As filed with the Securities and Exchange Commission on August 8, 2008 =============================================================================== 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, 2008 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: 67,415,581 shares of common stock ($.00006 par value) as of July 31, 2008. ===============================================================================
2 BOK Financial Corporation Form 10-Q Quarter Ended June 30, 2008 Index Part I. Financial Information Management's Discussion and Analysis (Item 2) 2 Market Risk (Item 3) 32 Controls and Procedures (Item 4) 34 Consolidated Financial Statements - Unaudited (Item 1) 35 Six Month Financial Summary - Unaudited (Item 2) 48 Quarterly Financial Summary - Unaudited (Item 2) 49 Part II. Other Information Item 1. Legal Proceedings 51 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 51 Item 4. Submission of Matters to a Vote of Security Holders 52 Item 6. Exhibits 52 Signatures 53 Management's Discussion and Analysis of Financial Condition and Results of Operations Performance Summary BOK Financial Corporation reported a net loss of $1.2 million or $0.02 per diluted share for the second quarter of 2008. Net income totaled $53.9 million or $0.80 per diluted share for the second quarter of 2007 and $62.3 million or $0.92 per diluted share for the first quarter of 2008. Net income for the six months ended June 30, 2008 totaled $61.1 million or $0.90 per diluted share. Net income for the six months ended June 30, 2007 totaled $106.7 million or $1.58 per diluted share. The Company recognized $87.0 million of pre-tax charges for loan and energy derivative credit exposure to SemGroup LP in the second quarter of 2008. These charges reduced net income by approximately $57.0 million or $0.84 per diluted share. Highlights of the second quarter of 2008 included: o Net interest margin was 3.44% for the second quarter of 2008, up 13 basis points from both the second quarter of 2007 and the first of 2008. Net interest revenue increased 18% over the second quarter of 2007. o Average outstanding loans increased 10% over the second quarter of 2007. Period-end annualized loan growth rate was 8% since the end of the first quarter of 2008. o Non-performing assets totaled $181 million or 1.45% of outstanding loans and repossessed assets at June 30, 2008, up from $126 million or 1.02% of outstanding loans and repossessed assets at March 31, 2008 and $70 million or 0.60% of outstanding loans at June 30, 2007. o Net loans charged off and provision for credit losses were $39.0 million and $59.3 million, respectively, for the second quarter of 2008, including a $26.0 million charge off and a $26.3 million provision for SemGroup. Net loans charged off and provision for credit losses were $8.9 million and $17.6 million, respectively for the first quarter of 2008. Net loans charged off and provision for credit losses were $5.8 million and $7.8 million, respectively for the second quarter of 2007. o Fees and commissions revenue totaled $63.6 million for the second quarter of 2008, compared with $97.0 million for the second quarter of 2007 and $113.9 million for the first quarter of 2008. Brokerage and trading revenue, which is a component of fees and commissions revenue, was reduced by a $60.7 million charge to adjust the fair value of energy derivative contracts with SemGroup to their estimated fair value. o Net losses on securities, derivatives used by the Company to manage its interest rate risk and mortgage servicing rights totaled $9.0 million for the second quarter of 2008, compared with net losses of $1.4 million for the second quarter of 2007 and net gains on securities, derivatives and mortgage servicing rights of $5.0 million for the first quarter of 2008.
3 o No other than temporary impairment charges against the Company's securities portfolio were recognized in the second quarter of 2008, compared with charges of $5.3 million in the first quarter of 2008. The Company has no equity investments in FNMA or FHLMC. Credit Exposure to SemGroup, LP and Related Entities At June 30, 2008, BOK Financial had credit exposure to SemGroup LP and related entities of approximately $147 million consisting of $97 million from energy derivative contracts and $50 million from loans and loan commitments. BOK Financial is a participant in an approximately $2.4 billion working capital and term facility to SemGroup; another commercial bank is the lead lender for this facility. The working capital and term facility is secured by SemGroup's inventory and accounts receivable. All of BOK Financial's energy derivative contracts and $46 million of the loans and loan commitments to SemGroup are secured by the working capital facility collateral. The $34 million outstanding balance of the working capital loan was reduced by a $26 million charge off. Included under the working capital and term facility are $11 million of letters of credit. BOK Financial also has a $4 million participation interest in an $806 million loan secured by SemGroup's fixed and other assets. On July 22, 2008, SemGroup LP and 24 related entities filed for bankruptcy protection. BOK Financial assessed a range of values for SemGroup using information currently available, including information provided by a nationally recognized financial advisor to SemGroup. The range considers both the value of SemGroup as a reorganized entity (going concern value) and its liquidation value. Based on the lower end of the range of values, BOK Financial recognized a $26.3 million charge to increase its provision for loan losses and a $60.7 million charge against trading revenue to reduce the estimated fair value of energy derivative contracts. The Company's net remaining credit exposure to SemGroup at June 30, 2008 totaled approximately $60 million, including $37 million from energy derivative contracts and $23 million of loans and loan commitments. Non-accruing loans include $12 million from SemGroup. This amount will increase if the amounts due under the energy derivative contracts, primarily in the third quarter of 2008, are not paid on their contractual settlement dates. Non-accruing loans may also increase if funding is required of all or some of $11 million of letters of credit. Mr. Thomas S. Kivisto, President and CEO of SemGroup, LP resigned from the Board of Directors of BOK Financial and Bank of Oklahoma, N.A. on July 16, 2008. The Company has no direct credit exposure to Mr. Kivisto. Results of Operations Net Interest Revenue and Net Interest Margin Net interest revenue totaled $158.9 million for the second quarter of 2008, up $24.0 million or 18% over the second quarter of 2007 and $11.8 million over the first quarter of 2008. Average earning assets increased $2.1 billion or 13% over the second quarter of 2007, including a $1.2 billion increase in average outstanding loans and a $917 million increase in average securities. Growth in the securities portfolio generally consisted of highly-rated, fixed-rate mortgage-backed securities. These securities were purchased to take advantage of widened spreads caused by short-term disruptions in the mortgage-backed securities markets. Growth in average earning assets was funded primarily by a $1.9 billion or 48% increase in average federal funds purchased and other borrowed funds. In addition, average deposits were up $915 million or 7% over the second quarter of 2007. Average interest-bearing transaction accounts grew $1.3 billion or 20% and average time deposits decreased $431 million or 10% compared with the second quarter of 2007. Average demand deposits increased $41 million or 3%. Funds generated by growth in deposits and borrowings were also used to fund a $667 million increase in average margin assets. Margin assets are placed by the Company to secure its obligations under various derivative contracts. Margin assets are generally reported as a reduction of the derivative liabilities which they secure on the Company's consolidated balance sheet. Fees earned on margin assets are included in fees and commissions revenue. Net interest margin was 3.44% for the second quarter of 2008 compared with 3.31% for both the second quarter of 2007 and the first quarter of 2008. Widening of the spread between LIBOR and the federal funds rate increased net interest margin. LIBOR is the basis for interest earned on many of our loans. The federal funds rate is the basis for interest paid on many of our interest-bearing liabilities. Yields on average earning assets decreased 139 basis points to 5.61% and the cost of interest-bearing liabilities decreased 183 basis points to 2.29% compared with the second quarter of 2007. Loan yields decreased 215 basis points to 5.79% while securities yields increased 24 basis points to 5.14%. Our securities re-price as cash flow received is reinvested at current market rates. The resulting change in yield on the securities portfolio
4 occurs more slowly than changes in market rates. The cost of interest bearing deposits decreased 147 basis points to 2.22% and the cost of funds purchased and other borrowings decreased 288 basis points. Competition for deposits in all our markets limited our ability to move deposit rates down as interest rates declined. The benefit to the net interest margin from earning assets funded by non-interest bearing liabilities was 12 basis points in the second quarter of 2008 compared with 43 basis points in the second quarter of 2007 and 25 basis points in 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 decrease slightly over a one-year forward looking period. However, other factors such as loan spread compression, deposit product mix, the overall balance sheet composition and the previously noted widening of the spread between LIBOR and the federal funds rate may affect this general expectation. Our overall objective is to manage the Company's balance sheet to be relatively neutral to changes in interest rates. Approximately 67% of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will re-price within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that re-price more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally re-price more quickly than liabilities. Among the strategies that we use to achieve a relatively rate-neutral position, we purchase fixed-rate, mortgage-backed securities to offset the short-term nature of the majority of the Company's funding sources. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also use derivative instruments to manage our interest rate risk. Interest rate swaps with a combined notional amount of $410 million convert fixed rate liabilities to floating rate based on LIBOR. The purpose of these derivatives is to position our balance sheet to be relatively neutral to changes in interest rates. 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, 2008 / 2007 June 30, 2008 / 2007 -------------------------------------------------------------------------- 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 $ 15,267 $ 11,689 $ 3,578 $ 29,114 $ 21,977 $ 7,137 Trading securities 786 652 134 1,700 1,477 223 Loans (44,068) 20,107 (64,175) (57,470) 44,323 (101,793) Funds sold and resell agreements (569) 50 (619) (394) 318 (712) - --------------------------------------------------------------------------------------------------------------------- Total (28,584) 32,498 (61,082) (27,050) 68,095 (95,145) - --------------------------------------------------------------------------------------------------------------------- Interest expense: Transaction deposits (20,487) 7,216 (27,703) (24,679) 16,430 (41,109) Savings deposits (229) 2 (231) (355) 28 (383) Time deposits (15,229) (4,632) (10,597) (20,636) (6,590) (14,046) Federal funds purchased and repurchase agreements (17,949) 4,339 (22,288) (27,865) 8,588 (36,453) Other borrowings 2,272 13,840 (11,568) 4,892 21,507 (16,615) Subordinated debentures (1,003) (205) (798) (807) 1,382 (2,189) - --------------------------------------------------------------------------------------------------------------------- Total (52,625) 20,560 (73,185) (69,450) 41,345 (110,795) - --------------------------------------------------------------------------------------------------------------------- Tax-equivalent net interest revenue 24,041 11,938 12,103 42,400 26,750 15,650 Change in tax-equivalent adjustment (15) (84) - --------------------------------------------------------------------------------------------------------------------- Net interest revenue $ 24,026 $ 42,316 - --------------------------------------------------------------------------------------------------------------------- (1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis. </TABLE>
Other Operating Revenue Other operating revenue decreased $34.6 million compared with the second quarter of last year. Fees and commission revenue decreased $33.4 million. The decrease in fees and commission revenue included a $60.7 million charge to write down SemGroup derivative contracts to estimated fair value, partially offset by a $27.3 million increase in all other fees and commissions revenue sources. Net losses on securities and derivatives used by the Company to manage its interest rate risk during the second quarter of 2008 totaled $8.2 million, compared with net losses on securities and derivatives of $6.4 million for the second quarter of 2007. Other operating revenue was down $64.9 million from the first quarter of 2008. Fees and commissions revenue decreased $50.3 million due primarily to the write down of SemGroup derivative contracts. Net gains on securities and derivatives used by the Company to manage its interest rate risk totaled $6.7 million for the first quarter of 2008 due primarily to Visa, Inc.'s initial public offering. Diversified sources of fees and commissions revenue are a significant part of our business strategy and generally represent 40% to 45% of our total revenue, excluding gains and losses on asset sales, securities and derivatives. 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 Brokerage and trading activities resulted in a net loss of $35.5 million for the second quarter of 2008 due to the $60.7 million charge to write down SemGroup derivative contracts to fair value. Excluding this charge and revenue from transactions with SemGroup that may not be recurring, brokerage and trading revenue totaled $23.3 million for the second quarter of 2008, up $10.6 million or 84% over the second quarter of 2007. Revenue from trading and institutional securities sales totaled $11.6 million in the second quarter of 2008 compared with $5.4 million in the second quarter of 2007. Revenue from retail brokerage activities totaled $6.2 million for the second quarter of 2008 and $4.5 million for the second quarter of 2007. Customer hedging revenue, excluding the write-down of derivative contracts and revenue from transactions with SemGroup, totaled $4.0 million for the second quarter of 2008 and $2.1 million for the second quarter of 2007. Brokerage and trading revenue, excluding the charge to write down derivative contracts to fair value and revenue from transactions with SemGroup, increased $469 thousand or 8% annualized compared with the first quarter of 2008. Revenue from trading and institutional securities sales were down $1.2 million and revenue from retail brokerage activities were up $857 thousand from the first quarter of 2008. Customer hedging revenue was up $106 thousand, excluding revenue from SemGroup transactions. In addition, investment banking revenue for the second quarter of 2008 totaled $1.4 million, up $752 thousand over the first quarter of 2008. Transaction card revenue increased $2.9 million or 13% over the second quarter of 2007. ATM network revenue increased $1.3 million or 13% while check card revenue increased $1.2 million or 20% over the second quarter of 2007 due to volume growth. Merchant discount fees increased $296 thousand, or 4%, over the second quarter of 2007. Transaction card revenue for the second quarter of 2008 was up $2.2 million over the first quarter of 2008 due largely to seasonal changes. ATM network fees increased $948 thousand and merchant discount fees increased $602 thousand due to transaction volumes. Check card revenue was up $661 thousand over the previous quarter. Trust fees and commissions increased $1.5 million or 8% for the second quarter of 2008. The fair value of all trust assets, which is the basis for a significant portion of trust revenue, totaled $34.4 billion at June 30, 2008 compared with $33.7 billion at June 30, 2007. Net fees from mutual fund advisory and administrative services, which provide 21% of total trust fees and commissions increased $188 thousand or 4%. Personal trust management fees, which provide 33% of total trust fees and commissions increased $863 thousand or 14%. Employee benefit plan management fees, which provide 19% of total trust fees, increased $359 thousand or 10%. Trust fees and commissions increased $144 thousand or 3% annualized over the first quarter of 2008. The fair value of all trust assets totaled $35.5 billion at March 31, 2008 or 3% more than the fair value of all trust relationships at June 30, 2008. Deposit service charges and fees totaled $30.2 million for the second quarter of 2008, up $3.4 million or 13% over the second quarter of 2007. Commercial deposit account fees were up $2.6 million or 38% over the same period of 2007 due to a decrease in earnings credit available to commercial deposit customers and an increase in service charges to partially offset higher deposit insurance costs. The earnings credit, which provides a non-cash method for commercial customers to avoid incurring charges for deposit services, decreases when interest rates fall. Overdraft fees grew $840 thousand or 5%. Service charges on retail accounts decreased $53 thousand or 4% due to service-charge free deposit products. Deposit service charges increased $2.5 million compared with the first quarter of 2008. Overdraft fees were up $1.5 million. Overdraft fees are generally lower in the first quarter of each year due to seasonal factors. Commercial deposit account fees were up $1.0 million.
6 Mortgage banking revenue was up $3.2 million or 78% compared with 2007. Servicing revenue totaled $4.3 million for both the second quarters of 2008 and 2007. The outstanding principal balance of mortgage loans serviced for other totaled $5.0 billion at June 30, 2008 and $4.8 billion at June 30, 2007. Net gains on mortgage loans sold totaled $2.9 million, up $3.2 million over the second quarter of 2007. Mortgage loans originated totaled $362 million for the second quarter of 2008, up 15% over the same period in 2007. Margin asset fees totaled $4.5 million in the second quarter of 2008 and $969 thousand in the second quarter of 2007. Margin assets which are held primarily as part of the Company's customer derivatives programs averaged $762 million for the second quarter of 2008, compared with $96 million for the second quarter of 2007. The increase in revenue earned on margin assets is offset by a decrease in net interest revenue due to the costs to fund the margin assets. Securities and derivatives Net gains and losses on securities consisted of the following: Three Months Ended June 30 March 31 June 30 2008 2008 2007 ---- ---- ---- Gain (loss) on portfolio securities $ 276 $2,947 $( 580) Gain on Visa, Inc. IPO securities - 6,788 - Other than temporary impairment of equity securities - (5,306) - Gain (loss) on mortgage hedge securities (5,518) 191 (5,682) ----- ------ ----- Net gain (loss) on securities $(5,242) $4,620 $(6,262) ===== ===== ===== BOK Financial recognized net losses of $5.2 million on securities for the second quarter of 2008, net losses on securities of $6.3 million for the second quarter of 2007 and net gains on securities of $4.6 million for the first quarter of 2008. Mortgage hedge securities held as an economic hedge of the changes in fair value of mortgage servicing rights are carried at fair value. Changes in fair value of these securities are recognized in earnings as they occur. During the first quarter of 2008, the Company recorded a $5.3 million pre-tax other-than-temporary-impairment charge to recognize the decrease in fair value of its holdings of variable-rate perpetual preferred stock issued by seven major banks and brokerage houses. The Company also recognized a $6.8 million gain from the partial redemption of Visa, Inc. Class B shares as part of Visa's initial public offering. The Company sold certain available for sale securities during the first quarter of 2008 at a $2.9 million gain to reduce prepayment risk in response to falling interest rates. Net losses on derivatives totaled $3.0 million for the second quarter of 2008 and $183 thousand for the second quarter of 2007. Net gains or losses on derivatives consist of fair value adjustments of all derivatives used to manage interest rate risk and the related hedged assets and liabilities when adjustments are permitted by generally accepted accounting principles. Derivative instruments generally consist of interest rate swaps where the Company pays a variable rate based on LIBOR and receives a fixed rate. These swaps generally decrease in value as interest rates rise and increase in value as interest rates fall. The Company adopted Statement of Financial Accounting Standards No. 159, Fair Value Option ("FAS 159") effective January 1, 2008. FAS 159 provides an option to measure eligible financial assets and financial liabilities at fair value. Certain certificates of deposit that were either currently designated as hedged or had previously been designated as hedged, but no longer met the correlation requirements of Statement of Financial Accounting Standards No. 133 were designated as being reported at fair value when FAS 159 was first adopted. In addition, certain certificates of deposit issued subsequent to the adoption of FAS 159 have been designated as reported at fair value. This determination is made when the certificates of deposit are issued based on the Company's intent to swap the interest rate on the certificates from a fixed rate to a LIBOR-based variable rate.
7 <TABLE> - -------------------------------------------------------------------------------------------------------------------------- Table 2 - Other Operating Revenue (In thousands) Three Months Ended ------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, 2008 2008 2007 2007 2007 ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Brokerage and trading revenue $ (35,462) $ 23,913 $ 20,402 $ 15,541 $ 13,317 Transaction card revenue 25,786 23,558 23,512 23,812 22,917 Trust fees and commissions 20,940 20,796 20,145 19,633 19,458 Deposit service charges and fees 30,199 27,686 29,938 27,885 26,797 Mortgage banking revenue 7,198 7,217 6,912 5,809 4,034 Bank-owned life insurance 2,658 2,512 2,614 2,520 2,525 Margin asset fees 4,460 1,967 2,012 1,061 969 Other revenue 7,824 6,215 7,819 7,456 6,947 - -------------------------------------------------------------------------------------------------------------------------- Total fees and commissions 63,603 113,864 113,354 103,717 96,964 - -------------------------------------------------------------------------------------------------------------------------- Gain (loss) on sales of assets 216 (35) (1,316) 42 (348) Gain (loss) on securities, net (5,242) 4,620 (6,251) 4,748 (6,262) Gain (loss) on derivatives, net (2,961) 2,113 1,529 865 (183) - -------------------------------------------------------------------------------------------------------------------------- Total other operating revenue $ 55,616 $ 120,562 $ 107,316 $ 109,372 $ 90,171 - -------------------------------------------------------------------------------------------------------------------------- </TABLE> Other Operating Expense Other operating expense for the second quarter of 2008 totaled $159.3 million, up $25.1 million or 19% over the second quarter of 2007. Changes in the fair value of mortgage servicing rights increased other operating expense $5.8 million. Personnel costs increased $9.5 million or 12% due largely to incentive compensation costs. Non-personnel expenses, excluding changes in the fair value of mortgage servicing rights, increased $9.8 million or 17% due largely to higher deposit insurance costs and losses on mortgage loans sold with recourse. Personnel expense Personnel expense totaled $89.6 million for the second quarter of 2008 and $80.1 million for the second quarter of 2007. Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel cost totaled $54.0 million, up $2.2 million or 4% over the second quarter of 2007. The increase in regular compensation expense was due primarily to an increase in average regular compensation per full time equivalent employee. Average staffing levels were up 1% over the second quarter of last year. <TABLE> - ---------------------------------------------------------------------------------------------------------------------- Table 3 - Personnel Expense (Dollars in thousands) Three Months Ended ---------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, 2008 2008 2007 2007 2007 ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Regular compensation $ 54,024 $ 52,576 $ 52,316 $ 53,592 $ 51,821 Incentive compensation: Cash-based 19,503 19,287 19,568 15,559 12,485 Stock-based 2,760 2,272 1,794 2,345 3,097 - --------------------------------------------------------------------------------------------------------------------- Total incentive compensation 22,263 21,559 21,362 17,904 15,582 Employee benefits 13,310 13,971 10,834 11,816 12,651 Workforce reduction costs, net - - - 2,499 - - --------------------------------------------------------------------------------------------------------------------- Total personnel expense $ 89,597 $ 88,106 $ 84,512 $ 85,811 $ 80,054 - --------------------------------------------------------------------------------------------------------------------- Number of employees (full-time equivalent) 4,137 4,135 4,110 4,299 4,093 - --------------------------------------------------------------------------------------------------------------------- </TABLE> Incentive compensation increased $6.7 million or 43% to $22.3 million. Expense for cash-based incentive compensation plans increased $7.0 million or 56%. These plans are either intended to provide current rewards to employees who generate long-term business opportunities to the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions. The increase in cash-based incentive compensation over the second quarter of 2007 included a $3.7 million increase in commissions related to brokerage and trading revenue.
8 The Company also provides stock-based incentive compensation plans. Stock-based compensation plans include both equity and liability awards. Compensation expense related to liability awards decreased $262 thousand compared with the second quarter of 2007. This decrease reflected changes in the market value of BOK Financial common stock. The market value of BOK Financial common stock increased $1.22 per share in the second quarter of 2008 and increased $3.89 per share in the second quarter of 2007. Compensation expense for equity awards decreased $75 thousand or 5% compared with the second quarter of 2007. Expense for equity awards is based on the grant-date fair value of the awards and is unaffected by subsequent changes in fair value. Employee benefit expense totaled $13.3 million, a $659 thousand or 5% increase over 2007. Medical insurance costs were down $378 thousand or 9%. The Company self-insures a portion of its employee health care coverage. Data processing and communications expense Data processing and communications expense totaled $19.5 million, up $1.1 million or 6% over the second quarter of 2007. This expense consists of two broad categories, data processing systems and transaction card processing. Data processing costs increased $674 thousand or 6% due to growth in processing volumes and acquisitions during 2007. Transaction card processing costs increased $447 thousand or 6% due to growth in processing volume. Other operating expenses Occupancy and equipment expenses totaled $15.1 million for the second quarter of 2008, up $1.2 million or 9% over 2007. Growth in occupancy expense was due to 24 new branch locations added in the past year, including 16 added from bank acquisitions during the second quarter of 2007. Insurance expense increased $1.9 million compared to the second quarter of 2007 due to an increase in FDIC insurance premiums. A one-time credit granted to eligible depository institutions by the Federal Deposit Insurance Reform Act of 2005 to offset deposit insurance premiums was largely used in 2007. Mortgage banking costs included a $3.4 million increase in provision for losses on residential mortgage loans sold with recourse. The Company's obligation to repurchase these loans is more-fully discussed in the Loan Commitments section of this report. <TABLE> - ---------------------------------------------------------------------------------------------------------------------- Table 4 - Other Operating Expense (In thousands) Three Months Ended ---------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, 2008 2008 2007 2007 2007 ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Personnel $ 89,597 $ 88,106 $ 84,512 $ 85,811 $ 80,054 Business promotion 5,777 4,639 6,528 5,399 5,391 Professional fees and services 6,973 5,648 6,209 5,749 5,963 Net occupancy and equipment 15,100 15,061 15,466 14,752 13,860 Insurance 2,626 3,710 843 759 693 Data processing & communications 19,523 18,893 19,086 18,271 18,402 Printing, postage and supplies 4,156 4,419 4,221 4,201 4,179 Net (gains) losses and operating expenses of repossessed assets (229) 378 120 172 192 Amortization of intangible assets 1,885 1,925 2,382 2,397 1,443 Mortgage banking costs 6,054 5,681 4,225 3,877 2,485 Change in fair value of mortgage servicing rights 767 1,762 3,344 3,446 (5,061) Visa retrospective responsibility obligation - (2,767) 2,767 - - Other expense 7,039 5,949 8,024 6,184 6,530 - --------------------------------------------------------------------------------------------------------------------- Total other operating expense $ 159,268 $ 153,404 $ 157,727 $ 151,018 $ 134,131 - --------------------------------------------------------------------------------------------------------------------- </TABLE> Income Taxes Income tax benefit was $2.9 million or 71% of book taxable loss for the second quarter of 2008 compared with $29.3 million or 35% of book taxable income for the second quarter of 2007 and $34.4 million or 36% of book taxable income for the first quarter of 2008. The effective tax rate for the second quarter of 2008 includes adjustments to estimated income tax expense due to the loss incurred in the second quarter.
9 BOK Financial operates in numerous jurisdictions, which requires judgment regarding the allocation of income, expense and earnings under various laws and regulations of each of these taxing jurisdictions. Each jurisdiction may audit our tax returns and may take different positions with respect to these allocations. The reserve for uncertain tax positions was largely unchanged from December 31, 2007. Lines of Business BOK Financial operates five principal lines of business: Oklahoma corporate banking, Oklahoma consumer banking, mortgage banking, wealth management, and regional banking. Mortgage banking activities include loan origination and servicing across all markets served by the Company. Wealth management provides brokerage and trading, private financial services and investment advisory services in all markets. It also provides fiduciary services in all markets except Colorado. Fiduciary services in Colorado are included in regional banking. Regional banking consists primarily of corporate and consumer banking activities in the respective local markets. In addition to its lines of business, BOK Financial has a funds management unit. The primary purpose of this unit is to manage the Company's overall liquidity needs and interest rate risk. Each line of business borrows funds from and provides funds to the funds management unit as needed to support their operations. Operating results for Funds Management and Other include the effect of interest rate risk positions and risk management activities, the provision for credit losses, tax-exempt income and tax credits and certain executive compensation costs that are not attributed to the lines of business. BOK Financial allocates resources and evaluates performance of its lines of business after allocation of funds, certain indirect expenses, taxes and capital costs. The cost of funds borrowed from the funds management unit by the operating 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. Return on economic capital excludes amortization of intangible assets.
10 <TABLE> - ------------------------------------------------------ -------------------------------- -------------------------------- Table 5 - Net Income by Line of Business (In thousands) Three months ended June 30, Six months ended June 30, 2008 2007 2008 2007 ---------------- --------------- ---------------- --------------- <S> <C> <C> <C> <C> Regional banking $ 22,532 $ 24,332 $ 41,780 $ 49,055 Oklahoma corporate banking (37,860) 19,039 (17,405) 37,060 Mortgage banking (3,515) 122 (4,492) 168 Oklahoma consumer banking 7,635 9,079 16,882 18,540 Wealth management 9,554 6,672 19,895 14,048 - ------------------------------------------------------ ---------------- --------------- ---------------- --------------- Subtotal (1,654) 59,244 56,660 118,871 Funds management and other 493 (5,381) 4,444 (12,215) - ------------------------------------------------------ ---------------- --------------- ---------------- --------------- Total $ (1,161) $ 53,863 $ 61,104 $106,656 - ------------------------------------------------------ ---------------- --------------- ---------------- --------------- </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, this Division has specialized groups that serve customers in the energy, agriculture, healthcare and banking/finance industries, and includes the TransFund network. The Oklahoma Corporate Banking Division incurred a net loss of $37.9 million for the second quarter of 2008 due to its credit exposure from one customer, SemGroup, which declared bankruptcy in mid July 2008. Losses on loans and derivative contracts with SemGroup reduced the Oklahoma Corporate Banking Division's net income for the second quarter of 2008 by $53.0 million. This Division contributed $19.0 million to consolidated net income in the second quarter of 2007 and $20.4 million to consolidated net income in the first quarter of 2008. Excluding SemGroup losses, the Oklahoma Corporate Banking Division's net income for the second quarter of 2008 was $15.1 million. Net interest revenue decreased $4.0 million or 10%. Average earnings assets attributed to this division increased $93 million or 2% over 2007 to $4.7 billion. Average loans decreased $33 million or 1% to $4.4 billion. Average commercial loans decreased $152 million or 6%. The decrease in average commercial loans was partially offset by a $70 million increase in average consumer loans, primarily indirect automobile loans, and a $50 million increase in average real estate loans. Average funds provided to the funds management unit by the Oklahoma Corporate Banking Division increased $122 million. Average deposits attributed to the Oklahoma Corporate Banking Division increased $206 million or 10% due primarily to growth in treasury services Eurodollar deposit products. Operating revenue decreased $57.6 million due primarily to a $60.7 million charge for the decrease in the fair value of derivative contracts with SemGroup. Operating revenue was up $3.1 million or 13% excluding this charge. Operating revenue provided by TransFund increased $1.4 million or 15% and service charges on commercial deposit accounts were up $1.1 million or 21%. Operating expenses, which consist primarily of personnel and data processing costs, increased $2.8 million or 10%. Net loans charged off by the Oklahoma Corporate Banking Division totaled $32.3 million in the second quarter of 2008, which included a $26.0 million charge off of SemGroup loans. Excluding SemGroup, net loans charged off in the second quarter of 2008 totaled $6.3 million or 0.54% of average loans. Net loans charged off totaled $3.3 million or 0.30% of average loans for the second quarter of 2007 and $2.2 million or 0.18% of average loans for the first quarter of 2008.
11 <TABLE> Table 6 - Oklahoma Corporate Banking (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- --- ------------- -- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 49,464 $ 62,907 $ 101,875 $ 122,679 NIR (expense) from internal sources (14,335) (23,731) (30,511) (45,903) ------------- ------------- -------------- ------------- Net interest revenue 35,129 39,176 71,364 76,776 Other operating revenue (34,183) 23,454 (10,304) 44,454 Operating expense 30,980 28,156 60,132 55,911 Gains on financial instruments, net - - 4,689 - Net loans charged off 32,271 3,313 34,443 4,644 Net income (loss) (37,860) 19,039 (17,405) 37,060 Average assets $ 6,135,980 $ 5,785,263 $ 6,118,107 $ 5,748,197 Average economic capital 461,840 405,160 434,280 413,010 Return on assets (2.48)% 1.32% (0.57)% 1.30% Return on economic capital (32.97)% 18.85% (8.06)% 18.10% Efficiency ratio NM 44.96% 98.48% 46.12% </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 and BOSC's retail brokerage division. Consumer banking services are offered through 35 locations in Tulsa, 32 locations in Oklahoma City and 16 locations throughout the state. The Oklahoma Consumer Banking Division contributed net income of $7.6 million for the second quarter of 2008, compared to net income of $9.1 million for the second quarter of 2007. Net interest revenue decreased $2.8 million or 15% over 2007 due primarily to deposit spread compression. Average loans attributed to the Oklahoma Consumer Banking Division in 2008 increased $19 million or 7% compared with 2007. Average deposits provided by the Oklahoma Consumer Banking Division grew $136 million or 5% to $3.0 billion. Average demand deposits were up $36 million or 10% over 2007. Interest bearing deposits increased $100 million or 4%, including a $229 million or 21% increase in interest bearing transaction accounts and a $129 million or 9% decrease in time deposits. Other operating revenue was up $1.5 million or 8% over 2007 largely from check card revenue and overdraft fees. Operating expenses increased $1.5 million or 7% over 2007, including a $546 thousand or 7% increase in personnel expense and a $946 thousand or 7% increase in non-personnel expense. Net loans charged-off, which consist primarily of overdrawn deposit accounts, totaled $402 thousand for the second quarter of 2008 and $801 thousand for the second quarter of 2007.
12 <TABLE> Table 7 - Oklahoma Consumer Banking (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ (11,537) $ (16,740) $ (26,395) $ (33,891) NIR (expense) from internal sources 27,265 35,224 58,814 70,439 ------------- ------------- -------------- ------------- Net interest revenue 15,728 18,484 32,419 36,548 Other operating revenue 20,876 19,329 39,942 37,208 Operating expense 23,699 22,207 45,361 42,382 Gains on financial instruments, net - - 1,576 - Net loans charged off 402 801 963 1,062 Net income 7,635 9,079 16,882 18,540 Average assets $ 3,036,095 $ 2,905,822 $ 3,013,375 $ 2,917,365 Average economic capital 58,230 66,370 59,930 65,820 Return on assets 1.01% 1.25% 1.13% 1.28% Return on economic capital 52.74% 54.87% 56.65% 56.80% Efficiency ratio 64.74% 58.73% 62.69% 57.46% </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. BOk Mortgage incurred a net loss of $3.5 million in the second quarter of 2008 compared to net income of $122 thousand in the second quarter of 2007. Changes in the fair value of mortgage servicing rights, net of hedging activity, reduced net income $3.8 million in 2008 and $379 thousand in 2007. In addition, an increase in the provision for off-balance sheet credit risk on mortgage loans sold with recourse reduced net income $2.1 million in the second quarter of 2008. Mortgage banking activities consisted primarily of two sectors, loan production and loan servicing. The loan production sector generally performs best when mortgage rates are relatively low and loan origination volumes are high. Conversely, the loan servicing sector generally performs best when mortgage rates are relatively high and prepayments are low. The Mortgage Banking Division also holds a permanent portfolio of $447 million of residential mortgage loans which generated net income of $473 thousand in the second quarter of 2008. Loan Production Sector Pre-tax loss from loan production totaled $1.8 million for the second quarter of 2008 compared with pre-tax income of $331 thousand for the second quarter of 2007. Loan production revenue totaled $3.9 million in second quarter of 2008, including $5.9 million of capitalized mortgage servicing rights, partially offset by net losses on mortgage loans sold. Loan production revenue totaled $4.1 million in second quarter of 2007. Capitalized mortgage servicing rights totaled $3.6 million for the second quarter of 2007. The average initial fair value of servicing rights on mortgage loans funded was 1.61% for 2008 and 1.46% for 2007. Mortgage loans funded totaled $362 million in second quarter of 2008 and $315 million in the second quarter of 2007. Approximately 60% and 17% of the loans funded during the second quarter of 2008 were in Oklahoma and Texas, respectively. The pipeline of mortgage loan applications totaled $517 million at June 30, 2008, compared to $525 million at March 31, 2008 and $306 million at June 30, 2007. Operating expenses, excluding direct loan production costs which are recognized as part of the gain or loss on loans sold, totaled $6.8 million in 2008 and $3.9 million in 2007. The increase in operating expenses was due to a $3.4 million increase in provision for losses on loans sold with recourse. Loan Servicing Sector The loan servicing sector had a pre-tax loss of $5.1 million for the second quarter of 2008 compared with a pre-tax loss of $552 thousand for the second quarter of 2007. The increase in net loss from loan servicing during the second quarter of 2008 was due to ineffectiveness of our economic hedging. We recognized a net pre-tax loss of $6.3 million in the second quarter of 2008 and a net pre-tax loss of $620 thousand in 2007 from changes in the value of mortgage servicing rights and economic hedging activities. The fair value of securities designated as an economic hedge decreased $5.5 million during the second quarter of 2008, which was largely expected based on changes in market interest rates for mortgage-backed securities. However, changes in mortgage commitment rates, prepayment speed assumptions, discount
13 rates and other estimates of future activities decreased the fair value of mortgage servicing rights recognized in earnings by $767 thousand in the second quarter of 2008, which was unexpected. Factors which caused the fair value of our servicing rights to not increase as expected included an increase in prepayment speed of our servicing rights relative to national averages and a decrease in short-term interest rates relative to mortgage commitment rates. During the second quarter of 2007, economic hedge activity produced net losses of $5.7 million, which largely offset that quarter's increase in the fair value of servicing rights of $5.1 million. Servicing revenue, including revenue on loans serviced for affiliates, totaled $4.8 million in second quarter of 2008 compared to $4.4 million in the same period of 2007. The average outstanding balance of loans serviced, including loans serviced for affiliates, was $5.7 billion during the second quarter of 2008 compared to $5.2 billion during 2007. Servicing revenue per outstanding loan principal was 34 basis points in 2008 compared with 34 basis points in 2007. Servicing costs totaled $1.8 million for the second quarter of 2008 and $2.0 million for the second quarter of 2007. At June 30, 2008, the total number of loans serviced by BOk Mortgage was 58,021. Serviced loans delinquent 90 days or more or in process of foreclosure totaled 620 or 1.07%; 366 of these loans are in Oklahoma, 71 are in Arkansas, 51 are in Kansas / Missouri and 38 are in Texas. The fair value of mortgage servicing rights decreased $3.4 million during the second quarter of 2008 and $3.2 million during the second quarter of 2007 due to actual runoff of the underlying loans serviced. This reduction in fair value is included in mortgage banking costs in the Consolidated Statement of Earnings. <TABLE> Table 8 - Mortgage Banking (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 11,584 $ 8,529 $ 23,236 $ 16,344 NIR (expense) from internal sources (8,406) (7,591) (17,527) (14,543) ------------- ------------- -------------- ------------- Net interest revenue 3,178 938 5,709 1,801 Capitalized mortgage servicing rights 5,909 3,566 10,314 5,915 Other operating revenue 2,043 5,654 5,718 10,594 Operating expense 10,444 9,215 20,859 16,314 Change in fair value of mortgage servicing rights 767 (5,061) 2,529 (3,897) Losses on financial instruments, net (5,518) (5,681) (5,327) (5,428) Net loans charged off 81 122 306 191 Net income (loss) (3,515) 122 (4,492) 168 Average assets $ 887,397 $ 684,483 $ 886,431 $ 653,332 Average economic capital 32,250 23,890 28,820 25,090 Return on assets (1.59)% 0.07% (1.02)% 0.05% Return on economic capital (43.84)% 2.05% (31.34)% 1.35% Efficiency ratio 93.84% 90.72% 95.94% 89.10% </TABLE> BOK Financial designated a portion of its securities portfolio as an economic hedge against the risk of changes in the fair value of its mortgage servicing rights. These securities, which are identified as mortgage trading securities are carried at fair value. Changes in fair value are recognized in earnings as they occur. Additionally, mortgage-related 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. No special hedge accounting treatment is applicable to either the mortgage servicing rights or the financial instruments designated as an economic hedge. Our 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.
14 At June 30, 2008, financial instruments with a fair value of $98.3 million and an unrealized loss of $1.9 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, 2008, the pre-tax results of this modeling on 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 $ 2,560 $ (3,724) Fair value of hedging instruments (2,661) 2,671 ----------------- ---------------- Net $ (101) $ (1,053) ----------------- ---------------- 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 the fair value of our servicing rights $2.6 million while a 50 basis point decrease is expected to reduce the fair value $3.7 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. This is much less of a limit of the speed at which mortgage loans may prepay in a declining rate environment. Modeling changes in the value of 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 the assumed loan prepayment speeds 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 prepayments may increase or decrease due to factors other than changes in interest rates. These factors and others may cause changes in the value of our mortgage servicing rights to differ from our expectations. Wealth Management BOK Financial provides a wide range of financial services through its wealth management line of business, including trust and private financial services, and brokerage and trading activities. This line of business includes the activities of BOSC, Inc., a registered broker / dealer and Cavanal Hill Investment Management, Inc., an SEC-registered investment advisor. Cavanal Hill changed its name from AXIA Investment Management, Inc. on June 20, 2008. Trust and private financial services includes sales of institutional, investment and retirement products, loans and other services to affluent individuals, businesses, not-for-profit organizations, and governmental agencies. Trust services are provided primarily to clients throughout Oklahoma, Texas and New Mexico. Additionally, trust services include a nationally competitive, self-directed 401-(k) program and administrative and advisory services to the American Performance family of mutual funds. Brokerage and trading activities within the wealth management line of business consists of retail sales of mutual funds, securities, and annuities, institutional sales of securities and derivatives, bond underwriting and other financial advisory services and customer risk management programs. Wealth Management contributed net income of $9.6 million in the second quarter of 2008. This compared to net income of $6.7 million in the second quarter of 2007. Growth in net income was due primarily to increased revenue from trading and institutional securities sales. Trust and private financial services provided $3.8 million of net income in the second quarter of 2008, down $1.8 million from the second quarter of 2007. Trust fees and commissions for the Wealth Management line of business totaled $18.1 million, up $1.2 million or 7% increase over last year. At June 30, 2008 and 2007, the Wealth Management line of business was responsible for trust assets with aggregate market values of $31.4 billion and $30.8 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 $11.9 billion of trust assets at June 30, 2008 compared to $11.4 billion of trust assets at June 30, 2007. The fair value of non-managed assets decreased $414 million to $11.8 billion at June 30, 2008. Assets held in safekeeping totaled $7.7 billion at June 30, 2008. Operating expenses attributed to trust and private financial services totaled $19.0 million for the second quarter of 2008 and $16.9 million for the second quarter of 2007. Personnel costs increased $1.1 million or 10% due primarily to staffing increases in the Arizona and Kansas City markets. Non-personnel costs increased $962 thousand or 15% due to increased legal, data processing and safekeeping costs. Brokerage and trading activities provided $5.8 million of net income in 2008 compared to $1.1 million in 2007. Operating revenue increased $14.5 million due to brokerage and trading revenue and fees earned on margin assets. Brokerage and trading revenue increased $9.5 million due primarily to institutional securities sales, customer derivative revenue and retail brokerage fees. In addition, fees on margin assets were up $3.2 million, largely offset by a decrease
15 in net interest revenue for the cost to fund margin assets. Operating expenses, which consist primarily of compensation expense increased $4.0 million or 34%. Incentive compensation expense which is directly related to revenue growth was up $4.0 million. <TABLE> Table 10 - Wealth Management (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 7,911 $ 3,480 $ 10,905 $ 8,005 NIR (expense) from internal sources (4,170) 4,608 (335) 8,894 ------------- ------------- -------------- ------------- Net interest revenue 3,741 8,088 10,570 16,899 Other operating revenue 47,527 31,957 91,408 62,490 Operating expense 34,816 28,746 68,211 56,004 Net loans charged off 807 393 1,199 407 Net income 9,554 6,672 19,895 14,048 Average assets $ 2,773,578 $ 1,774,525 $ 2,633,307 $ 1,733,099 Average economic capital 163,410 160,850 153,310 163,750 Return on assets 1.39% 1.51% 1.52% 1.63% Return on economic capital 23.52% 16.64% 26.10% 17.30% Efficiency ratio 67.91% 71.78% 66.89% 70.54% </TABLE> Regional Banking Regional banking consists primarily of the commercial and consumer 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 the regional banks' primary customer focus. Regional banking contributed net income of $22.5 million during the second quarter of 2008. This compares with net income of $24.3 million during the second quarter of 2007. Net income for the second quarter of 2008 from operations in Texas and Colorado decreased $1.4 million and $1.0 million, respectively, from the previous year. In addition net income from our Arizona banking operations decreased $628 thousand. Net income for the second quarter of 2008 from banking operations in New Mexico and Kansas City was up $860 thousand and $361 thousand, respectively, over the same period of 2007. Decrease in net income provided by Texas operations was due primarily to higher operating costs and an increase in net loans charged-off. Net interest revenue increased $811 thousand or 2%. Average earning assets increased $572 million, including a $505 million or 18% increase in average loans. Average loans totaled $3.4 billion for the second quarter of 2008 and $2.8 billion for the second quarter of 2007. Average corporate banking loans increased $72 million or 4% to $1.9 billion. Growth in the average outstanding balances of middle market and indirect automobile loans was partially offset by reductions in the average outstanding balances of energy loans. Average community banking loans totaled $1.2 billion, up $368 million compared with the second quarter of 2007. Community banking loans were up in Dallas, Houston and Fort Worth. Average consumer loans increased $40 million or 62% over the second quarter of 2007, primarily in the Fort Worth market. Average deposits totaled $3.1 billion for the second quarter of 2008 and $2.8 billion for the second quarter of 2007. Average corporate banking deposits were down $187 million or 14% to $615 million. Average community banking deposits increased $265 million to $1.3 billion, primarily in the Fort Worth market. Average consumer banking deposits totaled $1.1 billion for the second quarter of 2008, up $168 million or 18%. Consumer deposit growth was also primarily in the Fort Worth market. Growth in average loans and deposits in the Fort Worth market includes Worth National Bank, which was acquired on May 31, 2007. Other operating revenue in the Texas market increased $1.6 million or 23% over 2007 due primarily to a $1.0 million increase in deposit fees. Operating expenses were up $3.1 million or 13%, including a $1.0 million or 8% increase in personnel costs and a $2.1 million increase in non-personnel expense. Net loans charged off totaled $987 thousand or 0.12% of average loans for the second quarter of 2008 compared with a $609 thousand net recovery in 2007. Net income decreased at our Colorado operations $1.0 million or 25% due primarily to increased operating expenses. Other operating revenue increased $838 thousand or 27% due primarily to growth in trust fees and deposit service charges. Trust fees and commissions totaled $2.8 million for the second quarter of 2008, up $248 thousand over the second quarter of 2007. The fair value of trust assets overseen by Colorado State Bank and Trust was $3.0 billion at June 30, 2008 up 4% from June 30, 2007. Deposit fees totaled $593 thousand for the second quarter of 2008 and $296
16 thousand for the second quarter of 2007. Operating expenses in Colorado increased $2.5 million or 35% over the second quarter of last year. Personnel expenses were up $781 thousand and non-personnel operating expenses were up $1.7 million. Growth in operating expenses included additional expenses from the First United acquisition late in the second quarter of 2007, including a $254 thousand increase in intangible asset amortization. Average earning assets attributed to our Colorado operations increased $186 million or 13% to $1.7 billion. Securities and funds sold to the funds management unit increased $69 million. Average loans totaled $811 million for the second quarter of 2008, up $118 million or 17% over 2007. Average energy loans in the Colorado market increased $29 million or 11%. Commercial real estate loans were up $63 million or 34%, including commercial real estate loans acquired with First United Bank in the second quarter of 2007. Average deposits increased $164 million or 18% to $1.1 billion, including consumer deposit growth of $26 million or 5% and wealth management deposit growth of $120 million or 46%. Net income in New Mexico totaled $5.9 million for the second quarter of 2008, up $860 thousand or 17% over the same quarter of 2007. Net interest revenue increased $861 thousand or 7% and operating revenue was up $208 thousand or 5%. Average loans increased $51 million or 7% to $786 million for the second quarter of 2008. Average deposits were $956 million for the second quarter of 2008 and $1.0 billion for 2007. Operating expenses increased $66 thousand or 1% over the second quarter of 2007. Personnel costs in New Mexico increased $164 thousand or 5% and non-personnel operating expense decreased $98 thousand. Net income from banking operations in Arizona decreased $628 thousand due primarily to an increase in net loans charged-off. Net loss for the second quarter of 2008 totaled $148 thousand compared with net income of $480 thousand for the second quarter of 2007. Net loans charged-off were $1.3 million or 0.84% of average loans for the second quarter of 2008, up from $1 thousand in the second quarter of 2007. Net interest revenue grew $134 thousand. Average loans increased $130 million to $632 million. Small business and middle market commercial loans increased $105 million compared to the second quarter of 2007. Average commercial real estate loans decreased $13 million or 7% in Phoenix and increased $40 million or 25% in Tucson. Other operating revenue increased $97 thousand and operating expenses decreased $68 thousand or 2%. Net income from banking operations in the Kansas City market was up $361 thousand compared with the second quarter of 2007. Net interest revenue increased $904 thousand and other operating revenue was up $948 thousand. Average loans increased $200 million to $406 million due primarily to growth in commercial loans. Average deposits were up $36 million to $89 million. Operating expenses for the second quarter of 2008 totaled $3.2 million, up $571 thousand over the second quarter of 2007. Net loans charged off were $690 thousand or 0.68% of average loans for the second quarter of 2008, up from $1 thousand in the second quarter of 2007.
17 <TABLE> Table 11 - Bank of Texas (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 44,485 $ 45,929 $ 89,447 $ 91,237 NIR (expense) from internal sources (5,228) (7,483) (12,218) (14,683) ------------- ------------- -------------- ------------- Net interest revenue 39,257 38,446 77,229 76,554 Other operating revenue 8,417 6,852 16,014 13,137 Operating expense 26,979 23,873 54,211 45,583 Gains on financial instruments, net - - 258 - Net loans charged off (recovered) 987 (609) 2,894 536 Net income 12,692 14,057 23,356 27,841 Average assets $ 4,795,919 $ 4,102,189 $ 4,705,447 $ 4,029,689 Average economic capital 247,030 296,580 231,200 207,010 Average invested capital 498,910 463,660 483,090 458,890 Return on assets 1.06% 1.37% 1.00% 1.39% Return on economic capital 20.66% 19.01% 20.32% 27.12% Return on average invested capital 10.23% 12.16% 9.72% 12.23% Efficiency ratio 56.59% 52.70% 58.14% 50.82% </TABLE> <TABLE> Table 12 - Bank of Albuquerque (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 16,803 $ 18,735 $ 33,891 $ 36,446 NIR (expense) from internal sources (2,751) (5,544) (6,939) (10,770) ------------- ------------- -------------- ------------- Net interest revenue 14,052 13,191 26,952 25,676 Other operating revenue 4,568 4,360 8,807 8,286 Operating expense 7,863 7,797 15,811 15,111 Gains on financial instruments, net - - 190 - Net loans charged off 1,025 1,428 1,137 1,559 Net income 5,947 5,087 11,607 10,565 Average assets $ 2,393,109 $ 1,616,356 $ 2,101,474 $ 1,577,580 Average economic capital 101,380 89,430 96,830 88,510 Average invested capital 120,470 108,520 115,920 107,600 Return on assets 1.00% 1.26% 1.11% 1.35% Return on economic capital 23.59% 22.82% 24.11% 24.07% Return on average invested capital 19.85% 18.80% 20.14% 19.80% Efficiency ratio 42.23% 44.42% 44.22% 44.49% </TABLE>
18 <TABLE> Table 13 - Bank of Arkansas (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 4,137 $ 4,196 $ 8,425 $ 7,637 NIR (expense) from internal sources (1,101) (1,726) (2,629) (3,117) ------------- ------------- -------------- ------------- Net interest revenue 3,036 2,470 5,796 4,520 Other operating revenue 288 310 643 644 Operating expense 1,158 1,098 2,221 2,139 Gains on financial instruments, net - - 7 - Net loans charged off 782 264 1,356 406 Net income 846 867 1,753 1,599 Average assets $ 426,386 $ 333,995 $ 419,108 $ 308,324 Average economic capital 26,090 19,430 22,220 18,280 Average invested capital 26,090 19,430 22,220 18,280 Return on assets 0.80% 1.04% 0.84% 1.05% Return on economic capital 13.04% 17.90% 15.87% 17.64% Return on average invested capital 13.04% 17.90% 15.87% 17.64% Efficiency ratio 34.84% 39.50% 34.49% 41.42% </TABLE> <TABLE> Table 14 - Colorado State Bank and Trust (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 14,873 $ 17,734 $ 31,805 $ 35,143 NIR (expense) from internal sources (4,233) (7,123) (9,794) (14,154) ------------- ------------- -------------- ------------- Net interest revenue 10,640 10,611 22,011 20,989 Other operating revenue 3,995 3,157 7,744 6,344 Operating expense 9,727 7,197 20,235 13,944 Gains on financial instruments, net - - 66 - Net loans charged off 17 7 434 81 Net income 3,004 4,011 5,626 8,131 Average assets $ 1,865,368 $ 1,594,657 $ 1,888,792 $ 1,576,326 Average economic capital 111,620 78,030 110,430 80,170 Average invested capital 166,920 133,330 165,720 135,470 Return on assets 0.65% 1.01% 0.60% 1.04% Return on economic capital 10.82% 20.62% 10.25% 20.45% Return on average invested capital 7.24% 12.07% 6.83% 12.10% Efficiency ratio 66.46% 52.27% 68.01% 51.02% </TABLE>
19 <TABLE> Table 15 - Bank of Arizona (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 8,175 $ 10,185 $ 16,965 $ 19,743 NIR (expense) from internal sources (3,119) (5,263) (6,986) (10,246) ------------- ------------- -------------- ------------- Net interest revenue 5,056 4,922 9,979 9,497 Other operating revenue 281 184 557 368 Operating expense 4,251 4,319 8,325 7,955 Net loans charged off 1,329 1 2,143 1 Net income (loss) (148) 480 42 1,166 Average assets $ 638,673 $ 576,311 $ 616,571 $ 564,516 Average economic capital 63,910 50,320 61,550 47,270 Average invested capital 80,560 66,970 78,200 63,920 Return on assets (0.09)% 0.33% 0.01% 0.42% Return on economic capital (0.93)% 3.83% 0.14% 4.97% Return on average invested capital (0.74)% 2.87% 0.11% 3.68% Efficiency ratio 79.65% 84.59% 79.01% 80.64% </TABLE> <TABLE> Table 16 - Bank of Kansas City (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 4,812 $ 4,023 $ 9,762 $ 8,300 NIR (expense) from internal sources (2,342) (2,457) (5,080) (5,283) ------------- ------------- -------------- ------------- Net interest revenue 2,470 1,566 4,682 3,017 Other operating revenue 1,703 755 2,448 1,210 Operating expense 3,170 2,599 5,744 4,629 Net loans charged off 690 1 2,376 2 Net income (loss) 191 (170) (604) (247) Average assets $ 460,542 $ 258,100 $ 429,155 $ 257,776 Average economic capital 26,690 13,330 26,390 6,520 Average invested capital 26,690 13,330 26,390 6,520 Return on assets 0.17% (0.26)% (0.28)% (0.19)% Return on economic capital 2.88% (5.12)% (4.60)% (7.64)% Return on average invested capital 2.88% (5.12)% (4.60)% (7.64)% Efficiency ratio 75.96% 111.98% 80.56% 109.51% </TABLE> Financial Condition Securities Investment securities, which consist primarily of Oklahoma municipal bonds, are carried at cost and adjusted for amortization of premiums or accretion of discounts. At June 30, 2008, investment securities were carried at $246 million and had a fair value of $243 million. Management has the ability and intent to hold these securities until they mature. Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, less deferred taxes, are recorded as accumulated other comprehensive income in shareholders' equity. The amortized cost of available for sale securities totaled $6.0 billion at June 30, 2008, up $337 million compared with March 31, 2008. Mortgage-backed securities represented 97% of total available for sale securities. 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
20 making an investment and throughout the life of the security. The expected duration of the mortgage-backed securities portfolio was approximately 2.9 years at June 30, 2008. Management estimates that the expected duration would extend to approximately 3.3 years assuming a 300 basis point immediate rate shock. Mortgage-backed securities also have credit risk from delinquency or default of the underlying loans. The Company mitigates this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest payments on the underlying loans are either fully or partially guaranteed. Credit risk on mortgage-backed securities originated by private issuers is mitigated by investment in senior tranches with additional collateral support. The Company has invested $46 million in variable rate perpetual preferred stocks issued by seven major banks and brokerage houses. Although these issuers remain rated investment grade by the major rating agencies and all scheduled dividend payments have been made, the fair values of these stocks declined to $32 million at as of June 30, 2008. Cumulative other-than-temporary impairment charges of $14 million have been recognized. The fair value of these securities has decreased an additional $5.1 million since June 30, 2008. Net unrealized losses on available for sale securities totaled $91 million at June 30, 2008 compared with net unrealized losses of $28 million at March 31, 2008. The aggregate gross amount of unrealized losses at June 30, 2008 totaled $123 million. 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 $416 million of Alt-A mortgage-backed securities were held at June 30, 2008 with a total unrealized loss of $29 million. Approximately 82% 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. Approximately 86% of all of our Alt-A mortgage-backed securities represent pools of fixed-rate mortgage loans. Management does not believe that any of the unrealized losses were due to credit concerns. We also considered our intent and ability to either hold or sell the securities. It is our belief, based on currently available information and our evaluation, that the unrealized losses in these securities were temporary. 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 portfolio. Trading portfolio securities, which are also carried at fair value with changes in fair value recognized in current period income, are acquired and held with the intent to sell at a profit to the Company. Loans The aggregate loan portfolio before allowance for loan losses totaled $12.6 billion at June 30, 2008, a $250 million or 8% annualized increase since March 31, 2008. Loan growth was broadly distributed among the various segments of the portfolio and across all geographic markets.
21 <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 17 - Loans (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2008 2008 2007 2007 2007 --------------------------------------------------------------------------------- Commercial: <S> <C> <C> <C> <C> <C> Energy $ 1,895,050 $ 1,966,996 $ 1,954,967 $ 1,852,681 $ 1,842,888 Services 1,848,360 1,784,723 1,721,143 1,671,291 1,686,650 Wholesale/retail 1,226,875 1,206,224 1,081,172 1,039,855 1,017,486 Manufacturing 542,019 542,297 493,185 536,631 596,002 Healthcare 747,434 733,086 680,294 648,871 606,965 Agriculture 253,198 248,345 236,860 259,904 313,247 Other commercial and industrial 525,637 475,187 569,884 501,128 485,594 - --------------------------------------------------------------------------------------------------------------------- Total commercial 7,038,573 6,956,858 6,737,505 6,510,361 6,548,832 - --------------------------------------------------------------------------------------------------------------------- Commercial real estate: Construction and land development 1,021,135 1,066,096 1,004,547 975,764 916,526 Multifamily 251,325 236,787 214,388 234,182 221,069 Other real estate loans 1,555,037 1,529,041 1,531,537 1,575,089 1,654,385 - --------------------------------------------------------------------------------------------------------------------- Total commercial real estate 2,827,497 2,831,924 2,750,472 2,785,035 2,791,980 - --------------------------------------------------------------------------------------------------------------------- Residential mortgage: Secured by 1-4 family residential properties 1,607,597 1,529,769 1,531,296 1,497,568 1,399,637 Residential mortgages held for sale 119,944 91,905 76,677 73,488 116,257 - --------------------------------------------------------------------------------------------------------------------- Total residential mortgage 1,727,541 1,621,674 1,607,973 1,571,056 1,515,894 - --------------------------------------------------------------------------------------------------------------------- Consumer: Indirect automobile 735,098 685,803 625,203 592,207 554,150 Other consumer 309,273 291,401 296,094 292,505 288,526 - --------------------------------------------------------------------------------------------------------------------- Total consumer 1,044,371 977,204 921,297 884,712 842,676 - --------------------------------------------------------------------------------------------------------------------- Total $ 12,637,982 $ 12,387,660 $ 12,017,247 $ 11,751,164 $ 11,699,382 - --------------------------------------------------------------------------------------------------------------------- </TABLE> The commercial loan portfolio increased $82 million during the second quarter of 2008 to $7.0 billion at June 30, 2008. Energy loans totaled $1.9 billion or 15% of total loans. Outstanding energy loans decreased $72 million during the second quarter of 2008, including a $46 million decrease in net outstanding balances and a $26 million charge off of SemGroup loans. Approximately $1.6 billion of energy loans was to oil and gas producers, down from $1.7 billion at March 31, 2008. 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 energy category of our loan portfolio is distributed $1.0 billion in Oklahoma, $576 million in Texas and $295 million in Colorado. The services sector of the loan portfolio totaled $1.8 billion or 15% of total loans and consists of a large number of loans to a variety of businesses, including communications, gaming and transportation services. Approximately $1.3 billion of the services category is made up of loans with individual balances of less than $10 million. Approximately $703 million of the outstanding balance of services loans is attributed to Texas, $558 million to Oklahoma, $238 million to New Mexico, $134 million to Arizona and $104 million to Colorado. Other notable loan concentrations by primary industry of the borrowers are presented in Table 17. BOK Financial participates in shared national credits when appropriate to obtain or maintain business relationships with local customers. Shared national credits are defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants. At June 30, 2008, the outstanding principal balance of these loans totaled $1.7 billion. Substantially all of these loans are to borrowers with local market relationships. BOK Financial serves as the agent lender in approximately 24% of its shared national credits, based on dollars committed. The Company's lending policies generally avoid loans in which we do not have the opportunity to maintain or achieve other business relationships with the customer. Commercial real estate loans totaled $2.8 billion or 22% of the loan portfolio at June 30, 2008. Over the past five years, the percentage of commercial real estate loans to our total loan portfolio ranged from 20% to 23%. The outstanding balance of commercial real estate loans decreased $4 million or 1% annualized from the previous quarter end. Construction and land development loans decreased $45 million to $1.0 billion. Loans secured by multifamily
22 residential property increased $15 million and loans secured by other commercial real estate increased $26 million. Loans secured by land, residential lots and construction totaled $1.0 billion at June 30, 2008. Approximately $265 million of these loans are attributed to the Oklahoma market, $299 million to the Texas market, $180 million to the Colorado market and $173 million to the Arizona market. Other commercial real estate loans totaled $1.6 billion at June 30, 2008. The geographic distribution of these loans included $547 million in Oklahoma, $484 million in Texas, $186 million in New Mexico, $162 million in Arizona and $87 million in Colorado. The major components of other commercial real estate loans were retail facilities - $378 million, office buildings - $423 million and industrial facilities - $180 million. Residential mortgage loans, excluding loans held for sale, totaled $1.6 billion, up $78 million since March 31, 2008. At June 30, 2008, residential mortgage loans included $477 million of home equity loans, $520 million of loans held for business relationship purposes, $447 million of adjustable rate mortgages and $138 million of loans held for community development. Loans held for business relationship purposes increased $57 million and adjustable rate mortgage loans increased $22 million since March 31, 2008. We have no concentration in sub-prime residential mortgage loans. Our portfolio of adjustable rate mortgage loans is generally underwritten to prime standards and does not include loans with initial rates that are below market. At June 30, 2008, consumer loans included $735 million of indirect automobile loans. Approximately $476 million of these loans were purchased from dealers in Oklahoma and $181 million were purchased from dealers in Arkansas. The remaining $78 million were purchased from dealers in Texas. Indirect automobile loans grew $49 million since March 31, 2008, including $27 million in Texas, $15 million in Oklahoma and $7 million in Arkansas. Approximately 7% of the outstanding balance at June 30, 2008 is considered near-prime, which is defined as loans to borrowers that had poor credit in the past but have re-established credit over a period of time. We generally do not originate sub-prime indirect automobile loans.
23 <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 18 - Loans by Principal Market Area (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2008 2008 2007 2007 2007 --------------------------------------------------------------------------------- Oklahoma: <S> <C> <C> <C> <C> <C> Commercial $ 3,228,179 $ 3,248,424 $ 3,219,176 $ 3,113,412 $ 3,317,877 Commercial real estate 875,546 940,686 890,703 875,135 897,838 Residential mortgage 1,099,277 1,080,882 1,080,483 1,058,142 971,692 Residential mortgage held for sale 119,944 91,905 76,677 73,488 112,596 Consumer 601,184 586,695 576,070 562,631 540,986 --------------------------------------------------------------------------------- Total Oklahoma $ 5,924,130 $ 5,948,592 $ 5,843,109 $ 5,682,808 $ 5,840,989 --------------------------------------------------------------------------------- Texas: Commercial $ 2,166,925 $ 2,124,192 $ 1,985,645 $ 1,941,731 $ 1,856,049 Commercial real estate 889,364 838,781 846,303 913,910 888,118 Residential mortgage 299,996 262,305 275,533 266,850 263,344 Consumer 204,081 168,949 142,958 133,391 135,659 --------------------------------------------------------------------------------- Total Texas $ 3,560,366 $ 3,394,227 $ 3,250,439 $ 3,255,882 $ 3,143,170 --------------------------------------------------------------------------------- New Mexico: Commercial $ 451,225 $ 472,543 $ 473,262 $ 446,573 $ 434,394 Commercial real estate 271,177 258,731 252,884 256,994 263,342 Residential mortgage 89,469 85,834 84,336 83,274 81,521 Consumer 16,977 14,977 16,105 15,769 13,225 --------------------------------------------------------------------------------- Total New Mexico $ 828,848 $ 832,085 $ 826,587 $ 802,610 $ 792,482 --------------------------------------------------------------------------------- Arkansas: Commercial $ 96,775 $ 100,489 $ 106,328 $ 117,993 $ 103,534 Commercial real estate 124,049 130,956 124,317 107,588 102,537 Residential mortgage 19,527 16,621 16,393 18,411 22,508 Consumer 197,979 180,551 163,626 148,404 129,431 --------------------------------------------------------------------------------- Total Arkansas $ 438,330 $ 428,617 $ 410,664 $ 392,396 $ 358,010 --------------------------------------------------------------------------------- Colorado: Commercial $ 489,844 $ 486,525 $ 490,373 $ 491,204 $ 480,097 Commercial real estate 276,062 261,099 252,537 247,802 274,610 Residential mortgage 38,517 31,011 26,556 26,322 18,516 Consumer 16,367 17,552 16,457 18,623 18,470 --------------------------------------------------------------------------------- Total Colorado $ 820,790 $ 796,187 $ 785,923 $ 783,951 $ 791,693 --------------------------------------------------------------------------------- Arizona: Commercial $ 207,173 $ 174,360 $ 157,341 $ 147,103 $ 124,765 Commercial real estate 351,058 361,567 342,673 349,840 326,951 Residential mortgage 53,321 50,719 46,269 43,510 43,192 Consumer 5,315 6,815 5,522 5,491 4,683 --------------------------------------------------------------------------------- Total Arizona $ 616,867 $ 593,461 $ 551,805 $ 545,944 $ 499,591 --------------------------------------------------------------------------------- Kansas / Missouri: Commercial $ 398,452 $ 350,325 $ 305,380 $ 252,345 $ 232,116 Commercial real estate 40,241 40,104 41,055 33,766 38,584 Residential mortgage 7,490 2,397 1,726 1,059 2,525 Consumer 2,468 1,665 559 403 222 --------------------------------------------------------------------------------- Total Kansas / Missouri $ 448,651 $ 394,491 $ 348,720 $ 287,573 $ 273,447 --------------------------------------------------------------------------------- Total BOK Financial loans $ 12,637,982 $ 12,387,660 $ 12,017,247 $ 11,751,164 $ 11,699,382 --------------------------------------------------------------------------------- </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 $5.6 billion and standby letters of credit which totaled $626 million at June 30, 2008. Loan commitments may be unconditional obligations to provide financing or conditional obligations that depend on the borrower's financial condition, collateral value or other factors. Standby letters of credit are unconditional commitments to guarantee the performance of our customer to a third party. Since some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily
24 represent future cash requirements. Standby letters of credit issued on behalf of customers whose loans are non-performing totaled approximately $14 million. The Company also has off-balance sheet commitments for residential mortgage loans sold with full or partial recourse. These loans consist of first lien, fixed rate residential mortgage loans originated under various community development programs and sold to U.S. government agencies. These loans were underwritten to standards approved by the agencies, including full documentation and focused primarily on first-time homebuyers. However, these loans have a higher risk of delinquency and losses given default than traditional residential mortgage loans. A separate recourse reserve is maintained as part of other liabilities. At June 30, 2008, the principal balance of loans sold subject to recourse obligations totaled $400 million. Approximately $15 million of these loans were originated in 2008, $107 million in 2007 and $89 million in 2006. Substantially all of these loans are to borrowers in our primary markets including $281 million to borrowers in Oklahoma, $45 million to borrowers in Arkansas, $23 million to borrowers in New Mexico, $19 million to borrowers in the Kansas City area and $17 million to borrowers in Texas. These programs to originate and sell mortgage loans with recourse were discontinued in the first quarter of 2008. We maintain a separate reserve for this off-balance commitment which totaled $7.5 million at June 30, 2008. Approximately 2.12% of the loans sold with recourse with an outstanding principal balance of $8.7 million were either delinquent more than 90 days, in bankruptcy or in foreclosure. The provision for credit losses on loans sold with recourse, which is included in mortgage banking costs, was $2.9 million for the second quarter of 2008. Net losses charged against the reserve totaled $1.3 million for the second quarter of 2008. Derivatives with Credit Risk The Company offers programs that permit its customers to hedge various risks, including fluctuations in energy, cattle and other agricultural product prices, interest rates and foreign exchange rates, or to take positions in derivative contracts. Each of these programs work essentially the same way. Derivative contracts are executed between the customers and BOK Financial. Offsetting contracts are executed between the Company and selected counterparties to minimize the risk to us of changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or a fee paid to us as compensation for administrative costs, credit risk and profit. Our customer energy hedging program is an integral part of our energy lending. This program allows customers that either produce, purchase, store or transport oil and natural gas to hedge their commodity price risk. We believe that a customer's prudent hedging strategy reduces our overall credit exposure. Generally, the fair value of customer contracts will increase or decrease in direct relation to the fair value of their oil or natural gas reserves or their obligations to acquire or deliver energy products. For example, the amount a customer owes us to settle an energy contract may increase as market prices for that commodity increase. The market price for the oil or natural gas owned by that customer will also increase as the market prices for that commodity increase. This relationship is one way our customer energy derivative contracts remain well-secured as energy prices change. The customer derivative programs create credit risk for potential amounts due to the Company from its customers and from the counterparties. Customer credit risk is monitored through existing credit policies and procedures. The effects of changes in commodity prices, interest rates or foreign exchange rates are evaluated across a range of possible options to determine the maximum exposure we are willing to have individually to any customer. Customers may also be required to provide margin collateral to further limit our credit risk. Counterparty credit risk is evaluated through existing policies and procedures. This evaluation considers the total relationship between BOK Financial and each of the counterparties. Individual limits are established by management, approved by Credit Administration and reviewed by the Asset / Liability Committee. Margin collateral is required if the exposure between the Company and any counterparty exceeds established limits. Based on declines in the counterparties' credit ratings, these limits are reduced and additional margin collateral is required. A deterioration of the credit standing of one or more of the customers or counterparties to these contracts may result in BOK Financial recognizing a loss as the fair value of the affected contracts may no longer move in tandem with the offsetting contracts. This occurs if the credit standing of the customer or counterparty deteriorated such that either the fair value of underlying collateral no longer supported the contract or the customer or counterparty's ability to provide margin collateral was impaired. At June 30, 2008, the fair value of derivative contracts with SemGroup was reduced to approximately $37 million and a charge of $61 million was recognized because of their bankruptcy filing on July 22, 2008 and the estimated value of the underlying collateral no longer supported the contracts. At June 30, 2008, the fair values of derivative contracts reported as assets under these programs totaled $1.4 billion. This included energy contracts with fair values of $1.3 billion, interest rate contracts with fair values of $73 million,
25 agricultural product contracts with fair values of $12 million and foreign exchange contracts with fair values of $18 million. The aggregate net fair values of derivative contracts reported as liabilities totaled $1.4 billion. As of January 1, 2008, the Company adopted FASB Staff Position FIN 39-1 which permits offsetting of cash collateral against the fair value of derivative instruments executed with the same counterparty under a master netting agreement. The aggregate net fair value of derivative liabilities at June 30, 2008 was $455 million after offsetting $990 million of cash collateral. Approximately $1.3 billion or 98% of the fair value of asset energy contracts was with customers. Approximately $989 million of the fair value of the asset energy contracts are with energy producing customers. Credit risk of these contracts is backed by energy production owned by these customers. Approximately $252 million or 20% of the fair value of energy contracts, including $37 million of contracts with SemGroup, are with customers which store or transport energy products. Contracts with the five largest non-energy producing customers, including SemGroup, total approximately $222 million. Credit risk of these contracts is backed by physical product and other collateral, including cash margin held by the Company and letters of credit issued by third-party banks for the benefit of the Company. The remaining 2% of the fair value of asset energy contracts was with dealer counterparties, consisting primarily of highly-rated financial institutions and energy companies. The maximum net exposure to any single customer totaled $129 million at June 30, 2008. At July 31, 2008, the fair value of derivative contracts reported as assets under our customer hedging programs totaled $748 million, down $631 million from $1.4 billion at June 30, 2008 due primarily to decreases in energy prices and contractual cash settlements. At July 31, 2008, the fair value of derivative liabilities totaled $843 million, down $602 million from $1.4 billion at June 30, 2008. The decrease in the fair value of derivative liabilities reduced our obligation to place cash margin collateral with our counterparties. Cash margin collateral placed by us to secure our obligations to dealer counterparties decreased $564 million during July to $426 million at July 31, 2008. The loss in fair value of SemGroup contracts, net of gains on amounts owed to energy dealers on related contracts, decreased $14.7 million during July 2008 due to decreases in energy prices. This reduction in net loss increases brokerage and trading revenue in the third quarter. However, the net loss on SemGroup contracts is subject to further changes during the third quarter until the settlement prices on open contracts become fixed. At July 31, 2008, approximately $160 million of the fair value of energy contracts are with customers which store or transport energy products. Contracts with the five largest non-energy producing customers, including SemGroup, total approximately $151 million. The maximum net exposure to any single customer totaled $95 million at July 31, 2008. Summary of Loan Loss Experience BOK Financial maintains separate reserves for loan losses and reserves for off-balance sheet credit risk. Combined, these reserves totaled $177 million or 1.41% of outstanding loans at June 30, 2008 and $156 million or 1.27% of outstanding loans at March 31, 2008. The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $154 million at June 30, 2008 compared with $137 million at March 31, 2008. These amounts represented 1.23% and 1.11% of outstanding loans, excluding loans held for sale, at June 30, 2008 and March 31, 2008, respectively. Losses on loans held for sale, principally mortgage loans accumulated for placement into security pools, are charged to earnings through adjustment in the carrying value. The reserve for loan losses also represented 96% of outstanding balance of nonperforming loans at June 30, 2008 compared to 123% at March 31, 2008. Net loans charged off during the second quarter of 2008 totaled $39.0 million compared to $8.9 million in the previous quarter and $5.8 million in the second quarter of 2007. Charge-offs of SemGroup loans were $26.0 million. The ratio of net loans charged off to average outstanding loans was 1.26% for the second quarter of 2008 compared with 0.29% in first quarter of 2008. Net commercial loan charge-offs, excluding SemGroup and net commercial real estate loan charge-offs increased $2.9 million and $924 thousand, respectively, compared with the previous quarter. Subsequent to June 30, 2008, the Company recovered $11.1 million on two loans charged off in previous years. These recoveries will increase the allowance for loan losses in the third quarter of 2008. Consumer loan net charge-offs, which includes indirect auto loan and deposit account overdraft losses, totaled $2.9 million for the second quarter of 2008, up $168 thousand over the previous quarter. Net charge-offs of indirect auto loans totaled $1.7 million for the second quarter of 2008 and $1.6 million for the first quarter of 2008. Net indirect auto loans charged off were $950 thousand in the Oklahoma market, $692 thousand in the Arkansas market and $56 thousand in the Texas market. Approximately 1.95% of the indirect automobile loan portfolio is past due 30 days or more, including 2.03% in Oklahoma, 2.03% in Arkansas and 1.27% in Texas. At March 31, 2008, approximately 1.96% of the indirect automobile loan portfolio was past due 30 days or more. The Company considers the credit risk from loan commitments and letters of credit in its evaluation of the adequacy of the reserve for loan losses. A separate reserve for off-balance sheet credit risk is maintained. Table 19 presents the trend of reserves for off-balance sheet credit losses and the relationship between the reserve and loan commitments. The
26 relationship between the combined reserve for credit losses and outstanding loans is also presented for comparison with peer banks and others who have not adopted the 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. <TABLE> - ------------------------------------------------------------------------------------------------------------------------------ Table 19 - Summary of Loan Loss Experience (In thousands) Three Months Ended ---------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, 2008 2008 2007 2007 2007 ---------------------------------------------------------------------------------- Reserve for loan losses: <S> <C> <C> <C> <C> <C> Beginning balance $ 136,584 $ 126,677 $ 121,932 $ 119,759 $ 114,371 Loans charged off: Commercial 33,502 4,244 2,731 3,072 5,454 Commercial real estate 2,572 1,602 1,369 339 57 Residential mortgage 1,068 814 891 394 300 Consumer 4,384 4,418 3,939 3,684 3,000 - ------------------------------------------------------------------------------------------------------------------------------ Total 41,526 11,078 8,930 7,489 8,811 - ------------------------------------------------------------------------------------------------------------------------------ Recoveries of loans previously charged off: Commercial 842 435 242 1,172 1,649 Commercial real estate 98 52 2 30 37 Residential mortgage 121 58 19 86 15 Consumer 1,474 1,676 1,321 1,332 1,338 - ------------------------------------------------------------------------------------------------------------------------------ Total 2,535 2,221 1,584 2,620 3,039 - ------------------------------------------------------------------------------------------------------------------------------ Net loans charged off 38,991 8,857 7,346 4,869 5,772 Provision for loan losses 56,425 18,764 12,091 7,104 7,570 Adjustments due to acquisitions - - - (62) 3,590 - ------------------------------------------------------------------------------------------------------------------------------ Ending balance $ 154,018 $ 136,584 $ 126,677 $ 121,932 $ 119,759 - ------------------------------------------------------------------------------------------------------------------------------ Reserve for off-balance sheet credit losses: Beginning balance $ 19,660 $ 20,853 $ 19,744 $ 19,647 $ 19,397 Provision for off-balance sheet credit losses 2,885 (1,193) 1,109 97 250 - ------------------------------------------------------------------------------------------------------------------------------ Ending balance $ 22,545 $ 19,660 $ 20,853 $ 19,744 $ 19,647 - ------------------------------------------------------------------------------------------------------------------------------ Total provision for credit losses $ 59,310 $ 17,571 $ 13,200 $ 7,201 $ 7,820 - ------------------------------------------------------------------------------------------------------------------------------ Reserve for loan losses to loans outstanding at period-end (1) 1.23% 1.11% 1.06% 1.04% 1.03% Net charge-offs (annualized) to average loans (1) 1.26 0.29 0.25 0.17 0.21 Total provision for credit losses (annualized) to average loans (1) 1.91 0.58 0.45 0.25 0.28 Recoveries to gross charge-offs 6.10 20.05 17.74 34.98 34.49 Reserve for loan losses as a multiple of net charge-offs (annualized) 0.99x 3.86x 4.31x 6.26x 5.19x Reserve for off-balance sheet credit losses to off-balance sheet credit commitments 0.36% 0.32% 0.35% 0.33% 0.33% Combined reserves for credit losses to loans outstanding at period-end (1) 1.41 1.27 1.24 1.21 1.20 - ------------------------------------------------------------------------------------------------------------------------------ (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, 2008, specific impairment reserves totaled $11.0 million on total impaired loans of $139 million. Specific impairment reserves were $5.2 million on total impaired loans of $90 million at March 31, 2008. 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 range of nonspecific reserves for general economic factors includes their effect on our commercial, residential mortgage and consumer loan portfolios. Nonspecific reserves attributed to general economic conditions increased in the second quarter of 2008. Weakness in the economy became more apparent due to rising materials, food and energy prices along with continued weakness in residential real estate markets. The provision for credit losses totaled $59.3 million for the second quarter of 2008, $17.6 million for the first quarter of 2008 and $7.8 million for the second quarter of 2007. The second quarter of 2008 provision included $26.3 million directly related to the Company's loans and loan commitments to SemGroup. Other factors considered in determining
27 the provision for credit losses included trends in net losses and nonperforming loans, the application of statistical migration factors to loan growth and concentrations in commercial real estate and residential homebuilder loans. In addition, the outstanding balances of criticized and classified loans and potential problem loans increased. Nonperforming Assets Information regarding nonperforming assets, which totaled $181 million at June 30, 2008 and $126 million at March 31, 2008, is presented in Table 20. Nonperforming assets included nonaccrual and renegotiated loans and excluded loans 90 days or more past due but still accruing interest. Total nonperforming assets were 1.45% of period-end loans and repossessed assets at June 30, 2008, up from 1.02% at March 31, 2008. At June 30, 2008, nonperforming assets excluded $47 million of amounts due from SemGroup under derivative contracts and outstanding letters of credit that have not been funded. Amounts due under the derivative contracts will be reclassified as loans and reported as nonperforming if not paid on their contractual settlement dates, primarily in the third quarter of 2008. If all amounts due from SemGroup had been reported as loans at June 30, 2008, nonperforming assets and nonperforming assets as a percent of period-end loans and repossessed assets would have been $229 million and 1.82%, respectively. Nonaccrual loans totaled $149 million at June 30, 2008 and $99 million at March 31, 2008. Newly identified nonaccrual loans totaled $100 million during the second quarter, including $38 million of loans to SemGroup. Newly identified nonaccrual loans also included $24 million of loans to residential homebuilders and $12 million to a mortgage lender. Nonaccrual loans decreased $33 million for loans charged off and foreclosed, including $26 million of loans to SemGroup, and $16 million for cash payments received. The net increase in nonaccrual loans to SemGroup during the second quarter of 2008 totaled $12 million. Approximately $12 million of nonaccrual loans are subject to the First United Bank sellers' escrow. Nonaccrual commercial loans totaled $70 million at June 30, 2008 and $42 million at March 31, 2008. In addition to $12 million of nonaccrual loans to SemGroup and a $12 million nonaccrual loan to a mortgage lender, nonaccrual commercial loans consisted primarily of loans in the services and manufacturing sectors of the portfolio. None of the other nonaccrual commercial loans exceeded $10 million. Approximately $40 million of nonaccrual commercial loans are to borrowers in the Oklahoma market, $6 million are in the Texas market, $17 million are in the Colorado market and $4 million are in the New Mexico market. Nonaccrual commercial real estate loans totaled $60 million at June 30, 2008 and $40 million at March 31, 2008. Approximately $45 million are loans secured by land and residential lots and construction, including $30 million in Arizona ($7 million in Tucson and $23 million in Phoenix), $6 million in Texas and $5 million in Colorado. Other significant nonaccrual commercial real estate loans included $5.3 million of retail facilities in New Mexico. In addition to nonaccrual loans, nonperforming assets included $12 million of renegotiated loans and $21 million of real estate and other repossessed assets. Renegotiated loans consisted of residential mortgage loans and indirect automobile loans whose original terms have been modified. Approximately $8.6 million of renegotiated loans are residential mortgage loans guaranteed by agencies of the U.S. government. Real estate and other repossessed assets included $8 million of single family residential properties, $5 million of land and single family lots and construction, $3 million of manufacturing facilities and $2 million of automobiles. The geographic distribution of real estate and other repossessed assets included $6 million in Oklahoma, $3 million in New Mexico, $3 million in Colorado, $4 million in Arkansas, $3 million in Texas and $2 million in Arizona. Approximately $1.7 million of real estate and other repossessed assets are subject to the First United Bank sellers' escrow.
28 <TABLE> - ---------------------------------------------------------------------------------------------------------------------- Table 20 - Nonperforming Assets (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2008 2008 2007 2007 2007 ----------------------------------------------------------------------- Nonaccrual loans: <S> <C> <C> <C> <C> <C> Commercial $ 69,679 $ 41,966 $ 42,981 $ 21,168 $ 20,456 Commercial real estate 60,456 40,399 25,319 11,355 19,470 Residential mortgage 17,861 15,960 15,272 11,469 11,418 Consumer 611 812 718 705 675 - ---------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 148,607 99,137 84,290 44,697 52,019 Renegotiated loans (3) 11,840 11,850 10,394 10,752 10,113 - ---------------------------------------------------------------------------------------------------------------------- Total nonperforming loans 160,447 110,987 94,684 55,449 62,132 Other nonperforming assets 21,025 15,112 9,475 10,627 7,664 - ---------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 181,472 $ 126,099 $ 104,159 $ 66,076 $ 69,796 - ---------------------------------------------------------------------------------------------------------------------- Nonaccrual loans by principal market: Oklahoma $ 57,155 $ 52,211 $ 47,977 $ 24,628 $ 26,529 Texas 20,860 8,157 4,983 4,921 6,176 New Mexico 9,838 7,497 11,118 6,542 7,025 Arkansas 2,924 2,866 1,635 843 816 Colorado (4) 23,812 8,101 9,222 5,688 8,067 Arizona 33,482 18,811 9,355 2,075 3,406 Kansas / Missouri 536 1,494 - - - - ---------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans $ 148,607 $ 99,137 $ 84,290 $ 44,697 $ 52,019 - ---------------------------------------------------------------------------------------------------------------------- Nonaccrual loans by loan portfolio sector: Commercial: Energy $ 12,342 $ 475 $ 529 $ 536 $ 542 Manufacturing 6,731 9,274 9,915 8,858 8,705 Wholesale / retail 3,735 3,868 3,792 3,850 2,838 Agriculture 811 1,848 380 540 769 Services 30,080 23,849 25,468 5,987 6,843 Healthcare 3,791 2,079 2,301 963 509 Other 12,189 573 596 434 250 - ---------------------------------------------------------------------------------------------------------------------- Total commercial 69,679 41,966 42,981 21,168 20,456 Commercial real estate: Land development and construction 45,291 29,439 13,466 7,289 9,333 Multifamily 896 1,906 3,998 1,238 2,233 Other commercial real estate 14,269 9,054 7,855 2,828 7,904 - ---------------------------------------------------------------------------------------------------------------------- Total commercial real estate 60,456 40,399 25,319 11,355 19,470 Residential mortgage 17,861 15,960 15,272 11,469 11,418 Consumer 611 812 718 705 675 - ---------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans $ 148,607 $ 99,137 $ 84,290 $ 44,697 $ 52,019 - ---------------------------------------------------------------------------------------------------------------------- Ratios: Reserve for loan losses to nonperforming loans 95.99% 123.06% 133.79% 219.90% 192.75% Nonperforming loans to period-end loans (1) 1.28 0.90 0.79 0.47 0.54 - ---------------------------------------------------------------------------------------------------------------------- Loans past due (90 days) (2) $ 10,683 $ 11,266 $ 5,575 $ 3,986 $ 4,215 - ---------------------------------------------------------------------------------------------------------------------- (1) Excludes residential mortgage loans held for sale. (2) Includes residential mortgages guaranteed by agencies of the U.S. Government. $ 1,015 $ 788 $ 1,017 $ 1,806 $ 2,028 (3) Includes residential mortgages guaranteed by agencies of the U.S. Government. These loans have been modified to extend payment terms and/or reduce interest 8,638 8,386 7,550 7,083 6,430 rates to current market. (4) Includes loans subject to First United Bank sellers escrow. 11,973 8,101 8,412 4,677 6,944 - ---------------------------------------------------------------------------------------------------------------------- </TABLE> The loan review process also identified loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrower or the value of the collateral. Because the borrowers are still performing in accordance with the original terms of the loan agreements, and no loss of principal or interest is anticipated, these loans were not included in Nonperforming Assets. Known information does, however, cause management concern as to the borrowers' ability to comply with current repayment terms. These potential problem loans totaled $40 million at June 30, 2008 and $31 million at March 31, 2008. The current composition of potential problem loans by primary industry included real estate - $16 million, healthcare - $9 million and services - $10 million. Potential problem real estate loans consisted primarily of loans to residential builders in the Arizona market of $12 million.
29 Deposits Deposit accounts represent our largest funding source. Average deposits represented approximately 62% of total liabilities and capital for the second quarter of 2008, down from 67% for the second quarter of 2007 and 64% for the first quarter of 2008. The decrease in average deposits relative to other funding sources is due largely to the structuring of our balance sheet to be relatively neutral to changes in interest rates. Other borrowed funds increased to fund an increase in average securities to implement this interest rate risk management strategy and an increase in margin assets. In addition, competition has increased the cost of deposits compared to other funding sources in many of our markets. Average deposits totaled $13.3 billion for the second quarter of 2008, a $915 million or 7% increase over the second quarter of 2007. Average deposits increased $198 million or 6% annualized compared with the first quarter of 2008. Interest-bearing transaction deposit accounts continued to grow in the second quarter of 2008, up $1.3 billion or 20% over the second quarter of 2007 and $244 million or 13% annualized over the first quarter of 2008. Time deposits decreased $431 million or 10% from the second quarter of 2007 and $149 million or 14% annualized from the first quarter of 2008. Average demand deposits increased $41 million or 3% over the second quarter of 2007 and $100 million over the first quarter of 2008. Core deposits, which we define as deposits of less than $100,000, excluding public funds and brokered deposits, averaged $6.5 billion for the second quarter of 2008, $6.4 billion for the second quarter of 2007 and $6.5 billion for the first quarter of 2008. Accounts with balances in excess of $100,000 averaged $5.5 billion for the second quarter of 2008, $4.7 billion for the second quarter of 2007 and $5.4 billion, for the first quarter of 2008. Average commercial banking deposits totaled $4.5 billion for the second quarter of 2008, up $297 million or 7% over the second quarter of last year. The average balance of commercial banking deposits for the second quarter of 2007 was $4.3 billion. Commercial deposit growth was primarily centered in Oklahoma and Texas. Consumer deposits averaged $5.6 billion for the second quarter of 2008, up $312 million or 6% over 2007. Average consumer deposit account balances increased $136 million or 5% in Oklahoma and $169 million or 18% in Texas, including deposits acquired with Worth National Bank in the second quarter of 2007. Wealth management deposit accounts averaged $2.0 billion for the second quarter of 2008, a $416 million or 27% increase over 2007. Approximately $294 million of the increase was in the Oklahoma market. The remaining increase was primarily in Colorado. The distribution of deposit accounts among our principal markets is shown in Table 21.
30 <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 21 - Deposits by Principal Market Area (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2008 2008 2007 2007 2007 --------------------------------------------------------------------------------- Oklahoma: <S> <C> <C> <C> <C> <C> Demand $ 1,003,516 $ 999,214 $ 936,160 $ 717,478 $ 876,671 Interest-bearing: Transaction 4,449,617 4,124,046 3,935,909 3,473,547 3,470,896 Savings 90,100 88,141 80,467 83,139 88,133 Time 2,672,401 2,230,110 2,426,822 2,725,992 2,798,719 --------------------------------------------------------------------------------- Total interest-bearing 7,212,118 6,442,297 6,443,198 6,282,678 6,357,748 --------------------------------------------------------------------------------- Total Oklahoma $ 8,215,634 $ 7,441,511 $ 7,379,358 $ 7,000,156 $ 7,234,419 --------------------------------------------------------------------------------- Texas: Demand $ 734,730 $ 651,781 $ 738,105 $ 597,534 $ 626,193 Interest-bearing: Transaction 2,025,052 1,996,784 2,050,872 1,978,920 2,019,311 Savings 33,207 32,191 34,618 35,310 36,989 Time 723,146 759,892 800,460 893,018 804,877 --------------------------------------------------------------------------------- Total interest-bearing 2,781,405 2,788,867 2,885,950 2,907,248 2,861,177 --------------------------------------------------------------------------------- Total Texas $ 3,516,135 $ 3,440,648 $ 3,624,055 $ 3,504,782 $ 3,487,370 --------------------------------------------------------------------------------- New Mexico: Demand $ 99,605 $ 103,329 $ 93,923 $ 109,854 $ 113,579 Interest-bearing: Transaction 486,623 492,096 490,227 479,204 521,154 Savings 16,432 16,141 15,146 16,437 17,662 Time 445,505 455,861 486,868 512,497 500,443 --------------------------------------------------------------------------------- Total interest-bearing 948,560 964,098 992,241 1,008,138 1,039,259 --------------------------------------------------------------------------------- Total New Mexico $ 1,048,165 $ 1,067,427 $ 1,086,164 $ 1,117,992 $ 1,152,838 --------------------------------------------------------------------------------- Arkansas: Demand $ 15,322 $ 16,661 $ 9,755 $ 10,225 $ 11,030 Interest-bearing: Transaction 30,344 25,923 22,519 22,401 22,096 Savings 895 945 883 993 1,011 Time 39,305 39,803 40,692 43,401 46,597 --------------------------------------------------------------------------------- Total interest-bearing 70,544 66,671 64,094 66,795 69,704 --------------------------------------------------------------------------------- Total Arkansas $ 85,866 $ 83,332 $ 73,849 $ 77,020 $ 80,734 --------------------------------------------------------------------------------- Colorado: Demand $ 65,647 $ 51,901 $ 60,250 $ 42,194 $ 42,006 Interest-bearing: Transaction 551,310 577,454 504,116 432,188 426,031 Savings 20,245 22,233 23,806 27,143 35,152 Time 423,014 455,262 539,523 608,962 549,676 --------------------------------------------------------------------------------- Total interest-bearing 994,569 1,054,949 1,067,445 1,068,293 1,010,859 --------------------------------------------------------------------------------- Total Colorado $ 1,060,216 $ 1,106,850 $ 1,127,695 $ 1,110,487 $ 1,052,865 --------------------------------------------------------------------------------- Arizona: Demand $ 28,196 $ 28,592 $ 29,807 $ 25,295 $ 31,196 Interest-bearing: Transaction 94,733 102,564 82,682 98,611 74,892 Savings 1,233 878 1,435 1,269 1,233 Time 6,364 8,395 11,603 13,314 11,563 --------------------------------------------------------------------------------- Total interest-bearing 102,330 111,837 95,720 113,194 87,688 --------------------------------------------------------------------------------- Total Arizona $ 130,526 $ 140,429 $ 125,527 $ 138,489 $ 118,884 --------------------------------------------------------------------------------- Kansas / Missouri: Demand $ 4,923 $ 5,341 $ 7,946 $ 7,849 $ 1,081 Interest-bearing: Transaction 12,576 9,993 10,014 3,169 1,356 Savings 26 92 13 15 12 Time 51,649 33,837 24,670 23,119 32,695 --------------------------------------------------------------------------------- Total interest-bearing 64,251 43,922 34,697 26,303 34,063 --------------------------------------------------------------------------------- Total Kansas / Missouri $ 69,174 $ 49,263 $ 42,643 $ 34,152 $ 35,144 --------------------------------------------------------------------------------- Total BOK Financial deposits $ 14,125,716 $ 13,329,460 $ 13,459,291 $ 12,983,078 $ 13,162,254 --------------------------------------------------------------------------------- </TABLE>
31 Borrowings and Capital At June 30, 2008, BOK Financial (parent company) had a $188 million unsecured revolving line of credit with certain commercial banks that matures in December 2010. The outstanding principal balance of this credit agreement was $50 million. Interest is based upon a base rate or LIBOR plus a defined margin determined by the Company's credit rating. This margin ranged from 0.375% to 1.125% or a base rate. At June 30, 2008, the margin applicable to borrowings against this line was 0.375%. The base rate was defined as the greater of the daily federal funds rate plus 0.5% or the SunTrust Bank prime rate. Interest was generally paid monthly. Facility fees were 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 included 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 required BOK Financial and subsidiary banks to maintain minimum capital levels and established maximum nonperforming asset levels. BOK Financial met all of the restrictive covenants at June 30, 2008. Subsequent to June 30, all amounts due under this credit agreement were paid and the agreement was terminated at the request of the Company. On July 21, 2008, the Company entered into a $188 million, unsecured revolving credit agreement with George B. Kaiser, its Chairman and principal shareholder. Interest on the outstanding balance is based on one-month LIBOR plus 125 basis points and is payable quarterly. Additional interest in the form of a facility fee is paid quarterly on the unused portion of the commitment at 25 basis points. This agreement has no restrictive covenants, which provides greater flexibility to fund the needs of BOK Financial and its subsidiaries. The primary source of liquidity for BOK Financial is dividends from subsidiary banks, which are limited by various banking regulations to net profits, as defined, for the preceding two years. Dividends are further restricted by minimum capital requirements. Based on the most restrictive limitations, the subsidiary banks could declare up to $67 million of dividends without regulatory approval. Management has developed and the Board of Directors has approved an internal capital policy that is more restrictive than the regulatory capital standards. The subsidiary banks could declare dividends of up to $18 million under this policy. Equity capital for BOK Financial decreased $50.2 million to $1.9 billion during the second quarter of 2008. Cumulative retained earnings decreased $16.4 million due to a $1.2 million net loss and $15.2 million of cash dividends paid. Accumulated other comprehensive losses increased $38.7 million during the second quarter of 2008 due primarily to an increase in net unrealized losses on available for sale securities. Employee stock option transactions increased equity capital $4.8 million. 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 program may be suspended or discontinued at any time without prior notice. Since this program began, 709,073 shares have been repurchased by the Company for $35.4 million. No shares were repurchased in the second quarter of 2008. In addition, the Company initiated a 10b5-1 stock repurchase plan in the second quarter of 2008. This plan has subsequently been terminated. BOK Financial and subsidiary banks are subject to various capital requirements administered by federal agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that could have a material impact on operations. These capital requirements include quantitative measures of assets, liabilities, and off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulators. For a banking institution to qualify as well capitalized, its Tier 1, Total and Leverage capital ratios must be at least 6%, 10% and 5%, respectively. All of the Company's banking subsidiaries exceeded the regulatory definitions of well capitalized at June 30, 2008, except Bank of Arizona. The total capital ratio for Bank of Arizona at June 30, 2008 was 9.83%. Subsequently, $4 million of additional capital was contributed, which brought its total capital ratio to 11.48%. The capital ratios for BOK Financial on a consolidated basis are presented in Table 22.
32 <TABLE> - -------------------------------------------------------------------------------------------------------------------- Table 22 - Capital Ratios June 30, March 31, Dec. 31, Sept. 30, June 30, 2008 2008 2007 2007 2007 -------------------------------------------------------------------------- Average shareholders' equity <S> <C> <C> <C> <C> <C> to average assets 9.19% 9.69% 9.48% 9.42% 9.65% Tangible capital ratio 7.15% 7.83% 7.72% 7.67% 7.50% Risk-based capital: Tier 1 capital 8.86 9.38 9.38 9.30 9.12 Total capital 11.90 12.48 12.54 12.53 12.36 Leverage 7.95 8.23 8.20 8.17 8.30 </TABLE> Off-Balance Sheet Arrangements During the third quarter of 2007, Bank of Oklahoma agreed to guarantee rents totaling $28.4 million over 10 years to the City of Tulsa ("City") as owner of a building immediately adjacent to the bank's main office. These rents are due for space rented by third-party tenants in the building as of the date of the agreement. All guaranteed space has been rented since the date of the agreement. At June 30, 2008, rent payments of $26.7 million remain subject to this guaranty agreement. In return for this guarantee, Bank of Oklahoma will receive 80% of net rent as defined in an agreement with the City over the next 10 years from space in the same building that was vacant as of the date of the agreement. The maximum amount that Bank of Oklahoma may receive under this agreement is $4.5 million. The fair value of this agreement at inception was zero and no asset or liability is currently recognized in the Company's financial statements. Market Risk Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange prices, commodity prices or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading. Market risk excludes changes in fair value due to credit of the individual issuers of financial instruments. BOK Financial is subject to market risk primarily through the effect of changes in interest rates on both its assets held for purposes other than trading and trading assets. The effects of other changes, such as foreign exchange rates, commodity prices or equity prices do not pose significant market risk to BOK Financial. BOK Financial has no material investments in assets that are affected by changes in foreign exchange rates or equity prices. Energy and agricultural product derivative contracts, which are affected by changes in commodity prices, are matched against offsetting contracts as previously discussed. Responsibility for managing market risk rests with the Asset / Liability Committee that operates under policy guidelines established by the Board of Directors. The acceptable negative variation in net interest revenue, net income or economic value of equity due to a specified basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 10%. These guidelines also set maximum levels for short-term borrowings, short-term assets, public funds, and brokered deposits, and establish minimum levels for un-pledged assets, among other things. Compliance with these guidelines is reviewed monthly. Interest Rate Risk - Other than Trading As previously noted in the Net Interest Revenue section of this report, management has implemented strategies to manage the Company's balance sheet to be relatively neutral to changes in interest rates over a twelve month period. The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model. BOK Financial performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions, on net interest revenue, net income and economic value of equity. A simulation model is used to estimate the effect of changes in interest rates over the next twelve and 24 months based on eight interest rate scenarios. Two specified interest rate scenarios are used to evaluate interest rate risk against policy guidelines. The first assumes a sustained parallel 200 basis point increase and the second assumes a sustained parallel 100 basis point decrease in interest rates. Management historically evaluated interest rate sensitivity for a sustained 200 basis point decrease in interest rates. However, the results of a 200 basis point decrease in interest rates in the current low-rate environment are not meaningful. The Company also performs a sensitivity analysis based on a "most likely" interest rate scenario, which includes non-parallel shifts in interest rates. An independent source is used to determine the most likely interest rate scenario. The Company's primary interest rate exposures included the Federal Funds rate, which affects short-term borrowings,
33 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 23 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 re-pricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest revenue, net income or economic value of equity or precisely predict the impact of higher or lower interest rates on net interest revenue, net income or economic value of equity. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, market conditions and management strategies, among other factors. <TABLE> Table 23 - Interest Rate Sensitivity (Dollars in Thousands) 200 bp Increase 100 bp Decrease Most Likely -------------------------- --------------------------- ------------------------- 2008 2007 2008 2007 2008 2007 ------------- ------------ ------------ -------------- ------------ ------------ Anticipated impact over the next twelve months on <S> <C> <C> <C> <C> <C> net interest revenue $(17,132) $ (3,335) $ 7,392 *** $ (1,386) $ 567 (1.1)% (0.6)% 0.4% *** (0.2)% 0.1% - -------------------------------- --------------- ------------ --- ----------- -------------- -- ----------- ------------ ***A 100 basis point decrease was not computed in 2007. A 200 basis point decrease in interest rates was expected to increase net interest revenue by $1.4 million or 0.2%. </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. 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, 2008, the VAR was $1.2 million. The greatest value at risk during the second quarter of 2008 was $1.8 million.
34 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.
35 <TABLE> - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Consolidated Statements of Earnings (Unaudited) (In Thousands Except Share and Per Share Data) Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 ----------- --- -------------- ---- -------------- ---- -------------- Interest Revenue <S> <C> <C> <C> <C> Loans $ 180,177 $ 224,215 $ 379,561 $ 437,040 Taxable securities 75,959 60,223 148,014 117,817 Tax-exempt securities 2,656 2,922 5,341 5,950 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Total securities 78,615 63,145 153,355 123,767 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Trading securities 939 401 2,016 865 Funds sold and resell agreements 355 924 1,195 1,589 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Total interest revenue 260,086 288,685 536,127 563,261 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Interest Expense Deposits 66,114 102,059 154,261 199,931 Borrowed funds 29,212 44,889 64,579 87,552 Subordinated debentures 5,821 6,824 11,220 12,027 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Total interest expense 101,147 153,772 230,060 299,510 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Net Interest Revenue 158,939 134,913 306,067 263,751 Provision for Credit Losses 59,310 7,820 76,881 14,320 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Net Interest Revenue After Provision for Credit Losses 99,629 127,093 229,186 249,431 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Other Operating Revenue Brokerage and trading revenue (35,462) 13,317 (11,549) 26,599 Transaction card revenue 25,786 22,917 49,344 43,101 Trust fees and commissions 20,940 19,458 41,736 38,453 Deposit service charges and fees 30,199 26,797 57,885 51,395 Mortgage banking revenue 7,198 4,034 14,415 9,554 Bank-owned life insurance 2,658 2,525 5,170 4,924 Margin asset fees 4,460 969 6,427 1,727 Other revenue 7,824 6,947 14,039 12,798 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Total fees and commissions 63,603 96,964 177,467 188,551 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Gain (loss) on sales of assets 216 (348) 181 346 Loss on securities, net (5,242) (6,262) (622) (6,825) Loss on derivatives, net (2,961) (183) (848) (112) - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Total other operating revenue 55,616 90,171 176,178 181,960 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Other Operating Expense Personnel 89,597 80,054 177,703 158,382 Business promotion 5,777 5,391 10,416 9,961 Professional fees and services 6,973 5,963 12,621 10,837 Net occupancy and equipment 15,100 13,860 30,161 27,066 Insurance 2,626 693 6,336 1,415 Data processing and communications 19,523 18,402 38,416 35,376 Printing, postage and supplies 4,156 4,179 8,575 8,148 Net losses and operating expenses of repossessed assets (229) 192 149 399 Amortization of intangible assets 1,885 1,443 3,810 2,579 Mortgage banking costs 6,054 2,485 11,734 5,009 Change in fair value of mortgage servicing rights 767 (5,061) 2,529 (3,897) Visa retrospective responsibility obligation - - (2,767) - Other expense 7,039 6,530 12,989 10,967 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Total other operating expense 159,268 134,131 312,672 266,242 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Income (Loss) Before Taxes (4,023) 83,133 92,692 165,149 Federal and state income tax (2,862) 29,270 31,588 58,493 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Net Income (Loss) $ (1,161) $ 53,863 $ 61,104 $ 106,656 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Earnings Per Share: - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Basic $ (0.02) $ 0.80 $ 0.91 $ 1.59 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Diluted $ (0.02) $ 0.80 $ 0.90 $ 1.58 - ------------------------------------------------------ ---- ----------- --- -------------- ---- -------------- ---- -------------- Average Shares Used in Computation: - ------------------------------------------------------ --- ------------ --- -------------- ---- -------------- ---- -------------- Basic 67,452,181 67,116,902 67,246,250 67,099,752 - ------------------------------------------------------ --- ------------ --- -------------- ---- -------------- ---- -------------- Diluted 67,452,181 67,606,330 67,610,014 67,589,146 - ------------------------------------------------------ --- ------------ --- -------------- ---- -------------- ---- -------------- Dividends Declared per Share $ 0.225 $ 0.20 $ 0.425 $ 0.35 - ------------------------------------------------------ --- ------------ --- -------------- ---- -------------- ---- -------------- See accompanying notes to consolidated financial statements. </TABLE>
36 <TABLE> - -------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets (In Thousands Except Share Data) June 30, December 31, June 30, 2008 2007 2007 -------------------------------------------------- (Unaudited) (Footnote 1) (Unaudited) Assets <S> <C> <C> <C> Cash and due from banks $ 712,324 $ 717,259 $ 596,827 Funds sold and resell agreements 52,005 173,154 50,635 Trading securities 62,532 45,724 30,977 Securities: Available for sale 5,439,524 5,323,001 4,699,735 Available for sale securities pledged to creditors 487,078 327,539 339,231 Investment (fair value: June 30, 2008 - $242,828; December 31, 2007 - $248,788; June 30, 2007 - $257,455) 245,754 247,949 265,507 Mortgage trading securities 98,269 154,701 133,967 - -------------------------------------------------------------------------------------------------------------------- Total securities 6,270,625 6,053,190 5,438,440 - -------------------------------------------------------------------------------------------------------------------- Loans 12,637,982 12,017,247 11,699,382 Less reserve for loan losses (154,018) (126,677) (119,759) - -------------------------------------------------------------------------------------------------------------------- Loans, net of reserve 12,483,964 11,890,570 11,579,623 - -------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 266,435 258,786 241,579 Accrued revenue receivable 159,066 138,243 160,595 Intangible assets, net 365,060 368,353 377,957 Mortgage servicing rights, net 72,103 70,009 74,067 Real estate and other repossessed assets 21,025 9,475 7,664 Bankers' acceptances 16,031 1,780 31,702 Derivative contracts 1,380,876 502,446 264,845 Cash surrender value of bank-owned life insurance 231,527 229,540 224,250 Receivable on unsettled securities trades 39,052 10,071 - Other assets 303,312 199,101 202,075 - -------------------------------------------------------------------------------------------------------------------- Total assets $ 22,435,937 $ 20,667,701 $ 19,281,236 - -------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Noninterest-bearing demand deposits $ 1,951,939 $ 1,875,946 $ 1,701,756 Interest-bearing deposits: Transaction 7,650,255 7,096,339 6,508,677 Savings 162,138 156,368 207,251 Time (includes $103,678 at fair value at June 30, 2008) 4,361,384 4,330,638 4,744,570 - -------------------------------------------------------------------------------------------------------------------- Total deposits 14,125,716 13,459,291 13,162,254 - -------------------------------------------------------------------------------------------------------------------- Funds purchased and repurchase agreements 3,101,425 3,225,131 2,317,846 Other borrowings 2,153,853 1,027,564 888,362 Subordinated debentures 398,340 398,273 547,896 Accrued interest, taxes and expense 81,507 124,029 104,224 Bankers' acceptances 16,031 1,780 31,702 Due on unsettled security transactions - - 71,838 Derivative contracts 456,379 341,677 217,140 Other liabilities 160,310 154,572 144,066 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 20,493,561 18,732,317 17,485,328 - -------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: June 30, 2008 - 69,811,531; December 31, 2007 - 69,465,154; June 30, 2007 - 69,025,829) 4 4 4 Capital surplus 738,403 722,088 703,683 Retained earnings 1,365,456 1,332,954 1,248,829 Treasury stock (shares at cost: June 30, 2008 - 2,323,143; December 31, 2007 - 2,158,774; June 30, 2007 - 1,745,722) (97,109) (88,428) (67,081) Accumulated other comprehensive loss (64,378) (31,234) (89,527) - -------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,942,376 1,935,384 1,795,908 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 22,435,937 $ 20,667,701 $ 19,281,236 - -------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. </TABLE>
37 <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> 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) tax (1) ---------- 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 - --------------------------------------------------------------------------------------------------------- Balances at December 31, 2007 69,465 $ 4 $ (31,234) $ 722,088 $1,332,954 2,159 $(88,428) $1,935,384 Effect of implementing FAS 159, net of income taxes - - - - 62 - - 62 Comprehensive income: Net income - - - - 61,104 - - 61,104 Other comprehensive income, net of tax (1) - - (33,144) - - - - (33,144) income, net of ----------- Comprehensive income 27,960 ----------- Treasury stock purchase - - - - - 91 (4,655) (4,655) Exercise of stock options 347 - - 10,661 - 73 (4,026) 6,635 Tax benefit on exercise of stock options - - - 1,132 - - - 1,132 Stock-based compensation - - - 4,522 - - - 4,522 Cash dividends on common stock - - - - (28,664) - - (28,664) - --------------------------------------------------------------------------------------------------------- Balances at June 30, 2008 69,812 $ 4 $ (64,378) $ 738,403 $1,365,456 2,323 $(97,109) $1,942,376 - --------------------------------------------------------------------------------------------------------- </TABLE> (1) June 30, 2008 June 30, 2007 ------------- ------------- Changes in other comprehensive loss: Unrealized losses on securities $ (120,274) $ (32,306) Unrealized gains on cash flow hedges 184 658 Tax benefit (expense) on unrealized gains (losses) 85,433 11,143 Reclassification adjustment for losses realized and included in net income 5,242 6,825 Reclassification adjustment for tax benefit on realized losses (3,729) (2,403) ------------------------------------ Net change in other comprehensive loss $ (33,144) $ (16,083) ------------------------------------ See accompanying notes to consolidated financial statements.
38 <TABLE> - --------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flows (Unaudited) (In Thousands) Six Months Ended June 30, --------------------------------------------- 2008 2007 --------------------------------------------- Cash Flows From Operating Activities: <S> <C> <C> Net income $ 61,104 $ 106,656 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 76,881 14,320 Change in fair value of mortgage servicing rights 2,529 (3,897) Unrealized losses (gains) from derivatives 44,815 (3,332) Tax benefit on exercise of stock options (1,132) (1,423) Change in bank-owned life insurance (1,987) (12,020) Stock-based compensation 5,306 4,936 Depreciation and amortization 26,669 18,448 Net (accretion) amortization of securities discounts and premiums (7,623) 474 Net (gain) loss on sale of assets (5,537) 660 Mortgage loans originated for resale (312,668) (242,089) Proceeds from sale of mortgage loans held for resale 267,175 227,007 Change in trading securities, including mortgage trading securities 40,269 35,683 Change in accrued revenue receivable (20,823) (53,071) Change in other assets (51,427) 31,918 Change in accrued interest, taxes and expense (42,639) (528) Change in other liabilities (565) (53,114) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 80,347 70,628 - --------------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Proceeds from maturities of investment securities 33,792 39,775 Proceeds from maturities of available for sale securities 541,500 595,664 Purchases of investment securities (31,737) (56,670) Purchases of available for sale securities (2,335,268) (1,483,082) Proceeds from sales of available for sale securities 1,470,701 495,026 Loans originated or acquired net of principal collected (634,746) (575,558) Proceeds from derivative asset contracts (77,563) (21,391) Net change in other investment assets 148 11,694 Proceeds from disposition of assets 34,283 45,593 Purchases of assets (40,921) (37,503) Cash and equivalents of subsidiaries and branches acquired and sold, net - (47,258) - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (1,039,811) (1,033,710) - --------------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net change in demand deposits, transaction deposits and savings accounts 635,679 149,644 Net change in time deposits 31,347 124,439 Net change in other borrowings 1,002,583 254,606 Payments on derivative liability contracts 86,302 27,503 Net change in derivative margin accounts (867,998) 62,221 Change in amount receivable (due) on unsettled security transactions (28,981) (35,582) Issuance of common and treasury stock, net 6,635 6,102 Issuance of subordinated debenture, net - 248,618 Tax benefit on exercise of stock options 1,132 1,423 Repurchase of common stock (4,655) (2,223) Dividends paid (28,664) (23,533) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 833,380 813,218 - --------------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (126,084) (149,864) Cash and cash equivalents at beginning of period 890,413 797,326 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 764,329 $ 647,462 - --------------------------------------------------------------------------------------------------------------------------- Cash paid for interest $ 241,655 $ 294,475 - --------------------------------------------------------------------------------------------------------------------------- Cash paid for taxes $ 72,561 $ 53,590 - --------------------------------------------------------------------------------------------------------------------------- Net loans transferred to repossessed real estate and other assets $ 15,426 $ 4,082 - --------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements.
39 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 2007 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. Amounts presented as of December 31, 2007 have been derived from BOK Financial's 2007 Form 10-K. Newly Adopted and Pending Accounting Policies The Company adopted Statement of Financial Accounting Standards No. 159, Fair Value Option ("FAS 159") effective January 1, 2008. FAS 159 provides an option to measure eligible financial assets and financial liabilities at fair value. Certain certificates of deposit that were either currently designated as hedged or had previously been designated as hedged, but no longer met the correlation requirements of Statement of Financial Accounting Standards No. 133 were designated as being reported at fair value. Adoption of FAS 159 increased opening retained earnings for the first quarter of 2008 by $62 thousand. Interest expense on certificates of deposit carried at fair value is based on the instruments' contractual interest rates and outstanding principal balances. As of January 1, 2008, the Company adopted Financial Accounting Standards Board Staff Position FIN 39-1, which permits offsetting of cash collateral against the fair value of derivative instruments executed with the same counterparty under a master netting agreement. The total amount of derivative assets and liabilities at June 30, 2008 was reduced by $10 million and $990 million, respectively, of cash collateral. Statement of Financial Accounting Standards No. 160, "Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB Statement No. 51," ("FAS 160") amends Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial Statements," to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. FAS 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, FAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. FAS 160 is effective for the Company on January 1, 2009 and is not expected to have a significant impact on the Company's financial statements. Statement of Financial Accounting Standards No. 161, "Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133," ("FAS 161") amends and expands the disclosure requirements of FAS 133, "Accounting for Derivative Instruments and Hedging Activities," to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity's financial position, results of operations and cash flows. To meet those objectives, FAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. FAS 161 is effective for the Company on January 1, 2009 and is not expected to have a significant impact on the Company's financial statements.
40 (2) Fair Value Measurements Fair value measurements as of June 30, 2008 are as follows (in thousands): <TABLE> Quoted Prices Significant in Active Other Significant Markets for Observable Unobservable Total Identical Inputs Inputs Instruments ----------- ---------------- --------------- ---------------- Assets: <S> <C> <C> <C> <C> Trading securities $62,532 $ 13,829 $48,703 Available for sale securities 5,926,602 36,936 5,889,666 Mortgage trading securities 98,269 98,269 Mortgage servicing rights 72,103 72,103 (1) Derivative contracts 1,380,876 1,344,256 36,620 (2) Liabilities: Certificates of deposit 203,580 203,580 Derivative contracts 1,446,425 1,446,425 </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 4, Mortgage Banking Activities. (2) The fair value of derivative contracts with SemGroup, LP was based largely on significant unobservable inputs. On July 22, 2008, SemGroup and 24 related entities filed for bankruptcy protection. BOK Financial assessed a range of values for derivative contracts with SemGroup using information currently available, including information provided by a nationally recognized financial advisor to SemGroup. The range considered both the value of SemGroup as a reorganized entity (going concern value) and its liquidation value. The fair value of derivative contracts was based on the lower end of the range of values. The fair value of derivative contracts with SemGroup totaled $88.2 million at March 31, 2008 and $97.3 million at June 30, 2008 based on significant observable inputs. At June 30, 2008, the fair value of these contracts was written down by $60.7 million to $36.6 million based on significant unobservable inputs. 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 significant fair value measurements of significant assets or liabilities measured on a non-recurring basis were made during the first half of 2008. Assets measured on a non-recurring basis include pension plan assets, which are based on quoted prices in active markets for identical instruments, real property and other assets acquired to satisfy loans, which are based primarily on comparisons of completed sales of similar assets, and goodwill, which is based on significant unobservable inputs. Certain certificates of deposit were designated as carried at fair value as permitted by FAS 159. These certificates have been converted from fixed interest rates to variable interest rates based on LIBOR with interest rate swaps. The fair value election for these liabilities better represents the economic effect of these instruments on the Company. At June 30, 2008, the fair value and contractual principal amount of these certificates was $204 million and $205 million, respectively. Change in the fair value of these certificates of deposit resulted in an unrealized gain during the second quarter and first half of 2008 of $2.2 million and $601 thousand, respectively, which is included in Gain (Loss) on Derivatives, net on the Consolidated Statement of Earnings.
41 (3) Derivatives The fair values of derivative contracts at June 30, 2008 are as follows (in thousands): Assets Liabilities ----------- --- ------------ Customer Risk Management Programs: Interest rate contracts $73,168 $73,296 Energy contracts 1,281,937 1,337,368 Agriculture contracts 12,054 11,949 Foreign exchange contracts 17,994 17,994 CD options 4,163 4,163 - --------------------------------------------- ----------- --- ------------ Fair value before cash collateral 1,389,316 1,444,770 Less: cash collateral (10,000) (990,046) - --------------------------------------------- ----------- --- ------------ Total Customer Derivatives 1,379,316 454,724 Interest Rate Risk Management Programs 1,560 1,655 - --------------------------------------------- ----------- --- ------------ Total Derivative Contracts $1,380,876 $456,379 - --------------------------------------------- ----------- --- ------------ As of January 1, 2008, the Company adopted Financial Accounting Standards Board Staff Position FIN 39-1, which permits offsetting of cash collateral against the fair value of derivative instruments executed with the same counterparty under a master netting agreement. The total amount of derivative assets and liabilities at June 30, 2008 were reduced by $10 million and $990 million, respectively, of cash collateral.
42 (4) Mortgage Banking Activities At June 30, 2008, BOK Financial owned the rights to service 58,021 mortgage loans with outstanding principal balances of $5.7 billion, including $648 million serviced for affiliates. The weighted average interest rate and remaining term was 6.15% and 281 months, respectively. For the three and six months ended June 30, 2008, mortgage banking revenue includes servicing fee income of $4.3 million and $8.6 million, respectively. 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. Activity in capitalized mortgage servicing rights and related valuation allowance during the six months ending June 30, 2008 is as follows (in thousands): <TABLE> Capitalized Mortgage Servicing Rights ------------------------------------------ Purchased Originated Total --------------- ------------ ------------- <S> <C> <C> <C> Balance at December 31, 2007 $ 13,906 $ 56,103 $ 70,009 Additions, net - 10,314 10,314 Change in fair value due to loan runoff (1,174) (4,517) (5,691) Change in fair value due to market changes (509) (2,020) (2,529) - -------------------------------------------- -- ---------- -- ---------- -- ----------- Balance at June 30, 2008 $ 12,223 $ 59,880 $ 72,103 - -------------------------------------------- -- ---------- -- ---------- -- ----------- </TABLE> Fair value is determined by discounting the projected net cash flows. Significant assumptions used to determine fair value are: <TABLE> June 30, 2008 December 31, 2007 --------------------- -------------------- <S> <C> <C> Discount rate - risk-free rate plus a market premium 9.86% 10.02% Prepayment rate - based upon loan interest rate, original term and loan type 5.3% - 14.0% 6.8% - 15.2% Loan servicing costs - annually per loan based upon loan type $43 - $73 $43 - $70 Escrow earnings rate - indexed to rates paid on deposit accounts with comparable average life 4.28% 5.01% </TABLE> Stratification of the mortgage loan servicing portfolio and outstanding principal of loans serviced by interest rate at June 30, 2008 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 $ 13,387 $ 41,391 $ 14,305 $ 3,020 $ 72,103 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- Outstanding principal of loans serviced (1)$ 984,400 $2,824,100 $ 1,007,000 $186,500 $5,002,000 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- </TABLE> (1) Excludes outstanding principal of $648 million for loans serviced for affiliates and $37 million of mortgage loans for which there are no capitalized mortgage servicing rights.
43 (5) Disposal of Available for Sale Securities Sales of available for sale securities resulted in gains and losses as follows (in thousands): Six Months Ended June 30, ------------------------------------- 2008 2007 -------------- ---------------- Proceeds $ 1,470,701 $ 495,026 Gross realized gains 8,507 1,015 Gross realized losses (5,284) (2,412) Related federal and state income tax expense (benefit) 1,098 (495) (6) 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 and made no Pension Plan contributions during the six months ended June 30, 2008 and June 30, 2007. Management has been advised that no minimum contribution will be required for 2008. The maximum allowable contribution for 2008 has not yet been determined. (7) Shareholders' Equity On July 29, 2008, the Board of Directors of BOK Financial Corporation approved a $0.225 per share quarterly common stock dividend. The quarterly dividend will be payable on or about August 29, 2008 to shareholders of record on August 15, 2008. Dividends declared during the three and six month periods ended June 30, 2008 were $0.225 per share and $0.425 per share, respectively. Dividends declared during the three and six month periods ended June 30, 2007 were $0.20 per share and $0.35 per share, respectively.
44 (8) Earnings Per Share The following table presents the computation of basic and diluted earnings per share (dollars in thousands, except share data): <TABLE> Three Months Ended Six Months Ended ----------------------------------------------------- June 30, June 30, June 30, June 30, 2008 2007 2008 2007 ----------------------------------------------------- Numerator: <S> <C> <C> <C> <C> Net income (loss) $ (1,161) $ 53,863 $ 61,104 $ 106,656 - --------------------------------------------------------------------------------------------------------------- Denominator: Denominator for basic earnings per share - weighted average shares 67,452,181 67,116,902 67,246,250 67,099,752 Effect of dilutive potential common shares: Employee stock compensation plans (1) - 489,428 363,764 489,394 - --------------------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 67,452,181 67,606,330 67,610,014 67,589,146 - --------------------------------------------------------------------------------------------------------------- Basic earnings (loss) per share $ (0.02) $ 0.80 $ 0.91 $ 1.59 - --------------------------------------------------------------------------------------------------------------- Diluted earnings (loss) per share $ (0.02) $ 0.80 $ 0.90 $ 1.58 - --------------------------------------------------------------------------------------------------------------- (1) Excludes employee stock options with exercise prices greater than current market price. - 850,926 278,812 811,184 </TABLE> (9) Reportable Segments Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2008 is as follows (in thousands): <TABLE> Net Other Other Interest Operating Operating Net Income Average Revenue Revenue(1) Expense Assets ------------ -- ------------ -- ------------- -- ----------- -- -------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 266,711 $ 173,291 $ 303,639 $ 56,660 $ 22,811,767 Unallocated items: Tax-equivalent adjustment 4,238 - - 4,238 - Funds management and other 35,118 4,357 9,033 206 (1,651,616) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 306,067 $ 177,648 $ 312,672 $ 61,104 $ 21,160,151 ============ == ============ == ============= == =========== == ============== </TABLE> (1) Excluding financial instruments gains/(losses). Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended June 30, 2008 is as follows (in thousands): <TABLE> Net Other Other Net Interest Operating Operating Income Average Revenue Revenue(1) Expense (Loss) Assets ------------ -- ------------ -- ------------- -- ----------- -- -------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 132,287 $ 61,424 $ 153,854 $ (1,654) $ 23,413,047 Unallocated items: Tax-equivalent adjustment 2,084 - - 2,084 - Funds management and other 24,568 2,395 5,414 (1,591) (1,804,747) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 158,939 $ 63,819 $ 159,268 $ (1,161) $ 21,608,300 ============ == ============ == ============= == =========== == ============== </TABLE> (1) Excluding financial instruments gains/(losses).
45 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 Income Average Revenue Revenue(1) Expense Assets ------------ -- ------------ -- ------------- -- ----------- -- -------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 272,277 $ 190,650 $ 256,075 $ 118,871 $ 19,366,204 Unallocated items: Tax-equivalent adjustment 4,154 - - 4,154 - Funds management and other (12,680) (1,753) 10,167 (16,369) (1,081,888) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 263,751 $ 188,897 $ 266,242 $ 106,656 $ 18,284,316 ============ == ============ == ============= == =========== == ============== </TABLE> (1) Excluding financial instruments gains/(losses). 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 Income Average Revenue Revenue(1) Expense Assets ------------ -- ------------ -- ------------- -- ----------- -- -------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 137,892 $ 99,578 $ 130,146 $ 59,244 $ 19,631,701 Unallocated items: Tax-equivalent adjustment 2,069 - - 2,069 - Funds management and other (5,048) (2,962) 3,985 (7,450) (1,073,631) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 134,913 $ 96,616 $ 134,131 $ 53,863 $ 18,558,070 ============ == ============ == ============= == =========== == ============== </TABLE> (1) Excluding financial instruments gains/(losses). (10) Contingent Liabilities In September 2006, BISYS settled the SEC's two-year investigation of BISYS Fund Services Ohio, Inc. ("BISYS") marketing assistance agreements with 27 different families of mutual funds, including a BISYS marketing arrangement with AXIA which had been terminated effective January 1, 2004. In the SEC settlement, BISYS consented to an order in which the SEC determined that BISYS had "willfully aided and abetted and caused" the 27 investment advisors to (i) violate provisions of the Investment Advisors Act of 1940 that prohibit fraudulent conduct; (ii) 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 (iii) 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 was one of the 27 advisors and the AP Funds one of the 27 mutual fund families to which the SEC referred in its BISYS Order. On October 10, 2006, the Examinations Division of the Securities and Exchange Commission (the "SEC") conducted an examination of AXIA. The examination was concluded in July 2007 with no action taken by the Examinations Division. In August 2007, AXIA settled all claims relating to the BISYS marketing arrangements with the AP Funds for $2.2 million and the AP Funds regard the matter as fully concluded. The settlement with the AP Funds is not binding on the SEC. On April 7, 2008, AXIA and its parent, BOK, received a Wells notice from the regional office of the SEC in Los Angeles indicating that the staff is considering recommending that the SEC bring a civil injunctive action against AXIA and BOK for violations of Section 17(a) of the Securities Act of 1955, Section 10(b) of the Securities Exchange Act of 1934, Sections 206(1) and (2) of the Investment Advisors Act of 1940, and Sections 12(b) and 34(b) of the Investment Company Act of 1940. BOK and AXIA have been cooperating fully with the SEC in connection with these matters that arose prior to December 31, 2003. BOK and AXIA are not bound by the SEC BISYS Order and disagree with the SEC position as it relates to BOK and AXIA. On May 27, 2008, BOK and AXIA responded to the Wells notice denying the SEC position. On June 26, 2008, BOK and AXIA representatives met with SEC Staff. Nothing further has occurred as of this time.
46 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. During the fourth quarter of 2007, Visa announced that it had recognized liabilities related to antitrust litigation with American Express and Discover and that it was subject to other litigation. As a member of Visa, BOK Financial is obligated for a proportionate share of losses incurred by Visa. A contingent liability was recognized for the Company's share of Visa's litigation liabilities. During the first quarter of 2008, Visa completed its initial public offering and funded a $3.0 billion escrow account for litigation claims including claims by American Express and Discover. BOK Financial recognized a receivable for its proportionate share of this escrow account, which equals the contingent liability previously recognized. In addition, during the first quarter of 2008 BOK Financial received 410,562 Visa Class B shares. A partial redemption of Class B shares was completed and the Company received $6.8 million in cash in exchange for 158,725 Class B shares. The remaining 251,837 Class B shares are convertible into Visa Class A shares at the later of three years after the date of Visa's initial public offering or the final settlement of all covered litigation. The current exchange rate is approximately 0.71 Class A share for each Class B share. However, the Company's Class B shares may be diluted in the future if the escrow fund is not adequate to cover future covered litigation costs. Therefore, under currently issued accounting guidance no value has been currently assigned to the Class B shares and no value may be assigned until the Class B shares are converted into a known number of Class A shares. (11) Federal and State Income Taxes The reconciliations of income (loss) attributable to continuing operations at the U.S. federal statutory tax rate to income tax expense are as follows (in thousands): Three Months Ended Six Months Ended June 30, June 30, ------------------------------------------------ 2008 2007 2008 2007 ------------------------------------------------ Amount: Federal statutory tax $ (1,408) $ 29,097 $ 32,442 $ 57,802 Tax exempt revenue (1,113) (1,037) (2,225) (2,080) Effect of state income taxes, net of federal (78) 1,728 2,438 3,456 benefit Utilization of tax credits (296) (290) (592) (580) Bank-owned life insurance (875) (841) (1,750) (1,668) Other, net 908 613 1,275 1,563 ----------------------------------------------------------------------------- Total $ (2,862) $ 29,270 $ 31,588 $ 58,493 ----------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ----------------------------------------------- 2008 2007 2008 2007 ----------------------------------------------- Percent of pretax income: Federal statutory tax 35% 35% 35% 35% Tax exempt revenue 28 (1) (2) (1) Effect of state income taxes, net of federal 2 1 3 1 benefit Utilization of tax credits 7 - (1) - Bank-owned life insurance 22 (1) (2) (1) Other, net (23) 1 1 1 ----------------------------------------------------------------------------- Total 71% 35% 34% 35% -----------------------------------------------------------------------------
47 (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, 2008, outstanding commitments and letters of credit were as follows (in thousands): June 30, 2008 -------------- Commitments to extend credit $ 5,600,714 Standby letters of credit 625,554 Commercial letters of credit 10,723 (13) Related Parties On July 21, 2008, the Company entered into a $188 million, unsecured revolving credit agreement with George B. Kaiser, its Chairman and principal shareholder. Interest on the outstanding balance is based on one-month LIBOR plus 125 basis points and is payable quarterly. Additional interest in the form of a facility fee is paid quarterly on the unused portion of the commitment at 25 basis points. This agreement has no restrictive covenants.
48 <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, 2008 June 30, 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) $ 5,825,599 $ 148,014 5.08% $ 4,908,738 $ 117,839 4.86% Tax-exempt securities (3) 261,904 8,354 6.40 338,834 9,415 5.90 - ------------------------------------------------------------------------------------------------------------------------------- Total securities (3) 6,087,503 156,368 5.14 5,247,572 127,254 4.90 - ------------------------------------------------------------------------------------------------------------------------------- Trading securities 74,507 2,700 7.27 31,264 1,000 6.45 Funds sold and resell agreements 76,589 1,195 3.13 61,397 1,589 5.22 Loans (2) 12,354,145 380,102 6.17 11,116,881 437,572 7.94 Less reserve for loan losses 138,277 - - 115,809 - - - ------------------------------------------------------------------------------------------------------------------------------- Loans, net of reserve 12,215,868 380,102 6.24 11,001,072 437,572 8.02 - ------------------------------------------------------------------------------------------------------------------------------- Total earning assets (3) 18,454,467 540,365 5.87 16,341,305 567,415 7.01 - ------------------------------------------------------------------------------------------------------------------------------- Cash and other assets 2,705,684 1,943,011 - ------------------------------------------------------------------------------------------------------------------------------- Total assets $ 21,160,151 $ 18,284,316 - ------------------------------------------------------------------------------------------------------------------------------- Liabilities And Shareholders' Equity Transaction deposits $ 7,595,724 69,930 1.85% $ 6,257,933 94,609 3.05% Savings deposits 158,375 386 0.49 150,952 741 0.99 Time deposits 4,150,654 83,945 4.06 4,463,961 104,581 4.72 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 11,904,753 154,261 2.60 10,872,846 199,931 3.71 - ------------------------------------------------------------------------------------------------------------------------------- Funds purchased and repurchase agreements 3,093,946 38,829 2.52 2,633,821 66,694 5.11 Other borrowings 1,803,962 25,750 2.86 767,634 20,858 5.48 Subordinated debentures 398,288 11,220 5.65 354,657 12,027 6.84 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 17,200,949 230,060 2.68 14,628,958 299,510 4.13 - ------------------------------------------------------------------------------------------------------------------------------- Demand deposits 1,286,552 1,346,620 Other liabilities 687,681 542,505 Shareholders' equity 1,984,969 1,766,233 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 21,160,151 $ 18,284,316 - ------------------------------------------------------------------------------------------------------------------------------- Tax-Equivalent Net Interest Revenue (3) 310,305 3.19% 267,905 2.88% Tax-Equivalent Net Interest Revenue To Earning Assets (3) 3.37 3.31 Less tax-equivalent adjustment (1) 4,238 4,154 - ------------------------------------------------------------------------------------------------------------------------------- Net Interest Revenue 306,067 263,751 Provision for credit losses 76,881 14,320 Other operating revenue 176,178 181,960 Other operating expense 312,672 266,242 - ------------------------------------------------------------------------------------------------------------------------------- Income Before Taxes 92,692 165,149 Federal and state income tax 31,588 58,493 - ------------------------------------------------------------------------------------------------------------------------------- Net Income $ 61,104 $ 106,656 - ------------------------------------------------------------------------------------------------------------------------------- Earnings Per Average Common Share Equivalent: Net Income: Basic $ 0.91 $ 1.59 - ------------------------------------------------------------------------------------------------------------------------------- Diluted $ 0.90 $ 1.58 - ------------------------------------------------------------------------------------------------------------------------------- (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. </TABLE>
49 <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, 2008 March 31, 2008 ------------------------------------------ ------------------------------------- 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) $ 6,026,769 $ 75,959 5.08% $ 5,624,430 $ 72,055 5.11% Tax-exempt securities (3) 259,410 4,165 6.46 264,398 4,189 6.38 - ------------------------------------------------------------------------------------------------------------------------------ Total securities (3) 6,286,179 80,124 5.14 5,888,828 76,244 5.17 - ------------------------------------------------------------------------------------------------------------------------------ Trading securities 74,058 1,267 6.88 74,957 1,433 7.69 Funds sold and resell agreements 72,444 355 1.97 80,735 840 4.18 Loans (2) 12,527,011 180,424 5.79 12,181,279 199,678 6.59 Less reserve for loan losses 145,524 - - 131,709 - - - ------------------------------------------------------------------------------------------------------------------------------ Loans, net of reserve 12,381,487 180,424 5.86 12,049,570 199,678 6.66 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets (3) 18,814,168 262,170 5.61 18,094,090 278,195 6.17 - ------------------------------------------------------------------------------------------------------------------------------ Cash and other assets 2,794,132 2,402,963 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 21,608,300 $ 20,497,053 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities And Shareholders' Equity Transaction deposits $ 7,717,777 $ 27,755 1.45% $ 7,473,670 $ 42,175 2.27% Savings deposits 159,798 148 0.37 156,953 238 0.61 Time deposits 4,076,167 38,211 3.77 4,225,141 45,734 4.35 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 11,953,742 66,114 2.22 11,855,764 88,147 2.99 - ------------------------------------------------------------------------------------------------------------------------------ Funds purchased and repurchase agreements 3,126,110 15,180 1.95 3,061,783 23,649 3.11 Other borrowings 2,267,076 14,032 2.49 1,340,846 11,718 3.51 Subordinated debentures 398,336 5,821 5.88 398,241 5,399 5.45 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 17,745,264 101,147 2.29 16,656,634 128,913 3.11 - ------------------------------------------------------------------------------------------------------------------------------ Demand deposits 1,336,552 1,236,552 Other liabilities 541,693 618,721 Shareholders' equity 1,984,791 1,985,146 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 21,608,300 $ 20,497,053 - ------------------------------------------------------------------------------------------------------------------------------ Tax-Equivalent Net Interest Revenue (3) $ 161,023 3.32% $ 149,282 3.06% Tax-Equivalent Net Interest Revenue To Earning Assets (3) 3.44 3.31 Less tax-equivalent adjustment (1) 2,084 2,154 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Revenue 158,939 147,128 Provision for credit losses 59,310 17,571 Other operating revenue 55,616 120,562 Other operating expense 159,268 153,404 - ------------------------------------------------------------------------------------------------------------------------------ Income (loss) before taxes (4,023) 96,715 Federal and state income tax (2,862) 34,450 - ------------------------------------------------------------------------------------------------------------------------------ Net Income (Loss) $ (1,161) $ 62,265 - ------------------------------------------------------------------------------------------------------------------------------ Earnings Per Average Common Share Equivalent: Net income (loss): Basic $ (0.02) $ 0.93 - ------------------------------------------------------------------------------------------------------------------------------ Diluted $ (0.02) $ 0.92 - ------------------------------------------------------------------------------------------------------------------------------ </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.
50 <TABLE> - ------------------------------------------------------------------------------------------------------------------------- Three Months Ended - ------------------------------------------------------------------------------------------------------------------------- December 31, 2007 September 30, 2007 June 30, 2007 - ------------------------------------------------------------------------------------------------------------------------- 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> $ 5,633,173 $ 68,670 4.86% $ 5,206,482 $ 62,531 4.84% $ 5,014,231 $ 60,176 4.85% 328,900 5,990 7.19 360,710 5,820 6.44 354,956 4,681 5.81 - ------------------------------------------------------------------------------------------------------------------------- 5,962,073 74,660 4.99 5,567,192 68,351 4.95 5,369,187 64,857 4.90 - ------------------------------------------------------------------------------------------------------------------------- 29,303 489 6.62 24,413 459 7.46 32,897 481 5.86 86,948 1,303 5.95 101,281 1,588 6.22 67,057 924 5.53 11,806,242 223,146 7.50 11,709,638 232,446 7.88 11,338,140 224,492 7.94 125,996 - - 123,059 - - 118,505 - - - ------------------------------------------------------------------------------------------------------------------------- 11,680,246 223,146 7.58 11,586,579 232,446 7.96 11,219,635 224,492 8.03 - ------------------------------------------------------------------------------------------------------------------------- 17,758,570 299,598 6.70 17,279,465 302,844 6.99 16,688,776 290,754 7.00 - ------------------------------------------------------------------------------------------------------------------------- 2,224,045 2,056,910 1,869,294 - ------------------------------------------------------------------------------------------------------------------------- $ 19,982,615 $ 19,336,375 $ 18,558,070 - ------------------------------------------------------------------------------------------------------------------------- $ 7,016,136 $ 49,358 2.79% $ 6,683,056 $ 50,650 3.01% $ 6,414,014 $ 48,242 3.02% 160,170 348 0.86 200,362 410 0.81 158,718 377 0.95 4,544,802 53,613 4.68 4,798,812 58,436 4.83 4,507,053 53,440 4.76 - ------------------------------------------------------------------------------------------------------------------------- 11,721,108 103,319 3.50 11,682,230 109,496 3.72 11,079,785 102,059 3.69 - ------------------------------------------------------------------------------------------------------------------------- 3,158,153 35,169 4.42 2,603,372 32,484 4.95 2,627,230 33,129 5.06 936,353 11,611 4.92 880,894 11,789 5.31 866,096 11,760 5.45 398,109 5,708 5.69 471,458 7,166 6.03 410,883 6,824 6.66 - ------------------------------------------------------------------------------------------------------------------------- 16,213,723 155,807 3.81 15,637,954 160,935 4.08 14,983,994 153,772 4.12 - ------------------------------------------------------------------------------------------------------------------------- 1,293,419 1,300,280 1,295,930 580,574 577,161 487,400 1,894,899 1,820,980 1,790,746 - ------------------------------------------------------------------------------------------------------------------------- $ 19,982,615 $ 19,336,375 $ 18,558,070 - ------------------------------------------------------------------------------------------------------------------------- $ 143,791 2.89% $ 141,909 2.91% $ 136,982 2.88% 3.22 3.27 3.31 2,502 2,464 2,069 - ------------------------------------------------------------------------------------------------------------------------- 141,289 139,445 134,913 13,200 7,201 7,820 107,316 109,372 90,171 157,727 151,018 134,131 - ------------------------------------------------------------------------------------------------------------------------- 77,678 90,598 83,133 26,518 30,750 29,270 - ------------------------------------------------------------------------------------------------------------------------- $ 51,160 $ 59,848 $ 53,863 - ------------------------------------------------------------------------------------------------------------------------- $ 0.76 $ 0.89 $ 0.80 - ------------------------------------------------------------------------------------------------------------------------- $ 0.76 $ 0.89 $ 0.80 - ------------------------------------------------------------------------------------------------------------------------- </TABLE>
51 PART II. Other Information Item 1. Legal Proceedings See discussion of legal proceedings at footnote 10 to the consolidated financial statements. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table provides information with respect to purchases made by or on behalf of the Company or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company's common stock during the three months ended March 31, 2008. <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, 2008 to 11,618 $59.06 - 1,290,927 April 30, 2008 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- May 1, 2008 to May 21,220 $59.40 - 1,290,927 31, 2008 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- June 1, 2008 to 2,895 $54.00 - 1,290,927 June 30, 2008 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- Total 35,733 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- </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, 2008, the Company had repurchased 709,073 shares under the new plan. (2) The Company routinely repurchases mature shares from employees to cover the exercise price and taxes in connection with employee stock option exercises.
52 Item 4. Submission of Matters to a Vote of Security Holders Our Annual Meeting of Shareholders was held on April 29, 2008 (the "Annual Meeting"). At the Annual Meeting, shareholders voted on three matters: (i) to fix the number of directors to be elected at eighteen (18) and to elect eighteen (18) persons as directors for a term of one year or until their successors have been elected and qualified, (ii) to approve the Amended and Restated 2003 Executive Incentive Plan, and (iii) to ratify the selection of Ernst & Young LLP as the Company's independent auditor for the fiscal year ending December 31, 2008. The shareholders approved these matters by the following votes, respectively: (i) Election of eighteen (18) directors for a term of one year: Votes Withheld/ Votes For Against ---------------- ----------------- Gregory S. Allen 58,881,316 5,603,901 C. Fred Ball, Jr. 61,869,319 2,615,898 Sharon J. Bell 64,365,872 119,345 Peter C. Boylan III 64,200,721 284,496 Chester Cadieux III 59,296,607 5,188,610 Joseph W. Craft III 64,382,600 102,617 William E. Durrett 64,361,940 123,277 John W. Gibson 64,457,758 27,459 David F. Griffin 64,469,262 15,955 V. Burns Hargis 64,319,913 165,303 E. Carey Joullian IV 59,299,019 5,186,198 George B. Kaiser 61,772,014 2,713,202 Thomas L. Kivisto 58,805,718 5,679,499 Robert J. LaFortune 64,361,941 123,276 Stanley A. Lybarger 61,899,839 2,585,377 Steven J. Malcolm 62,166,183 2,319,034 Paula Marshall 58,378,455 6,106,762 E. C. Richards 64,466,665 18,552 <TABLE> Votes Withheld/ Exceptions / Votes For Against Abstain (ii) Approval of the Amended and Restated 2003 Executive <S> <C> <C> <C> Incentive Plan 57,852,637 2,946,537 3,876,212 Votes Withheld/ Exceptions / Votes For Against Abstain (iii) Ratification of Ernst & Young LLP as the independent auditor for the year ending December 31, 2008 64,543,595 122,560 9,232 </TABLE> Item 6. Exhibits 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Items 1A, 3 and 5 are not applicable and have been omitted.
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 8, 2008 /s/ Steven E. Nell ------------------------------- ------------------------------- Steven E. Nell Executive Vice President and Chief Financial Officer /s/ John C. Morrow ------------------------------ John C. Morrow Senior Vice President and Chief Accounting Officer