As filed with the Securities and Exchange Commission on July 30, 2009 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2009 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: 67,674,442 shares of common stock ($.00006 par value) as of June 30, 2009. ================================================================================
2 BOK Financial Corporation Form 10-Q Quarter Ended June 30, 2009 Index Part I. Financial Information Item 1. Consolidated Financial Statements - Unaudited 3 Item 2. Management's Discussion and Analysis 28 Six Month Financial Summary - Unaudited 68 Quarterly Financial Summary - Unaudited 69 Quarterly Earnings Trend - Unaudited 71 Item 3. Market Risk 72 Item 4. Controls and Procedures 73 Part II. Other Information Item 1. Legal Proceedings 74 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 74 Item 4. Submission of Matters to a Vote of Security Holders 75 Item 6. Exhibits 75 Signatures 76
3 <TABLE> - ------------------------------------------------------- ----- ------------- -- -------------- -- -------------- ---- -------------- Consolidated Statements of Earnings (Unaudited) (In thousands, except share and per share data) Three Months Ended June 30, Six Months Ended June 30, Interest revenue 2009 2008 2009 2008 ----------- --- -------------- ---- -------------- ---- -------------- <S> <C> <C> <C> <C> Loans $ 146,269 $ 180,177 $ 292,013 $ 379,561 Taxable securities 80,713 75,959 164,715 148,014 Tax-exempt securities 2,913 2,656 5,563 5,341 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Total securities 83,626 78,615 170,278 153,355 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Trading securities 776 939 1,577 2,016 Funds sold and resell agreements 14 355 44 1,195 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Total interest revenue 230,685 260,086 463,912 536,127 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Interest expense Deposits 45,103 66,114 97,030 154,261 Borrowed funds 4,370 29,212 10,259 64,579 Subordinated debentures 5,632 5,821 11,198 11,220 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Total interest expense 55,105 101,147 118,487 230,060 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Net interest revenue 175,580 158,939 345,425 306,067 Provision for credit losses 47,120 59,310 92,160 76,881 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Net interest revenue after provision for credit losses 128,460 99,629 253,265 229,186 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Other operating revenue Brokerage and trading revenue 21,794 (35,462) 46,493 (11,549) Transaction card revenue 27,533 25,786 52,961 49,344 Trust fees and commissions 16,860 20,940 33,370 41,736 Deposit service charges and fees 28,421 30,199 55,826 57,885 Mortgage banking revenue 19,882 8,203 38,380 16,237 Bank-owned life insurance 2,418 2,658 4,735 5,170 Margin asset fees 68 4,460 135 6,427 Other revenue 6,124 6,965 12,707 12,356 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Total fees and commissions 123,100 63,749 244,607 177,606 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Gain (loss) on sales of assets 973 (1,149) 1,116 (1,145) Loss on derivatives, net (1,037) (2,961) (2,701) (848) Gain (loss) on securities, net 6,471 (5,242) 26,579 4,684 Total other-than-temporary impairment losses (1,263) - (55,631) (5,306) Portion of loss recognized in other comprehensive income 279 - (39,087) - - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Net impairment losses recognized in earnings (1,542) - (16,544) (5,306) - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Total other operating revenue 127,965 54,397 253,057 174,991 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Other operating expense Personnel 96,191 89,597 188,818 177,703 Business promotion 4,569 5,777 8,997 10,416 Professional fees and services 7,363 6,973 13,875 12,621 Net occupancy and equipment 15,973 15,100 32,231 30,161 Insurance 5,898 2,626 11,536 6,336 FDIC special assessment 11,773 - 11,773 - Data processing and communications 20,452 19,523 39,758 38,416 Printing, postage and supplies 4,072 4,156 8,643 8,575 Net (gains) losses and expenses of repossessed assets 996 (229) 2,802 149 Amortization of intangible assets 1,686 1,885 3,372 3,810 Mortgage banking costs 9,336 6,054 16,803 11,735 Change in fair value of mortgage servicing rights (7,865) 767 (9,820) 2,529 Visa retrospective responsibility obligation - - - (2,767) Other expense 5,326 7,039 12,776 12,988 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Total other operating expense 175,770 159,268 341,564 312,672 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Income (loss) before taxes 80,655 (5,242) 164,758 91,505 Federal and state income tax 28,315 (2,862) 57,153 31,588 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Net income (loss) before non-controlling interest 52,340 (2,380) 107,605 59,917 Non-controlling interest income (expense), net (225) 1,219 (458) 1,187 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Net income (loss) attributable to BOK Financial Corp. $ 52,115 $ (1,161) $ 107,147 $ 61,104 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Earnings (loss) per share: - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Basic $ 0.77 $ (0.02) $ 1.59 $ 0.91 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Diluted $ 0.77 $ (0.02) $ 1.58 $ 0.90 - ------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- -------------- Average shares used in computation: - ------------------------------------------------------- ---- ------------ --- -------------- ---- -------------- ---- -------------- Basic 67,344,577 67,452,181 67,330,590 67,327,155 - ------------------------------------------------------- ---- ------------ --- -------------- ---- -------------- ---- -------------- Diluted 67,448,029 67,452,181 67,417,874 67,690,919 - ------------------------------------------------------- ---- ------------ --- -------------- ---- -------------- ---- -------------- Dividends declared per share $ 0.24 $ 0.225 $ 0.465 $ 0.425 - ------------------------------------------------------- ---- ------------ --- -------------- ---- -------------- ---- -------------- </TABLE> See accompanying notes to consolidated financial statements.
4 <TABLE> - -------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets (In Thousands Except Share Data) June 30, December 31, June 30, 2009 2008 2008 -------------------------------------------------- Assets (Unaudited) (Footnote 1) (Unaudited) <S> <C> <C> <C> Cash and due from banks $ 470,553 $ 581,133 $ 712,324 Funds sold and resell agreements 112,128 113,809 52,005 Trading securities 84,548 99,601 62,532 Securities: Available for sale 7,033,090 5,800,691 5,439,524 Available for sale securities pledged to creditors 191,583 590,760 487,078 Investment (fair value: June 30, 2009 - $273,770; December 31, 2008 - $245,769; June 30, 2008 - $266,405) 269,844 242,344 245,754 Mortgage trading securities 222,864 399,211 98,269 - -------------------------------------------------------------------------------------------------------------------- Total securities 7,717,381 7,033,006 6,270,625 - -------------------------------------------------------------------------------------------------------------------- Residential mortgage loans held for sale 326,363 129,246 119,944 Loans 12,069,928 12,876,006 12,518,038 Less reserve for loan losses (263,309) (233,236) (154,018) - -------------------------------------------------------------------------------------------------------------------- Loans, net of reserve 11,806,619 12,642,770 12,364,020 - -------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 286,295 277,458 266,435 Accrued revenue receivable 118,718 96,673 159,066 Intangible assets, net 357,838 361,209 365,060 Mortgage servicing rights, net 67,413 42,752 72,103 Real estate and other repossessed assets 75,243 29,179 21,025 Bankers' acceptances 8,260 12,913 16,031 Derivative contracts 462,971 452,604 1,380,876 Cash surrender value of bank-owned life insurance 241,792 237,006 231,527 Receivable on unsettled securities trades 237,200 239,474 39,052 Other assets 394,997 385,815 303,312 - -------------------------------------------------------------------------------------------------------------------- Total assets $ 22,768,319 $ 22,734,648 $ 22,435,937 - -------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Noninterest-bearing demand deposits $ 2,825,179 $ 3,082,379 $ 2,859,160 Interest-bearing deposits: Transaction 7,091,471 6,562,350 6,743,034 Savings 166,806 154,635 162,138 Time (includes fair value: $520,245 at June 30, 2009; $632,754 at December 31, 2008; $103,678 at June 30, 2008) 4,571,933 5,183,243 4,361,384 - -------------------------------------------------------------------------------------------------------------------- Total deposits 14,655,389 14,982,607 14,125,716 - -------------------------------------------------------------------------------------------------------------------- Funds purchased and repurchase agreements 2,798,274 3,025,399 3,101,425 Other borrowings 2,152,177 1,522,054 2,153,853 Subordinated debentures 398,465 398,407 398,340 Accrued interest, taxes and expense 119,003 133,220 81,507 Bankers' acceptances 8,260 12,913 16,031 Derivative contracts 445,463 667,034 456,379 Other liabilities 125,126 132,902 140,758 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 20,702,157 20,874,536 20,474,009 - -------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: June 30, 2009 - 70,092,396; December 31, 2008 - 69,884,749; June 30, 2008 - 69,811,531) 4 4 4 Capital surplus 747,624 743,411 738,403 Retained earnings 1,502,993 1,427,057 1,365,456 Treasury stock (shares at cost: June 30, 2009 - 2,417,954; December 31, 2008 - 2,411,663; June 30, 2008 - 2,323,143) (101,601) (101,329) (97,109) Accumulated other comprehensive loss (98,448) (222,886) (64,378) - -------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 2,050,572 1,846,257 1,942,376 Non-controlling interest 15,590 13,855 19,552 - -------------------------------------------------------------------------------------------------------------------- Total equity 2,066,162 1,860,112 1,961,928 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and equity $ 22,768,319 $ 22,734,648 $ 22,435,937 - -------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements.
5 <TABLE> - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Changes in Equity (Unaudited) (In Thousands) Accumulated Other Total Non- Common Stock Comprehensive Capital Retained Treasury Stock Shareholders' Controlling Total ----------------- -------------------- Shares Amount Loss Surplus Earnings Shares Amount Equity Interest Equity ------------------------------------------------------------------------------------------------------------ Balances at <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> December 31, 2007 69,465 $ 4 $ (31,234) $ 722,088 $1,332,954 2,159 $ (88,428) $1,935,384 $ 18,849 $1,954,233 Effect of implementing FAS 159, net of income taxes - - - - 62 - - 62 - 62 Comprehensive income: Net income from BOKF - - - - 61,104 - - 61,104 - 61,104 Non-controlling interest expense, net - - - - - - - - 1,187 1,187 Other comprehensive loss, net of tax - - (33,144) - - - - (33,144) - (33,144) ------------------------------------ Comprehensive income 27,960 1,187 29,147 ------------------------------------ Treasury stock purchase - - - - - 91 (4,655) (4,655) - (4,655) Exercise of stock options 347 - - 10,661 - 73 (4,026) 6,635 - 6,635 Tax benefit on exercise of stock options - - - 1,132 - - - 1,132 - 1,132 Stock-based compensation - - - 4,522 - - - 4,522 - 4,522 Cash dividends on common stock - - - - (28,664) - - (28,664) - (28,664) Capital calls, net - - - - - - - - (484) (484) - ----------------------------------------------------------------------------------------------------------------------------------- Balances at June 30, 2008 69,812 $ 4 $ (64,378) $ 738,403 $1,365,456 2,323 $(97,109) $1,942,376 $ 19,552 $1,961,928 - ----------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2008 69,885 $ 4 $(222,886) $ 743,411 $1,427,057 2,412 $ (101,329) $1,846,257 $ 13,855 $1,860,112 Comprehensive income: Net income from BOKF - - - - 107,147 - - 107,147 - 107,147 Non-controlling interest expense, net - - - - - - - - (458) (458) Other comprehensive loss, net of tax - - 124,438 - - - - 124,438 - 124,438 ----------------------------------- Comprehensive income 231,585 (458) 231,127 ----------------------------------- Exercise of stock options 207 - - 2,048 - 6 (272) 1,776 - 1,776 Tax benefit on exercise of stock options - - - (585) - - - (585) - (585) Stock-based compensation - - - 2,750 - - - 2,750 - 2,750 Cash dividends on common stock - - - - (31,211) - - (31,211) - (31,211) Capital calls - - - - - - - - 2,193 2,193 - ----------------------------------------------------------------------------------------------------------------------------------- Balances at June 30, 2009 70,092 $ 4 $ (98,448) $ 747,624 $1,502,993 2,418 $( 101,601) $2,050,572 $ 15,590 $2,066,162 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements.
6 <TABLE> - --------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flows (Unaudited) (In Thousands) Six Months Ended June 30, --------------------------------------------- 2009 2008 --------------------------------------------- Cash Flows From Operating Activities: <S> <C> <C> Net income before non-controlling interest $ 107,605 $ 59,917 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 92,160 76,881 Change in fair value of mortgage servicing rights (9,820) 2,529 Unrealized losses from derivatives 21,875 44,815 Tax benefit on exercise of stock options 585 (1,132) Change in bank-owned life insurance (4,786) (1,987) Stock-based compensation 2,750 5,306 Depreciation and amortization 28,761 26,669 Net (accretion) amortization of securities discounts and premiums 6,119 (7,623) Realized gains on financial instruments and other assets (40,771) (5,537) Mortgage loans originated for resale (1,715,763) (312,668) Proceeds from sale of mortgage loans held for resale 1,539,800 267,175 Capitalized mortgage servicing rights (25,268) (10,339) Change in trading securities, including mortgage trading securities 157,809 40,269 Change in accrued revenue receivable (22,045) (20,823) Change in other assets (119,836) (51,427) Change in accrued interest, taxes and expense (14,217) (42,639) Change in other liabilities (7,441) 622 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (2,483) 70,008 - --------------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Proceeds from maturities of investment securities 35,147 33,792 Proceeds from maturities of available for sale securities 1,290,008 541,500 Purchases of investment securities (62,736) (31,737) Purchases of available for sale securities (3,593,463) (2,335,268) Proceeds from sales of available for sale securities 1,710,776 1,470,701 Loans originated or acquired net of principal collected 682,167 (634,746) Net payments or proceeds on derivative asset contracts 264,564 (77,563) Net change in other investment assets - 148 Proceeds from disposition of assets 9,939 34,283 Purchases of assets (25,435) (30,582) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 310,967 (1,029,472) - --------------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net change in demand deposits, transaction deposits and savings accounts 284,092 635,679 Net change in time deposits (605,407) 31,347 Net change in other borrowings 402,998 1,002,583 Net payments or proceeds on derivative liability contracts (301,580) 86,302 Net change in derivative margin accounts (173,102) (867,998) Change in amount receivable (due) on unsettled security transactions 2,274 (28,981) Issuance of common and treasury stock, net 1,776 6,635 Tax benefit on exercise of stock options (585) 1,132 Repurchase of common stock - (4,655) Dividends paid (31,211) (28,664) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (420,745) 833,380 - --------------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (112,261) (126,084) Cash and cash equivalents at beginning of period 694,942 890,413 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 582,681 $ 764,329 - --------------------------------------------------------------------------------------------------------------------------- Cash paid for interest $ 141,757 $ 241,655 - --------------------------------------------------------------------------------------------------------------------------- Cash paid for taxes $ 70,919 $ 72,561 - --------------------------------------------------------------------------------------------------------------------------- Net loans transferred to repossessed real estate and other assets $ 57,119 $ 15,426 - --------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements.
7 Notes to Consolidated Financial Statements (Unaudited) (1) Significant 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. Certain prior period amounts have been reclassified to conform to current period classification. Previously, the Company reported minority interest as part of other liabilities. This balance is now reported as part of total equity on the consolidated balance sheet. 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. The financial information should be read in conjunction with BOK Financial's 2008 Form 10-K filed with the Securities and Exchange Commission, which contains audited financial statements. Amounts presented as of December 31, 2008 have been derived from BOK Financial's 2008 Form 10-K. Newly Adopted and Pending Accounting Policies Financial Accounting Standards Board Statement of Financial Accounting Standards No. 141, "Business Combinations (Revised 2007),"("FAS 141R") FAS 141R replaces FAS 141, "Business Combinations," and applies to all transactions and other events in which one entity obtains control over one or more other businesses. FAS 141R requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under FAS 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. FAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under FAS 141. Under FAS 141R, the requirements of FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of FAS 5, "Accounting for Contingencies." FAS 141R is applicable to the Company's accounting for business combinations closing on or after January 1, 2009. Statement of Financial Accounting Standards No. 160,"Non-controlling Interest in Consolidated Financial Statements - An Amendment of ARB No. 51" ("FAS 160") The Financial Accounting Standards Board ("FASB") issued FAS 160 during 2007 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 included 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. The Company adopted FAS 160 as of January 1, 2009, and it did not have a significant impact on the Company's financial statements.
8 Statement of Financial Accounting Standards No. 161, "Disclosure About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133," ("FAS 161") FAS 161 amends and expands the disclosure requirements of FAS 133 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 FAS 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 was effective for the Company as of January 1, 2009. It did not have a significant impact on the Company's financial statements. Financial Accounting Standards Board Staff Position No.FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly" ("FSP 157-4") FSP 157-4 was issued April 9, 2009 to provide guidance for determining fair value when there is no active market or where price inputs represent distressed sales. It reaffirms the fair value measurement objective of FAS 157 to reflect how much an asset would be sold for in an orderly transaction under current market conditions. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009. Early adoption for interim and annual periods ending after March 15, 2009 is permitted. FSP 157-4 was adopted as of March 31, 2009. It did not have a significant impact on the Company's financial statements. Financial Accounting Standards Board Staff Position No.FAS 115-2 and FAS 124-2 "Recognition and Presentation of Other-Than-Temporary Impairments" ("FSP No. 115-2") FSP 115-2 was issued April 9, 2009 to provide additional guidance and create greater clarity and consistency in accounting for impairment losses on securities. FSP 115-2 replaces the assertion of intent and ability to hold an impaired debt security until fair value recovers with assertions that the holder does not intend to sell the security prior to recovery and that it is more likely than not that the holder will not be required to sell the impaired security prior to recovery. The full impairment loss is recognized in earnings if the holder is unable to make these assertions. Otherwise, a credit loss portion of the impairment is recognized in earnings and the remaining impairment is recognized in other comprehensive income (equity). Both the full impairment and credit loss portion are presented on the face of the income statement. FSP 115-2 also requires additional disclosures in interim periods. FAS 115-2 is effective for interim and annual periods ending after June 15, 2009. Early adoption for interim and annual periods ending after March 15, 2009 is permitted. FSP 115-2, which was adopted as of March 31, 2009, reduced the loss recognized in earnings on debt securities determined to be other-than-temporarily impaired by $39 million. FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments" ("FSP107-1") FSP 107-1 enhances consistency in financial reporting by increasing the frequency of fair value disclosures for any financial instruments that are not currently reflected on the balance sheet at fair value. Previously, these disclosures were only required in annual financial statements. FSP 107-1 requires disclosures in interim financial statements that provide qualitative and quantitative information about fair value estimates. FSP 107-1 is effective for interim and annual periods ending after June 15, 2009. Early adoption for interim and annual periods ending after March 15, 2009 is permitted. BOK Financial adopted FSP 107-1 as of June 30, 2009. It did not have a significant impact on the Company's financial statements. Financial Accounting Standards Board Staff Position No. EITF 03-6-1 "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" ("FSP No. EITF 03-6-1") FSP No. EITF 03-6-1 provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 became effective on January 1, 2009. See additional discussion at Note 8 - - Earnings Per Share.
9 Statement of Financial Accounting Standards No. 165, "Subsequent Events" ("FAS 165") On May 28, 2009, the FASB issued FAS 165 to provide authoritative accounting guidance on management's assessment of subsequent events. FAS 165 incorporates existing U.S. auditing literature and clarifies that management is responsible for evaluating, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued or are available to be issued. FAS 165 is effective for the Company as of June 30, 2009. Adoption of FAS 165 did not have a significant impact on the Company's financial statements. Statement of Financial Accounting Standards No. 166, "Accounting for Transfers of Financial Assets - an amendment to Statement No. 140," ("FAS 166") FAS 166 amends FAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. FAS 166 eliminates the concept of a "qualifying special-purpose entity" and changes the requirements for derecognizing financial assets. FAS 166 also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. FAS 166 will be effective January 1, 2010 and is not expected to have a significant impact on the Company's financial statements. Statement of Financial Accounting Standards No. 167, "Amendments to FASB Interpretation No. 46(R)," ("FAS 167") FAS 167 amends FIN 46 (Revised December 2003), "Consolidation of Variable Interest Entities," to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. FAS 167 requires additional disclosures about the reporting entity's involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity's financial statements. FAS 167 will be effective January 1, 2010 and is not expected to have a significant impact on the Company's financial statements. Statement of Financial Accounting Standards No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a Replacement of FASB Statement No. 162," ("FAS 168") FAS 168 replaces FAS 162, "The Hierarchy of Generally Accepted Accounting Principles" and establishes the FASB Accounting Standards Codification (the "Codification") as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the Codification carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. FAS 168 will be effective for the Company's financial statements for periods ending after September 15, 2009. FAS 168 is not expected have a significant impact on the Company's financial statements.
10 (2) Securities Investment Securities The amortized cost and fair values of investment securities are as follows (in thousands): <TABLE> June 30, ------------------------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------------------------- Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized - ----------------------------------------------------------------------------------------------------------------------------- Cost Value Gain Loss Cost Value Gain Loss ------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Municipal and other tax-exempt $263,393 $267,298 $ 4,357 $(452) $239,145 $259,759 $ 21,392 $(778) Other debt securities 6,451 6,472 21 - 6,609 6,646 37 - - ----------------------------------------------------------------------------------------------------------------------------- Total $269,844 $273,770 $ 4,378 $(452) $245,754 $266,405 $ 21,429 $ (778) - ----------------------------------------------------------------------------------------------------------------------------- </TABLE> The amortized cost and fair values of investment securities at June 30, 2009, by contractual maturity, are as shown in the following table (dollars in thousands): <TABLE> Weighted Less than One to Six to Over Average One Year Five Years Ten Years Ten Years Total Maturity(2) ------------ -------------- ------------- ------------- ------------- ------------ Municipal and other tax-exempt: <S> <C> <C> <C> <C> <C> <C> Amortized cost $ 63,101 $ 164,548 $28,009 $ 7,735 $ 263,393 2.76 Fair value 63,481 167,708 28,425 7,684 267,298 Nominal yield(1) 5.39 4.65 5.79 6.38 5.00 Other debt securities: Amortized cost $ 4,988 $ 1,450 $ - $ 13 $ 6,451 1.01 Fair value 5,004 1,455 - 13 6,472 Nominal yield 3.18 5.13 - - 3.61 ------------ -------------- ------------- ------------- ------------- ------------ Total fixed maturity securities: Amortized cost $ 68,089 $ 165,998 $ 28,009 $ 7,748 $ 269,844 2.71 Fair value 68,485 169,163 28,425 7,697 273,770 Nominal yield 5.23 4.65 5.79 6.37 4.97 ------------ -------------- ------------- ------------- Total investment securities: Amortized cost $ 269,844 Fair value 273,770 Nominal yield 4.97 ------------- </TABLE> (1) Calculated on a taxable equivalent basis using a 39% effective tax rate. (2) Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty.
11 Available for Sale Securities The amortized cost and fair value of available for sale securities are as follows (in thousands): <TABLE> June 30, ----------------------------------------------------------------------------------------------- 2009 2008 ----------------------------------------------------------------------------------------------- Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized ----------------------- ------------------------ Cost Value Gain Loss Cost Value Gain Loss ----------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> U.S. Treasury $ 6,993 $ 7,073 $ 80 $ - $ 10,982 $ 10,969 $ 20 $ (33) Municipal and other tax-exempt 42,423 43,009 617 (31) 17,447 17,377 90 (160) Residential mortgage-backed securities: U. S. agencies: FNMA 3,047,648 3,130,098 83,173 (723) 2,098,540 2,090,383 17,128 (25,285) FHLMC 1,951,564 2,003,808 54,280 (2,036) 1,802,473 1,792,984 9,652 (19,141) GNMA 447,287 451,516 5,318 (1,089) 60,652 60,059 42 (635) Other 199,025 204,297 6,302 (1,030) 129,805 128,419 202 (1,588) - --------------------------------------------------------------------------------------------------------------------------------- Total U.S. agencies 5,645,524 5,789,719 149,073 (4,878) 4,091,470 4,071,845 27,024 (46,649) - --------------------------------------------------------------------------------------------------------------------------------- Private issue: Alt-A loans 357,037 254,424 - (102,613) 415,361 386,783 - (28,578) Jumbo-A loans 1,090,211 919,888 - (170,323) 1,272,346 1,226,018 381 (46,709) - --------------------------------------------------------------------------------------------------------------------------------- Total private issue 1,447,248 1,174,312 - (272,936) 1,687,707 1,612,801 381 (75,287) - --------------------------------------------------------------------------------------------------------------------------------- Total residential mortgage-backed securities 7,092,772 6,964,031 149,073 (277,814) 5,779,177 5,684,646 27,405 (121,936) - --------------------------------------------------------------------------------------------------------------------------------- Other debt securities 11,684 11,684 - - 39 39 - - Federal Reserve Bank stock 32,040 32,040 - - 27,855 27,855 - - Federal Home Loan Bank stock 115,368 115,368 - - 120,056 120,056 - - Perpetual preferred stock 19,224 16,317 - (2,907) 32,473 32,210 58 (321) Equity securities and mutual funds 32,661 35,151 3,014 (524) 29,801 33,450 4,433 (784) - --------------------------------------------------------------------------------------------------------------------------------- Total $7,353,165 $7,224,673 $ 152,784 $(281,276) $ 6,017,830 $5,926,602 $ 32,006 $(123,234) - --------------------------------------------------------------------------------------------------------------------------------- </TABLE>
12 The amortized cost and fair values of available for sale securities at June 30, 2009, by contractual maturity, are as shown in the following table (dollars in thousands): <TABLE> Less than One to Six to Over Wtd Avg One Year Five Years Ten Years Ten Years Total Maturity(5) ------------ -------------- ------------- ------------- -------------- ----------- U.S. Treasuries: <S> <C> <C> <C> <C> <C> <C> Amortized cost $ 6,993 $ - $ - $ - $ 6,993 0.67 Fair value 7,073 - - - 7,073 Nominal yield 2.16 - - - 2.16 Municipal and other tax-exempt: Amortized cost $ - $ 3,176 $ 16,024 $ 23,223 $ 42,423 16.62 Fair value - 3,318 16,456 23,235 43,009 Nominal yield(1) - 3.99 4.12 0.78 2.28 Other debt securities: Amortized cost $ - $ 34 $ - $ 11,650 $ 11,684 30.17 Fair value - 34 - 11,650 11,684 Nominal yield(1) - 6.55 - 7.61 7.61 ------------ -------------- ------------- ------------- -------------- ----------- Total fixed maturity securities: Amortized cost $ 6,993 $ 3,210 $ 16,024 $ 34,873 $ 61,101 11.64 Fair value 7,073 3,352 16,456 34,885 61,766 Nominal yield 2.16 4.02 4.12 3.06 3.29 ------------ -------------- ------------- ------------- Residential mortgage-backed securities: Amortized cost $ 7,092,772 (2) Fair value 6,964,031 Nominal yield(4) 4.65 -------------- Equity securities and mutual funds: Amortized cost $ 199,293 (3) Fair value 198,876 Nominal yield 2.63 -------------- Total available-for-sale securities: Amortized cost $ 7,353,165 Fair value 7,224,673 Nominal yield 4.59 -------------- </TABLE> (1) Calculated on a taxable equivalent basis using a 39% effective tax rate. (2) The average expected lives of mortgage-backed securities were 3.38 years based upon current prepayment assumptions. (3) Primarily restricted common stock of U.S. government agencies and preferred stock of corporate issuers with no stated maturity. (4) The nominal yield on mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. (5) Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty. Sales of available for sale securities resulted in gains and losses as follows (in thousands): <TABLE> Three Months Ended June 30 Six Months Ended June 30, -------------------------------- --------------------------------- 2009 2008 2009 2008 -- ------------ ---- ----------- --- ------------ --- ------------ <S> <C> <C> <C> <C> Proceeds $ 1,155,995 $ 393,925 $ 1,710,776 $ 1,470,701 Gross realized gains 16,670 2,936 38,896 8,507 Gross realized losses - (2,660) - (5,284) Related federal and state income tax expense 5,835 97 13,476 1,994 </TABLE> Gross realized gains for the six months ended June 30, 2008 exclude $6.8 million gain from the redemption of Visa, Inc. Class B common stock. Mortgage trading securities are mortgage-backed securities issued by U.S. government agencies that have been designated as an economic hedge of the mortgage servicing rights and are separately identified on the balance sheet. These securities are carried at fair value. Changes in fair value are recognized in earnings as they occur. As of June 30, 2009, mortgage trading securities are carried at their $223 million fair value and had a net unrealized gain of $1.4 million. The Company recognized net losses of $10.2 million and $12.3 million on mortgage trading securities in the second quarter and first half of 2009, respectively. The Company recognized net losses of $5.5 million and $5.3 million in the second quarter and first half of 2008, respectively.
13 <TABLE> Temporarily Impaired Securities as of June 30, 2009 (In Thousands) Less Than 12 Months 12 Months or Longer Total Number ------------ ------------ ------------ ------------ ------------ ------------ of Fair Unrealized Fair Unrealized Fair Unrealized Securities Value Loss Value Loss Value Loss ---------- ------------ ------------ ------------ ------------ ------------ ------------ Investment: <S> <C> <C> <C> <C> <C> <C> <C> Municipal and other tax exempt 62 $ 32,722 $ 280 $ 8,074 $ 172 $ 40,796 $ 452 Available for sale: Municipal and other tax-exempt 1 643 31 - - 643 31 Residential mortgage-backed securities: U. S. agencies: FNMA 13 156,381 595 107,048 128 263,429 723 FHLMC 12 325,286 2,036 - - 325,286 2,036 GNMA 4 127,661 1,089 - - 127,661 1,089 Other 4 64,272 1,030 - - 64,272 1,030 - ------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------ Total U.S. agencies 33 673,600 4,750 107,048 128 780,648 4,878 - ------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------ Private issue: Alt-A loans 28 - - 254,424 102,613 254,424 102,613 Jumbo-A loans 87 97,380 8,989 822,509 161,334 919,889 170,323 - ------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------ Total private issue 115 97,380 8,989 1,076,933 263,947 1,174,313 272,936 - ------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------ Total residential mortgage-backed securities 148 770,980 13,739 1,183,981 264,075 1,954,961 277,814 - ------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------ Perpetual preferred stock 8 7,968 988 8,350 1,919 16,318 2,907 Equity securities and mutual funds 8 2,681 524 38 - 2,719 524 - ------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------ Total available for sale 165 782,272 15,282 1,192,369 265,994 1,974,641 281,276 - ------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------ Total 227 $ 814,994 $ 15,562 $1,200,443 $ 266,166 $2,015,437 $281,728 - ------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------ </TABLE> <TABLE> Temporarily Impaired Securities as of June 30, 2008 (In Thousands) Less Than 12 Months 12 Months or Longer Total Number ------------ ------------ ------------ ------------ ------------ ------------ of Fair Unrealized Fair Unrealized Fair Unrealized Securities Value Loss Value Loss Value Loss ---------- ------------ ------------ ------------ ------------ ------------ ------------ Investment: <S> <C> <C> <C> <C> <C> <C> <C> Municipal and other tax exempt 163 $ 25,444 $ 291 $ 31,332 $ 487 $ 56,776 $ 778 Available for sale: U.S. Treasury 1 6,949 33 - - 6,949 33 Municipal and other tax-exempt 25 6,807 107 1,692 53 8,499 160 Residential mortgage-backed securities: U. S. agencies: FNMA 140 867,867 19,935 364,189 5,350 1,232,056 25,285 FHLMC 117 295,331 11,398 580,421 7,743 875,752 19,141 GNMA 30 42,405 483 10,246 152 52,651 635 Other 2 47,658 1,588 - - 47,658 1,588 - ------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------ Total U.S. agencies 289 1,253,261 33,404 954,856 13,245 2,208,117 46,649 - ------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------ Private issue: Alt-A loans 28 91,328 9,925 295,455 18,653 386,783 28,578 Jumbo-A loans 76 186,560 5,529 938,820 41,180 1,125,380 46,709 - ------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------ Total private issue 104 277,888 15,454 1,234,275 59,833 1,512,163 75,287 - ------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------ Total residential mortgage-backed securities 393 1,531,149 48,858 2,189,131 73,078 3,720,280 121,936 - ------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------ Perpetual preferred stock 8 4,982 18 18,214 303 23,196 321 Equity securities and mutual funds 17 - - 10,474 784 10,474 784 - ------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------ Total available for sale 444 1,549,887 49,016 2,219,511 74,218 3,769,398 123,234 - ------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------ Total 607 $ 1,575,331 $ 49,307 $2,250,843 $ 74,705 $3,826,174 $124,012 - ------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------ </TABLE> On a quarterly basis, the Company performs separate evaluations of impaired debt and equity securities to determine if the unrealized losses are temporary.
14 For equity securities, including perpetual preferred stocks, this evaluation begins with an assessment of management's ability and intent to hold the securities until fair value recovers. The assessment of the ability and intent to hold these securities focuses on liquidity needs, asset / liability management objectives and securities portfolio objectives. Based on the results of this evaluation, management concluded that as of June 30, 2009, it had both the intent and ability to hold these equity securities until the fair value recovers. For debt securities, management determines whether it intends to sell or if it is more-likely-than-not that it will be required to sell impaired securities. This determination considers current and forecasted liquidity requirements, regulatory and capital requirements and securities portfolio management. The Company identified $91 million of impaired debt securities that it intends to sell after June 30, 2009. The current fair value of these securities was below their amortized costs and the Company recognized $1.3 million in other-than-temporary impairment ("OTTI") charges on these securities during the second quarter of 2009. For all impaired debt securities for which there was no intent or expected requirement to sell, the evaluation considers all available evidence to assess whether it is more likely than not that all amounts due would not be collected according to the security's contractual terms. Impaired debt securities are divided into two groups, those rated investment grade by all nationally-recognized rating agencies and those rated below investment grade by at least one of the nationally-recognized rating agencies. Impairment of debt securities consistently rated investment grade is considered temporary unless specific contrary information is identified. None of the debt securities rated investment grade were considered to be other-than-temporarily impaired at June 30, 2009.
15 As of June 30, 2009 the composition of the Company's securities portfolio by the lowest current credit rating assigned by any of the three nationally-recognized rating agencies is as follows (in thousands): <TABLE> - ------------------------------------------------------------------------------------------------------------------------------- Not Rated or Below U.S. Govt / GSE (1) AAA - AA A - BBB Investment Grade Total Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value Cost Value Cost Value ------------------------------------------------------------------------------------------------------- Held-to-Maturity: <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Municipal and other tax-exempt $- $- $53,186 $53,722 $62,278 $62,847 $147,929 $150,729 $263,393 $267,298 Other debt securities - - - - 600 600 5,851 5,872 6,451 6,472 - -------------------------------------------------------------------------------------------------------------------------------- Total $- $- $53,186 $53,722 $62,878 $63,447 $153,780 $156,601 $269,844 $273,770 - -------------------------------------------------------------------------------------------------------------------------------- Available for Sale: U.S. Treasury $ 6,993 $ 7,073 $ - $ - $ - $ - $ - $ - $ 6,993 $ 7,073 Municipal and other tax-exempt - - 30,537 31,012 7,231 7,314 4,655 4,683 42,423 43,009 Residential mortgage-backed securities: U. S. agencies: FNMA 3,047,648 3,130,098 - - - - - - 3,047,648 3,130,098 FHLMC 1,951,564 2,003,808 - - - - - - 1,951,564 2,003,808 GNMA 447,287 451,516 - - - - - - 447,287 451,516 Other 199,025 204,297 - - - - - - 199,025 204,297 - -------------------------------------------------------------------------------------------------------------------------------- Total U.S. agencies 5,645,524 5,789,719 - - - - - - 5,645,524 5,789,719 - -------------------------------------------------------------------------------------------------------------------------------- Private issue: Alt-A loans - - 46,204 41,290 43,409 32,192 267,424 180,942 357,037 254,424 Jumbo-A loans - - 726,777 633,986 125,146 109,530 238,288 176,372 1,090,211 919,888 - -------------------------------------------------------------------------------------------------------------------------------- Total private issue - - 772,981 675,276 168,555 141,722 505,712 357,314 1,447,248 1,174,312 - -------------------------------------------------------------------------------------------------------------------------------- Total residential mortgage-backed securities 5,645,524 5,789,719 772,981 675,276 168,555 141,722 505,712 357,314 7,092,772 6,964,031 - -------------------------------------------------------------------------------------------------------------------------------- Other debt securities - - 6,700 6,700 2,400 2,400 2,584 2,584 11,684 11,684 Federal Reserve Bank stock 32,040 32,040 - - - - - - 32,040 32,040 Federal Home Loan Bank stock 115,368 115,368 - - - - - - 115,368 115,368 Perpetual preferred stock - - - - 19,224 16,317 - - 19,224 16,317 Equity securities and mutual funds - - - - - - 32,661 35,151 32,661 35,151 - -------------------------------------------------------------------------------------------------------------------------------- Total $5,799,925 $5,944,200$810,218 $712,988 $197,410 $ 167,753 $545,612 $399,732 $7,353,165$7,224,673 - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> (1) U.S. government and government sponsored enterprises are not rated by the nationally-recognized rating agencies as these securities are guaranteed by agencies of the U.S. government or government-sponsored enterprises. Approximately $506 million of our portfolio of privately issued mortgage-backed securities (based on amortized cost before impairment charges) was rated below investment grade by at least one of the nationally-recognized rating agencies. The aggregate unrealized loss on these securities totaled $148 million. Ratings by the nationally recognized rating agencies are subjective in nature and accordingly rating can vary significantly amongst the agencies. Limitations generally expressed by the rating agencies include statements that ratings do not predict the specific percentage default likelihood over any given period of time and that ratings do not opine on expected loss severity of an obligation should the issuer default. As such, the impairment of securities rated below investment grade by at least one of the nationally-recognized rating agencies was evaluated to determine if we expect not to recover the entire amortized cost basis of the security. This evaluation was based on projections of estimated cash flows based on individual loans underlying each security using current and anticipated increases in unemployment and default rates, decreases in housing prices and increases in loss severity at foreclosure. The primary assumptions used in this evaluation were: o Unemployment rates - increasing to 10.5% over the next 12 months, dropping to 8% for the following 12 months, and holding at 8% thereafter. o Housing price depreciation - starting with current depreciated housing prices based on information derived from the Federal Housing Finance Agency data, decreasing by an additional 10% over the next twelve months and holding at that level thereafter. o Loss severity - held constant at 27% of the then-current depreciated housing price at estimated foreclosure date.
16 o Discount rates - estimated cash flows were discounted at rates that range from 5.50% to 6.14% based on our current expected yields. These securities were further evaluated based on the loan-to-value ratio and credit enhancement coverage ratio, with each of these criteria being given equal weight in the evaluation. Adjusted loan-to-value ratio is an estimate of the collateral value available to support the realizable value of the security. The Company calculates the adjusted loan-to-value ratio for each security using loan-level data that comprises each security. The adjusted loan-to-value ratio is the original loan-to-value ratio adjusted for market-specific home price depreciation and the credit enhancement on the specific tranche of the security owned by the Company. The home price depreciation is derived from the Federal Housing Finance Agency ("FHFA"). FHFA provides historical information on home price depreciation at both the Metropolitan Statistical Area ("MSA") and state level. This information is matched to each loan to calculate the home price depreciation. Data is accumulated from the loan level to determine the adjusted loan-to-value ratio for the security as a whole. The Company believes that an adjusted loan-to-value ratio above 85% provides evidence that the collateral value may not provide sufficient cash flows to support our carrying value. The 85% guideline provides a reasonable cushion for further home price depreciation in future periods beyond our assumptions of current loss trends for residential real estate loans and is consistent with underwriting standards used by the Company to originate new residential mortgage loans. A distribution of the amortized cost (after recognition of the other-than-temporary impairment) and fair value by adjusted loan to value ratio is as follows (in thousands): Adjusted LTV Ratio Amortized Cost Fair Value --------------------------------------------------- < 70 % $ 44,977 $ 36,349 70 < 75 173,271 119,027 75 < 80 191,193 140,770 80 < 85 85,350 52,204 >= 85 10,921 8,964 --------------------------------------------------- Total $ 505,712 $ 357,314 --------------------------------------------------- OTTI charges have been recognized through earnings on securities with adjusted loan-to-value ratios in excess of 85%. The remaining impairment represents unrealized losses attributed to factors other than credit losses and are recognized in accumulated other comprehensive losses. Credit enhancement coverage ratio is an estimate of credit enhancement available to absorb current projected losses within the pool of loans that support the security. The Company acquires the benefit of credit enhancement by investing in super-senior tranches for many of our mortgage-backed securities. Subordinated tranches held by other investors are specifically designed to absorb losses before the super-senior tranches which effectively doubled the typical credit support for these types of bonds. Current projected losses consider depreciation of home prices based on FHFA data, estimated costs and additional losses to liquidate collateral and delinquency status of the individual loans underlying the security. Management believes that a credit enhancement coverage ratio below 1.50 provides evidence that current credit enhancement may not provide sufficient cash flows of the individual loans to support our carrying value at the security level. The credit enhancement coverage ratio guideline of 1.50 times is based on standard underwriting criteria which consider loans with coverage ratios of 1.20 to 1.25 times to be well-secured. No impaired securities rated below investment grade by any one of the nationally-recognized rating agencies have credit enhancement coverage ratios below 1.50 times. Additional evidence considered by the Company is the current loan-to-value ratio and the FICO score of individual borrowers whose loans are still performing within the collateral pool as forward-looking indicators of possible future losses that could affect our evaluation. Based on the results of management's evaluation , the Company recognized $279 thousand of OTTI charges against earnings in the second quarter of 2009 on certain mortgage-backed securities due to further declines in the projected cash flows from these securities. OTTI of $7.0 million was recognized in earnings in the first quarter of 2009 from these same securities.
17 The following represents the composition of net impairment losses recognized in earnings (in thousands): <TABLE> Three Months Six Months Ended Ended June 30, 2009 June 30, 2009 ----------------- ---------------- <S> <C> <C> OTTI related to perpetual preferred stocks $ - $ 8,008 OTTI on debt securities due to change in intent to sell 1,263 1,263 OTTI on debt securities not intended for sale - 46,360 Less: Portion of OTTI recognized in other other comprehensive income (279) (39,087) - ------------------------------------------------------ ----------------- ---------------- OTTI recognized in earnings related to credit losses on debt securities not intended for sale 279 7,273 - ------------------------------------------------------ ----------------- ---------------- Total OTTI recognized in earnings $ 1,542 $ 16,544 - ------------------------------------------------------ ----------------- ---------------- </TABLE> The following is a tabular rollforward of the amount of credit-related OTTI recognized on available-for-sale debt securities in earnings (in thousands): <TABLE> Three Months Six Months Ended Ended June 30, 2009 June 30, 2009 ----------------- ---------------- Balance of credit-related OTTI recognized on available for sale debt securities at April 1, 2009 <S> <C> <C> and January 1, 2009, respectively $ 6,994 $ - Additions for credit-related OTTI not previously recognized - 6,994 Additions for increases in credit-related OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost 279 279 - ------------------------------------------------------ ----------------- ---------------- Balance of credit-related OTTI recognized on available for sale debt securities at June 30, 2009 $ 7,273 $ 7,273 - ------------------------------------------------------ ----------------- ---------------- </TABLE>
18 (3) Derivatives The fair values of derivative contracts at June 30, 2009 are as follows (in thousands): <TABLE> Derivatives Gain (Loss) Recognized in Income Statement --------------------------- -------------------------- --------------------------------------------------- Three Months ended Six Months ended Assets Liabilities June 30, 2009 June 30, 2009 --------------------------- -------------------------- ---------------------------- ---------------------- Gain Gain Brokerage (Loss) Brokerage (Loss) and on and on Fair Fair Trading Derivatives, Trading Derivatives, Notional(1) Value Notional(1) Value Revenue Net Revenue Net -------------- ------------ ------------ ------------- ------------- -------------- ----------- ---------- Customer Risk Management Programs: <S> <C> <C> <C> <C> <C> <C> <C> <C> Interest rate contracts $4,895,898 $131,191 $5,165,943 $136,034 $ 741 $ - $1,680 $ - Energy contracts 1,141,854 290,974 932,194 294,081 1,485 - 1,314 - Cattle contracts 20,837 960 14,189 849 131 - 334 - Foreign exchange contracts 48,644 48,237 47,956 48,237 93 - 174 - CD options 51,380 4,494 51,380 4,494 - - - - - ----------------------- -------------- ------------ ------------ ------------- ------------- -------------- ----------- ---------- Fair value before cash collateral 6,158,613 475,856 6,211,662 483,695 2,450 - 3,502 - Less: cash collateral - (17,147) - (38,232) - - - - - ----------------------- -------------- ------------ ------------ ------------- ------------- -------------- ----------- ---------- Total Customer Derivatives 6,158,613 458,709 6,211,662 445,463 2,450 - 3,502 - Interest Rate Risk Management Programs 438,586 4,262 - - - (4,578) - (8,604) - ----------------------- -------------- ------------ ------------ ------------- ------------- -------------- ----------- ---------- Total Derivative Contracts $6,597,199 $462,971 $6,211,662 $445,463 $2,450 $(4,578) $3,502 $(8,604) - ----------------------- -------------- ------------ ------------ ------------- ------------- -------------- ----------- ---------- </TABLE> (1) Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract. Interest Rate Risk Management Programs BOK Financial uses interest rate swaps in managing its interest rate sensitivity. Interest rate swaps are generally used to reduce overall asset sensitivity by converting specific fixed rate liabilities to floating rate based on LIBOR. For the quarter ended June 30, 2009 and 2008, net interest revenue was increased by $3.9 million and $1.7 million, respectively, from the settlement of amounts receivable or payable on interest rate swaps. The notional, fair value included in residential mortgage loans held for sale on the balance sheet and related gain (loss) included in mortgage banking revenue due to changes in the fair value of derivative contracts not designated as hedging instruments under FAS 133 (R) related to mortgage loan commitments and forward contract sales as of June 30, 2009 were (in thousands): Mortgage Loans Held for Sale ---------------------------- Mortgage Fair Banking Notional Value Revenue --------------- ------------ ------------ Mortgage loan commitments $572,306 $2,252 $(10,853) Forward sales contracts 561,639 5,085 9,589 - -------------------------------- --------------- ------------ ------------ $7,337 $ (1,264) - -------------------------------- --------------- ------------ ------------
19 (4) Mortgage Banking Activities BOK Financial engages in mortgage banking activities through the BOk Mortgage Division of BOk. Residential mortgage loans held for sale totaled $326 million and $120 million, and outstanding mortgage loan commitments totaled $292 million and $80 million at June 30, 2009 and 2008, respectively. Mortgage loan commitments are generally outstanding for 60 to 90 days and are subject to both credit and interest rate risk. Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Exposure to interest rate fluctuations is partially managed through forward sales of mortgage-backed securities and forward sales contracts. These latter contracts set the price for loans that will be delivered in the next 60 to 90 days. As of June 30, 2009, the unrealized gain recognized on forward sales contracts used to manage the mortgage pipeline interest rate risk was approximately $5.1 million. Gains on mortgage loans sold, including capitalized mortgage servicing rights, totaled $21.2 million and $5.5 million in the first half of 2009 and 2008, respectively. At June 30, 2009, BOK Financial owned the rights to service 61,595 mortgage loans with outstanding principal balances of $6.9 billion, including $825 million serviced for affiliates. The weighted average interest rate and remaining term was 5.80% and 287 months, respectively. For the three and six months ended June 30, 2009, mortgage banking revenue includes servicing fee income and late charges on loans serviced for others of $4.8 million and $9.4 million, respectively. For the three and six months ended June 30, 2008, mortgage banking revenue includes servicing fee income and late charges on loans serviced for others of $4.3 million and $8.6 million, respectively. Activity in capitalized mortgage servicing rights and related valuation allowance during the six months ending June 30, 2009 is as follows (in thousands): <TABLE> Capitalized Mortgage Servicing Rights ------------------------------------------ Purchased Originated Total --------------- ------------ ------------- <S> <C> <C> <C> Balance at December 31, 2008 $ 6,353 $ 36,399 $ 42,752 Additions, net - 25,268 25,268 Change in fair value due to loan runoff (1,464) (8,963) (10,427) Change in fair value due to market changes 3,080 6,740 9,820 - -------------------------------------------- -- ---------- -- ---------- -- ----------- Balance at June 30, 2009 $ 7,969 $ 59,444 $ 67,413 - -------------------------------------------- -- ---------- -- ---------- -- ----------- </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> June 30, 2009 December 31, 2008 --------------------- -------------------- <S> <C> <C> Discount rate - risk-free rate plus a market premium 10.51% 9.26% Prepayment rate - based upon loan interest rate, original term and loan type 5.2% - 26.2% 8.3% - 38% Loan servicing costs - annually per loan based upon loan type $43 - $73 $43 - $73 Escrow earnings rate - indexed to rates paid on deposit accounts with comparable average life 2.96% 2.08% </TABLE>
20 Stratification of the mortgage loan servicing portfolio and outstanding principal of loans serviced by interest rate at June 30, 2009 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 $ 32,927 $ 25,435 $ 7,306 $ 1,745 $ 67,413 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- Outstanding principal of loans serviced (1) $ 2,580,000 $2,432,000 $839,000 $155,000 $ 6,006,000 - ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------- </TABLE> (1) Excludes outstanding principal of $825 million for loans serviced for affiliates and $30 million of mortgage loans for which there are no capitalized mortgage servicing rights. (5) 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 periodic pension cost of $1.2 million during the six months ended June 30, 2009, and none during the same period of the prior year. The Company made no Pension Plan contributions during the six months ended June 30, 2009 and June 30, 2008. Management has been advised that the maximum and minimum allowable contributions for 2009 are $23 million and $0.4 million, respectively. (6) Commitments and Contingent Liabilities As described in previous filings, 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 was 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. The Staff of the Securities Exchange Commission has since advised the Company that it does not intend to recommend the Commission take any action as originally contemplated by the Wells Notice received by the Company in connection with the Staff's investigation of BISYS Fund Services Ohio, Inc. BOSC, Inc. has been joined as a defendant in a punitive class action brought on behalf of unit holders of SemGroup Energy Partners, LP in the United States District Court for the Northern District of Oklahoma. The lawsuit is brought pursuant to Sections 11 and 12(a)(2) of the Securities Act of 1933 against all of the underwriters of issuances of partnership units in the Initial Public Offering in July 2007 and in a Secondary Offering in January 2008. BOSC underwrote $6.25 million of units in the Initial Public Offering. BOSC was not an underwriter in the Secondary Offering. Counsel for BOSC believes BOSC has valid defenses to the claims asserted in the litigation and management does not anticipate any material loss. 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. This contingent liability totaled $2.1 million at June 30, 2009. During 2008, 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 and from available cash. BOK Financial recognized a $2.1 million receivable for its proportionate share of this 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 0.5824 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
21 shares. At June 30, 2009, Cavanal Hill Funds' assets included $1.0 billion of U.S. Treasury, $1.3 billion of cash management and $634 million of tax-free money market funds. Assets of these funds consist of highly-rated, short-term obligations of the U.S. Treasury, corporate issuers and U.S. states and municipalities. The net asset value of units in these funds was $1.00 at June 30, 2009. An investment in these funds is not insured by the Federal Deposit Insurance Corporation or guaranteed by BOK Financial or any of its subsidiaries. BOK Financial may, but is not obligated to purchase assets from these funds to maintain the net asset value at $1.00. 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. The Company has evaluated events from the date of the consolidated financial statements on June 30, 2009 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q on July 30, 2009. No events were identified requiring recognition in and/or disclosure in consolidated financial statements.
22 (7) Shareholders' Equity On July 28, 2009, the Board of Directors of BOK Financial Corporation approved a $0.24 per share quarterly common stock dividend. The quarterly dividend will be payable on August 28, 2009 to shareholders of record on August 14, 2009. Dividends declared during the three and six months ended June 30, 2009 were $0.24 per share and $0.465 per share, respectively. Dividends declared during the three and six months ended June 30, 2008 were $0.225 per share and $0.425 per share, respectively. Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss) ("AOCI") includes unrealized gains and losses on available for sale securities and accumulated gains or losses on effective cash flow hedges, including hedges of anticipated transactions. Gains and losses in AOCI are net of deferred income taxes. Accumulated losses on the rate lock hedge of the 2005 subordinated debenture issuance will be reclassified into income over the ten-year life of the debt. Unrealized losses on employee benefit plans were recognized as required by Statement of Financial Accounting Standards Board No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("FAS 158"), and will be reclassified into income as Pension Plan costs. <TABLE> (In thousands) Unrealized Other Accumulated Unrealized Gain (Loss) Than (Loss) on (Loss) On Available Temporary Effective On For Sale Impairment Cash Flow Employee Securities Losses Hedges Benefit Plans Total ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance at December 31, 2007 $ (22,775) $ - $ (1,461) $ (6,998) $ (31,234) Unrealized losses on securities (120,175) - - - (120,175) Unrealized gains on cash flow hedges - - 139 - 139 Tax benefit (expense) on unrealized gains (losses) 85,433 - (54) - 85,379 Reclassification adjustment for losses realized and included in net income 5,081 - 161 - 5,242 Reclassification adjustment for tax benefit on realized losses (3,666) - (63) - (3,729) ------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2008 $ (56,102) $ - $ (1,278) $ (6,998) $ (64,378) ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2008 $ (204,648) $ - $ (1,199) $ (17,039) $(222,886) Unrealized gains on securities 224,634 15,177 - - 239,811 Other-than-temporary impairment losses on securities - (39,087) - - (39,087) Tax benefit (expense) on unrealized gains (losses) (78,027) 8,295 - - (69,732) Reclassification adjustment for (gains) losses realized and included in net income (10,152) - 117 - (10,035) Reclassification adjustment for tax expense (benefit) on realized gains (losses) 3,526 - (45) - 3,481 ------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2009 $ (64,667) $ (15,615) $ (1,127) $ (17,039) $ (98,448) ------------------------------------------------------------------------------------------------------------------------------- </TABLE>
23 (8) Earnings Per Share Effective January 1, 2009, the Company adopted Financial Accounting Standards Board Staff Position (FSP) No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." FSP EITF 03-6-1 provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Corporation has determined that its outstanding non-vested stock awards are participating securities. Accordingly, effective January 1, 2009, earnings per common share is computed using the two-class method prescribed by FAS 128, "Earnings Per Share." All previously reported earnings per common share data has been retrospectively adjusted to conform to the new computation method, the effects of which were not material. <TABLE> Three Months Ended Six Months Ended ------------------------------------------------------ June 30, June 30, June 30, June 30, 2009 2008 2009 2008 ------------------------------------------------------ Numerator: <S> <C> <C> <C> <C> Net income $ 52,115 $ (1,161) $ 107,147 $ 61,104 Earnings allocated to participating securities (234) 3 (414) (161) - ------------------------------------------------------------------------------------------------------------------------ Numerator for basic earnings per share - income available to common shareholders 51,881 (1,158) 106,733 60,943 Effect of reallocating undistributed earnings of participating securities - - - - - ------------------------------------------------------------------------------------------------------------------------ Numerator for diluted earnings per share - income available to common shareholders $ 51,881 $ (1,158) $ 106,733 $ 60,943 - ------------------------------------------------------------------------------------------------------------------------ Denominator: Weighted average shares outstanding 67,647,860 67,452,181 67,592,257 67,415,930 Less: Participating securities included in weighted average shares outstanding (303,283) - (261,667) (88,775) - ------------------------------------------------------------------------------------------------------------------------ Denominator for basic earnings per common share 67,344,577 67,452,181 67,330,590 67,327,155 Dilutive effect of employee stock compensation plans (1) 103,452 - 87,284 363,764 - ------------------------------------------------------------------------------------------------------------------------ Denominator for diluted earnings per common share 67,448,029 67,452,181 67,417,874 67,690,919 - ------------------------------------------------------------------------------------------------------------------------ Basic earnings per share $ 0.77 $ (0.02) $ 1.59 $ 0.91 - ------------------------------------------------------------------------------------------------------------------------ Diluted earnings per share $ 0.77 $ (0.02) $ 1.58 $ 0.90 - ------------------------------------------------------------------------------------------------------------------------ (1) Excludes employee stock options with exercise prices greater than current market price. 2,497,178 - 3,059,192 278,812 </TABLE> (9) Reportable Segments Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2009 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 $ 241,260 $ 242,007 $ 312,093 $ 54,848 $ 24,675,430 Unallocated items: Tax-equivalent adjustment 3,897 - - 3,897 - Funds management and other 100,268 3,716 29,471 48,402 (1,777,698) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 345,425 $ 245,723 $ 341,564 $ 107,147 $ 22,897,732 ============ == ============ == ============= == =========== == ============== </TABLE> (1) Excluding financial instruments gains/(losses).
24 Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended June 30, 2009 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 $ 119,489 $ 122,025 $ 155,907 $ 24,729 $ 24,711,251 Unallocated items: Tax-equivalent adjustment 1,792 - - 1,791 - Funds management and other 54,299 2,048 19,863 25,595 (2,637,220) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 175,580 $ 124,073 $ 175,770 $ 52,115 $ 22,074,031 ============ == ============ == ============= == =========== == ============== </TABLE> (1) Excluding financial instruments gains/(losses). Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2008 is as follows (in thousands): <TABLE> Net Other Other Interest Operating Operating Net Income Average Revenue Revenue(1) Expense (Loss) Assets ------------ -- ------------ -- ------------- -- ----------- -- -------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 251,332 $ 232,204 $ 287,618 $ 91,052 $ 23,039,803 Unallocated items: Tax-equivalent adjustment 4,238 - - 4,238 - Funds management and other 50,497 (55,743) 25,054 (34,186) (1,879,652) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 306,067 $ 176,461 $ 312,672 $ 61,104 $ 21,160,151 ============ == ============ == ============= == =========== == ============== </TABLE> (1) Excluding financial instruments gains/(losses). Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended June 30, 2008 is as follows (in thousands): <TABLE> Net Other Other Interest Operating Operating Net Income Average Revenue Revenue(1) Expense (Loss) Assets ------------ -- ------------ -- ------------- -- ----------- -- -------------- <S> <C> <C> <C> <C> <C> Total reportable segments $ 123,503 $ 121,346 $ 147,626 $ 32,214 $ 23,400,196 Unallocated items: Tax-equivalent adjustment 2,084 - - 2,084 - Funds management and other 33,352 (58,746) 11,642 (35,459) (1,791,896) ------------ -- ------------ -- ------------- -- ----------- -- -------------- BOK Financial consolidated $ 158,939 $ 62,600 $ 159,268 $ (1,161) $ 21,608,300 ============ == ============ == ============= == =========== == ============== </TABLE> (1) Excluding financial instruments gains/(losses).
25 (10) Fair Value Measurements The following table presents the carrying values and estimated fair values of financial instruments as of June 30, 2009 (dollars in thousands): <TABLE> Range of Average Estimated Carrying Contractual Repricing Discount Fair Value Yields (in years) Rate Value --------------------------------------------------------------------- <S> <C> <C> Cash and cash equivalents $ 582,681 $ 582,681 Securities 7,801,929 7,805,855 Residential mortgage - held for sale 326,363 - - - 326,363 Loans: Commercial 6,715,851 0.50 -18.00% 0.44 0.31 - 3.81% 6,657,955 Commercial real estate 2,611,693 1.75 -18.00 1.23 0.47 - 3.81 2,595,892 Residential mortgage 1,833,975 4.00 -12.75 7.07 1.37 - 4.77 1,990,548 Consumer 908,409 2.05 -21.00 1.40 3.81 943,284 ---------------------------------------------------------------------------------------------------------------- Total loans 12,069,928 12,187,679 Reserve for loan losses (263,309) - ---------------------------------------------------------------------------------------------------------------- Net loans 11,806,619 12,187,679 Derivative instruments with positive fair value, net of cash margin 462,971 462,971 Deposits with no stated maturity 10,083,456 10,083,456 Time deposits 4,571,933 0.02 - 10.00 1.92 0.10 - 2.44 4,589,691 Other borrowings 4,950,451 1.20 - 2.92 0.08 0.10 - 0.60 4,802,696 Subordinated debentures 398,465 5.58 4.03 2.09 444,068 Derivative instruments with negative fair value, net of cash margin 445,463 445,463 ---------------------------------------------------------------------------------------------------------------- </TABLE> The fair value of financial assets and liabilities that are measured on a recurring basis are as follows as of June 30, 2009 (in thousands): <TABLE> Quoted Prices Significant in Active Other Significant Markets for Observable Unobservable Total Identical Inputs Inputs Instruments ----------- ---------------- --------------- ---------------- Assets: <S> <C> <C> <C> <C> Trading securities $84,548 $ 233 $74,365 $9,950 Investment securities 273,770 273,770 Available for sale securities: U.S. Treasury 7,073 7,073 - Municipal and other tax-exempt 43,009 20,407 22,602 Mortgage-backed securities 6,964,031 6,964,031 Other debt securities 11,684 34 11,650 Federal Reserve Bank stock 32,040 32,040 Federal Home Loan Bank stock 115,368 115,368 Perpetual preferred stock 16,317 16,317 Equity securities and mutual funds 35,151 13,620 21,531 ----------- ---------------- --------------- ---------------- 7,224,673 20,693 7,169,728 34,252 Mortgage trading securities 222,864 222,864 Mortgage servicing rights 67,413 67,413 (1) Derivative contracts 462,971 462,971 Liabilities: Certificates of deposit 520,245 520,245 Derivative contracts 445,463 445,463 </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.
26 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. Management has evaluated the methodologies employed by the third-party pricing services and determined that the results represent prices that would be received to sell assets or paid to transfer liabilities in orderly transactions in the current market. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth in the Company's 2008 Form 10-K. The fair value of certain municipal and other debt securities are based on significant unobservable inputs. Inputs used to estimate fair value include limited observed trades, projected cash flows, current credit rating of the issuers and, when applicable, the insurers of the debt and observed trades of similar debt. All of these securities are currently paying in accordance with their respective contractual terms. Losses reported in earnings on these securities totaled $513 thousand in the second quarter of 2009. At June 30, 2009, fair value equaled amortized cost of these securities. Certain certificates of deposit were designated as carried at fair value as permitted by FAS 159. These certificates have been converted from fixed interest rates to variable interest rates based on LIBOR with interest rate swaps. The fair value election for these liabilities better represents the economic effect of these instruments on the Company. At June 30, 2009, the fair value and contractual principal amount of these certificates was $520 million and $517 million, respectively. Change in the fair value of these certificates of deposit resulted in an unrealized gain during the first half of 2009 of $5.9 million, which is included in Gain (Loss) on Derivatives, net on the Consolidated Statement of Earnings. 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.
27 (11) Federal and State Income Taxes The reconciliations of income (loss) attributable to continuing operations at the U.S. federal statutory tax rate to income tax expense are as follows (in thousands): Three Months Ended Six Months Ended June 30, June 30, ------------------------------------------------ 2009 2008 2009 2008 ------------------------------------------------ Amount: Federal statutory tax $ 28,229 $ (1,835) $ 57,665 $ 32,027 Tax exempt revenue (1,125) (1,113) (2,250) (2,225) Effect of state income taxes, net of federal benefit 2,091 (78) 4,615 2,438 Utilization of tax credits (378) (296) (757) (592) Bank-owned life insurance (789) (875) (1,578) (1,750) Other, net 287 1,335 (542) 1,690 ------------------------------------------------------------------------------ Total $ 28,315 $ (2,862) $ 57,153 $ 31,588 ------------------------------------------------------------------------------ Three Months Ended Six Months Ended June 30, June 30, ------------------------------------------------ 2009 2008 2009 2008 ------------------------------------------------ Percent of pretax income: Federal statutory tax 35% 35% 35% 35% Tax exempt revenue (1) 21 (1) (2) Effect of state income taxes, net of federal benefit 3 1 3 3 Utilization of tax credits (1) 6 (1) (1) Bank-owned life insurance (1) 17 (1) (2) Other, net - (25) - 1 ------------------------------------------------------------------------------ Total 35% 55% 35% 34% ------------------------------------------------------------------------------ (12) Financial Instruments with Off-Balance Sheet Risk BOK Financial is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to manage interest rate risk. Those financial instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in BOK Financial's Consolidated Balance Sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the notional amount of those instruments. As of June 30, 2009, outstanding commitments and letters of credit were as follows (in thousands): June 30, 2009 -------------- Commitments to extend credit $ 4,925,347 Standby letters of credit 568,961 Commercial letters of credit 13,500
28 Management's Discussion and Analysis of Financial Condition and Results of Operations Performance Summary BOK Financial Corporation ("the Company") reported net income of $52.1 million or $0.77 per diluted share for the second quarter of 2009. Net income totaled $55.0 million or $0.81 per diluted share for the first quarter of 2009 and a net loss of $1.2 million or $0.02 per diluted share was recognized for the second quarter of 2008. Net income for the six months ended June 30, 2009 totaled $107.1 million or $1.58 per diluted share compared with net income of $61.1 million or $0.90 per diluted share for the six months ended June 30, 2008. The second quarter of 2008 was impacted by $87.0 million in pre-tax charges for loan and energy derivative credit exposure related to the bankruptcy filing by SemGroup LP and related entities which reduced net income for the second quarter of 2008 by approximately $57.0 million or $0.84 per diluted share. In the second quarter of 2009, the Company incurred an $11.8 million pre-tax charge for a special assessment by the FDIC and recognized net pre-tax gains on available for sale securities of $15.2 million. In the first quarter of 2009, the Company recognized net pre-tax gains on available for sale securities of $7.2 million. Highlights of the second quarter of 2009 included: o Net interest revenue totaled $175.6 million, up $5.7 million compared to the first quarter of 2009. Net interest margin was 3.55% for the second quarter of 2009, up 8 basis points over the first quarter of 2009 largely due to higher loan yields and lower funding costs. o Fees and commission revenue totaled $123.1 million for the second quarter of 2009. Mortgage banking revenue remained at relative high levels due to increased loan volume driven by government initiatives to lower national mortgage interest rates. o Operating expenses totaled $175.8 million, up $10.0 million over the first quarter of 2009. Increased operating expenses included an $11.8 million FDIC special assessment. o Combined reserve for credit losses totaled $274 million or 2.27% of outstanding loans at June 30, 2009, up from $262 million or 2.07% of outstanding loans at March 31, 2009. Net loans charged off and provision for credit losses were $34.9 million and $47.1 million, respectively, for the second quarter of 2009. o Non-performing assets totaled $446 million or 3.67% of outstanding loans and repossessed assets at June 30, 2009, $414 million or 3.26% of outstanding loans and repossessed assets at March 31, 2009. o Outstanding loan balances were $12.1 billion at June 30, 2009, down $570 million since March 31, 2009. Commercial, commercial real estate and consumer loans all decreased during the second quarter due largely to reduced customer demand. o Average deposit balances totaled $15.3 billion for the second quarter of 2009, up $479 million compared with average deposits for the first quarter of 2009. Total period-end deposits were $14.7 billion at June 30, 2009, down $615 million since March 31, 2009 due to lower time deposit account balances. Lower time deposit account balances were due largely to maturities of brokered deposits. o The Company's tangible common equity ratio and tier 1 common equity ratio increased to 7.55% and 9.77%, respectively, at June 30, 2009 from 6.84% and 9.58%, respectively, at March 31, 2009 due largely to lower unrealized losses on securities. The tangible common equity ratio and tier 1 common equity ratio are non-GAAP measures of capital strength used by the Company and investors based on shareholders' equity as defined by generally accepted accounting principles minus intangible assets and equity that does not benefit common shareholders such as preferred equity and equity provided by the U.S. Treasury's Troubled Asset Relief Program ("TARP") Capital Purchase Program. The Company chose not to participate in the TARP Capital Purchase Program. Tier 1 capital ratios were 9.86% at June 30, 2009 and 9.66% at March 31, 2009.
o The Company paid a cash dividend of $16.2 million or $0.24 per common share during the second quarter of 2009. On July 28, 2009, the board of directors declared a cash dividend of $0.24 per common share payable on or about August 28, 2009 to shareholders of record as of August 14, 2009. Results of Operations Net Interest Revenue and Net Interest Margin Net interest revenue totaled $175.6 million for the second quarter of 2009, up $16.6 million or 10% over the second quarter of 2008 and $5.7 million over the first quarter of 2009. The increase in net interest revenue over the second quarter of 2008 was due primarily to growth in average earning assets. Improvement in net interest margin also contributed to the growth in net interest revenue. Average earning assets for the second quarter of 2009 increased $1.6 billion or 9% compared to the second quarter of 2008, primarily due to a $1.6 billion increase in average securities. Average available for sale securities, which consist largely of U.S. government agency issued mortgage-backed securities, increased $1.4 billion. We purchase securities to supplement earnings, especially during periods of declining loan demand, and to manage the Company's interest rate risk. Average loans, net of allowance for loan losses, decreased $146 million compared to the second quarter of 2008 primarily due to growth in residential mortgage loans offset by decreases in commercial, commercial real estate and consumer loans due to reduced customer demand as a result of current economic conditions. Growth in average earning assets was funded primarily by a $914 million increase in average deposits and borrowed funds and a $583 million decrease in average margin assets held as part of our customer derivatives programs. Average deposits increased $2.0 billion over the second quarter of 2008, partially offset by $1.1 billion decrease in average borrowed funds. Average time deposits increased $1.0 billion compared with the second quarter of 2008. Average demand deposits increased $549 million and average interest-bearing transaction accounts increased $434 million over the second quarter of 2008. Average earning assets for the second quarter of 2009 increased $205 million compared to the first quarter of 2009, primarily due to a $542 million increase in average securities, offset by a $402 million decrease in average loans, net of allowance for loan losses. Growth in average securities was due to both additional purchases of U.S. government agency issued mortgage-backed securities and increases in the fair value of securities held by the Company. Average outstanding loans decreased primarily due to lower outstanding commercial and consumer loan balances due to reduced customer demand as a result of current economic conditions. Residential mortgage loans, excluding mortgage loans held for sale, increased $43 million due to activity stimulated by government actions to lower mortgage interest rates. Average deposits increased $479 million compared with the first quarter of 2009, including a $319 million increase in average demand deposits, a $243 million increase in average interest-bearing transaction accounts, offset by a $91 million decrease in average time deposits. Average funds purchased, repurchase agreements and other borrowed funds decreased $452 million from the first quarter of 2009. Net interest margin was 3.55% for the second quarter of 2009, 3.47% for the first quarter of 2009 and 3.44% for the second quarter of 2008. The cost of interest-bearing liabilities was 1.31% for the second quarter of 2009, down 116 basis points from the second quarter of 2008. The cost of interest bearing deposits decreased 101 basis points to 1.49% and the cost of funds purchased and other borrowings decreased 157 basis points to 0.86%. The cost of interest-bearing liabilities for the second quarter of 2009 was also down 19 basis points from the first quarter of 2009. The cost of interest-bearing deposits decreased 27 basis points and the cost of funds purchased and other borrowings decreased 5 basis points. The benefit to the net interest margin from earning assets funded by non-interest bearing liabilities was 21 basis points in the second quarter of 2009 compared with 30 basis points in the second quarter of 2008 and 22 basis points in the preceding quarter. The tax-equivalent yield on earning assets was 4.65% for the second quarter of 2009, down 96 basis points from the second quarter of 2008. Loan yields decreased 116 basis points from the second quarter of 2008 to 4.64%. The securities portfolio yield was 4.54%, down 60 basis points over the second quarter of 2008. Our securities re-price as cash flow received is reinvested at current market rates. The resulting change in yield on the securities portfolio
30 occurs more slowly and may not immediately move in the same direction as changes in market rates. The tax-equivalent yield on earning assets for the second quarter of 2009 was down 10 basis points from the first quarter of 2009. Yield on the securities portfolio dropped by 42 basis points while yield on the loan portfolio increased by 8 basis points. Management regularly models the effects of changes in interest rates on net interest revenue. Based on this modeling, we expect net interest revenue to increase slightly over a one-year forward looking period. However, other factors such as loan spread compression, deposit product mix, the overall balance sheet composition and the previously noted widening of the spread between LIBOR and the federal funds rate may affect this general expectation. Our overall objective is to manage the Company's balance sheet to be relatively neutral to changes in interest rates. Approximately 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 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 $435 million convert certain 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. Net interest revenue increased $3.9 million in the second quarter of 2009, $4.3 million in the first quarter of 2009, $1.7 million in the second quarter of 2008 from periodic settlements of these contracts. This increase in net interest revenue contributed 8 basis points to net interest margin in the second quarter of 2009, 9 basis points to net interest margin in the first quarter of 2009, and 4 basis points to the second quarter of 2008. These derivative contracts are carried on the balance sheet at fair value. Changes in the fair value of these contracts are reported in income as derivatives gains or losses. The effectiveness of these strategies is reflected in the overall change in net interest revenue due to changes in interest rates as shown in the following table and in the interest rate sensitivity projections as shown in the Market Risk section of this report. <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 1 - Volume / Rate Analysis (In thousands) Three Months Ended Six Months Ended June 30, 2009 / 2008 June 30, 2009 / 2008 -------------------------------------------------------------------------- Change Due To (1) Change Due To (1) -------------------------------------------------------------------------- Yield / Yield Change Volume Rate Change Volume /Rate -------------------------------------------------------------------------- Tax-equivalent interest revenue: <S> <C> <C> <C> <C> <C> <C> Securities $ 4,631 $ 14,654 $ (10,023) $ 16,529 $ 29,394 $ (12,865) Trading securities (284) 503 (787) (698) 1,015 (1,713) Loans (33,699) 2,303 (36,002) (87,236) 11,212 (98,448) Funds sold and resell agreements (341) (116) (225) (1,151) (307) (844) - --------------------------------------------------------------------------------------------------------------------- Total (29,693) 17,344 (47,037) (72,556) 41,314 (113,870) - --------------------------------------------------------------------------------------------------------------------- Interest expense: Transaction deposits (14,393) (2,375) (12,018) (41,151) (6,035) (35,116) Savings deposits (44) 6 (50) (173) 9 (182) Time deposits (6,574) 8,180 (14,754) (15,907) 16,633 (32,540) Federal funds purchased and repurchase agreements (13,185) (2,309) (10,876) (34,009) (4,656) (29,353) Other borrowings (11,657) (1,164) (10,493) (20,311) 2,062 (22,373) Subordinated debentures (189) 9 (198) (22) (58) 36 - --------------------------------------------------------------------------------------------------------------------- Total (46,042) 2,347 (48,389) (111,573) 7,955 (119,528) - --------------------------------------------------------------------------------------------------------------------- Tax-equivalent net interest revenue 16,349 14,997 1,352 39,017 33,359 5,658 Change in tax-equivalent adjustment 292 341 - --------------------------------------------------------------------------------------------------------------------- Net interest revenue $ 16,641 $ 39,358 - --------------------------------------------------------------------------------------------------------------------- (1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis </TABLE>
31 Other Operating Revenue Other operating revenue was $128 million for the second quarter of 2009 compared to $54 million for the second quarter of 2008. The second quarter of 2008 included a $60.7 million charge to write down SemGroup LP derivative contracts as a result of SemGroup LP's bankruptcy filing. Excluding SemGroup LP items, other operating revenue increased $14.8 million or 12% over the second quarter of 2008. Excluding SemGroup LP items, fees and commissions revenue increased $619 thousand or 1% compared with the second quarter of 2008. Net gains on securities, derivatives and other assets increased $14.2 million over the second quarter of 2008. Other operating revenue increased $2.9 million over the first quarter of 2009, including a $1.6 million increase in fees and commissions revenue and a $1.3 million increase in net gains on securities, derivatives and other assets. Fees and commissions revenue Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 41% of total revenue, excluding provision for credit losses and gains and losses on asset sales, securities and derivatives, for the second quarter of 2009. 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. We expect continued growth in other operating revenue through offering new products and services and by expanding penetration into markets outside of Oklahoma. However, current and future economic conditions, increased competition and saturation in our existing markets could affect the rate of future increases. <TABLE> - --------------------------------------------------------- -------------- ------------- ------------ ---------------- ------------ Table 2 - Other Operating Revenue (In thousands) Three Months Ended Three Months June 30, Increase % Increase Ended Increase % Increase ----------------------- 2009 2008 (Decrease) (Decrease) March 31, 2009 (Decrease) (Decrease) ----------- ----------- ----------- ------------ ----------------- ----------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> Brokerage and trading revenue $ 21,794 $ (35,462) $57,256 161% $ 24,699 $ (2,905) (12%) Transaction card revenue 27,533 25,786 1,747 7% 25,428 2,105 8% Trust fees and commissions 16,860 20,940 (4,080) (19%) 16,510 350 2% Deposit service charges and fees 28,421 30,199 (1,778) (6%) 27,405 1,016 4% Mortgage banking revenue 19,882 8,203 11,679 142% 18,498 1,384 7% Bank-owned life insurance 2,418 2,658 (240) (9%) 2,317 101 4% Margin asset fees 68 4,460 (4,392) (98%) 67 1 1% Other revenue 6,124 6,965 (841) (12%) 6,583 (459) (7%) - ------------------------------------- ----------- ----------- ----------- ------------ ----------------- ----------- ------------ Total fees and commissions 123,100 63,749 59,351 93% 121,507 1,593 1% - ------------------------------------- ----------- ----------- ----------- ------------ ----------------- ----------- ------------ Gain (loss) on other assets 973 (1,149) 2,122 N/A 143 830 N/A Gain (loss) on derivatives, net (1,037) (2,961) 1,924 N/A (1,664) 627 N/A Gain on available for sale securities 16,670 276 16,394 N/A 22,226 (5,556) N/A Loss on mortgage hedge securities (10,199) (5,518) (4,681) N/A (2,118) (8,081) N/A - ------------------------------------- ----------- ----------- ----------- ------------ ----------------- ----------- ------------ Gain (loss) on securities, net 6,471 (5,242) 11,713 N/A 20,108 (13,637) N/A - ------------------------------------- ----------- ----------- ----------- ------------ ----------------- ----------- ------------ Total other-than-temporary impairment (1,263) - (1,263) N/A (54,368) 53,105 N/A Portion of loss recognized in other comprehensive income 279 - 279 N/A (39,366) 39,645 N/A - ------------------------------------- ----------- ----------- ----------- ------------ ----------------- ----------- ------------ Net impairment losses recognized in earnings (1,542) - (1,542) N/A (15,002) 13,460 N/A - ------------------------------------- ----------- ----------- ----------- ------------ ----------------- ----------- ------------ Total other operating revenue $ 127,965 $ 54,397 $73,568 135% $125,092 $ 2,873 2% - ------------------------------------- ----------- ----------- ----------- ------------ ----------------- ----------- ------------ Gain (loss) on change in fair value of mortgage servicing rights $ 7,865 $ (767) $8,632 N/A $ 1,955 $ 5,910 N/A - ------------------------------------- ----------- ----------- ----------- ------------ ----------------- ----------- ------------ </TABLE> Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item. Brokerage and trading revenue, excluding SemGroup LP items, decreased $1.5 million or 7% over the second quarter of 2008. Securities trading increased $2.5 million or 22% over the second quarter of 2008. Increased
32 mortgage lending activity increased the level of securities transactions by our mortgage banking customers. Customer hedging revenue decreased $4.4 million compared to the second quarter of 2008. Low commodity prices continued into the second quarter and reduced the level of customer hedging activity compared to the second quarter of 2008. Brokerage and trading revenue decreased $2.9 million compared with the first quarter of 2009, including a $1.8 million decline in other institutional trading fees as volatility declined in the second quarter of 2009, a decrease of $1.2 million in investment banking revenue related to non-recurring commercial syndication fees in the first quarter of 2009 and a $910 thousand reduction in securities transactions by customers as refinancing activity began to slow in the second quarter of 2009. Decreases were offset by a $568 thousand increase in derivative fee income and a $504 thousand increase in retail brokerage fees. Transaction card revenue depends largely on the volume and amount of transactions processed, the number of ATM locations and the number of merchants served. Transaction card revenue increased $1.7 million or 7% over the prior year primarily due to higher ATM network revenue. Transaction card revenue increased $2.1 million over the first quarter of 2009, primarily due to a $1.3 million increase in ATM network revenue and $543 thousand increase in check card revenue. Trust fees declined $4.1 million or 19% compared to the prior year. In the second quarter of 2009, approximately $1.0 million of fees related to administration of the Cavanal Hill Funds and our cash management sweep fund were voluntarily waived in order to maintain positive yields on these funds in the current low short-term interest rate environment. The remaining decline is primarily due to decreases in the fair value of all trust assets administered by the Company, which is the basis for a significant portion of trust fees and commissions revenue. The decline in the fair value of trust assets was primarily due to current market conditions. The fair value of trust assets administered by the Company totaled $29.2 billion at June 30, 2009 compared to $34.4 billion at June 30, 2008 and $28.7 billion at March 31, 2009. Deposit service charges and fees were primarily impacted by a $1.1 million or 6% decrease in overdraft fees due to lower transaction volumes and a $466 thousand or 5% decrease in commercial account service charge revenue compared with the second quarter of 2008. Commercial account service charge revenue decreased during the second quarter of 2009 due to an increased earnings credit. The earnings credit, which provides a non-cash method for commercial customers to avoid incurring charges for deposit services, increases as commercial demand deposit account balances increase. In the current low interest rate environment and with the unlimited FDIC insurance coverage on such balances, average commercial demand deposit account balances were up $549 million over the second quarter of 2008. Deposit service charges and fees increased $1.0 million compared to the first quarter of 2009 primarily due to a $1.8 million increase in overdraft fees, offset by a decrease of $657 thousand in commercial account service charge revenue. Overdraft fees are generally lower in the first quarter of each year due to seasonal factors. Mortgage banking revenue increased $11.7 million compared to the second quarter of 2008 and $1.4 million compared to the first quarter of 2009. Revenue from originating and marketing mortgage loans increased $11.1 and $1.1 million compared to the second quarter of 2008 and the first quarter of 2009, respectively. Mortgage loans originated for sale in the secondary market totaled $1.0 billion for the second quarter of 2009, $709 million for the first quarter of 2009 and $289 million in the second quarter of 2008. Increase in mortgage loan originations are primarily due to government initiatives to lower national mortgage interest rates. Mortgage loan servicing revenue totaled $4.8 million for the second quarter of 2009, $4.6 million for the first quarter of 2009 and $4.3 million for the second quarter of 2008. The outstanding principal balance of mortgage loans serviced for others totaled $6.1 billion at June 30, 2009, $5.5 billion at March 31, 2009 and $5.1 billion at June 30, 2008. Growth in mortgage loans serviced for others is due to retaining mortgage servicing rights from mortgage loans originated. No mortgage loan servicing rights were purchased in 2008 or 2009. Margin assets which are held primarily as part of the Company's customer derivatives programs averaged $179 million for the second quarter of 2009 compared with $762 million for the second quarter of 2008. The decrease in revenue earned on margin assets is offset by an increase in net interest revenue due to lower costs to fund the margin assets.
33 Net gains on securities, derivatives and other assets 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. For the second quarter of 2009, losses on mortgage hedge securities of $10.2 million were partially offset with a gain on the change in the fair value of mortgage servicing rights of $7.9 million. The Company recognized $16.7 million of gains on sales of $1.2 billion of available for sale securities in the second quarter of 2009. These securities were purchased at deep discounts near the beginning of the recent market disruption. In general, securities sold were low coupon mortgage-backed securities. These were replaced with higher coupon securities that will have superior future yields. The Company intends to sell an additional $91 million of similar securities after June 30. The current value of these securities was below their amortized cost and the Company recognized $1.3 million in other-than-temporary impairment charges on these securities during the second quarter of 2009. The Company recognized an additional other-than-temporary impairment loss on certain mortgage-backed securities of $279 thousand in earnings during the second quarter of 2009. The Company recognized an other-than-temporary impairment loss on these mortgage-backed securities of $7.0 million in the first quarter of 2009. Other-than-temporary impairment of these mortgage-backed securities was due to declines in the projected cash flows. The Company also recognized an $8.0 million other-than-temporary impairment in the first quarter of 2009 on a preferred stock that was downgraded below investment grade by at least one of the nationally recognized rating agencies. No other-than-temporary impairment losses were recognized on preferred stocks in the second quarter of 2009 and no other-than-temporary impairment was recognized in the second quarter of 2008. Net gains or losses on derivatives consist of fair value adjustments of all derivatives used to manage interest rate risk and certain liabilities the Company has elected to carry at fair value. 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 decrease in value as interest rates rise resulting in a loss to the Company and increase in value as interest rates fall resulting in a gain to the Company. Certain certificates of deposit 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 and the Company recognizes a loss as interest rates fall. The fair value of these fixed-rate certificates of deposit generally decreases in value and the Company recognizes a gain as interest rates rise.
34 Other Operating Expense Other operating expense increased $16.5 million or 10% compared with the second quarter of last year. Excluding changes in the fair value of mortgage servicing rights, other operating expense increased $25.1 million or 16%. Personnel expense increased $6.6 million or 7% compared with the second quarter of 2008 and non-personnel expense, excluding changes in the fair value of mortgage servicing rights, increased $18.5 million or 27% due largely to a $15.1 million increase in FDIC assessments. <TABLE> - -------------------------------------------- ----------- ----------- ------------ ------------ ----------- ------------ Table 3 - Other Operating Expense (In thousands) Three Months % % Ended June 30, Increase Increase March 31, Increase Increase ---------------------- 2009 2008 (Decrease) (Decrease) 2009 (Decrease) (Decrease) ---------- ----------- ----------- ------------ ------------ ----------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> Regular compensation $ 58,573 $54,024 $ 4,549 8% $54,976 $ 3,597 7% Incentive compensation: Cash-based 20,427 19,503 924 5% 20,586 (159) 1% Stock-based 2,443 2,760 (317) (11%) 1,409 1,034 73% - --------------------------------- ---------- ----------- ----------- ------------ ------------ ----------- ------------ Total incentive compensation 22,870 22,263 607 3% 21,995 875 4% Employee benefits 14,748 13,310 1,438 11% 15,656 (908) (6%) - --------------------------------- ---------- ----------- ----------- ------------ ------------ ----------- ------------ Total personnel expense 96,191 89,597 6,594 7% 92,627 3,564 4% Business promotion 4,569 5,777 (1,208) (21%) 4,428 141 3% Professional fees and services 7,363 6,973 390 6% 6,512 851 13% Net occupancy and equipment 15,973 15,100 873 6% 16,258 (285) (2%) Insurance 5,898 2,626 3,272 125% 5,638 260 5% FDIC special assessment 11,773 - 11,773 N/A - 11,773 N/A Data processing & communications 20,452 19,523 929 5% 19,306 1,146 6% Printing, postage and supplies 4,072 4,156 (84) (2%) 4,571 (499) (11%) Net (gains) losses on operating expenses of repossessed assets 996 (229) 1,225 535% 1,806 (810) (45%) Amortization of intangible assets 1,686 1,885 (199) (11%) 1,686 - - % Mortgage banking costs 9,336 6,054 3,282 54% 7,467 1,869 25% Change in fair value of mortgage servicing rights (7,865) 767 (8,632) (1,125%) (1,955) (5,910) 302% Other expense 5,326 7,039 (1,713) (24%) 7,450 (2,124) (29%) - --------------------------------- ---------- ----------- ----------- ------------ ------------ ----------- ------------ Total other operating expense $175,770 $159,268 $ 16,502 10% $165,794 $ 9,976 6% - --------------------------------- ---------- ----------- ----------- ------------ ------------ ----------- ------------ Number of employees (full-time equivalent) 4,434 4,137 297 7% 4,374 60 1% - --------------------------------- ---------- ----------- ----------- ------------ ------------ ----------- ------------ </TABLE> Personnel expense Regular compensation expense, which consists of salaries and wages, overtime pay and temporary personnel costs, increased $4.5 million or 8% over the second quarter of 2008 primarily due to head count and standard annual merit increases. Incentive compensation increased $607 thousand or 3% compared to the second quarter of 2008. Cash-based incentive compensation are either intended to provide current rewards to employees who generate long-term business opportunities to the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions. The increase in cash-based incentive compensation over the second quarter of 2008 included a $757 thousand increase in commissions and incentives related to brokerage and trading revenue, partially offset by net decreases in all other cash-based
35 incentive compensation. 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 increased $101 thousand compared with the second quarter of 2008 due to changes in the market value of BOK Financial common stock and other investments. The market value of BOK Financial common stock increased $4.00 per share in the second quarter of 2009 and increased $1.22 per share in the second quarter of 2008. Compensation expense for equity awards decreased $418 thousand compared with the second quarter of 2008. Expense for equity awards is based on the grant-date fair value of the awards and is unaffected by subsequent changes in fair value. Compared to the second quarter of 2008, employee benefit expense increased primarily due to increased expenses related to payroll taxes, employee retirement plans and medical insurance costs. Medical insurance costs were up $531 thousand or 14%. The Company self-insures a portion of its employee health care coverage and these costs may be volatile. Personnel expense increased $3.6 million compared with the first quarter of 2009 primarily due to annual merit increases in regular compensation costs and headcount. The Company generally awards annual merit increases effective April 1st for a majority of its staff. Non-personnel operating expenses Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, increased $18.5 million compared to the second quarter of 2008 primarily due to the $11.8 million FDIC insurance special assessment, a $3.2 million increase in regular FDIC insurance premiums related to previously announced increases in deposit insurance premiums and a $3.3 million increase in mortgage banking costs. Growth in non-personnel operating expense was partially offset by a $1.2 million decrease in business promotion expense primarily due to timing. Growth in mortgage banking costs included the effects of actual loan prepayments on mortgage servicing rights, provision for losses on mortgage loans sold with recourse and other costs related to increased production volume. In addition, net losses and operating expenses of repossessed assets increased $1.2 million compared to the second quarter of 2008. Real estate and other repossessed assets totaled $75 million at June 30, 2009 compared to $21 million at June 30, 2008. Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, increased $12.3 million compared to the first quarter of 2009 primarily due to the $11.8 million FDIC insurance special assessment and higher mortgage banking costs. Net losses on repossessed assets decreased by $810 thousand compared to the first quarter of 2009. Income Taxes Income tax expense was $28.3 million or 35% of book taxable income for the second quarter of 2009 compared with an income tax benefit of $2.9 million or 55% of book taxable loss for the second quarter of 2008 and income tax expense of $28.8 million or 34% of book taxable income for the first quarter of 2009. The effective tax rate for the second quarter of 2008 includes adjustments to estimated income tax expense due to the loss incurred in the second quarter of 2008. 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 $13 million at June 30, 2009 and was largely unchanged from December 31, 2008.
36 Lines of Business BOK Financial operates three principal lines of business: commercial banking, consumer banking and wealth management. Our principal lines of business have been re-defined from the previous year to better present the Company's organization as it has grown in markets outside of Oklahoma. The prior year information has been revised for consistent presentation. Commercial banking includes lending, treasury and cash management services and customer risk management products to small businesses, middle market and larger commercial customers. Commercial banking also includes the TransFund network. Consumer banking includes retail lending and deposit services, all mortgage banking activities and our indirect automobile lending products. Wealth management provides fiduciary services, brokerage and trading, private financial services and investment advisory services in all 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, securities gains and losses including impairment charges, the provision for credit losses in excess of net loans charged off, tax planning strategies and certain executive compensation costs that are not attributed to the lines of business. Funds Management and Other also included the FDIC special assessment charge in the second quarter of 2009. Regular increases in FDIC insurance assessments are charged to the business units. BOK Financial allocates resources and evaluates performance of its lines of business after allocation of funds, certain indirect expenses, taxes based on statutory rates, actual net credit losses and capital costs. The cost of funds borrowed from the funds management unit by the operating lines of business is transfer priced at rates that approximate market for funds with similar duration. Market is generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of transfer-pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk. The value of funds provided by the operating lines of business to the funds management unit is based on applicable Federal Home Loan Bank advance rates. Deposit accounts with indeterminate maturities, such as demand deposit accounts and interest-bearing transaction accounts, are transfer-priced at a rolling average based on expected duration of the accounts. The expected duration ranges from 30 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. Average invested capital includes economic capital and amounts we have invested in the lines of business. As shown in the following table, net income attributable to our lines of business decreased $7.5 million or 23% compared to the second quarter of 2008. The decrease was due primarily to decreased transfer pricing credit provided to business units in the second quarter of 2009 compared to the second quarter of 2008, lower fee revenue and higher operating costs in certain units. Lower interest rates decrease the transfer pricing credit provided to business units that generate lower-costing funds for the Company. This tends to shift revenue from units that provide funds to the Company, such as consumer banking. Total net interest revenue (expense) recognized by the Funds Management unit increased to $1.0 million during the second quarter of 2009 from $(4.0) million in the second quarter of 2008 due largely to changes in the transfer pricing credit. Net income of the Funds Management unit was also reduced by the FDIC special assessment of $11.8 million during the second quarter of 2009. For the second quarter of 2008, Funds management and other includes the $60.7 million charge to writedown the SemGroup LP derivatives to estimated fair value.
37 <TABLE> - ------------------------------------------------------ ------------------------------ --------------------------- Table 4 - Net Income (Loss) by Line of Business (In thousands) Three months ended June 30, Six months ended June 30, 2009 2008 2009 2008 ------------ ----------------- ------------ -------------- <S> <C> <C> <C> <C> Commercial banking $ 17,719 $ 17,413 $ 32,850 $ 54,162 Consumer banking 5,320 6,709 14,803 18,741 Wealth management 1,690 8,092 7,195 18,148 - ------------------------------------------------------ ------------ ----------------- ------------ -------------- Subtotal 24,729 32,214 54,848 91,051 Funds management and other 27,386 (33,375) 52,299 (29,947) - ------------------------------------------------------ ------------ ----------------- ------------ -------------- Total $ 52,115 ($ 1,161) $107,147 $ 61,104 - ------------------------------------------------------ ------------ ----------------- ------------ -------------- </TABLE> Commercial Banking Commercial banking contributed $17.7 million and $17.4 million to consolidated net income for the second quarters of 2009 and 2008, respectively. Commercial banking net income was reduced by pre-tax charges for credit losses of $22.2 million in 2009 and $34.6 million in 2008. Credit losses in 2008 included $26.0 million related to SemGroup LLP. Other operating revenue decreased $8.4 million and net interest revenue decreased $1.5 million. <TABLE> Table 5 Commercial Banking (Dollars in Thousands) Three Months ended June 30, Increase Six Months ended June 30, Increase -------------- -------------- ------------- -------------- 2009 2008 (Decrease) 2009 2008 (Decrease) -------------- -------------- ------------- ------------- -------------- ------------ <S> <C> <C> <C> <C> <C> <C> NIR (expense) from external sources $ 87,016 $ 114,479 $(27,463) $ 172,615 $ 232,253 $ (59,638) NIR (expense) from internal sources (13,252) (39,254) 26,002 (25,952) (78,789) 52,837 - ------------------------------------- -------------- -------------- ------------- ------------- -------------- ------------ Total net interest revenue 73,764 75,225 (1,461) 146,663 153,464 (6,801) Other operating revenue 33,837 42,258 (8,421) 67,261 75,730 (8,469) Operating expense 56,506 54,846 1,660 110,239 105,470 4,769 Net loans charged off 22,155 34,602 (12,447) 48,796 40,213 8,583 Gain on financial instruments, net - - - - 4,689 (4,689) Gain (loss) on repossessed assets, net 59 464 (405) (1,125) 445 (1,570) - ------------------------------------- -------------- -------------- ------------- ------------- -------------- ------------ Income before taxes 28,999 28,499 500 53,764 88,645 (34,881) Federal and state income tax 11,280 11,086 194 20,914 34,483 (13,569) - ------------------------------------- -------------- -------------- ------------- ------------- -------------- ------------ Net income $ 17,719 $ 17,413 $ 306 $ 32,850 $ 54,162 $ (21,312) - ------------------------------------- -------------- -------------- ------------- ------------- -------------- ------------ Average assets $12,539,330 $13,002,607 $(463,277) $12,686,690 $12,740,116 $(53,426) Average loans 9,436,325 9,673,709 (237,384) 9,618,102 9,507,513 110,589 Average deposits 5,234,401 4,495,339 739,062 4,993,078 4,454,800 538,278 Average invested capital 1,037,370 1,076,710 (39,340) 1,056,920 1,109,560 (52,640) Return on average assets 0.57% 0.54% 3 b.p. 0.55% 0.85% (30 b.p.) Return on invested capital 6.85 6.50 0.35 6.27 9.82 (3.55) Efficiency ratio 52.51 46.68 5.83 51.53 46.02 5.51 Net charge-offs (annualized) to average loans 0.94 1.43 (0.49) 0.96 0.85 0.11 </TABLE> Average earning assets decreased $421 million or 4% primarily due to a $238 million decrease in loans and $196 million decrease in funds sold and resell agreements. The impact of this decrease was largely offset by improving loan spreads. Decreases in average earning assets combined with changes in the internal transfer pricing credit to reduce net interest revenue by $1.5 million. Other operating revenue decreased $8.4 million compared to the second quarter of 2008, primarily due to declines in energy derivative activity and their associated fees due to low commodity prices. Operating expenses were up $1.6
million compared to the second quarter of 2008 largely due to increased FDIC insurance expenses as a result of an increase in deposits balances and the regular assessment rate. Repossession expenses were also up over the second quarter of 2008. The increase in net loans charged off was due primarily to increased losses on commercial real estate loans. The average outstanding balance of loans attributed to commercial banking was $9.4 billion for the second quarter of 2009, down $237 million or 2% over the second quarter of 2008. Energy loans averaged $1.9 billion, an increase of $196 million or 11% over the first quarter of 2008. Commercial real estate loans of $1.7 billion decreased $16 million or 1% over the first quarter of 2008. Average commercial and industrial loans of $3.1 billion were down $249 million or 7% over the second quarter of 2009. Agricultural loans decreased $99 million or 35% compared to the second quarter of 2008 to $185 million. Small business loans averaged $1.8 billion, a decrease of $444 million or 20% over the second quarter of 2008. Average deposits attributed to commercial banking were $5.2 billion for the second quarter of 2009, up $739 million or 16% over the second quarter of 2008. Treasury services balances increased $178 million or 14% and balances attributed to our commercial and industrial customers increased $506 million or 38%. Balances attributed to our energy customers increased by $30 million or 8% and balances associated with our commercial real estate customers increased slightly by $8 million or 3%. Average balances attributed to our small business customers declined slightly by $13 million or 1% compared to the second quarter of 2008.
39 Consumer Banking Consumer banking services are provided through four primary distribution channels: traditional branches, supermarket branches, the 24-hour ExpressBank call center and online internet banking. Consumer banking contributed $5.3 million to consolidated net income for the second quarter of 2009, down $1.4 million compared to the second quarter of 2008. <TABLE> Table 6 Consumer Banking (Dollars in Thousands) Three Months ended June 30, Increase Six Months ended June 30, Increase ------------------------------- ---------------------------- 2009 2008 (Decrease) 2009 2008 (Decrease) --------------- --------------- ----------- -------------- ------------- ------------- <S> <C> <C> <C> <C> <C> <C> NIR (expense) from external sources $ 12,878 $ 9,144 $ 3,734 $ 25,200 $ 12,020 $ 13,180 NIR (expense) from internal sources 21,463 28,656 (7,193) 46,565 64,217 (17,652) - --------------------------------------- --------------- --------------- ----------- -------------- ------------- ------------- Total net interest revenue 34,341 37,800 (3,459) 71,765 76,237 (4,472) Other operating revenue 49,632 38,603 11,029 94,917 74,651 20,266 Operating expense 64,759 55,577 9,182 126,388 107,537 18,851 Net loans charged off 8,153 3,562 4,591 13,736 6,412 7,324 Increase (decrease) in fair value of mortgage service rights 7,865 (767) 8,632 9,820 (2,529) 12,349 Loss on financial instruments, net (10,199) (5,518) (4,681) (12,317) (3,751) (8,566) Gain (loss) on repossessed assets, net (20) 2 (22) 166 15 151 - --------------------------------------- --------------- --------------- ----------- -------------- ------------- ------------- Income before taxes 8,707 10,981 (2,274) 24,227 30,674 (6,447) Federal and state income tax 3,387 4,272 (885) 9,424 11,933 (2,509) - --------------------------------------- --------------- --------------- ----------- -------------- ------------- ------------- Net income $ 5,320 $ 6,709 ($ 1,389) $ 14,803 $ 18,741 $ (3,938) - --------------------------------------- --------------- --------------- ----------- -------------- ------------- ------------- Average assets $8,766,518 $7,987,610 $778,908 $8,626,205 $7,920,915 $ 705,290 Average loans 2,633,624 2,540,891 92,733 2,635,012 2,478,729 156,283 Average deposits 6,156,665 5,690,423 466,242 6,051,901 5,645,792 406,109 Average invested capital 261,410 231,610 29,800 249,130 213,950 35,180 Return on average assets 0.24% 0.38% (14 bp) 0.34% 0.47% (13 bp) Return on invested capital 8.16 11.65 (3.49) 11.98 17.62 (5.64) Efficiency ratio 77.12 72.74 4.38 75.83 71.27 4.56 Net charge-offs (annualized) to average loans 1.24 0.56 0.68 1.04 0.52 0.52 Mortgage loans funded $ 1,023,272 $ 288,937 $734,335 $ 1,731,833 $545,554 $ 1,186,279 </TABLE> June 30, June 30, Increase 2009 2008 (Decrease) ------------- ------------- -------------- Banking locations 197 193 4 Mortgage loan servicing portfolio $6,082,501 $5,075,285 $1,007,216 Net interest revenue from consumer banking activities decreased $3.5 million or 9% over the second quarter of 2008. Average earning assets increased $328 million or 12% from the second quarter of 2008 due to increases in mortgage hedge securities held as an economic hedge of our mortgage servicing rights, loans and funds sold to the funds management unit. The favorable impact of this growth was offset by a $6.6 million decrease related to lower internal transfer pricing credit provided to the consumer banking segment for deposits sold to our funds management unit. Other operating revenue increased $11.0 million or 29% over the second quarter of 2008 primarily due to increased mortgage banking revenue. Loan refinancing volumes were up due to government initiatives to lower national mortgage interest rates. Operating expenses increased $9.2 million or 17% over the second quarter of 2008, including a $4.4 million increase in personnel cost due to branch expansion in Arizona, Colorado and Texas compared to the second quarter of 2008. Mortgage banking expenses increased $2.7 million due to the effect of accelerated actual loan repayments on the value of our mortgage servicing rights. FDIC insurance premiums grew $1.5 million primarily due to increased deposits balances and FDIC insurance regular assessment rates. In addition, operating expenses increased due to branch expansion in Arizona, Colorado, and Texas.
40 Net loans charged off totaled $8.2 million in the second quarter of 2009 and $3.6 million in the second quarter of 2008. Net indirect automobile loans charged-off increased $512 thousand and net other consumer loans charged off increased $775 thousand compared with the second quarter of 2008. Our Consumer Banking division originates, markets and services conventional and government-sponsored mortgage loans for all of our geographical markets. During the second quarter of 2009, $1.0 billion of mortgage loans were funded compared to $289 million funded in the second quarter of 2008. Approximately 57% of our mortgage loans funded were in the Oklahoma market 11% in the Texas market and 10% in the Colorado market. Revenue from mortgage loan origination and marketing activities totaled $15.1 million in the second quarter of 2009 and $3.9 million in the second quarter of 2008. We also service $6.8 billion of mortgage loans, including $778 million of loans serviced for affiliated entities. Approximately 95% of the mortgage loans serviced were to borrowers in our primary geographical market areas. Mortgage loan servicing revenue totaled $4.8 million in the second quarter of 2009 and $4.3 million in the second quarter of 2008. Changes in fair value of our mortgage loan servicing rights, net of economic hedge, decreased consumer banking net income by $2.3 million in the second quarter of 2009 compared with a decrease in net income of $6.3 million in the second quarter of 2008. Changes in the fair value of mortgage servicing rights and securities held as an economic hedge are due to movement in interest rates, actual and anticipated loan prepayment speeds and related factors. The interest rate sensitivity of our mortgage servicing rights and securities held as an economic hedge is modeled over a range of +/- 50 basis points. At June 30, 2009, a 50 basis point increase in mortgage interest rates is expected to decrease the fair value of our mortgage servicing rights, net of economic hedging by $136 thousand. A 50 basis point decrease in mortgage interest rates is expected to decrease the fair value of our mortgage servicing rights, net of economic hedging by $4.3 million. Modeling changes in the value of our servicing rights due to changes in interest rates assumes stable relationships between mortgage commitment rates and discount rates and assumed prepayment speeds and actual prepayment speeds. Changes in market conditions can cause variations from these assumptions. These factors and others may cause changes in the value of our mortgage servicing rights to differ from our expectations. Average consumer deposits in the second quarter of 2009 increased $466 million or 8% over the second quarter of 2008. Average interest-bearing transaction accounts in the second quarter of 2009 were up $58 million or 2% and average time deposits were up $335 million or 13% compared to the second quarter of 2008. Average demand deposit accounts in the second quarter of 2009 increased $73 million or 10% over the second quarter of 2008. Movement of funds among the various types of consumer deposits was largely based on interest rates and product features offered. Wealth Management Wealth Management contributed consolidated net income of $1.7 million in the second quarter of 2009 compared to net income of $8.1 million in the second quarter of 2008. The decrease in net income was due primarily to increased operating expenses, increased net loans charged off and lower other operating revenue.
41 <TABLE> Table 7 Wealth Management (Dollars in Thousands) Three Months ended June 30, Increase Six Months ended June 30, Increase ------------------------------ --------------------------- 2009 2008 (Decrease) 2009 2008 (Decrease) --------------- -------------- ------------ ------------ -------------- ----------- <S> <C> <C> <C> <C> <C> <C> NIR (expense) from external sources $ 5,661 $ 4,111 $ 1,550 $ 9,506 $ 5,975 $ 3,531 NIR (expense) from internal sources 5,723 6,367 (644) 13,326 15,656 (2,330) - ------------------------------------ --------------- -------------- ------------ ------------ -------------- ----------- Total net interest revenue 11,384 10,478 906 22,832 21,631 1,201 Other operating revenue 38,556 40,485 (1,929) 79,829 81,823 (1,994) Operating expense 42,546 36,902 5,644 84,327 72,542 11,785 Net loans charged off 4,629 809 3,820 6,558 1,204 5,354 Loss on financial instruments, net - (7) 7 - (7) 7 - ------------------------------------ --------------- -------------- ------------ ------------ -------------- ----------- Income before taxes 2,765 13,245 (10,480) 11,776 29,701 (17,925) Federal and state income tax 1,075 5,153 (4,078) 4,581 11,553 (6,972) - ------------------------------------ --------------- -------------- ------------ ------------ -------------- ----------- Net income $ 1,690 $ 8,092 $ (6,402) $ 7,195 $ 18,148 $ (10,953) - ------------------------------------ --------------- -------------- ------------ ------------ -------------- ----------- Average assets $ 3,405,403 $ 2,409,979 $ 995,424 $3,362,535 $ 2,378,772 $983,763 Average loans 1,049,921 914,174 135,747 1,038,787 909,307 129,480 Average deposits 3,024,808 2,006,781 1,018,027 2,977,227 1,955,812 1,021,415 Average invested capital 216,180 202,430 13,750 209,440 195,540 13,900 Return on assets 0.20% 1.35% (115 b.p.) 0.43% 1.53% (110 b.p.) Return on invested capital 3.14 16.08 (12.94) 6.93 18.66 (11.73) Efficiency ratio 85.19 72.41 12.78 82.14 70.12 12.02 Net charge-offs (annualized) to average loans 1.76 0.35 1.41 1.26 0.26 1.00 </TABLE> June 30, June 30, Increase 2009 2008 (Decrease) Trust assets $29,288,041 $34,433,874 (5,145,833) Net interest revenue for the second quarter of 2009 increased $906 thousand or 9% compared to second quarter of 2008 due to increases in average earning assets partially offset by lower internal transfer pricing credit. Earning assets of the Wealth Management unit consist primarily of funds sold to the Funds Management unit. Other operating revenue declined $1.9 million compared to the second quarter of 2008. Declines in trust fees and commissions due to fee waivers and decreases in the fair value of trust assets were partially offset by increased trading and brokerage fees. Operating expenses increased $5.6 million compared to the second quarter of 2008 primarily related to higher personnel costs due to increased headcount and incentive compensation. Additional staffing has been added to increase penetration in markets outside of Oklahoma. Growth in non-personnel expenses was primarily due to increased FDIC insurance premiums as a result of increased deposit balances and an increase in the FDIC regular assessment rate in the second quarter of 2009 compared to the second quarter of 2008. Growth in average assets was largely due to funds sold to the Funds Management unit. Funds provided by Wealth Management deposits, which are largely sold to the Funds Management unit, increased primarily due to an increase in non-traditional deposit products and continued movement of customer funds from managed money market products that are not on the Company's balance sheet, to deposits. Average deposits provided by the Wealth Management division increased $1.0 billion in the second quarter of 2009 compared with the second quarter of 2008. Interest-bearing transaction accounts averaged $1.8 billion for the second quarter of 2009, an increase of $352 million or 24% over the second quarter of 2008. Average time deposits were $956 million, up $676 million or 242% over last year. At June 30, 2009 and 2008, the Wealth Management line of business was responsible for trust assets with aggregate market values of $29.3 billion and $34.4 billion, respectively, under various fiduciary arrangements. The decrease in trust assets was primarily due to general market conditions. We have sole or joint discretionary authority over $11.0
42 billion of trust assets at June 30, 2009 compared to $13.0 billion of trust assets at June 30, 2008. The fair value of non-managed assets was $18.2 billion at June 30, 2009 and $21.4 billion at June 30, 2008. The fair value of assets held in safekeeping totaled $7.9 billion at June 30, 2009 and $9.3 billion at June 30, 2008. Geographical Market Distribution The Company also secondarily evaluates performance by primary geographical market. Loans are generally attributed to geographical markets based on the location of the customer and may not reflect the location of the underlying collateral. Brokered deposits and other wholesale funds are not attributed to a geographical market. Funds management and other also include insignificant results of operations in locations outside our primary geographic regions. <TABLE> Table 8 Net Income (Loss) by Geographic Region (In Thousands) Three Months ended June 30, Six Months ended June 30, 2009 2008 2009 2008 --------------- -------------- ------------- ------------- <S> <C> <C> <C> <C> Oklahoma $ 27,310 $ 9,323 $ 52,355 $ 45,657 Texas 2,276 12,369 9,084 24,550 New Mexico 1,453 3,931 4,064 8,525 Arkansas 2,628 2,588 6,336 4,827 Colorado 436 3,336 (1,437) 6,316 Arizona (10,987) 238 (17,443) 793 Kansas / Missouri 1,652 1,113 3,392 1,602 - ------------------------------------------------------ --------------- -------------- ------------- ------------- Subtotal 24,768 32,898 56,351 92,270 Funds management and other 27,347 (34,059) 50,796 (31,166) - ------------------------------------------------------ --------------- -------------- ------------- ------------- Total $ 52,115 $( 1,161) $107,147 $ 61,104 - ------------------------------------------------------ --------------- -------------- ------------- ------------- </TABLE>
43 Oklahoma Market Oklahoma is a significant market to the Company. Our Oklahoma offices are located primarily in the Tulsa and Oklahoma City metropolitan areas. For the second quarter of 2009, approximately 51% of our average loans, 52% of our average deposits and 52% of our consolidated net income is attributed to the Oklahoma market. In addition, all of our mortgage servicing activity and 76% of our trust assets are attributed to the Oklahoma market. <TABLE> Table 9 Oklahoma (Dollars in Thousands) Three Months ended June 30, Increase Six Months ended June 30, Increase ------------------------------- ----------------------------- 2009 2008 (Decrease) 2009 2008 (Decrease) ---------------- -------------- ------------ -------------- -------------- ------------ <S> <C> <C> <C> <C> <C> <C> Net interest revenue $ 60,127 $ 57,040 $ 3,087 $ 121,948 $ 118,687 $ 3,261 Other operating revenue 87,792 87,017 775 163,786 165,964 (2,178) Operating expense 93,842 88,133 5,709 184,583 170,208 14,375 Net loans charged off 7,067 34,718 (27,651) 13,173 38,488 (25,315) Increase (decrease) in fair value of mortgage service rights 7,865 (767) 8,632 9,820 (2,529) 12,349 Gain (loss) on financial instruments, net (10,199) (5,524) (4,675) (12,317) 932 (13,249) Gain (loss) on repossessed assets, net 20 344 (324) 206 368 (162) - --------------------------------------- ---------------- -------------- ------------ -------------- -------------- ------------ Income before taxes 44,696 15,259 29,437 85,687 74,726 10,961 Federal and state income tax 17,386 5,936 11,450 33,332 29,069 4,263 - --------------------------------------- ---------------- -------------- ------------ -------------- -------------- ------------ Net income $ 27,310 $ 9,323 $ 17,987 $ 52,355 $ 45,657 $ 6,698 - --------------------------------------- ---------------- -------------- ------------ -------------- -------------- ------------ Average assets $13,425,256 $13,087,964 $ 337,292 $13,484,048 $12,905,304 $ 578,744 Average loans 6,305,435 6,463,506 (158,071) 6,391,762 6,411,051 (19,289) Average deposits 7,940,597 6,551,924 1,388,673 7,754,242 6,478,410 1,275,832 Average invested capital 807,930 777,070 30,860 818,740 795,410 23,330 Return on average assets 0.82% 0.31% 51 bp 0.78% 0.71% 7 bp Return on invested capital 13.56 4.83 8.73 12.90 11.54 1.36 Efficiency ratio 63.44 61.18 2.26 64.60 59.80 4.80 Net charge-offs (annualized) to average loans 0.45 2.15 (1.70) 0.41 1.20 (0.79) </TABLE> Oklahoma net income in the second quarter of 2008 was reduced by a $26.0 million pre-tax charge-off of SemGroup, LP, loans. Excluding this charge, net income generated in the Oklahoma market increased $574 thousand over the second quarter of 2008 primarily due to increased net interest revenue offset by increased operating expenses primarily due to increased FDIC insurance premiums. Net interest revenue increased $3.1 million or 5% compared to the second quarter of 2008. Net interest revenue was impacted by a decline in average loans of $158 million compared to the second quarter of 2008, offset by improving interest spreads on loans. Strong deposit growth of $1.4 billion compared to the second quarter of 2008 was largely offset by lower internal funds transfer credit provided for deposits sold to the Funds Management unit. Other operating revenue increased $775 thousand primarily due to increased mortgage banking revenue related to government initiatives to lower national mortgage rates and transaction card revenues, offset by lower trust fees, brokerage and trading revenue and deposit service fees and charges. Operating expenses increased primarily due to increased FDIC premiums as a result of increased deposit balances and regular assessment rate in the second quarter of 2009. In addition, mortgage banking costs and personnel costs were higher. Changes in the fair value of mortgage servicing rights, net of changes in the fair value of financial instruments,
44 decreased pre-tax income by $2.3 million in the second quarter of 2009 and $6.3 million in the second quarter of 2008. Excluding $26.0 million charged off in the first quarter of 2008 related to SemGroup, LP, net loans charged off increased by $848 thousand. Average deposits in the Oklahoma market for the second quarter of 2009 increased $1.4 billion over the second quarter of 2008. The increase came primarily from commercial and wealth management units, including trust, broker/dealer and private banking. Consumer banking also contributed to deposit growth. Texas Market Texas is our second largest market. Our Texas offices are located primarily in Dallas, Fort Worth and Houston metropolitan areas. Approximately 30% of our average loans, 24% of our average deposits and 4% of our consolidated net income is attributed to the Texas market. <TABLE> Table 10 Texas (Dollars in Thousands) Three Months ended June 30, Increase Six Months Ended June 30, Increase ------------------------------ ---------------------------- 2009 2008 (Decrease) 2009 2008 (Decrease) --------------- -------------- ------------ -------------- ------------- ------------ <S> <C> <C> <C> <C> <C> <C> Net interest revenue $ 33,751 $ 37,930 $ (4,179) $ 68,588 $ 74,843 $ (6,255) Other operating revenue 10,264 11,972 (1,708) 23,591 22,281 1,310 Operating expense 34,106 29,599 4,507 66,197 55,787 10,410 Net loans charged off 6,278 1,099 5,179 11,722 3,076 8,646 Gain (loss) on repossessed assets, net (75) 122 (197) (67) 98 (165) - ---------------------------------------- --------------- -------------- ------------ -------------- ------------- ------------ Income before taxes 3,556 19,326 (15,770) 14,193 38,359 (24,166) Federal and state income tax 1,280 6,957 (5,677) 5,109 13,809 (8,700) - ---------------------------------------- --------------- -------------- ------------ -------------- ------------- ------------ Net income $ 2,276 $ 12,369 $(10,093) $ 9,084 $ 24,550 $ (15,466) - ---------------------------------------- --------------- -------------- ------------ -------------- ------------- ------------ Average assets $ 5,800,944 $5,222,814 $578,130 $ 5,775,332 $5,076,487 $ 698,845 Average loans 3,694,715 3,588,761 105,954 3,767,884 3,471,868 296,016 Average deposits 3,619,200 3,313,169 306,031 3,506,710 3,221,912 284,798 Average invested capital 549,550 544,170 5,380 548,300 540,490 7,810 Return on average assets 0.16% 0.95% (79 bp) 0.32% 0.97% (65 bp) Return on invested capital 1.66 9.14 (7.48) 3.34 9.13 (5.79) Efficiency ratio 77.49 59.31 18.18 71.81 57.44 14.37 Net charge-offs (annualized) to average loans 0.68 0.12 0.56 0.62 0.18 0.44 </TABLE> Net income in the Texas market decreased by $10.1 million compared to the second quarter of 2008 primarily due to increased net loans charged off and operating expenses and decreased net interest revenue. Net interest revenue decreased $4.2 million or 11% compared to the second quarter of 2008. Average outstanding loans increased $106 million or 3% over the second quarter of 2008. Average deposits increased $306 million. The benefit of an increase in average loans and deposits was largely offset by the reduced benefit from funds sold to the funds management unit. Other operating revenue declined $1.7 million or 14% compared to the second quarter of 2008 primarily due to declines in energy derivative activity and their associated fees due to low commodity prices compared to the second quarter of 2008 and losses on mortgage loans not yet sold due to declining interest rates, offset by increased gains on mortgages sold during the second quarter of 2009 compared to the second quarter of 2008 due to increased loan refinancing activity. Operating expenses increased $4.5 million or 15% over the second quarter of last year primarily due to higher personnel costs and the FDIC insurance premiums due to increased deposit balances and
45 assessment rate. Net loans charged off increased $5.2 million to 0.68% of average loans, compared to 0.12% of average loans for the second quarter of 2009. Other Markets For the second quarter of 2009, net income attributable to our New Mexico market totaled $1.5 million or 3% of consolidated net income, down from $3.9 million in the second quarter of 2008. The decrease in net income attributed to New Mexico resulted primarily from lower net interest revenue due to lower internal funds transfer credit provided for deposits sold to the Funds Management unit. For the second quarter of 2009, net income in the Arkansas market increased $40 thousand over the second quarter to $2.6 million. Increased securities trading revenue at our Little Rock office was primarily offset by higher personnel costs. Average deposits in our Arkansas market were up $79 million or 120% over the second quarter of 2008 due primarily to commercial banking deposits. Consumer and Wealth Management deposits also increased over the second quarter of 2008. For the second quarter of 2009, net income in the Colorado market decreased $2.9 million compared to the second quarter of 2008. The decrease was primarily due to increases in net loans charged off and the FDIC insurance premiums in the second quarter of 2009. Average loans increased $146 million over the second quarter of 2008 and average deposits increased $102 million. We incurred a net loss of $11.0 million in the Arizona market in the second quarter of 2009 compared with net income of $238 thousand in the second quarter of 2008. The loss was primarily due to an increase in net commercial real estate loans charged off of $14.3 million compared to the second quarter of 2008 and increased operating expenses related to the opening of 3 branch locations in the first quarter of 2009. Approximately $5.4 million of loans charged off in the second quarter of 2009 relate to loans in the Tucson market which the Company is no longer operating. Average loans declined $25.9 million compared to the second quarter of 2008 and average deposits grew by $51.5 million compared to the second quarter of 2008. The positive deposit growth was offset by lower internal funds transfer credit provided for deposits sold to the Funds Management unit. Consistent with plans when we first acquired Valley Commerce Bank in Phoenix, the Company's objective is to focus on growth in commercial and small business lending in the Arizona market. We currently have approximately $17 million of goodwill in the Arizona market. The majority of this goodwill is attributed to commercial banking. Future goodwill impairment analysis will depend largely on our ability to meet these growth projections. We continue to grow in the Kansas City market. Net income for the second quarter of 2009 increased $539 thousand or 48% over the second quarter of 2008 due largely to growth in other operating revenue. Total average deposits increased $173 million over the second quarter of 2008.
46 <TABLE> Table 11 New Mexico (Dollars in Thousands) Three Months ended June 30, Increase Six Months ended June 30, Increase ------------------------------- ---------------------------- 2009 2008 (Decrease) 2009 2008 (Decrease) ---------------- -------------- ----------- -------------- ------------- ----------- <S> <C> <C> <C> <C> <C> <C> Net interest revenue $ 8,320 $ 10,066 $(1,746) $ 16,788 $ 20,642 $ (3,854) Other operating revenue 5,549 6,298 (749) 11,919 12,136 (217) Operating expense 10,046 8,905 1,141 19,182 17,627 1,555 Net loans charged off 1,444 1,025 419 1,949 1,194 755 Gain (loss) on repossessed assets, net - - - (925) (5) (920) - --------------------------------------- ---------------- -------------- ----------- -------------- ------------- ----------- Income before taxes 2,379 6,434 (4,055) 6,651 13,952 (7,301) Federal and state income tax 926 2,503 (1,577) 2,587 5,427 (2,840) - --------------------------------------- ---------------- -------------- ----------- -------------- ------------- ----------- Net income $ 1,453 $ 3,931 $(2,478) $ 4,064 $ 8,525 $ (4,461) - --------------------------------------- ---------------- -------------- ----------- -------------- ------------- ----------- Average assets $ 1,809,355 $1,759,045 $50,310 $ 1,781,718 $1,767,388 $ 14,330 Average loans 832,214 839,536 (7,322) 829,815 847,355 (17,540) Average deposits 1,151,349 1,027,233 124,116 1,132,838 1,036,428 96,410 Average invested capital 100,960 114,860 (13,900) 100,760 118,190 (17,430) Return on average assets 0.32% 0.90% (58 bp) 0.46% 0.97% (51 bp) Return on invested capital 5.77 13.76 (7.99) 8.13 14.51 (6.38) Efficiency ratio 72.43 54.42 18.01 66.82 53.78 13.04 Net charge-offs (annualized) to average loans 0.69 0.49 0.20 0.47 0.28 0.19 </TABLE> <TABLE> Table 12 Arkansas (Dollars in Thousands) Three Months ended June 30, Increase Six Months ended June 30, Increase ------------------------------- ----------------------------- 2009 2008 (Decrease) 2009 2008 (Decrease) ----------------- ------------- ------------ ---------------- ------------ ----------- <S> <C> <C> <C> <C> <C> <C> Net interest revenue $ 3,022 $ 2,797 $ 225 $ 5,975 $ 5,504 $ 471 Other operating revenue 9,156 7,377 1,779 20,196 14,683 5,513 Operating expense 7,031 5,157 1,874 13,969 10,903 3,066 Net loans charged off 845 781 64 1,831 1,384 447 Loss on repossessed assets, net - - - (1) - (1) - ------------------------------------- ----------------- ------------- ------------ ---------------- ------------ ----------- Income before taxes 4,302 4,236 66 10,370 7,900 2,470 Federal and state income tax 1,674 1,648 26 4,034 3,073 961 - ------------------------------------- ----------------- ------------- ------------ ---------------- ------------ ----------- Net income $ 2,628 $ 2,588 $ 40 $ 6,336 $ 4,827 $ 1,509 - ------------------------------------- ----------------- ------------- ------------ ---------------- ------------ ----------- Average assets $ 505,461 $ 474,753 $30,708 $ 505,047 $ 465,611 $ 39,436 Average loans 422,855 437,654 (14,799) 429,057 429,044 13 Average deposits 145,550 66,306 79,244 142,781 65,202 77,579 Average invested capital 35,660 34,240 1,420 34,010 30,610 3,400 Return on average assets 2.09% 2.19% (10 bp) 2.52% 2.08% 44 bp Return on invested capital 29.56 30.40 (0.84) 37.57 31.71 5.86 Efficiency ratio 57.74 50.69 7.05 53.38 54.01 (0.63) Net charge-offs (annualized) to average loans 0.80 0.71 0.09 0.85 0.65 0.20 </TABLE>
47 <TABLE> Table 13 Colorado (Dollars in Thousands) Three Months ended June 30, Increase Six Months ended June 30, Increase ------------------------------- ---------------------------- 2009 2008 (Decrease) 2009 2008 (Decrease) --------------- --------------- ----------- -------------- ------------- ----------- <S> <C> <C> <C> <C> <C> <C> Net interest revenue $ 9,376 $ 8,655 $ 721 $ 18,454 $ 18,026 $ 428 Other operating revenue 4,093 4,725 (632) 9,262 8,622 640 Operating expense 10,200 7,904 2,296 19,236 15,773 3,463 Net loans charged off 2,888 17 2,871 10,889 538 10,351 Gain on repossessed assets, net 333 - 333 57 - 57 - --------------------------------------- --------------- --------------- ----------- -------------- ------------- ----------- Income before taxes 714 5,459 (4,745) (2,352) 10,337 (12,689) Federal and state income tax 278 2,123 (1,845) (915) 4,021 (4,936) - --------------------------------------- --------------- --------------- ----------- -------------- ------------- ----------- Net income $ 436 $ 3,336 $(2,900) $ (1,437) $ 6,316 $ (7,753) - --------------------------------------- --------------- --------------- ----------- -------------- ------------- ----------- Average assets $ 2,010,030 $1,819,416 $ 190,614 $2,013,557 $1,844,732 $168,825 Average loans 962,455 816,695 145,760 969,583 808,163 161,420 Average deposits 1,169,336 1,066,988 102,348 1,155,557 1,087,289 68,268 Average invested capital 161,660 162,290 (630) 144,660 148,810 (4,150) Return on average assets 0.09% 0.74% (65 bp) -0.14% 0.69% (83 bp) Return on invested capital 1.08 8.27 (7.19) -2.00 8.54 (10.54) Efficiency ratio 74.08 59.07 15.01 69.40 59.19 10.21 Net charge-offs (annualized) to average loans 1.19 0.01 1.18 2.24 0.13 2.11 </TABLE> <TABLE> Table 14 Arizona (Dollars in Thousands) Three Months ended June 30, Increase Six Months ended June 30, Increase ------------------------------ --------------------------- 2009 2008 (Decrease) 2009 2008 (Decrease) --------------- -------------- ------------ -------------- ------------ ----------- <S> <C> <C> <C> <C> <C> <C> Net interest revenue $ 2,922 $ 4,959 $(2,037) $ 5,769 $ 9,853 $ (4,084) Other operating revenue 105 385 (280) 1,149 757 392 Operating expense 4,556 3,625 931 8,942 7,170 1,772 Net loans charged off 16,214 1,329 14,885 26,295 2,143 24,152 Gains (losses) on repossessed assets, net (239) - (239) (229) - (229) - ---------------------------------------- --------------- -------------- ------------ -------------- ------------ ----------- Income before taxes (17,982) 390 (18,372) (28,548) 1,297 (29,845) Federal and state income tax (6,995) 152 (7,147) (11,105) 504 (11,609) - ---------------------------------------- --------------- -------------- ------------ -------------- ------------ ----------- Net income (loss) $ (10,987) $ 238 $ (11,225) $ (17,443) $ 793 $(18,236) - ---------------------------------------- --------------- -------------- ------------ -------------- ------------ ----------- Average assets $ 665,372 $ 643,029 $ 22,343 $ 659,749 $ 619,986 $ 39,763 Average loans 577,234 603,101 (25,867) 582,320 580,515 1,805 Average deposits 182,403 130,929 51,474 164,539 131,060 33,479 Average invested capital 84,600 78,780 5,820 86,280 76,910 9,370 Return on average assets -6.62% 0.15% (677 bp) -5.30% 0.26% (556 bp) Return on invested capital -52.09 1.22 (53.31) -40.77 2.07 (42.84) Efficiency ratio 150.51 67.83 82.68 129.26 67.58 61.68 Net charge-offs (annualized) to average loans 10.98 0.88 10.10 8.91 0.74 8.17 </TABLE>
48 <TABLE> Table 15 Kansas / Missouri (Dollars in Thousands) Three Months ended June 30, Increase Six Months ended June 30, Increase ------------------------------ ---------------------------- 2009 2008 (Decrease) 2009 2008 (Decrease) ---------------- ------------- ------------ -------------- ------------- ----------- <S> <C> <C> <C> <C> <C> <C> Net interest revenue $ 1,964 $ 1,970 $ (6) $ 3,686 $ 3,625 $ 61 Other operating revenue 4,747 3,298 1,449 10,547 6,964 3,583 Operating expense 3,806 3,441 365 7,948 6,961 987 Net loans charged off 201 5 196 733 1,006 (273) - --------------------------------------- ---------------- ------------- ------------ -------------- ------------- ----------- Income before taxes 2,704 1,822 882 5,552 2,622 2,930 Federal and state income tax 1,052 709 343 2,160 1,020 1,140 - --------------------------------------- ---------------- ------------- ------------ -------------- ------------- ----------- Net income $ 1,652 $ 1,113 $ 539 $ 3,392 $ 1,602 $ 1,790 - --------------------------------------- ---------------- ------------- ------------ -------------- ------------- ----------- Average assets $ 494,514 $ 382,737 $111,777 $ 452,754 $ 350,657 $102,097 Average loans 324,773 369,368 (44,595) 318,403 338,281 (19,878) Average deposits 207,438 34,214 173,224 165,534 35,073 130,461 Average invested capital 25,170 30,590 (5,420) 23,850 29,220 (5,370) Return on average assets 1.34% 1.17% 17 bp 1.50% 0.92% 58 bp Return on invested capital 26.33 14.63 11.70 28.68 11.03 17.65 Efficiency ratio 56.71 65.32 (8.61) 55.84 65.74 (9.90) Net charge-offs (annualized) to average loans 0.25 0.01 0.24 0.46 0.59 (0.13) </TABLE> Financial Condition Securities BOK Financial maintains a securities portfolio to support its interest rate risk management strategies, enhance profitability, provide liquidity and comply with regulatory requirements. Securities are classified as held for investment, available for sale or trading. See Note 2 to the consolidated financial statements for the composition of the securities portfolio as of June 30, 2009. Investment securities, which consist primarily of Oklahoma municipal bonds, are carried at cost and adjusted for amortization of premiums or accretion of discounts. At June 30, 2009, investment securities were carried at $270 million and had a fair value of $274 million. 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 $7.4 billion at June 30, 2009, up $100 million compared with March 31, 2009. Mortgage-backed securities represented 97% of total available for sale securities. The Company holds no debt securities of corporate issuers or mortgage-backed securities holding pools of commercial real estate loans. 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 1.9 years at June 30, 2009. Management estimates that the expected duration would extend to approximately 2.8 years assuming an immediate 300 basis point upward rate shock. The effect of falling interest rates from current low levels is not expected to be significant. Mortgage-backed securities also have credit risk from delinquency or default of the underlying loans. The Company mitigates this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest
49 payments on the underlying loans are either fully or partially guaranteed. At June 30, 2009, approximately $5.6 billion of the Company's mortgage-backed securities, based on amortized cost, were issued by U.S. government agencies. The fair value of these mortgage-backed securities totaled $5.8 billion at June 30, 2009. The Company also holds amortized cost of $1.4 billion in mortgage-backed securities privately issued by publicly-owned financial institutions. The fair value of our portfolio of privately issued mortgage-backed securities totaled $1.2 billion at June 30, 2009. The Company's portfolio of mortgage-backed securities originated by private issuers consists primarily of $1.1 billion of Jumbo-A mortgage loans and $357 million of Alt-A mortgage loans. Jumbo-A mortgage loans generally meet government agency underwriting standards, but have loan balances that exceed agency maximums. Alt-A mortgage loans generally do not have sufficient documentation to meet government agency underwriting standards. Credit risk on mortgage-backed securities originated by private 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 89% of these securities, including all Alt-A mortgage-backed securities originated in 2007 and 2006, are credit enhanced with additional collateral support. Approximately 85% 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 six financial institutions. These stocks were originally purchased for $46 million and had a June 30, 2009 carrying value of $24 million. Our carrying value of these stocks was reduced by $22 million of other-than-temporary impairment charges in prior quarters. At June 30, 2009, the aggregate fair value of these securities was $30 million. During the second quarter of 2009, preferred shares with a carrying value of $5.2 million and fair value of $14 million were converted to common shares by one of the issuing financial institutions. These shares are now included in equity securities and mutual funds. The current carrying value and aggregate fair value of the remaining preferred stocks was $19 million and $16 million, respectively, at June 30, 2009. The aggregate unrealized loss on these preferred stocks decreased by $5.4 million in the second quarter of 2009 and no additional other-than-temporary impairments were recorded. 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. 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 a 24-month to 36-month period beginning June 30, 2008, the most recent date that the fair value of these securities equaled our carrying value. On a quarterly basis, the Company performs separate evaluations on debt and equity securities to determine if the unrealized losses are temporary as more fully described in Note 2 to the financial statements. The Company intends to sell certain U.S. government agency issued residential mortgage-backed securities after June 30, 2009. The current fair value of these securities was below their amortized costs and the Company recognized $1.3 million in other-than-temporary impairment charges on these securities in the second quarter of 2009. In addition, the Company recognized a $279 thousand other-than-temporary impairment charge against earnings in the second quarter of 2009 related to certain residential mortgage-backed securities that the Company does not intend to sell due to further declines in the projected cash flows of these securities. Other-than-temporary impairment of $7.0 million was recognized in earnings in the first quarter of 2009 from these same securities. Certain government agency issued residential mortgage-backed securities, identified as mortgage trading securities, have been designated as economic hedges of mortgage servicing rights. These securities are carried at fair value with changes in fair value recognized in current period income. These securities are held with the intent that gains or losses will offset changes in the fair value of mortgage servicing rights. The Company also maintains a separate trading portfolio. Trading portfolio securities, which are also carried at fair value with changes in fair value recognized in current period income, are acquired and held with the intent to sell at a profit to the Company. Bank-Owned Life Insurance The Company has approximately $242 million of bank-owned life insurance at June 30, 2009. This investment is expected to provide a long-term source of earnings to support existing employee benefit programs. Approximately
50 $208 million is held in separate accounts. The Company's separate account holdings are invested in diversified portfolios of investment-grade fixed income securities and cash equivalents, including U.S. Treasury and Agency securities, mortgage-backed securities, corporate debt, asset-backed and CMBS securities. The portfolios are managed by unaffiliated professional managers within parameters established in the portfolio's investment guidelines. 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 June 30, 2009, the cash surrender value represented by the underlying fair value of investments held in separate accounts was approximately $211 million. As the underlying fair value of the investments held in a separate account at June 30, 2009 exceeded the net book value of the investments, no cash surrender value was supported by the stable value wrap. The stable value wrap is provided by a well-rated, domestic financial institution. The remaining cash surrender value of $30 million primarily represented the cash surrender value of policies held in general accounts and other amounts due from various insurance companies. Loans The aggregate loan portfolio before allowance for loan losses totaled $12.1 billion at June 30, 2009, a $570 million decrease since March 31, 2009. <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 16 - Loans (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2009 2009 2008 2008 2008 --------------------------------------------------------------------------------- Commercial: <S> <C> <C> <C> <C> <C> Energy $ 2,203,558 $ 2,329,237 $ 2,311,813 $ 2,099,996 $ 1,895,050 Services 1,884,097 1,962,297 2,038,451 1,975,604 1,848,360 Wholesale/retail 1,027,532 1,133,275 1,165,099 1,199,216 1,226,875 Manufacturing 496,496 514,748 497,957 519,485 542,019 Healthcare 765,285 747,299 777,154 778,819 747,434 Agriculture 157,759 193,863 197,629 229,447 253,198 Other commercial and industrial 181,124 220,811 423,500 471,235 525,637 - --------------------------------------------------------------------------------------------------------------------- Total commercial 6,715,851 7,101,530 7,411,603 7,273,802 7,038,573 - --------------------------------------------------------------------------------------------------------------------- Commercial real estate: Construction and land development 818,837 879,368 926,226 968,522 1,021,135 Retail 413,789 424,565 371,228 375,929 378,241 Office 490,044 486,065 459,357 470,383 422,558 Multifamily 306,175 344,227 316,596 268,614 251,325 Industrial 129,239 150,488 149,367 151,187 180,358 Other real estate loans 453,609 447,368 478,474 479,357 573,880 - --------------------------------------------------------------------------------------------------------------------- Total commercial real estate 2,611,693 2,732,081 2,701,248 2,713,992 2,827,497 - --------------------------------------------------------------------------------------------------------------------- Residential mortgage: Permanent mortgage 1,362,505 1,339,957 1,273,275 1,193,488 1,130,417 Home equity 471,470 479,993 479,299 476,465 477,180 - --------------------------------------------------------------------------------------------------------------------- Total residential mortgage 1,833,975 1,819,950 1,752,574 1,669,953 1,607,597 - --------------------------------------------------------------------------------------------------------------------- Consumer: Indirect automobile 582,380 650,370 692,615 721,390 735,098 Other consumer 326,029 335,985 317,966 300,833 309,273 - --------------------------------------------------------------------------------------------------------------------- Total consumer 908,409 986,355 1,010,581 1,022,223 1,044,371 - --------------------------------------------------------------------------------------------------------------------- Total $ 12,069,928 $ 12,639,916 $ 12,876,006 $ 12,679,970 $ 12,518,038 - --------------------------------------------------------------------------------------------------------------------- </TABLE>
51 The decline in outstanding loan balances was broadly distributed among the various segments of the portfolio and across geographic markets. Generally, the decline in outstanding loan balances was due to reduced customer demand in response to current economic conditions, normal repayment trends and management decisions to mitigate credit risk by exiting certain loan types and relationships. A breakdown by geographical market follows: <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 17 - Loans by Principal Market Area (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2009 2009 2008 2008 2008 --------------------------------------------------------------------------------- Oklahoma: <S> <C> <C> <C> <C> <C> Commercial $ 2,918,478 $ 3,119,362 $ 3,356,520 $ 3,368,823 $ 3,228,179 Commercial real estate 855,742 881,620 843,576 827,357 875,546 Residential mortgage 1,249,104 1,234,417 1,196,924 1,134,066 1,099,277 Consumer 521,431 562,021 579,809 580,211 601,184 --------------------------------------------------------------------------------- Total Oklahoma $ 5,544,755 $ 5,797,420 $ 5,976,829 $ 5,910,457 $ 5,804,186 --------------------------------------------------------------------------------- Texas: Commercial $ 2,182,756 $ 2,277,186 $ 2,353,860 $ 2,205,169 $ 2,166,925 Commercial real estate 741,199 816,830 825,769 853,653 889,364 Residential mortgage 345,780 337,044 315,438 307,655 299,996 Consumer 196,752 214,134 212,820 214,133 204,081 --------------------------------------------------------------------------------- Total Texas $ 3,466,487 $ 3,645,194 $ 3,707,887 $ 3,580,610 $ 3,560,366 --------------------------------------------------------------------------------- New Mexico: Commercial $ 380,378 $ 393,180 $ 418,732 $ 442,644 $ 451,225 Commercial real estate 313,190 315,511 286,574 281,061 271,177 Residential mortgage 90,944 99,805 98,018 95,165 89,469 Consumer 18,826 19,900 18,616 18,296 16,977 --------------------------------------------------------------------------------- Total New Mexico $ 803,338 $ 828,396 $ 821,940 $ 837,166 $ 828,848 --------------------------------------------------------------------------------- Arkansas: Commercial $ 97,676 $ 99,955 $ 103,446 $ 104,630 $ 96,775 Commercial real estate 133,026 133,227 134,015 127,925 124,049 Residential mortgage 19,015 17,145 16,875 16,941 19,527 Consumer 152,620 168,971 175,647 183,543 197,979 --------------------------------------------------------------------------------- Total Arkansas $ 402,337 $ 419,298 $ 429,983 $ 433,039 $ 438,330 --------------------------------------------------------------------------------- Colorado: Commercial $ 595,858 $ 675,223 $ 660,546 $ 598,519 $ 489,844 Commercial real estate 269,923 267,035 261,820 266,739 276,062 Residential mortgage 58,557 59,120 53,875 49,676 38,517 Consumer 14,097 14,599 16,141 18,328 16,367 --------------------------------------------------------------------------------- Total Colorado $ 938,435 $ 1,015,977 $ 992,382 $ 933,262 $ 820,790 --------------------------------------------------------------------------------- Arizona: Commercial $ 215,540 $ 211,953 $ 211,356 $ 213,861 $ 207,173 Commercial real estate 262,607 285,841 319,525 326,615 351,058 Residential mortgage 58,265 61,605 62,123 58,800 53,321 Consumer 3,229 5,261 6,075 5,551 5,315 --------------------------------------------------------------------------------- Total Arizona $ 539,641 $ 564,660 $ 599,079 $ 604,827 $ 616,867 --------------------------------------------------------------------------------- Kansas / Missouri: Commercial $ 325,165 $ 324,671 $ 307,143 $ 340,156 $ 398,452 Commercial real estate 36,006 32,017 29,969 30,642 40,241 Residential mortgage 12,310 10,814 9,321 7,650 7,490 Consumer 1,454 1,469 1,473 2,161 2,468 --------------------------------------------------------------------------------- Total Kansas / Missouri $ 374,935 $ 368,971 $ 347,906 $ 380,609 $ 448,651 --------------------------------------------------------------------------------- Total BOK Financial loans $ 12,069,928 $ 12,639,916 $ 12,876,006 $ 12,679,970 $ 12,518,038 --------------------------------------------------------------------------------- </TABLE>
52 Commercial The commercial loan portfolio decreased $386 million during the second quarter of 2009 to $6.7 billion at June 30, 2009. The decrease in outstanding commercial loans was primarily due to decreases of $126 million in energy sector loans and $106 million in wholesale/retail sector loans. Commercial loan origination activity has slowed to less than amounts necessary to offset normal repayment trends in the portfolio. Additionally, committed amounts on certain collateral-dependent commercial loans have been reduced due to lower collateral values. This required partial repayment of the outstanding balances. The commercial sector of our loan portfolio is distributed as follows (in thousands): <TABLE> Table 18 - Commercial Loans by Principal Market Area Kansas/ Oklahoma Texas New Mexico Arkansas Colorado Arizona Missouri Total ------------ ------------ ------------ ---------- ---------- ---------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Energy $1,053,660 $778,239 $ 5,984 $ 1,602 $357,380 $ - $ 6,693 $2,203,558 Services 553,804 658,955 243,305 28,482 149,569 142,416 107,566 1,884,097 Wholesale/retail 517,829 296,226 60,867 50,484 28,294 35,950 37,882 1,027,532 Manufacturing 283,339 132,412 46,237 1,575 18,747 9,445 4,741 496,496 Healthcare 402,665 285,885 9,614 14,627 28,844 22,951 699 765,285 Agriculture 27,385 3,153 299 36 243 - 126,643 157,759 Other commercial And industrial 79,796 27,886 14,072 870 12,781 4,778 40,941 181,124 - ----------------------------- ------------ ------------ ------------ ---------- ---------- ---------- ------------ ------------ Total commercial loans $2,918,478 $2,182,756 $380,378 $ 97,676 $595,858 $215,540 $325,165 $6,715,851 - ----------------------------- ------------ ------------ ------------ ---------- ---------- ---------- ------------ ------------ </TABLE> Energy loans totaled $2.2 billion or 18% of total loans. Outstanding energy loans decreased $126 million during the second quarter of 2009 primarily due to low customer loan demand as a result of low commodity prices which has led to curtailed exploration and production of oil and gas reserves and reduced collateral value available to support outstanding balances. Approximately $1.9 billion of energy loans were to oil and gas producers, down from $2.0 billion at March 31, 2009. 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 $149 million of loans to borrowers that provide services to the energy industry, $96 million of loans to borrowers engaged in wholesale or retail energy sales and $55 million of loans to borrowers that manufacture equipment for the energy industry. The services sector of the loan portfolio totaled $1.9 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. Outstanding loans to the service sector of the loan portfolio decreased $78 million during the second quarter of 2009 due to reduced loan demand as a result of general economic conditions. Approximately $1.1 billion of the services category is made up of loans with individual balances of less than $10 million. BOK Financial participates in shared national credits when appropriate to obtain or maintain business relationships with local customers. Shared national credits are defined by banking regulators as credits of more than $20 million and with three or more non-affiliated banks as participants. At June 30, 2009, the outstanding principal balance of these loans totaled $1.7 billion. Substantially all of these loans are to borrowers with local market relationships. BOK Financial serves as the agent lender in approximately 22% 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.
53 Commercial Real Estate Commercial real estate loans totaled $2.6 billion or 21% of the loan portfolio at June 30, 2009. 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 $120 million from the previous quarter end. The commercial real estate sector of our loan portfolio is distributed as follows (in thousands): <TABLE> Table 19 - Commercial Real Estate Loans by Principal Market Area Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/ Total Missouri ------------ ------------- ------------ ----------- ----------- ----------- ---------- ------------- Construction and <S> <C> <C> <C> <C> <C> <C> <C> <C> land development $ 232,922 $ 196,318 $ 83,342 $ 20,724 $163,295 $ 115,235 $7,001 $ 818,837 Retail 149,747 115,144 50,709 19,130 14,514 49,399 15,146 413,789 Office 152,540 143,782 73,985 14,008 57,393 46,064 2,272 490,044 Multifamily 90,117 119,004 19,532 54,667 6,200 10,287 6,368 306,175 Industrial 63,979 33,672 21,102 752 1,474 8,185 75 129,239 Other real estate loans 166,437 133,279 64,520 23,745 27,047 33,437 5,144 453,609 - -------------------------- ------------ ------------- ------------ ----------- ----------- ----------- ---------- ------------- Total commercial real estate loans $ 855,742 $ 741,199 $ 313,190 $ 133,026 $269,923 $ 262,607 $36,006 $2,611,693 - -------------------------- ------------ ------------- ------------ ----------- ----------- ----------- ---------- ------------- </TABLE> Construction and land development loans decreased $61 million from March 31, 2009 to $819 million at June 30, 2009 due to payments, transfers to other real estate owned and charge-offs. This sector of the loan portfolio is expected to continue to decrease as construction projects currently in process are completed. Loans secured by multifamily residential properties decreased $38 million, loans secured by industrial properties decreased $21 million and loans secured by retail facilities decreased $11 million. Decrease in these sectors of the loan portfolio was largely due to normal payoff of outstanding loan balances. Residential Mortgage and Consumer Residential mortgage loans totaled $1.8 billion, up $14 million since March 31, 2009. Permanent 1-4 family mortgage loans increased $23 million and home equity loans decreased $9 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 adjustable rate mortgage loans with initial rates that are below market. Our portfolio of permanent 1-4 family mortgage loans includes $114 million of community development loans. Approximately $1.2 billion of our residential mortgage loans portfolio is attributed to borrowers in Oklahoma and $346 million to borrowers in Texas. At June 30, 2009, consumer loans included $582 million of indirect automobile loans. Approximately $358 million of these loans were purchased from dealers in Oklahoma and $147 million were purchased from dealers in Arkansas. The remaining $77 million were purchased from dealers in Texas. Indirect automobile loans decreased $68 million since March 31, 2009, primarily due to the previously-disclosed decision by the Company to exit the business in the first quarter of 2009 in favor of a customer-focused direct lending approach. Loan Commitments BOK Financial enters into certain off-balance sheet arrangements in the normal course of business. These arrangements included loan commitments which totaled $4.9 billion and standby letters of credit which totaled $569 million at June 30, 2009. Loan commitments may be unconditional obligations to provide financing or conditional obligations that depend on the borrower's financial condition, collateral value or other factors. Standby letters of credit are unconditional commitments to guarantee the performance of our customer to a third party. Since some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Approximately $2.2 million of the outstanding standby letters of credit were issued on behalf of customers whose loans are non-performing at June 30, 2009.
54 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 June 30, 2009, the principal balance of loans sold subject to recourse obligations totaled $346 million, down from $379 million at March 31, 2009. Substantially all of these loans are to borrowers in our primary markets including $243 million to borrowers in Oklahoma, $39 million to borrowers in Arkansas, $19 million to borrowers in New Mexico, $17 million to borrowers in Texas and $14 million to borrowers in the Kansas City area. The separate reserve for these off-balance sheet commitments was $10.8 million at June 30, 2009. Approximately 4.30% of the loans sold with recourse with an outstanding principal balance of $15 million were either delinquent more than 90 days, in bankruptcy or in foreclosure, and 6% were past due 30 to 90 days. The provision for credit losses on loans sold with recourse, which is included in mortgage banking costs, was $3.3 million for the second quarter of 2009. Net losses charged against the reserve totaled $1.8 million for the second quarter of 2009. 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 are reduced and additional margin collateral is required. A deterioration of the credit standing of one or more of the customers or counterparties to these contracts may result in BOK Financial recognizing a loss as the fair value of the affected contracts may no longer move in tandem with the offsetting contracts. This occurs if the credit standing of the customer or counterparty deteriorated such that either the fair value of underlying collateral no longer supported the contract or the customer or counterparty's ability to provide margin collateral was impaired. Derivative contracts are carried at fair value. At June 30, 2009, the fair values of derivative contracts reported as assets under these programs totaled $476 million, down from $627 million at March 31, 2009 due primarily to cash settlements and reduced transaction volumes. At June 30, 2009, derivative contracts carried as assets included primarily energy contracts with fair values of $291 million, interest rate contracts with fair values of $131 million, and foreign exchange contracts with fair values of $48 million. The aggregate net fair values of derivative contracts reported as liabilities totaled $484 million. At June 30, 2009, total derivative assets were reduced by $17 million of cash collateral received from counterparties and total derivative liabilities were reduced by $38 million of cash collateral paid to counterparties related to instruments executed with the same counterparty under a master netting agreement as permitted by generally accepted accounting principles. A table showing the fair value of derivative assets and liabilities, net of cash margin, is presented in Note 3 to the Consolidated Financial Statements (Unaudited).
55 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 June 30, 2009 was (in thousands): Table 20 - Fair Value of Derivative Contracts Energy companies $ 163,406 Customers 170,382 Banks 87,118 Exchanges 33,228 Other 4,575 - ---------------------------------------------------------------- ------------- Fair value of customer hedge asset derivative contracts, net $ 458,709 - ---------------------------------------------------------------- ------------- The largest net amount due from a single counterparty, a domestic subsidiary of a major energy company, at June 30, 2009 was $164 million. This amount was offset by $140 million in letters of credit issued by multiple independent financial institutions. Our customer derivative program also introduces liquidity and capital risk. We are required to provide cash margin to certain counterparties when the net negative fair value of the contracts exceeds established limits. Also, changes in commodity prices affect the amount of regulatory capital we are required to hold as support for the fair value of our derivative assets. These risks are modeled as part of the management of these programs. Based on current prices, a decrease in market prices to the equivalent of $25 per barrel of oil would increase the fair value of derivative assets by $612 million, with dealer counterparties comprising the bulk of the assets. An increase in prices to the equivalent $65 per barrel of oil would increase the fair value of derivative assets by $9 million as current prices move away from the fixed prices embedded in our existing contracts. Further increases in prices to the equivalent of $115 per barrel of oil would increase the fair value of our derivative assets by $304 million with lending customers comprising the bulk of the assets.
56 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 $274 million or 2.27% of outstanding loans at June 30, 2009 and 78% of non-accruing loans at June 30, 2009. The allowance for loan losses was $263 million and the reserve for off-balance sheet credit losses was $11 million. At March 31, 2009, the combined allowance for loan losses and reserve for off-balance sheet credit losses totaled $262 million or 2.07% of outstanding loans and 77% of non-accruing loans at March 31, 2009. <TABLE> - ------------------------------------------------------------------------------------------------------------------------------ Table 21 - Summary of Loan Loss Experience (In thousands) Three Months Ended ---------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, 2009 2009 2008 2008 2008 ---------------------------------------------------------------------------------- Reserve for loan losses: <S> <C> <C> <C> <C> <C> Beginning balance $ 251,002 $ 233,236 $ 186,516 $ 154,018 $ 136,584 Loans charged off: Commercial 9,135 15,791 25,837 11,393 33,502 Commercial real estate 17,186 10,215 573 14,394 2,572 Residential mortgage 5,373 1,765 2,476 2,865 1,068 Consumer 5,715 6,764 6,795 5,274 4,384 - ------------------------------------------------------------------------------------------------------------------------------ Total 37,409 34,535 35,681 33,926 41,526 - ------------------------------------------------------------------------------------------------------------------------------ Recoveries of loans previously charged off: Commercial 692 356 220 11,882 842 Commercial real estate 83 41 7 175 98 Residential mortgage 179 214 122 65 121 Consumer 1,518 2,053 1,673 1,590 1,474 - ------------------------------------------------------------------------------------------------------------------------------ Total 2,472 2,664 2,022 13,712 2,535 - ------------------------------------------------------------------------------------------------------------------------------ Net loans charged off 34,937 31,871 33,659 20,214 38,991 Provision for loan losses 47,244 49,637 80,379 52,712 56,425 - ------------------------------------------------------------------------------------------------------------------------------ Ending balance $ 263,309 $ 251,002 $ 233,236 $ 186,516 $ 154,018 - ------------------------------------------------------------------------------------------------------------------------------ Reserve for off-balance sheet credit losses: Beginning balance $ 10,569 $ 15,166 $ 22,544 $ 22,545 $ 19,660 Provision for off-balance sheet credit losses (124) (4,597) (7,378) (1) 2,885 - ------------------------------------------------------------------------------------------------------------------------------ Ending balance $ 10,445 $ 10,569 $ 15,166 $ 22,544 $ 22,545 - ------------------------------------------------------------------------------------------------------------------------------ Total provision for credit losses $ 47,120 $ 45,040 $ 73,001 $ 52,711 $ 59,310 - ------------------------------------------------------------------------------------------------------------------------------ Reserve for loan losses to loans outstanding at period-end 2.18% 1.99% 1.81% 1.47% 1.23% Net charge-offs (annualized) to average loans 1.13 1.00 1.05 0.64 1.26 Total provision for credit losses (annualized) to average loans 1.52 1.41 2.28 1.67 1.91 Recoveries to gross charge-offs 6.61 7.71 5.67 40.42 6.10 Reserve for loan losses as a multiple of net charge-offs (annualized) 1.88x 1.97x 1.73x 2.31x 0.99x Reserve for off-balance sheet credit losses to off-balance sheet credit commitments 0.19% 0.19% 0.27% 0.38% 0.36% Combined reserves for credit losses to loans outstanding at period-end 2.27 2.07 1.93 1.65 1.41 - ------------------------------------------------------------------------------------------------------------------------------ </TABLE> Allowance for Loan Losses Adequacy of the allowance for loan losses is assessed by management based on an ongoing quarterly evaluation of the probable estimated losses inherent in the portfolio. The allowance consists of specific reserves attributed to impaired loans, general reserves based on migration factors and non-specific reserves based on general economic, risk concentration and related factors. Specific reserves for impaired loans are determined by evaluation of estimated future cash flows, collateral value or historical statistics. Loans are considered to be impaired when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. This is substantially the same
57 criteria used to determine when a loan should be placed on non-accrual status. Generally all non-accruing commercial and commercial real estate loans are considered impaired. Substantially all impaired loans are collateralized. Collateral includes real property, inventory, accounts receivable, operating equipment, interests in mineral rights, and other property. Collateral may also include personal guaranties by borrowers and related parties. Delinquency status is not a significant consideration in the evaluation of impairment or risk-grading of commercial or commercial real estate loans. These evaluations are based on an assessment of the borrowers' paying capacity and attempt to identify changes in credit risk before payments become delinquent. Changes in the delinquency trends of residential mortgage loans and consumer loans may indicate increases or decreases in expected losses. Impaired loans are charged-off when the loan balance or a portion of the loan balance is no longer supported by the paying capacity of the borrower based on an evaluation of available cash resources or collateral value. No reserves are attributed to the remaining balance of loans that have been charged-down to amounts management expects to recover. Impaired loans totaled $328 million at June 30, 2009 and $309 million at March 31, 2009. At June 30, 2009, $229 million of impaired loans had $34 million of specific reserves and $99 million had no specific reserves. Impaired loans with a gross outstanding principal balance of $207 million have been charged down to an estimated recoverable balance of $99 million. Cumulative life-to-date charge-offs of loans identified as impaired at June 30, 2009 totaled $108 million, including $19 million charged off in the second quarter of 2009. At March 31, 2009, $233 million of impaired loans had $19 million of specific reserves and $76 million had no specific reserves. General reserves for unimpaired loans are based on migration models. Separate migration models are used to determine general reserves for commercial and commercial real estate loans, residential mortgage loans, and consumer loans. All commercial and commercial real estate loans are risk-graded based on an evaluation of the borrowers' ability to repay the loans. Migration factors are determined for each risk-grade to determine the inherent loss based on historical trends. We use an eight-quarter aggregate accumulation of net losses as a basis for the migration factors. Greater emphasis is placed on losses incurred in more recent periods. The higher of current loss factors based on migration trends or a minimum migration factor based upon long-term history is assigned to each risk grade. The general reserve for residential mortgage loans is based on an eight-quarter average percent of loss. The general reserve for consumer loans is based on an eight-quarter average percent of loss with separate migration factors determined by major product line, such as indirect automobile loans and direct consumer loans. The aggregate amount of general reserves determined by migration factors for all unimpaired loans totaled $204 million at June 30, 2009. Nonspecific reserves are maintained for risks beyond factors specific to a particular loan or identified by the migration models. These factors include trends in the economy in our primary lending areas, conditions in certain industries where we have a concentration and overall growth in the loan portfolio. In addition, migration factors used to determine general reserves based on historical losses are inherently backward-looking. Evaluation of nonspecific factors considers the effect of the duration of the business cycle on migration factors. Nonspecific factors also considered regulatory examination results and other relevant factors. Aggregate of nonspecific reserves totaled $25 million at June 30, 2009. The provision for credit losses is the amount necessary to maintain the allowance for loan losses at an amount determined by management to be adequate based on its evaluation. The provision for credit losses totaled $47.1 million for the second quarter of 2009, $45.0 million for the first quarter of 2009, and $59.3 million for the second quarter of 2008. Provision for the second quarter of 2008 included $26.3 million for SemGroup credit losses. Factors considered in determining the provision for credit losses for the second quarter of 2009 included trends of net charge-offs, nonperforming loans and risk grading. These trends generally have indicated increasing credit risk, though the rate of increase slowed in the second quarter of 2009. Net Loans Charged-Off Loans are charged off against the allowance for loan losses when the loan balance or a portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value. Collateral values are generally evaluated annually, or more frequently for certain collateral types or collateral located in certain distressed markets. Loans are evaluated quarterly and charge-offs are taken in the quarter in which the loss is identified. Net loans charged off during the second quarter of 2009 totaled $34.9 million compared to $31.9 million in the
58 previous quarter and $39.0 million in the second quarter of 2008. Loans charged-off in the second quarter of 2008 included $26.0 million for SemGroup. The ratio of net loans charged off to average outstanding loans was 1.13% for the second quarter of 2009 compared with 1.00% for the first quarter of 2009 and 1.26% for the second quarter of 2008. Gross loans charged off in the second quarter of 2009 increased to $37.4 million from $34.5 million in the first quarter of 2009. Recoveries of loans previously charged off were $2.5 million, largely unchanged from the previous quarter. Net loans charged off by category and principal market area during the second quarter of 2009 is as follows (in thousands): <TABLE> Table 22 - Net Loans Charged Off Oklahoma Texas Colorado Arkansas New Arizona Kansas/ Total Mexico Missouri ------------ --------- ---------- ----------- --------- --------- ----------- --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Commercial $2,329 $1,327 $1,722 $ (47) $ 760 $2,164 $ 188 8,443 Commercial real estate 672 1,249 1,064 259 413 13,433 13 17,103 Residential mortgage 2,511 2,048 - (3) 41 597 - 5,194 Consumer 1,680 1,559 102 636 200 20 - 4,197 - ---------------------------- ------------ --------- ---------- ----------- --------- --------- ----------- --------- Total net loans charged off $ 7,192 $ 6,183 $ 2,888 $ 845 $ 1,414 $16,214 $ 201 $34,937 - ---------------------------- ------------ --------- ---------- ----------- --------- --------- ----------- --------- </TABLE> Net commercial loans charged off during the second quarter of 2009 included $5.7 million from the services sector of the loan portfolio and $1.7 million from the wholesale / retail sector of the loan portfolio. Commercial real estate loans charged off during the second quarter of 2009 comprised 49% of total net charge-offs and included $9.4 million in the land and residential construction sector of the loan portfolio, primarily in the Arizona market. Consumer loan net charge-offs, which includes indirect auto loan and deposit account overdraft losses, totaled $4.2 million for the second quarter of 2009, down $514 thousand from the previous quarter. Net charge-offs of indirect auto loans totaled $2.2 million for the second quarter of 2009 and $3.0 million for the first quarter of 2009. 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 21 presents the trend of reserves for off-balance sheet credit losses and the relationship between the reserve and loan commitments. 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.
59 Nonperforming Assets <TABLE> - ---------------------------------------------------------------------------------------------------------------------- Table 23 - Nonperforming Assets (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2009 2009 2008 2008 2008 ----------------------------------------------------------------------- Nonaccrual loans: <S> <C> <C> <C> <C> <C> Commercial $ 126,510 $ 128,501 $ 134,846 $ 105,757 $ 69,679 Commercial real estate 189,586 175,487 137,279 78,235 60,456 Residential mortgage 35,860 34,182 27,387 27,075 17,861 Consumer 1,037 1,065 561 758 611 - ---------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 352,993 339,235 300,073 211,825 148,607 Renegotiated loans (3) 17,479 13,623 13,039 12,326 11,840 - ---------------------------------------------------------------------------------------------------------------------- Total nonperforming loans 370,472 352,858 313,112 224,151 160,447 Other nonperforming assets 75,243 61,383 29,179 28,088 21,025 - ---------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 445,715 $ 414,241 $ 342,291 $ 252,239 $ 181,472 - ---------------------------------------------------------------------------------------------------------------------- Nonaccrual loans by principal market: Oklahoma $ 108,490 $ 105,536 $ 108,367 $ 87,885 $ 57,155 Texas 51,582 55,225 42,934 29,141 20,860 New Mexico 29,640 18,046 16,016 12,293 9,838 Arkansas 3,888 4,078 3,263 3,386 2,924 Colorado (4) 45,794 38,567 32,415 20,980 23,812 Arizona 106,076 111,772 80,994 54,832 33,482 Kansas / Missouri 7,523 6,011 16,084 3,308 536 - ---------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans $ 352,993 $ 339,235 $ 300,073 $ 211,825 $ 148,607 - ---------------------------------------------------------------------------------------------------------------------- Nonaccrual loans by loan portfolio sector: Commercial: Energy $ 53,842 $ 49,618 $ 49,364 $ 49,839 $ 12,342 Manufacturing 16,975 18,248 7,343 6,479 6,731 Wholesale / retail 10,983 8,650 18,773 7,806 3,735 Agriculture 105 115 680 755 811 Services 24,713 30,226 36,873 26,581 30,080 Healthcare 14,222 14,288 12,118 3,300 3,791 Other 5,670 7,356 9,695 10,997 12,189 - ---------------------------------------------------------------------------------------------------------------------- Total commercial 126,510 128,501 134,846 105,757 69,679 Commercial real estate: Land development and construction 97,425 99,922 76,082 53,624 45,291 Retail 17,474 9,893 15,625 13,011 7,591 Office 27,685 23,305 7,637 3,022 3,304 Multifamily 27,827 27,198 24,950 896 896 Industrial 527 575 6,287 390 396 Other commercial real estate 18,648 14,594 6,698 7,292 2,978 - ---------------------------------------------------------------------------------------------------------------------- Total commercial real estate 189,586 175,487 137,279 78,235 60,456 Residential mortgage: Permanent mortgage 34,149 32,848 26,233 26,401 17,039 Home equity 1,711 1,334 1,154 674 822 - ---------------------------------------------------------------------------------------------------------------------- Total residential mortgage 35,860 34,182 27,387 27,075 17,861 Consumer 1,037 1,065 561 758 611 - ---------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans $ 352,993 $ 339,235 $ 300,073 $ 211,825 $ 148,607 - ---------------------------------------------------------------------------------------------------------------------- Ratios: Reserve for loan losses to nonperforming loans 71.07% 71.13% 74.49% 83.21% 95.99% Nonperforming loans to period-end loans 3.07 2.79 2.43 1.77 1.28 - ---------------------------------------------------------------------------------------------------------------------- Loans past due (90 days or more) (1) $ 32,443 $ 46,123 (2) $ 19,123 $ 20,213 $ 10,683 - ---------------------------------------------------------------------------------------------------------------------- (1) Includes residential mortgages guaranteed by agencies of the U.S. Government. $ 1,337 $ 395 $ 872 $ 1,210 $ 1,015 (2) Includes a $23 million loan that was paid current after March 31, 2009. (3) Includes residential mortgages guaranteed by agencies of the U.S. Government. These loans have been modified to extend payment terms and/or reduce interest rates to current market. 11,079 10,514 10,396 9,604 8,638 (4) Includes loans subject to First United Bank sellers escrow. 8,305 11,287 13,181 13,262 11,973 - ---------------------------------------------------------------------------------------------------------------------- </TABLE>
60 Non-performing assets totaled $446 million or 3.67% of outstanding loans and repossessed assets at June 30, 2009, up $31 million since March 31, 2009. In addition to $353 million of non-accruing loans, non-performing assets included $17 million of restructured residential mortgage loans and $75 million of real estate and other repossessed assets. Non-performing assets included $11 million of restructured residential mortgage loans guaranteed by agencies of the U.S. government and $8 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 $5.3 million for any losses incurred during a three-year period after the June 2007 acquisition date. The distribution of non-accruing loans among our various markets was: <TABLE> Table 24 - Non-Accruing Loans by Principal Market (In thousands) June 30, 2009 March 31, 2009 Change --------------------------- --------------------------- --------------------------- % of % of % of outstanding outstanding outstanding Amount loans Amount loans Amount loans ------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Oklahoma $108,490 1.96% $105,536 1.82% $ 2,954 14 bp Texas 51,582 1.49 55,225 1.52 (3,643) (3) New Mexico 29,640 3.69 18,046 2.18 11,594 151 Arkansas 3,888 0.97 4,078 0.97 (190) - Colorado 45,794 4.88 38,567 3.80 7,227 108 Arizona 106,076 19.66 111,772 19.79 (5,696) (13) Kansas / Missouri 7,523 2.01 6,011 1.63 1,512 38 - ---------------------------------------------------------------------------------------------------------- Total $352,993 2.92% $339,235 2.68% 13,758 24 bp - ---------------------------------------------------------------------------------------------------------- </TABLE> Non-accruing loans newly identified in the second quarter of 2009 totaled $72 million. Cash payments received during the second quarter on non-accruing loans totaled $9 million, $27 million of non-accruing loans were charged-off and $20 million of non-accruing loans were transferred to real estate owned and other repossessed assets. The majority of non-accruing loans continued to be in the Oklahoma and Arizona markets. Non-accruing loans in the Oklahoma market included $47 million of commercial energy loans related to SemGroup. Non-accruing loans in the Arizona market consisted primarily of commercial real estate loans. Growth in non-accruing loans during the second quarter was concentrated primarily in the New Mexico market due primarily to one retail commercial real estate loan and the Colorado market due primarily to one other commercial real estate loan. Non-accruing loans in the Arizona market decreased due primarily to commercial real estate loans charged-off or transferred to other real estate owned. Non-accruing commercial loans totaled $127 million or 1.88% at June 30, 2009 and $129 million or 1.81% of total commercial loans at March 31, 2009. Non-accruing commercial loans decreased by $2.0 million during the second quarter of 2009. The distribution of non-accruing commercial loans among our various markets was: <TABLE> Table 25 - Non-Accruing Commercial Loans by Principal Market (Dollars in thousands) June 30, 2009 March 31, 2009 Change -------------------------- -------------------------- -------------------------- % of % of % of outstanding outstanding outstanding Amount loans Amount loans Amount loans ------------- ------------ --- ------------ ------------- -- ------------- ------------ <S> <C> <C> <C> <C> <C> <C> Oklahoma (1) $ 69,088 2.37% $ 67,846 2.17% $ 1,242 20 bp Texas 34,384 1.58 36,387 1.60 (2,003) (2) New Mexico 7,737 2.03 5,357 1.36 2,380 67 Arkansas 702 0.72 621 0.62 81 10 Colorado 12,849 2.16 14,554 2.16 (1,705) - Arizona 532 0.25 3,335 1.57 (2,803) (132) Kansas / Missouri 1,218 0.37 400 0.12 818 25 - ---------------------- ------------- ------------ --- ------------ ------------- -- ------------- ------------ Total commercial $ 126,510 1.88% $ 128,500 1.81% $ (1,990) 7 bp - ---------------------- ------------- ------------ --- ------------ ------------- -- ------------- ------------ (1) Includes $47 million related to SemGroup. Subsequent to June 30, 2009, SemGroup loans with a face amount of $25 million were sold for $13.2 million. Proceeds of this sale will reduce non-accruing energy loans in the Oklahoma market in the third quarter. </TABLE>
61 Approximately $54 million of non-accruing commercial loans are in the energy sector of the portfolio, including $47 million due from SemGroup. This amount represents one-third of our pre-bankruptcy amounts due from SemGroup. Non-accruing energy sector loans increased $4.2 million over the first quarter of 2009. In addition, $25 million of non-accruing commercial loans are in the services sector of the loan portfolio. Approximately 1.31% or $25 million of all loans in the services sector of the portfolio was non-accruing at June 30, 2009, a $5.5 million decrease over the first quarter of 2009. Non-accruing loans to the manufacturing sector of the portfolio totaled $17 million or 3.42% of all loans to the manufacturing sector at June 30, 2009. Non-accruing loans to the wholesale / retail sector of the loan portfolio increased $2.3 million from March 31, 2009 to $11 million or 1.07% of all loans in the wholesale /retail sector of the loan portfolio. Non-accruing commercial real estate loans are largely concentrated in the Arizona market. Approximately $100 million or 53% of total non-accruing commercial real estate loans are in Arizona. Total non-accruing commercial real estate loans increased $14 million during the second quarter of 2009. The increase included a $7.5 million net increase in non-accruing loans secured by retail facilities, primarily related to one borrower in the Arizona market. Non-accruing loans secured by office buildings increased $4.4 million, primarily related to one borrower in the New Mexico market. Other commercial real estate increased $4.1 million primarily related to one borrower in the Colorado market. Non-accruing residential construction and land development loans experienced a net decrease of $2.5 million which consisted primarily of a $6.2 million increase in the Colorado market offset by a $6.0 million decrease in the Arizona market and a $3.3 million decrease in the Texas market. Decreases in non-accruing residential construction and land development loans were primarily related to charge-offs and transfers to other real estate owned. The distribution of non-accruing commercial real estate loans among our various markets was: <TABLE> Table 26 - Non-Accruing Commercial Real Estate Loans by Principal Market (Dollars in thousands) June 30, 2009 March 31, 2009 Change -------------------------- -------------------------- -------------------------- Amount % of Amount % of Amount % of outstanding outstanding outstanding loans loans loans ------------- ------------ --- ------------ ------------- -- ------------- ------------ <S> <C> <C> <C> <C> <C> <C> Oklahoma $ 27,913 3.26% $ 26,408 3.00% $ 1,505 26 bp Texas 5,031 0.68 7,545 0.92 (2,514) (24) New Mexico 18,328 5.85 9,976 3.16 8,352 269 Arkansas 1,566 1.18 2,286 1.72 (720) (54) Colorado 31,588 11.70 23,183 8.68 8,405 302 Arizona 100,160 38.14 102,064 35.71 (1,904) 243 Kansas / Missouri 5,000 13.89 4,024 12.57 976 132 - ------------------------------ ------------- ------------ --- ------------ ------------- -- ------------- ------------ Total commercial real estate $ 189,586 7.26% $ 175,486 6.42% $14,100 84 bp - ------------------------------ ------------- ------------ --- ------------ ------------- -- ------------- ------------ </TABLE> Non-accruing residential mortgage loans primarily consist of permanent residential mortgage loans which totaled $34 million or 2.51% of outstanding residential mortgage loans at June 30, 2009, a $1.3 million increase over March 31, 2009. In addition, non-accruing home equity loans totaled $1.7 million or 0.36% of total home equity loans. The distribution of non-accruing residential mortgage loans among our various markets was: <TABLE> Table 27 - Non-Accruing Residential Mortgage Loans by Principal Market (Dollars in thousands) June 30, 2009 March 31, 2009 Change -------------------------- --------------------------- -------------------------- Amount % of Amount % of Amount % of outstanding outstanding outstanding loans loans loans ------------ ------------- -- ------------- ------------- -- ------------ ------------- <S> <C> <C> <C> <C> <C> <C> Oklahoma $11,270 0.90% $10,819 0.88% $ 451 2 bp Texas 11,699 3.38 10,826 3.21 873 17 New Mexico 3,493 3.84 2,680 2.69 813 115 Arkansas 1,498 7.88 1,083 6.32 415 156 Colorado 1,357 2.32 830 1.40 527 92 Arizona 5,238 8.99 6,358 10.32 (1,120) (133) Kansas / Missouri 1,305 10.60 1,586 14.67 (281) (407) - ---------------------------------- ------------ ------------- -- ------------- ------------- -- ------------ ------------- Total residential mortgage loans $35,860 1.96% $34,182 1.88% $1,678 8 bp - ---------------------------------- ------------ ------------- -- ------------- ------------- -- ------------ ------------- </TABLE>
62 In addition to non-accruing residential mortgage and consumer loans, payments of residential mortgage loans and consumer loans may be delinquent. The composition of residential mortgage and consumer loans past due is included in the following table. Residential mortgage loans past due 90 days or more decreased $2.2 million during the second quarter and consumer loans past due less than 90 days were relatively unchanged. Consumer loans past due 30 to 89 days increased $5.8 million including an increase indirect automobile loans 30 to 89 days past due from $17.1 million at March 31, 2009 to $20.1 million at June 30, 2009. Other consumer loans 30 to 89 days past due increased to $5.1 million at June 30, 2009 compared with $2.3 million at March 31, 2009. - -------------------------------------------------------------------------- Table 28 - Residential Mortgage and Consumer Loans Past Due (In Thousands) June 30, 2009 March 31, 2009 ----------------------- ----------------------- 90 Days 30 to 89 90 Days 30 to 89 or More Days or More Days ----------- ----------- ----------- ----------- Residential mortgage $ 2,933 $27,079 $ 5,148 $27,970 Consumer 760 25,219 893 19,433 Real estate and other repossessed assets totaled $75 million at June 30, 2009, up from $61 million at March 31, 2009. Real estate and other repossessed assets included $43 million of 1-4 family residential properties and residential land development properties, $17 million of developed commercial real estate properties, $7 million of equipment, $5 million of undeveloped land and $2 million of automobiles. The distribution of real estate owned and other repossessed assets among our various markets included $25 million in Arizona, $17 million in Texas, $8 million in New Mexico, $7 million in Kansas City, $6 million in Arkansas, $6 million in Oklahoma and $5 million in Colorado. 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 Non-performing Assets. Known information does, however, cause management concern as to the borrowers' ability to comply with current repayment terms. These potential problem loans totaled $220 million at June 30, 2009 and $132 million at March 31, 2009. The current composition of potential problem loans by primary industry included real estate - $82 million, energy production - $60 million, manufacturing - $13 million, services - $28 million and wholesale/retail - $16 million. Potential problem real estate loans included $43 million of residential development loans on properties primarily located in Texas and Colorado and $16 million of loans secured by office buildings primarily located in Arizona. Growth in potential problem loans during the second quarter included $60 million of energy production loans. Although energy production loans remain well secured, collateral coverage on certain loans has fallen below limits set by Company policy. These loans have been identified for enhanced attention by management. Loans to energy producers and borrowers related to the energy industry are the largest portion of our commercial loan portfolio. In addition, energy production and related industries have a significant impact on the economy in our primary markets. BOK Financial has always been an energy lender and this continues to be an area of expertise. As part of our evaluation of credit quality, we analyze rigorous stress tests over a range of commodity prices and take proactive steps to mitigate risk when appropriate. Liquidity and Capital Subsidiary Banks Deposits and borrowed funds are the primary sources of liquidity for the subsidiary banks. For the second quarter of 2009, approximately 66% of our funding was provided by average deposit accounts, 18% from average borrowed funds, 2% from average long-term subordinated debt and 9% from shareholders' equity. Our funding sources primarily include deposits and borrowings from the Federal Home Loan Banks and other banks, and may include issuance of qualifying debt under the U.S. Treasury Liquidity Guarantee Program ("TLGP"). These funding sources provide adequate liquidity to meet our operating needs.
63 Deposit accounts represent our largest funding source. We compete for retail and commercial deposits by offering a broad range of products and services and focusing on customer convenience. Retail deposit growth is supported through our sales and customer service program, free checking and online bill paying services, an extensive network of branch locations and ATMs and a 24-hour Express Bank call center. Commercial deposit growth is supported by offering treasury management and lockbox services. We also acquire brokered deposits when the cost of funds is advantageous to other funding sources. Average deposits totaled $15.3 billion at June 30, 2009 and represented approximately 66% of total average liabilities and capital for the second quarter of 2009, compared with $14.8 billion and 65% of total average liabilities and capital for the first quarter of 2009. Average deposits increased $479 million over the first quarter of 2009. Average interest-bearing transaction deposit accounts continued to grow in the second quarter of 2009, up $160 million over the first quarter of 2009. Average demand deposits increased $319 million over the first quarter of 2009. Average time deposits decreased $91 million over the first quarter of 2009. Growth in our average interest-bearing transaction deposit accounts over the first quarter of 2009 included $485 million of commercial deposits, $210 million of consumer banking deposits and $96 million of wealth management deposits. Average brokered deposits and other non-core deposits decreased $294 million. Average commercial banking deposits were up $485 million, including an increase of $378 million from our commercial banking units and $95 million from our treasury services unit. Average consumer banking deposits increased $210 million across all of our geographical markets, including $75 million in Texas and $61 million in Oklahoma. Average wealth management time deposits increased $96 million over the first quarter of 2009, including $54 million of additional deposits generated by our broker / dealer network and $41 million generated by our trust division. Brokered deposits and other non-core deposits averaged $913 million in the second quarter of 2009, down $313 million from the first quarter of 2009. Brokered deposits totaled $36 million at June 30, 2009 compared to $447 million at March 31, 2009. Brokered deposits were largely added in 2008 to remix wholesale funding sources in order to provide more available overnight liquidity and are being replaced by other deposit products as they mature. The distribution of deposit accounts among our principal markets is shown in the following table.
64 <TABLE> - --------------------------------------------------------------------------------------------------------------------- Table 29 - Deposits by Principal Market Area (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2009 2009 2008 2008 2008 --------------------------------------------------------------------------------- Oklahoma: <S> <C> <C> <C> <C> <C> Demand $ 1,451,057 $ 1,651,111 $ 1,683,374 $ 1,681,325 $ 1,455,997 Interest-bearing: Transaction 4,374,089 4,089,838 4,117,729 4,151,430 3,997,136 Savings 94,048 95,827 86,476 86,900 90,100 Time 2,033,312 2,876,313 3,104,933 3,036,297 2,672,401 --------------------------------------------------------------------------------- Total interest-bearing 6,501,449 7,061,978 7,309,138 7,274,627 6,759,637 --------------------------------------------------------------------------------- Total Oklahoma $ 7,952,506 $ 8,713,089 $ 8,992,512 $ 8,955,952 $ 8,215,634 --------------------------------------------------------------------------------- Texas: Demand $ 1,002,266 $ 1,021,424 $ 1,067,456 $ 956,846 $ 1,046,651 Interest-bearing: Transaction 1,660,642 1,527,399 1,460,576 1,543,974 1,713,131 Savings 33,992 33,867 32,071 32,400 33,207 Time 1,035,919 1,054,632 857,416 794,911 723,146 --------------------------------------------------------------------------------- Total interest-bearing 2,730,553 2,615,898 2,350,063 2,371,285 2,469,484 --------------------------------------------------------------------------------- Total Texas $ 3,732,819 $ 3,637,322 $ 3,417,519 $ 3,328,131 $ 3,516,135 --------------------------------------------------------------------------------- New Mexico: Demand $ 175,033 $ 180,308 $ 155,345 $ 176,477 $ 168,621 Interest-bearing: Transaction 434,498 401,000 397,382 376,941 417,607 Savings 18,255 17,858 16,289 16,316 16,432 Time 542,388 561,300 522,894 475,560 445,505 --------------------------------------------------------------------------------- Total interest-bearing 995,141 980,158 936,565 868,817 879,544 --------------------------------------------------------------------------------- Total New Mexico $ 1,170,174 $ 1,160,466 $ 1,091,910 $ 1,045,294 $ 1,048,165 --------------------------------------------------------------------------------- Arkansas: Demand $ 17,261 $ 16,503 $ 16,293 $ 23,565 $ 21,142 Interest-bearing: Transaction 73,972 63,924 38,566 19,146 24,524 Savings 1,031 1,100 1,083 865 895 Time 162,505 150,015 75,579 47,684 39,305 --------------------------------------------------------------------------------- Total interest-bearing 237,508 215,039 115,228 67,695 64,724 --------------------------------------------------------------------------------- Total Arkansas $ 254,769 $ 231,542 $ 131,521 $ 91,260 $ 85,866 --------------------------------------------------------------------------------- Colorado: Demand $ 113,895 $ 111,048 $ 116,637 $ 115,677 $ 109,697 Interest-bearing: Transaction 445,521 466,276 480,113 440,888 507,260 Savings 18,144 18,905 17,660 19,300 20,245 Time 579,709 584,971 532,475 428,872 423,014 --------------------------------------------------------------------------------- Total interest-bearing 1,043,374 1,070,152 1,030,248 889,060 950,519 --------------------------------------------------------------------------------- Total Colorado $ 1,157,269 $ 1,181,200 $ 1,146,885 $ 1,004,737 $ 1,060,216 --------------------------------------------------------------------------------- Arizona: Demand $ 55,975 $ 54,362 $ 39,424 $ 45,725 $ 49,895 Interest-bearing: Transaction 89,842 66,809 56,985 64,463 73,034 Savings 1,282 970 1,014 1,033 1,233 Time 59,775 54,923 34,290 14,433 6,364 --------------------------------------------------------------------------------- Total interest-bearing 150,899 122,702 92,289 79,929 80,631 --------------------------------------------------------------------------------- Total Arizona $ 206,874 $ 177,064 $ 131,713 $ 125,654 $ 130,526 --------------------------------------------------------------------------------- Kansas / Missouri: Demand $ 9,692 $ 16,140 $ 3,850 $ 5,548 $ 7,157 Interest-bearing: Transaction 12,907 11,976 10,999 9,780 10,342 Savings 54 117 42 33 26 Time 158,325 141,505 55,656 19,794 51,649 --------------------------------------------------------------------------------- Total interest-bearing 171,286 153,598 66,697 29,607 62,017 --------------------------------------------------------------------------------- Total Kansas / Missouri $ 180,978 $ 169,738 $ 70,547 $ 35,155 $ 69,174 --------------------------------------------------------------------------------- Total BOK Financial deposits $ 14,655,389 $ 15,270,421 $ 14,982,607 $ 14,586,183 $ 14,125,716 --------------------------------------------------------------------------------- </TABLE>
65 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. Funds are primarily purchased from bankers' banks and Federal Home Loan banks from across the country. The largest single source of Federal funds purchased totaled $250 million at June 30, 2009. 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 June 30, 2009, the outstanding balance of federal funds purchased totaled $1.5 billion, securities repurchase agreements totaled $727 million and Federal Home Loan Bank borrowings totaled $1.2 billion. The Company participates in the U.S. Treasury Liquidity Guarantee Program ("TLGP"), which expanded insurance coverage to certain qualifying debt issued by eligible financial institutions. In general, senior unsecured debt newly issued on or before June 30, 2009 will be fully protected by the FDIC through the earlier of the maturity of the debt or June 30, 2012. Subsequently, the FDIC approved a limited four-month extension of the Debt Guarantee Program under the TLGP. Participating insured depository institutions may issue qualifying senior unsecured debt no later than October 31, 2009. The FDIC guarantee of qualifying debt expires on the earliest of the opt-out date, the mandatory conversion date, the stated maturity date or December 31, 2012. Collectively, our subsidiary banks may issue up to $1.8 billion of TLGP protected debt. No TLGP guaranteed debt was issued by our subsidiary banks. In 2008, the subsidiary banks began borrowing funds under the Federal Reserve Bank Term Auction Facility program. This is a temporary program which allows banks that are in generally sound financial condition to bid for funds. Funds are borrowed for either 28 or 84 days and are secured by a pledge of eligible collateral. Funds borrowed under this program totaled $1.1 billion at June 30, 2009. At June 30, 2009, the estimated unused credit available to the subsidiary banks from our traditional sources and within our internal policy limits was approximately $5.6 billion. Parent Company 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 year plus profits for the two preceding years. Dividends are further restricted by minimum capital requirements. Based on the most restrictive limitations, the subsidiary banks could declare up to $183 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 $22 million under this policy. Further losses or increases in required regulatory capital at the subsidiary banks could affect their ability to pay dividends to the parent company. On July 21, 2008, the Company entered into a $188 million, unsecured revolving credit agreement with George B. Kaiser, its Chairman and principal shareholder. Interest on the outstanding balance is based on one-month LIBOR plus 125 basis points and is payable quarterly. Additional interest in the form of a facility fee is paid quarterly on the unused portion of the commitment at 25 basis points. This agreement has no restrictive covenants. The credit agreement matures in December of 2010. No amounts were outstanding under this credit agreement as of June 30, 2009. Equity capital for BOK Financial was $2.1 billion at June 30, 2009, up $119 million from March 31, 2009. Net income less cash dividend paid increased equity $37 million. Accumulated other comprehensive losses decreased $82 million during the second quarter of 2009 primarily due to a $82 million decrease in net unrealized losses on available for sale securities. 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 July 28, 2009, the Company's board of directors declared a cash dividend of $0.24 per common share payable on or about August 28, 2009 to shareholders of record as of August 14, 2009.
66 BOK Financial is the largest commercial bank, based on asset size, that elected not to participate in the TARP Capital Purchase Program. The decision not to participate in TARP was based on an evaluation of our capital needs in both the current environment and in several capital stress environments. We considered capital requirements for organic growth and potential acquisitions, the cost of TARP capital and a defined exit strategy when the cost of TARP capital increases substantially at the end of year five. We also considered reasonable capital and liquidity support from our majority shareholder. 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. No shares were repurchased in the second quarter of 2009. 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 the following table. <TABLE> - ---------------------------------------------------------------------------------------------------------------------- Table 30 - Capital Ratios June 30, March 31, Dec. 31, Sept. 30, June 30, 2009 2009 2008 2008 2008 --------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Average total equity to average assets 8.70% 8.35% 8.57% 8.92% 9.28% Tangible common equity ratio 7.55 6.84 6.64 7.16 7.15 Tier 1 common equity ratio 9.77 9.58 9.32 9.20 8.82 Risk-based capital: Tier 1 capital 9.86 9.66 9.40 9.31 8.92 Total capital 13.34 13.08 12.81 12.62 12.00 Leverage 7.97 7.85 7.89 7.94 7.83 - ---------------------------------------------------------------------------------------------------------------------- </TABLE> Capital resources of financial institutions are also regularly measured by the tangible common equity ratio and tier 1 common equity ratio. Tangible common equity is shareholders' equity as defined by generally accepted accounting principles in the United States of America ("GAAP") less intangible assets and equity which does not benefit common shareholders. Equity that does not benefit common shareholders includes preferred equity and equity provided by the U.S. Treasury's TARP program. Tier 1 common equity is tier 1 equity as defined by banking regulations, adjusted for other comprehensive income (loss) and equity which does not benefit common shareholders. These non-GAAP measures are valuable indicators of a financial institution's capital strength since they eliminate intangible assets from shareholders' equity and retains the effect of unrealized losses on securities and other components of accumulated other comprehensive income (loss) in shareholders' equity. At June 30, 2009, BOK Financial's tangible common shareholders' equity ratio was 7.55% and tier 1 common equity ratio was 9.77%.
67 The following table provides a reconciliation of the non-GAAP measures with financial measures defined by GAAP. <TABLE> - ----------------------------------------------- ------------- ---------------- -------------- -------------- --------------- Table 31 - Non-GAAP Measures June 30, March 31, Dec. 31, Sept. 30, June 30, (Dollars in thousands) 2009 2009 2008 2008 2008 ------------- ---------------- -------------- -------------- --------------- Tangible common equity ratio: <S> <C> <C> <C> <C> <C> Total shareholders' equity $ 2,050,572 $ 1,931,300 $1,846,257 $ 1,940,503 $ 1,942,376 Less: Intangible assets, net 357,838 359,523 361,209 363,177 365,060 - ----------------------------------------------- ------------- ---------------- -------------- -------------- --------------- Tangible common equity 1,692,734 1,571,777 1,485,048 1,577,326 1,577,316 - ----------------------------------------------- ------------- ---------------- -------------- -------------- --------------- Total assets 22,767,983 23,333,442 22,734,648 22,377,802 22,435,937 Less: Intangible assets, net 357,838 359,523 361,209 363,177 365,060 - ----------------------------------------------- ------------- ---------------- -------------- -------------- --------------- Tangible assets $22,410,145 $22,973,919 $22,373,439 $22,014,625 $22,070,877 - ----------------------------------------------- ------------- ---------------- -------------- -------------- --------------- Tangible common equity ratio 7.55% 6.84% 6.64% 7.16% 7.15% - ----------------------------------------------- ------------- ---------------- -------------- -------------- --------------- Tier 1 common equity ratio: Tier 1 capital $1,807,705 $1,773,576 $1,728,926 $1,707,390 $1,665,448 Less: Non-controlling interest 15,590 14,751 13,855 19,205 19,552 - ----------------------------------------------- ------------- ---------------- -------------- -------------- --------------- Tier 1 common equity 1,792,115 1,758,825 1,715,071 1,688,185 1,645,896 - ----------------------------------------------- ------------- ---------------- -------------- -------------- --------------- Risk weighted assets 18,338,540 18,355,862 18,401,051 18,347,504 18,665,121 - ----------------------------------------------- ------------- ---------------- -------------- -------------- --------------- Tier 1 common equity ratio 9.77% 9.58% 9.32% 9.20% 8.82% - ----------------------------------------------- ------------- ---------------- -------------- -------------- --------------- </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.
68 <TABLE> - ------------------------------------------------------------------------------------------------------------------------------- Six Month Financial Summary - Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands, Except Per Share Data) Six Months Ended ------------------------------------------------------------------------------------- June 30, 2009 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) $ 7,340,756 $ 164,715 4.69% $ 5,825,599 $ 148,014 5.08% Tax-exempt securities (3) 268,935 8,182 6.14 261,904 8,354 6.40 - ------------------------------------------------------------------------------------------------------------------------------- Total securities (3) 7,609,691 172,897 4.75 6,087,503 156,368 5.14 - ------------------------------------------------------------------------------------------------------------------------------- Trading securities 112,464 2,002 3.59 74,507 2,700 7.27 Funds sold and resell agreements 39,929 44 0.22 76,589 1,195 3.13 Residential mortgage loans held for sale 233,800 5,593 4.82 96,175 2,379 4.96 Loans (2) 12,602,894 287,273 4.60 12,257,970 377,723 6.18 Less reserve for loan losses 269,490 - - 138,277 - - - ------------------------------------------------------------------------------------------------------------------------------- Loans, net of reserve 12,333,404 287,273 4.70 12,119,693 377,723 6.25 - ------------------------------------------------------------------------------------------------------------------------------- Total earning assets (3) 20,329,288 467,809 4.70 18,454,467 540,365 5.87 - ------------------------------------------------------------------------------------------------------------------------------- Cash and other assets 2,568,444 2,705,684 - ------------------------------------------------------------------------------------------------------------------------------- Total assets $ 22,897,732 $ 21,160,151 - ------------------------------------------------------------------------------------------------------------------------------- Liabilities And Shareholders' Equity Transaction deposits $ 6,733,076 28,779 0.86% $ 7,595,724 69,930 1.85% Savings deposits 163,698 213 0.26 158,375 386 0.49 Time deposits 5,169,267 68,038 2.65 4,150,654 83,945 4.06 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 12,066,041 97,030 1.62 11,904,753 154,261 2.60 - ------------------------------------------------------------------------------------------------------------------------------- Funds purchased and repurchase agreements 2,438,851 4,820 0.40 3,093,946 38,829 2.52 Other borrowings 2,054,759 5,439 0.53 1,803,962 25,750 2.86 Subordinated debentures 398,440 11,198 5.67 398,288 11,220 5.65 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 16,958,091 118,487 1.41 17,200,949 230,060 2.68 - ------------------------------------------------------------------------------------------------------------------------------- Demand deposits 3,024,925 1,286,552 Other liabilities 953,375 687,681 Shareholders' equity 1,961,341 1,984,969 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 22,897,732 $ 21,160,151 - ------------------------------------------------------------------------------------------------------------------------------- Tax-Equivalent Net Interest Revenue (3) 349,322 3.29% 310,305 3.19% Tax-Equivalent Net Interest Revenue To Earning Assets (3) 3.51 3.37 Less tax-equivalent adjustment (1) 3,897 4,238 - ------------------------------------------------------------------------------------------------------------------------------- Net Interest Revenue 345,425 306,067 Provision for credit losses 92,160 76,881 Other operating revenue 253,057 174,991 Other operating expense 341,564 312,672 - ------------------------------------------------------------------------------------------------------------------------------- Income Before Taxes 164,758 91,505 Federal and state income tax 57,153 31,588 Non-controlling interest income (expense), net (458) 1,187 - ------------------------------------------------------------------------------------------------------------------------------- Net Income $ 107,147 $ 61,104 - ------------------------------------------------------------------------------------------------------------------------------- Earnings Per Average Common Share Equivalent: Net Income: Basic $ 1.59 $ 0.91 - ------------------------------------------------------------------------------------------------------------------------------- Diluted $ 1.58 $ 0.90 - ------------------------------------------------------------------------------------------------------------------------------- </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.
69 <TABLE> - ----------------------------------------------------------------------------------------------------------------------------- Quarterly Financial Summary - Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands, Except Per Share Data) Three Months Ended ------------------------------------------------------------------------------------- June 30, 2009 March 31, 2009 ------------------------------------------- ------------------------------------ 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) $ 7,594,355 $ 80,711 4.50% $ 7,084,340 $ 84,004 4.90% Tax-exempt securities (3) 285,078 4,044 5.69 252,612 4,138 6.64 - ----------------------------------------------------------------------------------------------------------------------------- Total securities (3) 7,879,433 84,755 4.54 7,336,952 88,142 4.96 - ----------------------------------------------------------------------------------------------------------------------------- Trading securities 112,960 983 3.49 111,962 1,019 3.69 Funds sold and resell agreements 29,277 14 0.19 50,701 30 0.24 Residential mortgage loans held for sale 286,077 3,215 4.51 201,135 2,378 4.79 Loans (2) 12,403,050 143,510 4.64 12,784,765 143,763 4.56 Less reserve for loan losses 273,335 - - 252,734 - - - ----------------------------------------------------------------------------------------------------------------------------- Loans, net of reserve 12,129,715 143,510 4.75 12,532,031 143,763 4.65 - ----------------------------------------------------------------------------------------------------------------------------- Total earning assets (3) 20,437,462 232,477 4.65 20,232,781 235,332 4.75 - ----------------------------------------------------------------------------------------------------------------------------- Cash and other assets 2,636,569 2,710,588 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $ 23,074,031 $ 22,943,369 - ----------------------------------------------------------------------------------------------------------------------------- Liabilities and equity Transaction deposits $ 6,854,003 $ 13,362 0.78% $ 6,610,805 $ 15,417 0.95% Savings deposits 167,813 104 0.25 159,537 109 0.28 Time deposits 5,123,947 31,637 2.48 5,215,091 36,401 2.83 - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 12,145,763 45,103 1.49 11,985,433 51,927 1.76 - ----------------------------------------------------------------------------------------------------------------------------- Funds purchased and repurchase agreements 2,316,990 1,995 0.35 2,562,066 2,825 0.45 Other borrowings 1,951,699 2,375 0.49 2,158,963 3,064 0.58 Subordinated debentures 398,456 5,632 5.67 398,425 5,566 5.67 - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 16,812,908 55,105 1.31 17,104,887 63,382 1.50 - ----------------------------------------------------------------------------------------------------------------------------- Demand deposits 3,183,338 2,864,751 Other liabilities 1,071,121 1,058,216 Total equity 2,006,664 1,915,515 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and equity $ 23,074,031 $ 22,943,369 - ----------------------------------------------------------------------------------------------------------------------------- Tax-Equivalent Net Interest Revenue (3) $ 177,372 3.34% $ 171,950 3.25% Tax-Equivalent Net Interest Revenue To Earning Assets (3) 3.55 3.47 Less tax-equivalent adjustment (1) 1,792 2,105 - ----------------------------------------------------------------------------------------------------------------------------- Net interest revenue 175,580 169,845 Provision for credit losses 47,120 45,040 Other operating revenue 127,965 125,092 Other operating expense 175,770 165,794 - ----------------------------------------------------------------------------------------------------------------------------- Income (loss) before taxes 80,655 84,103 Federal and state income tax 28,315 28,838 Non-controlling interest income (expense), net (225) (233) - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 52,115 $ 55,032 - ----------------------------------------------------------------------------------------------------------------------------- Earnings Per Average Common Share Equivalent: Net income (loss): Basic $ 0.77 $ 0.81 - ----------------------------------------------------------------------------------------------------------------------------- Diluted $ 0.77 $ 0.81 - ----------------------------------------------------------------------------------------------------------------------------- (1) Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments shown are for comparative purposes. (2) The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned income. (3) Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income. </TABLE>
70 <TABLE> - ------------------------------------------------------------------------------------------------------------------------- Three Months Ended - ------------------------------------------------------------------------------------------------------------------------- December 31, 2008 September 30, 2008 June 30, 2008 - ------------------------------------------------------------------------------------------------------------------------- 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> $ 6,634,035 $ 87,317 5.12% $ 6,056,909 $ 78,030 5.09% $ 6,026,769 $ 75,959 5.08% 255,693 4,133 6.43 254,803 4,166 6.64 259,410 4,165 6.46 - ------------------------------------------------------------------------------------------------------------------------- 6,889,728 91,450 5.17 6,311,712 82,196 5.15 6,286,179 80,124 5.14 - ------------------------------------------------------------------------------------------------------------------------- 78,840 1,298 6.55 66,419 937 5.61 74,058 1,267 6.88 48,246 92 0.76 79,862 290 1.44 72,444 355 1.97 121,184 1,683 5.52 116,533 1,743 5.95 105,925 1,394 5.29 12,826,696 169,700 5.26 12,596,823 180,119 5.69 12,421,086 179,030 5.80 209,319 - - 182,844 - - 145,524 - - - ------------------------------------------------------------------------------------------------------------------------- 12,617,377 169,700 5.35 12,413,979 180,119 5.77 12,275,562 179,030 5.87 - ------------------------------------------------------------------------------------------------------------------------- 19,755,375 264,223 5.28 18,988,505 265,285 5.55 18,814,168 262,170 5.61 - ------------------------------------------------------------------------------------------------------------------------- 2,516,276 2,832,658 2,794,132 - ------------------------------------------------------------------------------------------------------------------------- $ 22,271,651 $ 21,821,163 $ 21,608,300 - ------------------------------------------------------------------------------------------------------------------------- $ 6,116,465 $ 23,161 1.51% $ 6,565,935 $ 28,312 1.72% $ 6,420,291 $ 27,755 1.74% 155,784 143 0.37 159,856 147 0.37 159,798 148 0.37 5,109,303 42,090 3.28 4,792,366 40,810 3.39 4,076,167 38,211 3.77 - ------------------------------------------------------------------------------------------------------------------------- 11,381,552 65,394 2.29 11,518,157 69,269 2.39 10,656,256 66,114 2.50 - ------------------------------------------------------------------------------------------------------------------------- 3,095,054 7,289 0.94 3,061,186 15,253 1.98 3,126,110 15,180 1.95 1,986,857 7,541 1.51 1,390,233 8,935 2.56 2,267,076 14,032 2.49 398,392 5,489 5.48 398,361 5,553 5.55 398,336 5,821 5.88 - ------------------------------------------------------------------------------------------------------------------------- 16,861,855 85,713 2.02 16,367,937 99,010 2.41 16,447,778 101,147 2.47 - ------------------------------------------------------------------------------------------------------------------------- 2,712,384 2,739,209 2,634,038 788,530 767,832 521,867 1,908,882 1,946,185 2,004,617 - ------------------------------------------------------------------------------------------------------------------------- $ 22,271,651 $ 21,821,163 $ 21,608,300 - ------------------------------------------------------------------------------------------------------------------------- $ 178,510 3.26% $ 166,275 3.14% $ 161,023 3.14% 3.05 3.57 3.48 3.44 2,063 1,927 2,084 - ------------------------------------------------------------------------------------------------------------------------- 176,447 164,348 158,939 73,001 52,711 59,310 121,447 132,286 54,397 185,442 164,290 159,268 - ------------------------------------------------------------------------------------------------------------------------- 39,451 79,633 (5,242) 10,363 22,958 (2,862) 6,355 10 1,219 - ------------------------------------------------------------------------------------------------------------------------- $ 35,443 $ 56,685 $ (1,161) - ------------------------------------------------------------------------------------------------------------------------- $ 0.53 $ 0.84 $ (0.02) - ------------------------------------------------------------------------------------------------------------------------- $ 0.52 $ 0.84 $ (0.02) - ------------------------------------------------------------------------------------------------------------------------- </TABLE>
71 <TABLE> - ---------------------------------------------------- -- ------------- --- -------------- -- -------------- ---- -------------------- Quarterly Earnings Trends -- Unaudited (In thousands, except share and per share data) Three Months Ended ---------------------------------------------------------------------------- June 30, March 31, Dec.31, Sept. 30, June 30, 2009 2009 2008 2008 2008 - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ <S> <C> <C> <C> <C> <C> Interest revenue $ 230,685 233,227 $ 262,160 $ 263,358 $ 260,086 Interest expense 55,105 63,382 85,713 99,010 101,147 - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ Net interest revenue 175,580 169,845 176,447 164,348 158,939 Provision for credit losses 47,120 45,040 73,001 52,711 59,310 - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ Net interest revenue after provision for credit losses 128,460 124,805 103,446 111,637 99,629 - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ Other operating revenue Brokerage and trading revenue 21,794 24,699 23,507 30,846 (35,462) Transaction card revenue 27,533 25,428 25,177 25,632 25,786 Trust fees and commissions 16,860 16,510 17,143 20,100 20,940 Deposit service charges and fees 28,421 27,405 29,239 30,404 30,199 Mortgage banking revenue 19,882 18,498 7,217 7,145 8,203 Bank-owned life insurance 2,418 2,317 2,682 2,829 2,658 Margin asset fees 68 67 187 1,934 4,460 Other revenue 6,124 6,583 5,778 7,768 6,965 - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ Total fees and commissions 123,100 121,507 110,930 126,658 63,749 - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ Gain (loss) on sales of assets 973 143 (7,420) (841) (1,149) Gain (loss) on derivatives, net (1,037) (1,664) (2,219) 4,366 (2,961) Gain (loss) on securities, net 6,471 20,108 20,156 2,103 (5,242) Total other-than-temporary impairment losses (1,263) (54,368) - - - Portion of loss recognized in other comprehensive income 279 (39,366) - - - - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ Net impairment losses recognized in earnings (1,542) (15,002) - - - - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ Total other operating revenue 127,965 125,092 121,447 132,286 54,397 - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ Other operating expense Personnel 96,191 92,627 87,695 87,549 89,597 Business promotion 4,569 4,428 7,283 5,837 5,777 Professional fees and services 7,363 6,512 7,923 6,501 6,973 Net occupancy and equipment 15,973 16,258 14,901 15,570 15,100 Insurance 5,898 5,638 3,216 2,436 2,626 FDIC special assessment 11,773 - - - - Data processing and communications 20,452 19,306 19,720 19,911 19,523 Printing, postage and supplies 4,072 4,571 3,823 4,035 4,156 Net (gains) losses and expenses of repossessed assets 996 1,806 1,006 (136) (229) Amortization of intangible assets 1,686 1,686 1,967 1,884 1,885 Mortgage banking costs 9,336 7,467 4,967 5,811 6,054 Change in fair value of mortgage servicing rights (7,865) (1,955) 26,432 5,554 767 Visa retrospective responsibility obligation - - (1,700) 1,700 - Other expense 5,326 7,450 8,209 7,638 7,039 - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ Total other operating expense 175,770 165,794 185,442 164,290 159,268 - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ Income (loss) before taxes 80,655 84,103 39,451 79,633 (5,242) Federal and state income tax 28,315 28,838 10,363 22,958 (2,862) - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ Net income (loss) before non-controlling interest 52,340 55,265 29,088 56,675 (2,380) Non-controlling interest income (expense), net (225) (233) 6,355 10 1,219 - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ Net income (loss) attributable to BOK Financial Corp.$ 52,115 $ 55,032 $ 35,443 $ 56,685 (1,161) - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ Earnings (loss) per share: - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ Basic $ 0.77 0.81 $ 0.53 $ 0.84 $ (0.02) - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ Diluted $ 0.77 0.81 $ 0.52 $ 0.84 $ (0.02) - ---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- ------------ Average shares used in computation: - ---------------------------------------------------- -- ----------- --- ------------- -- ------------ -- ------------ -- ----------- Basic 67,344,577 67,315,986 67,294,069 67,263,317 67,452,181 - ---------------------------------------------------- -- ----------- --- ------------- -- ------------ -- ------------ -- ----------- Diluted 67,448,029 67,387,102 67,456,267 67,432,444 67,452,181 - ---------------------------------------------------- -- ----------- --- ------------- -- ------------ -- ------------ -- ----------- </TABLE>
72 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 12 and 24 months based on eight interest rate scenarios. Two specified interest rate scenarios are used to evaluate interest rate risk against policy guidelines. The first assumes a sustained parallel 200 basis point increase and the second assumes a sustained parallel 100 basis point decrease in interest rates. Management historically evaluated interest rate sensitivity for a sustained 200 basis point decrease in interest rates. However, the results of a 200 basis point decrease in interest rates in the current low-rate environment are not meaningful. The Company also performs a sensitivity analysis based on a "most likely" interest rate scenario, which includes non-parallel shifts in interest rates. An independent source is used to determine the most likely interest rate scenario. The Company's primary interest rate exposures included the Federal Funds rate, which affects short-term borrowings, 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 25 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 - Consumer 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.
73 <TABLE> Interest Rate Sensitivity (Dollars in Thousands) 200 bp Increase 100 bp Decrease Most Likely -------------------------- --------------------------- ------------------------- 2009 2008 2009 2008 2009 2008 ------------- ------------ ------------ -------------- ------------ ------------ Anticipated impact over the next twelve months on <S> <C> <C> <C> <C> <C> <C> net interest revenue $ (12,159) $(17,132) $ (20,541) $ 7,392 $ 993 $(1,386) (1.5)% (1.1)% (2.8)% 0.4% 0.1% (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 June 30, 2009, the VAR was $2.1 million. The greatest value at risk during the second quarter of 2009 was $2.6 million. Controls and Procedures As required by Rule 13a-15(b), BOK Financial's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by their report, of the effectiveness of the company's disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13a-15(d), BOK Financial's management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the company's internal controls over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the company's internal controls over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.
74 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. PART II. Other Information Item 1. Legal Proceedings See discussion of legal proceedings at footnote 6 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 June 30, 2009. <TABLE> - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- Total Number Average Price Total Number of Shares Purchased Maximum Number of Shares of Shares Paid per as Part of Publicly Announced that May Yet Be Purchased Period Purchased (2) Share Plans or Programs (1) Under the Plans - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- <S> <C> <C> <C> <C> April 1, 2009 to 617 $41.62 - 1,215,927 April 30, 2009 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- May 1, 2009 to - - - 1,215,927 May 31, 2009 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- June 1, 2009 to - - - 1,215,927 June 30, 2009 - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- Total 617 - - ------------------------ ---------------- ---------------- ------------------------------------ ----------------------------- (1) The Company had a stock repurchase plan that was initially authorized by the Company's board of directors on February 24, 1998 and amended on May 25, 1999. Under the terms of that plan, the Company could repurchase up to 800,000 shares of its common stock. As of March 31, 2005, the Company had repurchased 638,642 shares under that plan. On April 26, 2005, the Company's board of directors terminated this authorization and replaced it with a new stock repurchase plan authorizing the Company to repurchase up to two million shares of the Company's common stock. As of June 30, 2009, 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. </TABLE>
75 Item 4. Submission of Matters to a Vote of Security Holders Our Annual Meeting of Shareholders was held on April 28, 2009 (the "Annual Meeting"). At the Annual Meeting, shareholders voted on three matters: (i) to fix the number of directors to be elected at sixteen (16) and to elect sixteen (16) persons as directors for a term of one year or until their successors have been elected and qualified, (ii) to approve the 2009 Omnibus Incentive Plan, and (iii) to ratify the selection of Ernst & Young LLP as the Company's independent auditor for the fiscal year ending December 31, 2009. The shareholders approved these matters by the following votes, respectively: (i) Election of sixteen (16) directors for a term of one year: Votes Withheld/ Votes For Against ----------------- ----------------- Gregory S. Allen 62,157,280 209,846 C. Fred Ball, Jr. 59,235,084 3,132,042 Sharon J. Bell 62,291,870 75,256 Peter C. Boylan III 62,301,422 65,704 Chester Cadieux III 56,832,362 5,534,764 Joseph W. Craft III 57,092,032 5,275,094 William E. Durrett 62,292,592 74,534 John W. Gibson 62,310,623 56,503 David F. Griffin 62,311,347 55,779 V. Burns Hargis 62,241,646 125,480 E. Carey Joullian IV 56,391,836 5,975,290 George B. Kaiser 58,772,376 3,594,750 Robert J. LaFortune 62,292,417 74,709 Stanley A. Lybarger 59,272,684 3,094,442 Steven J. Malcolm 59,630,840 2,736,286 E. C. Richards 62,311,079 56,047 <TABLE> Votes Withheld/ Exceptions / Votes For Against Abstain <S> <C> <C> <C> <C> (ii) Approval of the 2009 Omnibus Incentive Plan 50,823,724 3,238,294 8,305,108 Votes Withheld/ Exceptions / Votes For Against Abstain (iii) Ratification of Ernst & Young LLP as the independent auditor for the year ending December 31, 2009 62,181,605 85,094 100,427 </TABLE> Item 6. Exhibits 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Items 1A, 3 and 5 are not applicable and have been omitted.
76 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: July 30, 2009 /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