As filed with the Securities and Exchange Commission on August 9, 2007 ============================================================================= UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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: 67,259,004 shares of common stock ($.00006 par value) as of July 31, 2007. ===============================================================================
2 BOK Financial Corporation Form 10-Q Quarter Ended June 30, 2007 Index Part I. Financial Information Management's Discussion and Analysis (Item 2) 2 Market Risk (Item 3) 27 Controls and Procedures (Item 4) 29 Consolidated Financial Statements - Unaudited (Item 1) 30 Six Month Financial Summary - Unaudited (Item 2) 42 Quarterly Financial Summary - Unaudited (Item 2) 43 Part II. Other Information Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45 Item 4. Submission of Matters to a Vote of Security Holders 46 Item 6. Exhibits 46 Signatures 47 Management's Discussion and Analysis of Financial Condition and Results of Operations Performance Summary BOK Financial Corporation reported earnings of $53.9 million or $0.80 per diluted share for the second quarter of 2007, compared with net income of $55.0 million or $0.82 per diluted share for the second quarter of 2006. The returns on average assets and shareholders' equity were 1.16% and 12.06%, respectively for the second quarter of 2007, compared with returns of 1.33% and 14.03%, respectively for the second quarter of 2006. Year-to-date net income was $106.7 million or $1.58 per diluted share for 2007 and $109.7 million or $1.63 per diluted share for 2006. Highlights of the quarter included: o Acquisitions of Worth National Bank and First United Bank were completed during the quarter. Worth added net loans of $281 million, total deposits of $369 million and five banking locations in Fort Worth, Texas. First United added net loans of $94 million, total deposits of $133 million and eleven bank locations in the Denver, Colorado area. These acquisitions did not significantly affect average asset, average liabilities or net income for the second quarter. o Net interest revenue grew $13.8 million or 11% over the second quarter of 2006 and $6.1 million or 16% annualized over the first quarter of 2007, excluding the impact of acquisitions. o Average earning assets increased $2.2 billion or 15% over the second quarter of 2006. Average outstanding loans totaled $11.3 billion, up $1.9 billion or 20%. Average deposits totaled $12.4 billion, up $1.2 billion or 10% over the second quarter of 2006. o Net interest margin was 3.31% for the second quarter of 2007, 3.32% for the first quarter of 2007 and 3.40% for the second quarter of 2006. The yield on average earning assets was 7.00%, up from 6.71% for the second quarter of 2006 and down two basis points from the preceding quarter. The cost of interest-bearing funds was 4.12% for the second quarter of 2007 compared with 3.73% for the second quarter of 2006 and 4.14% for the first quarter of 2007. o Provision for credit losses was $7.8 million for the second quarter of 2007, up from $3.8 million for the second quarter of 2006 and $6.5 million for the first quarter of 2007. Non-performing assets totaled $60 million or 0.52% of outstanding loans at June 30, 2007 and $39 million or 0.40% of outstanding loans at June
3 30, 2006. Non-performing assets totaled $50.7 million or 0.44% of outstanding loans at June 30, 2007, excluding acquisitions. o The combined allowance for loan losses and reserve for off-balance sheet credit losses totaled $139 million or 1.20% of outstanding loans at June 30, 2007, $126 million or 1.30% at June 30, 2006 and $134 million or 1.21% of outstanding loans at March 31, 2007. o Fees and commissions revenue increased $4.9 million or 5% over the second quarter of 2006. Transaction card revenue grew $3.0 million or 15% due to volume increases, and trust fees grew $1.7 million or 10% due primarily to increases in the fair value of trust assets. Revenue from bank-owned life insurance totaled $2.5 million for the second quarter of 2007 compared with $32 thousand in 2006 due to a $202 million investment in bank-owned life insurance at the end of the third quarter of 2006. Other revenue decreased $2.9 million due primarily to fees earned on margin asset balances. o Operating expenses, excluding changes in the fair value of mortgage servicing rights increased $15.3 million or 12%; personnel expenses grew $9.5 million or 13% over the second quarter of 2006. o The fair value of mortgage servicing rights increased $5.1 million during the second quarter of 2007. At the same time, the fair value of securities held as an economic hedge of mortgage servicing rights decreased $5.7 million for a net pre-tax loss of $621 thousand. During the second quarter of 2006, the fair value of mortgage servicing rights increased $3.6 million and the fair value of securities designated as an economic hedge decreased $2.5 million for a net pre-tax gain of $1.1 million. o Debt rating was placed on positive outlook by Standard & Poors. Results of Operations Net Interest Revenue Tax-equivalent net interest revenue increased to $137 million for the second quarter of 2007 from $123 million for the same period of 2006, due primarily to a $1.9 billion or 20% increase in average outstanding loan principal. Average loan growth was funded by a $1.2 billion or 10% increase in average deposits and a $809 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 3.31% for the second quarter of 2007, compared with 3.40% for the second quarter of 2006 and 3.32% for the first quarter of 2007. The yield on average earning assets was 7.00%, up 29 basis points compared with the second quarter of 2006 and down 2 basis points over the preceding quarter. Beginning in 2005, the weighted average spread of rates earned on our commercial loan portfolio over LIBOR funding sources decreased from approximately 272 basis points to approximately 239 basis points due largely to competitive pricing pressure. Over the same period, deposit account balances have been steadily migrating to higher costing products. Non-interest bearing funds and changes in the mix of funding sources added 43 basis points to the net interest margin in second quarter of 2007 compared with 42 basis points for the second quarter of 2006 and 44 basis points for the preceding quarter. Management regularly models the effects of changes in interest rates on net interest revenue. Based on this modeling, we expect net interest revenue to decline slightly from rising rates over a one-year forward looking period. However, other factors such as loan spread compression, deposit product mix and overall balance sheet composition may affect this general expectation. Additionally, we have a large portion of our assets in mortgage-backed securities. These securities reprice as cash flow received is reinvested at current market rates. The resulting change in yield of the securities portfolio occurs more slowly than changes in market rates. The tax-equivalent yield of the securities portfolio for the second quarter of 2007 increased 13 basis points compared with the same period of 2006 while the average loan yield increased 26 basis points and the cost of interest-bearing liabilities increased 39 basis points. Our overall objective is to manage the Company's balance sheet to be relatively neutral to changes in interest rate. 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
4 reprice more quickly than liabilities. Among the strategies that we use to achieve a relatively rate-neutral position, we purchase fixed-rate, mortgage-backed securities to offset the short-term nature of the majority of the Company's funding sources. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also use derivative instruments to manage our interest rate risk. Interest rate swaps with a combined notional amount of $632 million convert fixed rate liabilities to floating rate based on LIBOR. The purpose of these derivatives, which include interest rate swaps designated as fair value hedges, is to position our balance sheet to be relatively neutral to changes in interest rates. We also have interest rate swaps with a notional amount of $100 million that convert prime-based loans to fixed rate. The purpose of these derivatives, which have been designated as cash flow hedges, also is to position our balance sheet to be relatively 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 Six Months Ended June 30, 2007 / 2006 June 30, 2007 / 2006 -------------------------------------------------------------------------- Change Due To (1) Change Due To (1) -------------------------------------------------------------------------- Yield / Yield Change Volume Rate Change Volume /Rate -------------------------------------------------------------------------- Tax-equivalent interest revenue: <S> <C> <C> <C> <C> <C> <C> Securities $ 4,740 $ 3,186 $ 1,554 $ 8,626 $ 3,519 $ 5,107 Trading securities 194 123 71 504 312 192 Loans 43,223 36,324 6,899 90,155 68,881 21,274 Funds sold and resell agreements 517 464 53 943 871 72 - --------------------------------------------------------------------------------------------------------------------- Total 48,674 40,097 8,577 100,228 73,583 26,645 - --------------------------------------------------------------------------------------------------------------------- Interest expense: Transaction deposits 13,367 7,443 5,924 28,605 12,608 15,997 Savings deposits 24 13 11 58 (16) 74 Time deposits 8,642 3,223 5,419 18,388 5,988 12,400 Federal funds purchased and repurchase agreements 7,433 6,297 1,136 22,515 17,075 5,440 Other borrowings 3,078 2,385 693 2,169 (395) 2,564 Subordinated debentures 1,894 1,982 (88) 2,182 2,039 143 - --------------------------------------------------------------------------------------------------------------------- Total 34,438 21,343 13,095 73,917 37,299 36,618 - --------------------------------------------------------------------------------------------------------------------- Tax-equivalent net interest revenue 14,236 18,754 (4,518) 26,311 36,284 (9,973) Change in tax-equivalent adjustment (429) (992) - --------------------------------------------------------------------------------------------------------------------- Net interest revenue $ 13,807 $ 25,319 - --------------------------------------------------------------------------------------------------------------------- (1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis. </TABLE> Year-to-date tax equivalent net interest revenue totaled $267.9 million, up 11% over 2006. Average earning assets increased $2.0 billion or 14%. Net interest margin was 3.31% for the first half of 2007 compared with 3.40% for the first half of 2006. The yield on average earning assets was 7.01%, up 44 basis points over the first half of 2006. The cost of interest-bearing liabilities was 4.13%, up 55 basis points over last year. Non-interest-bearing funds and changes in the mix of funding sources added 43 basis points to the net interest margin in the first half of 2007 and 41 basis points in the first half of 2006. Other Operating Revenue Other operating revenue increased $1.1 million compared with the second quarter of 2006. Fees and commission revenue increased $4.9 million or 5%. Growth in fee revenue was offset by a $3.7 million increase in losses on securities, including securities held as an economic hedge of our mortgage servicing rights. 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 second quarter of 2007.
5 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 $3.0 million or 15% over the second quarter of 2006. ATM network revenue increased $1.8 million or 21% due to additional locations added in the second half of 2006 while check card revenue increased $1.1 million or 22% over the second quarter of 2006 due to volume growth. Merchant discount fees increased 1% over the second quarter of 2006. Trust fees and commissions increased $1.7 million or 10% for the second quarter of 2007. The fair value of all trust relationships, which is the basis for a significant portion of trust fees increased to $33.7 billion at June 30, 2007 compared with $28.7 billion at June 30, 2006. Personal trust management fees, which provide 31% of total trust fees and commissions increased $297 thousand or 5%. Employee benefit plan management fees, which provide 19% of total trust fees, grew $360 thousand or 11%. Net fees from mutual fund advisory and administrative services increased $626 thousand or 17%. Revenue from the management of oil and gas properties and other real estate, which provide 10% of total trust revenue, increased 2% over the second quarter of 2006. Brokerage and trading revenue grew $720 thousand or 6%. Revenue from retail brokerage activities increased $864 thousand or 24% over the same period of 2006. Revenue from securities trading activities increased $606 thousand or 13%. Customer hedging revenue decreased $191 thousand or 6% due to lower revenue from energy hedging. Investment banking fees were down $560 thousand or 48% due to the timing of transaction closings. Deposit service charges and fees increased $456 thousand or 2% over the second quarter of 2006. Overdraft fees grew $721 thousand or 4% due to increased volume while service charges on retail accounts decreased $286 thousand or 17% due to service-charge free deposit products. Commercial deposit account fees were largely unchanged compared with the second quarter of 2006. Mortgage banking revenue decreased $513 thousand or 7% compared with 2006. Servicing revenue totaled $4.3 million for the second quarter of 2007, up $37 thousand over the same period last year. Net gains on mortgage loans sold totaled $2.4 million, down $550 thousand from the second quarter of 2006. Changes in the cash surrender value of life insurance provided revenue of $2.5 million in the second quarter of 2007 and $32 thousand in the second quarter of 2006. The Company invested $202 million in bank-owned life insurance during the third quarter of 2006. The increase in revenue earned on life insurance is partially offset by a decrease in net interest revenue due to increased costs to fund insurance assets. Other operating revenue included $969 thousand of fees earned on margin assets in the second quarter of 2007 and $3.6 million in the second quarter of 2006. Margin assets which are held primarily as part of the Company's customer derivatives programs averaged $96 million for the second quarter of 2007, compared with $260 million for the second quarter of 2006. The decrease in revenue earned on margin assets is partially offset by an increase in net interest revenue due to lower costs to fund the margin assets. Year-to-date fees and commissions revenue grew $7.0 million or 4% over 2006. Other revenue decreased $6.2 million due primarily to lower margin interest fees while revenue from bank-owned life insurance increased $4.8 million. Transaction card revenue was up $4.6 million or 12% due to increases in transaction volumes and the number of ATM locations. Trust fees increased $2.8 million or 8% due largely to growth in the fair value of trust assets. Brokerage and trading revenue and deposit service charges each grew 2% over the same period last year. Securities and derivatives BOK Financial recognized net losses of $6.3 million on securities for the second quarter of 2007, including net losses of $5.7 million on securities held as an economic hedge of mortgage servicing rights. Securities held as an economic hedge of the mortgage servicing rights which are separately identified on the balance sheet as "mortgage trading securities" are carried at fair value. Changes in fair value are recognized in earnings as they occur. The Company's use of securities as an economic hedge of mortgage servicing rights is more-fully discussed in the Line of Business - Mortgage Banking section of this report. During the second quarter of 2006, BOK Financial recognized net losses of $2.5 million on securities held as an economic hedge of mortgage servicing rights and net losses of $1.3 million on other securities. Net losses on derivatives totaled $183 thousand for the second quarter of 2007, compared with net losses of $172
6 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 ------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, 2007 2007 2006 2006 2006 ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Brokerage and trading revenue $ 13,317 $ 13,282 $ 14,382 $ 13,078 $ 12,597 Transaction card revenue 22,917 20,184 20,224 19,939 19,951 Trust fees and commissions 19,458 18,995 18,240 17,101 17,751 Deposit service charges and fees 26,797 24,598 25,787 26,322 26,341 Mortgage banking revenue 6,682 6,540 6,077 6,935 7,195 Bank-owned life insurance 2,525 2,399 2,346 117 32 Other revenue 7,096 5,990 7,799 9,519 10,037 - -------------------------------------------------------------------------------------------------------------------------- Total fees and commissions 98,792 91,988 94,855 93,011 93,904 - -------------------------------------------------------------------------------------------------------------------------- Gain (loss) on sales of assets (348) 694 252 475 (269) Gain (loss) on securities, net (6,262) (563) (864) 3,718 (2,583) Gain (loss) on derivatives, net (183) 71 (520) 379 (172) - -------------------------------------------------------------------------------------------------------------------------- Total other operating revenue $ 91,999 $ 92,190 $ 93,723 $ 97,583 $ 90,880 - -------------------------------------------------------------------------------------------------------------------------- </TABLE> Other Operating Expense Other operating expense for the second quarter of 2007 totaled $136.0 million, a $13.8 million increase from 2006. Increases in the fair value of mortgage servicing rights decreased operating expenses by $5.1 million in the second quarter of 2007 and $3.6 million in the second quarter of 2006. Excluding changes in the value of mortgage servicing rights, operating expenses increased $15.3 million or 12% over the second quarter of 2006 due primarily to higher personnel expense. Personnel expense Personnel expense totaled $81.9 million for the second quarter of 2007 compared with $72.4 million for the second quarter of 2006. <TABLE> - ---------------------------------------------------------------------------------------------------------------------- Table 3 - Personnel Expense (Dollars in thousands) Three Months Ended ---------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, 2007 2007 2006 2006 2006 ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Regular compensation $ 52,319 $ 49,144 $ 48,854 $ 47,113 $ 45,471 Incentive compensation: Cash-based 13,695 15,430 16,130 13,228 13,115 Stock-based 3,097 1,527 2,866 3,283 2,410 - --------------------------------------------------------------------------------------------------------------------- Total incentive compensation 16,792 16,957 18,996 16,511 15,525 Employee benefits 12,771 12,628 10,204 10,981 11,373 - --------------------------------------------------------------------------------------------------------------------- Total personnel expense $ 81,882 $ 78,729 $ 78,054 $ 74,605 $ 72,369 - --------------------------------------------------------------------------------------------------------------------- Number of employees (full-time equivalent) 4,093 3,918 3,908 3,859 3,803 - --------------------------------------------------------------------------------------------------------------------- </TABLE> Regular compensation expense increased $6.8 million or 15% over the second quarter of 2006. The increase in regular compensation expense was due to a 7% increase in average regular compensation per full-time equivalent employee and an 8% 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
7 programs, stock-based compensation plans and deferred compensation plans. Stock-based compensation plans include both equity and liability awards. Second quarter 2007 expense for the Company's various cash-based incentive programs totaled $13.7 million, up $580 thousand or 4% 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 $3.1 million for the second quarter of 2007 and $2.4 million for the second quarter of 2006. Compensation expense for stock-based compensation plans accounted for as equity awards totaled $1.7 million in the second quarter of 2007, compared with $1.6 million in the second quarter of 2006. Expense for these awards is determined by 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 $1.4 million for the second quarter of 2007, compared with $794 thousand 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 increased $3.89 per share during the second quarter of 2007 and $2.12 per share during the second quarter of 2006. Employee benefit expenses totaled $12.8 million for the second quarter of 2007 and $11.4 million for the second quarter of 2006 due to higher medical insurance costs, increased participation in the Company's thrift plan and payroll taxes. Data processing and communications expense Data processing and communication expenses increased $2.2 million or 14% compared with the second quarter of 2006. This expense consists of two broad categories, data processing systems and transaction card processing. Data processing systems costs increased $1.8 million or 19% compared with the second quarter of 2006, including increased hardware and software purchases and related maintenance costs for expansion in treasury services, customer hedging and mortgage loan origination activities. Transaction card processing costs increased $423 thousand or 6% due to growth in transaction volume. Professional fees and services Professional fees totaled $6.0 million for the second quarter of 2007, up $1.6 million or 37% over the second quarter of 2006. The increase in professional fees included costs related to the Worth and First United acquisitions and the issuance of $250 million of subordinated debt during the second quarter of 2007. <TABLE> - ---------------------------------------------------------------------------------------------------------------------- Table 4 - Other Operating Expense (In thousands) Three Months Ended ---------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, 2007 2007 2006 2006 2006 ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Personnel $ 81,882 $ 78,729 $ 78,054 $ 74,605 $ 72,369 Business promotion 5,391 4,570 5,345 4,401 4,802 Professional fees and services 5,963 4,874 4,734 4,734 4,362 Net occupancy and equipment 13,860 13,206 12,741 13,222 13,199 Data processing & communications 18,402 16,974 16,843 16,931 16,157 Printing, postage and supplies 4,179 3,969 3,774 4,182 4,001 Net losses and operating expenses of repossessed assets 192 207 167 34 54 Amortization of intangible assets 1,443 1,136 1,299 1,299 1,359 Mortgage banking costs 2,987 2,944 3,034 2,869 2,839 Change in fair value of mortgage servicing rights (5,061) 1,164 (236) 7,921 (3,613) Other expense 6,721 4,739 8,236 8,612 6,598 - --------------------------------------------------------------------------------------------------------------------- Total other operating expense $ 135,959 $ 132,512 $ 133,991 $ 138,810 $ 122,127 - --------------------------------------------------------------------------------------------------------------------- </TABLE> Year-to-date operating expenses increased $29.0 million or 12%, $22.2 million or 9% excluding changes in the fair value of mortgage servicing rights. Personnel expense grew $17.0 million or 12% due largely to growth in the average compensation cost per employee and total employment. All other operating expenses grew 5% over the first half of 2006.
8 Income Taxes Income tax expense was $29.3 million or 35% of book taxable income for the second quarter of 2007 compared with $31.1 million or 36% of book taxable income for the second quarter of 2006. 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 consist primarily of corporate and consumer banking activities in the respective local markets. Worth National Bank and First United Bank are included in regional banking results for the second quarter of 2007 in Texas and Colorado, respectively. 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 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.
9 <TABLE> - ---------------------------------------------------------------------------------------------------------------------- Table 5 - Net Income by Line of Business (In thousands) Three months ended June 30, Six months ended June 30, 2007 2006 2007 2006 --------------------------------------------------------------- <S> <C> <C> <C> <C> Regional banking $ 24,354 $ 22,413 $ 49,261 $ 44,710 Oklahoma corporate banking 19,138 20,168 37,182 38,266 Mortgage banking 122 1,341 168 4,485 Oklahoma consumer banking 9,079 8,545 18,540 17,012 Wealth management 6,510 6,528 13,870 14,287 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Subtotal 59,203 58,995 119,021 118,760 Funds management and other (5,340) (4,011) (12,365) (9,028) - ---------------------------------------------------------------------------------------------------------------------- Total $ 53,863 $ 54,984 $106,656 $109,732 - ---------------------------------------------------------------------------------------------------------------------- </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 $19.1 million or 36% to consolidated net income for the second quarter of 2007. This compares to $20.2 million or 37% of consolidated net income for 2006. Average loans attributed to the Oklahoma Corporate Banking Division were $4.7 billion for the second quarter of 2007, compared with $4.2 billion for the second quarter of 2006. Deposits attributed to Oklahoma Corporate Banking averaged $2.1 billion for the second quarter of 2007, up 20% over last year. Increased average loans and deposits combined to increase net interest revenue $2.3 million or 6%. In addition, other operating revenue increased $421 thousand or 2% due to growth in ATM processing fees. Operating expenses increased $1.2 million or 5%. Personnel expense increased $804 thousand or 9% due to growth in both regular salaries and incentive compensation. Net loans charged off increased to $3.3 million from $252 thousand. <TABLE> Table 6 - Oklahoma Corporate Banking (Dollars in Thousands) Three months ended June 30, Six months ended June 30, --------------------------------------------------------------------- 2007 2006 2007 2006 ----------------------------------------------------------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 64,335 $ 61,941 $ 125,464 $ 120,558 NIR (expense) from internal sources (24,648) (24,553) (47,774) (46,619) ------------- ------------- -------------- ------------- Net interest revenue 39,687 37,388 77,690 73,939 Other operating revenue 23,474 23,053 44,504 44,423 Operating expense 28,526 27,293 56,676 54,760 Net loans charged off 3,313 252 4,644 1,087 Net income 19,138 20,168 37,182 38,266 Average assets $ 5,862,417 $ 5,079,926 $ 5,824,817 $ 5,089,565 Average economic capital 411,970 387,510 413,010 382,380 Return on assets 1.31% 1.59% 1.29% 1.52% Return on economic capital 18.63% 20.88% 18.15% 20.18% Efficiency ratio 45.16% 45.16% 46.38% 46.26% </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.
10 The Oklahoma Consumer Banking Division contributed $9.1 million or 17% to consolidated net income for the second quarter of 2007. This compares to $8.5 million or 16% of consolidated net income for 2006. Net interest revenue, which consisted primarily of credits for funds provided to the funds management unit, increased $1.4 million or 8%. Average deposits attributed to this Division increased $82 million, or 3% compared with last year, including a $22 million or 7% increase in average demand deposits. The value to the Company of these lower-costing retail deposits continues to increase as short-term interest rates rise. Operating revenue increased $1.2 million or 7% over last year. Check card fees increased $771 thousand or 22% and overdraft charges increased $485 thousand or 4%. Deposit account service charges decreased $208 thousand or 18%. Operating expenses increased $1.7 million or 8%. Personnel expense grew $675 thousand or 9%. During the second quarter of 2007, Albertson's announced that it was selling or closing its supermarket locations in Oklahoma, affecting 24 of our supermarket branch locations. Twenty-one locations are being sold to four different retailers and three locations are being closed. Management has tentatively reached agreement with each of the purchasers to maintain BOk's twenty-one branch locations. We do not expect the closed locations to have a significant impact on our branch network. <TABLE> Table 7 - Oklahoma Consumer Banking (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ------------------------------------------------------------------- 2007 2006 2007 2006 ---------------------------------------------------------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ (16,740) $ (14,853) $ (33,891) $ (28,291) NIR (expense) from internal sources 35,224 31,978 70,439 61,437 ------------- ------------- -------------- ----------- Net interest revenue 18,484 17,125 36,548 33,146 Other operating revenue 19,329 18,139 37,208 35,393 Operating expense 22,207 20,511 42,382 39,844 Net loans charged off 801 775 1,062 907 Net income 9,079 8,545 18,540 17,012 Average assets $ 2,905,822 $ 2,818,034 $ 2,917,365 $ 2,793,626 Average economic capital 66,370 58,370 65,820 55,780 Return on assets 1.25% 1.22% 1.28% 1.23% Return on economic capital 54.87% 58.72% 56.80% 61.50% Efficiency ratio 58.73% 58.16% 57.46% 58.13% </TABLE> Mortgage Banking BOK Financial engages in mortgage banking activities through the BOk Mortgage Division of Bank of Oklahoma. These activities include the origination, marketing and servicing of conventional and government-sponsored mortgage loans. Mortgage banking activities provided net income of $122 thousand in the second quarter of 2007, compared with $1.3 million in the second quarter of 2006. The change in fair value of mortgage servicing rights, net of economic hedging decreased net income $379 thousand in the second quarter of 2007 and increased net income $660 thousand in the second quarter of 2006. Mortgage banking activities consisted of two primary 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 commitment rates increased 39 basis points during the second quarter of 2007 ending the quarter at 6.45%. During the second quarter of 2006, mortgage commitment rates increased 36 basis points to 6.61% at June 30, 2006. Loan Production Sector Loan production activities resulted in net pre-tax income of $331 thousand for the second quarter of 2007 and pre-tax income of $696 thousand for the second quarter of 2006. Loan production revenue totaled $4.1 million for the second quarter of 2007, including $3.6 million of capitalized mortgage servicing rights. Loan production revenue totaled $3.4 million for the second quarter of 2006, including $3.3 million of capitalized mortgage servicing rights. Mortgage loans funded in the second quarter of 2007 totaled $315 million, including $256 million of loans funded for resale and $59 million of loans funded for retention by affiliates. Mortgage loans funded in the same period of 2006 totaled $243
11 million. Approximately 63% of the loans funded during the second quarter of 2007 were to borrowers in Oklahoma. The pipeline of mortgage loan applications totaled $306 million at June 30, 2007, compared with $267 million at March 31, 2007 and $276 million at June 30, 2006. Personnel expenses associated with loan production activities increased from $677 thousand in the second quarter of 2006 to $1.4 million in the second quarter of 2007 due primarily to increased staffing and incentive compensation rates in markets outside of Oklahoma. Loan Servicing Sector The loan servicing sector had a net pre-tax loss of $552 thousand for the second quarter of 2007 compared to a pre-tax profit of $1.3 million for the same period of 2006. The fair value of mortgage servicing rights increased $5.1 million due to changes in commitment rates and prepayment speeds. At the same time, the fair value of securities held as an economic hedge of the servicing rights decreased $5.7 million. During the second quarter of 2006, the fair value of mortgage servicing rights appreciated $3.6 million due to changes in mortgage commitment rates and a slow-down in housing turnover. Appreciation in the value of servicing rights was partially offset by a $2.5 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 $4.3 million for the second quarter of 2007 and $4.2 million for the second quarter of 2006. The average outstanding balance of loans serviced for others was $4.6 billion during 2007 compared to $4.5 billion during 2006. Annualized servicing revenue per outstanding loan principal was 37 basis points for the second quarter of 2007 and 2006. <TABLE> Table 8 - Mortgage Banking (Dollars in Thousands) Three months ended June 30, Six months ended June 30, --------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------ <S> <C> <C> <C> <C> NIR (expense) from external sources $ 8,529 $ 5,624 $ 16,344 $ 10,406 NIR (expense) from internal sources (7,591) (4,683) (14,543) (8,914) ------------- ------------- -------------- ------------- Net interest revenue 938 941 1,801 1,492 Capitalized mortgage servicing rights 3,566 3,333 5,915 6,168 Other operating revenue 5,654 4,391 10,594 8,754 Operating expense 9,215 7,328 16,314 14,997 Change in fair value of mortgage servicing rights (5,061) (3,613) (3,897) (10,694) Losses on financial instruments, net (5,681) (2,533) (5,428) (4,394) Net income 122 1,341 168 4,485 Average assets $ 684,483 $ 498,495 $ 653,332 $ 472,610 Average economic capital 23,890 21,590 25,090 22,390 Return on assets 0.07% 1.08% 0.05% 1.91% Return on economic capital 2.05% 24.91% 1.35% 40.39% Efficiency ratio 90.72% 84.57% 89.10% 91.37% </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 June 30, 2007, financial instruments with a fair value of $139 million and a net unrealized loss of $5.3 million were held for the economic hedge program. The interest rate sensitivity of the mortgage servicing rights and securities held as a hedge is modeled over a range of +/- 50 basis points. At June 30, 2007, the pre-tax results of this modeling on
12 reported earnings were: Table 9 - Interest Rate Sensitivity - Mortgage Servicing (Dollars in Thousands) 50 bp increase 50 bp decrease Anticipated change in: Fair value of mortgage servicing rights $ 2,866 $ (3,760) Fair value of hedging instruments (3,769) 3,671 ----------------- ---------------- Net $ (903) $ (89) ----------------- ---------------- Table 9 shows the non-linear effect of changes in mortgage commitment rates on the value of mortgage servicing rights. A 50 basis point increase in rates is expected to increase value by $2.9 million while a 50 basis point decrease is expected to reduce value by $3.8 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 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. In addition, hedge coverage is a dynamic process. Securities designated as an economic hedge will increase or decrease over time based on management's assessment of expected changes in the value of the servicing rights. These changes will cause the value of hedging instruments to differ from value projected in our modeling. 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 includes 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 $6.5 million to consolidated net income for the second quarters of 2007 and 2006. Trust and private financial services provided $5.8 million of net income in the second quarter of 2007, up 5% over last year. Net income provided by brokerage and trading activities totaled $668 thousand down $300 thousand compared with the second quarter of 2006. Other operating revenue for the second quarter of 2007 totaled $31.3 million, up $1.1 million or 4% over 2006. Other operating revenue for the wealth management division consists primarily of trust fees and commissions, investment banking revenue, and brokerage and trading revenue. Trust fees and commissions totaled $16.8 million for the second quarter of 2007, a $1.5 million or 9% increase over 2006. At June 30, 2007 and 2006, the wealth management line of business was responsible for trust assets with aggregate market values of $30.8 billion and $26.2 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 $11.4 billion of trust assets at June 30, 2007 compared with $9.7 billion at June 30, 2006. Retail brokerage fees totaled $4.5 million for the second quarter of 2007, up $822 thousand or 22%. Securities trading profits and revenue from our customer hedging programs totaled $7.6 million for the second quarters of both 2007 and 2006. Investment banking revenue totaled $1.1 million, down $82 thousand from a year ago.
13 Operating expenses totaled $28.3 million for the second quarter of 2007, a $2.3 million or 9% increase over 2006. Personnel costs rose $1.4 million or 9%. <TABLE> Table 10 - Wealth Management (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2007 2006 2007 2006 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 3,480 $ 3,012 $ 8,005 $ 5,476 NIR (expense) from internal sources 4,608 3,660 8,894 7,698 ------------- ------------- -------------- ------------- Net interest revenue 8,088 6,672 16,899 13,174 Other operating revenue 31,285 30,211 61,461 61,595 Operating expense 28,337 26,045 55,267 51,236 Net income 6,510 6,528 13,870 14,287 Average assets $ 1,774,525 $ 1,913,243 $ 1,733,099 $ 1,894,992 Average economic capital 160,850 139,100 163,750 137,060 Return on assets 1.47% 1.37% 1.61% 1.52% Return on economic capital 16.23% 18.82% 17.08% 21.02% Efficiency ratio 71.97% 70.62% 70.53% 68.53% </TABLE> Regional Banking Regional Banking consists primarily of the corporate and commercial banking services provided by Bank of Texas, Bank of Albuquerque, Bank of Arkansas, Colorado State Bank and Trust, Bank of Arizona and Bank of Kansas City in their respective markets. It also includes fiduciary services provided by Colorado State Bank and Trust. Small businesses and middle-market corporations are Regional Banking's primary customer focus. Regional Banking contributed $24.4 million or 45% to consolidated net income during the second quarter of 2007. This compares with $22.4 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 $1.5 million or 12% compared with the same period of 2006. In addition, net income for 2007 in Colorado and Arizona increased $716 thousand and $107 thousand, respectively. Net income in New Mexico decreased $246 thousand from last year. Net income from Texas operations totaled $14.0 million for the second quarter of 2007, up $1.5 million or 12% over last year. Net charge-offs / recoveries improved from a $1.8 million pre-tax loss in the second quarter of 2006 to a $609 thousand pre-tax recovery in the second quarter of 2007. Net interest revenue grew $2.6 million or 7%. Average earning assets increased $347 million or 10% from the second quarter of 2006. This increase resulted from a $506 million increased in average outstanding loan balances and an $111 million increase in securities. The growth in average earning assets was funded primarily by a $278 million increase in average deposits and a decrease in funds sold to the funds management unit. Operating expenses increased $3.1 million or 15%. Personnel costs were up $2.1 million or 18% over the same period last year. Net income from operations in Colorado was $4.0 million for the second quarter of 2007, compared with $3.3 million for the second quarter of 2006. Net interest revenue increased $1.7 million or 19% due primarily to a $426 million increase in average earning assets. Average loans increased $200 million while average securities and funds sold to the funds management unit increased $226 million. The growth in earning assets was funded primarily by a $239 million increase in deposits and borrowings from the funds management unit. Other operating revenue grew $307 thousand or 11% due primarily to trust fees and commissions. At June 30, 2007 and 2006, Colorado regional banking was responsible for trust assets with aggregate fair values of $2.9 billion and $2.5 billion, respectively under various fiduciary arrangements. We have sole or joint discretionary authority over $1.1 billion of trust assets at June 30, 2007, compared with $955 million at June 30, 2006. Operating expenses increased $796 thousand or 12% including a $642 thousand or 20% increase in personnel costs. Net income from New Mexico operations decreased $246 thousand or 5%. Net loans charged off increased to $1.4 million in the second quarter of 2007 compared with net charge-offs of $692 thousand in the second quarter of 2006. Net interest revenue totaled $13.2 million, up $1.3 million or 11%. Average earning assets grew $181 million or 13%, including a $134 million increase in average outstanding loans. Average deposits in the New Mexico market increased $67 million. Operating expenses increased $1.2 million or 18%.
14 We continue to expand operations in the Arizona market since the acquisition of Bank of Arizona in the second quarter of 2005. Net interest revenue was up $1.3 million or 35% over the second quarter of 2006. Outstanding loans attributed to the Arizona market averaged $502 million for the second quarter of 2007, up $232 million from the second quarter of 2006's average of $270 million. Deposits averaged $115 million for the second quarter of 2007, down $6 million from the second quarter of 2006. Loan growth was funded by borrowings from the funds management unit. Operating expenses increased $1.1 million or 35%. Personnel costs were up $532 thousand and occupancy and equipment expense was up $126 thousand as we continue to build a commercial banking presence in Phoenix and Tucson. <TABLE> Table 11 - Bank of Texas (Dollars in Thousands) Three months ended June 30, Six months ended June 30, --------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------ <S> <C> <C> <C> <C> NIR (expense) from external sources $ 45,929 $ 41,190 $ 91,237 $ 80,200 NIR (expense) from internal sources (7,483) (5,345) (14,683) (9,526) ------------- ------------- -------------- ------------- Net interest revenue 38,446 35,845 76,554 70,674 Other operating revenue 6,852 6,060 13,137 11,523 Operating expense 23,871 20,819 45,582 41,101 Net loans charged off (recovered) (609) 1,789 536 2,190 Net income 14,022 12,543 27,925 25,289 Average assets $ 4,102,189 $ 3,610,316 $ 4,029,689 $ 3,578,237 Average economic capital 296,580 228,140 291,810 216,710 Average invested capital 463,660 395,220 458,890 383,790 Return on assets 1.37% 1.39% 1.40% 1.43% Return on economic capital 18.96% 22.05% 19.30% 23.53% Return on average invested capital 12.13% 12.73% 12.27% 13.29% Efficiency ratio 52.70% 49.68% 50.82% 50.00% </TABLE> <TABLE> Table 12 - Bank of Albuquerque (Dollars in Thousands) Three months ended June 30, Six months ended June 30, --------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------ <S> <C> <C> <C> <C> NIR (expense) from external sources $ 18,735 $ 15,992 $ 36,446 $ 31,665 NIR (expense) from internal sources (5,544) (4,126) (10,770) (8,011) ------------- ------------- -------------- ------------- Net interest revenue 13,191 11,866 25,676 23,654 Other operating revenue 4,360 4,122 8,286 8,009 Operating expense 7,797 6,609 15,111 13,681 Net loans charged off 1,428 692 1,559 751 Net income 5,079 5,325 10,588 10,545 Average $ 1,616,356 $ 1,446,500 $ 1,577,580 $ 1,459,371 assets Average economic capital 89,430 73,620 88,510 76,150 Average invested 108,520 92,710 107,600 95,240 capital Return on assets 1.26% 1.48% 1.35% 1.46% Return on economic capital 22.78% 29.01% 24.12% 27.92% Return on average invested capital 18.77% 23.04% 19.84% 22.33% Efficiency ratio 44.42% 41.34% 44.49% 43.21% </TABLE>
15 <TABLE> Table 13 - Bank of Arkansas (Dollars in Thousands) Three months ended June 30, Six months ended June 30, -------------------------------------------------------------------- 2007 2006 2007 2006 ----------------------------------------------------------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 4,196 $ 2,616 $ 7,637 $ 4,905 NIR (expense) from internal sources (1,726) (819) (3,117) (1,538) ------------- ------------- -------------- ------------- Net interest revenue 2,470 1,797 4,520 3,367 Other operating revenue 311 273 644 524 Operating expense 1,098 870 2,139 1,727 Net loans charged off / (recovered) 264 (70) 406 (28) Net income 867 775 1,592 1,338 Average assets $ 333,995 $ 188,922 $ 308,324 $ 192,477 Average economic capital 19,430 14,040 18,280 13,400 Average invested capital 19,430 14,040 18,280 13,400 Return on assets 1.04% 1.65% 1.04% 1.40% Return on economic capital 17.90% 22.14% 17.56% 20.14% Return on average invested capital 17.90% 22.14% 17.56% 20.14% Efficiency ratio 39.48% 42.03% 41.42% 44.38% </TABLE> <TABLE> Table 14 - Colorado State Bank and Trust (Dollars in Thousands) Three months ended June 30, Six months ended June 30, -------------------------------------------------------------------- 2007 2006 2007 2006 ----------------------------------------------------------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 17,734 $ 12,870 $ 35,143 $ 24,420 NIR (expense) from internal sources (7,123) (3,929) (14,154) (6,954) ------------- ------------- -------------- ------------- Net interest revenue 10,611 8,941 20,989 17,466 Other operating revenue 3,157 2,850 6,344 5,762 Operating expense 7,197 6,401 13,944 12,362 Net loans charged off / (recovered) 7 (5) 81 (51) Net income 4,012 3,296 8,173 6,670 Average assets $ 1,594,657 $ 1,151,708 $ 1,576,326 $ 1,095,054 Average economic capital 84,690 62,030 86,830 60,210 Average invested capital 126,680 104,020 128,810 102,190 Return on assets 1.01% 1.15% 1.05% 1.23% Return on economic capital 19.00% 21.31% 18.98% 22.34% Return on average invested capital 12.70% 12.71% 12.80% 13.16% Efficiency ratio 52.27% 54.29% 51.02% 53.22% </TABLE>
16 <TABLE> Table 15 - Bank of Arizona (Dollars in Thousands) Three months ended June 30, Six months ended June 30, --------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------ <S> <C> <C> <C> <C> NIR (expense) from external sources $ 10,185 $ 6,076 $ 19,743 $ 10,760 NIR (expense) from internal sources (5,263) (2,441) (10,246) (4,030) ------------- ------------- -------------- ------------- Net interest revenue 4,922 3,635 9,497 6,730 Other operating revenue 185 122 369 287 Operating expense 4,319 3,206 7,955 5,757 Net loans charged off / (recovered) 1 (2) 1 2 Net income 481 374 1,167 708 Average assets $ 576,311 $ 366,609 $ 564,516 $ 331,081 Average economic capital 50,320 19,510 47,270 16,820 Average invested capital 66,970 36,160 63,920 33,470 Return on assets 0.33% 0.41% 0.42% 0.43% Return on economic capital 3.83% 7.69% 4.98% 8.49% Return on average invested capital 2.88% 4.15% 3.68% 4.27% Efficiency ratio 84.57% 85.33% 80.63% 82.04% </TABLE> Financial Condition Securities Securities are classified as either held for investment, available for sale or trading based upon asset/liability management strategies, liquidity, 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 $5.1 billion at June 30, 2007 and $4.8 billion at March 31, 2007. 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 2.8 years at June 30, 2007 and 2.5 years at March 31, 2007. 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. The gross amount of unrealized losses on available for sale securities totaled $140 million at June 30, 2007 compared with gross unrealized losses of $83 million at March 31, 2007. The increase in unrealized losses during the quarter was due primarily to rising interest rates and an increase in the spread between market rates on mortgage-backed securities and benchmark interest rates. 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. The portfolio does not hold any securities backed by sub-prime mortgage loans, collateralized debt obligations or collateralized loan obligations. Approximately $400
17 million of Alt-A mortgage-backed securities were held at June 30, 2007. Alt-A mortgage loans generally include loans that lack some documentation required of prime loans such as verified borrower income or assets and loans to borrowers where credit scores fall between the definitions of sub-prime and prime. Approximately 77% of the Alt-A backed securities, including all Alt-A mortgage-backed securities originated in 2006 and 2007, are AAA rated and are credit enhanced with additional collateral support. Management does not believe that any of the unrealized losses are due to credit quality concerns. Changes in market rates and conditions reduced the gross unrealized loss on available for sale securities to $105 million at July 31, 2007. 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 unrealized losses in these securities are temporary. Bank-Owned Life Insurance During the third quarter of 2006, the Company invested $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 $201 million at June 30, 2007. In addition to investment in the separate accounts, $8 million of the amount invested paid taxes on the insurance premiums. These taxes will be recovered over a ten-year period. At June 30, 2007, a $7 million receivable was recorded based on the present value of the taxes. The Company also has life insurance policies obtained through various bank acquisitions with an aggregate cash surrender value of $16 million. Loans The aggregate loan portfolio at June 30, 2007 totaled $11.7 billion, a $556 million increase since March 31, 2007. The acquisitions of Worth National Bank and First United Bank added $378 million to the loan portfolio during the second quarter. Excluding acquisitions, the loan portfolio grew at an annualized rate of 6%. Commercial and commercial real estate loan growth was partially offset by approximately $140 million of payoffs of energy, healthcare and real estate loans. These payoffs affected the outstanding loan balances in the Texas, New Mexico and Arizona markets. Excluding acquisitions, commercial loans increased $38 million or 2% annualized and commercial real estate loans were unchanged during the quarter. Residential mortgage loans and consumer loans increased $43 million and $59 million, respectively. <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 16 - Loans (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2007 2007 2006 2006 2006 --------------------------------------------------------------------------------- Commercial: <S> <C> <C> <C> <C> <C> Energy $ 1,842,888 $ 1,781,224 $ 1,763,180 $ 1,538,651 $ 1,514,353 Services 1,686,650 1,596,844 1,555,141 1,432,156 1,405,060 Wholesale/retail 1,017,486 1,015,229 932,531 894,608 879,203 Manufacturing 596,002 622,329 609,571 598,424 541,592 Healthcare 606,965 642,876 602,273 572,911 546,595 Agriculture 313,247 309,439 321,380 299,901 292,022 Other commercial and industrial 485,594 474,415 424,808 340,925 360,493 - --------------------------------------------------------------------------------------------------------------------- Total commercial 6,548,832 6,442,356 6,208,884 5,677,576 5,539,318 - --------------------------------------------------------------------------------------------------------------------- Commercial real estate: Construction and land development 916,526 925,762 889,925 826,077 789,991 Multifamily 221,069 249,080 239,000 253,141 228,781 Other real estate loans 1,654,385 1,375,805 1,317,615 1,245,941 1,304,164 - --------------------------------------------------------------------------------------------------------------------- Total commercial real estate 2,791,980 2,550,647 2,446,540 2,325,159 2,322,936 - --------------------------------------------------------------------------------------------------------------------- Residential mortgage: Secured by 1-4 family residential properties 1,399,637 1,318,291 1,256,259 1,242,193 1,211,448 Residential mortgages held for sale 116,257 75,011 64,625 58,031 54,026 - --------------------------------------------------------------------------------------------------------------------- Total residential mortgage 1,515,894 1,393,302 1,320,884 1,300,224 1,265,474 - --------------------------------------------------------------------------------------------------------------------- Consumer 842,676 756,989 739,495 702,947 666,740 - --------------------------------------------------------------------------------------------------------------------- Total $ 11,699,382 $ 11,143,294 $ 10,715,803 $ 10,005,906 $ 9,794,468 - --------------------------------------------------------------------------------------------------------------------- </TABLE>
18 The commercial loan portfolio totaled $6.5 billion at June 30, 2007. Energy loans totaled $1.8 billion or 16% of total loans. Outstanding energy loans increased $62 million, or 14% annualized, during the second quarter of 2007. Approximately $1.6 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 $1.7 billion, or 14% of the Company's total outstanding loans. Loans in this sector of the portfolio increased $90 million since March 31, 2007. 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. Other notable loan concentrations by primary industry of the borrowers are presented in Table 16. 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 $1.5 billion at June 30, 2007 and $1.4 billion at March 31, 2007. Substantially all of these loans were to borrowers with local market relationships. BOK Financial serves as the agent lender in approximately 24% 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 $2.8 billion or 24% of the loan portfolio at June 30, 2007. Construction and land development loans totaled $917 million, down $9 million since March 31, 2007. Construction and land development included $718 million of loans secured by single family residential lots and premises, unchanged from the previous quarter's end. The major components of other commercial real estate loans were office buildings - $434 million and retail facilities - $396 million. Residential mortgage loans, excluding mortgage loans held for sale, included $415 million of home equity loans, $449 million of loans held for business relationship purposes, $317 million of first lien adjustable rate mortgages and $152 million of loans held for community development. Consumer loans included $554 million of indirect automobile loans. Indirect auto loans have increased $53 million since March 31, 2007. Approximately $416 million of these loans were purchased from dealers in Oklahoma and $124 million were purchased from dealers in Arkansas. Growth during the quarter included $25 million from indirect lending activities in Arkansas and $23 million in Oklahoma. Table 17 presents the distribution of the major loan categories among our primary market areas.
19 <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 17 - Loans by Principal Market Area (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2007 2007 2006 2006 2006 --------------------------------------------------------------------------------- Oklahoma: <S> <C> <C> <C> <C> <C> Commercial $ 3,397,273 $ 3,377,819 $ 3,261,592 $ 3,078,849 $ 3,119,736 Commercial real estate 897,838 895,585 979,251 968,267 995,953 Residential mortgage 968,031 945,147 896,567 878,390 854,723 Residential mortgage held for sale 116,257 75,011 64,625 58,031 54,026 Consumer 540,986 509,787 512,032 502,622 479,508 --------------------------------------------------------------------------------- Total Oklahoma $ 5,920,385 $ 5,803,349 $ 5,714,067 $ 5,486,159 $ 5,503,946 --------------------------------------------------------------------------------- Texas: Commercial $ 1,856,049 $ 1,797,262 $ 1,722,627 $ 1,557,361 $ 1,548,545 Commercial real estate 888,118 721,207 670,635 639,327 669,698 Residential mortgage 263,344 216,087 213,801 212,114 212,987 Consumer 135,659 105,604 95,652 80,836 84,212 --------------------------------------------------------------------------------- Total Texas $ 3,143,170 $ 2,840,160 $ 2,702,715 $ 2,489,638 $ 2,515,442 --------------------------------------------------------------------------------- New Mexico: Commercial $ 434,394 $ 424,539 $ 411,272 $ 387,164 $ 334,984 Commercial real estate 263,342 279,203 257,079 219,966 237,020 Residential mortgage 81,521 77,800 75,159 76,858 73,281 Consumer 13,225 11,493 13,256 13,899 13,404 --------------------------------------------------------------------------------- Total New Mexico $ 792,482 $ 793,035 $ 756,766 $ 697,887 $ 658,689 --------------------------------------------------------------------------------- Arkansas: Commercial $ 103,534 $ 96,084 $ 95,483 $ 89,849 $ 80,539 Commercial real estate 102,537 97,190 94,395 91,158 87,080 Residential mortgage 22,508 21,825 23,076 21,923 15,067 Consumer 129,431 103,662 86,017 67,206 51,166 --------------------------------------------------------------------------------- Total Arkansas $ 358,010 $ 318,761 $ 298,971 $ 270,136 $ 233,852 --------------------------------------------------------------------------------- Colorado: Commercial $ 480,097 $ 457,758 $ 451,046 $ 353,657 $ 299,380 Commercial real estate 274,610 199,736 193,747 170,081 155,453 Residential mortgage 18,516 15,501 15,812 17,656 21,113 Consumer 18,470 17,746 26,591 32,647 31,939 --------------------------------------------------------------------------------- Total Colorado $ 791,693 $ 690,741 $ 687,196 $ 574,041 $ 507,885 --------------------------------------------------------------------------------- Arizona: $ 124,765 $ 120,351 $ 96,453 $ 76,013 $ 63,019 Commercial Commercial real estate 326,951 316,661 207,035 196,286 153,870 Residential mortgage 43,192 41,731 31,280 34,772 33,913 Consumer 4,683 8,654 5,947 5,737 6,511 --------------------------------------------------------------------------------- Total Arizona $ 499,591 $ 487,397 $ 340,715 $ 312,808 $ 257,313 --------------------------------------------------------------------------------- Kansas: Commercial $ 152,720 $ 168,543 $ 170,411 $ 134,683 $ 93,115 Commercial real estate 38,584 41,065 44,398 40,074 23,862 Residential mortgage 2,525 200 564 480 364 Consumer 222 43 - - - --------------------------------------------------------------------------------- Total Kansas $ 194,051 $ 209,851 $ 215,373 $ 175,237 $ 117,341 --------------------------------------------------------------------------------- Total BOK Financial loans $ 11,699,382 $ 11,143,294 $ 10,715,803 $ 10,005,906 $ 9,794,468 --------------------------------------------------------------------------------- </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 $5.4 billion and standby letters of credit which totaled $519 million at June 30, 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 June 30, 2007, the fair value of derivative contracts reported as assets under these programs totaled $265 million. This included energy contracts with fair values of $203 million, interest rate contracts with fair values of $45 million and foreign exchange contracts with fair values of $15 million. The aggregate fair values of derivative contracts reported as liabilities totaled $277 million. Approximately 78% of the fair value of asset contracts was with customers. The credit risk of these contracts is generally backed by energy production. The remaining 22% was with dealer counterparties. The maximum net exposure to any single customer or counterparty totaled $34 million. Summary of Loan Loss Experience The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $120 million at June 30, 2007, compared with $114 million at March 31, 2007 and $105 million at June 30, 2006. These amounts represented 1.03%, 1.03% and 1.07% of outstanding loans, excluding loans held for sale, at June 30, 2007, March 31, 2007 and June 30, 2006, respectively. Losses on loans held for sale, principally mortgage loans accumulated for
21 placement into security pools, are charged to earnings through adjustment in the carrying value. The reserve for loan losses also represented 230% of outstanding balance of non-accruing loans at June 30, 2007, compared with 365% at March 31, 2007 and 337% at June 30, 2006. Non-accruing loans totaled $52 million at June 30, 2007, compared with $31 million at March 31, 2007 and June 30, 2006. Net loans charged off during the second quarter of 2007 totaled $5.8 million, up from $3.1 million in the preceding quarter and $3.8 million for the second quarter of 2006. Net charge-offs were disbursed among our operating regions and across borrowers' industries with no significant concentration in any area. Loans with an outstanding balance of $92 million acquired from First United Bank are subject to a guaranty by the sellers through an escrow fund held in trust by Colorado State Bank and Trust. The Company will be reimbursed for up to $8 million on losses, including principal, interest and collection costs, on any acquired loans in a three-year period after the acquisition date. 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 18 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.
22 <TABLE> - ------------------------------------------------------------------------------------------------------------------------------ Table 18 - Summary of Loan Loss Experience (In thousands) Three Months Ended ---------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, 2007 2007 2006 2006 2006 ---------------------------------------------------------------------------------- Reserve for loan losses: <S> <C> <C> <C> <C> <C> Beginning balance $ 114,371 $ 109,497 $ 105,465 $ 104,525 $ 104,143 Loans charged off: Commercial 5,454 3,123 2,202 4,550 2,523 Commercial real estate 57 30 87 - - Residential mortgage 300 124 465 230 363 Consumer 3,000 3,110 3,113 3,319 2,995 - ------------------------------------------------------------------------------------------------------------------------------ Total 8,811 6,387 5,867 8,099 5,881 - ------------------------------------------------------------------------------------------------------------------------------ Recoveries of loans previously charged off: Commercial 1,649 1,471 1,853 1,985 720 Commercial real estate 37 41 5 276 6 Residential mortgage 15 189 25 19 20 Consumer 1,338 1,567 1,196 1,523 1,339 - ------------------------------------------------------------------------------------------------------------------------------ Total 3,039 3,268 3,079 3,803 2,085 - ------------------------------------------------------------------------------------------------------------------------------ Net loans charged off 5,772 3,119 2,788 4,296 3,796 Provision for loan losses 7,570 7,993 6,820 5,236 4,178 Additions due to acquisitions 3,590 - - - - - ------------------------------------------------------------------------------------------------------------------------------ Ending balance $ 119,759 $ 114,371 $ 109,497 $ 105,465 $ 104,525 - ------------------------------------------------------------------------------------------------------------------------------ Reserve for off-balance sheet credit losses: Beginning balance $ 19,397 $ 20,890 $ 21,757 $ 21,739 $ 22,122 Provision for off-balance sheet credit losses 250 (1,493) (867) 18 (383) - ------------------------------------------------------------------------------------------------------------------------------ Ending balance $ 19,647 $ 19,397 $ 20,890 $ 21,757 $ 21,739 - ------------------------------------------------------------------------------------------------------------------------------ Total provision for credit losses $ 7,820 $ 6,500 $ 5,953 $ 5,254 $ 3,795 - ------------------------------------------------------------------------------------------------------------------------------ Reserve for loan losses to loans outstanding at period-end (1) 1.03% 1.03% 1. 03% 1.06% 1. 07% Net charge-offs (annualized) to average loans (1) 0.21 0.12 0.11 0.18 0.16 Total provision for credit losses (annualized) to average loans (1) 0.28 0.24 0.23 0.22 0.16 Recoveries to gross charge-offs 34.49 51.17 52.48 46.96 35.45 Reserve for loan losses as a multiple of net charge-offs (annualized) 5.19x 9.17x 9.82x 6.14x 6.88x Reserve for off-balance sheet credit losses to off-balance sheet credit commitments 0.33% 0.34% 0.36% 0.40% 0.41% Combined reserves for credit losses to loans outstanding at period-end (1) 1.20 1.21 1.22 1.28 1.30 - ------------------------------------------------------------------------------------------------------------------------------ (1) Excludes residential mortgage loans held for sale. </TABLE> Specific impairment reserves are determined through evaluation of estimated future cash flows and collateral value. At June 30, 2007, specific impairment reserves totaled $2.9 million on total impaired loans of $44 million. Required specific impairment reserves were $2.4 million at March 31, 2007. 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> June 30, 2007 March 31, 2007 --------------- ---------------- <S> <C> <C> General economic conditions - $4.2 million to $8.4 million $4.2 million to $8.4 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 $7.8 million for the second quarter of 2007, compared with $6.5 million for the first quarter of 2007 and $3.8 million for the second quarter of 2006. Factors considered in determining the provision for credit losses included increases in net losses and non-accruing loans during the quarter along with continued growth in outstanding loans.
23 Nonperforming Assets Information regarding nonperforming assets, which totaled $60 million at June 30, 2007, $41 million at March 31, 2007 and $39 million at June 30, 2006, is presented in Table 19. Nonperforming assets included non-accrual loans and excluded loans 90 days or more past due but still accruing interest. Non-accrual loans totaled $52 million at June 30, 2007, including $6.9 million of non-accrual loans subject to the First United Bank seller's guaranty (see Note 2). Non-accrual loans totaled $31 million at March 31, 2007 and at June 30, 2006. Newly identified non-accruing loans totaled $22 million during the second quarter of 2007 and acquisitions increased non-accruing loans $7.8 million. Newly identified non-accruing loans were disbursed among our geographic regions and across our loan portfolio. No significant concentrations were identified. Non-accruing loans decreased $5.9 million for loans charged off or foreclosed, and $4.8 million for cash payments received. <TABLE> - ---------------------------------------------------------------------------------------------------------------------- Table 19 - Nonperforming Assets (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2007 2007 2006 2006 2006 ----------------------------------------------------------------------- Nonaccrual loans: <S> <C> <C> <C> <C> <C> Commercial $ 20,456 $ 14,218 $ 10,737 $ 15,061 $ 15,087 Commercial real estate 19,470 6,832 4,771 3,540 4,369 Residential mortgage 11,418 9,920 10,325 7,889 7,604 Consumer 675 364 222 3,986 3,916 - ---------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 52,019 31,334 26,055 30,476 30,976 - ---------------------------------------------------------------------------------------------------------------------- Renegotiated loans 731 964 1,111 1,064 - Other nonperforming assets 7,664 8,414 8,486 9,322 8,257 - ---------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 60,414 $ 40,712 $ 35,652 $ 40,862 $ 39,233 - ---------------------------------------------------------------------------------------------------------------------- Ratios: Reserve for loan losses to nonaccrual loans 230.22% 365.01% 420.25% 346.06% 337.44% Combined reserves for credit losses to nonaccrual loans 267.99 426.91 500.43 417.45 407.62 Nonaccrual loans to period-end loans (2) 0.45 0.28 0.24 0.31 0.32 - ---------------------------------------------------------------------------------------------------------------------- Loans past due (90 days) (1) $ 4,215 $ 20,623 $ 5,945 $ 5,076 $ 9,630 - ---------------------------------------------------------------------------------------------------------------------- (1) Includes residential mortgages guaranteed by agencies of the U.S. Government. $ 2,028 $ 1,728 $ 2,233 $ 1,784 $ 2,310 (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 Nonperforming Assets. Known information does, however, cause management concerns as to the borrowers' ability to comply with current repayment terms. These potential problem loans totaled $45 million at June 30, 2007 and $27 million at March 31, 2007. Potential problem loans by primary industry included healthcare - - $23 million, services - $14 million and real estate - $6 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 $12.4 billion for the second quarter of 2007, up $314 million, or 10% annualized compared with average deposits in the first quarter of 2007. Average deposits attributed to funds management, which includes
23 brokered deposits and public funds, increased $103 million to $1.1 billion for the second quarter. In addition, deposits provided by the Worth National Bank acquisition averaged $126 million for the second quarter of 2007. Average commercial deposits decreased $7.3 million or 1%. Average deposits attributed to consumer banking increased $17 million or 1%. Average deposits attributed to trust and private financial services increased $69 million or 19% annualized. Core deposits, which we define as deposits of less than $100,000, excluding public funds and brokered deposits, averaged $6.4 billion for the second quarter of 2007, an annualized increase of 36% over the first quarter of 2007. Average core deposits comprised 51% of total deposits for the second quarter of 2007. Deposit accounts with balances in excess of $100,000 averaged $4.7 billion or 38% of total average deposits, down from $5.1 billion for the preceding quarter. The distribution of deposit accounts among our principal markets is shown in Table 20.
25 <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 20 - Deposits by Principal Market Area (In thousands) June 30, March 31, Dec. 31, Sept. 30, June30, 2007 2007 2006 2006 2006 --------------------------------------------------------------------------------- Oklahoma: <S> <C> <C> <C> <C> <C> Demand $ 876,671 $ 877,623 $ 915,101 $ 868,502 $ 908,034 Interest-bearing: Transaction 3,470,896 3,481,859 3,456,322 3,001,774 2,732,312 Savings 88,133 92,678 83,017 83,442 88,218 Time 2,798,719 2,556,423 2,595,890 2,621,522 2,662,770 --------------------------------------------------------------------------------- Total interest-bearing 6,357,748 6,130,960 6,135,229 5,706,738 5,483,300 --------------------------------------------------------------------------------- Total Oklahoma $ 7,234,419 $ 7,008,583 $ 7,050,330 $ 6,575,240 $ 6,391,334 --------------------------------------------------------------------------------- Texas: Demand $ 626,193 $ 602,315 $ 640,159 $ 582,014 $ 638,157 Interest-bearing: Transaction 2,019,311 1,701,382 1,688,131 1,671,993 1,530,491 Savings 36,989 24,558 24,074 25,888 26,370 Time 804,877 682,292 829,255 736,316 717,027 --------------------------------------------------------------------------------- Total interest-bearing 2,861,177 2,408,232 2,541,460 2,434,197 2,273,888 --------------------------------------------------------------------------------- Total Texas $ 3,487,370 $ 3,010,547 $ 3,181,619 $ 3,016,211 $ 2,912,045 --------------------------------------------------------------------------------- New Mexico: Demand $ 113,579 $ 126,111 $ 124,088 $ 144,138 $ 147,307 Interest-bearing: Transaction 521,154 464,569 432,342 434,521 410,166 Savings 17,662 17,972 16,417 16,804 16,860 Time 500,443 485,662 490,460 481,993 494,426 --------------------------------------------------------------------------------- Total interest-bearing 1,039,259 968,203 939,219 933,318 921,452 --------------------------------------------------------------------------------- Total New Mexico $ 1,152,838 $ 1,094,314 $ 1,063,307 $ 1,077,456 $ 1,068,759 --------------------------------------------------------------------------------- Arkansas: Demand $ 11,030 $ 10,980 $ 12,589 $ 11,914 $ 11,521 Interest-bearing: Transaction 22,096 21,762 17,905 19,504 20,577 Savings 1,011 1,029 1,010 1,058 1,072 Time 46,597 54,687 57,446 61,966 69,418 --------------------------------------------------------------------------------- Total interest-bearing 69,704 77,478 76,361 82,528 91,067 --------------------------------------------------------------------------------- Total Arkansas $ 80,734 $ 88,458 $ 88,950 $ 94,442 $ 102,588 --------------------------------------------------------------------------------- Colorado: Demand $ 42,006 $ 39,821 $ 48,756 $ 38,264 $ 45,214 Interest-bearing: Transaction 398,972 314,506 328,254 275,714 245,504 Savings 62,211 12,092 12,632 13,037 13,786 Time 549,676 502,880 485,200 421,841 379,239 --------------------------------------------------------------------------------- Total interest-bearing 1,010,859 829,478 826,086 710,592 638,529 --------------------------------------------------------------------------------- Total Colorado $ 1,052,865 $ 869,299 $ 874,842 $ 748,856 $ 683,743 --------------------------------------------------------------------------------- Arizona: Demand $ 31,196 $ 29,461 $ 39,352 $ 62,234 $ 73,696 Interest-bearing: Transaction 74,892 67,364 73,729 74,786 67,841 Savings 1,233 1,367 1,978 2,408 2,702 Time 11,563 10,018 6,574 4,549 4,077 --------------------------------------------------------------------------------- Total interest-bearing 87,688 78,749 82,281 81,743 74,620 --------------------------------------------------------------------------------- Total Arizona $ 118,884 $ 108,210 $ 121,633 $ 143,977 $ 148,316 --------------------------------------------------------------------------------- Kansas: Demand $ 1,081 $ 325 $ 14 $ - $ - Interest-bearing: Transaction 1,356 670 287 - - Savings 12 11 2 - - Time 32,695 28,166 5,721 - - --------------------------------------------------------------------------------- Total interest-bearing 34,063 28,847 6,010 - - --------------------------------------------------------------------------------- Total Kansas $ 35,144 $ 29,172 $ 6,024 $ - $ - --------------------------------------------------------------------------------- Total BOK Financial deposits $ 13,162,254 $ 12,208,583 $ 12,386,705 $ 11,656,182 $ 11,306,785 --------------------------------------------------------------------------------- </TABLE>
26 Borrowings and Capital BOK Financial (parent company) has a $100 million unsecured revolving line of credit with certain banks that expires in December 2010. There was no outstanding principal balance on this credit agreement at June 30, 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 June 30, 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. After issuing dividends in the second quarter of 2007 to fund acquisitions, the subsidiary banks could declare up to $35 million of dividends based on the most restrictive limitations 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 $18 million under this policy. Equity capital for BOK Financial totaled $1.8 billion at June 30, 2007, up $10 million during the quarter. Retained earnings, net income less cash dividends provided $40 million of the increase. Accumulated other comprehensive losses increased $33 million due primarily to net unrealized losses on available for sale securities. Employee stock option transactions increased equity capital $4 million during the second 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 second quarter of 2007, the Company repurchased 18,783 common shares at an average price of $51.49 per share. The Company may repurchase 1.7 million common shares in the future under this program. Cash dividends of $13.5 million or $0.20 per common share were paid during the second quarter of 2007. On July 31, 2007 the Board of Directors approved quarterly cash dividend of $0.20 per common share. The dividend will be payable on or about August 30, 2007 to shareholders of record on August 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. 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 21.
27 <TABLE> - -------------------------------------------------------------------------------------------------------------------- Table 21 - Capital Ratios June 30, March 31, Dec. 31, Sept. 30, June 30, 2007 2007 2006 2006 2006 -------------------------------------------------------------------------- Average shareholders' equity <S> <C> <C> <C> <C> <C> to average assets 9.61% 9.71% 9.67% 9.62% 9.49% Risk-based capital: Tier 1 capital 9.12 9.97 9.78 9.99 10.00 Total capital 12.36 11.76 11.58 12.07 12.14 Leverage 8.30 8.95 8.79 8.88 8.74 </TABLE> During the second quarter of 2007, Bank of Oklahoma issued $250 million of subordinated debt due May 15, 2017. Interest on this debt is based on a fixed rate of 5.75% through May 14, 2012 and on a floating rate of three-month LIBOR plus 0.69% thereafter. The proceeds of this debt, which qualifies as Tier 2 regulatory capital, was used to fund the Worth National Bank and First United Bank acquisitions and to fund continued asset growth. Off-Balance Sheet Arrangements During 2002, BOK Financial agreed to a limited price guarantee on a portion of the common shares issued to purchase of 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 June 30, 2007 was $53.42 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 2.8 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
28 with earning assets. During the second quarter of 2007, net interest revenue was reduced by $2.1 million from periodic settlements of these contracts. Net interest revenue was decreased by $2.1 million from periodic settlements of these contracts in the second 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. Net losses of $183 thousand and $172 thousand were recognized in the second quarters of 2007 and 2006, respectively, 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 22 due to the extreme volatility over such a large rate range. The effects of interest rate changes on the value of mortgage servicing rights and securities identified as economic hedges are presented in the Lines of Business - Mortgage Banking section of this report. The simulations used to manage market risk are based on numerous assumptions regarding the effects of changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest revenue, net income or economic value of equity or precisely predict the impact of higher or lower interest rates on net interest revenue, net income or economic value of equity. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, market conditions and management strategies, among other factors. <TABLE> Table 22 - 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 $ (3,335) $ (4,269) $ 764 $ 6,052 $ 567 $ (501) (0.6)% (0.8)% 0.1% 1.1% 0.1% (0.1)% - ----------------------------------------------------------------------------------------------------------------------- </TABLE> Trading Activities BOK Financial enters into trading activities both as an intermediary for customers and for its own account. As an intermediary, BOK Financial will take positions in securities, generally mortgage-backed securities, government agency securities, and municipal bonds. These securities are purchased for resale to customers, which include individuals, corporations, foundations and financial institutions. BOK Financial will also take trading positions in U.S. Treasury securities, mortgage-backed securities, municipal bonds and financial futures for its own account. These positions are taken with the objective of generating trading profits. Both of these activities involve interest rate risk. A variety of methods are used to manage the interest rate risk of trading activities. These methods include daily marking of all positions to market value, independent verification of inventory pricing, and position limits for each trading activity. Hedges in either the futures or cash markets may be used to reduce the risk associated with some trading programs. Management uses a Value at Risk ("VAR") methodology to measure the market risk inherent in its trading activities.
29 VAR is calculated based upon historical simulations over the past five years using a variance / covariance matrix of interest rate changes. It represents an amount of market loss that is likely to be exceeded only one out of every 100 two-week periods. Trading positions are managed within guidelines approved by the Board of Directors. These guidelines limit the VAR to $1.8 million. At June 30, 2007, the VAR was $558 thousand. The greatest value at risk during the quarter was $1.2 million. Controls and Procedures As required by Rule 13a-15(b), BOK Financial's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by their report, of the effectiveness of the company's disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13a-15(d), BOK Financial's management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the company's internal controls over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the company's internal controls over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report. Forward-Looking Statements This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates, and projections about BOK Financial, the financial services industry and the economy in general. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the provision and reserve for loan losses involve judgments as to expected events and are inherently forward-looking statements. Assessments that BOK Financial's acquisitions and other growth endeavors will be profitable are necessary statements of belief as to the outcome of future events, based in part on information provided by others that BOK Financial has not independently verified. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied, or forecasted in such forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to: (1) the ability to fully realize expected cost savings from mergers within the expected time frames, (2) the ability of other companies on which BOK Financial relies to provide goods and services in a timely and accurate manner, (3) changes in interest rates and interest rate relationships, (4) demand for products and services, (5) the degree of competition by traditional and nontraditional competitors, (6) changes in banking regulations, tax laws, prices, levies, and assessments, (7) the impact of technological advances and (8) trends in customer behavior as well as their ability to repay loans. BOK Financial and its affiliates undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events or otherwise.
30 <TABLE> - ---------------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Earnings (Unaudited) (In Thousands Except Share and Per Share Data) Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 ------------------------------------------------------------------- Interest Revenue <S> <C> <C> <C> <C> Loans $ 224,215 $ 180,999 $ 437,040 $ 346,926 Taxable securities 60,223 56,632 117,817 111,678 Tax-exempt securities 2,922 2,173 5,950 4,382 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ----------- Total securities 63,145 58,805 123,767 116,060 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ----------- Trading securities 401 229 865 393 Funds sold and resell agreements 924 407 1,589 646 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ----------- Total interest revenue 288,685 240,440 563,261 464,025 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ----------- Interest Expense Deposits 102,059 80,026 199,931 152,880 Borrowed funds 44,889 34,378 87,552 62,868 Subordinated debentures 6,824 4,930 12,027 9,845 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ----------- Total interest expense 153,772 119,334 299,510 225,593 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ----------- Net Interest Revenue 134,913 121,106 263,751 238,432 Provision for Credit Losses 7,820 3,795 14,320 7,195 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ----------- Net Interest Revenue After Provision for Credit Losses 127,093 117,311 249,431 231,237 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ----------- Other Operating Revenue Brokerage and trading revenue 13,317 12,597 26,599 25,953 Transaction card revenue 22,917 19,951 43,101 38,459 Trust fees and commissions 19,458 17,751 38,453 35,696 Deposit service charges and fees 26,797 26,341 51,395 50,327 Mortgage banking revenue 6,682 7,195 13,222 13,984 Bank-owned life insurance 2,525 32 4,924 95 Other revenue 7,096 10,037 13,086 19,316 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ----------- Total fees and commissions 98,792 93,904 190,780 183,830 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ----------- Gain (loss) on sales of assets (348) (269) 346 772 Loss on securities, net (6,262) (2,583) (6,825) (3,804) Loss on derivatives, net (183) (172) (112) (481) - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ----------- Total other operating revenue 91,999 90,880 184,189 180,317 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ----------- Other Operating Expense Personnel 81,882 72,369 160,611 143,601 Business promotion 5,391 4,802 9,961 9,605 Professional fees and services 5,963 4,362 10,837 8,276 Net occupancy and equipment 13,860 13,199 27,066 26,225 Data processing and communications 18,402 16,157 35,376 33,152 Printing, postage and supplies 4,179 4,001 8,148 7,906 Net losses and operating expenses of repossessed assets 192 54 399 273 Amortization of intangible assets 1,443 1,359 2,579 2,729 Mortgage banking costs 2,987 2,839 5,931 5,926 Change in fair value of mortgage servicing rights (5,061) (3,613) (3,897) (10,694) Other expense 6,721 6,598 11,460 12,507 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ----------- Total other operating expense 135,959 122,127 268,471 239,506 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ----------- Income Before Taxes 83,133 86,064 165,149 172,048 Federal and state income tax 29,270 31,080 58,493 62,316 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ----------- Net Income $ 53,863 $ 54,984 $ 106,656 $ 109,732 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ----------- Earnings Per Share: - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------ Basic $ 0.80 $ 0.82 $ 1.59 $ 1.64 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------ Diluted $ 0.80 $ 0.82 $ 1.58 $ 1.63 - --------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- ------------ Average Shares Used in Computation: - --------------------------------------------------------- --- ------------ --- -------------- ---- -------------- ---- ------------ Basic 67,116,902 66,775,117 67,099,752 66,745,422 - --------------------------------------------------------- --- ------------ --- -------------- ---- -------------- ---- ------------ Diluted 67,606,330 67,317,681 67,589,146 67,289,335 - --------------------------------------------------------- --- ------------ --- -------------- ---- -------------- ---- ------------ </TABLE> See accompanying notes to consolidated financial statements.
31 <TABLE> - -------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets (In Thousands Except Share Data) June 30, December 31, June 30, 2007 2006 2006 -------------------------------------------------- (Unaudited) (Footnote 1) (Unaudited) Assets <S> <C> <C> <C> Cash and due from banks $ 596,827 $ 775,376 $ 618,064 Funds sold and resell agreements 50,635 21,950 25,469 Trading securities 30,977 37,076 25,702 Securities: Available for sale 4,699,735 4,293,938 4,728,434 Available for sale securities pledged to creditors 339,231 361,123 - Investment (fair value: June 30, 2007 - $257,455; December 31, 2006 - $246,608; June 30, 2006 - $217,319) 265,507 248,689 223,411 Mortgage trading securities 133,967 162,837 82,983 - -------------------------------------------------------------------------------------------------------------------- Total securities 5,438,440 5,066,587 5,034,828 - -------------------------------------------------------------------------------------------------------------------- Loans 11,699,382 10,715,803 9,794,468 Less reserve for loan losses (119,759) (109,497) (104,525) - -------------------------------------------------------------------------------------------------------------------- Loans, net of reserve 11,579,623 10,606,306 9,689,943 - -------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 241,579 188,041 177,142 Accrued revenue receivable 160,595 118,236 100,138 Intangible assets, net 377,957 258,060 260,293 Mortgage servicing rights, net 74,067 65,946 73,103 Real estate and other repossessed assets 7,664 8,486 8,257 Bankers' acceptances 31,702 43,613 30,430 Derivative contracts 264,845 284,239 414,367 Cash surrender value of bank-owned life insurance 224,250 212,230 7,744 Other assets 268,221 373,478 458,605 - -------------------------------------------------------------------------------------------------------------------- Total assets $ 19,347,382 $ 18,059,624 $ 16,924,085 - -------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Noninterest-bearing demand deposits $ 1,701,756 $ 1,780,059 $ 1,823,929 Interest-bearing deposits: Transaction 6,508,677 5,996,970 5,006,891 Savings 207,251 139,130 149,008 Time 4,744,570 4,470,546 4,326,957 - -------------------------------------------------------------------------------------------------------------------- Total deposits 13,162,254 12,386,705 11,306,785 - -------------------------------------------------------------------------------------------------------------------- Funds purchased and repurchase agreements 2,317,846 2,348,516 2,342,339 Other borrowings 888,362 593,731 727,726 Subordinated debentures 547,896 297,800 290,522 Accrued interest, taxes and expense 104,224 104,752 74,580 Bankers' acceptances 31,702 43,613 30,430 Due on unsettled security transactions 71,838 107,420 3,335 Derivative contracts 283,286 298,679 437,182 Other liabilities 144,066 157,386 128,176 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 17,551,474 16,338,602 15,341,075 - -------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: June 30, 2007 - 69,025,829; December 31, 2006 - 68,704,575; June 30, 2006 - 68,291,976) 4 4 4 Capital surplus 703,682 688,861 670,662 Retained earnings 1,248,830 1,166,994 1,083,819 Treasury stock (shares at cost: June 30, 2007 - 1,745,722; December 31, 2006 - 1,636,825; June 30, 2006 - 1,451,735) (67,081) (61,393) (51,780) Accumulated other comprehensive loss (89,527) (73,444) (119,695) - -------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,795,908 1,721,022 1,583,010 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 19,347,382 $ 18,059,624 $ 16,924,085 - -------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements.
32 <TABLE> - ------------------------------------------------------------------------------------------------------------- Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (In Thousands) Accumulated Other Common Stock Comprehensive Capital Retained Treasury Stock ----------------- -------------------- Shares Amount Loss Surplus Earnings Shares Amount Total -------------------------------------------------------------------------------------- Balances at <S> <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 - - - - 109,732 - - 109,732 Other comprehensive income, net of tax (1) - - (51,884) - - - - (51,884) ------------ Comprehensive income 57,848 ------------ Treasury stock purchase - - - - - 169 (8,019) (8,019) Exercise of stock options 387 - - 9,423 - 81 (3,721) 5,702 Tax benefit on exercise of stock options - - - 1,518 - - - 1,518 Stock-based compensation - - - 3,142 - - - 3,142 Cash dividends on common stock - - - - (16,718) - - (16,718) - ------------------------------------------------------------------------------------------------------------- Balances at June 30, 2006 68,292 $ 4 $(119,695) $ 670,662 $1,083,819 1,452 $(51,780) $1,583,010 - ------------------------------------------------------------------------------------------------------------- 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 - - - - 106,656 - - 106,656 Other comprehensive income, net of tax (1) - - (16,083) - - - - (16,083) ------------- Comprehensive income 90,573 ------------- Treasury stock purchase - - - - - 44 (2,223) (2,223) Exercise of stock options 321 - - 9,571 - 65 (3,465) 6,106 Tax benefit on exercise of stock options - - - 1,423 - - - 1,423 Stock-based compensation - - - 3,828 - - - 3,828 Cash dividends on common stock - - - - (23,533) - - (23,533) - ------------------------------------------------------------------------------------------------------------- Balances at June 30, 2007 69,026 $ 4 $ (89,527) $ 703,683 $1,248,829 1,746 $(67,081) $1,795,908 - ------------------------------------------------------------------------------------------------------------- </TABLE> (1) June 30, 2007 June 30, 2006 ------------- ------------- Changes in other comprehensive loss: Unrealized losses on securities $ (32,306) $(84,970) Unrealized gains (losses) on cash flow hedges 658 (183) Tax benefit on unrealized losses 11,143 30,843 Reclassification adjustment for losses realized and included in net income 6,825 3,804 Reclassification adjustment for tax benefit on realized losses (2,403) (1,378) ------------------------------------ Net change in other comprehensive loss $ (16,083) $(51,884) ------------------------------------ See accompanying notes to consolidated financial statements.
33 <TABLE> - --------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flows (Unaudited) (In Thousands) Six Months Ended June 30, --------------------------------------------- 2007 2006 --------------------------------------------- Cash Flows From Operating Activities: <S> <C> <C> Net income $ 106,656 $ 109,732 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 14,320 7,195 Change in fair value of mortgage servicing rights (3,897) (10,694) Unrealized (gains) losses from derivatives (3,332) 5,710 Tax benefit on exercise of stock options (1,423) (1,518) Change in bank-owned life insurance (12,020) 1,535 Stock-based compensation 4,936 4,958 Depreciation and amortization 18,448 19,671 Net accretion of securities discounts and premiums 474 (4,908) Net (gain) loss on sale of assets 660 (2,643) Mortgage loans originated for resale (242,089) (360,820) Proceeds from sale of mortgage loans held for resale 227,007 374,165 Change in trading securities, including mortgage trading securities 35,683 (75,060) Change in accrued revenue receivable (53,071) (264) Change in other assets 31,918 (20,147) Change in accrued interest, taxes and expense (528) (17,639) Change in other liabilities (53,114) 2,188 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 70,628 31,461 - --------------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Proceeds from maturities of investment securities 39,775 39,405 Proceeds from maturities of available for sale securities 595,664 258,666 Purchases of investment securities (56,670) (18,240) Purchases of available for sale securities (1,483,082) (408,732) Proceeds from sales of investment securities - 447 Proceeds from sales of available for sale securities 495,026 142,073 Loans originated or acquired net of principal collected (575,558) (735,081) Payments on derivative asset contracts (21,391) (28,228) Net change in other investment assets 11,694 978 Proceeds from disposition of assets 45,593 77,469 Purchases of assets (37,503) (24,848) Cash and equivalents of subsidiaries and branches acquired and sold, net (47,258) - - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (1,033,710) (696,091) - --------------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net change in demand deposits, transaction deposits and savings accounts 149,644 (297,430) Net change in time deposits 124,439 233,133 Net change in other borrowings 254,606 677,856 Proceeds from derivative liability contracts 27,503 27,305 Net change in derivative margin accounts 62,221 (9,412) Change in amount receivable (due) on unsettled security transactions (35,582) (5,094) Issuance of common and treasury stock, net 6,102 5,702 Issuance of subordinated debenture, net 248,618 - Tax benefit on exercise of stock options 1,423 1,518 Repurchase of common stock (2,223) (8,019) Dividends paid (23,533) (16,718) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 813,218 608,841 - --------------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (149,864) (55,789) Cash and cash equivalents at beginning of period 797,326 699,322 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 647,462 $ 643,533 - --------------------------------------------------------------------------------------------------------------------------- Cash paid for interest $ 294,475 $ 224,281 - --------------------------------------------------------------------------------------------------------------------------- Cash paid for taxes $ 53,590 $ 61,868 - --------------------------------------------------------------------------------------------------------------------------- Net loans transferred to repossessed real estate and other assets $ 4,082 $ 3,195 - --------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements.
34 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 IRS intends to audit the 2005 consolidated United States income tax return for Worth Bancorporation Inc. The Company purchased Worth on May 31, 2007. The Company does not believe that the outcome of this examination will have a material impact on its financial statements, including total unrecognized tax benefits. 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
35 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-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 On May 31, 2007, BOK Financial paid $127 million in cash for all the outstanding stock of Texas-based Worth Bancorporation. Worth had total assets of approximately $410 million, including net loans of $281 million, and total deposits of $369 million and five branches in the Fort Worth market. A preliminary allocation of the purchase price to the net assets acquired is as follows (in thousands): Cash and cash equivalents $ 45,238 Funds sold 41,325 Securities 22,676 Loans 284,039 Less reserve for loan losses (3,528) ---------------- Loans, net of reserve 280,511 Premises and equipment, net 6,214 Core deposit premium 13,741 Other assets 15,029 ---------------- Total assets acquired 424,734 ---------------- Deposits 369,343 Other borrowings 7,217 Other liabilities 8,759 ---------------- Net assets acquired 39,415 Less purchase price 127,067 ---------------- Goodwill $ 87,652 ---------------- On June 18, 2007, BOK Financial paid $43 million in cash for all the outstanding stock of Colorado-based First United Bank. First United had total assets of approximately $166 million, including loans of $94 million, and total deposits of $133 million and eleven banking locations in the Denver area. Loans acquired from First United Bank are subject to a guaranty by the sellers through an escrow fund held in trust by Colorado State Bank and Trust. The Company will be reimbursed for up to $8 million of losses, including principal, interest and collection costs, on acquired loans in a three-year period after the acquisition date. Accordingly, none of the purchase price was allocated to an allowance for loan losses. A preliminary allocation of the purchase price to the net assets acquired is as follows (in thousands): Cash and cash equivalents $ 4,376 Funds sold 32,091 Securities 2,245 Loans 93,810 Premises and equipment, net 31,749 Other assets 2,050 Core deposit premium 5,039 ---------------- Total assets acquired 171,360 ---------------- Deposits 133,342 Other borrowings 2,138 Other liabilities 7,362 ---------------- Net assets acquired 28,518 Less purchase price 42,796 ---------------- Goodwill $ 14,278 ----------------
36 The results of operations of these acquisitions would not have been significant to the Company's consolidated results during the pre-acquisition periods of 2007 and 2006. 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. (3) Fair Value Measurements Fair value measurements as of June 30, 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> <C> Trading securities $30,977 $ 9,386 $21,591 Available for sale securities 5,038,966 25,397 5,013,569 Mortgage trading securities 133,967 133,967 Mortgage servicing rights 74,067 74,067 (1) Derivative contracts 264,845 264,845 Liabilities: Hedged certificates of deposit 472,083 472,083 Derivative contracts 283,286 283,286 </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, credit risks and default rates; o Other inputs derived from or corroborated by observable market inputs. The underlying methods used by the third-party pricing services are considered in determining the primary inputs used to determine fair values. No fair value measurements of significant assets or liabilities measured on a non-recurring basis were made during the first half 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.
37 (4) Derivatives The fair values of derivative contracts at June 30, 2007 are as follows (in thousands): Assets Liabilities ----------- --- ------------ Customer Risk Management Programs: Interest rate contracts $45,319 $48,713 Energy contracts 202,751 212,003 Agriculture contracts 966 910 Foreign exchange contracts 14,786 14,786 CD options 1,022 1,022 - --------------------------------------------- ----------- --- ------------ Total Customer Derivatives 264,844 277,434 Interest Rate Risk Management Programs 1 5,852 - --------------------------------------------- ----------- --- ------------ Total Derivative Contracts $264,845 $283,286 - --------------------------------------------- ----------- --- ------------ (5) Mortgage Banking Activities At June 30, 2007, BOK Financial owned the rights to service 58,390 mortgage loans with outstanding principal balances of $5.3 billion, including $566 million serviced for affiliates. The weighted average interest rate and remaining term was 6.13% 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 and six months ended June 30, 2007, mortgage banking revenue includes servicing fee income of $4.3 million and $8.5 million, respectively. For the three and six months ended June 30, 2006, mortgage banking revenue includes servicing income of $4.2 million and $8.3 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 six months ending June 30, 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 5,915 9,529 Change in fair value due to loan runoff (1,214) (4,091) (5,305) Change in fair value due to market changes 747 3,150 3,897 - -------------------------------------------- -- ---------- -- ---------- -- ----------- Balance at June 30, 2007 $ 15,960 $ 58,107 $ 74,067 - -------------------------------------------- -- ---------- -- ---------- -- ----------- </TABLE>
38 Fair value is determined by discounting the projected net cash flows. Significant assumptions used to determine fair value are: <TABLE> June 30, 2007 December 31, 2006 --------------------- -------------------- <S> <C> <C> Discount rate - risk-free rate plus a market premium 10.16% 9.91% Prepayment rate - based upon loan interest rate, original term and loan type 8.2% - 15.2% 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> Stratification of the mortgage loan servicing portfolio and outstanding principal of loans serviced by interest rate at June 30, 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 $16,093 $39,684 $14,421 $3,869 $74,067 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- Outstanding principal of loans serviced (1) $1,054,300 $2,501,300 $937,500 $221,800 $4,714,900 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- </TABLE> (1) Excludes outstanding principal of $566 million for loans serviced for affiliates and $46 million of mortgage loans for which there are no capitalized mortgage servicing rights. (6) Disposal of Available for Sale Securities Sales of available for sale securities resulted in gains and losses as follows (in thousands): Six Months Ended June 30, ---------------------------------- 2007 2006 -------------- --------------- Proceeds $ 495,026 $ 142,073 Gross realized gains 1,015 705 Gross realized losses (2,412) (115) Related federal and state income tax expense (benefit) (495) 214 (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 the six months ended June 30, 2007. During the six months ended June 30, 2006, net periodic pension cost was approximately $1.8 million. The Company made no Pension Plan contributions during the first half of 2007. During the first half of 2006, the Company made Pension Plan contributions totaling $2.8 million, which funded the remaining maximum contribution for 2005 permitted under applicable regulations. Management has been advised that no minimum contribution will be required for 2007. The maximum allowable contribution for 2007 has not yet been determined.
39 (8) Shareholders' Equity On August 1, 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 August 30, 2007 to shareholders of record on August 15, 2007. Dividends declared during the three and six month periods ended June 30, 2007 were $0.20 per share and $0.35 per share, respectively. Dividends declared during the three and six month periods ended June 30, 2006 were $0.15 per share and $0.25 per share, respectively. (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 Six Months Ended ----------------------------------------------------- June 30, June 30, June 30, June 30, 2007 2006 2007 2006 ----------------------------------------------------- Numerator: <S> <C> <C> <C> <C> Net income $ 53,863 $ 54,984 $ 106,656 $ 109,732 - --------------------------------------------------------------------------------------------------------------- Denominator: Denominator for basic earnings per share - weighted average shares 67,116,902 66,775,117 67,099,752 66,745,422 Effect of dilutive potential common shares: Employee stock compensation plans (1) 489,428 542,564 489,394 543,913 - --------------------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 67,606,330 67,317,681 67,589,146 67,289,335 - --------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 0.80 $ 0.82 $ 1.59 $ 1.64 - --------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 0.80 $ 0.82 $ 1.58 $ 1.63 - --------------------------------------------------------------------------------------------------------------- (1) Excludes employee stock options with exercise prices greater than current market price. 850,926 136,813 811,184 867,761 </TABLE> (10) Reportable Segments Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2007 is as follows (in thousands): <TABLE> Net Other Other Interest Operating Operating Net Average Revenue Revenue(1) Expense Income Assets ------------ -- ------------ -- ------------- -- ----------- -- -------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 272,277 $ 190,660 $ 256,073 $ 119,021 $ 19,366,203 Unallocated items: Tax-equivalent adjustment 4,154 - - 4,154 - Funds management and other (12,680) 466 12,398 (16,519) (1,081,887) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 263,751 $ 191,126 $ 268,471 $ 106,656 $ 18,284,316 ============ == ============ == ============= == =========== == ============== </TABLE> (1) Excluding financial instruments gains/(losses).
40 Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended June 30, 2007 is as follows (in thousands): <TABLE> Net Other Other Interest Operating Operating Net Average Revenue Revenue(1) Expense Income Assets ------------ -- ------------ -- ------------- -- ----------- -- -------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 137,892 $ 99,583 $ 130,145 $ 59,203 $ 19,631,700 Unallocated items: Tax-equivalent adjustment 2,069 - - 2,069 - Funds management and other (5,048) (1,139) 5,814 (7,409) (1,002,238) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 134,913 $ 98,444 $ 135,959 $ 53,863 $ 18,629,462 ============ == ============ == ============= == =========== == ============== </TABLE> (1) Excluding financial instruments gains/(losses). Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2006 is as follows (in thousands): <TABLE> Net Other Other Interest Operating Operating Net Average Revenue Revenue(1) Expense Income Assets ------------ -- ------------ -- ------------- -- ----------- -- -------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 244,623 $ 183,291 $ 226,344 $ 118,760 $ 16,988,161 Unallocated items: Tax-equivalent adjustment 3,162 - - 3,162 - Funds management and other (9,353) 1,311 13,162 (12,190) (549,984) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 238,432 $ 184,602 $ 239,506 $ 109,732 $ 16,438,177 ============ == ============ == ============= == =========== == ============== </TABLE> (1) Excluding financial instruments gains/(losses). Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended June 30, 2006 is as follows (in thousands): <TABLE> Net Other Other Interest Operating Operating Net Average Revenue Revenue(1) Expense Income Assets ------------ -- ------------ -- ------------- -- ----------- -- -------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 124,729 $ 93,010 $ 116,281 $ 58,995 $ 17,167,731 Unallocated items: Tax-equivalent adjustment 1,640 - - 1,640 - Funds management and other (5,263) 625 5,846 (5,651) (603,441) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 121,106 $ 93,635 $ 122,127 $ 54,984 $ 16,564,290 ============ == ============ == ============= == =========== == ============== </TABLE> (1) Excluding financial instruments gains/(losses). (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 $3.6 billion are held for BOK Financial's clients.
41 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 ("the SEC BYSIS Order"). 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. 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 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 examined the expenditures procured by AXIA pursuant to the questioned marketing arrangements and 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. Although AXIA believes the Committee's claims against it are without merit, it is in active settlement discussions regarding this matter. Any settlement with the Committee would not be binding on the SEC. BOK Financial does not expect the examination, a settlement with the Committee, or any action the SEC may take based upon the examination to have a material adverse effect on the Company. 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 June 30, 2007, outstanding commitments and letters of credit were as follows (in thousands): June 30, 2007 -------------- Commitments to extend credit $ 5,418,538 Standby letters of credit 518,923 Commercial letters of credit 18,334
42 <TABLE> - ------------------------------------------------------------------------------------------------------------------------------- Six Month Financial Summary - Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands, Except Per Share Data) Six Months Ended ------------------------------------------------------------------------------------- June 30, 2007 June 30, 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) $ 4,908,738 $ 117,839 4.86% $ 4,822,591 $ 111,678 4.68% Tax-exempt securities (3) 338,834 9,415 5.90 267,746 6,950 5.35 - ------------------------------------------------------------------------------------------------------------------------------- Total securities (3) 5,247,572 127,254 4.90 5,090,337 118,628 4.71 - ------------------------------------------------------------------------------------------------------------------------------- Trading securities 31,264 1,000 6.45 20,216 496 4.95 Funds sold and resell agreements 61,397 1,589 5.22 26,645 646 4.89 Loans (2) 11,116,881 437,572 7.94 9,319,358 347,417 7.52 Less reserve for loan losses 115,809 - - 105,756 - - - ------------------------------------------------------------------------------------------------------------------------------- Loans, net of reserve 11,001,072 437,572 8.02 9,213,602 347,417 7.60 - ------------------------------------------------------------------------------------------------------------------------------- Total earning assets (3) 16,341,305 567,415 7.01 14,350,800 467,187 6.57 - ------------------------------------------------------------------------------------------------------------------------------- Cash and other assets 1,943,011 2,087,377 - ------------------------------------------------------------------------------------------------------------------------------- Total assets $ 18,284,316 $ 16,438,177 - ------------------------------------------------------------------------------------------------------------------------------- Liabilities And Shareholders' Equity Transaction deposits $ 6,257,933 94,609 3.05% $ 5,340,281 66,004 2.49% Savings deposits 150,952 741 0.99 154,370 683 0.89 Time deposits 4,463,961 104,581 4.72 4,191,737 86,193 4.15 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 10,872,846 199,931 3.71 9,686,388 152,880 3.18 - ------------------------------------------------------------------------------------------------------------------------------- Funds purchased and repurchase agreements 2,633,821 66,694 5.11 1,926,164 44,179 4.63 Other borrowings 767,634 20,858 5.48 783,106 18,689 4.81 Subordinated debentures 354,657 12,027 6.84 294,124 9,845 6.75 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 14,628,958 299,510 4.13 12,689,782 225,593 3.58 - ------------------------------------------------------------------------------------------------------------------------------- Demand deposits 1,346,620 1,480,087 Other liabilities 542,505 708,299 Shareholders' equity 1,766,233 1,560,009 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 18,284,316 $ 16,438,177 - ------------------------------------------------------------------------------------------------------------------------------- Tax-Equivalent Net Interest Revenue (3) 267,905 2.88% 241,594 2.99% Tax-Equivalent Net Interest Revenue To Earning Assets (3) 3.31 3.40 Less tax-equivalent adjustment (1) 4,154 3,162 - ------------------------------------------------------------------------------------------------------------------------------- Net Interest Revenue 263,751 238,432 Provision for credit losses 14,320 7,195 Other operating revenue 184,189 180,317 Other operating expense 268,471 239,506 - ------------------------------------------------------------------------------------------------------------------------------- Income Before Taxes 165,149 172,048 Federal and state income tax 58,493 62,316 - ------------------------------------------------------------------------------------------------------------------------------- Net Income $ 106,656 $ 109,732 - ------------------------------------------------------------------------------------------------------------------------------- Earnings Per Average Common Share Equivalent: Net Income: Basic $ 1.59 $ 1.64 - ------------------------------------------------------------------------------------------------------------------------------- Diluted $ 1.58 $ 1.63 - ------------------------------------------------------------------------------------------------------------------------------- </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.
43 <TABLE> - ------------------------------------------------------------------------------------------------------------------------------ Quarterly Financial Summary - Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands, Except Per Share Data) Three Months Ended ------------------------------------------------------------------------------------- June 30, 2007 March 31, 2007 ------------------------------------------ ------------------------------------- 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) $ 5,014,231 $ 60,244 4.85% $ 4,802,768 $ 57,595 4.86% Tax-exempt securities (3) 354,956 4,613 5.73 322,202 4,802 6.09 - ------------------------------------------------------------------------------------------------------------------------------ Total securities (3) 5,369,187 64,857 4.90 5,124,970 62,397 4.93 - ------------------------------------------------------------------------------------------------------------------------------ Trading securities 32,897 481 5.86 29,613 519 7.11 Funds sold and resell agreements 67,057 924 5.53 55,674 665 4.84 Loans (2) 11,338,140 224,492 7.94 10,893,163 213,080 7.93 Less reserve for loan losses 118,505 - - 113,379 - - - ------------------------------------------------------------------------------------------------------------------------------ Loans, net of reserve 11,219,635 224,492 8.03 10,779,784 213,080 8.02 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets (3) 16,688,776 290,754 7.00 15,990,041 276,661 7.02 - ------------------------------------------------------------------------------------------------------------------------------ Cash and other assets 1,940,686 1,949,917 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 18,629,462 $ 17,939,958 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities And Shareholders' Equity Transaction deposits $ 6,414,014 $ 48,242 3.02% $ 6,100,117 $ 46,367 3.08% Savings deposits 158,718 377 0.95 143,101 364 1.03 Time deposits 4,507,053 53,440 4.76 4,420,390 51,141 4.69 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 11,079,785 102,059 3.69 10,663,608 97,872 3.72 - ------------------------------------------------------------------------------------------------------------------------------ Funds purchased and repurchase agreements 2,627,230 33,129 5.06 2,640,485 33,565 5.16 Other borrowings 866,096 11,760 5.45 668,078 9,098 5.52 Subordinated debentures 410,883 6,824 6.66 297,806 5,203 7.09 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 14,983,994 153,772 4.12 14,269,977 145,738 4.14 - ------------------------------------------------------------------------------------------------------------------------------ Demand deposits 1,295,930 1,397,874 Other liabilities 558,792 530,659 Shareholders' equity 1,790,746 1,741,448 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 18,629,462 $ 17,939,958 - ------------------------------------------------------------------------------------------------------------------------------ Tax-Equivalent Net Interest Revenue (3) $ 136,982 2.88% $ 130,923 2.88% Tax-Equivalent Net Interest Revenue To Earning Assets (3) 3.31 3.32 Less tax-equivalent adjustment (1) 2,069 2,085 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Revenue 134,913 128,838 Provision for credit losses 7,820 6,500 Other operating revenue 91,999 92,190 Other operating expense 135,959 132,512 - ------------------------------------------------------------------------------------------------------------------------------ Income before taxes 83,133 82,016 Federal and state income tax 29,270 29,223 - ------------------------------------------------------------------------------------------------------------------------------ Net Income $ 53,863 $ 52,793 - ------------------------------------------------------------------------------------------------------------------------------ Earnings Per Average Common Share Equivalent: Net income: Basic $ 0.80 $ 0.79 - ------------------------------------------------------------------------------------------------------------------------------ Diluted $ 0.80 $ 0.78 - ------------------------------------------------------------------------------------------------------------------------------ </TABLE> (1) Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments shown are for comparative purposes. (2) The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned income. (3) Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income.
44 <TABLE> - ------------------------------------------------------------------------------------------------------------------------- Three Months Ended - ------------------------------------------------------------------------------------------------------------------------- December 31, 2006 September 30, 2006 June 30, 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> $ 4,745,619 $ 56,264 4.69% $ 4,694,588 $ 54,589 4.63% $ 4,783,280 $ 56,632 4.75% 318,969 4,435 5.52 306,170 4,187 5.43 273,305 3,485 5.12 - ------------------------------------------------------------------------------------------------------------------------- 5,064,588 60,699 4.74 5,000,758 58,776 4.68 5,056,585 60,117 4.77 - ------------------------------------------------------------------------------------------------------------------------- 22,668 322 5.64 21,721 226 4.13 23,672 287 4.86 39,665 546 5.46 51,518 649 5.00 32,048 407 5.09 10,361,841 207,322 7.94 9,813,602 197,665 7.99 9,472,309 181,269 7.68 108,377 - - 106,474 - - 106,048 - - - ------------------------------------------------------------------------------------------------------------------------- 10,253,464 207,322 8.02 9,707,128 197,665 8.08 9,366,261 181,269 7.76 - ------------------------------------------------------------------------------------------------------------------------- 15,380,385 268,889 6.93 14,781,125 257,316 6.91 14,478,566 242,080 6.71 - ------------------------------------------------------------------------------------------------------------------------- 2,158,647 2,049,998 2,085,724 - ------------------------------------------------------------------------------------------------------------------------- $ 17,539,032 $ 16,831,123 $ 16,564,290 - ------------------------------------------------------------------------------------------------------------------------- $ 5,768,216 $ 43,411 2.99% $ 5,458,280 $ 39,571 2.88% $ 5,353,413 $ 34,875 2.61% 139,796 365 1.04 146,276 360 0.98 153,200 353 0.92 4,417,427 51,781 4.65 4,314,672 48,540 4.46 4,220,204 44,798 4.26 - ------------------------------------------------------------------------------------------------------------------------- 10,325,439 95,557 3.67 9,919,228 88,471 3.54 9,726,817 80,026 3.30 - ------------------------------------------------------------------------------------------------------------------------- 2,584,354 33,736 5.18 2,138,749 27,568 5.11 2,118,211 25,696 4.87 586,743 8,128 5.50 750,247 10,253 5.42 684,431 8,682 5.09 298,427 5,225 6.95 293,146 5,210 7.05 292,474 4,930 6.76 - ------------------------------------------------------------------------------------------------------------------------- 13,794,963 142,646 4.10 13,101,370 131,502 3.98 12,821,933 119,334 3.73 - ------------------------------------------------------------------------------------------------------------------------- 1,481,455 1,453,163 1,474,835 566,128 657,269 695,418 1,696,486 1,619,321 1,572,104 - ------------------------------------------------------------------------------------------------------------------------- $ 17,539,032 $ 16,831,123 $ 16,564,290 - ------------------------------------------------------------------------------------------------------------------------- $ 126,243 2.83% $ 125,814 2.93% $ 122,746 2.98% 3.25 3.38 3.40 1,965 1,836 1,640 - ------------------------------------------------------------------------------------------------------------------------- 124,278 123,978 121,106 5,953 5,254 3,795 93,723 97,583 90,880 133,991 138,810 122,127 - ------------------------------------------------------------------------------------------------------------------------- 78,057 77,497 86,064 27,472 24,837 31,080 - ------------------------------------------------------------------------------------------------------------------------- $ 50,585 $ 52,660 $ 54,984 - ------------------------------------------------------------------------------------------------------------------------- $ 0.76 $ 0.79 $ 0.82 - ------------------------------------------------------------------------------------------------------------------------- $ 0.75 $ 0.78 $ 0.82 - ------------------------------------------------------------------------------------------------------------------------- </TABLE>
45 PART II. Other Information Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table provides information with respect to purchases made by or on behalf of the Company or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company's common stock during the three months ended June 30, 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> <C> April 1, 2007 to 10,249 $51.67 8,783 1,687,540 April 30, 2007 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- May 1, 2007 to May 2,744 $52.00 2,500 1,685,040 31, 2007 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- June 1, 2007 to 14,830 $52.04 7,500 1,677,540 June 30, 2007 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- Total 27,823 18,783 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- </TABLE> (1) The Company had a stock repurchase plan that was initially authorized by the Company's board of directors on February 24, 1998 and amended on May 25, 1999. Under the terms of that plan, the Company could repurchase up to 800,000 shares of its common stock. As of March 31, 2005, the Company had repurchased 638,642 shares under that plan. On April 26, 2005, the Company's board of directors terminated this authorization and replaced it with a new stock repurchase plan authorizing the Company to repurchase up to two million shares of the Company's common stock. As of June 30, 2007, the Company had repurchased 322,460 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.
46 Item 4. Submission of Matters to a Vote of Security Holders Our Annual Meeting of Shareholders was held on April 24, 2007 (the "Annual Meeting"). At the Annual Meeting, shareholders voted on one matter: (i) to fix the number of directors to be elected at nineteen (19) and to elect nineteen (19) persons as directors for a term of one year or until their successors have been elected and qualified. The shareholders approved this matter by the following votes: (i) Election of nineteen (19) directors for a term of one year: Votes Withheld/ Votes For Against ----------------- ----------------- Gregory S. Allen 64,254,490 244,360 C. Fred Ball, Jr. 62,877,796 1,621,054 Sharon J. Bell 64,319,209 179,641 Peter C. Boylan III 64,229,833 269,017 Chester Cadieux III 63,248,470 1,250,380 Joseph W. Craft III 64,408,659 90,191 William E. Durrett 64,315,344 183,506 Robert G. Greer 62,869,184 1,629,666 David F. Griffin 64,347,587 151,263 V. Burns Hargis 62,876,951 1,621,899 E. Carey Joullian IV 61,643,856 2,854,994 George B. Kaiser 62,360,002 2,138,848 Judith Z. Kishner 64,408,969 89,881 Thomas L. Kivisto 63,469,383 1,029,467 David L. Kyle 64,249,223 249,627 Robert J. LaFortune 64,314,729 184,121 Stanley A. Lybarger 62,870,756 1,628,094 Steven J. Malcolm 64,255,368 243,482 Paula Marshall 60,341,011 4,157,839 Item 6. Exhibits 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Items 1, 3 and 5 are not applicable and have been omitted.
47 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BOK FINANCIAL CORPORATION (Registrant) Date: August 9, 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