average loans and deposits combined to increase net interest revenue $1.5 million or 4%. Other operating revenue decreased $340 thousand or 2%. A $1.2 million or 18% increase in ATM processing fees was offset by lower revenue on operating leases, merchant discount fees and letter of credit fees. Operating expenses increased $684 thousand or 2%. Personnel expense increased $1.2 million or 15% due to growth in both regular salaries and incentive compensation. Non-personnel operating expenses, including allocations for shared services, decreased $562 thousand.
9 <TABLE> Table 5 - Oklahoma Corporate Banking (Dollars in Thousands) Three months ended March 31, ---------------------------------- 2007 2006 ------------- --- ------------- <S> <C> <C> NIR (expense) from external sources $ 61,131 $ 58,618 NIR (expense) from internal sources (23,127) (22,066) ------------- ------------- Net interest revenue 38,004 36,552 Other operating revenue 21,030 21,370 Operating expense 28,151 27,467 Net loans charged off 1,331 834 Net income 18,045 18,098 Average assets $ 5,786,800 $ 5,099,312 Average economic capital 425,580 382,380 Return on assets 1.26% 1.44% Return on economic capital 17.20% 19.19% Efficiency ratio 47.69% 47.42% </TABLE> Oklahoma Consumer Banking The Oklahoma Consumer Banking Division provides a full line of deposit, loan and fee-based services to customers throughout Oklahoma through four major distribution channels: traditional branches, supermarket branches, the 24-hour ExpressBank call center and the Internet. Additionally, the division is a significant referral source for the Bank of Oklahoma Mortgage Division ("BOk Mortgage") and BOSC's retail brokerage division. Consumer banking activities outside of Oklahoma are included in the Regional Banking division. The Oklahoma Consumer Banking Division contributed $9.5 million or 18% to consolidated net income for the first quarter of 2007. This compares to $8.5 million or 15% of consolidated net income for 2006. Net interest revenue, which consisted primarily of credits for funds provided to the funds management unit increased $2.0 million or 13%. Average deposits attributed to this Division increased $156 million, or 6% compared with last year. The value to the Company of these lower-costing retail deposits continues to increase as short-term interest rates rise. Operating revenue increased $624 thousand or 4% over last year. Check card fees increased $604 thousand or 19% and overdraft charges increased $447 thousand or 4%. Other service charges on retail deposit accounts were down $232 thousand or 20% due to service charge free deposit products. Operating expenses increased $842 thousand or 4%. Personnel expense grew $465 thousand or 6% while non-personnel expenses and allocations for shared services increased $377 thousand. The Oklahoma Consumer Banking Division opened two new branch offices in the first quarter of 2007. <TABLE> Table 6 - Oklahoma Consumer Banking (Dollars in Thousands) Three months ended March 31, ---------------------------------- 2007 2006 ------------- ------------- <S> <C> <C> NIR (expense) from external sources $ (20,152) $ (13,438) NIR (expense) from internal sources 38,215 29,459 ------------- ------------- Net interest revenue 18,063 16,021 Other operating revenue 17,879 17,255 Operating expense 20,175 19,333 Net loans charged off 261 133 Net income 9,461 8,467 Average assets $ 2,929,035 $ 2,768,947 Average economic capital 65,700 55,780 Return on assets 1.31% 1.24% Return on economic capital 58.40% 61.56% Efficiency ratio 56.13% 58.10% </TABLE>
10 Mortgage Banking BOK Financial engages in mortgage banking activities through the BOk Mortgage Division of Bank of Oklahoma. These activities include the origination, marketing and servicing of conventional and government-sponsored mortgage loans. Mortgage banking activities provided net income of $46 thousand in the first quarter of 2007, compared with $3.1 million in the first quarter of 2006. Mortgage banking activities consist of two sectors, loan production and loan servicing. The loan production sector generally performs best when mortgage rates are relatively low and loan origination volumes are high. Conversely, the loan servicing sector generally performs best when mortgage rates are relatively high and prepayments are low. Mortgage loan commitment rates were largely unchanged during the first quarter of 2007 and increased significantly during the first quarter of 2006. Loan Production Sector Loan production revenue totaled $2.2 million for the first quarter of 2007, including $2.3 million of capitalized mortgage servicing rights and a $40 thousand net loss on loans sold. Loan production revenue totaled $3.0 million for the first quarter of 2006, including $2.8 million of capitalized mortgage servicing rights. Mortgage loans funded in the first quarter of 2007 totaled $215 million, including $177 million of loans funded for resale and $38 million of loans funded for retention by affiliates. Mortgage loans funded in the same period of 2006 totaled $183 million. Approximately 62% of the loans funded during the first quarter of 2007 was to borrowers in Oklahoma. Loan production activities resulted in net pre-tax income of $223 thousand for the first quarter of 2007 and pre-tax income of $160 thousand for the first quarter of 2006. The pipeline of mortgage loan applications totaled $267 million at March 31, 2007, compared with $199 million at December 31, 2006 and $268 million at March 31, 2006. Loan Servicing Sector The loan servicing sector had a net pre-tax loss of $871 thousand for the first quarter of 2007 compared to a net pre-tax profit of $4.5 million for the same period of 2006. Average mortgage commitment rates were largely unchanged during the first quarter of 2007. The fair value of mortgage servicing rights decreased $1.2 million during the first quarter of 2007. At the same time, the fair value of securities held as an economic hedge of the servicing rights increased $254 thousand. During the first quarter of 2006, the fair value of mortgage servicing rights appreciated $7.1 million due to a 28 basis point increase in average mortgage commitment rates and a slow-down in housing turnover. Appreciation in the value of servicing rights was partially offset by a $1.9 million decrease in the fair value of securities held as an economic hedge. Servicing revenue, which is included in mortgage banking revenue on the Consolidated Statements of Earnings, totaled $4.2 million for the first quarter of 2007 and $4.0 million for the first quarter of 2006. The average outstanding balance of loans serviced for others was $4.4 billion during 2007 compared to $4.0 billion during 2006. Annualized servicing revenue per outstanding loan principal was 38 basis points for the first quarter of 2007, compared with 40 basis points for the first quarter last year. In addition to changes in the fair value of mortgage servicing rights due to anticipated prepayments and other factors, the fair value of mortgage servicing rights decreased $2.6 million and $2.7 million during the first quarters of 2007 and 2006, respectively, due to actual runoff of the underlying loans serviced.
11 <TABLE> Table 7 - Mortgage Banking (Dollars in Thousands) Three months ended March 31, ---------------------------------- 2007 2006 ------------- --- ------------- <S> <C> <C> NIR (expense) from external sources $ 7,815 $ 4,782 NIR (expense) from internal sources (6,952) (4,230) ------------- ------------- Net interest revenue 2,349 2,835 Other operating revenue 4,940 4,363 Operating expense 7,098 7,669 Change in fair value of mortgage servicing rights 1,164 (7,081) Gains (losses) on financial instruments, net 254 (1,861) Net income 46 3,144 Average assets $ 621,835 $ 446,436 Average economic capital 23,360 22,390 Return on assets 0.03% 2.86% Return on economic capital 0.80% 56.95% Efficiency ratio 87.07% 98.95% </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 designated as "mortgage trading securities" when prepayment risks exceed certain levels. Additionally, interest rate derivative contracts may also be designated as an economic hedge of the risk of loss on mortgage servicing rights. Because the fair values of these instruments are expected to vary inversely to the fair value of the servicing rights, they are expected to partially offset risk. These financial instruments are carried at fair value. Changes in fair value are recognized in current period income. No special hedge accounting treatment is applicable to either the mortgage servicing rights or the financial instruments designated as an economic hedge. This hedging strategy presents certain risks. A well-developed market determines the fair value for the securities and derivatives, however there is no comparable market for mortgage servicing rights. Therefore, the computed change in value of the servicing rights for a specified change in interest rates may not correlate to the change in value of the securities. At March 31, 2007, financial instruments with a fair value of $132 million and a net unrealized loss of $69 thousand 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 March 31, 2007, 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 $ 3,295 $ (4,943) Fair value of hedging instruments (3,565) 3,470 ----------------- ---------------- Net $ (270) $ (1,473) ----------------- ---------------- 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 $3.3 million while a 50 basis point decrease is expected to reduce value by $4.9 million. This considers that there is an upper limit to appreciation in the value of servicing rights as rates rise due to the contractual repayment terms of the loans and other factors. There is much less of a limit on the speed at which mortgage loans may prepay in a declining rate environment. Modeling changes in value of the mortgage servicing rights due to changes in interest rates assumes stable relationships between mortgage commitment rates and discount rates used to determine the present value of future cash flows. It also assumes a stable relationship between assumed loan prepayments and actual prepayments of our loans. Changes in market conditions can increase or decrease the discount spread over benchmark rates expected by investors in mortgage
12 servicing rights and actual prepayment speeds may increase or decrease due to factors other than changes in interest rates. These factors and others may cause changes in the value of our mortgage servicing rights to differ from our expectations. Wealth Management BOK Financial provides a wide range of financial services through its wealth management line of business, including banking, fiduciary and brokerage services. Clients include affluent individuals, businesses, not-for-profit organizations and governmental agencies. Wealth management services are provided primarily to clients throughout Oklahoma, Texas and New Mexico. Wealth management services are provided to clients in Colorado through our Regional Banking line of business. Additionally, wealth management includes a nationally competitive, self-directed 401(k) program and administration and advisory services to the American Performance family of mutual funds. Activities within the Wealth Management unit also include retail sales of mutual funds, securities and annuities, institutional sales of securities, bond underwriting and other financial advisory services and customer risk management programs. Wealth Management contributed $7.4 million or 14% to consolidated net income for the first quarter of 2007. This compared to $7.8 million or 14% of consolidated net income for the first quarter of 2006. Trust and private financial services provided $5.9 million of net income in the first quarter of 2007, up $398 thousand or 7% over last year. Net income provided by brokerage and trading activities totaled $1.4 million, down $828 thousand compared with the first quarter of 2006. Net interest revenue for the Wealth Management unit increased $2.4 million or 36% over the first quarter of 2006. Lower funding costs related to margin assets held as part of our customer derivatives programs increased the net interest margin by $1.4 million. However, this was largely offset by a $1.3 million reduction in margin fees, which are included in operating revenue. The remaining $942 thousand increase in net interest revenue was due to growth in loans and deposits held by private financial services. In addition to the decrease in operating revenue due to margin fees, investment banking revenue declined $898 thousand compared with the first quarter of 2006 due to the timing of transaction closings. This decrease in revenue was partially offset by trust and retail brokerage fees, which increased $801 thousand and $647 thousand, respectively. Trust fees and commissions totaled $16.3 million for the first quarter of 2007 and $15.5 million for the first quarter of 2006. At March 31, 2007 and 2006, the wealth management line of business was responsible for trust assets with aggregate market values of $30.6 billion and $26.6 billion, respectively, under various fiduciary arrangements. The growth in trust assets reflected increased market value of assets managed in addition to new business generated during the year. We have sole or joint discretionary authority over $11.3 billion of trust assets at March 31, 2007 compared with $9.5 billion at March 31, 2006. Trading fees and commissions, which are also included in operating revenue, totaled $12.4 million, up $473 thousand or 4% over last year. Customer trading revenue increased $656 thousand due largely to volatility in energy prices. This revenue growth was offset by a $891 million decrease in securities trading profits due to the flat yield curve and a slow-down in the mortgage market. Retail brokerage fees increased $647 thousand or 19%. Operating expenses totaled $26.9 million for the first quarter of 2007, a $1.7 million or 7% increase over 2006. Personnel costs rose $1.5 million or 9% due primarily to higher costs in trust and brokerage and trading.
13 <TABLE> Table 9 - Wealth Management (Dollars in Thousands) Three months ended March 31, ---------------------------------- 2007 2006 ------------- ------------- <S> <C> <C> NIR (expense) from external sources $ 4,525 $ 2,464 NIR (expense) from internal sources 4,286 4,038 ------------- ------------- Net interest revenue 8,811 6,502 Other operating revenue 30,170 31,385 Operating expense 26,930 25,191 Net income 7,355 7,759 Average assets $ 1,691,212 $ 1,876,539 Average economic capital 145,740 137,060 Return on assets 1.76% 1.68% Return on economic capital 20.47% 22.96% Efficiency ratio 69.08% 66.49% </TABLE> Regional Banking Regional Banking consists primarily of the corporate and commercial banking services provided by Bank of Texas, N.A., Bank of Albuquerque, N.A., Bank of Arkansas, N.A., Colorado State Bank and Trust, N.A., Bank of Arizona, N.A. and Bank of Kansas City, N.A. in their respective markets. It also includes fiduciary services provided by Colorado State Bank and Trust, N.A. Small businesses and middle-market corporations are Regional Banking's primary customer focus. Regional Banking contributed $24.9 million or 47% to consolidated net income during the first quarter of 2007. This compares with $22.3 million or 41% of consolidated net income for the same period in 2006. Growth in net income contributed by the regional banks came primarily from operations in Texas. Net income from Texas operations increased $1.2 million or 9% compared with the same period of 2006. In addition, net income for 2007 in Colorado, New Mexico and Arizona increased $787 thousand, $288 thousand and $352 thousand, respectively. Net income in Arkansas increased $161 thousand from last year. Net income from Texas operations totaled $13.9 million for the first quarter of 2007, up $1.2 million or 9% over last year. Net interest revenue grew $3.3 million or 9%. Average loans increased $460 million, or 21% from the first quarter of 2006. The growth in average earning assets was funded by a $148 million increase in average deposits and borrowings from the funds management unit. Operating expenses increased $1.4 million or 7% due to personnel costs. Three retail banking locations were opened in the Dallas area during the first quarter of 2007. Net income from operations in Colorado was $4.2 million for the first quarter of 2007, compared with $3.4 million for the first quarter of 2006. Net interest revenue increased $1.9 million or 22% due primarily to a $516 million increase in average earning assets. Average loans increased $232 million while average funds provided to the funds management unit increased $251 million. Average deposits increased $237 million or 37% in the Colorado market. Other operating revenue grew $274 thousand or 9% due primarily to trust fees and commissions. At March 31, 2007 and 2006, Colorado regional banking was responsible for trust assets with aggregate fair values of $2.7 billion and $2.5 billion, respectively, under various fiduciary arrangements. We have sole or joint discretionary authority over $1.0 billion of trust assets at March 31, 2007, compared with $960 million at March 31, 2006. Operating expenses increased $786 thousand or 13% including a $405 thousand or 13% increase in personnel costs. Net income from New Mexico operations increased $288 thousand or 6%. Net interest revenue was up $696 thousand or 6% over the first quarter of 2006. Average loans increased $96 million or 16%. Average deposits in the New Mexico market increased $58 million, or 6%. Operating expenses increased $242 thousand or 3% due to personnel costs. Outstanding loans attributed to the Arizona market averaged $477 million for the first quarter of 2007, up $265 million from the first quarter of 2006's average of $212 million. Deposits averaged $119 million for the first quarter of 2007 and $108 million for the first quarter of 2006. Loan growth was funded by borrowings from the funds management unit. Net interest revenue was up $1.5 million or 48% due to loan growth. Operating expenses increased $1.1 million or 43%. Personnel costs were up $856 thousand as we continue to build a commercial banking presence in Phoenix and Tucson. We also opened our first retail branch in Tucson during the first quarter of 2007.
14 During the first quarter of 2007, we acquired the charter for Bank of Kansas City to start full-service banking operations in Missouri. Previously, our full-service banking rights were restricted to Kansas City, Kansas. We now have two full-service banking locations in the Kansas City market. Average loans attributed to the Kansas City market were $149 million for the first quarter of 2007, up $81 million or 120% over the same period of 2006. <TABLE> Table 10 - Bank of Texas (Dollars in Thousands) Three months ended March 31, ---------------------------------- 2007 2006 ------------- ------------- <S> <C> <C> NIR (expense) from external sources $ 45,307 $ 39,012 NIR (expense) from internal sources (7,199) (4,182) ------------- ------------- Net interest revenue 38,108 34,830 Other operating revenue 6,285 5,463 Operating expense 21,711 20,283 Net loans charged off 1,145 401 Net income 13,903 12,745 Average assets $ 3,956,383 $ 3,545,802 Average economic capital 302,990 216,710 Average invested capital 470,070 383,790 Return on assets 1.43% 1.46% Return on economic capital 18.61% 23.85% Return on average invested capital 11.99% 13.47% Efficiency ratio 48.91% 50.34% </TABLE> <TABLE> Table 11 - Bank of Albuquerque (Dollars in Thousands) Three months ended March 31, ---------------------------------- 2007 2006 ------------- ------------- <S> <C> <C> NIR (expense) from external sources $ 17,711 $ 15,674 NIR (expense) from internal sources (5,226) (3,885) ------------- ------------- Net interest revenue 12,485 11,789 Other operating revenue 3,925 3,887 Operating expense 7,314 7,072 Net loans charged off 131 59 Net income 5,508 5,221 Average assets $ 1,538,373 $ 1,472,386 Average economic capital 90,190 76,150 Average invested capital 109,280 95,240 Return on assets 1.45% 1.44% Return on economic capital 24.77% 27.81% Return on average invested capital 20.44% 22.23% Efficiency ratio 44.57% 45.11% </TABLE>
15 <TABLE> Table 12 - Bank of Arkansas (Dollars in Thousands) Three months ended March 31, ---------------------------------- 2007 2006 ------------- ------------- <S> <C> <C> NIR (expense) from external sources $ 3,441 $ 2,289 NIR (expense) from internal sources (1,391) (719) ------------- ------------- Net interest revenue 2,050 1,570 Other operating revenue 334 253 Operating expense 1,041 857 Net loans charged off 142 43 Net income 725 564 Average assets $ 282,367 $ 196,070 Average economic capital 19,620 13,400 Average invested capital 19,620 13,400 Return on assets 1.04% 1.17% Return on economic capital 14.99% 17.07% Return on average invested capital 14.99% 17.07% Efficiency ratio 43.67% 47.01% </TABLE> <TABLE> Table 13 - Colorado State Bank and Trust (Dollars in Thousands) Three months ended March 31, ---------------------------------- 2007 2006 ------------- ------------- <S> <C> <C> NIR (expense) from external sources $ 17,410 $ 11,550 NIR (expense) from internal sources (7,031) (3,025) ------------- ------------- Net interest revenue 10,379 8,525 Other operating revenue 3,187 2,913 Operating expense 6,747 5,961 Net loans charged off / (recovered) 74 (46) Net income 4,161 3,374 Average assets $ 1,557,792 $ 1,037,770 Average economic capital 85,780 60,210 Average invested capital 127,760 102,190 Return on assets 1.08% 1.32% Return on economic capital 19.67% 22.73% Return on average invested capital 13.21% 13.39% Efficiency ratio 49.73% 52.12% </TABLE>
16 <TABLE> Table 14 - Bank of Arizona (Dollars in Thousands) Three months ended March 31, ---------------------------------- 2007 2006 ------------- ------------- <S> <C> <C> NIR (expense) from external sources $ 9,557 $ 4,685 NIR (expense) from internal sources (4,982) (1,590) ------------- ------------- Net interest revenue 4,575 3,095 Other operating revenue 184 165 Operating expense 3,636 2,551 Net loans charged off - 4 Net income 686 334 Average assets $ 552,591 $ 295,158 Average economic capital 39,470 16,820 Average invested capital 56,120 33,470 Return on assets 0.50% 0.46% Return on economic capital 7.05% 8.05% Return on average invested capital 4.96% 4.05% Efficiency ratio 76.40% 78.25% </TABLE> Financial Condition Securities Securities are classified as either held for investment, available for sale or trading based upon asset/liability management strategies, liquidity and profitability objectives and regulatory requirements. Investment securities, which consist primarily of Oklahoma municipal bonds, are carried at cost and adjusted for amortization of premiums or accretion of discounts. Management has the ability and intent to hold these securities until they mature. Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, less deferred taxes, are recorded as accumulated other comprehensive income in shareholders' equity. Certain mortgage-backed securities, identified as mortgage trading securities, have been designated as economic hedges of mortgage servicing rights. These securities are carried at fair value with changes in fair value recognized in current period income. These securities are held with the intent that gains or losses will offset changes in the fair value of mortgage servicing rights. The Company also maintains a separate trading securities portfolio. Trading portfolio securities, which are also carried at fair value with changes in fair value recognized in current period income, are acquired and held with the intent to sell at a profit. The amortized cost of available for sale securities totaled $4.9 billion at March 31, 2007 and $4.8 billion at December 31, 2006. Mortgage-backed securities continued to represent substantially all available for sale securities. As previously discussed in the Net Interest Revenue section of this report, we hold mortgage backed securities as part of our overall interest rate risk management strategy. The primary risk of holding mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. We evaluate this risk through extensive modeling of risk both before making an investment and throughout the life of the security. The effective duration of the mortgage-backed securities portfolio was approximately 2.5 years at March 31, 2007 and 2.6 years at December 31, 2006. Management estimates that the effective duration of the mortgage-backed securities portfolio would extend to 3.4 years assuming a 300 basis point immediate rate shock. Net unrealized losses on available for sale securities totaled $69 million at March 31, 2007 compared with net unrealized losses of $97 million at December 31, 2006. The decrease in net unrealized losses during the quarter was due primarily to falling interest rates. The aggregate gross amount of unrealized losses at March 31, 2007 was $83 million, down $108 million from the previous quarter's end. Management evaluated the securities with unrealized losses to determine if we believe that the losses were temporary. This evaluation considered factors such as causes of the unrealized losses and prospects for recovery over various interest rate scenarios and time periods. Management does not believe that any of the unrealized losses are due to credit quality concerns. We also considered our intent and ability to either hold or sell the securities. It is our belief, based on currently available information and our evaluation, that the
17 unrealized losses in these securities are temporary. Bank-Owned Life Insurance During the third quarter of 2006, the Company purchased $202 million in bank-owned life insurance. This investment is expected to provide a long-term source of earnings to support existing employee benefit obligations. Substantially all of the funds are held in separate accounts and invested in U.S. government, mortgage-backed and corporate debt securities. The cash surrender value of the life insurance policies is further supported by a stable value wrap, which protects against changes in the fair value of the investments. The cash surrender value of the policies, including the value of the stable value wrap, was $208 million at March 31, 2007. In addition to investment in the separate accounts, $8 million of the $202 million amount invested paid taxes on the insurance premiums. These taxes will be recovered over a ten-year period. At March 31, 2007, a $7 million receivable was recorded based on the present value of the taxes. Loans The aggregate loan portfolio at March 31, 2007 totaled $11.1 billion, a $427 million or 16% annualized increase since December 31, 2006. Commercial loans increased $233 million or 15% annualized and commercial real estate increased $104 million or 17% annualized. Mortgage and consumer loans increased $72 million and $17 million, respectively. <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 15 - Loans (In thousands) March 31, Dec. 31, Sept. 30, June 30, March 31, 2007 2006 2006 2006 2006 --------------------------------------------------------------------------------- Commercial: <S> <C> <C> <C> <C> <C> Energy $ 1,781,224 $ 1,763,180 $ 1,538,651 $ 1,514,353 $ 1,367,400 Services 1,596,844 1,555,141 1,432,156 1,405,060 1,358,194 Wholesale/retail 1,015,229 932,531 894,608 879,203 850,013 Manufacturing 622,329 609,571 598,424 541,592 519,100 Healthcare 642,876 602,273 572,911 546,595 534,091 Agriculture 309,439 321,380 299,901 292,022 284,277 Other commercial and industrial 474,415 424,808 340,925 360,493 325,746 - --------------------------------------------------------------------------------------------------------------------- Total commercial 6,442,356 6,208,884 5,677,576 5,539,318 5,238,821 - --------------------------------------------------------------------------------------------------------------------- Commercial real estate: Construction and land development 925,762 889,925 826,077 789,991 686,400 Multifamily 249,080 239,000 253,141 228,781 205,755 Other real estate loans 1,375,805 1,317,615 1,245,941 1,304,164 1,212,805 - --------------------------------------------------------------------------------------------------------------------- Total commercial real estate 2,550,647 2,446,540 2,325,159 2,322,936 2,104,960 - --------------------------------------------------------------------------------------------------------------------- Residential mortgage: Secured by 1-4 family residential properties 1,318,291 1,256,259 1,242,193 1,211,448 1,177,337 Residential mortgages held for sale 75,011 64,625 58,031 54,026 40,299 - --------------------------------------------------------------------------------------------------------------------- Total residential mortgage 1,393,302 1,320,884 1,300,224 1,265,474 1,217,636 - --------------------------------------------------------------------------------------------------------------------- Consumer 756,989 739,495 702,947 666,740 640,542 - --------------------------------------------------------------------------------------------------------------------- Total $ 11,143,294 $ 10,715,803 $ 10,005,906 $ 9,794,468 $ 9,201,959 - --------------------------------------------------------------------------------------------------------------------- </TABLE> The commercial loan portfolio totaled $6.4 billion at March 31, 2007. Energy loans totaled $1.8 billion or 16% of total loans. Outstanding energy loans increased $18 million, or 4% annualized, during the first quarter of 2007. Approximately $1.5 billion of loans in the energy portfolio was to oil and gas producers. The amount of credit available to these customers generally depends on a percentage of the value of their proven energy reserves based on anticipated prices. The energy category also included loans to borrowers involved in the transportation and sale of oil and gas and to borrowers that manufacture equipment or provide other services to the energy industry. The services sector of the portfolio totaled $1.6 billion, or 14% of the Company's total outstanding loans. Loans in this sector of the portfolio increased $42 million or 11% annualized since December 31, 2006. The services sector consists of a large number of loans to a variety of businesses, including communications, gaming and transportation services. Approximately $1.1 billion of the services sector is made up of loans with balances of less than $10 million.
18 Other notable loan concentrations by primary industry of the borrowers are presented in Table 15. BOK Financial participates in shared national credits when appropriate to obtain or maintain business relationships with local customers. Shared national credits are defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants. The outstanding principal balances of these loans totaled $1.4 billion at March 31, 2007 and December 31, 2006. Substantially all of these loans were to borrowers with local market relationships. BOK Financial serves as the agent lender in approximately 25% of the shared national credits, based on dollars committed. Our lending policies generally avoid loans in which we do not have the opportunity to maintain or achieve other business relationships with the customer. Commercial real estate loans totaled $2.6 billion or 23% of the loan portfolio at March 31, 2007. Construction and land development loans totaled $926 million, up $36 million or 16% annualized over December 31, 2006. Construction and land development included $718 million of loans secured by single family residential lots and premises, up $19 million from the previous quarter's end. The major components of other commercial real estate loans were office buildings - $424 million and retail facilities - $370 million. Residential mortgage loans, excluding mortgage loans held for sale, included $397 million of home equity loans, $445 million of loans held for business relationship purposes, $310 million of adjustable rate mortgages and $158 million of loans held for community development. We have no concentration in sub-prime residential mortgage loans. Consumer loans included $492 million of indirect automobile loans. Indirect auto loans have increased $29 million since December 31, 2006. Approximately $393 million of these loans were purchased from dealers in Oklahoma and $99 million was purchased from dealers in Arkansas. Growth during the quarter included $19 million from indirect lending activities in Arkansas and $10 million in Oklahoma. Table 16 presents the distribution of the major loan categories among our primary market areas.
19 <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 16 - Loans by Principal Market Area (In thousands) March 31, Dec. 31, Sept. 30, June 30, March 31, 2007 2006 2006 2006 2006 --------------------------------------------------------------------------------- Oklahoma: <S> <C> <C> <C> <C> <C> Commercial $ 3,377,819 $ 3,261,592 $ 3,078,849 $ 3,119,736 $ 2,981,660 Commercial real estate 895,585 979,251 968,267 995,953 925,703 Residential mortgage 945,147 896,567 878,390 854,723 847,517 Residential mortgage held for sale 75,011 64,625 58,031 54,026 40,299 Consumer 509,787 512,032 502,622 479,508 468,920 --------------------------------------------------------------------------------- Total Oklahoma $ 5,803,349 $ 5,714,067 $ 5,486,159 $ 5,503,946 $ 5,264,099 --------------------------------------------------------------------------------- Texas: Commercial $ 1,797,262 $ 1,722,627 $ 1,557,361 $ 1,548,545 $ 1,420,860 Commercial real estate 721,207 670,635 639,327 669,698 604,413 Residential mortgage 216,087 213,801 212,114 212,987 200,957 Consumer 105,604 95,652 80,836 84,212 87,669 --------------------------------------------------------------------------------- Total Texas $ 2,840,160 $ 2,702,715 $ 2,489,638 $ 2,515,442 $ 2,313,899 --------------------------------------------------------------------------------- New Mexico: Commercial $ 424,539 $ 411,272 $ 387,164 $ 334,984 $ 348,930 Commercial real estate 279,203 257,079 219,966 237,020 228,955 Residential mortgage 77,800 75,159 76,858 73,281 68,810 Consumer 11,493 13,256 13,899 13,404 13,820 --------------------------------------------------------------------------------- Total New Mexico $ 793,035 $ 756,766 $ 697,887 $ 658,689 $ 660,515 --------------------------------------------------------------------------------- Arkansas: Commercial $ 96,084 $ 95,483 $ 89,849 $ 80,539 $ 74,423 Commercial real estate 97,190 94,395 91,158 87,080 80,529 Residential mortgage 21,825 23,076 21,923 15,067 13,069 Consumer 103,662 86,017 67,206 51,166 33,548 --------------------------------------------------------------------------------- Total Arkansas $ 318,761 $ 298,971 $ 270,136 $ 233,852 $ 201,569 --------------------------------------------------------------------------------- Colorado: Commercial $ 457,758 $ 451,046 $ 353,657 $ 299,380 $ 267,928 Commercial real estate 199,736 193,747 170,081 155,453 134,771 Residential mortgage 15,501 15,812 17,656 21,113 20,383 Consumer 17,746 26,591 32,647 31,939 31,487 --------------------------------------------------------------------------------- Total Colorado $ 690,741 $ 687,196 $ 574,041 $ 507,885 $ 454,569 --------------------------------------------------------------------------------- Arizona: Commercial $ 120,351 $ 96,453 $ 76,013 $ 63,019 $ 52,274 Commercial real estate 316,661 207,035 196,286 153,870 120,262 Residential mortgage 41,731 31,280 34,772 33,913 26,270 Consumer 8,654 5,947 5,737 6,511 5,098 --------------------------------------------------------------------------------- Total Arizona $ 487,397 $ 340,715 $ 312,808 $ 257,313 $ 203,904 --------------------------------------------------------------------------------- Kansas: Commercial $ 168,543 $ 170,411 $ 134,683 $ 93,115 $ 92,746 Commercial real estate 41,065 44,398 40,074 23,862 10,327 Residential mortgage 200 564 480 364 331 Consumer 43 - - - - --------------------------------------------------------------------------------- Total Kansas $ 209,851 $ 215,373 $ 175,237 $ 117,341 $ 103,404 --------------------------------------------------------------------------------- Total BOK Financial loans $ 11,143,294 $ 10,715,803 $ 10,005,906 $ 9,794,468 $ 9,201,959 --------------------------------------------------------------------------------- </TABLE> Loan Commitments BOK Financial enters into certain off-balance sheet arrangements in the normal course of business. These arrangements included loan commitments which totaled $5.3 billion and standby letters of credit which totaled $517 million at March 31, 2007. Loan commitments may be unconditional obligations to provide financing or conditional obligations that
20 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, or to take positions in derivative contracts. Each of these programs work essentially the same way. Derivative contracts are executed between the customers and BOK Financial. Offsetting contracts are executed between the Company and selected counterparties to minimize the risk to us of changes in commodity prices, interest rates, or foreign exchange rates. The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or a fee paid to us as compensation for administrative costs, credit risk and profit. The Company adopted Statement of Financial Accounting Standards No. 157, "Fair Value Measurement" (FAS 157") as of January 1, 2007. FAS 157 established a single authoritative definition of fair value, set out a framework for measuring fair value and required additional disclosures about fair value measurements. It also nullified EITF guidance that prohibited recognition of gains at inception for derivative transactions whose fair value is estimated by modeling. Beginning January 1, 2007, the fair value of customer derivative assets and liabilities fully reflects the discounted cash flows based on forward curves, volatilities, credit risks and other market-observable inputs. Changes in the net fair values of customer derivative contracts are a component of Brokerage and Trading Revenue. Retained earnings were charged $1.1 million for effect of the initial adoption of FAS 157 on the fair value of customer derivative assets and liabilities. The customer derivative programs create credit risk for potential amounts due from customers and from the counterparties. Customer credit risk is monitored through existing credit policies and procedures. The effects of changes in commodity prices, interest rates or foreign exchange rates are evaluated across a range of possible options to determine the maximum exposure we are willing to have individually to any customer. Customers may also be required to provide margin collateral to further limit our credit risk. Counterparty credit risk is evaluated through existing policies and procedures. This evaluation considers the total relationship between BOK Financial and each of the counterparties. Individual limits are established by management, approved by Credit Administration and reviewed by the Asset / Liability Committee. Margin collateral is required if the exposure between the Company and any counterparty exceeds established limits. Based on declines in the counterparties' credit rating, these limits are reduced and additional margin collateral is required. A deterioration of the credit standing of one or more of the customers or counterparties to these contracts may result in BOK Financial recognizing a loss as the fair value of the affected contracts may no longer move in tandem with the offsetting contracts. This could occur if the credit standing of the customer or counterparty deteriorated such that either the fair value of underlying collateral no longer supported the contract or the counterparty's ability to provide margin collateral was impaired. Derivative contracts are carried at fair value. At March 31, 2007, the fair value of derivative contracts reported as assets under these programs totaled $219 million. This included energy contracts with fair values of $179 million, interest rate contracts with fair values of $25 million and foreign exchange contracts with fair values of $13 million. The aggregate fair values of derivative contracts reported as liabilities totaled $230 million. Approximately 97% of the fair value of asset contracts was with customers. The credit risk of these contracts is generally backed by energy production. The remaining 3% was with dealer counterparties. The maximum net exposure to any single customer or counterparty totaled $35 million. Summary of Loan Loss Experience The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $114 million at March 31, 2007, compared with $109 million at December 31, 2006 and $104 million at March 31, 2006. These amounts represented 1.03%, 1.03% and 1.14% of outstanding loans, excluding loans held for sale, at March 31, 2007, December 31, 2006 and March 31, 2006, 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
21 reserve for loan losses also represented 365% of outstanding balance of non-accruing loans at March 31, 2007, compared with 420% at December 31, 2006 and 323% at March 31, 2006. Non-accruing loans totaled $31 million at March 31, 2007, compared with $26 million at December 31, 2006 and $32 million at March 31, 2006. Net loans charged off during the first quarter of 2007 totaled $3.1 million, up from $2.8 million in the preceding quarter and $1.6 million for the first quarter of 2006. The Company considers credit risk from loan commitments and letters of credit in its evaluation of the adequacy of the reserve for loan losses. A separate reserve for off-balance sheet credit risk is maintained. Table 17 presents the trend of reserves for off-balance sheet credit losses and the relationship between the reserve and loan commitments. The relationship between the combined reserve for credit losses and outstanding loans is also presented to facilitate comparison with peer banks and others who have not adopted this preferred presentation. The provision for credit losses included the combined charge to expense for both the reserve for loan losses and the reserve for off-balance sheet credit losses. All losses incurred from lending activities will ultimately be reflected in charge-offs against the reserve for loan losses following funds advanced against outstanding commitments and after the exhaustion of collection efforts. The reserve for off-balance sheet credit losses would decrease and the reserve for loan losses would increase as outstanding commitments are funded. <TABLE> - ------------------------------------------------------------------------------------------------------------------------------ Table 17 - Summary of Loan Loss Experience (In thousands) Three Months Ended ---------------------------------------------------------------------------------- March 31, Dec. 31, Sept. 30, June 30, March 31, 2007 2006 2006 2006 2006 ---------------------------------------------------------------------------------- Reserve for loan losses: <S> <C> <C> <C> <C> <C> Beginning balance $ 109,497 $ 105,465 $ 104,525 $ 104,143 $ 103,876 Loans charged off: Commercial 3,123 2,202 4,550 2,523 1,242 Commercial real estate 30 87 - - - Residential mortgage 124 465 230 363 207 Consumer 3,110 3,113 3,319 2,995 2,700 - ------------------------------------------------------------------------------------------------------------------------------ Total 6,387 5,867 8,099 5,881 4,149 - ------------------------------------------------------------------------------------------------------------------------------ Recoveries of loans previously charged off: Commercial 1,471 1,853 1,985 720 847 Commercial real estate 41 5 276 6 40 Residential mortgage 189 25 19 20 97 Consumer 1,567 1,196 1,523 1,339 1,580 - ------------------------------------------------------------------------------------------------------------------------------ Total 3,268 3,079 3,803 2,085 2,564 - ------------------------------------------------------------------------------------------------------------------------------ Net loans charged off 3,119 2,788 4,296 3,796 1,585 Provision for loan losses 7,993 6,820 5,236 4,178 1,852 - ------------------------------------------------------------------------------------------------------------------------------ Ending balance $ 114,371 $ 109,497 $ 105,465 $ 104,525 $ 104,143 - ------------------------------------------------------------------------------------------------------------------------------ Reserve for off-balance sheet credit losses: Beginning balance $ 20,890 $ 21,757 $ 21,739 $ 22,122 $ 20,574 Provision for off-balance sheet credit losses (1,493) (867) 18 (383) 1,548 - ------------------------------------------------------------------------------------------------------------------------------ Ending balance $ 19,397 $ 20,890 $ 21,757 $ 21,739 $ 22,122 - ------------------------------------------------------------------------------------------------------------------------------ Total provision for credit losses $ 6,500 $ 5,953 $ 5,254 $ 3,795 $ 3,400 - ------------------------------------------------------------------------------------------------------------------------------ Reserve for loan losses to loans outstanding at period-end (1) 1.03% 1.03% 1.06% 1.07% 1.14% Net charge-offs (annualized) to average loans (1) 0.12 0.11 0.18 0.16 0.07 Total provision for credit losses (annualized) to average loans (1) 0.24 0.23 0.22 0.16 0.15 Recoveries to gross charge-offs 51.17 52.48 46.96 35.45 61.80 Reserve for loan losses as a multiple of net charge-offs (annualized) 9.17x 9.82x 6.14x 6.88x 16.43x Reserve for off-balance sheet credit losses to off-balance sheet credit commitments 0.34% 0.36% 0.40% 0.41% 0.36% Combined reserves for credit losses to loans outstanding at period-end (1) 1.21 1.22 1.28 1.30 1.38 - ------------------------------------------------------------------------------------------------------------------------------ (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 March 31, 2007, specific impairment reserves totaled $2.4 million on total impaired loans of $24 million. Required specific impairment reserves were $1.7 million at December 31, 2006.
22 Nonspecific reserves are maintained for risks beyond factors specific to an individual loan or those identified through migration analysis. A range of potential losses is determined for each risk factor identified. The ranges of potential losses for the more significant factors were: <TABLE> March 31, 2007 December 31, 2006 <S> <C> <C> General economic conditions $4.2 million to $8.4 million $5.2 million to $9.1 million Concentration in large loans $1.4 million to $2.8 million $1.4 million to $2.8 million </TABLE> The provision for credit losses totaled $6.5 million for the first quarter of 2007, compared with $6.0 million for the fourth quarter of 2006 and $3.4 million for the first quarter of 2006. Factors considered in determining the provision for credit losses included continued growth in outstanding loans and increases in net losses and non-accruing loans during the quarter. Nonperforming Assets Information regarding nonperforming assets, which totaled $41 million at March 31, 2007 and $36 million at December 31, 2006, is presented in Table 18. Nonperforming assets included non-accrual loans and excluded loans 90 days or more past due but still accruing interest. Non-accrual loans totaled $31 million at March 31, 2007 and $26 million at December 31, 2006. Newly identified non-accruing loans totaled $9.6 million during the first quarter of 2007. Non-accruing loans decreased $2.2 million for loans charged off or foreclosed, and $930 thousand for cash payments received. Loans past due but still accruing at March 31, 2007 included $15.1 million from one matured loan whose renewal is pending due to administrative matters. <TABLE> - ---------------------------------------------------------------------------------------------------------------------- Table 18 - Nonperforming Assets (In thousands) March 31, Dec. 31, Sept. 30, June 30, March 31, 2007 2006 2006 2006 2006 ----------------------------------------------------------------------- Nonaccrual loans: <S> <C> <C> <C> <C> <C> Commercial $ 14,218 $ 10,737 $ 15,061 $ 15,087 $ 17,073 Commercial real estate 6,832 4,771 3,540 4,369 6,444 Residential mortgage 9,920 10,325 7,889 7,604 8,057 Consumer 364 222 3,986 3,916 655 - ---------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 31,334 26,055 30,476 30,976 32,229 - ---------------------------------------------------------------------------------------------------------------------- Renegotiated loans 964 1,111 1,064 - - Other nonperforming assets 8,414 8,486 9,322 8,257 8,196 - ---------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 40,712 $ 35,652 $ 40,862 $ 39,233 $ 40,425 - ---------------------------------------------------------------------------------------------------------------------- Ratios: Reserve for loan losses to nonaccrual loans 365.01% 420.25% 346.06% 337.44% 323.13% Combined reserves for credit losses to nonaccrual loans 426.91 500.43 417.45 407.62 391.77 Nonaccrual loans to period-end loans (2) 0.28 0.24 0.31 0.32 0.35 - ---------------------------------------------------------------------------------------------------------------------- Loans past due (90 days) (1) $ 20,623 $ 5,945 $ 5,076 $ 9,630 $ 3,919 - ---------------------------------------------------------------------------------------------------------------------- (1) Includes residential mortgages guaranteed by agencies of the U.S. Government. $ 1,728 $ 2,233 $ 1,784 $ 2,310 $ 1,595 (2) Excludes residential mortgage loans held for sale. - ---------------------------------------------------------------------------------------------------------------------- </TABLE> The loan review process also identifies loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrower or the value of the collateral. Because the borrowers are still performing in accordance with the original terms of the loan agreements, and no loss of principal or interest is anticipated, these loans were not included in the Nonperforming Assets table. Known information does, however, cause management concern as to the borrowers' ability to comply with current repayment terms. These potential problem loans totaled $27 million at
23 March 31, 2007 and $22 million at December 31, 2006. Potential problem loans by primary industry included healthcare - $11 million, residential home construction - $7 million, other real estate loans - $5 million, services - $2 million and manufacturing - $2 million. Deposits Deposit accounts represent our primary funding source. We compete for retail and commercial deposits by offering a broad range of products and services and focusing on customer convenience. Retail deposit growth is supported through our Perfect Banking program, free checking and on-line Billpay services, an extensive network of branch locations and ATMs and a 24-hour Express Bank call center. Commercial deposit growth is supported by offering treasury management and lockbox services. Total deposits averaged $12.1 billion for the first quarter of 2007, up $255 million, or 9% annualized compared with average deposits in the fourth quarter of 2006. Average commercial deposits increased $156 million or 16% annualized primarily due to a $117 million increase in Oklahoma. Average deposits attributed to consumer banking increased $52 million. Consumer deposits in Colorado and New Mexico increased $29 million and $14 million, respectively. Average deposits attributed to trust and private financial services increased $38 million or 10% annualized. Average deposits attributed to mortgage banking, which consisted primarily of escrow funds, decreased $19 million due to the timing of property tax payments. Core deposits, which we define as deposits of less than $100,000, excluding public funds and brokered deposits, averaged $5.8 billion for the first quarter of 2007, an annualized increase of 12% over the fourth quarter of 2006. Average core deposits comprised 48% of total deposits for the first quarter of 2007. Deposit accounts with balances in excess of $100,000 averaged $5.1 billion or 42% of total average deposits, unchanged from the preceding quarter. Average public funds increased $81 million or 56% annualized from seasonal changes based on the timing of tax receipts. The distribution of deposit accounts among our principal markets is shown in Table 19.
24 <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 19 - Deposits by Principal Market Area (In thousands) March 31, Dec. 31, Sept. 30, June 30, March 31, 2007 2006 2006 2006 2006 --------------------------------------------------------------------------------- Oklahoma: <S> <C> <C> <C> <C> <C> Demand $ 877,623 $ 915,101 $ 868,502 $ 908,034 $ 950,582 Interest-bearing: Transaction 3,481,859 3,456,322 3,001,774 2,732,312 2,937,228 Savings 92,678 83,017 83,442 88,218 93,093 Time 2,556,423 2,595,890 2,621,522 2,662,770 2,623,352 --------------------------------------------------------------------------------- Total interest-bearing 6,130,960 6,135,229 5,706,738 5,483,300 5,653,673 --------------------------------------------------------------------------------- Total Oklahoma $ 7,008,583 $ 7,050,330 $ 6,575,240 $ 6,391,334 $ 6,604,255 --------------------------------------------------------------------------------- Texas: Demand $ 602,315 $ 640,159 $ 582,014 $ 638,157 $ 551,411 Interest-bearing: Transaction 1,701,382 1,688,131 1,671,993 1,530,491 1,455,856 Savings 24,558 24,074 25,888 26,370 27,827 Time 682,292 829,255 736,316 717,027 726,530 --------------------------------------------------------------------------------- Total interest-bearing 2,408,232 2,541,460 2,434,197 2,273,888 2,210,213 --------------------------------------------------------------------------------- Total Texas $ 3,010,547 $ 3,181,619 $ 3,016,211 $ 2,912,045 $ 2,761,624 --------------------------------------------------------------------------------- New Mexico: Demand $ 126,111 $ 124,088 $ 144,138 $ 147,307 $ 159,125 Interest-bearing: Transaction 464,569 432,342 434,521 410,166 408,160 Savings 17,972 16,417 16,804 16,860 17,805 Time 485,662 490,460 481,993 494,426 483,428 --------------------------------------------------------------------------------- Total interest-bearing 968,203 939,219 933,318 921,452 909,393 --------------------------------------------------------------------------------- Total New Mexico $ 1,094,314 $ 1,063,307 $ 1,077,456 $ 1,068,759 $ 1,068,518 --------------------------------------------------------------------------------- Arkansas: Demand $ 10,980 $ 12,589 $ 11,914 $ 11,521 $ 11,629 Interest-bearing: Transaction 21,762 17,905 19,504 20,577 26,675 Savings 1,029 1,010 1,058 1,072 1,051 Time 54,687 57,446 61,966 69,418 73,082 --------------------------------------------------------------------------------- Total interest-bearing 77,478 76,361 82,528 91,067 100,808 --------------------------------------------------------------------------------- Total Arkansas $ 88,458 $ 88,950 $ 94,442 $ 102,588 $ 112,437 --------------------------------------------------------------------------------- Colorado: Demand $ 39,821 $ 48,756 $ 38,264 $ 45,214 $ 56,419 Interest-bearing: Transaction 314,506 328,254 275,714 245,504 258,801 Savings 12,092 12,632 13,037 13,786 16,315 Time 502,880 485,200 421,841 379,239 309,068 --------------------------------------------------------------------------------- Total interest-bearing 829,478 826,086 710,592 638,529 584,184 --------------------------------------------------------------------------------- Total Colorado $ 869,299 $ 874,842 $ 748,856 $ 683,743 $ 640,603 --------------------------------------------------------------------------------- Arizona: Demand $ 29,461 $ 39,352 $ 62,234 $ 73,696 $ 55,421 Interest-bearing: Transaction 67,364 73,729 74,786 67,841 57,400 Savings 1,367 1,978 2,408 2,702 3,380 Time 10,018 6,574 4,549 4,077 4,608 --------------------------------------------------------------------------------- Total interest-bearing 78,749 82,281 81,743 74,620 65,388 --------------------------------------------------------------------------------- Total Arizona $ 108,210 $ 121,633 $ 143,977 $ 148,316 $ 120,809 --------------------------------------------------------------------------------- Kansas: Demand $ 325 $ 14 $ - $ - $ - Interest-bearing: Transaction 670 287 - - - Savings 11 2 - - - Time 28,166 5,721 - - - --------------------------------------------------------------------------------- Total interest-bearing 28,847 6,010 - - - --------------------------------------------------------------------------------- Total Kansas $ 29,172 $ 6,024 $ - $ - $ - --------------------------------------------------------------------------------- Total BOK Financial deposits $ 12,208,583 $ 12,386,705 $ 11,656,182 $ 11,306,785 $ 11,308,246 --------------------------------------------------------------------------------- </TABLE>
25 Borrowings and Capital BOK Financial (parent company) has a $100 million unsecured revolving line of credit with certain banks that expires in December 2010. There was no outstanding principal balance on this credit agreement at March 31, 2007. Interest is based on LIBOR plus a defined margin that is determined by the Company's credit rating or a base rate. This margin ranges from 0.375% to 1.125%. The margin currently applicable to borrowings against this line is 0.375%. The base rate is defined as the greater of the daily federal funds rate plus 0.500% or the SunTrust Bank prime rate. Interest is generally paid monthly. Facility fees are paid quarterly on the unused portion of the commitment at rates that range from 0.100% to 0.250% based on the Company's credit rating. This credit agreement includes certain restrictive covenants that limit the Company's ability to borrow additional funds, to make investments and to pay cash dividends on common stock. These covenants also require BOK Financial and subsidiary banks to maintain minimum capital levels and to exceed minimum net worth ratios. BOK Financial met all of the restrictive covenants at March 31, 2007. The primary source of liquidity for BOK Financial is dividends from subsidiary banks, which are limited by various banking regulations to net profits, as defined, for the preceding two years. Dividends are further restricted by minimum capital requirements. Based on the most restrictive limitations, the subsidiary banks could declare up to $130 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 $55 million under this policy. Equity capital for BOK Financial totaled $1.8 billion at March 31, 2007, up $65 million during the quarter. Retained earnings, net income less cash dividends provided $43 million of the increase. Accumulated other comprehensive losses decreased $17 million due primarily to a reduction in net unrealized losses on available for sale securities. Employee stock option transactions increased equity capital $7.6 million during the first quarter of 2007. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings, asset growth and acquisition strategies, and regulatory and debt covenant requirements. Capital management may include subordinated debt issuance, share repurchase and stock and cash dividends. On April 26, 2005, the Board of Directors authorized a share repurchase program, which replaced a previously authorized program. The maximum of two million common shares may be repurchased. The specific timing and amount of shares repurchased will vary based on market conditions, securities law limitations and other factors. Repurchases may be made over time in open market or privately negotiated transactions. The repurchase programs may be suspended or discontinued at any time without prior notice. During the first quarter of 2007, the Company repurchased 25,000 common shares at an average price of $50.24 per share. The Company may repurchase 1.7 million common shares in the future under this program. Cash dividends of $10.1 million or $0.15 per common share were paid during the first quarter of 2007. On April 24, 2007 the Board of Directors approved quarterly cash dividend of $0.20 per common share. The dividend will be payable on or about May 30 to shareholders of record on May 15, 2007. BOK Financial and its subsidiary banks are subject to various capital requirements administered by federal agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that could have material impact on operations. These capital requirements include quantitative measures of assets, liabilities, and off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulators. Subsequent to March 31, 2007, the Company's Board of Directors authorized Bank of Oklahoma to issue up to $250 million of subordinated debt. The proceeds of this debt, which qualifies as Tier 2 regulatory capital, will be used to fund the Worth Bancorporation acquisition and continued asset growth. For a banking institution to qualify as well capitalized, its Tier 1, Total and Leverage capital ratios must be at least 6%, 10% and 5%, respectively. All of the Company's banking subsidiaries exceeded the regulatory definition of well capitalized. The capital ratios for BOK Financial on a consolidated basis are presented in Table 20.
26 <TABLE> - -------------------------------------------------------------------------------------------------------------------- Table 20 - Capital Ratios March 31, Dec. 31, Sept. 30, June 30, March 31, 2007 2006 2006 2006 2006 -------------------------------------------------------------------------- Average shareholders' equity <S> <C> <C> <C> <C> <C> to average assets 9.71% 9.67% 9.62% 9.49% 9.51% Risk-based capital: Tier 1 capital 9.97 9.78 9.99 10.00 10.16 Total capital 11.76 11.58 12.07 12.14 12.41 Leverage 8.95 8.79 8.88 8.74 8.60 </TABLE> Off-Balance Sheet Arrangements During 2002, BOK Financial agreed to a limited price guarantee on a portion of the common shares issued to purchase Bank of Tanglewood. Any holder of BOK Financial common shares issued in this acquisition may annually make a claim for the excess of the guaranteed price over the actual sales price of any shares sold during a 60-day period after each of the first five anniversary dates after October 25, 2002. The final anniversary date of this guarantee is October 25, 2007. The maximum annual number of shares subject to this guarantee is 210,069. The price guarantee is non-transferable and non-cumulative. BOK Financial may elect, in its sole discretion, to issue additional shares of common stock or to pay cash to satisfy any obligation under the price guarantee. 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 March 31, 2007 was $49.53 per share. Market Risk Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange prices, commodity prices or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading. BOK Financial is subject to market risk primarily through the effect of changes in interest rates on both its assets held for purposes other than trading and trading assets. The effects of other changes, such as foreign exchange rates, commodity prices or equity prices do not pose significant market risk to BOK Financial. BOK Financial has no material investments in assets that are affected by changes in foreign exchange rates or equity prices. Energy derivative contracts, which are affected by changes in commodity prices, are matched against offsetting contracts as previously discussed. Responsibility for managing market risk rests with the Asset / Liability Committee that operates under policy guidelines established by the Board of Directors. The acceptable negative variation in net interest revenue, net income or economic value of equity due to a specified basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 10%. These guidelines also set maximum levels for short-term borrowings, short-term assets, public funds, and brokered deposits, and establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is reviewed monthly. Interest Rate Risk - Other than Trading BOK Financial has a large portion of its earning assets in variable rate loans and a large portion of its liabilities in demand deposit accounts and interest bearing transaction accounts. Changes in interest rates affect earning assets more rapidly than interest bearing liabilities in the short term. Management has adopted several strategies to position the balance sheet to be neutral to interest rate changes. As previously noted in the Net Interest Revenue section of this report, management acquires securities that are funded by borrowings in the capital markets. The average duration of these securities is expected to be approximately 2.5 years based on a range of interest rate and prepayment assumptions. BOK Financial also uses interest rate swaps in managing its interest rate sensitivity. These products are generally used to more closely match interest on certain variable-rate loans with funding sources and long-term certificates of deposit with earning assets. During the first quarter of 2007, net interest revenue was reduced by $2.8 million from periodic settlements of these contracts. Net interest revenue was decreased by $2.3 million from periodic settlements of these
27 contracts in the first quarter of 2006. These contracts are carried on the balance sheet at fair value and changes in fair value are reporting in income as derivatives gains or losses. A net gain of $71 thousand was recognized in the first quarter of 2007 compared to a net loss of $ 309 thousand in same period of 2006 from adjustments of these swaps and hedged liabilities to fair value. Credit risk from interest rate swaps is closely monitored as part of our overall process of managing credit exposure to other financial institutions. The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model. BOK Financial performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions, on net interest revenue, net income and economic value of equity. A simulation model is used to estimate the effect of changes in interest rates over the next 12 and 24 months based on eight interest rate scenarios. Two specified interest rate scenarios are used to evaluate interest rate risk against policy guidelines. The first scenario assumes a sustained parallel 200 basis point increase and the second assumes a sustained parallel 200 basis point decrease in interest rates. The Company also performs a sensitivity analysis based on a "most likely" interest rate scenario, which includes non-parallel shifts in interest rates. An independent source is used to determine the most likely interest rate scenario. The Company's primary interest rate exposures included the Federal Funds rate, which affects short-term borrowings, and the prime lending rate and LIBOR, which are the basis for much of the variable-rate loan pricing. Additionally, mortgage rates directly affect the prepayment speeds for mortgage-backed securities and mortgage servicing rights. Derivative financial instruments and other financial instruments used for purposes other than trading are included in this simulation. The model incorporates assumptions regarding the effects of changes in interest rates and account balances on indeterminable maturity deposits based on a combination of historical analysis and expected behavior. The impact of planned growth and new business activities is factored into the simulation model. The effects of changes in interest rates on the value of mortgage servicing rights are excluded from Table 21 due to the extreme volatility over such a large rate range. The effects of interest rate changes on the value of mortgage servicing rights and securities identified as economic hedges are presented in the Lines of Business - Mortgage Banking section of this report. The results of our interest rate sensitivity analysis, as presented in Table 21, indicate that over the past year, the Company has shifted from being slightly asset sensitive to slightly liability sensitive. This means that rising interest rates will modestly increase the cost of our interest-bearing liabilities by more than they will increase the yield on our earning assets. We believe that this shift is due to an increase in the frequency of which deposit customers will switch account types or financial institutions as interest rates rise. 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) 200 bp Increase 200 bp Decrease Most Likely -------------------------- --------------------------- ------------------------- 2007 2006 2007 2006 2007 2006 ------------- ------------ ------------ -------------- ------------ ------------ Anticipated impact over the next twelve months on <S> <C> <C> <C> <C> <C> <C> net interest revenue $ (4,733) $ 6,413 $ 1,407 $ (4,174) $ 1,404 $ 3,889 (0.8)% 1.2% 0.2% (0.8)% 0.2% 0.7% - -------------------------------- --------------- ------------ --- ----------- -------------- -- ----------- ------------ </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, corporate debt and financial futures for its own account. These
28 positions are taken with the objective of generating trading profits. Both of these activities involve interest rate risk. A variety of methods are used to manage the interest rate risk of trading activities. These methods include daily marking of all positions to market value, independent verification of inventory pricing, and position limits for each trading activity. Hedges in either the futures or cash markets may be used to reduce the risk associated with some trading programs. Management uses a Value at Risk ("VAR") methodology to measure the market risk inherent in its trading activities. VAR is calculated based upon historical simulations over the past five years using a variance / covariance matrix of interest rate changes. It represents an amount of market loss that is likely to be exceeded only one out of every 100 two-week periods. Trading positions are managed within guidelines approved by the Board of Directors. These guidelines limit the VAR to $1.8 million. At March 31, 2007, the VAR was $652 thousand. The greatest value at risk during the quarter was $974 thousand. Controls and Procedures As required by Rule 13a-15(b), BOK Financial's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by their report, of the effectiveness of the company's disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13a-15(d), BOK Financial's management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the company's internal controls over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the company's internal controls over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report. Forward-Looking Statements This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates, and projections about BOK Financial, the financial services industry and the economy in general. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the provision and reserve for loan losses involve judgments as to expected events and are inherently forward-looking statements. Assessments that BOK Financial's acquisitions and other growth endeavors will be profitable are necessary statements of belief as to the outcome of future events, based in part on information provided by others that BOK Financial has not independently verified. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied, or forecasted in such forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to: (1) the ability to fully realize expected cost savings from mergers within the expected time frames, (2) the ability of other companies on which BOK Financial relies to provide goods and services in a timely and accurate manner, (3) changes in interest rates and interest rate relationships, (4) demand for products and services, (5) the degree of competition by traditional and nontraditional competitors, (6) changes in banking regulations, tax laws, prices, levies, and assessments, (7) the impact of technological advances and (8) trends in customer behavior as well as their ability to repay loans. BOK Financial and its affiliates undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events or otherwise.
29 <TABLE> - ------------------------------------------------------------- ----- ----------- --- -------------- Consolidated Statements of Earnings (Unaudited) (In Thousands Except Share and Per Share Data) Three Months Ended March 31, 2007 2006 ----------- --- -------------- Interest Revenue <S> <C> <C> Loans $ 212,825 $ 165,927 Taxable securities 57,594 55,046 Tax-exempt securities 3,028 2,209 - ------------------------------------------------------------- ----- ----------- --- -------------- Total securities 60,622 57,255 - ------------------------------------------------------------- ----- ----------- --- -------------- Trading securities 464 164 Funds sold and resell agreements 665 239 - ------------------------------------------------------------- ----- ----------- --- -------------- Total interest revenue 274,576 223,585 - ------------------------------------------------------------- ----- ----------- --- -------------- Interest Expense Deposits 97,872 72,854 Borrowed funds 42,663 28,490 Subordinated debentures 5,203 4,915 - ------------------------------------------------------------- ----- ----------- --- -------------- Total interest expense 145,738 106,259 - ------------------------------------------------------------- ----- ----------- --- -------------- Net Interest Revenue 128,838 117,326 Provision for Credit Losses 6,500 3,400 - ------------------------------------------------------------- ----- ----------- --- -------------- Net Interest Revenue After Provision for Credit Losses 122,338 113,926 - ------------------------------------------------------------- ----- ----------- --- -------------- Other Operating Revenue Brokerage and trading revenue 13,282 13,356 Transaction card revenue 20,184 18,508 Trust fees and commissions 18,995 17,945 Deposit service charges and fees 24,598 23,986 Mortgage banking revenue 6,540 6,789 Bank-owned life insurance 2,399 63 Other revenue 5,990 9,279 - ------------------------------------------------------------- ----- ----------- --- -------------- Total fees and commissions 91,988 89,926 - ------------------------------------------------------------- ----- ----------- --- -------------- Gain on sales of assets 694 1,041 Loss on securities, net (563) (1,221) Gain (loss) on derivatives, net 71 (309) - ------------------------------------------------------------- ----- ----------- --- -------------- Total other operating revenue 92,190 89,437 - ------------------------------------------------------------- ----- ----------- --- -------------- Other Operating Expense Personnel 78,729 71,232 Business promotion 4,570 4,803 Professional fees and services 4,874 3,914 Net occupancy and equipment 13,206 13,026 Data processing and communications 16,974 16,995 Printing, postage and supplies 3,969 3,905 Net losses and operating expenses of repossessed assets 207 219 Amortization of intangible assets 1,136 1,370 Mortgage banking costs 2,944 3,087 Change in fair value of mortgage servicing rights 1,164 (7,081) Other expense 4,739 5,909 - ------------------------------------------------------------- ----- ----------- --- -------------- Total other operating expense 132,512 117,379 - ------------------------------------------------------------- ----- ----------- --- -------------- Income Before Taxes 82,016 85,984 Federal and state income tax 29,223 31,236 - ------------------------------------------------------------- ----- ----------- --- -------------- Net Income $ 52,793 $ 54,748 - ------------------------------------------------------------- ----- ----------- --- -------------- Earnings Per Share: - ------------------------------------------------------------- ----- ----------- --- -------------- Basic $ 0.79 $ 0.82 - ------------------------------------------------------------- ----- ----------- --- -------------- Diluted $ 0.78 $ 0.81 - ------------------------------------------------------------- ----- ----------- --- -------------- Average Shares Used in Computation: - ------------------------------------------------------------- ---- ------------ --- -------------- Basic 67,085,310 66,715,396 - ------------------------------------------------------------- ---- ------------ --- -------------- Diluted 67,574,671 67,260,659 - ------------------------------------------------------------- ---- ------------ --- -------------- </TABLE> See accompanying notes to consolidated financial statements.
30 <TABLE> - -------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets (In Thousands Except Share Data) March 31, December 31, March 31, 2007 2006 2006 -------------------------------------------------- (Unaudited) (Footnote 1) (Unaudited) Assets <S> <C> <C> <C> Cash and due from banks $ 559,264 $ 775,376 $ 610,563 Funds sold and resell agreements 13,988 21,950 25,720 Trading securities 46,079 37,076 26,055 Securities: Available for sale 4,434,600 4,293,938 4,771,401 Available for sale securities pledged to creditors 351,716 361,123 - Investment (fair value: March 31, 2007 - $235,406; December 31, 2006 - $246,608; March 31, 2006 - $232,468) 241,436 248,689 237,224 Mortgage trading securities 131,524 162,837 64,704 - -------------------------------------------------------------------------------------------------------------------- Total securities 5,159,276 5,066,587 5,073,329 - -------------------------------------------------------------------------------------------------------------------- Loans 11,143,294 10,715,803 9,201,959 Less reserve for loan losses (114,371) (109,497) (104,143) - -------------------------------------------------------------------------------------------------------------------- Loans, net of reserve 11,028,923 10,606,306 9,097,816 - -------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 193,244 188,041 177,959 Accrued revenue receivable 111,782 118,236 102,759 Intangible assets, net 257,350 258,060 261,652 Mortgage servicing rights, net 68,120 65,946 68,608 Real estate and other repossessed assets 8,414 8,486 8,196 Bankers' acceptances 3,093 43,613 35,315 Derivative contracts 220,120 284,239 401,444 Cash surrender value of bank-owned life insurance 214,730 212,230 7,658 Receivable on unsettled securities trades 45,873 - - Other assets 227,820 373,478 403,695 - -------------------------------------------------------------------------------------------------------------------- Total assets $ 18,158,076 $ 18,059,624 $ 16,300,769 - -------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Noninterest-bearing demand deposits $ 1,686,636 $ 1,780,059 $ 1,784,587 Interest-bearing deposits: Transaction 6,052,112 5,996,970 5,144,120 Savings 149,707 139,130 159,471 Time 4,320,128 4,470,546 4,220,068 - -------------------------------------------------------------------------------------------------------------------- Total deposits 12,208,583 12,386,705 11,308,246 - -------------------------------------------------------------------------------------------------------------------- Funds purchased and repurchase agreements 2,511,210 2,348,516 1,622,185 Other borrowings 852,118 593,731 833,114 Subordinated debentures 298,819 297,800 294,130 Accrued interest, taxes and expense 108,524 104,752 92,495 Bankers' acceptances 3,093 43,613 35,315 Due on unsettled security transactions - 107,420 2,142 Derivative contracts 236,775 298,679 419,776 Other liabilities 153,006 157,386 127,931 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 16,372,128 16,338,602 14,735,334 - -------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: March 31, 2007 - 68,944,949; December 31, 2006 - 68,704,575; March 31, 2006 - 68,214,101) 4 4 4 Capital surplus 699,488 688,861 666,800 Retained earnings 1,208,418 1,166,994 1,038,859 Treasury stock (shares at cost: March 31, 2007 - 1,717,899; December 31, 2006 - 1,636,825; March 31, 2006 - 1,331,064) (65,639) (61,393) (45,915) Accumulated other comprehensive loss (56,323) (73,444) (94,313) - -------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,785,948 1,721,022 1,565,435 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 18,158,076 $ 18,059,624 $ 16,300,769 - -------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements.
31 <TABLE> - --------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (In Thousands) Accumulated Preferred Stock Common Stock Other Treasury Stock ------------------------------------ Comprehensive Capital Retained -------------------- Shares Amount Shares Amount Loss Surplus Earnings Shares Amount Total ---------------------------------------------------------------------------------------------------- Balances at <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> December 31, 2005 - $ - 67,905 $ 4 $ (67,811) $ 656,579 $990,422 1,202 $(40,040) $1,539,154 Effect of implementing FAS 156, net of income taxes - - - - - - 383 - - 383 Comprehensive income: Net income - - - - - - 54,748 - - 54,748 Other comprehensive income, net of tax (1) - - - - (26,502) - - - - (26,502) ---------- Comprehensive income 28,246 ---------- Treasury stock purchase - - - - - - - 61 (2,759) (2,759) Exercise of stock options - - 309 - - 7,554 - 68 (3,116) 4,438 Tax benefit on exercise of stock options - - - - - 1,140 - - - 1,140 Stock-based compensation - - - - - 1,527 - - - 1,527 Cash dividends on common stock - - - - - - (6,694) - - (6,694) - --------------------------------------------------------------------------------------------------------------------------- Balances at March 31, 2006 - $ - 68,214 $ 4 $(94,313) $ 666,800 $1,038,859 1,331 $(45,915) $1,565,435 - --------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2006 - $ - 68,705 $ 4 $(73,444) $ 688,861 $1,166,994 1,637 $(61,393) $1,721,022 Effect of implementing FAS 157, net of income taxes - - - - - - (679) - - (679) Effect of implementing FIN 48 - - - - - - (609) - - (609) Comprehensive income: Net income - - - - - - 52,793 - - 52,793 Other comprehensive income, net of tax (1) - - - - 17,121 - - - - 17,121 ---------- Comprehensive income 69,914 ---------- Treasury stock purchase - - - - - - - 25 (1,256) (1,256) Exercise of stock options - - 240 - - 7,424 - 56 (2,990) 4,434 Tax benefit on exercise of stock options - - - - - 1,039 - - - 1,039 Stock-based compensation - - - - - 2,164 - - - 2,164 Cash dividends on common stock - - - - - - (10,081) - - (10,081) - --------------------------------------------------------------------------------------------------------------------------- Balances at March 31, 2007 - $ - 68,945 $ 4 $ (56,323)$ 699,488 $1,208,418 1,718 $(65,639) $1,785,948 - --------------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> (1) March 31, 2007 March 31, 2006 Changes in other comprehensive loss: <S> <C> <C> Unrealized gains (losses) on securities $ 25,673 $ (42,660) Unrealized gains (losses) on cash flow hedges 363 (187) Tax (expense) benefit on unrealized (gains) losses (9,277) 15,567 Reclassification adjustment for losses realized and included in net income 563 1,221 Reclassification adjustment for tax benefit on realized losses (201) (443) -------------------------------------- Net change in other comprehensive loss $ 17,121 $ (26,502) -------------------------------------- </TABLE> See accompanying notes to consolidated financial statements.
32 <TABLE> - --------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flows (Unaudited) (In Thousands) Three Months Ended March 31, --------------------------------------------- 2007 2006 --------------------------------------------- Cash Flows From Operating Activities: <S> <C> <C> Net income $ 52,793 $ 54,748 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 6,500 3,400 Change in fair value of mortgage servicing rights 1,164 (7,081) Unrealized (gains) losses from derivatives (4,370) 3,358 Tax benefit on exercise of stock options (1,039) (1,140) Change in bank-owned life insurance (2,499) (102) Stock-based compensation 1,535 2,536 Depreciation and amortization 9,555 10,652 Net accretion of securities discounts and premiums 899 (1,060) Net gain on sale of assets (2,532) (2,469) Mortgage loans originated for resale (166,724) (162,905) Proceeds from sale of mortgage loans held for resale 152,612 176,147 Change in trading securities, including mortgage trading securities 22,666 (7,422) Change in accrued revenue receivable (4,258) (2,885) Change in other assets 96,241 11,879 Change in accrued interest, taxes and expense 3,772 1,416 Change in other liabilities (69,384) (13,996) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 96,931 65,076 - --------------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Proceeds from maturities of investment securities 13,978 10,828 Proceeds from maturities of available for sale securities 240,519 173,249 Purchases of investment securities (6,765) (2,983) Purchases of available for sale securities (814,351) (271,202) Proceeds from sales of available for sale securities 469,223 36,576 Loans originated or acquired net of principal collected (392,604) (149,739) Proceeds from derivative asset contracts 32,500 2,340 Net change in other investment assets 8,108 410 Proceeds from disposition of assets 42,098 75,196 Acquisition of bank charter (425) - Purchases of assets (15,933) (12,828) - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (423,652) (138,153) - --------------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net change in demand deposits, transaction deposits and savings accounts (27,704) (189,080) Net change in time deposits (148,705) 122,605 Net change in other borrowings 421,081 63,090 Payments on derivative liability contracts (27,628) (1,754) Net change in derivative margin accounts 44,760 25,339 Change in amount receivable (due) on unsettled security transactions (153,293) (6,287) Issuance of preferred, common and treasury stock, net 4,434 4,438 Tax benefit on exercise of stock options 1,039 1,140 Repurchase of common stock (1,256) (2,759) Dividends paid (10,081) (6,694) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 102,647 10,038 - --------------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (224,074) (63,039) Cash and cash equivalents at beginning of period 797,326 699,322 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 573,252 $ 636,283 - --------------------------------------------------------------------------------------------------------------------------- Cash paid for interest $ 146,637 $ 105,085 - --------------------------------------------------------------------------------------------------------------------------- Cash paid for taxes $ 1,546 $ 6,440 - --------------------------------------------------------------------------------------------------------------------------- Net loans transferred to repossessed real estate and other assets $ 925 $ 957 - --------------------------------------------------------------------------------------------------------------------------- </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" or "the Company") have been prepared in accordance with accounting principles for interim financial information generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The unaudited consolidated financial statements include accounts of BOK Financial and its subsidiaries, principally Bank of Oklahoma, N.A. and its subsidiaries ("BOk"), Bank of Texas, N.A., Bank of Arkansas, N.A., Bank of Albuquerque, N.A. Colorado State Bank and Trust, N.A., Bank of Arizona, N.A., Bank of Kansas City, N.A., and BOSC, Inc. Certain prior period amounts have been reclassified to conform to current period classification. The financial information should be read in conjunction with BOK Financial's 2006 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. Amounts presented as of December 31, 2006 have been derived from BOK Financial's 2006 Form 10-K. Newly Adopted and Pending Accounting Policies BOK Financial adopted Statement of Financial Accounting Standards No. 157, "Fair Value Measurement" (FAS 157") as of January 1, 2007. FAS 157 established a single authoritative definition of fair value, set out a framework for measuring fair value and required additional disclosures about fair value measurements. It also nullified EITF guidance that prohibited recognition of gains at inception for derivative transactions whose fair value is estimated by modeling. Beginning January 1, 2007, the fair value of customer derivative assets and liabilities fully reflects the discounted cash flows based on forward curves, volatilities, credit risks and other market-observable inputs. Changes in the net fair values of customer derivative contracts are a component of Brokerage and Trading Revenue. Retained earnings were charged $679 thousand for the after-tax effect of the initial adoption of FAS 157 on the fair value of customer derivative assets and liabilities. FAS 157 did not have a significant effect on other fair value measurements in the Company's financial statements. The Company adopted Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), effective January 1, 2007. FIN 48 requires that an uncertain tax position must be more likely than not of being upheld upon audit by the taxing authority for the benefit to be recognized. The benefit of uncertain tax positions that do not meet this criterion may not be recognized. In addition, FIN 48 requires that the amount of tax benefit that may be recognized for uncertain positions that meet the recognition criterion shall consider the amounts and probabilities of outcomes that could be realized upon settlement. BOK Financial recognized a $609 thousand increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. As of the date of adoption, total unrecognized tax benefits were $12.6 million, including the amount recognized in retained earnings. These unrecognized tax benefits, if recognized in the future, could affect the effective tax rate. Interest and penalties accrued related to unrecognized tax benefits are included in income tax expense. As of January 1, 2007, the Company had $2 million total interest and penalties accrued. Federal statute remains open for federal tax returns filed in the previous three reporting periods. Various state income tax statutes remain open for the previous three to six reporting periods. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("FAS 159") during the first quarter of 2007. The purpose of FAS 159 is to increase the use of fair value measurements in financials statements and to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. FAS 159 permits financial statement issuers an option to measure eligible financial assets and financial liabilities at fair value. Unrealized gains and losses on assets and liabilities measured at fair value are reported in earnings. The option to measure eligible assets and liabilities is applied on an instrument
34 - -by-instrument basis, is irrevocable and is applied to the entire instrument. FAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007 and may be adopted as of a fiscal year that begins on or before November 15, 2007, subject to certain conditions. The Company expects to adopt FAS 159 as required on January 1, 2008. The effect of FAS 159 on the Company's financial statements has not yet been determined. (2) Acquisitions During the first quarter of 2007, the Company reached an agreement to acquire Texas-based Worth Bancorporation, Inc. for approximately $127 million in cash. As of December 31, 2006, Worth had total assets of $390 million, net loans of $272 million, total deposits of $345 million and five branches in the Fort Worth market. The acquisition is expected to close on or about May 31, 2007. Also during the first quarter of 2007, the Company paid approximately $425 thousand to acquire a charter for Bank of Kansas City in order to begin full-service banking operations in Missouri. Previously, the Company's full-service banking rights were restricted to Kansas City, Kansas. The Company currently has two full-service banking locations in the Kansas City market.
35 (3) Fair Value Measurements Fair value measurements as of March 31, 2007 are as follows (in thousands): <TABLE> Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Total Instruments Inputs Inputs ----------- ---------------- --------------- ---------------- Assets: <S> <C> <C> <C> Trading securities $46,079 17,385 $28,694 Available for sale securities 4,786,316 28,204 4,758,112 Mortgage trading securities 131,524 131,524 Mortgage servicing rights 68,120 68,120 (1) Derivative contracts 220,120 220,120 Liabilities: Hedged certificates of deposit 349,424 349,424 Derivative contracts 236,775 236,775 </TABLE> (1) A reconciliation of the beginning and ending fair value of mortgage servicing rights and disclosures of significant assumptions used to determine fair value are presented in Note 5, Mortgage Banking Activities. The fair value of assets and liabilities based on significant other observable inputs are generally provided to us by third-party pricing services and are based on one or more of the following: o Quoted prices for similar, but not identical, assets or liabilities in active markets; o Quoted prices for identical or similar assets or liabilities in inactive markets; o Inputs other than quoted prices that are observable, such as interest rate and yield curves, volatilities, prepayment speeds, loss severities, credits risks and default rates; o Other inputs derived from or corroborated by observable market inputs. The underlying methods used by the third-party pricing services are considered in determining the primary inputs used to determine fair values. No fair value measurements of significant assets or liabilities measured on a non-recurring basis were made during the first quarter of 2007. Assets measured on a non-recurring basis include pension plan assets, which are based on quoted prices in active markets for identical instruments and goodwill, which is based on significant unobservable inputs. (4) Derivatives The fair values of derivative contracts at March 31, 2007 are as follows (in thousands): Assets Liabilities ----------- --- ------------ Customer Risk Management Programs: Interest rate contracts $24,959 $27,923 Energy contracts 178,512 187,167 Cattle contracts 2,311 2,202 Foreign exchange contracts 12,640 12,641 CD options 237 237 - --------------------------------------------- ----------- --- ------------ Total Customer Derivatives 218,659 230,170 Interest Rate Risk Management Programs 1,461 6,605 - --------------------------------------------- ----------- --- ------------ Total Derivative Contracts $220,120 $236,775 - --------------------------------------------- ----------- --- ------------
36 (5) Mortgage Banking Activities At March 31, 2007, BOK Financial owned the rights to service 55,385 mortgage loans with outstanding principal balances of $5.0 billion, including $531 million serviced for affiliates. The weighted average interest rate and remaining term was 6.14% and 277 months, respectively. In the first quarter of 2007, the Company paid approximately $3.6 million to acquire the rights to service approximately $270 million of mortgage loans. Substantially all of these loans are to borrowers in our primary market areas. For the three months ended March 31, 2007 and 2006, mortgage banking revenue includes servicing fee income of $4.2 million and $4.0 million, respectively. In 2006, BOK Financial implemented Statement of Financial Accounting Standards No. 156, "Accounting for Servicing of Financial Assets." Upon implementation, an initial adjustment of the mortgage servicing rights to fair value of approximately $351 thousand, net of income taxes, was recognized as an increase to retained earnings and certain securities designated as an economic hedge of mortgage servicing rights were transferred from the available for sale classification to trading. Activity in capitalized mortgage servicing rights and related valuation allowance during the three months ending March 31, 2007 is as follows (in thousands): <TABLE> Capitalized Mortgage Servicing Rights ------------------------------------------ Purchased Originated Total --------------- ------------ ------------- <S> <C> <C> <C> Balance at December 31, 2006 $ 12,813 $ 53,133 $ 65,946 Additions, net 3,614 2,349 5,963 Change in fair value due to loan runoff (600) (2,025) (2,625) Change in fair value due to market changes 66 (1,230) (1,164) - -------------------------------------------- -- ---------- -- ---------- -- ----------- Balance at March 31, 2007 (1) $ 15,893 $ 52,227 $ 68,120 - -------------------------------------------- -- ---------- -- ---------- -- ----------- Fair value is determined by discounting the projected net cash flows. Significant assumptions used to determine fair value are: </TABLE> <TABLE> March 31, 2007 December 31, 2006 --------------------- -------------------- <S> <C> <C> Discount rate - risk-free rate plus a market premium 10.02% 9.91% Prepayment rate - based upon loan interest rate, original term and loan type 9.2% - 17.4% 8.7% - 18.0% Loan servicing costs - annually per loan based upon loan type $41 - $58 $41 - $58 Escrow earnings rate - indexed to rates paid on deposit accounts with comparable average life 5.40% 5.49% </TABLE>
37 Stratification of the mortgage loan servicing portfolio and outstanding principal of loans serviced by interest rate at March 31, 2007 follows (in thousands): <TABLE> < 5.51% 5.51% - 6.50% 6.51% - 7.50% > 7.50% Total - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- <S> <C> <C> <C> <C> <C> Fair value $ 15,276 $ 35,766 $13,582 $3,496 $68,120 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- Outstanding principal of loans serviced (1) $ 1,000,000 $ 2,305,400 $ 912,500 $212,900 $4,430,800 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- (1) Excludes outstanding principal of $531 million for loans serviced for affiliates and $49 million of mortgage loans for which there are no capitalized mortgage servicing rights. </TABLE> (6) Disposal of Available for Sale Securities Sales of available for sale securities resulted in gains and losses as follows (in thousands): Three Months Ended March 31, ---------------------------------- 2007 2006 -------------- --------------- Proceeds $ 469,223 $ 36,576 Gross realized gains 944 714 Gross realized losses (1,761) (1,935) Related federal and state income tax expense (benefit) (291) (444) (7) Employee Benefits BOK Financial has sponsored a defined benefit Pension Plan for all employees who satisfied certain age and service requirements. Pension Plan benefits were curtailed as of April 1, 2006. The Company recognized no periodic pension cost during three months ended March 31, 2007. During the three months ended March 31, 2006, net periodic pension cost was approximately $1.8 million. The Company made no Pension Plan contributions during the first quarter of 2007 and 2006. Management has been advised that no minimum contribution will be required for 2007. The maximum allowable contribution for 2007 has not yet been determined. (8) Shareholders' Equity On April 24, 2007, the Board of Directors of BOK Financial Corporation approved a $0.20 per share quarterly common stock dividend. The quarterly dividend will be payable on or about May 30, 2007 to shareholders of record on May 15, 2007.
38 (9) 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 March 31, ---------------------------------- 2007 2006 ---------------------------------- Numerator: <S> <C> <C> Net income $ 52,793 $ 54,748 - ------------------------------------------------------------------------------------------------------ Denominator: Denominator for basic earnings per share - weighted average 67,085,310 66,715,396 shares Effect of dilutive potential common shares: Employee stock compensation plans (1) 489,361 545,263 - ------------------------------------------------------------------------------------------------------ Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 67,574,671 67,260,659 - ------------------------------------------------------------------------------------------------------ Basic earnings per share $ 0.79 $ 0.82 - ------------------------------------------------------------------------------------------------------ Diluted earnings per share $ 0.78 $ 0.81 - ------------------------------------------------------------------------------------------------------ (1) Excludes employee stock options with exercise prices greater than current market price. 771,442 1,598,709 </TABLE> (10) Reportable Segments Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended March 31, 2007 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 $ 134,385 $ 91,071 $ 125,928 $ 59,812 $ 19,097,755 Unallocated items: Tax-equivalent adjustment 2,085 - - 2,085 - Funds management and other (7,632) 1,611 6,584 (9,104) (1,157,797) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 128,838 $ 92,682 $ 132,512 $ 52,793 $ 17,939,958 ============ == ============ == ============= == =========== == ============== (1) Excluding financial instruments gains/(losses). </TABLE> Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended March 31, 2006 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 $ 119,897 $ 90,285 $ 110,064 $ 59,766 $ 16,806,596 Unallocated items: Tax-equivalent adjustment 1,522 - - 1,522 - Funds management and other (4,093) 682 7,315 (536,357) (6,540) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 117,326 $ 90,967 $ 117,379 $ 54,748 $ 16,270,239 ============ == ============ == ============= == =========== == ============== (1) Excluding financial instruments gains/(losses). </TABLE>
39 (11) Contingent Liabilities AXIA Investment Management, Inc. ("AXIA"), a wholly-owned subsidiary of BOk, is the administrator to and investment advisor for the American Performance Funds ("AP Funds"). AP Funds is a diversified, open-ended investment company established in 1987 as a business trust under the Investment Company Act of 1940 (the "1940 Act"). AP Fund's products are offered to customers, employee benefit plans, trusts and the general public in the ordinary course of business. Approximately 98% of AP Fund's assets of $3.4 billion are held for BOK Financial's clients. On October 10, 2006, the Securities and Exchange Commission (the "SEC") started a special examination of AXIA. The examination is focused on the BISYS Fund Services Ohio, Inc. ("BISYS") marketing assistance agreements with AXIA that were terminated in 2004. In September 2006, BISYS settled the SEC's two-year investigation of it by consenting to an order in which the SEC determined that BISYS had "willfully aided and abetted and caused" (1) the investment advisors to 27 different families of mutual funds to violate provisions of the Investment Advisors Act of 1940 that prohibit fraudulent conduct; (2) the investment advisors to the 27 fund families to violate provisions of the 1940 Act that prohibit the making of any untrue statement of a material fact in a registration statement filed by the mutual fund with the SEC, and (3) the 27 fund families to violate provisions of the 1940 Act that require the disclosure and inclusion of all distribution arrangements and expenses in the fund's 12b-1 fee plan. AXIA is one of the 27 advisors and the AP Funds one of the mutual fund families to which the SEC referred. AXIA is not bound by the SEC BISYS Order and disagrees with its findings as they relate to AXIA. Although the SEC's examination of AXIA is ongoing, BOK Financial does not expect the examination or any action the SEC may take based upon it to have a material adverse effect on the Company. On May 4, 2007, the AP Funds demanded AXIA and/or BISYS refund to the AP Funds $8.1 million (with interest) and reimburse the expenses of the AP Funds' investigation of this matter (which expenses are in excess of $1 million) or justify the appropriateness of $8.1 million of marketing arrangement expenditures. The AP Funds have further indicated that the foregoing demand was in respect of the period from 1997 to 2004, and that it may seek further reimbursement from AXIA and/or BISYS for periods before 1997. BOK Financial has examined the expenditures procured by AXIA pursuant to the questioned marketing arrangements and has paid or tendered for payment $1.7 million for expenses which were or could be argued to have been improperly charged to the marketing arrangements. Otherwise, BOK Financial believes the AP Funds demand on AXIA is without merit. 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. (12) Financial Instruments with Off-Balance Sheet Risk BOK Financial is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to manage interest rate risk. Those financial instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in BOK Financial's Consolidated Balance Sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the notional amount of those instruments. As of March 31, 2007, outstanding commitments and letters of credit were as follows (in thousands): March 31, 2007 -------------- Commitments to extend credit $ 5,260,750 Standby letters of credit 516,538 Commercial letters of credit 12,946
40 <TABLE> - ------------------------------------------------------------------------------------------------------------------------------ Quarterly Financial Summary - Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands, Except Per Share Data) Three Months Ended ------------------------------------------------------------------------------------- March 31, 2007 December 31, 2006 ------------------------------------------ ------------------------------------- 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) $ 4,802,768 $ 57,595 4.86% $ 4,745,619 $ 56,264 4.69% Tax-exempt securities (3) 322,202 4,802 6.09 318,969 4,435 5.52 - ------------------------------------------------------------------------------------------------------------------------------ Total securities (3) 5,124,970 62,397 4.93 5,064,588 60,699 4.74 - ------------------------------------------------------------------------------------------------------------------------------ Trading securities 29,613 519 7.11 22,668 322 5.64 Funds sold and resell agreements 55,674 665 4.84 39,665 546 5.46 Loans (2) 10,893,163 213,080 7.93 10,361,841 207,322 7.94 Less reserve for loan losses 113,379 - - 108,377 - - - ------------------------------------------------------------------------------------------------------------------------------ Loans, net of reserve 10,779,784 213,080 8.02 10,253,464 207,322 8.02 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets (3) 15,990,041 276,661 7.02 15,380,385 268,889 6.93 - ------------------------------------------------------------------------------------------------------------------------------ Cash and other assets 1,949,917 2,158,647 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 17,939,958 $ 17,539,032 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities And Shareholders' Equity Transaction deposits $ 6,100,117 $ 46,367 3.08 % $ 5,768,216 $ 43,411 2.99 % Savings deposits 143,101 364 1.03 139,796 365 1.04 Time deposits 4,420,390 51,141 4.69 4,417,427 51,781 4.65 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 10,663,608 97,872 3.72 10,325,439 95,557 3.67 - ------------------------------------------------------------------------------------------------------------------------------ Funds purchased and repurchase agreements 2,640,485 33,565 5.16 2,584,354 33,736 5.18 Other borrowings 668,078 9,098 5.52 586,743 8,128 5.50 Subordinated debentures 297,806 5,203 7.09 298,427 5,225 6.95 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 14,269,977 145,738 4.14 13,794,963 142,646 4.10 - ------------------------------------------------------------------------------------------------------------------------------ Demand deposits 1,397,874 1,481,455 Other liabilities 530,659 566,128 Shareholders' equity 1,741,448 1,696,486 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 17,939,958 $ 17,539,032 - ------------------------------------------------------------------------------------------------------------------------------ Tax-Equivalent Net Interest Revenue (3) $ 130,923 2.88% $ 126,243 2.83% Tax-Equivalent Net Interest Revenue To Earning Assets (3) 3.32 3.25 Less tax-equivalent adjustment (1) 2,085 1,965 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Revenue 128,838 124,278 Provision for credit losses 6,500 5,953 Other operating revenue 92,190 93,723 Other operating expense 132,512 133,991 - ------------------------------------------------------------------------------------------------------------------------------ Income before taxes 82,016 78,057 Federal and state income tax 29,223 27,472 - ------------------------------------------------------------------------------------------------------------------------------ Net Income $ 52,793 $ 50,585 - ------------------------------------------------------------------------------------------------------------------------------ Earnings Per Average Common Share Equivalent: Net income: Basic $ 0.79 $ 0.76 - ------------------------------------------------------------------------------------------------------------------------------ Diluted $ 0.78 $ 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 - ------------------------------------------------------------------------------------------------------------------------- September 30, 2006 June 30, 2006 March 31, 2006 - ------------------------------------------------------------------------------------------------------------------------- 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> $ 4,694,588 $ 54,589 4.63% $ 4,783,280 $ 56,632 4.75% $ 4,862,313 $ 55,046 4.60% 306,170 4,187 5.43 273,305 3,485 5.12 262,124 3,465 5.36 - ------------------------------------------------------------------------------------------------------------------------- 5,000,758 58,776 4.68 5,056,585 60,117 4.77 5,124,437 58,511 4.64 - ------------------------------------------------------------------------------------------------------------------------- 21,721 226 4.13 23,672 287 4.86 16,722 209 5.07 51,518 649 5.00 32,048 407 5.09 21,181 239 4.58 9,813,602 197,665 7.99 9,472,309 181,269 7.68 9,164,706 166,148 7.35 106,474 - - 106,048 - - 105,135 - - - ------------------------------------------------------------------------------------------------------------------------- 9,707,128 197,665 8.08 9,366,261 181,269 7.76 9,059,571 166,148 7.44 - ------------------------------------------------------------------------------------------------------------------------- 14,781,125 257,316 6.91 14,478,566 242,080 6.71 14,221,911 225,107 6.42 - ------------------------------------------------------------------------------------------------------------------------- 2,049,998 2,085,724 2,048,328 - ------------------------------------------------------------------------------------------------------------------------- $ 16,831,123 $ 16,564,290 $ 16,270,239 - ------------------------------------------------------------------------------------------------------------------------- $ 5,458,280 $ 39,571 2.88 % $ 5,353,413 $ 34,875 2.61 %$ 5,327,004 $ 31,129 2.37% 146,276 360 0.98 153,200 353 0.92 155,554 330 0.86 4,314,672 48,540 4.46 4,220,204 44,798 4.26 4,162,952 41,395 4.03 - ------------------------------------------------------------------------------------------------------------------------- 9,919,228 88,471 3.54 9,726,817 80,026 3.30 9,645,510 72,854 3.06 - ------------------------------------------------------------------------------------------------------------------------- 2,138,749 27,568 5.11 2,118,211 25,696 4.87 1,731,983 18,483 4.33 750,247 10,253 5.42 684,431 8,682 5.09 882,878 10,007 4.60 293,146 5,210 7.05 292,474 4,930 6.76 295,792 4,915 6.74 - ------------------------------------------------------------------------------------------------------------------------- 13,101,370 131,502 3.98 12,821,933 119,334 3.73 12,556,163 106,259 3.43 - ------------------------------------------------------------------------------------------------------------------------- 1,453,163 1,474,835 1,485,398 657,269 695,418 680,897 1,619,321 1,572,104 1,547,781 - ------------------------------------------------------------------------------------------------------------------------- $ 16,831,123 $ 16,564,290 $ 16,270,239 - ------------------------------------------------------------------------------------------------------------------------- $ 125,814 2.93% $ 122,746 2.98% $ 118,848 2.99% 3.05 3.38 3.40 3.39 1,836 1,640 1,522 - ------------------------------------------------------------------------------------------------------------------------- 123,978 121,106 117,326 5,254 3,795 3,400 97,583 90,880 89,437 138,810 122,127 117,379 - ------------------------------------------------------------------------------------------------------------------------- 77,497 86,064 85,984 24,837 31,080 31,236 - ------------------------------------------------------------------------------------------------------------------------- $ 52,660 $ 54,984 $ 54,748 - ------------------------------------------------------------------------------------------------------------------------- $ 0.79 $ 0.82 $ 0.82 - ------------------------------------------------------------------------------------------------------------------------- $ 0.78 $ 0.82 $ 0.81 - ------------------------------------------------------------------------------------------------------------------------- </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 March 31, 2007. <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> January 1, 2007 to 41,857 $54.27 - 1,721,323 January 31, 2007 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- - February 1, 2007 to 9,374 $52.84 1,721,323 February 28, 2007 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- March 1, 2007 to 29,843 $50.57 25,000 1,696,323 March 31, 2007 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- Total 81,074 25,000 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- (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 March 31, 2007, the Company had repurchased 303,677 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. </TABLE> 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: May 10, 2007 /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