As filed with the Securities and Exchange Commission on November 3, 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 September 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: 67,433,837 shares of common stock ($.00006 par value) as of September 30, 2008. ===============================================================================
2 BOK Financial Corporation Form 10-Q Quarter Ended September 30, 2008 Index Part I. Financial Information Management's Discussion and Analysis (Item 2) 2 Market Risk (Item 3) 31 Controls and Procedures (Item 4) 33 Consolidated Financial Statements - Unaudited (Item 1) 34 Nine Month Financial Summary - Unaudited (Item 2) 47 Quarterly Financial Summary - Unaudited (Item 2) 48 Part II. Other Information Item 1. Legal Proceedings 50 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 50 Item 6. Exhibits 50 Signatures 51 Management's Discussion and Analysis of Financial Condition and Results of Operations Performance Summary BOK Financial Corporation reported earnings of $56.7 million or $0.84 per diluted share for the third quarter of 2008. The Company reported a net loss of $1.2 million or $.02 per diluted share for the second quarter of 2008 and net income of $59.8 million or $0.89 per diluted share for the third quarter of 2007. Year-to-date net income totaled $117.8 million or $1.74 per diluted share for the nine months ended September 30, 2008 and $166.5 million or $2.46 per diluted share for the nine months ended September 30, 2007. As disclosed in the previous quarter's Form 10-Q, 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 for the second quarter of 2008 by approximately $57.0 million or $0.84 per diluted share. A $19.4 million increase in the fair value of derivative contracts related to SemGroup, partially offset by a $12.7 million write off of derivative contracts with Lehman Brothers increased net income for the third quarter of 2008 by $4.5 million or $0.07 per diluted share. Highlights of the third quarter of 2008 included: o Net interest revenue totaled $164.3 million, up $5.4 million over the second quarter of 2008 and $24.9 million over the third quarter of 2007. Net interest margin was 3.48% for the third quarter of 2008, 3.44% for the second quarter of 2008 and 3.27% for the third quarter of 2007. Growth in net interest revenue and net interest margin was due largely to increased earning assets and widening spreads. o Fees and commission revenue totaled $126.7 million for the third quarter of 2008, $63.6 million for the second quarter of 2008 and $103.7 million for the third quarter of 2007. Fees and commissions grew $16.9 million or 16% over the third quarter of 2007, excluding SemGroup and Lehman related items, due largely to brokerage and trading revenue. Fees and commissions decreased $2.4 million, excluding SemGroup and Lehman related items, from the second quarter of 2008. o Combined reserves for credit losses totaled $209 million or 1.65% of outstanding loans at September 30, 2008, up from $177 million or 1.41% of outstanding loans at June 30, 2008. Net loans charged off and provision for credit losses were $20.2 million and $52.7 million, respectively, for the third quarter of 2008. Net loans charged off and provision for credit losses were $39.0 million and $59.3 million, respectively, for the second quarter of 2008 and $4.9 million and $7.2 million, respectively, for the third quarter of 2007.
3 o Non-performing assets totaled $252 million or 1.98% of outstanding loans and repossessed assets at September 30, 2008, up from $181 million or 1.45% of outstanding loans and repossessed assets at June 30, 2008. The increase in non-performing assets included an expected $36.0 million of unpaid amounts due from SemGroup in settlement of funded letters of credit and derivative contracts which terminated during the third quarter. o The Company maintained strong Tier 1 and tangible capital ratios of 9.25% and 7.16%, respectively, at September 30, 2008. Tier 1 and tangible capital ratios were 8.69% and 7.15%, respectively, at June 30, 2008. The Company paid a dividend of $15.2 million or $0.225 per common share during the third quarter of 2008. o On October 28, 2008, the Company's board of directors declared a dividend of $0.225 per common share payable on December 2, 2008 to shareholders of record as of November 14, 2008. Results of Operations Net Interest Revenue and Net Interest Margin Net interest revenue totaled $164.3 million for the third quarter of 2008, up $5.4 million over the second quarter of 2008 and $24.9 million over the third quarter of 2007. Average earning assets for the third quarter of 2008 increased $1.7 billion over the third quarter of 2007. Average loans, excluding residential mortgage loans held for sale, increased $980 million and average securities increased $745 million. Growth in the securities portfolio generally consisted of fixed-rate mortgage backed securities issued by FNMA and FHLMC. These securities were purchased to take advantage of widening spreads caused by disruptions in the mortgage-backed securities market. Growth in average earning assets was funded primarily by a $1.3 billion increase in average deposits. Average deposits were up 10% over the third quarter of 2007. Interest-bearing transaction accounts increased $973 million and demand deposit accounts increased $349 million. In addition to deposit growth, average funds purchased and other borrowings increased $458 million and $509 million, respectively. Funds generated by growth in deposits and borrowings were also used to fund a $437 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 reductions of the derivative liabilities they secure on the Company's consolidated balance sheet. Net interest margin was 3.48% for the third quarter of 2008, 3.44% for the second quarter of 2008 and 3.27% for the third quarter of 2007. Growth in net interest margin compared with the third quarter of 2007 was due primarily to a widening of the spread between LIBOR and the federal funds rate. 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. The tax-equivalent yield on earning assets was 5.55% for the third quarter of 2008, down 144 basis points from the third quarter of 2007. Loan yields decreased 219 basis points to 5.69%. Securities portfolio yield was 5.15%, up 20 basis points over the third quarter of 2007. Our securities re-price as cash flow received is reinvested at current market rates. The resulting change in yield on the securities portfolio occurs more slowly and may not move in the same direction as changes in market rates. The cost of interest-bearing liabilities was 2.41% for the third quarter of 2008, down 198 basis points from the third quarter of 2007. The cost of interest bearing deposits decreased 171 basis points to 2.39% and the cost of funds purchased and other borrowings decreased 288 basis points to 2.16%. 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 34 basis points in the third quarter of 2008 compared with 67 basis points in the third quarter of 2007 and 30 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 changes in 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 two-thirds 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
4 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 $685 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 Nine months ended September 30, 2008 / 2007 September 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 $ 13,845 $ 10,525 $ 3,320 $ 42,959 $ 32,307 $ 10,652 Trading securities 478 691 (213) 2,178 2,165 13 Loans (50,584) 16,912 (67,496) (108,054) 60,604 (168,658) Funds sold and resell agreements (1,298) (207) (1,091) (1,692) 88 (1,780) - --------------------------------------------------------------------------------------------------------------------- Total (37,559) 27,921 (65,480) (64,609) 95,164 (159,773) - --------------------------------------------------------------------------------------------------------------------- Interest expense: Transaction deposits (22,338) 6,469 (28,807) (47,017) 21,765 (68,782) Savings deposits (263) (59) (204) (618) (44) (574) Time deposits (17,626) (125) (17,501) (38,262) (6,702) (31,560) Federal funds purchased and repurchase agreements (17,231) 3,979 (21,210) (45,096) 12,715 (57,811) Other borrowings (2,854) 5,039 (7,893) 2,038 26,363 (24,325) Subordinated debentures (1,613) (1,074) (539) (2,420) 203 (2,623) - --------------------------------------------------------------------------------------------------------------------- Total (61,925) 14,229 (76,154) (131,375) 54,300 (185,675) - --------------------------------------------------------------------------------------------------------------------- Tax-equivalent net interest revenue 24,366 13,692 10,674 66,766 40,864 25,902 Change in tax-equivalent adjustment 537 453 - --------------------------------------------------------------------------------------------------------------------- Net interest revenue $ 24,903 $ 67,219 - --------------------------------------------------------------------------------------------------------------------- (1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis. </TABLE>
5 Other Operating Revenue Other operating revenue increased $22.9 million compared with the third quarter of 2007. Fees and commissions revenue was up $22.9 million, including a $19.4 million increase in the fair value of derivative contracts related to SemGroup partially offset by charges of $12.7 million from the Lehman Brothers bankruptcy. The SemGroup-related contracts were with other counterparties to offset our exposure to commodity price changes. Diversified sources of fees and commission 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 revenue was $30.8 million for the third quarter of 2008, up $15.3 million over the third quarter of 2007. Excluding the net effect of transactions related to SemGroup and Lehman Brothers from the third quarters of 2008 and 2007, brokerage and trading revenue increased $9.3 million or 62%. Revenue from trading and institutional securities sales totaled $10.6 million for the third quarter of 2008, up $5.2 million over the third quarter of 2007. Customer hedging revenue, excluding SemGroup and Lehman Brothers, totaled $7.0 million for the third quarter of 2008, up $3.3 million over the third quarter of 2007. The Company is currently modifying the terms of its customer hedging program, which may affect future revenue. Brokerage and trading revenue, excluding SemGroup and Lehman Brothers, increased $884 thousand compared to the second quarter of 2008. Revenue from trading and institutional securities sales decreased $1.0 million and customer hedging revenue increased $3.0 million. Retail brokerage fees totaled $5.0 million for the third quarter of 2008, down $1.2 million from the previous quarter. Transaction card revenue totaled $25.6 million for the third quarter of 2008, up $1.8 million or 8% over the third quarter of 2007. ATM network revenue increased $1.0 million or 10% and check card revenue increased $971 thousand or 16%. Merchant discount fees were down $182 thousand or 3%. Transaction card revenue decreased $154 thousand or 2% annualized compared with the second quarter of 2008. Check card revenue was down $113 thousand or 6% annualized due to a general slow-down of consumer spending. Trust fees and commissions totaled $20.1 million for the third quarter of 2008, an increase of $467 thousand or 2% over the third quarter of 2007. The fair value of all trust assets which is the basis for a significant portion of trust revenue totaled $33.2 billion at September 30, 2008 and $34.9 billion at September 30, 2007. The decrease in the fair value of trust assets primarily affected personal trust management fees and mutual fund fees. Personal trust management fees, which provide 29% of total trust fees and commissions decreased $101 thousand or 2% compared with 2007. Net fees from mutual fund advisory and administrative services which provide 20% of total trust fees and commissions decreased $150 thousand or 4%. Revenue from management of oil and gas properties increased $1.0 million compared with the third quarter of 2007 due to higher energy prices. Employee benefit plan management fees, which provide 18% of total trust fees and commissions, increased $462 thousand or 15%. Trust fees and commissions decreased $841 thousand or 16% annualized compared with the second quarter of 2008. The fair value of all trust assets managed totaled $34.4 billion at June 30, 2008 or 3% more than the fair value of all trust assets at September 30, 2008 due to market conditions. Personal trust revenue decreased $1.0 million. Net fees from mutual fund advisory and administrative services decreased $463 thousand. Deposit service charges and fees totaled $30.4 million for the third quarter of 2008, up $2.5 million or 9% over the third quarter of 2007. Overdraft fees grew $1.2 million or 6%. Service charges on retail accounts decreased $51 thousand or 4% due to continued migration to service charge free checking products. Commercial deposit account fees were up $1.4 million or 19% over the same period of 2007 due to a decrease in earnings credit available to commercial deposit customers and an increase in service charges for 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. Deposit service charges increased $205 thousand or 3% annualized compared with the second quarter of 2008. Overdraft fees were up $911 thousand. Commercial deposit account fees were down $684 thousand. Mortgage banking revenue was up $421 thousand or 7% compared with 2007. Servicing revenue totaled $4.4 million, up $196 thousand or 5%. The outstanding principal balance of mortgage loans serviced for others totaled $5.1 billion at September 30, 2008 and $4.8 billion at September 30, 2007. Net gains on mortgage loans sold totaled $1.8 million, up $223 thousand over the third quarter of 2007. Mortgage loans originated for sale in the secondary market totaled $258 million for the third quarter of 2008, up 5% over the same period in 2007.
6 Margin asset fees totaled $1.9 million in the third quarter of 2008 and $1.1 million in the third quarter of 2007. Margin assets which are placed by the Company to secure its obligations under customer derivatives programs averaged $532 million for the third quarter of 2008, compared with $95 million for the third 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 (in thousands): Three Months Ended September 30, June 30, September 30, 2008 2008 2007 ---- ---- ---- Gain on portfolio securities $ 917 $ 276 $ 21 Gain on Mastercard IPO securities - - 1,073 Gain (loss) on mortgage hedge securities 1,186 (5,518) 3,654 ------- -------- -------- Net gain (loss) on securities $2,103 $(5,242) $ 4,748 ====== ======== ======= BOK Financial recognized net gains of $2.1 million on securities for the third quarter of 2008, net gains on securities of $4.7 million for the third quarter of 2007 and net losses on securities of $5.2 million for the second 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. Net gains on derivatives totaled $4.4 million for the third quarter of 2008 and $865 thousand for the third 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 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. The fair value of these swaps generally decreases 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. The fair value of these fixed-rate certificates of deposit generally increases as interest rates fall.
7 <TABLE> - -------------------------------------------------------------------------------------------------------------------------- Table 2 - Other Operating Revenue (In thousands) Three Months Ended ------------------------------------------------------------------------------- Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2008 2008 2008 2007 2007 ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Brokerage and trading revenue $ 30,846 $ (35,462) $ 23,913 $ 20,402 $ 15,541 Transaction card revenue 25,632 25,786 23,558 23,512 23,812 Trust fees and commissions 20,100 20,940 20,796 20,145 19,633 Deposit service charges and fees 30,404 30,199 27,686 29,938 27,885 Mortgage banking revenue 6,230 7,198 7,217 6,912 5,809 Bank-owned life insurance 2,829 2,658 2,512 2,614 2,520 Margin asset fees 1,934 4,460 1,967 2,012 1,061 Other revenue 8,691 7,824 6,215 7,819 7,456 - -------------------------------------------------------------------------------------------------------------------------- Total fees and commissions 126,666 63,603 113,864 113,354 103,717 - -------------------------------------------------------------------------------------------------------------------------- Gain (loss) on sales of assets (839) 216 (35) (1,316) 42 Gain (loss) on securities, net 2,103 (5,242) 4,620 (6,251) 4,748 Gain (loss) on derivatives, net 4,366 (2,961) 2,113 1,529 865 - -------------------------------------------------------------------------------------------------------------------------- Total other operating revenue $ 132,296 $ 55,616 $ 120,562 $ 107,316 $ 109,372 - -------------------------------------------------------------------------------------------------------------------------- </TABLE> Other Operating Expense Other operating expense for the third quarter of 2008 totaled $164.3 million, up $13.3 million or 9% over the third quarter of 2007. Personnel costs increased $1.7 million or 2%. Non-personnel expenses increased $11.5 million or 18% due largely to higher deposit insurance costs and losses on mortgage loans sold with recourse. In addition, the Company accrued $1.7 million in the third quarter of 2008 to recognize its additional contingent obligation to support Visa's antitrust litigation costs. This amount is expected to reverse in future periods when Visa issues additional common shares to provide additional funds to its litigation escrow account. Personnel expense Personnel expense totaled $87.5 million for the third quarter of 2008 and $85.8 million for the third quarter of 2007, including personnel expense of $2.5 million for net workforce reduction costs. Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs totaled $55.4 million, up $1.8 million or 3% over the third 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 down 4% over the third quarter of last year. <TABLE> - ---------------------------------------------------------------------------------------------------------------------- Table 3 - Personnel Expense (Dollars in thousands) Three Months Ended ---------------------------------------------------------------------------------- Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2008 2008 2008 2007 2007 ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Regular compensation $ 55,435 $ 54,024 $ 52,576 $ 52,316 $ 53,592 Incentive compensation: Cash-based 20,110 19,503 19,287 19,568 15,559 Stock-based 68 2,760 2,272 1,794 2,345 - --------------------------------------------------------------------------------------------------------------------- Total incentive compensation 20,178 22,263 21,559 21,362 17,904 Employee benefits 11,936 13,310 13,971 10,834 11,816 Workforce reduction costs, net - - - - 2,499 - --------------------------------------------------------------------------------------------------------------------- Total personnel expense $ 87,549 $ 89,597 $ 88,106 $ 84,512 $ 85,811 - --------------------------------------------------------------------------------------------------------------------- Number of employees (full-time equivalent) 4,231 4,137 4,135 4,110 4,299 - --------------------------------------------------------------------------------------------------------------------- </TABLE> Incentive compensation increased $2.3 million or 13% to $20.2 million compared to the third quarter of 2007. Expense for cash-based incentive compensation plans increased $4.6 million or 29%. 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 third quarter of 2007 included a
8 $2.8 million increase in commissions related to brokerage and trading revenue. 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 $2.7 million compared with the second quarter of 2008. This decrease reflected changes in the market value of BOK Financial common stock and other investments. The market value of BOK Financial common stock decreased $5.04 per share in the third quarter of 2008 and decreased $2.01 per share in the third quarter of 2007. Compensation expense for equity awards increased $371 thousand or 30% compared with the third 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 $11.9 million, a $120 thousand or 1% increase over the third quarter of 2007. Medical insurance costs were down $353 thousand or 8%. The Company self-insures a portion of its employee health care coverage. Personnel expense decreased $2.0 million compared with the second quarter of 2008 due to lower incentive compensation and employee benefit expenses. Stock-based incentive compensation decreased $2.7 million due to lower cost of liability awards. Employee benefit expense decreased $1.4 million due primarily to seasonally lower payroll tax expense. Data processing and communications expense Data processing and communications expense totaled $19.9 million, up $1.6 million or 9% over the third quarter of 2007. This expense consists of two broad categories, data processing systems and transaction card processing. Data processing systems costs increased $1.5 million or 14% due to growth in processing volumes. Transaction card processing costs increased $145 thousand or 2% due to growth in processing volume. Other operating expenses Occupancy and equipment expenses totaled $15.6 million for the third quarter of 2008, up $818 thousand or 6% over 2007. Growth in occupancy expense was due to 3 new branch locations added in the past year. Insurance expense increased $1.7 million compared to the third 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. The Company expects higher deposit insurance expense as recently-announced increases in deposit insurance premiums and other Treasury Department initiatives become effective. Mortgage banking costs included a $1.4 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. Subsequent to September 30, 2008, Visa and Mastercard announced that they had reached an agreement in principal to settle antitrust litigation with Discover Financial Services for approximately $2.8 billion. Management has estimated its additional obligation for this settlement under Visa's retrospective responsibility plan to be approximately $1.7 million. Management expects that this accrual will be offset in future periods as Visa issues additional Class A shares to provide funds for its litigation escrow account.
9 <TABLE> - ---------------------------------------------------------------------------------------------------------------------- Table 4 - Other Operating Expense (In thousands) Three Months Ended ---------------------------------------------------------------------------------- Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2008 2008 2008 2007 2007 ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Personnel $ 87,549 $ 89,597 $ 88,106 $ 84,512 $ 85,811 Business promotion 5,837 5,777 4,639 6,528 5,399 Professional fees and services 6,501 6,973 5,648 6,209 5,749 Net occupancy and equipment 15,570 15,100 15,061 15,466 14,752 Insurance 2,436 2,626 3,710 843 759 Data processing & communications 19,911 19,523 18,893 19,086 18,271 Printing, postage and supplies 4,035 4,156 4,419 4,221 4,201 Net (gains) losses and operating expenses of repossessed assets (136) (229) 378 120 172 Amortization of intangible assets 1,884 1,885 1,925 2,382 2,397 Mortgage banking costs 5,811 6,054 5,681 4,225 3,877 Change in fair value of mortgage servicing rights 5,554 767 1,762 3,344 3,446 Visa retrospective responsibility obligation 1,700 - (2,767) 2,767 - Other expense 7,638 7,039 5,949 8,024 6,184 - --------------------------------------------------------------------------------------------------------------------- Total other operating expense $ 164,290 $ 159,268 $ 153,404 $ 157,727 $ 151,018 - --------------------------------------------------------------------------------------------------------------------- </TABLE> Income Taxes Income tax expense was $23.0 million or 29% of book taxable income for the third quarter of 2008 compared with $30.8 million or 34% of book taxable income for the third quarter of 2007. The statute of limitations expired on an uncertain tax position and the Company adjusted its current income tax liability to amounts on filed tax returns for 2007 during the third quarter of 2008. Income tax expense would have been $26.6 million or 33% of book taxable income for the third quarter of 2008, excluding these items. 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 approximately $11.7 million at September 30, 2008. 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
10 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. The increase in contribution to net income provided by the Oklahoma Corporate Banking Division was due primarily to a $19.4 million increase in the fair value of derivative contracts related to SemGroup. The decrease in contribution to net income provided by the Regional Banking Division was due to increased net loans charged off, primarily in the Arizona market. <TABLE> - ------------------------------------------------------ -------------------------------- -------------------------------- Table 5 - Net Income by Line of Business (In thousands) Three months ended Sept. 30, Nine months ended Sept. 30, 2008 2007 2008 2007 ---------------- --------------- ---------------- --------------- <S> <C> <C> <C> <C> Regional banking $ 11,854 $ 21,798 $ 53,634 $ 70,853 Oklahoma corporate banking 34,125 21,694 16,720 58,754 Mortgage banking (2,352) 503 (6,844) 671 Oklahoma consumer banking 7,052 9,270 23,934 27,810 Wealth management 9,380 6,166 29,275 20,214 - ------------------------------------------------------ ---------------- --------------- ---------------- --------------- Subtotal 60,059 59,431 116,719 178,302 Funds management and other (3,374) 417 1,070 (11,798) - ------------------------------------------------------ ---------------- --------------- ---------------- --------------- Total $ 56,685 $ 59,848 $117,789 $166,504 - ------------------------------------------------------ ---------------- --------------- ---------------- --------------- </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 contributed $34.1 million to net income for the third quarter of 2008, up from $21.7 million for the third quarter of 2007. This Division recognized a $53.0 million after-tax loss in the second quarter of 2008 on loans and derivative contracts with SemGroup. During the third quarter of 2008, the fair value of certain derivative contracts related to SemGroup increased by $19.4 million due to falling energy prices. The change in fair value of these contracts increased net income after taxes by $11.9 million for the third quarter of 2008. The increase in fair value of derivative contracts is included in Other Operating Revenue. Excluding changes in the fair value of these contracts, the Oklahoma Corporate Banking Division's net income for the third quarter of 2008 was $22.3 million, up $585 thousand over the third quarter of 2007. Net interest revenue increased $829 thousand or 2% compared to the third quarter of 2007. Average earnings assets attributed to this division increased $151 million or 3% over the third quarter of 2007 to $4.7 billion. Average loans increased $23 million or 1% to $4.4 billion. Average commercial loans decreased $25 million or 1%. The decrease in average commercial loans was offset by a $38 million increase in average consumer loans, primarily indirect automobile loans, and a $13 million increase in average real estate loans. Average funds provided to the funds management unit by the Oklahoma Corporate Banking Division increased $104 million due to deposit growth. Operating revenue increased $3.3 million, excluding changes in the fair value of SemGroup related derivative contracts. Operating revenue provided by TransFund increased $1.1 million or 12% and service charges on commercial deposit accounts were up $495 thousand or 9%. Fees received from standby letters of credit were up $404 thousand or 20% over the third quarter of 2007. Operating expenses, which consist primarily of personnel and data processing costs, increased $2.6 million or 9%.
11 <TABLE> Table 6 - Oklahoma Corporate Banking (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- --- ------------- -- -------------- -- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 48,311 $ 62,144 $ 150,186 $ 184,822 NIR (expense) from internal sources (8,777) (23,439) (39,286) (69,341) ------------- ------------- -------------- ------------- Net interest revenue 39,534 38,705 110,900 115,481 Other operating revenue 46,870 24,174 36,566 68,627 Operating expense 31,116 28,532 91,248 84,443 Gains on financial instruments, net - 1,073 4,689 1,073 Net loans charged off (recovered) (512) (33) 33,932 4,611 Net income 34,125 21,694 16,720 58,754 Average assets $ 6,460,061 $ 5,743,011 $ 6,232,829 $ 5,746,449 Average economic capital 475,380 405,620 443,780 406,340 Return on assets 2.10% 1.50% 0.36% 1.37% Return on economic capital 28.56% 21.22% 5.03% 19.33% Efficiency ratio 36.01% 45.38% 61.88% 45.87% </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 36 locations in Tulsa, 32 locations in Oklahoma City and 15 locations throughout the state. Two locations are scheduled to open in the fourth quarter of 2008. The Oklahoma Consumer Banking Division contributed net income of $7.1 million for the third quarter of 2008, compared to net income of $9.3 million for the third quarter of 2007. Net interest revenue decreased $2.8 million or 15% over 2007 due primarily to a decrease in the internal transfer pricing credit. Average loans attributed to the Oklahoma Consumer Banking Division in 2008 increased $17 million or 6% compared with 2007. Average deposits provided by the Oklahoma Consumer Banking Division grew $109 million or 4% to $3.0 billion. Average demand deposits were up $44 million or 13% over 2007. Interest bearing deposits increased $65 million or 3%, including a $213 million or 21% increase in interest bearing transaction accounts and a $152 million or 10% decrease in time deposits. Other operating revenue was up $1.0 million or 5% over 2007 largely from check card revenue and overdraft fees. Operating expenses increased $2.0 million or 9% over 2007, including a $514 thousand or 6% increase in personnel expense and a $1.5 million or 14% increase in non-personnel expense. Net loans charged-off, which consist primarily of overdrawn deposit accounts, totaled $835 thousand for the third quarter of 2008 and $1.0 million for the third quarter of 2007. <TABLE> Table 7 - Oklahoma Consumer Banking (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ (10,812) $ (17,497) $ (37,208) $ (51,388) NIR (expense) from internal sources 26,455 35,899 85,270 106,338 ------------- ------------- -------------- ------------- Net interest revenue 15,643 18,402 48,062 54,950 Other operating revenue 20,991 19,975 60,933 57,183 Operating expense 24,258 22,242 69,619 64,624 Gains on financial instruments, net - - 1,576 - Net loans charged off 835 1,005 1,799 2,067 Net income 7,052 9,270 23,934 27,810 Average assets $ 3,044,296 $ 2,936,051 $ 3,023,757 $ 2,923,662 Average economic capital 60,340 63,540 60,020 61,660 Return on assets 0.92% 1.25% 1.06% 1.27% Return on economic capital 46.49% 57.88% 53.27% 60.30% Efficiency ratio 66.22% 57.96% 63.87% 57.63% </TABLE>
12 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 $2.4 million in the third quarter of 2008 compared to net income of $504 thousand in the third quarter of 2007. Changes in the fair value of mortgage servicing rights, net of hedging activity, reduced net income $2.7 million in 2008 and increased net income $127 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 $1.3 million in the third quarter of 2008 and $500 thousand for the third quarter of 2007. 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 $468 million of residential mortgage loans which generated net income of $513 thousand in the third quarter of 2008. Loan Production Sector Pre-tax losses from loan production totaled $1.0 million for the third quarter of 2008 and $201 thousand for the third quarter of 2007. Loan production revenue totaled $2.9 million in third quarter of 2008, including $5.1 million of capitalized mortgage servicing rights, partially offset by net losses on mortgage loans sold. Loan production revenue totaled $5.0 million in third quarter of 2007. Capitalized mortgage servicing rights totaled $4.0 million. The average initial fair value of servicing rights on mortgage loans funded was 1.47% for the third quarter of 2008 and 1.30% for the third quarter of 2007. Mortgage loans funded totaled $347 million in third quarter of 2008 and $305 million in the third quarter of 2007. Approximately 55% and 20% of the loans funded during the third quarter of 2008 were in Oklahoma and Texas, respectively. The pipeline of mortgage loan applications totaled $507 million at September 30, 2008, compared to $517 million at June 30, 2008 and $323 million at September 30, 2007. Operating expenses, excluding direct loan production costs which are recognized as part of the gain or loss on loans sold, totaled $5.2 million in 2008 and $5.6 million in 2007. Loan Servicing Sector The loan servicing sector had a pre-tax loss of $3.4 million for the third quarter of 2008 compared with pre-tax income of $467 thousand for the third quarter of 2007. We recognized a net pre-tax loss of $4.4 million in the third quarter of 2008 compared with a net pre-tax gain of $208 thousand in 2007 from changes in the value of mortgage servicing rights and economic hedging activities. Servicing revenue, including revenue on loans serviced for affiliates, totaled $5.0 million in third quarter of 2008 compared to $4.7 million in the same period of 2007. The average outstanding balance of loans serviced, including loans serviced for affiliates, was $5.8 billion during the third quarter of 2008 compared to $5.4 billion during 2007. Servicing revenue per outstanding loan principal was 35 basis points in 2008 compared with 36 basis points in 2007. Servicing costs totaled $2.2 million for the third quarter of 2008 and $1.9 million for the third quarter of 2007. At September 30, 2008, the total number of loans serviced by BOk Mortgage totaled 57,970. Serviced loans delinquent 90 days or more or in process of foreclosure totaled 682 or 1.18% of the number of loans serviced; 404 of these loans are in Oklahoma, 90 are in Arkansas, 59 are in Kansas / Missouri and 35 are in Texas.
13 <TABLE> Table 8 - Mortgage Banking (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 11,362 $ 9,833 $ 34,898 $ 26,177 NIR (expense) from internal sources (8,000) (8,620) (25,827) (23,163) ------------- ------------- -------------- ------------- Net interest revenue 3,362 1,213 9,071 3,014 Capitalized mortgage servicing rights 5,092 3,964 15,406 9,879 Other operating revenue 2,073 5,822 7,791 16,417 Operating expense 9,632 10,133 30,491 26,447 Change in fair value of mortgage servicing rights 5,554 3,446 8,083 (451) Gains (losses) on financial instruments, net 1,186 3,654 (4,141) (1,773) Net loans charged off 353 249 659 440 Net income (loss) (2,352) 503 (6,844) 671 Average assets $ 905,650 $ 770,608 $ 892,884 $ 692,854 Average economic capital 34,140 24,990 27,790 25,630 Return on assets (1.03)% 0.26% (1.02)% 0.13% Return on economic capital (27.41)% 7.99% (32.90)% 3.50% Efficiency ratio 91.50% 92.13% 94.49% 90.23% </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. At September 30, 2008, financial instruments with a fair value of $198 million were held for the economic hedge program. The interest rate sensitivity of the mortgage servicing rights and securities held as a hedge is modeled over a range of +/- 50 basis points. At September 30, 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 $ 4,498 $ (4,927) Fair value of hedging instruments (4,649) 3,697 ----------------- ---------------- Net $ (151) $ (1,230) ----------------- ---------------- 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 $4.5 million while a 50 basis point decrease is expected to reduce the fair value $4.9 million. This considers that there is an upper limit to appreciation in the value of servicing rights as rates rise due to the contractual repayment terms of the loans and other factors. There is much less of a limit 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.
14 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. 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 provides 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 $9.4 million in the third quarter of 2008. This compared to net income of $6.2 million in the third quarter of 2007. Growth in net income was due primarily to increased revenue from trading and institutional securities sales. Net income for the third quarter of 2007 was decreased $1.4 million for the after-tax cost of the settlement of certain matters with the American Performance Funds. Net income for the Wealth Management Division for the third quarter of 2008 increased $1.9 million or 25% over the same period of 2007, excluding this settlement cost. Trust fees and commissions for the Wealth Management line of business totaled $17.5 million, up $501 thousand or 3% increase over last year. At September 30, 2008 and 2007, the Wealth Management line of business was responsible for trust assets with aggregate market values of $30.4 billion and $31.8 billion, respectively, under various fiduciary arrangements. The change in trust assets reflected lower market value of assets managed partially offset by new business generated during the year. We have sole or joint discretionary authority over $11.5 billion of trust assets at September 30, 2008 compared to $11.8 billion of trust assets at September 30, 2007. The fair value of non-managed assets was $11.8 billion at September 30, 2008 and $12.2 billion at September 30, 2007. Assets held in safekeeping totaled $7.1 billion at September 30, 2008. Brokerage and trading activities provided $4.6 million of the Wealth Management Division's net income in the third quarter of 2008 compared to $2.5 million in 2007. Trading fees and commissions revenue increased $5.8 million due primarily to a $4.1 million increase in revenue from institutional securities and a $1.7 million increase in customer derivative revenue. Operating expenses, which consist primarily of compensation expense increased $2.4 million or 18%. Incentive compensation expense which is directly related to revenue growth was up $2.6 million. <TABLE> Table 10 - Wealth Management (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 6,697 $ 3,398 $ 17,603 $ 11,404 NIR (expense) from internal sources (1,075) 4,775 (1,410) 13,669 ------------- ------------- -------------- ------------- Net interest revenue 5,622 8,173 16,193 25,073 Other operating revenue 43,748 35,785 135,156 98,275 Operating expense 34,022 31,466 102,234 87,470 American Performance Fund settlement - 2,232 - 2,232 Net loans charged off (recovered) (3) 168 1,196 575 Net income 9,380 6,166 29,275 20,214 Average assets $ 2,848,047 $ 1,907,534 $ 2,705,409 $ 1,791,883 Average economic capital 156,840 155,270 147,700 156,430 Return on assets 1.31% 1.28% 1.45% 1.51% Return on economic capital 23.79% 15.76% 26.48% 17.28% Efficiency ratio 68.91% 71.58% 67.55% 70.91% </TABLE>
15 Regional Banking Regional banking consists primarily of the corporate and commercial banking services provided by Bank of Texas, Bank of Albuquerque, Bank of Arkansas, Colorado State Bank and Trust, Bank of Arizona and Bank of Kansas City in their respective markets. It also includes fiduciary services provided by Colorado State Bank and Trust. Small businesses and middle-market corporations are the regional banks' primary customer focus. Regional banking contributed net income of $11.9 million during the third quarter of 2008. This compares with net income of $21.8 million during the third quarter of 2007. Net loans charged off at the regional banks totaled $19.2 million in the third quarter of 2008, including $10.8 million in Arizona and $5.0 million in Colorado. Net loans charged off at the regional banks totaled $3.5 million in the third quarter of 2007. Net losses from banking operations in the Arizona market totaled $6.1 million for the third quarter of 2008, compared with net income of $142 thousand for the third quarter of 2007. Net loans charged off were $10.8 million, up $10 million over the third quarter of 2007. Substantially all of the third quarter's net loans charged off were residential development, construction and related land loans. Charge offs of two loans in the Tucson market totaled $6.1 million. Management has reviewed substantially all loans and loan commitments during the third quarter and has reorganized loan production staff in the Tucson market. Net losses from banking operations in the Colorado market totaled $658 thousand for the third quarter of 2008, compared with net income of $3.2 million for the third quarter of 2007. Net loans charged off were $5.0 million, compared with a net recovery of $9 thousand in the third quarter of 2007. A single real estate credit comprised substantially all of the third quarter of 2008 charge off. Average loans in the Colorado market increased $123 million or 16% over the third quarter of 2007. Average commercial loans and average commercial real estate loans were up $62 million and $60 million, respectively. Average deposits decreased $58 million. Average time deposits decreased $147 million and average interest-bearing transaction and savings deposits increased $75 million. Average demand deposits were up $15 million. Net income provided by Texas operations was $12.0 million for the third quarter of 2008 a $937 thousand decrease from the third quarter of 2007. Net loans charged off totaled $2.3 million for the third quarter of 2008 and $1.1 million for the third quarter of 2007. Average loans in the Texas market totaled $3.4 billion for the third quarter of 2008, up $324 million or 10% over the same quarter of last year. Average commercial loans were up $185 million and average real estate loans were up $85 million. Consumer loans, which consist primarily of indirect automobile loans, grew $63 million over the third quarter of 2007. Average loans in the Dallas market increased $330 million or 15% over the third quarter of 2007. Average loans in the Houston market increased $4.6 million or 1%. Growth in community banking loans was largely offset by a decrease in energy loans in the Houston market. Average deposits in the Texas market were $3.1 billon for the third quarter of 2008, down $70 million or 2% compared with the third quarter of 2007. Average time deposits decreased $105 million and average interest-bearing transaction deposits decreased $60 million. Average demand deposits increased $98 million. Average deposits decreased $55 million or 3% in the Dallas market and $22 million or 2% in the Houston market. Net income from banking operations in New Mexico and Arkansas totaled $5.0 million and $997 thousand, respectively, for the third quarter of 2008. Net income for the third quarter of 2007 was $5.0 million from banking operations in New Mexico and $886 thousand from banking operations in Arkansas. Average outstanding loans in the New Mexico market were $794 million for the third quarter of 2008, up $58 million or 8% over 2007. Average outstanding loans in the Arkansas market were $408 million for the third quarter of 2008, up $61 million or 18% over 2007. Net income from banking operations in Kansas City was $732 thousand for the third quarter of 2008 compared with a net loss of $328 thousand for the third quarter of 2007. Net interest revenue was up $1.2 million and other operating revenue was up $623 thousand. Average loans were $387 million, up $193 million from last year. Average deposits were $77 million, up $27 million over the third quarter of 2007.
16 <TABLE> Table 11 - Bank of Texas (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 45,353 $ 49,475 $ 134,800 $ 140,711 NIR (expense) from internal sources (5,498) (9,545) (17,716) (24,227) ------------- ------------- -------------- ------------- Net interest revenue 39,855 39,930 117,084 116,484 Other operating revenue 8,174 7,713 24,189 20,851 Operating expense 27,763 26,379 81,975 71,963 Gains on financial instruments, net - - 258 - Net loans charged off 2,299 1,110 5,193 1,646 Net income 11,960 12,898 35,316 40,740 Average assets $ 4,685,980 $ 4,617,458 $ 4,698,910 $ 4,227,765 Average economic capital 238,100 286,290 198,520 284,630 Average invested capital 489,990 453,370 450,400 451,710 Return on assets 1.02% 1.11% 1.00% 1.29% Return on economic capital 19.98% 17.87% 23.76% 19.14% Return on average invested capital 9.71% 11.29% 10.47% 12.06% Efficiency ratio 57.80% 55.37% 58.03% 52.40% </TABLE> <TABLE> Table 12 - Bank of Albuquerque (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 14,808 $ 18,685 $ 48,699 $ 55,130 NIR (expense) from internal sources (2,722) (5,669) (9,661) (16,438) ------------- ------------- -------------- ------------- Net interest revenue 12,086 13,016 39,038 38,692 Other operating revenue 4,571 4,401 13,378 12,687 Operating expense 8,235 7,893 24,046 23,004 Gains on financial instruments, net - - 190 - Net loans charged off 288 1,306 1,425 2,866 Net income 4,970 5,022 16,576 15,586 Average assets $ 1,696,897 $ 1,621,220 $ 1,965,631 $ 1,592,287 Average economic capital 96,730 94,450 93,420 92,890 Average invested capital 115,820 113,540 112,510 111,980 Return on assets 1.17% 1.23% 1.13% 1.31% Return on economic capital 20.44% 21.10% 23.70% 22.43% Return on average invested capital 17.07% 17.55% 19.68% 18.61% Efficiency ratio 49.44% 45.32% 45.88% 44.77% </TABLE>
17 <TABLE> Table 13 - Bank of Arkansas (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 4,279 $ 4,555 $ 12,704 $ 12,192 NIR (expense) from internal sources (1,039) (1,915) (3,668) (5,032) ------------- ------------- -------------- ------------- Net interest revenue 3,240 2,640 9,036 7,160 Other operating revenue 284 291 927 935 Operating expense 1,069 1,114 3,289 3,253 Gains on financial instruments, net - - 7 - Net loans charged off 825 367 2,180 773 Net income 997 886 2,750 2,486 Average assets $ 428,078 $ 366,423 $ 422,120 $ 327,903 Average economic capital 28,520 19,540 25,720 18,390 Average invested capital 28,520 19,540 25,720 18,390 Return on assets 0.93% 0.96% 0.87% 1.01% Return on economic capital 13.91% 17.99% 14.28% 18.07% Return on average invested capital 13.91% 17.99% 14.28% 18.07% Efficiency ratio 30.33% 38.01% 33.01% 40.19% </TABLE> <TABLE> Table 14 - Colorado State Bank and Trust (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 16,000 $ 19,551 $ 47,805 $ 54,695 NIR (expense) from internal sources (4,352) (8,031) (14,146) (22,185) ------------- ------------- -------------- ------------- Net interest revenue 11,648 11,520 33,659 32,510 Other operating revenue 3,437 3,416 11,181 9,760 Operating expense 11,064 9,707 31,298 23,651 Gains on financial instruments, net - - 66 - Net loans charged off (recovered) 4,998 (9) 5,432 72 Net income (loss) (658) 3,178 4,968 11,306 Average assets $ 1,880,419 $ 1,865,783 $ 1,885,981 $ 1,673,872 Average economic capital 115,320 97,550 109,730 91,530 Average invested capital 170,620 152,840 165,030 146,830 Return on assets (0.14)% 0.68% 0.35% 0.90% Return on economic capital (2.27)% 12.93% 6.05% 16.51% Return on average invested capital (1.53)% 8.25% 4.02% 10.29% Efficiency ratio 73.34% 64.99% 69.80% 55.95% </TABLE>
18 <TABLE> Table 15 - Bank of Arizona (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 7,563 $ 10,422 $ 24,527 $ 30,166 NIR (expense) from internal sources (2,869) (5,457) (9,855) (15,704) ------------- ------------- -------------- ------------- Net interest revenue 4,694 4,965 14,672 14,462 Other operating revenue 237 198 794 567 Operating expense 4,223 4,222 12,547 12,177 Net loans charged off 10,768 708 12,912 708 Net income (loss) (6,147) 142 (6,104) 1,309 Average assets $ 611,729 $ 598,967 $ 614,945 $ 576,126 Average economic capital 71,770 50,630 61,090 47,970 Average invested capital 88,420 67,280 77,740 64,620 Return on assets (4.00)% 0.09% (1.33)% 0.30% Return on economic capital (34.07)% 1.11% (13.35)% 3.65% Return on average invested capital (27.66)% 0.84% (10.49)% 2.71% Efficiency ratio 85.64% 81.77% 81.13% 81.02% </TABLE> <TABLE> Table 16 - Bank of Kansas City (Dollars in Thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------------- ---------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> NIR (expense) from external sources $ 4,719 $ 3,627 $ 14,480 $ 11,927 NIR (expense) from internal sources (2,150) (2,247) (7,230) (7,530) ------------- ------------- -------------- ------------- Net interest revenue 2,569 1,380 7,250 4,397 Other operating revenue 1,373 750 3,821 1,960 Operating expense 2,746 2,667 8,489 7,295 Net loans charged off (recovered) (3) - 2,373 2 Net income (loss) 732 (328) 128 (574) Average assets $ 425,999 $ 236,883 $ 428,095 $ 250,735 Average economic capital 40,050 12,590 28,690 6,070 Average invested capital 40,050 12,590 28,690 6,070 Return on assets 0.68% (0.55)% 0.04% (0.31)% Return on economic capital 7.27% (10.34)% 0.60% (12.64)% Return on average invested capital 7.27% (10.34)% 0.60% (12.64)% Efficiency ratio 69.66% 125.21% 76.68% 114.76% </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 September 30, 2008, investment securities were carried at $244 million and had a fair value of $240 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 $6.4 billion at September 30, 2008, up $420 million compared with June 30, 2008. Mortgage-backed securities represented 97% of total available for sale securities. The Company holds no debt securities of corporate issuers.
19 <TABLE> Table 17 - Available for Sale Securities (in thousands) September 30, 2008 ----------------------------------------------- Amortized Fair Gross Unrealized ----------------------- Cost Value Gain Loss ----------------------------------------------- <S> <C> <C> <C> <C> U.S. Treasury $ 26,984 $ 27,005 $ 21 $ - Municipal and other tax-exempt 18,833 18,534 57 (356) Mortgage-backed securities: U. S. agencies 4,553,582 4,560,587 34,716 (27,711) Private issue 1,685,742 1,523,021 44 (162,765) - ---------------------------------------------------------------------------------------- Total mortgage-backed securities 6,239,324 6,083,608 34,760 (190,476) - ---------------------------------------------------------------------------------------- Other debt securities 38 37 - (1) Equity securities and mutual funds 153,005 150,346 5,920 (8,579) - ---------------------------------------------------------------------------------------- Total $6,438,184 $6,279,530 $40,758 $(199,412) - ---------------------------------------------------------------------------------------- </TABLE> A primary risk of holding mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. We evaluate this risk through extensive modeling of risk both before making an investment and throughout the life of the security. The expected duration of the mortgage-backed securities portfolio was approximately 2.8 years at September 30, 2008. Management estimates that the expected duration would extend to approximately 3.3 years assuming an immediate 300 basis point upward 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 FNMA and FHLMC. Principal and interest payments on the underlying loans are fully guaranteed. At September 30, 2008, approximately $4.8 billion of the Company's mortgage-backed securities were issued by U.S. government agencies. The Company also holds $1.5 billion of mortgage-backed securities privately issued by publicly-owned financial institutions. Credit risk on mortgage-backed securities originated by these issuers is mitigated by investment in senior tranches with additional collateral support. None of these securities are backed by sub-prime mortgage loans, collateralized debt obligations or collateralized loan obligations. Approximately $439 million of the privately issued mortgage-backed securities consisted of Alt-A mortgage loans. Approximately 83% of these securities are credit enhanced with additional collateral support and approximately 87% of our Alt-A mortgage-backed securities represents pools of fixed-rate mortgage loans. None of the adjustable rate mortgages are payment option ARMs. Our portfolio of available for sale securities also included preferred stocks issued by seven financial institutions. These stocks were originally purchased for $46 million and have a current carrying value of $32 million. Our carrying value of these stocks has been reduced by $14 million of other-than-temporary impairment charges recognized in previous periods. None of the institutions that issued these stocks are in default and all of the issuers are rated investment grade. BOK Financial does not own any equity securities issued by Fannie Mae or Freddie Mac. These preferred stocks have certain debt-like features such as a quarterly dividend based on LIBOR. However, the issuers of these stocks have no obligation to redeem them. The aggregate fair value of these preferred stocks decreased to $24 million at September 30, 2008 due to a significant widening of spreads to LIBOR related to current market disruptions. Management believes that the fair value of these securities will recover to our carrying value as spreads to LIBOR return to a range of 400 basis points to 500 basis points over the next two years. Net unrealized losses on available for sale debt and equity securities totaled $159 million at September 30, 2008 compared with net unrealized losses of $91 million at June 30, 2008. The aggregate gross amount of unrealized losses at September 30, 2008 totaled $199 million. Management evaluated the securities with unrealized losses to determine if we believed that the losses were temporary. This evaluation considered factors such as causes of the unrealized losses, support for debt securities provided by government guarantees or credit enhancements, ratings of the respective issuers and other factors to assess the prospects for recovery over various interest rate scenarios and time periods. 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
20 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. Bank-Owned Life Insurance The Company has approximately $234 million of bank-owned life insurance at September 30, 2008. This investment is expected to provide a long-term source of earnings to support existing employee benefit programs. Substantially all of the funds are held in separate accounts and are invested in U.S. government, mortgage-backed and corporate debt securities. The cash surrender value of certain life insurance policies is further supported by a stable value wrap, which protects against changes in the fair value of the investments. At September 30, 2008, cash surrender value represented by the underlying fair value of investments held in separate accounts was approximately $196 million and cash surrender value represented by the value of the stable value wrap was approximately $5.7 million. The stable value wrap was provided by a highly-rated, domestic bank. The remaining cash surrender value primarily represented the cash surrender value of policies held in the general accounts of various insurance companies. Loans The aggregate loan portfolio before allowance for loan losses totaled $12.7 billion at September 30, 2008, a $162 million or 5% annualized increase since June 30, 2008. Commercial loans and residential mortgage loans increased during the third quarter of 2008. Commercial real estate loans and consumer loans decreased during the same period. Previously, the Company had reported residential loans held for sale by its mortgage banking division as part of its loan portfolio. These loans are now reported separately on the consolidated balance sheet and are excluded from this discussion. Information for prior periods has been reclassified for consistent presentation. <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 18 - Loans (In thousands) Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2008 2008 2008 2007 2007 --------------------------------------------------------------------------------- Commercial: <S> <C> <C> <C> <C> <C> Energy $ 2,099,996 $ 1,895,050 $ 1,966,996 $ 1,954,967 $ 1,852,681 Services 1,975,604 1,848,360 1,784,723 1,721,143 1,671,291 Wholesale/retail 1,199,216 1,226,875 1,206,224 1,081,172 1,039,855 Manufacturing 519,485 542,019 542,297 493,185 536,631 Healthcare 778,819 747,434 733,086 680,294 648,871 Agriculture 229,447 253,198 248,345 236,860 259,904 Other commercial and industrial 471,235 525,637 475,187 569,884 501,128 - --------------------------------------------------------------------------------------------------------------------- Total commercial 7,273,802 7,038,573 6,956,858 6,737,505 6,510,361 - --------------------------------------------------------------------------------------------------------------------- Commercial real estate: Construction and land development 968,522 1,021,135 1,066,096 1,004,547 975,764 Retail 375,929 378,241 409,690 371,913 380,040 Office 470,383 422,558 414,466 394,739 427,444 Multifamily 268,614 251,325 236,787 214,388 234,182 Industrial 151,187 180,358 161,068 151,765 163,116 Other real estate loans 479,357 573,880 543,817 613,120 604,489 - --------------------------------------------------------------------------------------------------------------------- Total commercial real estate 2,713,992 2,827,497 2,831,924 2,750,472 2,785,035 - --------------------------------------------------------------------------------------------------------------------- Residential mortgage: Permanent mortgage 1,193,488 1,130,417 1,052,785 1,089,073 1,069,356 Home equity 476,465 477,180 476,984 442,223 428,212 - --------------------------------------------------------------------------------------------------------------------- Total residential mortgage 1,669,953 1,607,597 1,529,769 1,531,296 1,497,568 - --------------------------------------------------------------------------------------------------------------------- Consumer: Indirect automobile 721,390 735,098 685,803 625,203 592,207 Other consumer 300,833 309,273 291,401 296,094 292,505 - --------------------------------------------------------------------------------------------------------------------- Total consumer 1,022,223 1,044,371 977,204 921,297 884,712 - --------------------------------------------------------------------------------------------------------------------- Total $ 12,679,970 $ 12,518,038 $ 12,295,755 $ 11,940,570 $ 11,677,676 - --------------------------------------------------------------------------------------------------------------------- </TABLE> The commercial loan portfolio increased $235 million during the third quarter of 2008 to $7.3 billion at September 30, 2008 from the second quarter of 2008. Energy loans totaled $2.1 billion or 17% of total loans. Outstanding energy loans increased $205 million during the third quarter of 2008. Approximately $1.8 billion of energy loans were to oil
21 and gas producers, up from $1.6 billion at June 30, 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 $1.1 billion in Oklahoma, $615 million in Texas and $392 million in Colorado. The services sector of the loan portfolio totaled $2.0 billion or 16% 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 $718 million of the outstanding balance of services loans is attributed to Texas, $644 million to Oklahoma, $244 million to New Mexico, $141 million to Arizona and $108 million to Colorado. Other notable loan concentrations by primary industry of the borrowers are presented in Table 18. BOK Financial participates in shared national credits when appropriate to obtain or maintain business relationships with local customers. Shared national credits are defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants. At September 30, 2008, the outstanding principal balance of these loans totaled $2.1 billion. Substantially all of these loans are to borrowers with local market relationships. BOK Financial serves as the agent lender in approximately 23% 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 $2.7 billion or 21% of the loan portfolio at September 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 $114 million from the previous quarter end. Construction and land development loans decreased $53 million to $969 million. Loans secured by industrial facilities decreased $29 million and other commercial real estate loans decreased $95 million. Loans secured by office buildings increased $48 million and loans secured by multifamily residential properties increased $17 million. Loans secured by land, residential lots and construction totaled $969 billion at September 30, 2008. Approximately $252 million of these loans are attributed to the Oklahoma market, $267 million to the Texas market, $178 million to the Colorado market and $160 million to the Arizona market. The geographic distribution of all other commercial real estate loans included $575 million in Oklahoma, $586 million in Texas, $200 million in New Mexico, $166 million in Arizona and $89 million in Colorado. Residential mortgage loans totaled $1.7 billion, up $62 million since June 30, 2008. Permanent 1-4 family mortgage loans increased $63 million and home equity loans decreased $1 million. We have no concentration in sub-prime residential mortgage loans and our mortgage loan portfolio does not include payment option adjustable rate mortgage loans or loans with initial rates that are below market. Our portfolio of permanent 1- 4 family mortgage loans includes $130 million of community development loans. These loans are generally underwritten to prime standards and require full documentation. Approximately $1.1 billion of our residential mortgage loan portfolio is attributed to borrowers in Oklahoma and $308 million to borrowers in Texas. At September 30, 2008, consumer loans included $721 million of indirect automobile loans. Approximately $454 million of these loans were purchased from dealers in Oklahoma and $176 million were purchased from dealers in Arkansas. The remaining $91 million were purchased from dealers in Texas. Indirect automobile loans decreased $14 million since June 30, 2008. Approximately 6% of the outstanding balance at September 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.
22 <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 19 - Loans by Principal Market Area (In thousands) Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2008 2008 2008 2007 2007 --------------------------------------------------------------------------------- Oklahoma: <S> <C> <C> <C> <C> <C> Commercial $ 3,368,823 $ 3,228,179 $ 3,248,424 $ 3,219,176 $ 3,113,412 Commercial real estate 827,357 875,546 940,686 890,703 875,135 Residential mortgage 1,134,066 1,099,277 1,080,882 1,080,483 1,058,142 Consumer 580,211 601,184 586,695 576,070 562,631 --------------------------------------------------------------------------------- Total Oklahoma $ 5,910,457 $ 5,804,186 $ 5,856,687 $ 5,766,432 $ 5,609,320 --------------------------------------------------------------------------------- Texas: Commercial $ 2,205,169 $ 2,166,925 $ 2,124,192 $ 1,985,645 $ 1,941,731 Commercial real estate 853,653 889,364 838,781 846,303 913,910 Residential mortgage 307,655 299,996 262,305 275,533 266,850 Consumer 214,133 204,081 168,949 142,958 133,391 --------------------------------------------------------------------------------- Total Texas $ 3,580,610 $ 3,560,366 $ 3,394,227 $ 3,250,439 $ 3,255,882 --------------------------------------------------------------------------------- New Mexico: Commercial $ 442,644 $ 451,225 $ 472,543 $ 473,262 $ 446,573 Commercial real estate 281,061 271,177 258,731 252,884 256,994 Residential mortgage 95,165 89,469 85,834 84,336 83,274 Consumer 18,296 16,977 14,977 16,105 15,769 --------------------------------------------------------------------------------- Total New Mexico $ 837,166 $ 828,848 $ 832,085 $ 826,587 $ 802,610 --------------------------------------------------------------------------------- Arkansas: Commercial $ 104,630 $ 96,775 $ 100,489 $ 106,328 $ 117,993 Commercial real estate 127,925 124,049 130,956 124,317 107,588 Residential mortgage 16,941 19,527 16,621 16,393 18,411 Consumer 183,543 197,979 180,551 163,626 148,404 --------------------------------------------------------------------------------- Total Arkansas $ 433,039 $ 438,330 $ 428,617 $ 410,664 $ 392,396 --------------------------------------------------------------------------------- Colorado: Commercial $ 598,519 $ 489,844 $ 486,525 $ 490,373 $ 491,204 Commercial real estate 266,739 276,062 261,099 252,537 247,802 Residential mortgage 49,676 38,517 31,011 26,556 26,322 Consumer 18,328 16,367 17,552 16,457 18,623 --------------------------------------------------------------------------------- Total Colorado $ 933,262 $ 820,790 $ 796,187 $ 785,923 $ 783,951 --------------------------------------------------------------------------------- Arizona: $ 213,861 $ 207,173 $ 174,360 $ 157,341 $ 147,103 Commercial Commercial real estate 326,615 351,058 361,567 342,673 349,840 Residential mortgage 58,800 53,321 50,719 46,269 43,510 Consumer 5,551 5,315 6,815 5,522 5,491 --------------------------------------------------------------------------------- Total Arizona $ 604,827 $ 616,867 $ 593,461 $ 551,805 $ 545,944 --------------------------------------------------------------------------------- Kansas / Missouri: Commercial $ 340,156 $ 398,452 $ 350,325 $ 305,380 $ 252,345 Commercial real estate 30,642 40,241 40,104 41,055 33,766 Residential mortgage 7,650 7,490 2,397 1,726 1,059 Consumer 2,161 2,468 1,665 559 403 --------------------------------------------------------------------------------- Total Kansas / Missouri $ 380,609 $ 448,651 $ 394,491 $ 348,720 $ 287,573 --------------------------------------------------------------------------------- Total BOK Financial loans $ 12,679,970 $ 12,518,038 $ 12,295,755 $ 11,940,570 $ 11,677,676 --------------------------------------------------------------------------------- </TABLE> Loan Commitments BOK Financial enters into certain off-balance sheet arrangements in the normal course of business. These arrangements included loan commitments which totaled $5.3 billion and standby letters of credit which totaled $601 million at September 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
23 represent future cash requirements. Approximately $311 thousand of the outstanding standby letters of credit were issued on behalf of customers whose loans are non-performing at September 30, 2008. 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. 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 September 30, 2008, the principal balance of loans sold subject to recourse obligations totaled $388 million. Substantially all of these loans are to borrowers in our primary markets including $274 million to borrowers in Oklahoma, $44 million to borrowers in Arkansas, $22 million to borrowers in New Mexico, $18 million to borrowers in the Kansas City area and $16 million to borrowers in Texas. The separate reserve for these off-balance sheet commitments was $8.6 million at September 30, 2008. Approximately 2.17% of the loans sold with recourse with an outstanding principal balance of $8.2 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 $2.2 million for the third quarter of 2008. Net losses charged against the reserve totaled $1.2 million for the third 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. 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 may be reduced and additional margin collateral may be 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. Derivative contracts are carried at fair value. At September 30, 2008, the net fair values of derivative contracts reported as assets under these programs totaled $572 million, down from $1.4 billion at June 30, 2008 due to cash settlements and falling energy prices. At September 30, derivative contracts carried as assets included energy contracts with fair values of $415 million, interest rate contracts with fair values of $93 million, agricultural product contracts with fair values of $4 million and foreign exchange contracts with fair values of $53 million. The aggregate net fair values of derivative contracts held under these programs reported as liabilities totaled $374 million. 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 total amount of derivative liabilities at September 30, 2008 was reduced by $217 million of cash collateral. A table showing the fair value of derivative assets and liabilities, net of cash margin, is presented in Footnote 3 to the Consolidated Financial Statements (Unaudited), which follows this report.
24 The fair value of derivative contracts reported as assets under these programs, net of cash margin held by the Company, by category of debtor at September 30, 2008 was (in thousands): Customers $362,308 Banks 73,619 Energy companies 82,802 Exchanges 51,196 Other 1,583 ------- Fair value of customer hedge asset derivative contracts, net $571,508 ======= In addition to cash margin, the Company accepts liens against physical commodities as collateral for derivative contracts. The fair value of contracts backed by energy production totaled approximately $221 million. Approximately $67 million of the fair value of derivative contracts are with customers which store or transport energy products. 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 largest amount due from a single counterparty, a subsidiary of an international energy company, at September 30, 2008 was $67 million. The amount due from this counterparty decreased to $35 million through receipt of cash margin the next day. Summary of Loan Loss Experience BOK Financial maintains separate reserves for loan losses and reserves for off-balance sheet credit risk. The combined allowance for loan losses and reserve for off-balance sheet credit losses totaled $209 million or 1.65% of outstanding loans and 99% of non-accruing loans at September 30, 2008. The allowance for loan losses was $187 million and the reserve for off-balance sheet credit losses was $22 million. At June 30, 2008, the combined allowance for loan losses and off-balance sheet credit losses was $177 million or 1.41% of outstanding loans and 119% of non-accruing loans. Net loans charged off during the third quarter of 2008 totaled $20.2 million compared to $39.0 million in the previous quarter and $4.9 million in the third quarter of 2007. The ratio of net loans charged off to average outstanding loans was 0.64% for the third quarter of 2008 compared with 1.26% for the second quarter of 2008 and 0.17% for the third quarter of 2007. Gross loans charged off in the third quarter of 2008 increased to $33.9 million from $15.2 million in the second quarter of 2008, excluding a $26.0 million SemGroup loan charge-off. Gross loans charged off included $11.4 million of commercial loans, $14.4 million of commercial real estate loans and $5.3 million of consumer loans. Recoveries of loans previously charged off increased to $13.7 million in the third quarter of 2008 from $2.5 million in the previous quarter. We recovered $7.1 million from a loan charged off in 2005 and $4.0 million from a loan charged off in 2001 during the third quarter of 2008. Consumer loan net charge-offs, which includes indirect auto loan and deposit account overdraft losses, totaled $3.7 million for the third quarter of 2008, up $774 thousand over the previous quarter. Net charge-offs of indirect auto loans totaled $2.3 million for the third quarter of 2008 and $1.7 million for the second quarter of 2008. Net indirect auto loans charged off were $1.4 million in the Oklahoma market, $668 thousand in the Arkansas market and $239 thousand in the Texas market. Approximately 2.29% of the indirect automobile loan portfolio is past due 30 days or more, including 2.23% in Oklahoma, 2.56% in Arkansas and 2.08% in Texas. At June 30, 2008, approximately 1.95% of the indirect automobile loan portfolio was past due 30 days or more. This compares to a national average of 2.60% for indirect automobile loans past due 30 days or more at June 30, 2008. 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 20 presents the trend of reserves for off-balance sheet credit losses and the relationship between the reserve and loan commitments. The relationship between the combined reserve for credit losses and outstanding loans is also presented 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.
25 <TABLE> - ------------------------------------------------------------------------------------------------------------------------------ Table 20 - Summary of Loan Loss Experience (In thousands) Three Months Ended ---------------------------------------------------------------------------------- Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2008 2008 2008 2007 2007 ---------------------------------------------------------------------------------- Reserve for loan losses: <S> <C> <C> <C> <C> <C> Beginning balance $ 154,018 $ 136,584 $ 126,677 $ 121,932 $ 119,759 Loans charged off: Commercial 11,393 33,502 4,244 2,731 3,072 Commercial real estate 14,394 2,572 1,602 1,369 339 Residential mortgage 2,865 1,068 814 891 394 Consumer 5,274 4,384 4,418 3,939 3,684 - ------------------------------------------------------------------------------------------------------------------------------ Total 33,926 41,526 11,078 8,930 7,489 - ------------------------------------------------------------------------------------------------------------------------------ Recoveries of loans previously charged off: Commercial 11,882 842 435 242 1,172 Commercial real estate 175 98 52 2 30 Residential mortgage 65 121 58 19 86 Consumer 1,590 1,474 1,676 1,321 1,332 - ------------------------------------------------------------------------------------------------------------------------------ Total 13,712 2,535 2,221 1,584 2,620 - ------------------------------------------------------------------------------------------------------------------------------ Net loans charged off 20,214 38,991 8,857 7,346 4,869 Provision for loan losses 52,712 56,425 18,764 12,091 7,104 Adjustments due to acquisitions - - - - (62) - ------------------------------------------------------------------------------------------------------------------------------ Ending balance $ 186,516 $ 154,018 $ 136,584 $ 126,677 $ 121,932 - ------------------------------------------------------------------------------------------------------------------------------ Reserve for off-balance sheet credit losses: Beginning balance $ 22,545 $ 19,660 $ 20,853 $ 19,744 $ 19,647 Provision for off-balance sheet credit losses (1) 2,885 (1,193) 1,109 97 - ------------------------------------------------------------------------------------------------------------------------------ Ending balance $ 22,544 $ 22,545 $ 19,660 $ 20,853 $ 19,744 - ------------------------------------------------------------------------------------------------------------------------------ Total provision for credit losses $ 52,711 $ 59,310 $ 17,571 $ 13,200 $ 7,201 - ------------------------------------------------------------------------------------------------------------------------------ Reserve for loan losses to loans outstanding at period-end 1.47% 1.23% 1.11% 1.06% 1.04% Net charge-offs (annualized) to average loans 0.64 1.26 0.29 0.25 0.17 Total provision for credit losses (annualized) to average loans 1.67 1.91 0.58 0.45 0.25 Recoveries to gross charge-offs 40.42 6.10 20.05 17.74 34.98 Reserve for loan losses as a multiple of net charge-offs (annualized) 2.31x 0.99x 3.86x 4.31x 6.26x Reserve for off-balance sheet credit losses to off-balance sheet credit commitments 0.38% 0.36% 0.32% 0.35% 0.33% Combined reserves for credit losses to loans outstanding at period-end 1.65 1.41 1.27 1.24 1.21 - ------------------------------------------------------------------------------------------------------------------------------ </TABLE> Specific impairment reserves are determined through evaluation of estimated future cash flows and collateral value. At September 30, 2008, specific impairment reserves totaled $4.0 million on total impaired loans of $201 million. Specific impairment reserves were $11.0 million on total impaired loans of $139 million at June 30, 2008. Approximately $7.5 million of loans impaired at June 30, 2008 were charged off in the third quarter. 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, commercial real estate, residential mortgage and consumer loan portfolios. Nonspecific reserves attributed to general economic conditions increased in the third quarter of 2008. Weakness in the economy became more apparent due to disruption in the credit markets, lower consumer confidence and continued weakness in residential real estate markets. The provision for credit losses totaled $52.7 million for the third quarter of 2008, $59.3 million for the second quarter of 2008 and $7.2 million for the third 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. Factors considered in determining the provision for credit losses for the third quarter of 2008 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 potential problem loans increased.
26 Nonperforming Assets Non-performing assets totaled $252 million or 1.98% of outstanding loans and repossessed assets at September 30, 2008, up $71 million since June 30, 2008. The increase in non-performing assets included an expected $36 million from amounts due from SemGroup on funded letters of credit and derivative contracts that terminated during the third quarter. Non-performing assets included $9.6 million of restructured residential mortgage loans guaranteed by agencies of the U.S. government and $16 million of loans and repossessed assets acquired with First United Bank in the second quarter of 2007. The Company will be reimbursed by the sellers up to $8 million for any losses incurred during a three-year period after the June 2007 acquisition date. Non-accruing loans totaled $212 million at September 30, 2008 and $149 million at June 30, 2008. Newly identified non-accruing loans totaled $101 million, including $36 million from SemGroup. Cash payment received on non-accruing loans totaled $19 million and $19 million of non-accruing loans were charged-off. Non-accruing commercial loans totaled $106 million or 1.45% of total commercial loans at September 30, 2008. Approximately $50 million of non-accruing commercial loans are in the energy sector of the portfolio, including $48 million due from SemGroup. This amount represents one-third of our pre-bankruptcy amounts due from SemGroup. In addition, $27 million of non-accruing commercial loans are in the services sector of the loan portfolio. The distribution of non-accruing commercial loans among our various markets included $75 million in Oklahoma, $12 million in Colorado and $10 million in Texas. Non-accruing commercial loans included $21.5 million of shared national credits at September 30, 2008. This represents 1.03% of the outstanding principal balance of shared national credits. The total of non-accruing commercial loans was unchanged during the third quarter of 2008, excluding SemGroup funded letters of credit and derivative contracts. Non-accruing commercial real estate loans totaled $78 million or 2.88% of outstanding commercial real estate loans at September 30, 2008. Non-accruing commercial real estate loans included $54 million of land and residential lot and construction loans, $13 million of loans secured by retail properties and $3 million of loans secured by office buildings. The distribution of non-accruing commercial real estate loans among our various markets included $51 million in Arizona, $8 million in Texas, $8 million in Colorado and $5 million in New Mexico. Non-accruing commercial real estate loans increased $18 million during the third quarter of 2008. At September 30, 2008, non-performing assets in the Arizona market totaled $58 million or 9.47% of Arizona loans and repossessed assets, up from $35 million or 5.67% at June 30, 2008. Non-performing land and residential lot and construction properties in Arizona totaled $41 million at September 30, 2008, up from $30 million at June 30, 2008. Non-accruing residential mortgage loans totaled $27 million or 1.62% of outstanding residential mortgage loans at September 30, 2008. Non-accruing home equity loans totaled $674 thousand or 0.14% of outstanding home equity loans and non-accruing permanent residential mortgage loans totaled $26 million or 2.21% of outstanding permanent residential mortgage loans. The distribution of non-accruing residential mortgage loans among our various markets included $10 million in Texas, $9 million in Oklahoma and $3 million in Arizona. Non-accruing residential mortgage loans increased $9 million during the third quarter of 2008 compared to the previous quarter. Real estate and other repossessed assets totaled $28 million at September 30, 2008, up from $21 million at June 30, 2008. Real estate and other repossessed assets included $17 million of 1-4 family residential properties and residential land development properties, $5 million of developed commercial real estate properties, $4 million of undeveloped land and $2 million of automobiles. Real estate owned and other repossessed assets are primarily located in Oklahoma, Texas, Arkansas and Colorado. Approximately $2 million of real estate and other repossessed assets are supported by the First United Bank sellers' guaranty.
27 <TABLE> - ---------------------------------------------------------------------------------------------------------------------- Table 21 - Nonperforming Assets (In thousands) Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2008 2008 2008 2007 2007 ----------------------------------------------------------------------- Nonaccrual loans: <S> <C> <C> <C> <C> <C> Commercial $ 105,757 $ 69,679 $ 41,966 $ 42,981 $ 21,168 Commercial real estate 78,235 60,456 40,399 25,319 11,355 Residential mortgage 27,075 17,861 15,960 15,272 11,469 Consumer 758 611 812 718 705 - ---------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 211,825 148,607 99,137 84,290 44,697 Renegotiated loans (2) 12,326 11,840 11,850 10,394 10,752 - ---------------------------------------------------------------------------------------------------------------------- Total nonperforming loans 224,151 160,447 110,987 94,684 55,449 Other nonperforming assets 28,088 21,025 15,112 9,475 10,627 - ---------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 252,239 $ 181,472 $ 126,099 $ 104,159 $ 66,076 - ---------------------------------------------------------------------------------------------------------------------- Nonaccrual loans by principal market: Oklahoma $ 87,885 $ 57,155 $ 52,211 $ 47,977 $ 24,628 Texas 29,141 20,860 8,157 4,983 4,921 New Mexico 12,293 9,838 7,497 11,118 6,542 Arkansas 3,386 2,924 2,866 1,635 843 Colorado (3) 20,980 23,812 8,101 9,222 5,688 Arizona 54,832 33,482 18,811 9,355 2,075 Kansas / Missouri 3,308 536 1,494 - - - ---------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans $ 211,825 $ 148,607 $ 99,137 $ 84,290 $ 44,697 - ---------------------------------------------------------------------------------------------------------------------- Nonaccrual loans by loan portfolio sector: Commercial: Energy $ 49,839 $ 12,342 $ 475 $ 529 $ 536 Manufacturing 6,479 6,731 9,274 9,915 8,858 Wholesale / retail 7,806 3,735 3,868 3,792 3,850 Agriculture 755 811 1,848 380 540 Services 26,581 30,080 23,849 25,468 5,987 Healthcare 3,300 3,791 2,079 2,301 963 Other 10,997 12,189 573 596 434 - ---------------------------------------------------------------------------------------------------------------------- Total commercial 105,757 69,679 41,966 42,981 21,168 Commercial real estate: Land development and construction 53,624 45,291 29,439 13,466 7,289 Retail 13,011 7,591 5,258 5,259 - Office 3,022 3,304 1,985 1,013 1,045 Multifamily 896 896 1,906 3,998 1,238 Industrial 390 396 - - - Other commercial real estate 7,292 2,978 1,811 1,583 1,783 - ---------------------------------------------------------------------------------------------------------------------- Total commercial real estate 78,235 60,456 40,399 25,319 11,355 Residential mortgage: Permanent mortgage 26,401 17,039 15,135 14,541 10,604 Home equity 674 822 825 731 865 - ---------------------------------------------------------------------------------------------------------------------- Total residential mortgage 27,075 17,861 15,960 15,272 11,469 Consumer 758 611 812 718 705 - ---------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans $ 211,825 $ 148,607 $ 99,137 $ 84,290 $ 44,697 - ---------------------------------------------------------------------------------------------------------------------- Ratios: Reserve for loan losses to nonperforming loans 83.21% 95.99% 123.06% 133.79% 219.90% Nonperforming loans to period-end loans 1.77 1.28 0.90 0.79 0.47 - ---------------------------------------------------------------------------------------------------------------------- Loans past due (90 days) (1) $ 20,213 $ 10,683 $ 11,266 $ 5,575 $ 3,986 - ---------------------------------------------------------------------------------------------------------------------- (1) Includes residential mortgages guaranteed by agencies of the U.S. Government. $ 1,210 $ 1,015 $ 788 $ 1,017 $ 1,806 (2) Includes residential mortgages guaranteed by agencies of the U.S. Government. These loans have been modified to extend payment terms and/or reduce interest 9,604 8,638 8,386 7,550 7,083 rates to current market. (3) Includes loans subject to First United Bank sellers escrow. 13,262 11,973 8,101 8,412 4,677 - ---------------------------------------------------------------------------------------------------------------------- </TABLE> Our 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
28 borrowers' ability to comply with current repayment terms. These potential problem loans totaled $81 million at September 30, 2008 and $40 million at June 30, 2008. The current composition of potential problem loans by primary industry included real estate - $66 million, healthcare - $11 million and services - $4 million. Potential problem real estate loans consisted primarily of loans to residential builders in the Colorado market of $20 million, the Arizona market of $16 million and the Texas market of $16 million. Deposits Deposit accounts represent our largest funding source. Average deposits represented approximately 65% of total liabilities and capital for the third quarter of 2008, compared with 62% for the second quarter of 2008 and 67% for the third quarter of 2007. The increase in average deposits relative to other funding sources in the third quarter was due largely to an increase in brokered deposits as the Company changed its mix of funding sources to increase short-term liquidity. Average brokered deposits were $1.0 billion for the third quarter of 2008 and $482 million for the second quarter of 2008. During the third quarter of 2008, the Company revised the presentation of certain deposit accounts. Previously, demand deposit accounts were shown net of adjustments made to manage its reserve requirements. These adjustments were excluded from the current presentation to provide a more-meaningful presentation of the Company's deposit accounts. All prior periods have been reclassified for a consistent presentation. The reclassification had no effect on total deposits, interest expense, net interest revenue or net interest margin. Average deposits totaled $14.3 billion for the third quarter of 2008, a $967 million increase over the second quarter of 2008. Average deposits increased $1.3 billion compared with the third quarter of 2007. Average time deposits increased $716 million over the second quarter of 2008, including a $453 million increase in average brokered deposits. Average time deposits increased $263 million excluding brokered deposits. Time deposits generated through our Wealth Management Division and Oklahoma Corporate Banking Division increased $136 million and $48 million, respectively. Average consumer time deposits increased $18 million in New Mexico and $17 million in Texas. Average interest-bearing transaction deposit accounts continued to grow in the third quarter of 2008, up $145 million over the second quarter of 2008. Average demand deposits increased $105 million over the second quarter of 2008 due primarily to our commercial energy customers. Core deposits, which we define as deposits of less than $100,000, excluding public funds and brokered deposits, averaged $6.5 billion for the third quarter of 2008, $6.5 billion for the second quarter of 2008 and $6.6 billion for the third quarter of 2007. Accounts with balances in excess of $100,000 excluding brokered deposit accounts averaged $5.9 billion for the third quarter of 2008, $5.5 billion for the second quarter of 2008 and $5.1 billion for the third quarter of 2007. The distribution of deposit accounts among our principal markets is shown in Table 22.
29 <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 22 - Deposits by Principal Market Area (In thousands) Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2008 2008 2008 2007 2007 --------------------------------------------------------------------------------- Oklahoma: <S> <C> <C> <C> <C> <C> Demand $ 1,681,325 $ 1,455,997 $ 1,464,258 $ 1,394,861 $ 1,155,820 Interest-bearing: Transaction 4,151,430 3,997,136 3,659,002 3,477,208 3,035,205 Savings 86,900 90,100 88,141 80,467 83,139 Time 3,036,297 2,672,401 2,230,110 2,426,822 2,725,992 --------------------------------------------------------------------------------- Total interest-bearing 7,274,627 6,759,637 5,977,253 5,984,497 5,844,336 --------------------------------------------------------------------------------- Total Oklahoma $ 8,955,952 $ 8,215,634 $ 7,441,511 $ 7,379,358 $ 7,000,156 --------------------------------------------------------------------------------- Texas: Demand $ 956,846 $ 1,046,651 $ 940,141 $ 1,035,134 $ 863,107 Interest-bearing: Transaction 1,543,974 1,713,131 1,708,424 1,753,843 1,713,347 Savings 32,400 33,207 32,191 34,618 35,310 Time 794,911 723,146 759,892 800,460 893,018 --------------------------------------------------------------------------------- Total interest-bearing 2,371,285 2,469,484 2,500,507 2,588,921 2,641,675 --------------------------------------------------------------------------------- Total Texas $ 3,328,131 $ 3,516,135 $ 3,440,648 $ 3,624,055 $ 3,504,782 --------------------------------------------------------------------------------- New Mexico: Demand $ 176,477 $ 168,621 $ 169,449 $ 151,231 $ 170,175 Interest-bearing: Transaction 376,941 417,607 425,976 432,919 418,883 Savings 16,316 16,432 16,141 15,146 16,437 Time 475,560 445,505 455,861 486,868 512,497 --------------------------------------------------------------------------------- Total interest-bearing 868,817 879,544 897,978 934,933 947,817 --------------------------------------------------------------------------------- Total New Mexico $ 1,045,294 $ 1,048,165 $ 1,067,427 $ 1,086,164 $ 1,117,992 --------------------------------------------------------------------------------- Arkansas: Demand $ 23,565 $ 21,142 $ 20,493 $ 13,247 $ 14,492 Interest-bearing: Transaction 19,146 24,524 22,091 19,027 18,134 Savings 865 895 945 883 993 Time 47,684 39,305 39,803 40,692 43,401 --------------------------------------------------------------------------------- Total interest-bearing 67,695 64,724 62,839 60,602 62,528 --------------------------------------------------------------------------------- Total Arkansas $ 91,260 $ 85,866 $ 83,332 $ 73,849 $ 77,020 --------------------------------------------------------------------------------- Colorado: Demand $ 115,677 $ 109,697 $ 99,584 $ 117,939 $ 98,914 Interest-bearing: Transaction 440,888 507,260 529,771 446,427 375,468 Savings 19,300 20,245 22,233 23,806 27,143 Time 428,872 423,014 455,262 539,523 608,962 --------------------------------------------------------------------------------- Total interest-bearing 889,060 950,519 1,007,266 1,009,756 1,011,573 --------------------------------------------------------------------------------- Total Colorado $ 1,004,737 $ 1,060,216 $ 1,106,850 $ 1,127,695 $ 1,110,487 --------------------------------------------------------------------------------- Arizona: Demand $ 45,725 $ 49,895 $ 46,508 $ 46,701 $ 46,339 Interest-bearing: Transaction 64,463 73,034 84,648 65,788 77,567 Savings 1,033 1,233 878 1,435 1,269 Time 14,433 6,364 8,395 11,603 13,314 --------------------------------------------------------------------------------- Total interest-bearing 79,929 80,631 93,921 78,826 92,150 --------------------------------------------------------------------------------- Total Arizona $ 125,654 $ 130,526 $ 140,429 $ 125,527 $ 138,489 --------------------------------------------------------------------------------- Kansas / Missouri: Demand $ 5,548 $ 7,157 $ 6,580 $ 9,656 $ 8,302 Interest-bearing: Transaction 9,780 10,342 8,754 8,304 2,716 Savings 33 26 92 13 15 Time 19,794 51,649 33,837 24,670 23,119 --------------------------------------------------------------------------------- Total interest-bearing 29,607 62,017 42,683 32,987 25,850 --------------------------------------------------------------------------------- Total Kansas / Missouri $ 35,155 $ 69,174 $ 49,263 $ 42,643 $ 34,152 --------------------------------------------------------------------------------- Total BOK Financial deposits $ 14,586,183 $ 14,125,716 $ 13,329,460 $ 13,459,291 $ 12,983,078 --------------------------------------------------------------------------------- </TABLE>
30 Borrowings and Capital 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 lack of restrictive covenants in this agreement also provides the Company time to maximize the recovery on nonperforming assets. At September 30, 2008, the outstanding balance under this credit agreement was $50 million. Subsequent to September 30, the U.S. Treasury announced its TARP Capital Purchase Program. The TARP program allows participating banks to increase capital by issuing preferred stock and common stock warrants to the U.S. government. The Company has been encouraged to apply and will make a decision about participating in the TARP program before the November 14, 2008 deadline. 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 $128 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 $109 million under this policy. Equity capital for BOK Financial was $1.9 billion at September 30, 2008, down $1.9 million from June 30, 2008. Net income less cash dividend paid increased equity $41.5 million. Accumulated other comprehensive losses increased $41.9 million during the third quarter of 2008 due primarily to an increase in net unrealized losses on available for sale securities. Employee stock option transactions increased equity capital $1.8 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, 784,073 shares have been repurchased by the Company for $38.7 million. The Company repurchased 75,000 shares for $3.3 million in the third quarter of 2008. 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. The capital ratios for BOK Financial on a consolidated basis are presented in Table 23. In addition to deposits, subsidiary bank liquidity is provided primarily by federal funds purchased, securities repurchase agreements and Federal Home Loan Bank borrowings. Federal funds purchased consist primarily of unsecured, overnight funds acquired from other financial institutions. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale securities. Federal Home Loan Bank borrowings are generally short term and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and mortgage-backed securities, 1-4 family mortgage loans and multifamily mortgage loans). At September 30, 2008, the outstanding balance of federal funds purchased totaled $1.7 billion, securities repurchase agreements totaled $2.0 billion and Federal Home Loan Bank borrowings totaled $991 million. Subsequent to September 30, 2008, the U.S. Treasury announced its Treasury Liquidity Guarantee Program ("TGLP"). TGLP is intended to improve market liquidity by providing FDIC insurance to certain non-interest bearing transaction deposit accounts, interbank funding and newly issued unsecured debt. The cost of the TGLP ranges from an additional 10 basis points for certain non-interest bearing transaction accounts to an additional 75 basis points on interbank funding
31 (federal funds purchased) and newly issued unsecured debt. <TABLE> - -------------------------------------------------------------------------------------------------------------------- Table 23 - Capital Ratios Sept. 30, June 30, March 31, Dec. 30, Sept. 30, 2008 2008 2008 2007 2007 -------------------------------------------------------------------------- Average shareholders' equity <S> <C> <C> <C> <C> <C> to average assets 8.83% 9.19% 9.69% 9.48% 9.42% Tangible capital ratio 7.16% 7.15% 7.83% 7.72% 7.67% Risk-based capital: Tier 1 capital 9.25 8.69 9.35 9.38 9.30 Total capital 12.55 11.69 12.44 12.54 12.53 Leverage 7.94 7.83 8.23 8.20 8.17 </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. 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.
32 The Company's primary interest rate exposures included the Federal Funds rate, which affects short-term borrowings, and the prime lending rate and LIBOR, which are the basis for much of the variable-rate loan pricing. Additionally, mortgage rates directly affect the prepayment speeds for mortgage-backed securities and mortgage servicing rights. Derivative financial instruments and other financial instruments used for purposes other than trading are included in this simulation. The model incorporates assumptions regarding the effects of changes in interest rates and account balances on indeterminable maturity deposits based on a combination of historical analysis and expected behavior. The impact of planned growth and new business activities is factored into the simulation model. The effects of changes in interest rates on the value of mortgage servicing rights are excluded from Table 24 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 24 - 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> <C> net interest revenue $(16,405) $ (6,738) $ 6,644 *** $ 29,639 $(1,745) (1.1)% (1.1)% 0.3% *** 3.4% (0.3)% - -------------------------------- --------------- ------------ --- ----------- -------------- -- ----------- ------------ *** 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 $1.1 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 $3.6 million. At September 30, 2008, the VAR was $1.8 million. The greatest value at risk during the third quarter of 2008 was $2.1 million. The value at risk guideline was exceeded with appropriate approvals by management to take advantage of wide yields available on certain securities during the quarter.
33 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.
34 <TABLE> - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Consolidated Statements of Earnings (Unaudited) (In Thousands Except Share and Per Share Data) Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 ----------- --- -------------- ---- -------------- ---- -------------- Interest Revenue <S> <C> <C> <C> <C> Loans $ 181,590 $ 232,150 $ 561,151 $ 669,190 Taxable securities 78,030 63,244 226,044 181,061 Tax-exempt securities 2,668 3,010 8,009 8,960 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Total securities 80,698 66,254 234,053 190,021 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Trading 780 388 2,796 1,253 securities Funds sold and resell agreements 290 1,588 1,485 3,177 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Total interest revenue 263,358 300,380 799,485 863,641 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Interest Expense Deposits 69,269 109,496 223,530 309,427 Borrowed funds 24,188 44,273 88,767 131,825 Subordinated debentures 5,553 7,166 16,773 19,193 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Total interest expense 99,010 160,935 329,070 460,445 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Net Interest Revenue 164,348 139,445 470,415 403,196 Provision for Credit Losses 52,711 7,201 129,592 21,521 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Net Interest Revenue After Provision for Credit Losses 111,637 132,244 340,823 381,675 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Other Operating Revenue Brokerage and trading revenue 30,846 15,541 19,297 42,140 Transaction card revenue 25,632 23,812 74,976 66,913 Trust fees and commissions 20,100 19,633 61,836 58,086 Deposit service charges and fees 30,404 27,885 88,289 79,280 Mortgage banking revenue 6,230 5,809 20,645 15,363 Bank-owned life insurance 2,829 2,520 7,999 7,444 Margin asset fees 1,934 1,061 8,361 2,788 Other revenue 8,691 7,456 22,730 20,254 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Total fees and commissions 126,666 103,717 304,133 292,268 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Gain (loss) on sales of assets (839) 42 (658) 388 Gain (loss) on securities, net 2,103 4,748 1,481 (2,077) Gain on derivatives, net 4,366 865 3,518 753 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Total other operating revenue 132,296 109,372 308,474 291,332 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Other Operating Expense Personnel 87,549 85,811 265,252 244,193 Business promotion 5,837 5,399 16,253 15,360 Professional fees and services 6,501 5,749 19,122 16,586 Net occupancy and equipment 15,570 14,752 45,731 41,818 Insurance 2,436 759 8,772 2,174 Data processing and communications 19,911 18,271 58,327 53,647 Printing, postage and supplies 4,035 4,201 12,610 12,349 Net (gains) losses and operating expenses of repossessed assets (136) 172 13 571 Amortization of intangible assets 1,884 2,397 5,694 4,976 Mortgage banking costs 5,811 3,877 17,545 8,932 Change in fair value of mortgage servicing rights 5,554 3,446 8,083 (451) Visa retrospective responsibility obligation 1,700 - (1,067) - Other expense 7,638 6,184 20,627 17,105 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Total other operating expense 164,290 151,018 476,962 417,260 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Income Before Taxes 79,643 90,598 172,335 255,747 Federal and state income tax 22,958 30,750 54,546 89,243 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Net Income $ 56,685 $ 59,848 $ 117,789 $ 166,504 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Earnings Per Share: - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Basic $ 0.84 $ 0.89 $ 1.75 $ 2.48 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Diluted $ 0.84 $ 0.89 $ 1.74 $ 2.46 - ------------------------------------------------------- ---- ----------- --- -------------- ---- -------------- ---- -------------- Average Shares Used in Computation: - ------------------------------------------------------- --- ------------ --- -------------- ---- -------------- ---- -------------- Basic 67,263,317 67,078,378 67,252,296 67,092,549 - ------------------------------------------------------- --- ------------ --- -------------- ---- -------------- ---- -------------- Diluted 67,471,376 67,537,643 67,564,159 67,571,900 - ------------------------------------------------------- --- ------------ --- -------------- ---- -------------- ---- -------------- Dividends Declared per Share $ 0.225 $ 0.20 $ 0.65 $ 0.55 - ------------------------------------------------------- --- ------------ --- -------------- ---- -------------- ---- -------------- See accompanying notes to consolidated financial statements. </TABLE>
35 <TABLE> - -------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets (In Thousands Except Share Data) September 30, December 31, September 30, 2008 2007 2007 -------------------------------------------------- (Unaudited) (Footnote 1) (Unaudited) Assets <S> <C> <C> <C> Cash and due from banks $ 669,914 $ 717,259 $ 565,747 Funds sold and resell agreements 105,594 173,154 118,768 Trading securities 92,588 45,724 25,000 Securities: Available for sale 5,047,524 5,323,001 5,214,837 Available for sale securities pledged to creditors 1,232,006 327,539 329,397 Investment (fair value: September 30, 2008 - $239,688; December 31, 2007 - $248,788; September 30, 2007 - $246,716) 243,617 247,949 250,873 Mortgage trading securities 198,201 154,701 127,222 - -------------------------------------------------------------------------------------------------------------------- Total securities 6,721,348 6,053,190 5,922,329 - -------------------------------------------------------------------------------------------------------------------- Residential mortgage loans held for sale 113,121 76,677 73,488 Loans 12,679,970 11,940,570 11,677,676 Less reserve for loan losses (186,516) (126,677) (121,932) - -------------------------------------------------------------------------------------------------------------------- Loans, net of reserve 12,493,454 11,813,893 11,555,744 - -------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 267,749 258,786 254,953 Accrued revenue receivable 118,096 128,350 129,849 Intangible assets, net 363,177 368,353 375,113 Mortgage servicing rights, net 68,680 70,009 71,927 Real estate and other repossessed assets 28,088 9,475 10,627 Bankers' acceptances 23,933 1,780 20,353 Derivative contracts 572,391 502,446 301,311 Cash surrender value of bank-owned life insurance 234,293 229,540 226,853 Receivable on unsettled securities trades 169,494 19,964 7,473 Other assets 335,882 199,101 187,670 - -------------------------------------------------------------------------------------------------------------------- Total assets $ 22,377,802 $ 20,667,701 $ 19,847,205 - -------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Noninterest-bearing demand deposits $ 3,005,163 $ 2,768,769 $ 2,357,149 Interest-bearing deposits: Transaction 6,606,622 6,203,516 5,641,320 Savings 156,847 156,368 164,306 Time (includes $528,715 at fair value at September 30, 2008) 4,817,551 4,330,638 4,820,303 - -------------------------------------------------------------------------------------------------------------------- Total deposits 14,586,183 13,459,291 12,983,078 - -------------------------------------------------------------------------------------------------------------------- Funds purchased and repurchase agreements 3,667,225 3,225,131 3,175,802 Other borrowings 1,077,450 1,027,564 908,711 Subordinated debentures 398,372 398,273 398,240 Accrued interest, taxes and expense 120,280 124,029 118,275 Bankers' acceptances 23,933 1,780 20,353 Derivative contracts 377,973 341,677 236,882 Other liabilities 185,883 154,572 137,301 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 20,437,299 18,732,317 17,978,642 - -------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: September 30, 2008 - 69,838,173; December 31, 2007 - 69,465,154; September 30, 2007 - 69,092,403) 4 4 4 Capital surplus 740,578 722,088 706,927 Retained earnings 1,406,971 1,332,954 1,295,233 Treasury stock (shares at cost: September 30, 2008 - 2,404,336; December 31, 2007 - 2,158,774; September 30, 2007 - 2,029,886) (100,801) (88,428) (81,619) Accumulated other comprehensive loss (106,249) (31,234) (51,982) - -------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,940,503 1,935,384 1,868,563 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 22,377,802 $ 20,667,701 $ 19,847,205 - -------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. </TABLE>
36 <TABLE> - ---------------------------------------------------------------------------------------------------------- Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (In Thousands) Accumulated Other Common Stock Comprehensive Retained Treasury Stock Capital ----------------- --------------------- Shares Amount Loss Surplus Earnings Shares Amount Total ----------------------------------------------------------------------------------- Balances at <S> <C> <C> <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 - - - - 166,504 - - 166,504 Other comprehensive income, net of tax (1) - - 21,462 - - - - 21,462 ---------- Comprehensive income 187,966 ---------- Treasury stock purchase - - - - - 306 (15,583) (15,583) Exercise of stock options 387 - - 11,443 - 87 (4,643) 6,800 Tax benefit on exercise of stock options - - - 1,562 - - - 1,562 Stock-based compensation - - - 5,061 - - - 5,061 Cash dividends on common stock - - - - (36,977) - - (36,977) - ---------------------------------------------------------------------------------------------------------- Balances at September 30, 2007 69,092 $ 4 $(51,982) $ 706,927 $1,295,233 2,030 $(81,619) $1,868,563 - ---------------------------------------------------------------------------------------------------------- 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 - - - - 117,789 - - 117,789 Other comprehensive income, net of tax (1) - - (75,015) - - - - (75,015) ----------- Comprehensive income 42,774 ----------- Treasury stock purchase - - - - - 166 (7,992) (7,992) Exercise of stock options 373 - - 11,359 - 79 (4,381) 6,978 Tax benefit on exercise of stock options - - - 1,004 - - - 1,004 Stock-based compensation - - - 6,127 - - - 6,127 Cash dividends on common stock - - - - (43,834) - - (43,834) - ---------------------------------------------------------------------------------------------------------- Balances at September 30, 2008 69,838 $ 4 $(106,249) $ 740,578 $1,406,971 2,404 $(100,801) $1,940,503 - ---------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> (1) September 30, 2008 September 30, 2007 ------------------- -------------------- Changes in other comprehensive loss: <S> <C> <C> Unrealized gains (losses) on securities $(103,510) $ 29,224 Unrealized gains on cash flow hedges 216 1,188 Tax benefit (expense) on unrealized gains (losses) 29,776 (10,322) Reclassification adjustment for (gains) losses realized and included in net income (2,103) 2,077 Reclassification adjustment for tax expense (benefit) on realized (gains) losses 606 (705) ------------------------------------ Net change in other comprehensive loss $ (75,015) $ 21,462 ------------------------------------ </TABLE> See accompanying notes to consolidated financial statements.
38 <TABLE> - --------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flows (Unaudited) (In Thousands) Nine Months Ended September 30, --------------------------------------------- 2008 2007 --------------------------------------------- Cash Flows From Operating Activities: <S> <C> <C> Net income $ 117,789 $ 166,504 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 129,592 21,521 Change in fair value of mortgage servicing rights 8,083 (451) Unrealized losses (gains) from derivatives 71,258 (15,337) Tax benefit on exercise of stock options (1,004) (1,562) Change in bank-owned life insurance (4,753) (14,623) Stock-based compensation 5,097 6,684 Depreciation and amortization 38,749 31,325 Net (accretion) amortization of securities discounts and premiums (12,200) (690) Net (gain) loss on sale of assets (9,334) (9,955) Mortgage loans originated for resale (902,186) (734,919) Proceeds from sale of mortgage loans held for resale 879,728 692,470 Change in trading securities, including mortgage trading securities (89,485) 48,782 Change in accrued revenue receivable 10,254 (31,037) Change in other assets (58,373) 67,800 Change in accrued interest, taxes and expense (3,749) 13,523 Change in other liabilities 38,630 (65,710) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 218,096 174,325 - --------------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Proceeds from maturities of investment securities 68,708 90,355 Proceeds from maturities of available for sale securities 706,594 847,662 Purchases of investment securities (65,506) (92,648) Purchases of available for sale securities (3,593,515) (2,224,574) Proceeds from sales of investment securities 982 - Proceeds from sales of available for sale securities 2,158,216 548,025 Loans originated or acquired net of principal collected (841,462) (619,518) Proceeds from derivative asset contracts 53,779 (36,372) Net change in other investment assets 35 69 Proceeds from disposition of assets 37,174 44,475 Purchases of assets (65,202) (61,643) Cash and equivalents of subsidiaries and branches acquired and sold, net - (47,258) - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (1,540,197) (1,551,427) - --------------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net change in demand deposits, transaction deposits and savings accounts 639,979 (105,266) Net change in time deposits 494,609 198,580 Net change in other borrowings 491,980 1,132,911 Payments on derivative liability contracts (140,428) 52,670 Net change in derivative margin accounts (85,570) 37,157 Change in amount receivable (due) on unsettled security transactions (149,530) (106,181) Issuance of common and treasury stock, net 6,978 6,800 Issuance of subordinated debenture, net - 248,618 Pay down of subordinated debentures - (150,000) Tax benefit on exercise of stock options 1,004 1,562 Repurchase of common stock (7,992) (15,583) Dividends paid (43,834) (36,977) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,207,196 1,264,291 - --------------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (114,905) (112,811) Cash and cash equivalents at beginning of period 890,413 797,326 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 775,508 $ 684,515 - --------------------------------------------------------------------------------------------------------------------------- Cash paid for interest $ 329,982 $ 447,605 - --------------------------------------------------------------------------------------------------------------------------- Cash paid for taxes $ 80,441 $ 84,561 - --------------------------------------------------------------------------------------------------------------------------- Net loans transferred to repossessed real estate and other assets $ 25,532 $ 6,585 - --------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements.
38 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. Previously, the Company had reported residential loans held for sale by its mortgage banking division as part of its loan portfolio. These loans are now reported separately on the consolidated balance sheet. The Company revised the presentation of certain deposit accounts. Previously, demand deposit accounts were shown net of adjustments made to manage its reserve requirements. These adjustments were excluded from the current presentation to provide a more meaningful presentation of the Company's deposit accounts. This reclassification had no effect on total deposits, interest expense, net interest revenue or net interest margin. 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 September 30, 2008 was reduced by $19 million and $217 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
39 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. (2) Fair Value Measurements Fair value measurements as of September 30, 2008 are as follows (in thousands): <TABLE> Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Total Instruments Inputs Inputs ----------- ---------------- --------------- ---------------- Assets: <S> <C> <C> <C> Trading securities $92,588 $ 10,336 $82,252 Available for sale securities 6,279,530 55,079 6,224,451 Mortgage trading securities 198,201 198,201 Mortgage servicing rights 68,680 68,680 (1) Derivative contracts 572,391 572,391 Liabilities: Certificates of deposit 528,715 528,715 Derivative contracts 377,973 377,973 </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. 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. At June 30, 2008, the fair value of derivative contracts with SemGroup LP of $36.6 million was largely based 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 the derivative contracts with SemGroup using information currently available, including information provided by a nationally recognized financial advisor to SemGroup. During the third quarter of 2008, the fair value of these contracts decreased by $4.6 million. The decrease in fair value, which was based largely on significant unobservable inputs and changes in energy prices during the quarter, was recognized as a reduction of fees and commissions revenue. All derivative contracts with SemGroup either expired or were terminated during the third quarter. The fair value of amounts due from SemGroup under these contracts totaled $32.0 million. This amount is included in outstanding commercial loans at September 30, 2008. No significant fair value measurements of significant assets or liabilities measured on a non-recurring basis were made during the first three quarters 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 September 30, 2008, the fair value and contractual principal amount of these certificates was $529 million and $537 million, respectively. Change in the fair value of these certificates of deposit resulted in an unrealized gain during the third quarter and first three quarters of 2008 of $7.1 million and $7.7 million, respectively, which is included in Gain (Loss) on Derivatives, net on the Consolidated Statement of Earnings.
40 (3) Derivatives The fair values of derivative contracts at September 30, 2008 are as follows (in thousands): Assets Liabilities ----------- --- ------------ Customer Risk Management Programs: Interest rate contracts $96,364 $77,549 Energy contracts 433,438 453,248 Agriculture contracts 3,534 3,273 Foreign exchange contracts 53,019 53,019 CD options 3,947 3,947 - --------------------------------------------- ----------- --- ------------ Fair value before cash collateral 590,302 591,036 Less: cash collateral (18,794) (216,912) - --------------------------------------------- ----------- --- ------------ Total Customer Derivatives 571,508 374,124 Interest Rate Risk Management Programs 883 3,849 - --------------------------------------------- ----------- --- ------------ Total Derivative Contracts $ 572,391 $377,973 - --------------------------------------------- ----------- --- ------------ 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 September 30, 2008 were reduced by $19 million and $217 million, respectively, of cash collateral.
41 (4) Mortgage Banking Activities At September 30, 2008, BOK Financial owned the rights to service 57,970 mortgage loans with outstanding principal balances of $5.8 billion, including $709 million serviced for affiliates. The weighted average interest rate and remaining term was 6.16% and 283 months, respectively. For the three and nine months ended September 30, 2008, mortgage banking revenue includes servicing fee income of $4.4 million and $13.0 million, respectively. For the three and nine months ended September 30, 2007, mortgage banking revenue includes servicing fee income of $4.2 million and $12.7 million, respectively. Activity in capitalized mortgage servicing rights and related valuation allowance during the nine months ending September 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 - 15,406 15,406 Change in fair value due to loan runoff (1,719) (6,933) (8,652) Change in fair value due to market changes (1,063) (7,020) (8,083) - -------------------------------------------- -- ---------- -- ---------- -- ----------- Balance at September 30, 2008 $ 11,124 $ 57,556 $ 68,680 - -------------------------------------------- -- ---------- -- ---------- -- ----------- </TABLE> Changes in the fair value of mortgage servicing rights are included in Other Operating Expense in the Consolidated Statements of Earnings (Unaudited). Changes in fair value due to loan runoff are included in mortgage banking costs. Changes in fair value due to market changes are reported separately. Changes in fair value due to market changes during the period relate to assets held at the reporting date. Fair value is determined by discounting the projected net cash flows. Significant assumptions used to determine fair value are: <TABLE> September 30, 2008 December 31, 2007 --------------------- -------------------- <S> <C> <C> Discount rate - risk-free rate plus a market premium 9.89% 10.02% - ------------- Prepayment rate - based upon loan interest rate, - --------------- original term and loan type 5.5% - 15.4% 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 3.83% 5.01% </TABLE> Stratification of the mortgage loan servicing portfolio and outstanding principal of loans serviced by interest rate at September 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 $ 12,244 $ 39,296 $ 14,437 $ 2,703 $ 68,680 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- Outstanding principal of loans serviced (1) $ 950,900 $ 2,892,500 $ 1,061,600 $178,000 $5,083,000 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- </TABLE> (1) Excludes outstanding principal of $709 million for loans serviced for affiliates and $36 million of mortgage loans for which there are no capitalized mortgage servicing rights.
42 (5) Disposal of Available for Sale Securities Sales of available for sale securities resulted in gains and losses as follows (in thousands): Nine Months Ended September 30, ------------------------------------- 2008 2007 -------------- --------------- Proceeds $ 2,158,216 $ 548,025 Gross realized gains 12,763 2,169 Gross realized losses (8,623) (2,473) Related federal and state income tax expense (benefit) 1,310 (106) (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 nine months ended September 30, 2008 and September 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 October 28, 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 December 2, 2008 to shareholders of record on November 14, 2008. Dividends declared during the three and nine month periods ended September 30, 2008 were $0.225 per share and $0.65 per share, respectively. Dividends declared during the three and nine month periods ended September 30, 2007 were $0.20 per share and $0.55 per share, respectively.
43 (8) Earnings Per Share The following table presents the computation of basic and diluted earnings per share (dollars in thousands, except share data): <TABLE> Three Months Ended Nine Months Ended ----------------------------------------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2008 2007 2008 2007 ----------------------------------------------------- Numerator: <S> <C> <C> <C> <C> Net income $ 56,685 $ 59,848 $ 117,789 $ 166,504 - --------------------------------------------------------------------------------------------------------------- Denominator: Denominator for basic earnings per share - weighted average shares 67,263,317 67,078,378 67,252,296 67,092,549 Effect of dilutive potential common shares: Employee stock compensation plans (1) 208,059 459,265 311,863 479,351 - --------------------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 67,471,376 67,537,643 67,564,159 67,571,900 - --------------------------------------------------------------------------------------------------------------- Basic earnings (loss) per share $ 0.84 $ 0.89 $ 1.75 $ 2.48 - --------------------------------------------------------------------------------------------------------------- Diluted earnings (loss) per share $ 0.84 $ 0.89 $ 1.74 $ 2.46 - --------------------------------------------------------------------------------------------------------------- (1) Excludes employee stock options with exercise prices greater than current market price. 2,892,091 830,479 1,149,905 817,616 </TABLE> (9) Reportable Segments Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2008 is as follows (in thousands): <TABLE> Net Other Other Interest Operating Operating Net Average Revenue Revenue(1) Expense Income Assets ------------ -- ------------ -- ------------- -- ----------- -- -------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 404,965 $ 310,142 $ 463,319 $ 116,719 $ 22,870,561 Unallocated items: Tax-equivalent adjustment 6,165 - - 6,165 - Funds management and other 59,285 (6,667) 13,643 (5,095) (1,487,382) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 470,415 $ 303,475 $ 476,962 $ 117,789 $ 21,383,179 ============ == ============ == ============= == =========== == ============== (1) Excluding financial instruments gains/(losses). </TABLE> Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended September 30, 2008 is as follows (in thousands): <TABLE> Net Other Other Interest Operating Operating Net Average Revenue Revenue(1) Expense Income Assets ------------ -- ------------ -- ------------- -- ----------- -- -------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 138,253 $ 136,850 $ 159,682 $ 60,059 $ 22,987,156 Unallocated items: Tax-equivalent adjustment 1,927 - - 1,927 - Funds management and other 24,168 (11,023) 4,608 (5,301) (1,165,993) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 164,348 $ 125,827 $ 164,290 $ 56,685 $ 21,821,163 ============ == ============ == ============= == =========== == ============== (1) Excluding financial instruments gains/(losses). </TABLE>
44 Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2007 is as follows (in thousands): <TABLE> Net Other Other Interest Operating Operating Net Average Revenue Revenue(1) Expense Income Assets ------------ -- ------------ -- ------------- -- ----------- -- -------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 412,223 $ 297,141 $ 406,108 $ 178,302 $ 19,803,536 Unallocated items: Tax-equivalent adjustment 6,618 - - 6,618 - Funds management and other (15,645) (4,485) 11,152 (18,416) (1,142,969) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 403,196 $ 292,656 $ 417,260 $ 166,504 $ 18,660,567 ============ == ============ == ============= == =========== == ============== (1) Excluding financial instruments gains/(losses). </TABLE> Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended September 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 $ 139,944 $ 106,489 $ 150,033 $ 59,431 $ 20,663,938 Unallocated items: Tax-equivalent adjustment 2,464 - - 2,464 - Funds management and other (2,963) (2,730) 985 (2,047) (1,327,563) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 139,445 $ 103,759 $ 151,018 $ 59,848 $ 19,336,375 ============ == ============ == ============= == =========== == ============== (1) Excluding financial instruments gains/(losses). </TABLE> (10) Commitments and 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
45 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 at which time the SEC Staff advised that the Staff had not determined whether to recommend any action to the Commission. On September 25, 2008, The SEC Staff requested, and BOK and AXIA agreed to, a tolling agreement for any action the SEC might take until January 15, 2009. Nothing further has occurred as of the time of this filing. As a member of Visa, BOK Financial is obligated for a proportionate share of certain covered litigation losses incurred by Visa under a retrospective responsibility plan. A contingent liability was recognized for the Company's share of Visa's covered litigation liabilities. Visa funded an escrow account to cover litigation claims, including covered litigation losses under the retrospective responsibility plan, with proceeds from its initial public offering in the first quarter of 2008. BOK Financial recognized a receivable for its proportionate share of this escrow account which equals the contingent liability previously recognized. Subsequent to the third quarter of 2008, Visa announced an agreement to settle covered litigation with Discover Financial Services for approximately $1.8 billion. BOK Financial recognized an additional contingent liability of $1.7 million for its proportionate share of this settlement in the third quarter of 2008. This additional liability is expected to be offset in future periods as additional funds are provided to the escrow account. BOK Financial received 410,562 Visa Class B shares as part of Visa's initial public offering in the first quarter of 2008. 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 shares 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. 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 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. 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.
46 (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 Nine Months Ended September 30, September 30, ------------------------------------------------ 2008 2007 2008 2007 ------------------------------------------------ Amount: Federal statutory tax $ 27,875 $ 31,709 $ 60,317 $ 89,511 Tax exempt revenue (1,062) (1,042) (3,186) (3,125) Effect of state income taxes, net of federal benefit 1,241 1,649 2,828 4,684 Utilization of tax credits (297) (284) (890) (852) Bank-owned life insurance (987) (844) (2,961) (2,531) Other, net (3,812) (438) (1,562) 1,556 ------------------------------------------------------------------------------ Total $ 22,958 $ 30,750 $ 54,546 $ 89,243 ------------------------------------------------------------------------------ Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------------------ 2008 2007 2008 2007 ------------------------------------------------ Percent of pretax income: Federal statutory tax 35% 35% 35% 35% Tax exempt revenue (1) (1) (2) (1) Effect of state income taxes, net of federal benefit 2 2 2 2 Bank-owned life insurance (1) (1) (2) (1) Other, net (6) (1) (1) - ------------------------------------------------------------------------------ Total 29% 34% 32% 35% ------------------------------------------------------------------------------ (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 September 30, 2008, outstanding commitments and letters of credit were as follows (in thousands): September 30, 2008 -------------- Commitments to extend credit $ 5,340,615 Standby letters of credit 600,689 Commercial letters of credit 20,793 (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. The outstanding balance at September 30, 2008 was $50 million. This credit agreement matures on December 2, 2010.
47 <TABLE> - ------------------------------------------------------------------------------------------------------------------------------- Nine Month Financial Summary - Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands, Except Per Share Data) Nine Months Ended ------------------------------------------------------------------------------------- September 30, 2008 September 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) $ 5,903,319 $ 226,044 5.09% $ 5,008,824 $ 181,401 4.88% Tax-exempt securities (3) 259,507 12,520 6.49 346,261 14,204 5.69 - ------------------------------------------------------------------------------------------------------------------------------- Total securities (3) 6,162,826 238,564 5.15 5,355,085 195,605 4.92 - ------------------------------------------------------------------------------------------------------------------------------- Trading securities 71,792 3,637 6.77 28,955 1,459 6.74 Funds sold and resell agreements 77,688 1,485 2.55 74,838 3,177 5.68 Loans (2) 12,474,755 561,964 6.02 11,316,638 670,018 7.92 Less reserve for loan losses 153,372 - - 118,216 - - - ------------------------------------------------------------------------------------------------------------------------------- Loans, net of reserve 12,321,383 561,964 6.09 11,198,422 670,018 8.00 - ------------------------------------------------------------------------------------------------------------------------------- Total earning assets (3) 18,633,689 805,650 5.77 16,657,300 870,259 7.00 - ------------------------------------------------------------------------------------------------------------------------------- Cash and other assets 2,749,490 2,003,267 - ------------------------------------------------------------------------------------------------------------------------------- Total assets $ 21,383,179 $ 18,660,567 - ------------------------------------------------------------------------------------------------------------------------------- Liabilities And Shareholders' Equity Transaction deposits $ 6,418,290 98,242 2.04% $ 5,389,967 145,259 3.60% Savings deposits 158,872 533 0.45 167,603 1,151 0.92 Time deposits 4,366,120 124,755 3.82 4,576,805 163,017 4.76 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 10,943,282 223,530 2.73 10,134,375 309,427 4.08 - ------------------------------------------------------------------------------------------------------------------------------- Funds purchased and repurchase agreements 3,084,312 54,082 2.34 2,623,561 99,178 5.05 Other borrowings 1,665,046 34,685 2.78 805,802 32,647 5.42 Subordinated debentures 398,313 16,773 5.63 394,019 19,193 6.51 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 16,090,953 329,070 2.73 13,957,757 460,445 4.41 - ------------------------------------------------------------------------------------------------------------------------------- Demand deposits 2,605,971 2,342,235 Other liabilities 720,886 575,892 Shareholders' equity 1,965,369 1,784,683 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 21,383,179 $ 18,660,567 - ------------------------------------------------------------------------------------------------------------------------------- Tax-Equivalent Net Interest Revenue (3) 476,580 3.04% 409,814 2.59% Tax-Equivalent Net Interest Revenue To Earning Assets (3) 3.41 3.30 Less tax-equivalent adjustment (1) 6,165 6,618 - ------------------------------------------------------------------------------------------------------------------------------- Net Interest Revenue 470,415 403,196 Provision for credit losses 129,592 21,521 Other operating revenue 308,474 291,332 Other operating expense 476,962 417,260 - ------------------------------------------------------------------------------------------------------------------------------- Income Before Taxes 172,335 255,747 Federal and state income tax 54,546 89,243 - ------------------------------------------------------------------------------------------------------------------------------- Net Income $ 117,789 $ 166,504 - ------------------------------------------------------------------------------------------------------------------------------- Earnings Per Average Common Share Equivalent: Net Income: Basic $ 1.75 $ 2.48 - ------------------------------------------------------------------------------------------------------------------------------- Diluted $ 1.74 $ 2.46 - ------------------------------------------------------------------------------------------------------------------------------- </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.
48 <TABLE> - ------------------------------------------------------------------------------------------------------------------------------ Quarterly Financial Summary - Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands, Except Per Share Data) Three Months Ended ------------------------------------------------------------------------------------- September 30, 2008 June 30, 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) $ 6,056,909 $ 78,030 5.09% $ 6,026,769 $ 75,959 5.08% Tax-exempt securities (3) 254,803 4,166 6.64 259,410 4,165 6.46 - ------------------------------------------------------------------------------------------------------------------------------ Total securities (3) 6,311,712 82,196 5.15 6,286,179 80,124 5.14 - ------------------------------------------------------------------------------------------------------------------------------ Trading securities 66,419 937 5.61 74,058 1,267 6.88 Funds sold and resell agreements 79,862 290 1.44 72,444 355 1.97 Loans (2) 12,713,356 181,862 5.69 12,527,011 180,424 5.79 Less reserve for loan losses 182,844 - - 145,524 - - - ------------------------------------------------------------------------------------------------------------------------------ Loans, net of reserve 12,530,512 181,862 5.77 12,381,487 180,424 5.86 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets (3) 18,988,505 265,285 5.55 18,814,168 262,170 5.61 - ------------------------------------------------------------------------------------------------------------------------------ Cash and other assets 2,832,658 2,794,132 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 21,821,163 $ 21,608,300 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities And Shareholders' Equity Transaction deposits $ 6,565,935 $ 28,312 1.72% $ 6,420,291 $ 27,755 1.74% Savings deposits 159,856 147 0.37 159,798 148 0.37 Time deposits 4,792,366 40,810 3.39 4,076,167 38,211 3.77 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 11,518,157 69,269 2.39 10,656,256 66,114 2.50 - ------------------------------------------------------------------------------------------------------------------------------ Funds purchased and repurchase agreements 3,061,186 15,253 1.98 3,126,110 15,180 1.95 Other borrowings 1,390,233 8,935 2.56 2,267,076 14,032 2.49 Subordinated debentures 398,361 5,553 5.55 398,336 5,821 5.88 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 16,367,937 99,010 2.41 16,447,778 101,147 2.47 - ------------------------------------------------------------------------------------------------------------------------------ Demand deposits 2,739,209 2,634,038 Other liabilities 787,420 541,693 Shareholders' equity 1,926,597 1,984,791 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 21,821,163 $ 21,608,300 - ------------------------------------------------------------------------------------------------------------------------------ Tax-Equivalent Net Interest Revenue (3) $ 166,275 3.14% $ 161,023 3.14% Tax-Equivalent Net Interest Revenue To Earning Assets (3) 3.48 3.44 Less tax-equivalent adjustment (1) 1,927 2,084 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Revenue 164,348 158,939 Provision for credit losses 52,711 59,310 Other operating revenue 132,296 55,616 Other operating expense 164,290 159,268 - ------------------------------------------------------------------------------------------------------------------------------ Income (loss) before taxes 79,643 (4,023) Federal and state income tax 22,958 (2,862) - ------------------------------------------------------------------------------------------------------------------------------ Net Income (Loss) $ 56,685 $ (1,161) - ------------------------------------------------------------------------------------------------------------------------------ Earnings Per Average Common Share Equivalent: Net income (loss): Basic $ 0.84 $ (0.02) - ------------------------------------------------------------------------------------------------------------------------------ Diluted $ 0.84 $ (0.02) - ------------------------------------------------------------------------------------------------------------------------------ </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.
49 <TABLE> - ------------------------------------------------------------------------------------------------------------------------- Three Months Ended - ------------------------------------------------------------------------------------------------------------------------- March 31, 2008 December 31, 2007 September 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> $ 5,624,430 $ 72,055 5.11% $ 5,633,173 $ 68,670 4.86% $ 5,206,482 $ 62,531 4.84% 264,398 4,189 6.38 328,900 5,990 7.19 360,710 5,820 6.44 - ------------------------------------------------------------------------------------------------------------------------- 5,888,828 76,244 5.17 5,962,073 74,660 4.99 5,567,192 68,351 4.95 - ------------------------------------------------------------------------------------------------------------------------- 74,957 1,433 7.69 29,303 489 6.62 24,413 459 7.46 80,735 840 4.18 86,948 1,303 5.95 101,281 1,588 6.22 12,181,279 199,678 6.59 11,806,242 223,146 7.50 11,709,638 232,446 7.88 131,709 - - 125,996 - - 123,059 - - - ------------------------------------------------------------------------------------------------------------------------- 12,049,570 199,678 6.66 11,680,246 223,146 7.58 11,586,579 232,446 7.96 - ------------------------------------------------------------------------------------------------------------------------- 18,094,090 278,195 6.17 17,758,570 299,598 6.70 17,279,465 302,844 6.99 - ------------------------------------------------------------------------------------------------------------------------- 2,402,963 2,224,045 2,056,910 - ------------------------------------------------------------------------------------------------------------------------- $ 20,497,053 $ 19,982,615 $ 19,336,375 - ------------------------------------------------------------------------------------------------------------------------- $ 6,267,021 $ 42,175 2.71% $ 5,861,544 $ 49,358 3.34% $ 5,593,043 $ 50,650 3.59% 156,953 238 0.61 160,170 348 0.86 200,362 410 0.81 4,225,141 45,734 4.35 4,544,802 53,613 4.68 4,798,812 58,436 4.83 - ------------------------------------------------------------------------------------------------------------------------- 10,649,115 88,147 3.33 10,566,516 103,319 3.88 10,592,217 109,496 4.10 - ------------------------------------------------------------------------------------------------------------------------- 3,061,783 23,649 3.11 3,158,153 35,169 4.42 2,603,372 32,484 4.95 1,340,846 11,718 3.51 936,353 11,611 4.92 880,894 11,789 5.31 398,241 5,399 5.45 398,109 5,708 5.69 471,458 7,166 6.03 - ------------------------------------------------------------------------------------------------------------------------- 15,449,985 128,913 3.36 15,059,131 155,807 4.10 14,547,941 160,935 4.39 - ------------------------------------------------------------------------------------------------------------------------- 2,443,201 2,448,011 2,390,293 618,721 580,574 577,161 1,985,146 1,894,899 1,820,980 - ------------------------------------------------------------------------------------------------------------------------- $ 20,497,053 $ 19,982,615 $ 19,336,375 - ------------------------------------------------------------------------------------------------------------------------- $ 149,282 2.81% $ 143,791 2.60% $ 141,909 2.60% 3.05 3.31 3.22 3.27 2,154 2,502 2,464 - ------------------------------------------------------------------------------------------------------------------------- 147,128 141,289 139,445 17,571 13,200 7,201 120,562 107,316 109,372 153,404 157,727 151,018 - ------------------------------------------------------------------------------------------------------------------------- 96,715 77,678 90,598 34,450 26,518 30,750 - ------------------------------------------------------------------------------------------------------------------------- $ 62,265 $ 51,160 $ 59,848 - ------------------------------------------------------------------------------------------------------------------------- $ 0.93 $ 0.76 $ 0.89 - ------------------------------------------------------------------------------------------------------------------------- $ 0.92 $ 0.76 $ 0.89 - ------------------------------------------------------------------------------------------------------------------------- </TABLE>
50 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 September 30, 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> July 1, 2008 to 75,000 $44.49 75,000 1,215,927 July 31, 2008 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- - August 1, 2008 to 2,254 $42.15 1,215,927 August 31, 2008 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- - September 1, 2008 to 3,939 $57.00 1,215,927 September 30, 2008 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- Total 81,193 75,000 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- </TABLE> (1) The Company had a stock repurchase plan that was initially authorized by the Company's board of directors on February 24, 1998 and amended on May 25, 1999. Under the terms of that plan, the Company could repurchase up to 800,000 shares of its common stock. As of March 31, 2005, the Company had repurchased 638,642 shares under that plan. On April 26, 2005, the Company's board of directors terminated this authorization and replaced it with a new stock repurchase plan authorizing the Company to repurchase up to two million shares of the Company's common stock. As of September 30, 2008, the Company had repurchased 784,073 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. 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, 4 and 5 are not applicable and have been omitted.
51 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BOK FINANCIAL CORPORATION (Registrant) Date: November 3, 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