As filed with the Securities and Exchange Commission on April 29, 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 March 31, 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: 67,589,045 shares of common
stock ($.00006 par value) as of March 31, 2009.
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2
BOK Financial Corporation
Form 10-Q
Quarter Ended March 31, 2009
Index
Part I. Financial Information
Management's Discussion and Analysis (Item 2) 2
Market Risk (Item 3) 33
Controls and Procedures (Item 4) 35
Consolidated Financial Statements - Unaudited (Item 1) 36
Quarterly Financial Summary - Unaudited (Item 2) 54
Part II. Other Information
Item 1. Legal Proceedings 56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 56
Item 6. Exhibits 56
Signatures 57
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Performance Summary
BOK Financial Corporation ("the Company") reported net income of $55.0 million
or $0.81 per diluted share for the first quarter of 2009, up $19.6 million or
55% over the fourth quarter of 2008. Net income for the first quarter of 2008
was $62.3 million or $0.92 per diluted share including after-tax gains from the
sale of Visa, Inc. Class B common stock and reversal of accrued contingent
liabilities related to Visa of $6.2 million or $0.09 per diluted share.
Highlights of the first quarter of 2009 included:
o Net interest revenue totaled $169.8 million, down $6.6 million compared to
the fourth quarter of 2008 and up $22.7 million or 15% over the first
quarter of 2008. Net interest margin was 3.47% for the first quarter of
2009, 3.57% for the fourth quarter of 2008 (3.42% excluding the 15 basis
point favorable LIBOR spread, as previously disclosed) and 3.31% for the
first quarter of 2008.
o Fees and commission revenue totaled $121.5 million for the first quarter of
2009, $110.9 million for the fourth quarter of 2008 and $113.9 million for
the first quarter of 2008. Mortgage banking revenue grew $11.3 million or
156% over the fourth quarter of 2008 primarily driven by increased volume
in refinancing due to government initiatives to lower national mortgage
interest rates.
o Other-than-temporary impairment charges reduced pre-tax income by $15.0
million in the first quarter of 2009 and $5.3 million in the first quarter
of 2008. No other-than-temporary impairment charges were recognized in the
fourth quarter of 2008. Impairment charges were recognized for certain
preferred stocks and privately issued mortgage-backed securities.
o Combined reserve for credit losses totaled $262 million or 2.07% of
outstanding loans at March 31, 2009, up from $248 million or 1.93% of
outstanding loans at December 31, 2008. Net loans charged off and provision
for credit losses were $31.9 million and $45.0 million, respectively, for
the first quarter of 2009. Net loans charged off and provision for credit
losses were $33.7 million and $73.0 million, respectively, for the fourth
quarter of 2008 and $8.9 million and $17.6 million, respectively for the
first quarter of 2008.
o Non-performing assets totaled $414 million or 3.26% of outstanding loans
and repossessed assets at March 31, 2009, $342 million or 2.65% of
outstanding loans and repossessed assets at December 31, 2008 and $126
million or 1.02% of outstanding loans and repossessed assets at March 31,
2008.
3
o Average deposit accounts totaled $14.9 billion for the first quarter of
2009, up $756 million compared with average deposits for the fourth quarter
of 2008. Total period-end deposits were $15.3 billion at March 31, 2009.
o The Company's Tier 1 and tangible common equity ratios were 9.76% and
6.84%, respectively, at March 31, 2009. Tier 1 and tangible common equity
ratios were 9.42% and 6.64%, respectively, at December 31, 2008. The
Company chose not to participate in the U.S. Treasury's Troubled Asset
Relief Program ("TARP").
o The Company paid a cash dividend of $15.0 million or $0.225 per common
share during the first quarter of 2009. On April 28, 2009, the board of
directors declared an increase in the cash dividend to $0.24 per common
share payable on or about May 29, 2009 to shareholders of record as of May
15, 2009.
Results of Operations
Net Interest Revenue and Net Interest Margin
Net interest revenue totaled $169.8 million, up $22.7 million or 15% over the
first quarter of 2008 and down $6.6 million compared to the fourth quarter of
2008. The increase in net interest revenue over the first quarter of 2008 was
due primarily to growth in average earning assets. The decrease in net interest
revenue from the fourth quarter of 2008 was due primarily to a narrowing of the
spread between LIBOR and the federal funds rate.
Average earning assets for the first quarter of 2009 increased $2.1 billion or
12% compared to the first quarter of 2008, primarily due to a $1.4 billion
increase in average securities and a $688 million increase in average loans.
Average available for sale securities, which consist largely of U.S. government
agency issued mortgage-backed securities, increased $1.2 billion. We purchase
securities to supplement earnings and to manage interest rate risk. Average
outstanding commercial loans increased $341 million and average residential
mortgage loans increased $331 million. Growth in average earning assets was
funded by a $1.8 billion increase in average deposits and a $318 million
increase in average borrowed funds. Average time deposits increased $990 million
compared with the first quarter of 2008. Average demand deposits increased $422
million and average interest-bearing transaction accounts increased $344 million
over the first quarter of 2008.
Average earning assets for the first quarter of 2009 increased $477 million
compared to the fourth quarter of 2008, primarily due to a $447 million increase
in average securities. 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 $42 million due primarily to lower outstanding
commercial loan balances. Residential mortgage loans held for sale increased $80
million due to refinancing activity. Average deposits increased $756 million
compared with the fourth quarter of 2008, including a $494 million increase in
average interest-bearing transaction accounts, a $152 million increase in
average demand deposits and a $106 million increase in average time deposits.
Average funds purchased, repurchase agreements and other borrowed funds
decreased $361 million from the fourth quarter of 2008.
Net interest margin was 3.47% for the first quarter of 2009, 3.31% for the first
quarter of 2008 and 3.57% for the fourth quarter of 2008.
The tax-equivalent yield on earning assets was 4.75% for the first quarter of
2009, down 142 basis points from the first quarter of 2008. Loan yields
decreased 203 basis points from the first quarter of 2008 to 4.56%. The
securities portfolio yield was 4.96%, down 21 basis points over the first
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
occurs more slowly and may not immediately move in the same direction as changes
in market rates.
The cost of interest-bearing liabilities was 1.50% for the first quarter of
2009, down 186 basis points from the first quarter of 2008. The cost of interest
bearing deposits decreased 157 basis points to 1.76% and the cost of funds
purchased and other borrowings decreased 275 basis points to 0.51%. Competition
for deposits in all our markets limited our ability to move deposit rates down
as interest rates declined. The benefit to the net interest margin from earning
assets funded by non-interest bearing liabilities was 22 basis points in the
first quarter of 2009 compared with 50 basis points in the first quarter of 2008
and 31 basis points in the preceding quarter.
Net interest margin for the first quarter of 2009 decreased 10 basis points
compared with the fourth quarter of 2008. As previously disclosed, the change in
net interest margin from the fourth quarter of 2008 is primarily due to the
spread between LIBOR and the federal funds rate returning to a historically
normal level. LIBOR is the basis for interest earned on many of our loans and
the federal funds rate is the basis for interest paid on many of our
interest-bearing
4
liabilities. This spread positively impacted net interest margin in the fourth
quarter of 2008 by 15 basis points. Net interest margin, excluding the narrowed
LIBOR / federal funds rate spread, increased by 5 basis points over the fourth
quarter of 2008.
Management regularly models the effects of changes in interest rates on net
interest revenue. Based on this modeling, we expect net interest revenue to
decrease slightly over a one-year forward looking period. However, other factors
such as loan spread compression, deposit product mix, the overall balance sheet
composition and the previously noted changes in the spread between LIBOR and the
federal funds rate may affect this general expectation.
Our overall objective is to manage the Company's balance sheet to be relatively
neutral to changes in interest rates. Approximately two-thirds of our commercial
and commercial real estate loan portfolios are either variable rate or fixed
rate that will re-price within one year. These loans are funded primarily by
deposit accounts that are either non-interest bearing, or that re-price more
slowly than the loans. The result is a balance sheet that would be asset
sensitive, which means that assets generally re-price more quickly than
liabilities. Among the strategies that we use to achieve a 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 $650 million convert fixed rate liabilities to
floating rate based on LIBOR. The purpose of these derivatives is to position
our balance sheet to be relatively neutral to changes in interest rates. Net
interest revenue increased $4.3 million in the first quarter of 2009, $463
thousand in the first quarter of 2008 and $2.3 million in the fourth quarter of
2008 from periodic settlements of these contracts. This increase in revenue
contributed 9 basis points to net interest margin in the first quarter of 2009,
0 basis points to the first quarter of 2008 and 5 basis points to the fourth
quarter of 2008. These contracts are carried on the balance sheet at fair value
and changes in fair value 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 Table 1 and in the
interest rate sensitivity projections as shown in the Market Risk section of
this report.
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Table 1 - Volume / Rate Analysis
(In thousands)
Three Months Ended
March 31, 2009 / 2008
-----------------------------------
Change Due To (1)
-----------------------------------
Yield /
Change Volume Rate
-----------------------------------
Tax-equivalent interest revenue:
Securities $ 11,898 $ 15,385 $ (3,487)
Trading securities (414) 519 (933)
Loans (53,537) 10,550 (64,087)
Funds sold and resell agreements (810) (165) (645)
------------------------------------------------------------------------------
Total (42,863) 26,289 (69,152)
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Interest expense:
Transaction deposits (26,758) (3,514) (23,244)
Savings deposits (129) 2 (131)
Time deposits (9,333) 8,689 (18,022)
Federal funds purchased and
repurchase agreements (20,824) (2,219) (18,605)
Other borrowings (8,654) 4,147 (12,801)
Subordinated debentures 167 (21) 188
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Total (65,531) 7,084 (72,615)
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Tax-equivalent net interest revenue 22,668 19,205 3,463
Change in tax-equivalent adjustment 49
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Net interest revenue $ 22,717
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(1) Changes attributable to both volume and yield/rate are allocated to both
volume and yield/rate on an equal basis.
5
Other Operating Revenue
Other operating revenue increased $4.5 million compared with the first quarter
of 2008. Fees and commissions revenue increased $7.7 million or 7% compared with
the first quarter of 2008 and net gains on securities, derivatives and other
assets decreased $3.2 million. Other operating revenue increased $3.6 million
over the fourth quarter of 2008, including a $10.6 million increase in total
fees and commissions partially offset by lower net gains on securities,
derivatives and other assets.
Diversified sources of fees and commission revenue are a significant part of our
business strategy and represented 42% of total revenue at March 31, 2009,
excluding provision for credit losses and gains and losses on asset sales,
securities and derivatives. We believe that a variety of fee revenue sources
provide an offset to changes in interest rates, values in the equity markets,
commodity prices and consumer spending, all of which can be volatile. 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.
Fees and commissions revenue
Brokerage and trading revenue totaled $24.7 million for the first quarter of
2009, up $786 thousand or 3% over the first quarter of 2008. Securities trading
totaled $16.9 million for the first quarter of 2009, up $4.0 million or 31% over
the first quarter of 2008. Increased mortgage lending activity increased the
level of securities transactions by our mortgage banking customers. Customer
hedging revenue, totaled $1.0 million for the first quarter of 2009, down $4.0
million over the first quarter of 2008. Low commodity prices in the first
quarter of 2009 reduced the level of customer hedging activity compared to the
first quarter of 2008. Investment banking revenue was up $1.2 million over the
first quarter of 2008 due to the timing of completed loan syndication
transactions.
Brokerage and trading revenue was also up $1.2 million over the fourth quarter
of 2008, primarily due to increases in securities trading revenue of $3.1
million and investment banking revenue of $1.0 million, offset with decreased
revenue from customer hedging activities of $3.1 million.
Transaction card revenue totaled $25.4 million for the first quarter of 2009, up
$1.9 million or 8% over the first quarter of 2008. Transaction card revenue
depends largely on the volume and amount of transactions processed, the number
of ATM locations and the number of merchants served. ATM network revenue
increased $1.4 million or 13% over the first quarter of 2008. Merchant discounts
and check card revenue increased slightly over the prior year.
Transaction card revenue increased $251 thousand or 4% annualized compared with
the fourth quarter of 2008, primarily due to higher ATM network revenue offset
by lower merchant fees and check card revenue.
Trust fees and commissions totaled $16.5 million for the first quarter of 2009,
down $4.3 million or 21% compared to the first quarter of 2008. The fair value
of all trust assets administered by the Company, which is the basis for a
significant portion of trust fees totaled $28.7 billion at March 31, 2009 and
$35.5 billion at March 31, 2008. The decline in the fair value of trust assets
was primarily due to current market conditions. Trust management fees decreased
$1.4 million or 11% and mutual fund advisory and administrative service fees
declined $2.1 million compared to the first quarter of 2008.
Trust fees and commissions decreased $633 thousand or 15% annualized compared
with the fourth quarter of 2008. The fair value of all trust assets managed
totaled $30.5 billion at December 31, 2008, $1.8 billion or 6% more than the
fair value of all trust assets at March 31, 2009 due to market conditions.
Deposit service charges and fees totaled $27.4 million for the first quarter of
2009, down $281 thousand or 1% from the first quarter of 2008. Commercial
account service charge revenue increased $1.2 million or 15% to $9.8 million and
overdraft fees decreased $1.4 million or 8% to $16.4 million compared to the
first quarter of 2008. The increase in commercial service charge revenue was due
to a decrease in the earnings credit available to commercial deposit customers.
The earnings credit, which provides a non-cash method for commercial customers
to avoid incurring charges for deposit services, decreases when interest rates
fall. The decrease in overdraft fees was due to lower transaction volumes.
Deposit service charges and fees decreased $1.8 million compared with the fourth
quarter of 2008. The decrease was primarily due to a $2.2 million seasonal
decrease in overdraft fees, partially offset by a $417 thousand increase in
commercial service charges.
Mortgage banking revenue increased $10.5 million or 130% compared with the first
quarter of 2008 and $11.3 million
6
compared with the fourth quarter of 2008. Net gains on mortgage loans sold
totaled $10.9 million for the first quarter of 2009, up $8.3 million over the
first quarter of 2008 and $9.0 million over the fourth quarter of 2008. Mortgage
loans originated for sale in the secondary market totaled $709 million for the
first quarter of 2009, up 176% over the same period in 2008, due to government
initiatives to lower national mortgage interest rates. Servicing revenue totaled
$4.6 million, up $257 thousand or 6% over the first quarter of 2008 and $136
thousand over the fourth quarter of 2008. The outstanding principal balance of
mortgage loans serviced for others totaled $5.5 billion at March 31, 2009 and
$5.0 billion at March 31, 2008.
Margin asset fees declined $1.9 million to $67 thousand compared to the first
quarter of 2008 due to a decrease in average margin assets and lower earning
rates. Margin assets which are held primarily as part of the Company's customer
derivatives programs averaged $165 million for the first quarter of 2009,
compared with $273 million for the first 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.
Securities and derivatives
Net gains and losses on securities consisted of the following (in thousands):
Three Months Ended
--------------------------------------
March 31, December 31, March 31,
2009 2008 2008
Gain on available for sale securities $ 22,226 $ 5,067 $ 2,936
Gain (loss) on mortgage hedge securities (2,118) 15,089 191
Gain on Visa IPO securities - - 6,799
---------------------------------------- ------------- ------------- ----------
Net gains on securities $ 20,108 $20,156 $ 9,926
---------------------------------------- ------------- ------------- ----------
BOK Financial recognized net gains of $20.1 million on securities for the first
quarter of 2009, net gains on securities of $9.9 million for the first quarter
of 2008 and net gains on securities of $20.2 million for the fourth quarter of
2008. Mortgage hedge securities held as an economic hedge of the changes in fair
value of mortgage servicing rights are carried at fair value. Changes in fair
value of these securities are recognized in earnings as they occur.
The Company recognized $22.2 million of gains on the sale of $735 million of
available for sale securities in the first 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.
Net losses on derivatives totaled $1.7 million for the first quarter of 2009
compared to net gains of $2.1 million for the first quarter of 2008 and net
losses of $2.2 million for the fourth quarter of 2008. Net gains or losses on
derivatives consist of fair value adjustments of all derivatives used to manage
interest rate risk and the related hedged liabilities when adjustments are
permitted by generally accepted accounting principles. Derivative instruments
generally consist of interest rate swaps where the Company pays a variable rate
based on LIBOR and receives a fixed rate. The fair value of these swaps
generally increases in value and the Company recognizes a gain as interest rates
fall. The fair value of these swaps generally decreases in value and the Company
recognizes a loss as interest rates rise.
The Company adopted Statement of Financial Accounting Standards No. 159, "Fair
Value Option" ("FAS 159") effective January 1, 2008. FAS 159 provides an option
to measure eligible financial assets and financial liabilities at fair value.
Certain certificates of deposit that were either currently designated as hedged
or had previously been designated as hedged, but no longer met the correlation
requirements of Statement of Financial Accounting Standards No. 133 were
designated as being reported at fair value when FAS 159 was first adopted. In
addition, certain certificates of deposit issued subsequent to the adoption of
FAS 159 have been designated as reported at fair value. This determination is
made when the certificates of deposit are issued based on the Company's intent
to swap the interest rate on the certificates from a fixed rate to a LIBOR-based
variable rate. The fair value of these fixed-rate certificates of deposit
generally increases 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.
As more fully discussed in the Financial Condition - Securities section of this
report, the Company also recognized other-than-temporary impairment losses on
certain mortgage-backed securities and preferred stocks of $15.0 million in
earnings during the first quarter of 2009 and $5.3 million in earnings during
the first quarter of 2008. No other-than-temporary impairment losses were
recognized in the fourth quarter of 2008.
7
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Table 2 - Other Operating Revenue
(In thousands)
Three Months Ended
-------------------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
2009 2008 2008 2008 2008
-------------------------------------------------------------------------------
Brokerage and trading revenue $ 24,699 $ 23,507 $ 30,846 $ (35,462) $ 23,913
Transaction card revenue 25,428 25,177 25,632 25,786 23,558
Trust fees and commissions 16,510 17,143 20,100 20,940 20,796
Deposit service charges and fees 27,405 29,239 30,404 30,199 27,686
Mortgage banking revenue 18,498 7,217 7,145 8,203 8,034
Bank-owned life insurance 2,317 2,682 2,829 2,658 2,512
Margin asset fees 67 187 1,934 4,460 1,967
Other revenue 6,583 5,778 7,768 6,965 5,391
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Total fees and commissions 121,507 110,930 126,658 63,749 113,857
----------------------------------------------------------------------------------------------------------------------------
Gain (loss) on other assets 143 (7,420) (841) (1,149) 4
Gain (loss) on derivatives, net (1,664) (2,219) 4,366 (2,961) 2,113
Gain (loss) on securities, net 20,108 20,156 2,103 (5,242) 9,926
Total other-than temporary impairment losses (54,368) - - - (5,306)
Portion of loss recognized in other
comprehensive income (39,366) - - - -
----------------------------------------------------------------------------------------------------------------------------
Net impairment losses recognized in earnings (15,002) - - - (5,306)
----------------------------------------------------------------------------------------------------------------------------
Total other operating revenue $ 125,092 $ 121,447 $ 132,286 $ 54,397 $ 120,594
----------------------------------------------------------------------------------------------------------------------------
Other Operating Expense
Other operating expense for the first quarter of 2009 totaled $165.8 million, up
$12.4 million or 8% over the first quarter of 2008. Personnel costs increased
$4.5 million or 5%. Non-personnel expenses increased $7.9 million or 12%
primarily due to higher deposit insurance costs, net losses and operating
expenses of repossessed assets and mortgage banking costs, offset by a favorable
change in fair value of mortgage servicing rights. Other operating expenses for
the first quarter of 2009 decreased $19.6 million from the fourth quarter of
2008. Favorable changes in the fair value of mortgage servicing rights reduced
other operating expenses by $28.4 million. This decrease in other operating
expenses was partially offset by higher personnel expense, deposit insurance
expense and mortgage banking costs.
Personnel expense
Personnel expense totaled $92.6 million for the first quarter of 2009 and $88.1
million for the first quarter of 2008. Regular compensation, which consists of
salaries and wages, overtime pay and temporary personnel costs totaled $55.0
million, up $2.4 million or 5% over the first quarter of 2008. The increase in
regular compensation expense was due primarily to a 6% increase in average
staffing levels over the first quarter of last year.
----------------------------------------------------------------------------------------------------------------------
Table 3 - Personnel Expense
(Dollars in thousands)
Three Months Ended
----------------------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
2009 2008 2008 2008 2008
----------------------------------------------------------------------------------
Regular compensation $ 54,976 $ 57,594 $ 55,435 $ 54,024 $ 52,576
Incentive compensation:
Cash-based 20,586 20,315 20,110 19,503 19,287
Stock-based 1,409 (1,138) 68 2,760 2,272
---------------------------------------------------------------------------------------------------------------------
Total incentive compensation 21,995 19,177 20,178 22,263 21,559
Employee benefits 15,656 10,924 11,936 13,310 13,971
---------------------------------------------------------------------------------------------------------------------
Total personnel expense $ 92,627 $ 87,695 $ 87,549 $ 89,597 $ 88,106
---------------------------------------------------------------------------------------------------------------------
Number of employees
(full-time equivalent) 4,374 4,300 4,231 4,137 4,135
---------------------------------------------------------------------------------------------------------------------
Incentive compensation increased $436 thousand or 2% to $22 million compared to
the first quarter of 2008. Expense for cash-based incentive compensation plans
increased $1.3 million or 7%. These plans are either intended to provide current
rewards to employees who generate long-term business opportunities to the
Company based on growth in loans,
8
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 first quarter of 2008 included a $1.4
million increase in commissions related to brokerage and trading revenue.
The Company also provides stock-based incentive compensation plans. Stock-based
compensation plans include both equity and liability awards. Compensation
expense related to liability awards decreased $409 thousand compared with the
first quarter of 2008. This decrease reflected changes in the market value of
BOK Financial common stock and other investments. The market value of BOK
Financial common stock decreased $5.90 per share in the first quarter of 2009
and increased $0.53 per share in the first quarter of 2008. Compensation expense
for equity awards decreased $454 thousand or 22% compared with the first 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.
Employee benefit expense totaled $16 million, a $1.7 million or 12% increase
over the first quarter of 2008 due to increased expenses related to payroll
taxes and employee retirement plans. Medical insurance costs were down $129
thousand or 2%. The Company self-insures a portion of its employee health care
coverage and these costs may be volatile.
Personnel expense increased $4.9 million compared with the fourth quarter of
2008 primarily due to increased employee benefit expenses. Incentive
compensation increased $2.8 million, partially offset by a $2.6 million decrease
in regular compensation. Employee benefit expense increased $4.7 million
primarily due to seasonally higher payroll tax expense and higher employee
retirement plan expenses.
Non-personnel operating expenses
Non-personnel operating expenses totaled $73.2 million for the first quarter of
2009 compared to $65.3 million for the first quarter of 2008 and $97.1 million
for the fourth quarter of 2008. Non-personnel operating expenses, excluding
changes in the fair value of mortgage servicing rights, were $75.1 million for
the first quarter of 2009, $63.5 million for the first quarter of 2008 and $71.3
million for the fourth quarter of 2008.
Insurance expense increased $1.9 million compared to the first quarter of 2008
due to an increase in FDIC insurance premiums. The Company expects higher
deposit insurance expense as previously announced increases in deposit insurance
premiums and other Treasury Department initiatives become effective.
Net occupancy and equipment expense totaled $16.3 million for the first quarter
of 2009, up $1.2 million over the first quarter of 2008 and $1.4 million over
the fourth quarter of 2008. The increase in expense was due to $628 thousand of
costs incurred to close our Tucson, Arizona, location and ongoing costs
associated with new 8 banking locations since the first quarter of 2008.
Certain mortgage banking costs, excluding changes in the fair value of mortgage
servicing rights, totaled $7.5 million for the first quarter of 2009 compared
with $5.7 million for the first quarter of 2008. 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.
Net (gains) losses and operating expenses of repossessed assets increased $1.4
million compared to the first quarter of 2008. Real estate and other repossessed
assets totaled $61 million at March 31, 2009 compared to $15 million at March
31, 2008.
Non-personnel operating expenses for the first quarter of 2008 included a
non-recurring reversal of a litigation reserve related to the Company's
estimated obligation for certain legal costs related to Visa of $2.8 million due
to Visa funding the litigation escrow account from proceeds of its initial
public offering of common shares.
Non-personnel operating expenses, excluding changes in the fair value of
mortgage servicing rights, increased $3.8 million compared to the fourth quarter
of 2008 primarily related to higher mortgage banking, deposit insurance and
repossessed asset costs.
9
----------------------------------------------------------------------------------------------------------------------
Table 4 - Other Operating Expense
(In thousands)
Three Months Ended
----------------------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
2009 2008 2008 2008 2008
----------------------------------------------------------------------------------
Personnel $ 92,627 $ 87,695 $ 87,549 $ 89,597 $ 88,106
Business promotion 4,428 7,283 5,837 5,777 4,639
Professional fees and services 6,512 7,923 6,501 6,973 5,648
Net occupancy and equipment 16,258 14,901 15,570 15,100 15,061
Insurance 5,638 3,216 2,436 2,626 3,710
Data processing & communications 19,306 19,720 19,911 19,523 18,893
Printing, postage and supplies 4,571 3,823 4,035 4,156 4,419
Net (gains) losses and operating
expenses of repossessed assets 1,806 1,006 (136) (229) 378
Amortization of intangible assets 1,686 1,967 1,884 1,885 1,925
Mortgage banking costs 7,467 4,967 5,811 6,054 5,681
Change in fair value of mortgage
servicing rights (1,955) 26,432 5,554 767 1,762
Visa retrospective responsibility
obligation - (1,700) 1,700 - (2,767)
Other expense 7,450 8,209 7,638 7,039 5,949
---------------------------------------------------------------------------------------------------------------------
Total other operating expense $ 165,794 $ 185,442 $ 164,290 $ 159,268 $ 153,404
---------------------------------------------------------------------------------------------------------------------
Income Taxes
Income tax expense was $28.8 million or 34% of book taxable income for the first
quarter of 2009 compared with $34.4 million or 36% of book taxable income for
the first quarter of 2008 and $10.4 million or 26% of book taxable income for
the fourth quarter of 2008. The Company recognized a $2.9 million tax benefit
from certain appreciated securities contributed to the BOKF Charitable
Foundation in the fourth quarter of 2008. Income tax expense would have been
$13.2 million or 33% of book taxable income for the fourth quarter excluding
this contribution.
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 March 31, 2009 and was largely unchanged from December 31, 2008.
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.
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
10
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 Table 5, net income attributable to our lines of business decreased
$27 million or 46% compared to the first quarter of 2008. The decrease was due
primarily to credit losses attributed to the business units and decreased the
transfer pricing credit provided to business units in the first quarter of 2009
compared to the first quarter of 2008. Lower interest rates decrease the
transfer pricing credit provided to business units that generate lower-costing
funds for the Company. Total net interest revenue recognized by the Funds
Management unit increased to $50 million during the first quarter of 2009 from
$22 million in the first quarter of 2008 due largely to changes in the transfer
pricing credit.
Table 5 Net Income by Line of Business
(In Thousands)
Three Months ended March 31,
2009 2008
----------------- ---------------
Commercial banking $ 16,521 $ 36,750
Consumer banking 9,628 12,033
Wealth management 5,502 10,053
-------------------------------------- ----------------- ---------------
Subtotal 31,651 58,836
Funds management and other 23,381 3,429
-------------------------------------- ----------------- ---------------
Total $ 55,032 $ 62,265
-------------------------------------- ----------------- ---------------
Commercial Banking
Commercial banking contributed $16.5 million to consolidated net income for the
first quarter of 2009, down from $36.8 million for the first quarter of 2008.
The decrease in commercial banking net income was largely due to an $18.8
pre-tax increase in net loans charged off and lower net interest revenue.
Net interest revenue decreased $5.3 million or 7% compared to the first quarter
of 2008. Average earning assets grew $661 million or 6% on solid growth in both
loans and deposits. The $4.4 million favorable impact on net interest revenue of
this growth was offset by a $8.5 million decrease related to lower internal
transfer pricing credit provided to the commercial banking segment for deposits
sold to our funds management unit.
Other operating revenue was flat compared to first quarter of 2008. Declines in
energy derivative activity and their associated fees due to low commodity prices
were partially offset with increased deposit service charges. Other fee revenue
including TransFund fees increased over the first quarter of 2008. Operating
expenses were up $3.1 million or 6% compared to the first quarter of 2008
largely due to increases in FDIC insurance expenses related to deposit growth
and previously announced rate increases.
Net commercial banking loans charged off in the first quarter of 2009 totaled
$24.4 million or 1.00% of average loans attributable to this line of business.
During the first quarter of 2009, net charge-offs of commercial real estate
loans totaled $10.4 million, net charge-offs of small business loans totaled
$6.9 million and net charge-offs of other commercial loans totaled $6.6 million.
Gains on financial instruments, net in the first quarter of 2008 related to a
$4.7 million one-time gain related to the sale of Visa, Inc. Class B common
stock.
The average outstanding balance of loans attributed to commercial banking was
$9.8 billion for the first quarter of 2009, up $464 million or 5% over the first
quarter of 2008. Energy loans averaged $2.0 billion, an increase of $304 million
or 17% over the first quarter of 2008 and commercial real estate loans averaged
$2.1 billion, up $125 million or 6% over the first quarter of 2008. Average
other commercial and industrial loans of $2.9 billion for the first quarter of
2009 were essentially flat compared to the first quarter of 2008. Small business
loans averaged $2.0 billion for the first quarter of 2009, down $155 million or
7% compared to the first quarter of 2008.
11
Average deposits attributed to commercial banking were $4.8 billion for the
first quarter of 2009, up $356 million or 8% over the first quarter of 2008.
Treasury services balances increased $92 million or 7% and deposit balances
attributed to our commercial & industrial customers increased $175 million.
Balances attributed to our energy customers increased $30 million offset by a
decrease of $28 million in balances attributable to our commercial real estate
customers. Average balances attributable to our small business customers
increased $72 million or 4% over the first quarter of 2008.
Table 6 Commercial Banking
(Dollars in Thousands)
Three Months ended March 31,
------------------------------------
2009 2008
------------------------------------
NIR (expense) from external sources $ 85,558 $ 117,774
NIR (expense) from internal sources (12,659) (39,534)
------------------------------------
Total net interest revenue 72,899 78,240
Other operating revenue 33,424 33,472
Operating expense 53,734 50,624
Net loans charged off 24,366 5,611
Gains on financial instruments, net - 4,689
Losses on repossessed assets, net (1,184) (19)
------------------------------------
Income before taxes 27,039 60,147
Federal and state income tax 10,518 23,397
------------------------------------
Net income $ 16,521 $ 36,750
====================================
Average assets $10,494,346 $ 10,371,366
Average loans 9,794,882 9,331,335
Average deposits 4,770,050 4,414,261
Average invested capital 985,870 1,035,700
Return on assets 0.64% 1.43%
Return on invested capital 6.80 14.27
Efficiency ratio 50.54 45.32
Net charge-offs (annualized) to average loans 1.00 0.24
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. During the first quarter of 2009, the
Company opened 3 consumer banking locations in the Phoenix, Arizona, market and
announced plans to close its Tucson, Arizona, banking location.
Consumer banking contributed $9.6 million to consolidated net income for the
first quarter of 2009, down $2.4 million compared to the first quarter of 2008.
The decrease in consumer banking net income was largely due to a $2.5 million
increase in net loans charged off.
Net interest revenue from consumer banking activities decreased $1.0 million or
3% over the first quarter of 2008. Average earning assets increased $775 million
or 10% in the first quarter of 2009 compared to the first quarter of 2008 due to
increases in mortgage hedge securities held as an economic hedge of our mortgage
servicing rights, loans and deposits. The $5.6 million favorable impact of this
growth was offset by a $5.8 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 $9.2 million or 26% over the first quarter of
2008 due to an increase in mortgage banking revenue of $10.6 million. Loan
refinancing volumes were up due to government initiatives to lower national
mortgage interest rates. Growth due to mortgage banking revenue was partially
offset by a $1.4 million decrease in deposit service charges. Operating expenses
increased $9.7 million or 19% over the first quarter of 2008. An increase of
$5.0 million in operating expenses for the first quarter of 2009 compared to the
first quarter of 2008 was due to branch expansion in Arizona, Colorado and
Texas. In addition, mortgage banking expenses increased $2.7 million in the
first quarter of 2009 compared to the first quarter of 2008 due to the effect of
accelerated actual loan repayments on
the value of our mortgage servicing rights. FDIC insurance premiums grew $1.9
million in the first quarter of 2009 compared to the first quarter of 2008 due
to deposit growth and assessment rate increases.
Net loans charged off totaled $5.3 million in the first quarter of 2009 and $2.8
million in the first quarter of 2008. Indirect automobile loans charged-off
increased $1.2 million and other consumer loans charged off increased $779
thousand compared with the first quarter of 2008. In addition, net residential
mortgage loans charged-off increased by $217 thousand.
Changes in fair value of our mortgage loan servicing rights, net of economic
hedge, increased consumer banking net income by $2.0 million in the first
quarter of 2009 compared with a decrease of $1.8 million in the first quarter of
2008. Anticipated prepayment speeds increased significantly beginning in the
fourth quarter of 2008 in response to government programs to lower national
mortgage interest rates. We maintain a portfolio of mortgage-backed securities
as an economic hedge against changes in fair value of our servicing rights. The
disconnection between current yields on these securities and current mortgage
loan commitment rates noted in the fourth quarter of 2008 subsided in the first
quarter of 2009.
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
March 31, 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 $63 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 $437 thousand. 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 increased $345 million or 6% over the first quarter of
2008. Average interest-bearing transaction accounts were up $113 million or 5%
and average time deposits were up $145 million or 5% compared to the first
quarter of 2008. Average demand deposit accounts increased $78 million or 11%
over the first quarter of 2008. Movement of funds among the various types of
consumer deposits was largely based on interest rates and product features
offered.
Our Consumer Banking division originates, markets and services conventional and
government-sponsored mortgage loans for all of our geographical markets. During
the first quarter of 2009, $709 million of mortgage loans were funded compared
to $257 million funded in the first quarter of 2008. Approximately 59% of our
mortgage loans funded were in the Oklahoma market and 12% of mortgage loans
funded were in the Texas market. We also service $6.3 billion of mortgage loans,
including $758 million of loans serviced for affiliated entities. Approximately
94% of the mortgage loans serviced were to borrowers in our primary geographical
market areas.
13
Table 7 Consumer Banking
(Dollars in Thousands)
Three Months ended March 31,
------------------------------------
2009 2008
------------------------------------
NIR (expense) from external sources $ 12,322 $ 2,877
NIR (expense) from internal sources 25,102 35,562
------------------------------------
Total net interest revenue 37,424 38,439
Other operating revenue 45,286 36,048
Operating expense 61,630 51,961
Net loans charged off 5,346 2,850
Increase (decrease) in fair value of
mortgage servicing rights 1,955 (1,762)
Gains (losses) on financial (2,118) 1,767
instruments, net
Gains on repossessed assets, net 186 13
------------------------------------
Income before taxes 15,757 19,694
Federal and state income tax 6,129 7,661
------------------------------------
Net income $ 9,628 $ 12,033
====================================
Average assets $ 6,011,426 $ 5,644,127
Average loans 2,632,378 2,417,177
Average deposits 5,945,973 5,601,162
Average invested capital 251,310 212,260
Return on assets 0.65% 0.86%
Return on invested capital 15.54 22.80
Efficiency ratio 74.51 69.76
Net charge-offs (annualized) to average loans 0.81 0.47
Banking locations (period-end) 197 189
Mortgage loan servicing portfolio $ 5,515,893 $ 4,967,384
Mortgage loans funded 708,561 256,617
Wealth Management
Wealth Management contributed consolidated net income of $5.5 million in the
first quarter of 2009 compared to net income of $10.1 million in the first
quarter of 2008 due primarily to increased operating expenses. Operating
expenses were up $6.1 million compared to the first quarter of 2009 due to a
$3.8 million increase in personnel expenses and a $2.3 million increase in
non-personnel operating expenses. Growth in personnel expense was due to
increased headcount and incentive compensation. Additional staffing has been
added to increase penetration in markets outside of Oklahoma. Growth in
non-personnel operating expenses was due to increased FDIC insurance premiums
and growth in the business.
Net interest revenue for the first quarter of 2009 was flat with the first
quarter of 2008 due to increases in average earning assets offset by lower
internal transfer pricing credit provided to the wealth management segment for
deposits sold to our funds management unit as a result of lower short-term
interest rates in the first quarter of 2009 compared to the first quarter of
2008. Other operating revenue was flat compared to the first quarter of 2008 due
to increased trading and brokerage fees offset by declines in trust management
fees due to market declines in the assets on which those fees are based.
The Wealth Management division provided $2.9 billion of average deposits for the
first quarter of 2009 compared with $1.9 billion of average deposits in the
first quarter of 2008. Interest-bearing transaction accounts average $1.8
billion for the first quarter of 2009, an increase of $438 million or 32% over
the first quarter of 2008. Average time deposits were $857 million, up $584
million or 214% over last year. Deposit growth for Wealth management was due
largely to movement of customer funds from managed money market products into
deposits.
At March 31, 2009 and 2008, the Wealth Management line of business was
responsible for trust assets with aggregate market values of $28.7 billion and
$35.5 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 billion of trust assets at March 31,
2009 compared to $12.7 billion of trust assets at March 31, 2008. The fair value
of non-managed assets was $10.2 billion at March 31, 2009 and $12.3 billion at
March 31, 2008. The fair value of assets held in safekeeping totaled $7.6
billion at March 31, 2009 and $9.0 billion at March 31, 2008.
Table 8 Wealth Management
(Dollars in Thousands)
Three Months ended March 31,
-------------------------------------
2009 2008
-------------------------------------
NIR (expense) from external sources $ 3,846 $ 1,864
NIR (expense) from internal sources 7,602 9,288
-------------------------------------
Total net interest revenue 11,448 11,152
Other operating revenue 41,273 41,338
Operating expense 41,781 35,640
Net loans charged off 1,935 396
-------------------------------------
Income before taxes 9,005 16,454
Federal and state income tax 3,503 6,401
-------------------------------------
Net income $ 5,502 $ 10,053
=====================================
Average assets $ 2,978,247 $ 1,967,755
Average loans 1,027,554 904,454
Average deposits 2,929,117 1,904,842
Average invested capital 200,640 196,650
Return on assets 0.75% 2.05%
Return on invested capital 11.12 20.56
Efficiency ratio 79.25 67.90
Net charge-offs (annualized) to average loans 0.75 0.18
Trust assets $28,700,791 $ 35,524,730
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 includes insignificant
results of operations in locations outside our primary geographic regions.
Table 9 Net Income by Geographic Region
(In Thousands)
Three Months ended March 31,
2009 2008
----------------- ----------------
Oklahoma $ 25,051 $ 36,335
Texas 6,808 12,180
New Mexico 2,610 4,592
Arkansas 3,707 2,239
Colorado (1,873) 2,981
Arizona (6,455) 554
Kansas City 1,739 489
-------------------------------------------- ----------------- ----------------
Subtotal 31,587 59,370
Funds management and other 23,445 2,895
-------------------------------------------- ----------------- ----------------
Total $ 55,032 $ 62,265
-------------------------------------------- ----------------- ----------------
15
Oklahoma Market
Table 10 Oklahoma
(Dollars in Thousands)
Three Months ended March 31,
---------------------------------
2009 2008
---------------------------------
Net interest revenue $ 61,822 $ 61,647
Other operating revenue 75,994 78,948
Operating expense 90,742 82,075
Net loans charged off 6,097 3,770
Increase (decrease) in fair value of
mortgage servicing rights 1,955 (1,762)
Gains (losses) on financial instruments, net (2,118) 6,456
Gains on repossessed assets, net 186 24
---------------------------------
Income before taxes 41,000 59,468
Federal and state income tax 15,949 23,133
---------------------------------
Net income $ 25,051 $ 36,335
=================================
Average assets $ 13,564,470 $ 12,722,643
Average loans 6,473,341 6,358,016
Average deposits 7,586,793 6,404,896
Average invested capital 761,470 770,180
Return on assets 0.75% 1.15%
Return on invested capital 13.34 18.97
Efficiency ratio 65.84 58.38
Net charge-offs (annualized) to average loans 0.38 0.24
Oklahoma remains our predominate market. Our Oklahoma offices are located
primarily in the Tulsa and Oklahoma City metropolitan areas. Approximately 52%
of our average loans, 51% of our average deposits and 46% 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.
Net income generated in the Oklahoma market in the first quarter of 2009 totaled
$25.1 million, down $11.3 million from the first quarter of 2008 primarily due
to an $8.7 million increase in operating expenses. Operating expenses increased
due primarily to increased personnel and deposit insurance expenses. In
addition, net gains (losses) on financial instruments in the Oklahoma market
reduced income by $8.6 million. Net gains (losses) on financial instruments in
the Oklahoma market generally consist of mortgage trading securities, which are
held as an economic hedge of changes in the fair value of mortgage servicing
rights. In addition, net gains on financial instruments for the first quarter of
2008 included $6.3 million of gains on Visa, Inc. Class B common stock.
Net interest revenue was flat compared to the first quarter of 2008. Increased
revenue from growth in average earning assets was offset by lower internal funds
transfer credit provided for deposits sold to the funds management unit. Other
operating revenue decreased approximately $3.0 million or 4% primarily due to
lower trust and brokerage and trading revenue.
Net loans charged off totaled $6.1 million or 0.38% of average loans in the
first quarter of 2009, compared with $3.8 million or 0.24% of average loans in
the first quarter of 2008.
Average deposits in the Oklahoma market for the first quarter of 2009 increased
$1.2 billion over the first quarter of 2008. The increase came primarily from
wealth management units, including trust, broker/dealer and private banking.
Consumer banking also contributed to deposit growth.
16
Texas Market
Table 11 Texas
(Dollars in Thousands)
Three Months ended March 31,
------------------------------------
2009 2008
------------------------------------
Net interest revenue $ 34,837 $ 36,913
Other operating revenue 13,328 10,309
Operating expense 32,091 26,189
Net loans charged off 5,444 1,977
Gains (losses) on repossessed assets, net 7 (24)
------------------------------------
Income before taxes 10,637 19,032
Federal and state income tax 3,829 6,852
------------------------------------
Net income $ 6,808 $ 12,180
====================================
Average assets $ 5,749,436 $ 4,930,161
Average loans 3,836,249 3,348,704
Average deposits 3,392,970 3,130,655
Average invested capital 547,010 554,650
Return on assets 0.48% 0.99%
Return on invested capital 5.05 8.83
Efficiency ratio 66.63 55.46
Net charge-offs (annualized) to average loans 0.57 0.24
Texas is our second largest market. Our Texas offices are located primarily in
Dallas, Fort Worth and Houston metropolitan areas. Approximately 31% of our
average loans, 23% of our average deposits and 12% of our consolidated net
income is attributed to the Texas market.
Net income in the Texas market decreased to $6.8 million for the first quarter
of 2009 from $12.2 million for the first quarter of 2008. Net interest revenue
decreased $2.1 million or 6% over the first quarter of 2008. Average outstanding
loans increased $488 million or 15% over the first quarter of 2008. The benefit
of an increase in average loans was largely offset by the reduced benefit from
funds sold to the funds management unit.
Other operating revenue increased 29% over the first quarter of 2008 primarily
due to an increase in mortgage banking revenue due to increased loan refinancing
activity. Operating expenses increased 23% over the first quarter of last year
primarily due to higher personnel costs and deposit insurance expense.
Net loans charged off totaled $5.4 million or 0.57% of average loans for the
first quarter of 2009 and $2.0 million or 0.24% of average loans for the first
quarter of 2008.
Other Markets
For the first quarter of 2009, net income attributable to our New Mexico market
totaled $2.6 million or 5% of consolidated net income, down from $10.6 million
in the first quarter of 2008. The decrease in net income attributed to New
Mexico resulted from lower net interest revenue due to lower internal funds
transfer credit provided for deposits sold to the funds management unit.
For the first quarter of 2009, net income in the Arkansas market increased to
$3.7 million from $2.2 million in the first quarter of 2008 primarily due to
growth in securities trading revenue at our Little Rock office. Average deposits
in our Arkansas market were up $76 million or 118% over the first quarter of
2008 due primarily to commercial banking deposits. Consumer and wealth
management deposits also increased over the first quarter of 2008.
We incurred a net loss of $1.9 million in the Colorado market in the first
quarter of 2009, compared with net income of $3.0 million in the first quarter
of 2008. The loss was primarily due to a $7.5 million increase in net loans
charged off. Net loans charged off totaled $8.0 million during the first quarter
of 2009 and $521 thousand during the first quarter of 2008. Approximately $6.7
million of loans charged off in the first quarter of 2009 was to two borrowers,
one in the communications media industry and one in financial services.
We also incurred a net loss of $6.5 million in the Arizona market in the first
quarter of 2009 compared with net income of $554 thousand in the first quarter
of 2008. The loss was largely due to an increase in net commercial real estate
loans
17
charged off of $9.2 million compared to the first quarter of 2008 and a
$2.2 million decrease in net interest revenue. Net loans charged off totaled
$10.0 million during the first quarter of 2009 and $814 thousand during the
first quarter of 2008. We opened three banking offices in the Phoenix market
during the first quarter of 2009 to build our consumer banking and wealth
management business on the Valley Commerce Bank foundation we acquired in 2005.
We also announced plans to exit the Tucson market which we first entered in
2006.
We continue to grow in the Kansas City market. Net income for the first quarter
of 2009 totaled $1.7 million, up from $489 thousand in the first quarter of 2008
due largely to growth in other operating revenue. Total average deposits
increased $87 million.
Table 12 New Mexico
(Dollars in Thousands)
Three Months ended March 31,
------------------------------------
2009 2008
------------------------------------
Net interest revenue $ 8,468 $ 10,575
Other operating revenue 6,370 5,838
Operating expense 9,136 8,722
Net loans charged off 505 170
Losses on repossessed assets, net (925) (5)
------------------------------------
Income before taxes 4,272 7,516
Federal and state income tax 1,662 2,924
------------------------------------
Net income $ 2,610 $ 4,592
====================================
Average assets $ 1,753,774 $ 1,775,731
Average loans 825,995 853,649
Average deposits 1,114,123 1,045,623
Average invested capital 106,500 118,680
Return on assets 0.60% 1.04%
Return on invested capital 9.94 15.56
Efficiency ratio 61.57 53.14
Net charge-offs (annualized) to average loans 0.24 0.08
Table 13 Arkansas
(Dollars in Thousands)
Three Months ended March 31,
------------------------------------
2009 2008
------------------------------------
Net interest revenue $ 2,953 $ 2,706
Other operating revenue 11,040 7,306
Operating expense 6,939 5,745
Net loans charged off 986 603
Losses on repossessed assets, net (1) -
------------------------------------
Income before taxes 6,067 3,664
Federal and state income tax 2,360 1,425
------------------------------------
Net income $ 3,707 $ 2,239
====================================
Average assets $ 504,629 $ 456,469
Average loans 434,182 419,079
Average deposits 139,981 64,099
Average invested capital 34,660 31,200
Return on assets 2.98% 1.97%
Return on invested capital 43.38 28.86
Efficiency ratio 49.59 57.38
Net charge-offs (annualized) to average loans 0.91 0.58
18
Table 14 Colorado
(Dollars in Thousands)
Three Months ended March 31,
------------------------------------
2009 2008
------------------------------------
Net interest revenue $ 9,078 $ 9,371
Other operating revenue 5,169 3,898
Operating expense 9,036 7,869
Net loans charged off 8,001 521
Losses on repossessed assets, net (276) -
------------------------------------
Income (loss) before taxes (3,066) 4,879
Federal and state income tax (benefit) (1,193) 1,898
------------------------------------
Net income (loss) $ (1,873) $ 2,981
====================================
Average assets $ 2,017,122 $ 1,870,049
Average loans 977,496 799,993
Average deposits 1,141,625 1,107,589
Average invested capital 141,780 141,050
Return on assets (0.38)% 0.64%
Return on invested capital (5.36) 8.50
Efficiency ratio 63.42 59.30
Net charge-offs (annualized) to average loans 3.27 0.26
Table 15 Arizona
(Dollars in Thousands)
Three Months ended March 31,
------------------------------------
2009 2008
------------------------------------
Net interest revenue $ 2,847 $ 4,893
Other operating revenue 1,044 373
Operating expense 4,386 3,545
Net loans charged off 10,080 814
Gains on repossessed assets, net 11 -
------------------------------------
Income (loss) before taxes (10,564) 907
Federal and state income tax (benefit) (4,109) 353
------------------------------------
Net income (loss) $ (6,455) $ 554
====================================
Average assets $ 654,063 $ 596,942
Average loans 589,398 557,931
Average deposits 146,477 131,192
Average invested capital 70,640 53,100
Return on assets (4.00)% 0.37%
Return on invested capital (37.06) 4.20
Efficiency ratio 112.72 67.32
Net charge-offs (annualized) to average loans 6.84 0.58
19
Table 16 Kansas City
(Dollars in Thousands)
Three Months ended March 31,
------------------------------------
2009 2008
------------------------------------
Net interest revenue $ 1,722 $ 1,655
Other operating revenue 5,800 3,666
Operating expense 4,142 3,520
Net loans charged off 534 1,001
------------------------------------
Income before taxes 2,846 800
Federal and state income tax 1,107 311
------------------------------------
Net income $ 1,739 $ 489
====================================
Average assets $ 410,531 $ 318,576
Average loans 312,158 307,206
Average deposits 123,164 35,932
Average invested capital 24,570 26,070
Return on assets 1.72% 0.62%
Return on invested capital 28.70 7.54
Efficiency ratio 55.07 66.15
Net charge-offs (annualized) to average loans 0.68 1.30
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.
Investment securities, which consist primarily of Oklahoma municipal bonds, are
carried at cost and adjusted for amortization of premiums or accretion of
discounts. At March 31, 2009, investment securities were carried at $252 million
and had a fair value of $256 million. Management has the ability and intent to
hold these securities until they mature.
Available for sale securities, which may be sold prior to maturity, are carried
at fair value. Unrealized gains or losses, less deferred taxes, are recorded as
accumulated other comprehensive income in shareholders' equity. The amortized
cost of available for sale securities totaled $7.3 billion at March 31, 2009, up
$531 million compared with December 31, 2008. Mortgage-backed securities
represented 97% of total available for sale securities. The Company holds no
debt securities of corporate issuers.
Table 17 - Available for Sale Securities
(in thousands) March 31, 2009
-----------------------------------------------
Amortized Fair Gross Unrealized
-----------------------
Cost Value Gain Loss
----------------------------------------------
U.S. Treasury $ 6,990 $ 7,088 $ 98 $ -
Municipal and other tax-exempt 19,679 20,436 798 (41)
Mortgage-backed securities:
U. S. agencies 5,494,930 5,618,879 128,208 (4,259)
Private issue 1,556,716 1,177,645 27 (379,098)
---------------------------------------------------------------------------------------
Total mortgage-backed securities 7,051,646 6,796,524 128,235 (383,357)
---------------------------------------------------------------------------------------
Other debt securities 35 35 - -
Federal Reserve Bank stock 32,423 32,423 - -
Federal Home Loan Bank stock 86,172 86,172 - -
Perpetual preferred stock 24,464 16,161 - (8,303)
Equity securities and mutual funds 32,250 32,964 2,323 (1,609)
---------------------------------------------------------------------------------------
Total $7,253,659 $6,991,803 $131,454 $(393,310)
---------------------------------------------------------------------------------------
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 March 31, 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 payments
on the underlying loans are fully guaranteed. At March 31, 2009, approximately
$5.5 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 $5.6 billion at March 31, 2009.
The Company also holds amortized cost of $1.6 billion in mortgage-backed
securities privately issued by publicly-owned financial institutions based on
amortized cost. The fair value of our portfolio of privately issued
mortgage-backed securities totaled $1.2 billion at March 31, 2009.
Credit risk on mortgage-backed securities originated by these issuers is
mitigated by investment in senior tranches with additional collateral support.
None of these securities are backed by sub-prime mortgage loans, collateralized
debt obligations or collateralized loan obligations. Approximately $381 million
of the privately issued mortgage-backed securities consisted of Alt-A mortgage
loans. Approximately 82% 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.
The aggregate gross amount of unrealized losses on available for sale securities
at March 31, 2009 totaled $393 million. Management evaluated the securities with
unrealized losses to determine if the losses were temporary based on the
guidance provided in Financial Accounting Standards Board ("FASB") Staff
Position No. FAS 115-2 and FAS 124-2, "Recognition and Presentation of
Other-Than-Temporary Impairments," which was issued on April 9, 2009. We do not
intend to sell any impaired available for sale securities before fair value
recovers to our current amortized cost and it is more-likely-than-not that we
will not be required to sell impaired securities before fair value recovers.
Separate impairment evaluations were performed on debt and equity securities.
Debt securities were 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 agencies. Impairment of debt
securities consistently rated investment grade is considered temporary unless
specific contrary information is identified. None of the debt securities
consistently rated investment grade were considered to be other-than-temporarily
impaired at March 31, 2009.
Approximately $444 million of our portfolio of 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 $167 million before recognition of
any other-than-temporary impairment charges. Impairment of securities rated
below investment grade 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% for the remainder of 2009, dropping
to 8% in 2010 and holding at 8% thereafter.
o Housing price depreciation - starting with current depreciated housing
prices based on information derived from the Office of Federal Housing
Enterprise Oversight data, decreasing by an additional 10% over the
remainder of 2009 and holding at that level thereafter.
o Loss severity - held constant at 27% of the then-current depreciated
housing price at estimated foreclosure date. Loss severity includes
estimated holding and disposal expenses.
o Discount rates - estimated cash flows were discounted at rates that range
from 5.50% to 6.14% based on our current expected yields.
We also use an adjusted loan to value ratio as part of our evaluation of whether
the unrealized losses on these securities are temporary or other-than-temporary.
The adjusted loan to value ratio is based on the original loan to value ratio
inherent in the security, adjusted for changes in housing prices, prepayment
speeds, default rates and credit enhancements. A higher adjusted loan to value
ratio indicates a greater likelihood that projected cash flows may result
21
in losses. A shortfall between our current amortized cost and the present value
of expected cash flows we are likely to collect, based on all available
information, is referred to as the credit loss. Credit loss is the amount
recognized in net income.
Based on our evaluation, four securities were identified with
other-than-temporary impairment at March 31, 2009. Unrealized losses totaled $46
million and estimated credit losses totaled $7.0 million on these securities.
Estimated credit losses were charge against earnings for the first quarter of
2009. The difference between total unrealized losses and estimated credit losses
on these securities was charged against equity, net of deferred taxes.
A distribution of the amortized cost (after recognition of the
other-than-temporary impairment) and fair value by adjusted loan to value ratio
is presented in Table 18.
Table 18 Below Investment Grade Debt Securities at March 31, 2009
(in thousands)
Adjusted LTV Ratio Amortized Cost Fair Value
---------------------------------------------------
< 70 % $ 58,922 $ 37,282
70 < 75 129,551 79,982
75 < 80 148,039 95,158
80 < 85 89,608 58,141
>= 85 11,028 6,281
---------------------------------------------------
Total $ 437,148 $ 276,844
---------------------------------------------------
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 have a current carrying value of $24 million. Our carrying value
of these stocks has been reduced by $22 million of other-than-temporary
impairment charges. The aggregate fair value of these preferred stocks was $16
million at March 31, 2009. Although none of the institutions that issued these
stocks were in default, one of the preferred stocks was downgraded to below
investment grade by at least one of the nationally-recognized rating agencies.
We recognized an $8.0 million other-than-temporary impairment loss on the
preferred stocks of that issuer during the first quarter of 2009. 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.
Certain mortgage-backed securities, identified as mortgage trading securities,
have been designated as economic hedges of mortgage servicing rights. These
securities are carried at fair value with changes in fair value recognized in
current period income. These securities are held with the intent that gains or
losses will offset changes in the fair value of mortgage servicing rights. The
Company also maintains a separate trading portfolio. Trading portfolio
securities, which are also carried at fair value with changes in fair value
recognized in current period income, are acquired and held with the intent to
sell at a profit to the Company.
Bank-Owned Life Insurance
The Company has approximately $239 million of bank-owned life insurance at March
31, 2009. This investment is expected to provide a long-term source of earnings
to support existing employee benefit programs. Approximately $206 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 March 31, 2009, the
cash surrender value represented by the underlying fair value of investments
held in separate accounts was approximately $205 million and cash surrender
value represented by the value of the stable value wrap was approximately $700
thousand. The stable value wrap was provided by a well-rated, domestic financial
institution. The remaining cash surrender value of $33 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 $12.6
billion at March 31, 2009, a $236 million or 7% annualized decrease since
December 31, 2008. Commercial real estate loans and residential mortgage loans
increased during the first quarter of 2009. Commercial loans and consumer loans
decreased during the same period.
22
---------------------------------------------------------------------------------------------------------------------
Table 19 - Loans
(In thousands)
March 31, Dec. 31, Sept. 30, June 30, March 31,
2009 2008 2008 2008 2008
---------------------------------------------------------------------------------
Commercial:
Energy $ 2,329,237 $ 2,311,813 $ 2,099,996 $ 1,895,050 $ 1,966,996
Services 1,962,297 2,038,451 1,975,604 1,848,360 1,784,723
Wholesale/retail 1,133,275 1,165,099 1,199,216 1,226,875 1,206,224
Manufacturing 514,748 497,957 519,485 542,019 542,297
Healthcare 747,299 777,154 778,819 747,434 733,086
Agriculture 193,863 197,629 229,447 253,198 248,345
Other commercial and industrial 220,811 423,500 471,235 525,637 475,187
---------------------------------------------------------------------------------------------------------------------
Total commercial 7,101,530 7,411,603 7,273,802 7,038,573 6,956,858
---------------------------------------------------------------------------------------------------------------------
Commercial real estate:
Construction and land development 879,368 926,226 968,522 1,021,135 1,066,096
Retail 424,565 371,228 375,929 378,241 409,690
Office 486,065 459,357 470,383 422,558 414,466
Multifamily 344,227 316,596 268,614 251,325 236,787
Industrial 150,488 149,367 151,187 180,358 161,068
Other real estate loans 447,368 478,474 479,357 573,880 543,817
---------------------------------------------------------------------------------------------------------------------
Total commercial real estate 2,732,081 2,701,248 2,713,992 2,827,497 2,831,924
---------------------------------------------------------------------------------------------------------------------
Residential mortgage:
Permanent mortgage 1,339,957 1,273,275 1,193,488 1,130,417 1,052,785
Home equity 479,993 479,299 476,465 477,180 476,984
---------------------------------------------------------------------------------------------------------------------
Total residential mortgage 1,819,950 1,752,574 1,669,953 1,607,597 1,529,769
---------------------------------------------------------------------------------------------------------------------
Consumer:
Indirect automobile 650,370 692,615 721,390 735,098 685,803
Other consumer 335,985 317,966 300,833 309,273 291,401
---------------------------------------------------------------------------------------------------------------------
Total consumer 986,355 1,010,581 1,022,223 1,044,371 977,204
---------------------------------------------------------------------------------------------------------------------
Total $ 12,639,916 $ 12,876,006 $ 12,679,970 $ 12,518,038 $ 12,295,755
---------------------------------------------------------------------------------------------------------------------
The commercial loan portfolio decreased $310 million during the first quarter of
2009 to $7.1 billion at March 31, 2009. The decrease in outstanding commercial
loans was generally consistent across most sectors of the portfolio.
Energy loans totaled $2.3 billion or 18% of total loans. Outstanding energy
loans increased $17 million during the first quarter of 2009. Approximately $2.0
billion of energy loans were to oil and gas producers, up $15 million from
December 31, 2008. The amount of credit available to these customers generally
depends on a percentage of the value of their proven energy reserves based on
anticipated prices. The energy category also included $163 million of loans to
borrowers that provide services to the energy industry, $93 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 energy
category of our loan portfolio is distributed $1.1 billion in Oklahoma, $761
million in Texas and $426 million in Colorado.
The services sector of the loan portfolio totaled $2.0 billion or 16% of total
loans and consists of a large number of loans to a variety of businesses,
including communications, gaming, financial services and transportation
services. Outstanding loans to the services sector of the loan portfolio
decreased $76 million during the first quarter of 2009. Approximately $1.2
billion of the services category is made up of loans with individual balances of
less than $10 million. Approximately $690 million of the outstanding balance of
services loans is attributed to Texas, $587 million to Oklahoma, $242 million to
New Mexico, $157 million to Colorado and $141 million to Arizona.
Other notable loan concentrations by primary industry of the borrowers are
presented in Table 19.
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 March 31, 2009, the
outstanding principal balance of these loans totaled $2.1 billion. Substantially
all of these loans are to borrowers with local market relationships. BOK
Financial serves as the agent lender in approximately 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.
23
Commercial real estate loans totaled $2.7 billion or 22% of the loan portfolio
at March 31, 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 increased $31 million
from the previous quarter end. Construction and land development loans decreased
$47 million from December 31, 2008 to $879 million at March 31, 2009 due to
payments, foreclosures and charge-offs. Approximately $246 million of
outstanding construction and land development loans are attributed to the
Oklahoma market, $223 million to Texas, $165 million to Colorado, $131 million
to Arizona and $87 million to New Mexico.
Loans secured by retail facilities increased $53 million and other commercial
real estate loans decreased $31 million. Loans secured by multifamily
residential properties increased $27 million and loans secured by office
buildings increased $26 million. The geographic distribution of the $1.9 billion
of commercial real estate loans excluding construction land and land development
loans consisted of $635 million in Oklahoma, $594 million in Texas, $229 million
in New Mexico, $155 million in Arizona, $113 million in Arkansas and $102
million in Colorado. Other commercial real estate loans in the Arizona market
included $54 million secured by retail facilities and $49 million secured by
office facilities.
Residential mortgage loans totaled $1.8 billion, up $67 million since December
31, 2008. Permanent 1-4 family mortgage loans increased $67 million and home
equity loans increased $694 thousand. We have no concentration in sub-prime
residential mortgage loans and our mortgage loan portfolio does not include
payment option adjustable rate mortgage loans or loans with initial rates that
are below market. Our portfolio of permanent 1- 4 family mortgage loans includes
$124 million of community development loans. These loans were generally
underwritten to prime standards and required full documentation. Approximately
$1.2 billion of our residential mortgage loan portfolio is attributed to
borrowers in Oklahoma and $337 million to borrowers in Texas.
At March 31, 2009, consumer loans included $650 million of indirect automobile
loans. Approximately $404 million of these loans were purchased from dealers in
Oklahoma and $162 million were purchased from dealers in Arkansas. The remaining
$84 million were purchased from dealers in Texas. Indirect automobile loans
decreased $42 million since December 31, 2008, primarily due to the Company's
decision to exit the business in the first quarter of 2009 in favor of a
customer-focused direct lending approach.
24
---------------------------------------------------------------------------------------------------------------------
Table 20 - Loans by Principal Market Area
(In thousands)
March 31, Dec. 31, Sept. 30, June 30, March 31,
2009 2008 2008 2008 2008
---------------------------------------------------------------------------------
Oklahoma:
Commercial $ 3,119,362 $ 3,356,520 $ 3,368,823 $ 3,228,179 $ 3,248,424
Commercial real estate 881,620 843,576 827,357 875,546 940,686
Residential mortgage 1,234,417 1,196,924 1,134,066 1,099,277 1,080,882
Consumer 562,021 579,809 580,211 601,184 586,695
---------------------------------------------------------------------------------
Total Oklahoma $ 5,797,420 $ 5,976,829 $ 5,910,457 $ 5,804,186 $ 5,856,687
---------------------------------------------------------------------------------
Texas:
Commercial $ 2,277,186 $ 2,353,860 $ 2,205,169 $ 2,166,925 $ 2,124,192
Commercial real estate 816,830 825,769 853,653 889,364 838,781
Residential mortgage 337,044 315,438 307,655 299,996 262,305
Consumer 214,134 212,820 214,133 204,081 168,949
---------------------------------------------------------------------------------
Total Texas $ 3,645,194 $ 3,707,887 $ 3,580,610 $ 3,560,366 $ 3,394,227
---------------------------------------------------------------------------------
New Mexico:
Commercial $ 393,180 $ 418,732 $ 442,644 $ 451,225 $ 472,543
Commercial real estate 315,511 286,574 281,061 271,177 258,731
Residential mortgage 99,805 98,018 95,165 89,469 85,834
Consumer 19,900 18,616 18,296 16,977 14,977
---------------------------------------------------------------------------------
Total New Mexico $ 828,396 $ 821,940 $ 837,166 $ 828,848 $ 832,085
---------------------------------------------------------------------------------
Arkansas:
Commercial $ 99,955 $ 103,446 $ 104,630 $ 96,775 $ 100,489
Commercial real estate 133,227 134,015 127,925 124,049 130,956
Residential mortgage 17,145 16,875 16,941 19,527 16,621
Consumer 168,971 175,647 185,543 197,979 180,551
---------------------------------------------------------------------------------
Total Arkansas $ 419,298 $ 429,983 $ 433,039 $ 438,330 $ 428,617
---------------------------------------------------------------------------------
Colorado:
Commercial $ 675,223 $ 660,546 $ 598,519 $ 489,844 $ 486,525
Commercial real estate 267,035 261,820 266,739 276,062 261,099
Residential mortgage 59,120 53,875 49,676 38,517 31,011
Consumer 14,599 16,141 18,328 16,367 17,552
---------------------------------------------------------------------------------
Total Colorado $ 1,015,977 $ 992,382 $ 933,262 $ 820,790 $ 796,187
---------------------------------------------------------------------------------
Arizona:
Commercial $ 211,953 $ 211,356 $ 213,861 $ 207,173 $ 174,360
Commercial real estate 285,841 319,525 326,615 351,058 361,567
Residential mortgage 61,605 62,123 58,800 53,321 50,719
Consumer 5,261 6,075 5,551 5,315 6,815
---------------------------------------------------------------------------------
Total Arizona $ 564,660 $ 599,079 $ 604,827 $ 616,867 $ 593,461
---------------------------------------------------------------------------------
Kansas / Missouri:
Commercial $ 324,671 $ 307,143 $ 340,156 $ 398,452 $ 350,325
Commercial real estate 32,017 29,969 30,642 40,241 40,104
Residential mortgage 10,814 9,321 7,650 7,490 2,397
Consumer 1,469 1,473 2,161 2,468 1,665
---------------------------------------------------------------------------------
Total Kansas / Missouri $ 368,971 $ 347,906 $ 380,609 $ 448,651 $ 394,491
---------------------------------------------------------------------------------
Total BOK Financial loans $ 12,639,916 $ 12,876,006 $ 12,679,970 $ 12,518,038 $ 12,295,755
---------------------------------------------------------------------------------
Loan Commitments
BOK Financial enters into certain off-balance sheet arrangements in the normal
course of business. These arrangements included loan commitments which totaled
$5.0 billion and standby letters of credit which totaled $562 million at March
31, 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
25
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 March 31, 2009.
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 March 31, 2009, the
principal balance of loans sold subject to recourse obligations totaled $379
million. Substantially all of these loans are to borrowers in our primary
markets including $266 million to borrowers in Oklahoma, $41 million to
borrowers in Arkansas, $21 million to borrowers in New Mexico, $18 million to
borrowers in the Kansas City area and $17 million to borrowers in Texas. The
separate reserve for these off-balance sheet commitments was $9.2 million at
March 31, 2009. Approximately 3.71% of the loans sold with recourse with an
outstanding principal balance of $13 million were either delinquent more than 90
days, in bankruptcy or in foreclosure. The provision for credit losses on loans
sold with recourse, which is included in mortgage banking costs, was $1.8
million for the first quarter of 2009. Net losses charged against the reserve
totaled $1.3 million for the first quarter of 2009.
Customer Derivative Programs
The Company offers programs that permit its customers to hedge various risks,
including fluctuations in energy, cattle and other agricultural product prices,
interest rates and foreign exchange rates, or to take positions in derivative
contracts. Each of these programs work essentially the same way. Derivative
contracts are executed between the customers and BOK Financial. Offsetting
contracts are executed between the Company and selected counterparties to
minimize the risk to us of changes in commodity prices, interest rates or
foreign exchange rates. The counterparty contracts are identical to the customer
contracts, except for a fixed pricing spread or a fee paid to us as compensation
for administrative costs, credit risk and profit.
The customer derivative programs create credit risk for potential amounts due to
the Company from its customers and from the counterparties. Customer credit risk
is monitored through existing credit policies and procedures. The effects of
changes in commodity prices, interest rates or foreign exchange rates are
evaluated across a range of possible options to determine the maximum exposure
we are willing to have individually to any customer. Customers may also be
required to provide margin collateral to further limit our credit risk.
Counterparty credit risk is evaluated through existing policies and procedures.
This evaluation considers the total relationship between BOK Financial and each
of the counterparties. Individual limits are established by management, approved
by Credit Administration and reviewed by the Asset / Liability Committee. Margin
collateral is required if the exposure between the Company and any counterparty
exceeds established limits. Based on declines in the counterparties' credit
ratings, these limits may be reduced and additional margin collateral may be
required.
A deterioration of the credit standing of one or more of the customers or
counterparties to these contracts may result in BOK Financial recognizing a loss
as the fair value of the affected contracts may no longer move in tandem with
the offsetting contracts. This occurs if the credit standing of the customer or
counterparty deteriorated such that either the fair value of underlying
collateral no longer supported the contract or the customer or counterparty's
ability to provide margin collateral was impaired.
Derivative contracts are carried at fair value. At March 31, 2009, the net fair
values of derivative contracts reported as assets under these programs totaled
$627 million, down from $656 million at December 31, 2008 due to cash
settlements and reduced transaction volumes. At March 31, 2009, derivative
contracts carried as assets included energy contracts with fair values of $431
million, interest rate contracts with fair values of $144 million, and foreign
exchange contracts with fair values of $46 million. The aggregate net fair
values of derivative contracts held under these programs reported as liabilities
totaled $640 million.
At March 31, 2009, total derivative assets were reduced by $84 million of cash
collateral received from counterparties and total derivative liabilities were
reduced by $10 million of cash collateral paid to counterparties related to
instruments executed with the same counterparty under a master netting agreement
as permitted by Financial Accounting Standards Board Staff Position FIN 39-1,
"Amendment of FASB Interpretation No. 39."
A table showing the fair value of derivative assets and liabilities, net of cash
margin, is presented in Footnote 3 to the Consolidated Financial Statements
(Unaudited), which follows this report.
26
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 March 31, 2009
was (in thousands):
Energy companies $202,025
Customers 180,169
Banks 128,412
Exchanges 27,792
Other 4,078
---------
Fair value of customer hedge asset derivative contracts, net $542,476
========
The largest net amount due from a single counterparty, a domestic subsidiary of
a major energy company, at March 31, 2009 was $187 million. This amount was
fully offset by 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 equivalent to $25 per barrel of oil would increase the
fair value of derivative assets by $452 million. An increase in prices
equivalent to $55 per barrel of oil would decrease the fair value of derivative
assets by $75 million as current prices move closer to the fixed prices embedded
in our existing contracts. Further increases in prices equivalent to $115 per
barrel of oil would increase the fair value of our derivative assets by $448
million.
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 $262 million or 2.07% of
outstanding loans and 77% of non-accruing loans at March 31, 2009. The allowance
for loan losses was $251 million and the reserve for off-balance sheet credit
losses was $11 million. At December 31, 2008, the combined allowance for loan
losses and off-balance sheet credit losses was $248 million or 1.93% of
outstanding loans and 83% of non-accruing loans.
Net loans charged off during the first quarter of 2009 totaled $31.9 million
compared to $33.7 million in the previous quarter and $8.9 million in the first
quarter of 2008. The ratio of net loans charged off to average outstanding loans
was 1.00% for the first quarter of 2009 compared with 1.05% for the fourth
quarter of 2008 and 0.29% for the first quarter of 2008.
Gross loans charged off in the first quarter of 2009 decreased to $34.5 million
from $35.7 million in the fourth quarter of 2008. Gross loans charged off
included $15.8 million of commercial loans, $10.2 million of commercial real
estate loans, $6.8 million of consumer loans and $1.8 million of residential
mortgage loans. Recoveries of loans previously charged off increased to $2.6
million in the first quarter of 2009 from $2.0 million in the previous quarter.
Commercial loans charged off during the first quarter of 2009 included $8.7
million from the services sector of the loan portfolio and $3.0 million from the
wholesale / retail sector of the loan portfolio. Commercial loans charged off
were primarily in the Colorado market. Commercial real estate loans charged off
during the first quarter of 2009 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 $4.7 million for the first quarter of 2009,
down $410 thousand from the previous quarter. Net charge-offs of indirect auto
loans totaled $3.0 million for the first quarter of 2009 and $2.9 million for
the fourth quarter of 2008. Net indirect auto loans charged off were $1.6
million in the Oklahoma market, $904 thousand in the Arkansas market and $401
thousand in the Texas market. Approximately 2.64% of the indirect automobile
loan portfolio is past due 30 days or more, including 2.60% in Oklahoma, 2.62%
in Arkansas and 2.84% in Texas. At December 31, 2008, approximately 3.36% of the
indirect automobile loan portfolio was past due 30 days or more. This compares
to a national average of 3.02% for indirect automobile loans past due 30 days or
more at December 31, 2008.
The Company considers the credit risk from loan commitments and letters of
credit in its evaluation of the adequacy of the reserve for loan losses. A
separate reserve for off-balance sheet credit risk is maintained. Table 20
presents the trend of reserves for off-balance sheet credit losses and the
relationship between the reserve and loan commitments. The relationship between
the combined reserve for credit losses and outstanding loans is also presented
for comparison with peer banks and others who have not adopted the preferred
presentation. The provision for credit losses included the combined charge to
expense for both the reserve for loan losses and the reserve for off-balance
sheet credit losses. All
27
losses incurred from lending activities will ultimately be reflected in
charge-offs against the reserve for loan losses following funds advanced against
outstanding commitments and after the exhaustion of collection efforts.
------------------------------------------------------------------------------------------------------------------------------
Table 21 - Summary of Loan Loss Experience
(In thousands)
Three Months Ended
----------------------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
2009 2008 2008 2008 2008
----------------------------------------------------------------------------------
Reserve for loan losses:
Beginning balance $ 233,236 $ 186,516 $ 154,018 $ 136,584 $ 126,677
Loans charged off:
Commercial 15,791 25,837 11,393 33,502 4,244
Commercial real estate 10,215 573 14,394 2,572 1,602
Residential mortgage 1,765 2,476 2,865 1,068 814
Consumer 6,764 6,795 5,274 4,384 4,418
------------------------------------------------------------------------------------------------------------------------------
Total 34,535 35,681 33,926 41,526 11,078
------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 356 220 11,882 842 435
Commercial real estate 41 7 175 98 52
Residential mortgage 214 122 65 121 58
Consumer 2,053 1,673 1,590 1,474 1,676
------------------------------------------------------------------------------------------------------------------------------
Total 2,664 2,022 13,712 2,535 2,221
------------------------------------------------------------------------------------------------------------------------------
Net loans charged off 31,871 33,659 20,214 38,991 8,857
Provision for loan losses 49,637 80,379 52,712 56,425 18,764
------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 251,002 $ 233,236 $ 186,516 $ 154,018 $ 136,584
------------------------------------------------------------------------------------------------------------------------------
Reserve for off-balance sheet credit losses:
Beginning balance $ 15,166 $ 22,544 $ 22,545 $ 19,660 $ 20,853
Provision for off-balance sheet credit losses (4,597) (7,378) (1) 2,885 (1,193)
------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 10,569 $ 15,166 $ 22,544 $ 22,545 $ 19,660
------------------------------------------------------------------------------------------------------------------------------
Total provision for credit losses $ 45,040 $ 73,001 $ 52,711 $ 59,310 $ 17,571
------------------------------------------------------------------------------------------------------------------------------
Reserve for loan losses to loans outstanding
at period-end 1.99% 1.81% 1.47% 1.23% 1.11%
Net charge-offs (annualized)
to average loans 1.00 1.05 0.64 1.26 0.29
Total provision for credit losses (annualized)
to average loans 1.41 2.28 1.67 1.91 0.58
Recoveries to gross charge-offs 7.71 5.67 40.42 6.10 20.05
Reserve for loan losses as a multiple of net
charge-offs (annualized) 1.97x 1.73x 2.31x 0.99x 3.86x
Reserve for off-balance sheet credit losses to
off-balance sheet credit commitments 0.19% 0.27% 0.38% 0.36% 0.32%
Combined reserves for credit losses to loans
outstanding at period-end 2.07 1.93 1.65 1.41 1.27
------------------------------------------------------------------------------------------------------------------------------
Impaired loans as defined by Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan - an amendment of FASB
Statements No. 5 and 15," totaled $309 million at March 31, 2009 and $270
million at December 31, 2008. All of these loans are non-accruing. At March 31,
2009, $233 million of impaired loans had $19 million of specific reserves and
$76 million had no specific reserves. At December 31, 2008, $194 million of
impaired loans had $29 million of specific reserves and $76 million had no
specific reserves. Losses of $19 million were charged off in the first quarter
of 2009 on impaired loans with no specific reserves.
Nonspecific reserves are maintained for risks beyond factors specific to an
individual loan or those identified through migration analysis. A range of
potential losses is determined for each risk factor identified. The range of
nonspecific reserves for general economic factors includes their effect on our
commercial, commercial real estate, residential mortgage and consumer loan
portfolios. Nonspecific reserves attributed to general economic conditions
increased in the first quarter of 2009. Weakness in the economy continues to
become more apparent due to disruption in the credit markets, lower consumer
confidence and continued weakness in residential real estate markets.
The provision for credit losses totaled $45.0 million for the first quarter of
2009, $73.0 million for the fourth quarter of 2008 and $17.6 million for the
first quarter of 2008. Factors considered in determining the provision for
credit losses for the first quarter of 2009 included trends of increasing net
charge-offs and nonperforming loans, concentrations in energy, commercial real
estate and residential homebuilder loans and deteriorating trends in the general
economy. The application of statistical migration factors to our loan portfolio
identified a trend toward more rapid deterioration from pass grading in the
current recession. The increased provision also considered growth of potential
problem loans.
28
Nonperforming Assets
Non-performing assets totaled $414 million or 3.26% of outstanding loans and
repossessed assets at March 31, 2009, up $72 million since December 31, 2008. In
addition to $339 million of non-accruing loans, non-performing assets included
$14 million of restructured residential mortgage loans and $61 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 $11 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.
Non-accruing loans totaled $339 million or 2.68% of outstanding loans at March
31, 2009, compared with $300 million or 2.33% of outstanding loans at December
31, 2008. Growth in non-accruing loans was concentrated primarily in the Arizona
and Colorado markets. Approximately $112 million or 20% of loans in the Arizona
market were non-accruing at March 31, 2009, up from $81 million or 14% at
December 31, 2008. Approximately $39 million or 3.80% of loans in the Colorado
market were non-accruing at March 31, 2009, up from $32 million or 3.27% of
loans in the Colorado market at December 31, 2008. Non-accruing loans in
Oklahoma and Texas, our largest markets, totaled $106 million or 1.82% of
outstanding loans and $55 million or 1.52% of outstanding loans, respectively,
at March 31, 2009. Non-accruing loans decreased $3 million in the Oklahoma
market and increased $12 million in the Texas market during the first quarter.
Newly identified non-accruing loans totaled $111 million. Cash payments received
on non-accruing loans totaled $15 million, $20 million of non-accruing loans
were charged-off and $31 million of non-accruing loans were transferred to real
estate owned and other repossessed assets.
Non-accruing commercial and commercial real estate loans included $48 million of
shared national credits at March 31, 2009. This represented 2% of the
outstanding principal balance of shared national credits.
Non-accruing commercial loans totaled $129 million or 1.81% of total commercial
loans at March 31, 2009. Approximately $50 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. In addition, $30 million of non-accruing commercial loans are in
the services sector of the loan portfolio. Approximately 1.54% of loans in the
services sector of the portfolio were non-accruing at March 31, 2009.
Non-accruing loans to the manufacturing sector of the portfolio totaled $18
million or 3.55% of all loans to the manufacturing sector at March 31, 2009, up
$11 million since year-end. At the same time, non-accruing loans to the
wholesale / retail sector of the loan portfolio decreased $10 million. The
distribution of non-accruing commercial loans among our various markets included
$68 million or 2.17% of commercial loans in Oklahoma ($59 million or 1.02% of
loans in the Oklahoma market excluding SemGroup), $36 million or 1.60% of
commercial loans in Texas, $15 million or 2.16% of commercial loans in Colorado
and $5 million or 1.36% of commercial loans in New Mexico. Non-accruing
commercial loans decreased by $6.3 million during the first quarter of 2009.
Non-accruing commercial real estate loans totaled $175 million or 6.42% of
outstanding commercial real estate loans at March 31, 2009. Non-accruing
commercial real estate loans included $100 million of land and residential lot
and construction loans, $27 million of loans secured by multifamily residential
properties and $23 million of loans secured by office buildings. The
distribution of non-accruing commercial real estate loans among our various
markets included $102 million or 36% of commercial real estate loans in Arizona,
$26 million or 3.00% of commercial real estate loans in Oklahoma, $23 million or
8.68% of commercial real estate loans in Colorado, $10 million or 3.16% of
commercial real estate loans in New Mexico and $8 million or 0.92% of commercial
real estate loans in Texas. Non-accruing commercial real estate loans increased
$38 million during the first quarter of 2009, primarily due to single family
construction and land development loans in the Arizona and Colorado markets.
Non-accruing consumer loans primarily consist of permanent residential mortgage
loans which totaled $33 million or 1.80% of outstanding residential mortgage
loans at March 31, 2009, a $6.6 million increase over December 31, 2008.
Non-accruing home equity loans totaled $1.3 million or 0.27% of total home
equity loans. The distribution of non-accruing residential mortgage loans among
our various markets included $11 million in Oklahoma, $11 million in Texas and
$6 million in Arizona.
Real estate and other repossessed assets totaled $61 million at March 31, 2009,
up from $32 million at December 31, 2008. Real estate and other repossessed
assets included $34 million of 1-4 family residential properties and residential
land development properties, $11 million of developed commercial real estate
properties, $8 million of equipment, $6 million of undeveloped land and $2
million of automobiles. The distribution of real estate owned and other
repossessed assets among our various markets included $16 million in Arizona,
$12 million in Texas, $9 million in Kansas City, $8 million in New Mexico and $6
million in Arkansas.
29
----------------------------------------------------------------------------------------------------------------------
Table 22 - Nonperforming Assets
(In thousands)
March 31, Dec. 31, Sept. 30, June 30, March 31,
2009 2008 2008 2008 2008
-----------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 128,501 $ 134,846 $ 105,757 $ 69,679 $ 41,966
Commercial real estate 175,487 137,279 78,235 60,456 40,399
Residential mortgage 34,182 27,387 27,075 17,861 15,960
Consumer 1,065 561 758 611 812
----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 339,235 300,073 211,825 148,607 99,137
Renegotiated loans (3) 13,623 13,039 12,326 11,840 11,850
----------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 352,858 313,112 224,151 160,447 110,987
Other nonperforming assets 61,383 29,179 28,088 21,025 15,112
----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 414,241 $ 342,291 $ 252,239 $ 181,472 $ 126,099
----------------------------------------------------------------------------------------------------------------------
Nonaccrual loans by principal market:
Oklahoma $ 105,536 $ 108,367 $ 87,885 $ 57,155 $ 52,211
Texas 55,225 42,934 29,141 20,860 8,157
New Mexico 18,046 16,016 12,293 9,838 7,497
Arkansas 4,078 3,263 3,386 2,924 2,866
Colorado (4) 38,567 32,415 20,980 23,812 8,101
Arizona 111,772 80,994 54,832 33,482 18,811
Kansas / Missouri 6,011 16,084 3,308 536 1,494
----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans $ 339,235 $ 300,073 $ 211,825 $ 148,607 $ 99,137
----------------------------------------------------------------------------------------------------------------------
Nonaccrual loans by loan portfolio sector:
Commercial:
Energy $ 49,618 $ 49,364 $ 49,839 $ 12,342 $ 475
Manufacturing 18,248 7,343 6,479 6,731 9,274
Wholesale / retail 8,650 18,773 7,806 3,735 3,868
Agriculture 115 680 755 811 1,848
Services 30,226 36,873 26,581 30,080 23,849
Healthcare 14,288 12,118 3,300 3,791 2,079
Other 7,356 9,695 10,997 12,189 573
----------------------------------------------------------------------------------------------------------------------
Total commercial 128,501 134,846 105,757 69,679 41,966
Commercial real estate:
Land development and construction 99,922 76,082 53,624 45,291 29,439
Retail 9,893 15,625 13,011 7,591 5,258
Office 23,305 7,637 3,022 3,304 1,985
Multifamily 27,198 24,950 896 896 1,906
Industrial 575 6,287 390 396 -
Other commercial real estate 14,594 6,698 7,292 2,978 1,811
----------------------------------------------------------------------------------------------------------------------
Total commercial real estate 175,487 137,279 78,235 60,456 40,399
Residential mortgage:
Permanent mortgage 32,848 26,233 26,401 17,039 15,135
Home equity 1,334 1,154 674 822 825
----------------------------------------------------------------------------------------------------------------------
Total residential mortgage 34,182 27,387 27,075 17,861 15,960
Consumer 1,065 561 758 611 812
----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans $ 339,235 $ 300,073 $ 211,825 $ 148,607 $ 99,137
----------------------------------------------------------------------------------------------------------------------
Ratios:
Reserve for loan losses to nonperforming loans 71.13% 74.49% 83.21% 95.99% 123.06%
Nonperforming loans to period-end loans 2.79 2.43 1.77 1.28 0.90
----------------------------------------------------------------------------------------------------------------------
Loans past due (90 days) (1) (2) $ 46,123 $ 19,123 $ 20,213 $ 10,683 $ 11,266
----------------------------------------------------------------------------------------------------------------------
(1) Includes residential mortgages guaranteed
by agencies of the U.S. Government. $ 395 $ 872 $ 1,210 $ 1,015 $ 788
(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. 10,514 10,396 9,604 8,638 8,386
(4) Includes loans subject to First United
Bank sellers escrow. 11,287 13,181 13,262 11,973 8,101
----------------------------------------------------------------------------------------------------------------------
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
30
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 $132 million at March 31, 2009 and $95 million
at December 31, 2008. The current composition of potential problem loans by
primary industry included real estate - $81 million, manufacturing - $16
million, services - $13 million and wholesale/retail - $12 million. Potential
problem real estate loans included $43 million of residential development loans
on properties primarily located in Arizona and Colorado, $13 million of loans
secured by retail facilities primarily located in Arizona and $11 million of
loans secured by office buildings.
As previously noted, 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. The energy sector of the
economy will be challenged if commodity prices remain in their current range for
an extended period of time. 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 first quarter of 2009, approximately 65% of our
funding was provided by average deposit accounts, 21% from borrowed funds, 2%
from long-term subordinated debt and 8% from shareholders' equity. Our funding
sources, which primarily included 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"), provide adequate
liquidity to meet our operating needs.
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 $14.8 billion at March 31, 2009 and represented
approximately 65% of total average liabilities and capital for the first quarter
of 2009, compared with $14.1 billion and 63% of total average liabilities and
capital for the fourth quarter of 2008.
Average deposits increased $756 million over the fourth quarter of 2008. Average
interest-bearing transaction deposit accounts continued to grow in the first
quarter of 2009, up $494 million over the fourth quarter of 2008, including a
$179 million increase in average deposits due to the movement of customer funds
from managed money market products into deposits. Average demand deposits
increased $152 million over the fourth quarter of 2008. Average time deposits
increased $106 million over the fourth quarter of 2008.
Growth in our average interest-bearing transaction deposit accounts over the
fourth quarter of 2008 included $496 million of wealth management deposits, $369
million of commercial deposits and $221 million of consumer banking deposits.
Average brokered deposits and other non-core deposits decreased $330 million.
Average wealth management time deposits increased $496 million over the fourth
quarter of 2008, including $223 million of deposits generated by our broker /
dealer network, and $214 million generated by our trust division. Growth in
trust division deposits was due largely to movement of customer funds from
managed money market products. Average consumer banking deposits increased $221
million across our various markets. Average commercial banking deposits were up
$369 million, including $265 million from our commercial banking units and $134
million from our treasury services unit.
Brokered deposits and other non-core deposits averaged $1.2 billion in the first
quarter of 2009, down $330 million from the fourth quarter of 2008. Brokered
deposits totaled $447 million at March 31, 2009 compared to a $1.0 billion at
December 31, 2008. 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
Table 23.
31
---------------------------------------------------------------------------------------------------------------------
Table 23 - Deposits by Principal Market Area
(In thousands)
March 31, Dec. 31, Sept. 30, June 30, March 31,
2009 2008 2008 2008 2008
---------------------------------------------------------------------------------
Oklahoma:
Demand $ 1,651,111 $ 1,683,374 $ 1,681,325 $ 1,455,997 $ 1,464,258
Interest-bearing:
Transaction 4,089,838 4,117,729 4,151,430 3,997,136 3,659,002
Savings 95,827 86,476 86,900 90,100 88,141
Time 2,876,313 3,104,933 3,036,297 2,672,401 2,230,110
---------------------------------------------------------------------------------
Total interest-bearing 7,061,978 7,309,138 7,274,627 6,759,637 5,977,253
---------------------------------------------------------------------------------
Total Oklahoma $ 8,713,089 $ 8,992,512 $ 8,955,952 $ 8,215,634 $ 7,441,511
---------------------------------------------------------------------------------
Texas:
Demand $ 1,021,424 $ 1,067,456 $ 956,846 $ 1,046,651 $ 940,141
Interest-bearing:
Transaction 1,527,399 1,460,576 1,543,974 1,713,131 1,708,424
Savings 33,867 32,071 32,400 33,207 32,191
Time 1,054,632 857,416 794,911 723,146 759,892
---------------------------------------------------------------------------------
Total interest-bearing 2,615,898 2,350,063 2,371,285 2,469,484 2,500,507
---------------------------------------------------------------------------------
Total Texas $ 3,637,322 $ 3,417,519 $ 3,328,131 $ 3,516,135 $ 3,440,648
---------------------------------------------------------------------------------
New Mexico:
Demand $ 180,308 $ 155,345 $ 176,477 $ 168,621 $ 169,449
Interest-bearing:
Transaction 401,000 397,382 376,941 417,607 425,976
Savings 17,858 16,289 16,316 16,432 16,141
Time 561,300 522,894 475,560 445,505 455,861
---------------------------------------------------------------------------------
Total interest-bearing 980,158 936,565 868,817 879,544 897,978
---------------------------------------------------------------------------------
Total New Mexico $ 1,160,466 $ 1,091,910 $ 1,045,294 $ 1,048,165 $ 1,067,427
---------------------------------------------------------------------------------
Arkansas:
Demand $ 16,503 $ 16,293 $ 23,565 $ 21,142 $ 20,493
Interest-bearing:
Transaction 63,924 38,566 19,146 24,524 22,091
Savings 1,100 1,083 865 895 945
Time 150,015 75,579 47,684 39,305 39,803
---------------------------------------------------------------------------------
Total interest-bearing 215,039 115,228 67,695 64,724 62,839
---------------------------------------------------------------------------------
Total Arkansas $ 231,542 $ 131,521 $ 91,260 $ 85,866 $ 83,332
---------------------------------------------------------------------------------
Colorado:
Demand $ 111,048 $ 116,637 $ 115,677 $ 109,697 $ 99,584
Interest-bearing:
Transaction 466,276 480,113 440,888 507,260 529,771
Savings 18,905 17,660 19,300 20,245 22,233
Time 584,971 532,475 428,872 423,014 455,262
---------------------------------------------------------------------------------
Total interest-bearing 1,070,152 1,030,248 889,060 950,519 1,007,266
---------------------------------------------------------------------------------
Total Colorado $ 1,181,200 $ 1,146,885 $ 1,004,737 $ 1,060,216 $ 1,106,850
---------------------------------------------------------------------------------
Arizona:
Demand $ 54,362 $ 39,424 $ 45,725 $ 49,895 $ 46,508
Interest-bearing:
Transaction 66,809 56,985 64,463 73,034 84,648
Savings 970 1,014 1,033 1,233 878
Time 54,923 34,290 14,433 6,364 8,395
---------------------------------------------------------------------------------
Total interest-bearing 122,702 92,289 79,929 80,631 93,921
---------------------------------------------------------------------------------
Total Arizona $ 177,064 $ 131,713 $ 125,654 $ 130,526 $ 140,429
---------------------------------------------------------------------------------
Kansas / Missouri:
Demand $ 16,140 $ 3,850 $ 5,548 $ 7,157 $ 6,580
Interest-bearing:
Transaction 11,976 10,999 9,780 10,342 8,754
Savings 117 42 33 26 92
Time 141,505 55,656, 19,794 51,649 33,837
---------------------------------------------------------------------------------
Total interest-bearing 153,598 66,697 29,607 62,017 42,683
---------------------------------------------------------------------------------
Total Kansas / Missouri $ 169,738 $ 70,547 $ 35,155 $ 69,174 $ 49,263
---------------------------------------------------------------------------------
Total BOK Financial deposits $ 15,270,421 $ 14,982,607 $ 14,586,183 $ 14,125,716 $ 13,329,460
---------------------------------------------------------------------------------
32
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 $178
million at March 31, 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 March 31, 2009, the outstanding balance of federal funds purchased
totaled $1.3 billion, securities repurchase agreements totaled $913 million and
Federal Home Loan Bank borrowings totaled $1.3 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 protected
debt is currently outstanding.
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 $900 million at March 31,
2009.
At March 31, 2009, the estimated unused credit available to the subsidiary banks
from our traditional sources and within our internal policy limits was
approximately $5.7 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 $152 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 $80 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. The Company fully repaid the amounts owed under
this credit agreement during the first quarter of 2009.
Equity capital for BOK Financial was $1.9 billion at March 31, 2009, up $85
million from December 31, 2008. Net income less cash dividend paid increased
equity $40 million. Accumulated other comprehensive losses decreased $42 million
during the first quarter of 2009 due primarily to a $69 million decrease in net
unrealized losses on available for sale securities offset by $25 million related
to the non-credit portion of the other-than-temporary impairment of certain debt
securities in the first quarter of 2009. Capital is managed to maximize
long-term value to the shareholders. Factors considered in managing capital
include projections of future earnings, asset growth and acquisition strategies,
and regulatory and debt covenant requirements. Capital management may include
subordinated debt issuance, share repurchase and stock and cash dividends. On
April 28, 2009, the Company's board of directors declared an increase in the
cash dividend to $0.24 per common share payable on or about May 29, 2009 to
shareholders of record as of May 15, 2009.
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.
33
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 first 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 Table 24.
----------------------------------------------------------------------------------------------------------------------
Table 24 - Capital Ratios March 31, Dec. 31, Sept. 30, June 30, March 31,
2009 2008 2008 2008 2008
---------------------------------------------------------------------------
Average total equity to average assets 8.35% 8.57% 8.92% 9.28% 9.78%
Tangible common equity ratio 6.84% 6.64% 7.16% 7.15% 7.83%
Risk-based capital:
Tier 1 capital 9.76 9.42 9.25 8.69 9.35
Total capital 13.20 12.84 12.55 11.69 12.44
Leverage 7.85 7.89 7.94 7.83 8.23
----------------------------------------------------------------------------------------------------------------------
Capital resources of financial institutions are also regularly measured by the
tangible common shareholders' equity ratio. Common shareholders' 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. This non-GAAP measure is a valuable indicator of a
financial institution's capital strength since it eliminates 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 March 31, 2009, BOK Financial's tangible common
shareholders' equity ratio was 6.84%.
Off-Balance Sheet Arrangements
During the third quarter of 2007, Bank of Oklahoma agreed to guarantee rents
totaling $28.4 million over 10 years to the City of Tulsa ("City") as owner of a
building immediately adjacent to the bank's main office. These rents are due for
space rented by third-party tenants in the building as of the date of the
agreement. All guaranteed space has been rented since the date of the agreement.
In return for this guarantee, Bank of Oklahoma will receive 80% of net rent as
defined in an agreement with the City over the next 10 years from space in the
same building that was vacant as of the date of the agreement. The maximum
amount that Bank of Oklahoma may receive under this agreement is $4.5 million.
The fair value of this agreement at inception was zero and no asset or liability
is currently recognized in the Company's financial statements.
Market Risk
Market risk is a broad term for the risk of economic loss due to adverse changes
in the fair value of a financial instrument. These changes may be the result of
various factors, including interest rates, foreign exchange prices, commodity
prices or equity prices. Financial instruments that are subject to market risk
can be classified either as held for trading or held for purposes other than
trading. Market risk excludes changes in fair value due to credit of the
individual issuers of financial instruments.
BOK Financial is subject to market risk primarily through the effect of changes
in interest rates on both its assets held for purposes other than trading and
trading assets. The effects of other changes, such as foreign exchange rates,
commodity prices or equity prices do not pose significant market risk to BOK
Financial. BOK Financial has no material investments in assets that are affected
by changes in foreign exchange rates or equity prices. Energy and agricultural
34
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.
Table 25 - 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 net interest revenue $ (9,776) $(15,711) $ (24,029) $ 3,031 $ 2,089 $(6,633)
(1.2)% (2.5)% (3.5)% 0.5% 0.3% (1.0)%
-------------------------------- --------------- ------------ --- ----------- -------------- -- ----------- ------------
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.
35
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 March 31, 2009, the VAR was $2.0 million. The
greatest value at risk during the first quarter of 2009 was $2.3 million.
Controls and Procedures
As required by Rule 13a-15(b), BOK Financial's management, including the Chief
Executive Officer and Chief Financial Officer, conducted an evaluation as of the
end of the period covered by their report, of the effectiveness of the company's
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures were effective as
of the end of the period covered by this report. As required by Rule 13a-15(d),
BOK Financial's management, including the Chief Executive Officer and Chief
Financial Officer, also conducted an evaluation of the company's internal
controls over financial reporting to determine whether any changes occurred
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, the company's internal controls over
financial reporting. Based on that evaluation, there has been no such change
during the quarter covered by this report.
Forward-Looking Statements
This report contains forward-looking statements that are based on management's
beliefs, assumptions, current expectations, estimates, and projections about BOK
Financial, the financial services industry and the economy in general. Words
such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans,"
"projects," variations of such words and similar expressions are intended to
identify such forward-looking statements. Management judgments relating to and
discussion of the provision and reserve for loan losses involve judgments as to
expected events and are inherently forward-looking statements. Assessments that
BOK Financial's acquisitions and other growth endeavors will be profitable are
necessary statements of belief as to the outcome of future events, based in part
on information provided by others that BOK Financial has not independently
verified. These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions that are difficult to predict with
regard to timing, extent, likelihood and degree of occurrence. Therefore, actual
results and outcomes may materially differ from what is expressed, implied, or
forecasted in such forward-looking statements. Internal and external factors
that might cause such a difference include, but are not limited to: (1) the
ability to fully realize expected cost savings from mergers within the expected
time frames, (2) the ability of other companies on which BOK Financial relies to
provide goods and services in a timely and accurate manner, (3) changes in
interest rates and interest rate relationships, (4) demand for products and
services, (5) the degree of competition by traditional and nontraditional
competitors, (6) changes in banking regulations, tax laws, prices, levies, and
assessments, (7) the impact of technological advances and (8) trends in customer
behavior as well as their ability to repay loans. BOK Financial and its
affiliates undertake no obligation to update, amend, or clarify forward-looking
statements, whether as a result of new information, future events or otherwise.
36
--------------------------------------------------------- ---- ----------- --- --------------
Consolidated Statements of Earnings (Unaudited)
(In Thousands Except Share and Per Share Data)
Three Months Ended
March 31,
2009 2008
Interest revenue ----------- --- --------------
Loans $ 145,744 $ 199,384
Taxable securities 84,002 72,055
Tax-exempt securities 2,650 2,685
--------------------------------------------------------- ---- ----------- --- --------------
Total securities 86,652 74,740
--------------------------------------------------------- ---- ----------- --- --------------
Trading 801 1,077
securities
Funds sold and resell agreements 30 840
--------------------------------------------------------- ---- ----------- --- --------------
Total interest revenue 233,227 276,041
--------------------------------------------------------- ---- ----------- --- --------------
Interest expense
Deposits 51,927 88,147
Borrowed funds 5,889 35,367
Subordinated debentures 5,566 5,399
--------------------------------------------------------- ---- ----------- --- --------------
Total interest expense 63,382 128,913
--------------------------------------------------------- ---- ----------- --- --------------
Net interest revenue 169,845 147,128
Provision for credit losses 45,040 17,571
--------------------------------------------------------- ---- ----------- --- --------------
Net interest revenue after provision for credit losses 124,805 129,557
--------------------------------------------------------- ---- ----------- --- --------------
Other operating revenue
Brokerage and trading revenue 24,699 23,913
Transaction card revenue 25,428 23,558
Trust fees and commissions 16,510 20,796
Deposit service charges and fees 27,405 27,686
Mortgage banking revenue 18,498 8,034
Bank-owned life insurance 2,317 2,512
Margin asset fees 67 1,967
Other revenue 6,583 5,391
--------------------------------------------------------- ---- ----------- --- --------------
Total fees and commissions 121,507 113,857
--------------------------------------------------------- ---- ----------- --- --------------
Gain on other assets 143 4
Gain (loss) on derivatives, net (1,664) 2,113
Gain on securities, net 20,108 9,926
Total other-than-temporary impairment losses (54,368) (5,306)
Portion of loss recognized in other comprehensive income (39,366) -
--------------------------------------------------------- ---- ----------- --- --------------
Net impairment losses recognized in earnings (15,002) (5,306)
--------------------------------------------------------- ---- ----------- --- --------------
Total other operating revenue 125,092 120,594
--------------------------------------------------------- ---- ----------- --- --------------
Other operating expense
Personnel 92,627 88,106
Business promotion 4,428 4,639
Professional fees and services 6,512 5,648
Net occupancy and equipment 16,258 15,061
Insurance 5,638 3,710
Data processing and communications 19,306 18,893
Printing, postage and supplies 4,571 4,419
Net losses and operating expenses of repossessed assets 1,806 378
Amortization of intangible assets 1,686 1,925
Mortgage banking costs 7,467 5,681
Change in fair value of mortgage servicing rights (1,955) 1,762
Visa retrospective responsibility obligation - (2,767)
Other expense 7,450 5,949
--------------------------------------------------------- ---- ----------- --- --------------
Total other operating expense 165,794 153,404
--------------------------------------------------------- ---- ----------- --- --------------
Income before taxes 84,103 96,747
Federal and state income tax 28,838 34,450
--------------------------------------------------------- ---- ----------- --- --------------
Net income before non-controlling interest 55,265 62,297
Non-controlling interest income (expense), net (233) (32)
--------------------------------------------------------- ---- ----------- --- --------------
Net income attributable to BOK Financial Corporation $ 55,032 $ 62,265
--------------------------------------------------------- ---- ----------- --- --------------
Earnings per share:
--------------------------------------------------------- ---- ----------- --- --------------
Basic $ 0.81 $ 0.92
--------------------------------------------------------- ---- ----------- --- --------------
Diluted $ 0.81 $ 0.92
--------------------------------------------------------- ---- ----------- --- --------------
Average shares used in computation:
--------------------------------------------------------- --- ------------ --- --------------
Basic 67,315,986 67,202,128
--------------------------------------------------------- --- ------------ --- --------------
Diluted 67,387,102 67,504,288
--------------------------------------------------------- --- ------------ --- --------------
Dividends declared per share $ 0.225 $ 0.20
--------------------------------------------------------- --- ------------ --- --------------
See accompanying notes to consolidated financial statements.
37
--------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
(In Thousands Except Share Data)
March 31, December 31, March 31,
2009 2008 2008
--------------------------------------------------
Assets (Unaudited) (Footnote 1) (Unaudited)
Cash and due from banks $ 686,976 $ 581,133 $ 642,224
Funds sold and resell agreements 27,197 113,809 23,291
Trading securities 128,179 99,601 93,081
Securities:
Available for sale 6,728,354 5,800,691 5,145,575
Available for sale securities pledged to creditors 263,449 590,760 506,645
Investment (fair value: March 31, 2009 - $256,340;
December 31, 2008 - $245,769;
March 31, 2008 - $260,912) 251,848 242,344 256,255
Mortgage trading securities 454,493 399,211 182,533
--------------------------------------------------------------------------------------------------------------------
Total securities 7,698,144 7,033,006 6,091,008
--------------------------------------------------------------------------------------------------------------------
Residential mortgage loans held for sale 245,791 129,246 91,905
Loans 12,639,916 12,876,006 12,295,755
Less reserve for loan losses (251,002) (233,236) (136,584)
--------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 12,388,914 12,642,770 12,159,171
--------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 281,300 277,458 261,814
Accrued revenue receivable 104,205 96,673 128,224
Intangible assets, net 359,523 361,209 366,051
Mortgage servicing rights, net 50,246 42,752 69,794
Real estate and other repossessed assets 61,383 29,179 15,112
Bankers' acceptances 9,316 12,913 12,590
Derivative contracts 551,316 452,604 716,173
Cash surrender value of bank-owned life insurance 239,348 237,006 228,786
Receivable on unsettled securities trades - 239,474 -
Other assets 501,604 385,815 226,727
--------------------------------------------------------------------------------------------------------------------
Total assets $ 23,333,442 $ 22,734,648 $ 21,125,951
--------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Noninterest-bearing demand deposits $ 3,050,896 $ 3,082,379 $ 2,747,014
Interest-bearing deposits:
Transaction 6,627,222 6,562,350 6,438,665
Savings 168,644 154,635 160,621
Time (includes fair value: $633,745 at March 31, 2009;
$632,754 at December 31, 2008; $139,106 at March 31, 2008) 5,423,659 5,183,243 3,983,160
--------------------------------------------------------------------------------------------------------------------
Total deposits 15,270,421 14,982,607 13,329,460
--------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase agreements 2,217,081 3,025,399 2,910,237
Other borrowings 2,276,430 1,522,054 1,802,388
Subordinated debentures 398,443 398,407 398,306
Accrued interest, taxes and expense 146,111 133,220 133,939
Bankers' acceptances 9,316 12,913 12,590
Derivative contracts 640,275 667,034 378,243
Due on unsettled securities trades 311,133 - 16,824
Other liabilities 118,181 132,902 132,015
--------------------------------------------------------------------------------------------------------------------
Total liabilities 21,387,391 20,874,536 19,114,002
--------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock ($.00006 par value; 2,500,000,000 shares
authorized; shares issued and outstanding:
March 31, 2009 - 70,004,401; December 31, 2008
- 69,884,749; March 31, 2008 - 69,670,728) 4 4 4
Capital surplus 746,250 743,411 731,452
Retained earnings 1,467,062 1,427,057 1,381,797
Treasury stock (shares at cost: March 31, 2009 - 2,415,356;
December 31, 2008 - 2,411,663; March 31, 2008 - 2,287,410) (101,493) (101,329) (95,007)
Accumulated other comprehensive loss (180,523) (222,886) (25,676)
--------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,931,300 1,846,257 1,992,570
Non-controlling interest 14,751 13,855 19,379
--------------------------------------------------------------------------------------------------------------------
Total equity 1,946,051 1,860,112 2,011,949
--------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 23,333,442 $ 22,734,648 $ 21,125,951
--------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
38
-----------------------------------------------------------------------------------------------------------------------------------
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
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 - - - - 62,265 - - 62,265 - 62,265
Non-controlling interest
expense, net - - - - - - - - (32) (32)
Other comprehensive
income, net of tax (1) - - 5,558 - - - - 5,558 - 5,558
------------------------------------
Comprehensive income 67,823 (32) 67,791
------------------------------------
Treasury stock purchase - - - - - 91 (4,655) (4,655) - (4,655)
Exercise of stock options 206 - - 6,095 - 37 (1,924) 4,171 - 4,171
Tax benefit on exercise of
stock options - - - 336 - - - 336 - 336
Stock-based compensation - - - 2,933 - - - 2,933 - 2,933
Cash dividends on
common stock - - - - (13,484) - - (13,484) - (13,484)
Capital calls - - - - - - - - 562 562
-----------------------------------------------------------------------------------------------------------------------------------
Balances at
March 31, 2008 69,671 $ 4 $(25,676) $ 731,452 $1,381,797 2,287 $(95,007) $1,992,570 $ 19,379 $2,011,949
-----------------------------------------------------------------------------------------------------------------------------------
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 - - - - 55,032 - - 55,032 - 55,032
Non-controlling
interest expense, net - - - - - - - - (233) (233)
Other comprehensive
income, net of tax (1) - - 42,363 - - - - 42,363 - 42,363
-----------------------------------
Comprehensive income 97,395 (233) 97,162
-----------------------------------
Exercise of stock options 119 - - 1,502 - 3 (164) 1,338 - 1,338
Tax benefit on exercise
of stock options - - - (242) - - - (242) - (242)
Stock-based compensation - - - 1,579 - - - 1,579 - 1,579
Cash dividends on
common stock - - - - (15,027) - - (15,027) - (15,027)
Capital calls - - - - - - - - 1,129 1,129
-----------------------------------------------------------------------------------------------------------------------------------
Balances at
March 31, 2009 70,004 $ 4 $(180,523) $ 746,250 $1,467,062 2,415 $(101,493) $1,931,300 $ 14,751 $1,946,051
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
39
---------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands) Three Months Ended March 31,
---------------------------------------------
2009 2008
---------------------------------------------
Cash Flows From Operating Activities:
Net income $ 55,032 $ 62,265
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for credit losses 45,040 17,571
Change in fair value of mortgage servicing rights (1,955) 1,762
Unrealized (gains) losses from derivatives 4,153 (6,630)
Tax benefit on exercise of stock options 242 (336)
Change in bank-owned life insurance (2,342) 754
Stock-based compensation 1,579 3,202
Depreciation and amortization 13,886 13,951
Net (accretion) amortization of securities discounts and premiums (2,353) (3,007)
Realized gains on financial instruments and other assets (12,070) (7,086)
Mortgage loans originated for resale (709,450) (242,040)
Proceeds from sale of mortgage loans held for resale 603,827 232,541
Capitalized mortgage servicing rights (10,490) 40,188
Change in trading securities, including mortgage trading securities (83,568) (74,853)
Change in accrued revenue receivable (7,532) 10,019
Change in other assets (115,160) (6,317)
Change in accrued interest, taxes and expense 12,891 9,910
Change in other liabilities (13,028) (24,968)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (221,298) 26,926
---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities 4,793 6,002
Proceeds from maturities of available for sale securities 81,539 277,176
Purchases of investment securities (14,350) (14,349)
Purchases of available for sale securities (1,450,712) (1,339,379)
Proceeds from sales of available for sale securities 840,482 1,076,776
Loans originated or acquired net of principal collected 166,550 (385,663)
Proceeds from derivative asset contracts (12,048) 158,536
Net change in other investment assets - 33
Proceeds from disposition of assets 3,181 1,610
Purchases of assets (12,765) (25,837)
---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (393,330) (245,095)
---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net change in demand deposits, transaction deposits and savings accounts 47,398 217,647
Net change in time deposits 242,778 (349,101)
Net change in other borrowings (53,942) 459,930
Net payments or proceeds on derivative liability contracts 8,514 (158,251)
Net change in derivative margin accounts (147,565) (190,217)
Change in amount receivable (due) on unsettled security transactions 550,607 26,895
Issuance of common and treasury stock, net 1,338 4,171
Tax benefit on exercise of stock options (242) 336
Repurchase of common stock - (4,655)
Dividends paid (15,027) (13,484)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 633,859 (6,729)
---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 19,231 (224,898)
Cash and cash equivalents at beginning of period 694,942 890,413
---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 714,173 $ 665,515
---------------------------------------------------------------------------------------------------------------------------
Cash paid for interest $ 69,551 $ 128,551
---------------------------------------------------------------------------------------------------------------------------
Cash paid for taxes $ 562 $ 2,653
---------------------------------------------------------------------------------------------------------------------------
Net loans transferred to repossessed real estate and other assets $ 37,669 $ 1,314
---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
40
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 or other events in which an entity obtains control over one or more
businesses, including combinations achieved without the transfer of
consideration. FAS 141R retains the fundamental requirement that all business
combinations must be accounted for under the acquisition or purchase method of
accounting. All assets acquired, including identifiable intangible assets,
liabilities assumed and any non-controlling interests must be recognized at the
acquisition-date fair values. Banks may no longer carry over the pre-acquisition
allowance for loan losses. Costs incurred to effect the acquisition and
restructuring costs that the acquirer is expected but not obligated to incur
must be recognized separately from the business combination. Contingent assets
and liabilities generally will be recognized at their acquisition-date fair
values. Changes in the recognized amounts of contingent assets and liabilities
will be recognized in post acquisition-date earnings. FAS 141R may have a
significant effect on the Company's financial statements for business
combinations completed after January 1, 2009.
Financial Accounting Standards Board Staff Position No. FAS 141R-1, "Accounting
for Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies." ("FSP 141R-1")
FSP 141R-1 amends the guidance in FAS 141R to require that assets acquired and
liabilities assumed in a business combination that arise from contingencies be
recognized at fair value if fair value can be reasonably estimated. If fair
value of such an asset or liability cannot be reasonably estimated, the asset or
liability would generally be recognized in accordance with FAS 5, "Accounting
for Contingencies," and FASB Interpretation (FIN) No. 14, "Reasonable Estimation
of the Amount of a Loss." FSP 141R-1 removes subsequent accounting guidance for
assets and liabilities arising from contingencies from FAS 141R and requires
entities to develop a systematic and rational basis for subsequently measuring
and accounting for assets and liabilities arising from contingencies. FSP 141R-1
eliminates the requirement to disclose an estimate of the range of outcomes of
recognized contingencies at the acquisition date. For unrecognized
contingencies, entities are required to include only the disclosures required by
FAS 5. FSP 141R-1 also requires that contingent consideration arrangements of an
acquiree assumed by the acquirer in a business combination be treated as
contingent consideration of the acquirer and should be initially and
subsequently measured at fair value in accordance with FAS 141R. FSP 141R-1 is
effective for assets or liabilities arising from contingencies the Company
acquires in business combinations occurring after January 1, 2009.
41
Statement of Financial Accounting Standards No. 160,"Non-controlling Interest in
Consolidated Financial Statements - An Amendment of ARB No. 51" ("FAS 160")
The 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.
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. FAS 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 will adopt FSP
42
107-1 as of June 30, 2009. It is not expected to 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.
(2) Securities
Investment Securities
The amortized cost and fair values of investment securities are as follows (in
thousands):
March 31,
-------------------------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------------------------
Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized
----------------------- -----------------------
Cost Value Gain Loss Cost Value Gain Loss
-------------------------------------------------------------------------------------------
Municipal and other tax-exempt $ 244,682 $ 249,136 $ 4,672 $ (218) $249,380 $253,982 $ 4,731 $ (129)
Other debt securities 7,166 7,204 38 - 6,875 6,930 55 -
-----------------------------------------------------------------------------------------------------------------------------
Total $ 251,848 $ 256,340 $ 4,710 $ (218) $256,255 $260,912 $ 4,786 $ (129)
-----------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of investment securities at March 31, 2009,
by contractual maturity, are as shown in the following table (dollars in
thousands):
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:
Amortized cost $ 69,680 $ 136,671 $30,841 $ 7,490 $ 244,682 2.55
Fair value 70,034 140,141 31,483 7,478 249,136
Nominal yield(1) 5.28 5.44 5.75 6.51 5.33
Other debt securities:
Amortized cost $ 5,465 $ 1,689 $ - $ 12 $ 7,166 1.10
Fair value 5,465 1,726 - 13 7,204
Nominal yield 3.66 4.40 - - 3.83
------------ -------------- ------------- ------------- ------------- ------------
Total fixed maturity securities:
Amortized cost $ 75,145 $ 138,360 $ 30,841 $ 7,502 $ 251,848 2.51
Fair value 75,499 141,867 31,483 7,491 256,340
Nominal yield 5.16 5.43 5.75 6.50 5.29
------------ -------------- ------------- -------------
Total investment securities:
Amortized cost $ 251,848
Fair value 256,340
Nominal yield 5.29
-------------
(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.
43
Available for Sale Securities
The amortized cost and fair value of available for sale securities are as
follows (in thousands):
March 31,
-----------------------------------------------------------------------------------------------
2009 2008
-----------------------------------------------------------------------------------------------
Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized
----------------------- ------------------------
Cost Value Gain Loss Cost Value Gain Loss
-----------------------------------------------------------------------------------------------
U.S. Treasury $ 6,990 $ 7,088 $ 98 $ - $ 6,990 $ 7,053 $ 63 $ -
Municipal and other tax-exempt 19,679 20,436 798 (41) 15,753 16,303 551 (1)
Mortgage-backed securities:
U. S. agencies 5,494,930 5,618,879 128,208 (4,259) 3,904,825 3,949,420 55,296 (10,701)
Private issue 1,556,716 1,177,645 27 (379,098) 1,583,495 1,504,567 512 (79,440)
---------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 7,051,646 6,796,524 128,235 (383,357) 5,488,320 5,453,987 55,808 (90,141)
---------------------------------------------------------------------------------------------------------------------------------
Other debt securities 35 35 - - 40 39 - (1)
Federal Reserve Bank stock 32,423 32,423 - - 27,731 27,731 - -
Federal Home Loan Bank stock 86,172 86,172 - - 86,735 86,735 - -
Perpetual preferred stock 24,464 16,161 - (8,303) 27,472 27,472 - -
Equity securities and mutual funds 32,250 32,964 2,323 (1,609) 27,555 32,900 5,345 -
---------------------------------------------------------------------------------------------------------------------------------
Total $7,253,659 $6,991,803 $ 131,454 $(393,310) $ 5,680,596 $5,652,220 $ 61,767 $(90,143)
---------------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of available for sale securities at March 31,
2009, by contractual maturity, are as shown in the following table (dollars in
thousands):
Weighted
Less than One to Six to Over Average
One Year Five Years Ten Years Ten Years Total Maturity(5)
------------ -------------- ------------- ------------- -------------- -----------
U.S. Treasuries:
Amortized cost $ 6,990 $ - $ - $ - $ 6,990 0.92
Fair value 7,088 - - - 7,088
Nominal yield 2.16 - - - 2.16
Municipal and other tax-exempt:
Amortized cost $ - $ 3,155 $ 15,910 $ 614 $ 19,679 7.12
Fair value - 3,295 16,510 631 20,436
Nominal yield(1) - 3.23 9.67 4.67 4.12
Other debt securities:
Amortized cost $ - $ 35 $ - $ - $ 35 1.54
Fair value - 35 - - 35
Nominal yield(1) - 6.59 - - 6.59
------------ -------------- ------------- ------------- -------------- -----------
Total fixed maturity securities:
Amortized cost $ 6,990 $ 3,190 $ 15,910 $ 614 $ 26,704 5.49
Fair value 7,088 3,330 16,510 631 27,559
Nominal yield 2.16 3.27 9.67 4.67 3.61
------------ -------------- ------------- -------------
Mortgage-backed securities:
Amortized cost $ 7,051,646 (2)
Fair value 6,796,524
Nominal yield(4) 4.65
--------------
Equity securities and mutual funds:
Amortized cost $ 175,309 (3)
Fair value 167,720
Nominal yield 3.00
--------------
Total available-for-sale securities:
Amortized cost $ 7,253,659
Fair value 6,991,803
Nominal yield 4.60
--------------
(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.
44
Sales of available for sale securities resulted in gains and losses as follows
(in thousands):
Three Months Ended March 31,
-------------------------------------
2009 2008
------------- ---------------
Proceeds $ 840,482 $ 1,076,776
Gross realized gains 22,226 5,571
Gross realized losses - (2,624)
Related federal and state income tax 7,641 1,897
expense
Gross realized gains for the three months ended March 31, 2008 exclude $6.8
million gain from the redemption of Visa, Inc. Class B common stock.
Mortgage trading securities are mortgage-backed securities 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
March 31, 2009, mortgage trading securities are carried at their $454 million
fair value and had a net unrealized gain of $12.8 million. The Company
recognized net losses of $2.1 million on mortgage trading securities in the
first quarter of 2009 and net gains on mortgage trading securities of $191
thousand in the first quarter of 2008.
Temporarily Impaired Securities as of March 31, 2009
(In Thousands)
Number Less Than 12 Months 12 Months or Longer Total
-------------------------- ------------------------- -------------------------
of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Loss Value Loss Value Loss
---------- ------------ ------------- ------------ ------------ ------------ ------------
Investment:
Municipal and other tax exempt 35 $ 3,469 $ 88 $ 5,167 $ 130 $ 8,636 $ 218
Available for sale:
Other debt securities 2 10 - 25 - 35 -
Municipal and other tax-exempt 2 896 41 - - 896 41
Mortgage-backed securities:
U. S. agencies 30 432,955 1,929 112,336 2,330 545,291 4,259
Other 114 207,285 77,432 963,401 301,666 1,170,686 379,098
Perpetual preferred stock 8 2,443 2,557 8,478 5,746 10,921 8,303
Equity securities and mutual funds 8 - - 2,327 1,609 2,327 1,609
---------------------------------- ---------- ------------ ------------- ------------ ------------ ------------ ------------
164 643,589 81,959 1,086,567 311,351 1,730,156 393,310
---------------------------------- ---------- ------------ ------------- ------------ ------------ ------------ ------------
Total 199 $647,058 $ 82,047 $ 1,091,734 $ 311,481 $1,738,792 $ 393,528
---------------------------------- ---------- ------------ ------------- ------------ ------------ ------------ ------------
Temporarily Impaired Securities as of March 31, 2008
(In Thousands)
Number Less Than 12 Months 12 Months or Longer Total
-------------------------- ------------------------- -------------------------
of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Loss Value Loss Value Loss
---------- ------------ ------------- ------------ ------------ ------------ ------------
Investment:
Municipal and other tax exempt 50 $ 2,195 $ 21 $ 9,855 $ 108 $ 12,050 $ 129
Other 3 1,152 - 600 - 1,752 -
---------------------------------- ---------- ------------ ------------- ------------ ------------ ------------ ------------
53 3,347 21 10,455 108 13,802 129
Available for sale:
Other debt securities 1 - - 25 1 25 1
Municipal and other tax-exempt 1 - - 314 1 314 1
Mortgage-backed securities:
U. S. agencies 111 549,550 7,530 336,656 3,171 886,206 10,701
Other 94 496,486 24,396 873,148 55,044 1,369,634 79,440
Equity securities and mutual funds 2 - - 76 - 76 -
---------------------------------- ---------- ------------ ------------- ------------ ------------ ------------ ------------
209 1,046,036 31,926 1,210,219 58,217 2,256,255 90,143
---------------------------------- ---------- ------------ ------------- ------------ ------------ ------------ ------------
Total 262 $1,049,383 $ 31,947 $1,220,674 $ 58,325 $2,270,057 $ 90,272
---------------------------------- ---------- ------------ ------------- ------------ ------------ ------------ ------------
45
Debt securities were 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 agencies. Impairment of debt
securities consistently rated investment grade is considered temporary unless
specific contrary information is identified. None of the debt securities
consistently rated investment grade were considered to be other-than-temporarily
impaired at March 31, 2009.
Approximately $444 million of our portfolio of 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 $167 million before recognition of
any other-than-temporary impairment charges. Impairment of securities rated
below investment grade 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% for the remainder of 2009, dropping
to 8% in 2010 and holding at 8% thereafter.
o Housing price depreciation - starting with current depreciated housing
prices based on information derived from the Office of Federal Housing
Enterprise Oversight data, decreasing by an additional 10% over the
remainder of 2009 and holding at that level thereafter.
o Loss severity - held constant at 27% of the then-current depreciated
housing price at estimated foreclosure date. Loss severity includes
estimated holding and disposal expenses.
o Discount rates - estimated cash flows were discounted at rates that range
from 5.50% to 6.14% based on our current expected yields.
We also use an adjusted loan to value ratio as part of our evaluation of whether
the unrealized losses on these securities are temporary or other-than-temporary.
The adjusted loan to value ratio is based on the original loan to value ratio
inherent in the security, adjusted for changes in housing prices, prepayment
speeds, default rates and credit enhancements. A higher adjusted loan to value
ratio indicates a greater likelihood that projected cash flows may result in
losses. A shortfall between our current amortized cost and the present value of
expected cash flows we are likely to collect, based on all available
information, is referred to as the credit loss. Credit loss is the amount
recognized in net income.
Based on our evaluation, four securities were identified with
other-than-temporary impairment at March 31, 2009. Unrealized losses totaled $46
million and estimated credit losses totaled $7.0 million on these securities.
Estimated credit losses were charge against earnings for the first quarter of
2009. The difference between total unrealized losses and estimated credit losses
on these securities was charged against equity, net of deferred taxes.
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 have a current carrying value of $24 million. Our carrying value
of these stocks has been reduced by $22 million of other-than-temporary
impairment charges. The aggregate fair value of these preferred stocks was $16
million at March 31, 2009. Although none of the institutions that issued these
stocks were in default, one of the preferred stocks was downgraded to below
investment grade by at least one of the nationally-recognized rating agencies.
We recognized an $8.0 million other-than-temporary impairment loss on the
preferred stocks of that issuer during the first quarter of 2009. 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.
46
(3) Derivatives
The fair values of derivative contracts at March 31, 2009 are as follows (in
thousands):
Derivatives Gain
(Loss) Recognized in
Assets Liabilities the Income Statement
--------------------------- ------------------------- -------------------------
Gain (Loss)
Brokerage on
and Derivatives,
Fair Fair Trading Net
Notional(1) Value Notional(1) Value Revenue
-------------- ------------ ------------ ------------ ------------ ------------
Customer Risk Management Programs:
Interest rate contracts $2,689,388 $144,391 $2,689,388 $149,580 $ 939 $ -
Energy contracts 1,161,140 430,503 1,161,140 448,716 (171) -
Cattle contracts 50,709 1,673 50,709 1,637 203 -
Foreign exchange contracts 47,941 46,496 48,633 46,496 81 -
CD options 47,469 3,873 47,469 3,873 - -
----------------------------------------- -------------- ------------ ------------ ------------ ------------ ------------
Fair value before cash collateral 3,996,647 626,936 3,997,339 650,302 1,052 -
Less: cash collateral - (84,460) - (10,027) - -
----------------------------------------- -------------- ------------ ------------ ------------ ------------ ------------
Total Customer Derivatives 3,996,647 542,476 3,997,339 640,275 1,052 -
Interest Rate Risk Management Programs 654,046 8,840 - - - (4,026)
----------------------------------------- -------------- ------------ ------------ ------------ ------------ ------------
Total Derivative Contracts $ 4,650,693 $551,316 $3,997,339 $640,275 $1,052 $(4,026)
----------------------------------------- -------------- ------------ ------------ ------------ ------------ ------------
(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 period ended March 31, 2009 and 2008, net interest revenue was increased
by $4.3 million and $463 thousand, 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 March 31, 2009 were (in thousands):
Mortgage Loans Held for Sale
---------------------------- Mortgage
Fair Banking
Notional Value Revenue
--------------- ------------ ------------
Mortgage loan commitments $661,261 $13,105 $8,517
Forward sales contracts 532,495 (4,503) (2,341)
-------------------------------- --------------- ------------ ------------
$8,602 $6,176
-------------------------------- --------------- ------------ ------------
47
(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 $246 million
and $92 million, and outstanding mortgage loan commitments totaled $527 million
and $125 million at March 31, 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 March 31, 2009, the
unrealized loss recognized on forward sales contracts used to manage the
mortgage pipeline interest rate risk was approximately $4.5 million. Gains on
mortgage loans sold, including capitalized mortgage servicing rights, totaled
$10.9 million and $2.9 million in the first quarter of 2009 and 2008,
respectively.
At March 31, 2009, BOK Financial owned the rights to service 59,235 mortgage
loans with outstanding principal balances of $6.3 billion, including $810
million serviced for affiliates. The weighted average interest rate and
remaining term was 5.99% and 278 months, respectively.
For the three months ended March 31, 2009 and 2008, mortgage banking revenue
includes servicing fee income and late charges on loans serviced for others of
$4.6 million and $4.3 million, respectively.
Activity in capitalized mortgage servicing rights and related valuation
allowance during the three months ending March 31, 2009 is as follows (in
thousands):
Capitalized Mortgage Servicing Rights
------------------------------------------
Purchased Originated Total
--------------- ------------ -------------
Balance at December 31, 2008 $ 6,353 $ 36,399 $ 42,752
Additions, net - 10,490 10,490
Change in fair value due to loan runoff (776) (4,175) (4,951)
Change in fair value due to market changes 1,209 746 1,955
-------------------------------------------- -- ---------- -- ---------- -- -----------
Balance at March 31, 2009 $ 6,786 $ 43,460 $ 50,246
-------------------------------------------- -- ---------- -- ---------- -- -----------
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:
March 31, 2009 December 31, 2008
--------------------- --------------------
Discount rate - risk-free rate plus a market premium 9.25% 9.26%
-------------
Prepayment rate - based upon loan interest rate,
---------------
original term and loan type 6% - 47% 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 2.30% 2.08%
48
Stratification of the mortgage loan servicing portfolio and outstanding
principal of loans serviced by interest rate at March 31, 2009 follows (in
thousands):
< 5.51% 5.51% - 6.50% 6.51% - 7.50% > 7.50% Total
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
Fair value $ 18,813 $ 24,422 $ 5,521 $ 1,490 $ 50,246
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
Outstanding principal of loans serviced (1) $ 1,603,300 $2,760,000 $956,000 $164,700 $5,484,000
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
(1) Excludes outstanding principal of $810 million for loans serviced for
affiliates and $32 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
$462 thousand during the three months ended March 31, 2009, and none during the
same period of the prior year. The Company made no Pension Plan contributions
during the three months ended March 31, 2009 and March 31, 2008.
Management has been advised that the maximum and minimum allowable contributions
for 2009 are $25 million and $1 million, respectively.
(6) Commitments and Contingent Liabilities
In September 2006, BISYS settled the SEC's two-year investigation of BISYS Fund
Services Ohio, Inc. ("BISYS") marketing assistance agreements with 27 different
families of mutual funds, including a BISYS marketing arrangement with AXIA,
which had been terminated effective January 1, 2004. In the SEC settlement,
BISYS consented to an order in which the SEC determined that BISYS had
"willfully aided and abetted and caused" the 27 investment advisors to (i)
violate provisions of the Investment Advisors Act of 1940 that prohibit
fraudulent conduct; (ii) violate provisions of the 1940 Act that prohibit the
making of any untrue statement of a material fact in a registration statement
filed by the mutual fund with the SEC, and (iii) violate provisions of the 1940
Act that require the disclosure and inclusion of all distribution arrangements
and expenses in the fund's 12b-1 fee plan ("the SEC BYSIS Order"). AXIA was one
of the 27 advisors and the AP Funds one of the 27 mutual fund families to which
the SEC referred in its BISYS Order. On October 10, 2006, the Examinations
Division of the Securities and Exchange Commission (the "SEC") conducted an
examination of AXIA. The examination was concluded in July 2007 with no action
taken by the Examinations Division. In August 2007, AXIA settled all claims
relating to the BISYS marketing arrangements with the AP Funds for $2.2 million
and the AP Funds regard the matter as fully concluded. The settlement with the
AP Funds is not binding on the SEC.
On April 7, 2008, AXIA and its parent, BOK, received a Wells notice from the
regional office of the SEC in Los Angeles indicating that the staff is
considering recommending that the SEC bring a civil injunctive action against
AXIA and BOK for violations of Section 17(a) of the Securities Act of 1955,
Section 10(b) of the Securities Exchange Act of 1934, Sections 206(1) and (2) of
the Investment Advisors Act of 1940, and Sections 12(b) and 34(b) of the
Investment Company Act of 1940. BOK and AXIA have been cooperating fully with
the SEC in connection with these matters that arose prior to December 31, 2003.
BOK and AXIA are not bound by the SEC BISYS Order and disagree with the SEC
position as it relates to BOK and AXIA. On May 27, 2008, BOK and AXIA responded
to the Wells notice denying the SEC position. On June 26, 2008, BOK and AXIA
representatives met with SEC Staff at which time the SEC Staff advised that the
Staff had not determined whether to recommend any action to the Commission. On
September 25, 2008, the SEC Staff requested, and BOK and AXIA agreed to, a
tolling agreement for any action the SEC might take until January 15, 2009. On
December 22, 2008, the tolling agreement was extended to March 2, 2009. On
February 11, AXIA representatives met again with SEC Staff. Nothing further has
occurred as of the time of this filing.
As a member of Visa, BOK Financial is obligated for a proportionate share of
certain covered litigation losses incurred by Visa under a retrospective
responsibility plan. A contingent liability was recognized for the Company's
49
share of Visa's covered litigation liabilities. This contingent liability
totaled $2.5 million at March 31, 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 $2.5 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 0.6296 Class A shares for each Class B
share. However, the Company's Class B shares may be diluted in the future if the
escrow fund is not adequate to cover future covered litigation costs. Therefore,
under currently issued accounting guidance, no value has been currently assigned
to the Class B shares and no value may be assigned until the Class B shares are
converted into a known number of Class A shares.
At March 31, 2009, Cavanal Hill Funds' assets included $1.2 billion of U.S.
Treasury, $1.5 billion of cash management and $780 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 March
31, 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.
50
(7) Shareholders' Equity
On April 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 May 29, 2009 to shareholders of record on May 15, 2009.
Dividends declared during the three month periods ended March 31, 2009 and 2008
were $0.225 per share and $0.20 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.
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
-------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007 $ (22,775) $ - $ (1,461) $ (6,998) $ (31,234)
Unrealized gains on securities 13,167 - - - 13,167
Unrealized gains on cash flow hedges - - 139 - 139
Tax expense on unrealized gains (4,721) - (54) - (4,775)
Reclassification adjustment for (gains) losses
realized and included in net income (4,672) - 52 - (4,620)
Reclassification adjustment for tax expense (benefit)
on realized gains (losses) 1,667 - (20) - 1,647
-------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2008 $ (17,334) $ - $ (1,344) $ (6,998) $ (25,676)
-------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2008 $ (204,648) $ - $ (1,199) $ (17,039) $(222,886)
Unrealized gains on securities 108,941 - - - 108,941
Other-than-temporary impairment losses on securities - (39,366) - - (39,366)
Tax benefit (expense) on unrealized gains (losses) (37,355) 13,498 - - (23,857)
Reclassification adjustment for (gains) losses
realized and included in net income (5,170) - 64 - (5,106)
Reclassification adjustment for tax expense (benefit)
on realized gains (losses) 1,776 - (25) - 1,751
-------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2009 $ (136,456) $ (25,868) $ (1,160) $ (17,039) $(180,523)
-------------------------------------------------------------------------------------------------------------------------------
51
(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 SFAS 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.
Three Months Ended
---------------------------
March 31, March 31,
2009 2008
---------------------------
Numerator:
Net income $ 55,032 $ 62,265
Earnings allocated to participating securities (180) (164)
-----------------------------------------------------------------------------------------------------
Numerator for basic earnings per share - income
available to common shareholders 54,852 62,101
Effect of reallocating undistributed earnings of participating securities - -
-----------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share - income available
to common shareholders $ 54,852 $ 62,101
-----------------------------------------------------------------------------------------------------
Denominator:
Weighted average shares outstanding 67,536,038 67,379,678
Less: Participating securities included in weighted average shares
outstanding (220,052) (177,550)
-----------------------------------------------------------------------------------------------------
Denominator for basic earnings per common share 67,315,986 67,202,128
Dilutive effect of employee stock compensation plans (1) 71,116 302,160
-----------------------------------------------------------------------------------------------------
Denominator for diluted earnings per common share 67,387,102 67,504,288
-----------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.81 $ 0.92
-----------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.81 $ 0.92
-----------------------------------------------------------------------------------------------------
(1) Excludes employee stock options with exercise prices greater than
current market price. 3,621,306 557,624
(9) Reportable Segments
Reportable segments reconciliation to the Consolidated Financial Statements for
the three months ended March 31, 2009 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Income Average
Revenue Revenue(1) Expense Assets
------------ -- ------------ -- ------------- -- ----------- -- --------------
Total reportable segments $ 121,771 $ 119,983 $ 156,188 $ 31,651 $ 19,484,019
Unallocated items:
Tax-equivalent adjustment 2,105 - - 2,105 -
Funds management and other 45,969 1,667 9,606 21,276 3,459,350
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 169,845 $ 121,650 $ 165,794 $ 55,032 $ 22,943,369
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
52
Reportable segments reconciliation to the Consolidated Financial Statements for
the three months ended March 31, 2008 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Income Average
Revenue Revenue(1) Expense Assets
------------ -- ------------ -- ------------- -- ----------- -- --------------
Total reportable segments $ 127,831 $ 110,858 $ 139,993 $ 58,836 $ 17,983,248
Unallocated items:
Tax-equivalent adjustment 2,154 - - 2,154 -
Funds management and other 17,143 3,003 13,411 1,275 2,513,805
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 147,128 $ 113,861 $ 153,404 $ 62,265 $ 20,497,053
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
(10) Fair Value Measurements
Fair value measurements as of March 31, 2009 are as follows (in thousands):
Quoted Prices Significant
in Active Other Significant
Markets for Observable Unobservable
Total Identical Inputs Inputs
Instruments
----------- ---------------- --------------- ----------------
Assets:
Trading securities $128,179 $ 9,627 $118,552
Investment securities 256,340 256,340
Available for sale securities:
U.S. Treasury 7,088 7,088 -
Municipal and other tax-exempt 20,436 20,436
Mortgage-backed securities 6,796,524 6,796,524
Other debt securities 35 35
Federal Reserve Bank stock 32,423 32,423
Federal Home Loan Bank stock 86,172 86,172
Perpetual preferred stock 16,161 16,161
Equity securities and mutual funds 32,964 20,124 12,840
----------- ---------------- ---------------
6,991,803 27,212 6,964,591
Mortgage trading securities 454,493 454,493
Mortgage servicing rights 50,246 50,246 (1)
Derivative contracts 635,776 635,776
Liabilities:
Certificates of deposit 633,745 633,745
Derivative contracts 650,302 650,302
(1) A reconciliation of the beginning and ending fair value of mortgage
servicing rights and disclosures of significant assumptions used to
determine fair value are presented in Note 4, Mortgage Banking
Activities.
The fair value of assets and liabilities based on significant other observable
inputs are generally provided to us by third-party pricing services and are
based on one or more of the following:
o Quoted prices for similar, but not identical, assets or liabilities in
active markets;
o Quoted prices for identical or similar assets or liabilities in inactive
markets;
o Inputs other than quoted prices that are observable, such as interest rate
and yield curves, volatilities, prepayment speeds, loss severities, credit
risks and default rates;
o Other inputs derived from or corroborated by observable market inputs.
The underlying methods used by the third-party pricing services are considered
in determining the primary inputs used to determine fair values. 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.
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 March 31, 2009, the fair value and
contractual principal amount of these certificates was $634 million and $625
million, respectively. Change in the fair value of these certificates of deposit
resulted in an unrealized gain during the first quarter of 2009 of $2.4 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.
(11) Financial Instruments with Off-Balance Sheet Risk
BOK Financial is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to manage interest rate risk. Those financial instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in BOK
Financial's Consolidated Balance Sheets. Exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the notional
amount of those instruments.
As of March 31, 2009, outstanding commitments and letters of credit were as
follows (in thousands):
March 31,
2009
--------------
Commitments to extend credit $4,985,330
Standby letters of credit 562,322
Commercial letters of credit 14,786
54
------------------------------------------------------------------------------------------------------------------------------
Quarterly Financial Summary - Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share Data)
Three Months Ended
-------------------------------------------------------------------------------------
March 31, 2009 December 31, 2008
------------------------------------------ -------------------------------------
Average Revenue/ Yield / Average Revenue/ Yield /
Balance Expense(1) Rate Balance Expense(1) Rate
-------------------------------------------------------------------------------------
Assets
Taxable securities (3) $ 7,084,340 $ 84,004 4.90% $ 6,634,035 $ 87,317 5.12%
Tax-exempt securities (3) 252,612 4,138 6.64 255,693 4,133 6.43
------------------------------------------------------------------------------------------------------------------------------
Total securities (3) 7,336,952 88,142 4.96 6,889,728 91,450 5.17
------------------------------------------------------------------------------------------------------------------------------
Trading securities 111,962 1,019 3.69 78,840 1,298 6.55
Funds sold and resell agreements 50,701 30 0.24 48,246 92 0.76
Loans (2) 12,985,900 146,141 4.56 12,947,880 171,383 5.27
Less reserve for loan losses 252,734 - - 209,319 - -
------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 12,733,166 146,141 4.65 12,738,561 171,383 5.35
------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 20,232,781 235,332 4.75 19,755,375 264,223 5.28
------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,710,588 2,516,276
------------------------------------------------------------------------------------------------------------------------------
Total assets $ 22,943,369 $ 22,271,651
------------------------------------------------------------------------------------------------------------------------------
Liabilities and equity
Transaction deposits $ 6,610,805 $ 15,417 0.95% $ 6,116,465 $ 23,161 1.51%
Savings deposits 159,537 109 0.28 155,784 143 0.37
Time deposits 5,215,091 36,401 2.83 5,109,303 42,090 3.28
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 11,985,433 51,927 1.76 11,381,552 65,394 2.29
------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 2,562,066 2,825 0.45 3,095,054 7,289 0.94
Other borrowings 2,158,963 3,064 0.58 1,986,857 7,541 1.51
Subordinated debentures 398,425 5,566 5.67 398,392 5,489 5.48
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 17,104,887 63,382 1.50 16,861,855 85,713 2.02
------------------------------------------------------------------------------------------------------------------------------
Demand deposits 2,864,751 2,712,384
Other liabilities 1,058,216 788,530
Total equity 1,915,515 1,908,882
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 22,943,369 $ 22,271,651
------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (3) $ 171,950 3.25% $ 178,510 3.26%
Tax-Equivalent Net Interest Revenue
To Earning Assets (3) 3.47 3.57
Less tax-equivalent adjustment (1) 2,105 2,063
------------------------------------------------------------------------------------------------------------------------------
Net interest revenue 169,845 176,447
Provision for credit losses 45,040 73,001
Other operating revenue 125,092 121,447
Other operating expense 165,794 185,442
------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 84,103 39,451
Federal and state income tax 28,838 10,363
Non-controlling interest income
(expense), net (233) 6,355
------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 55,032 $ 35,443
------------------------------------------------------------------------------------------------------------------------------
Earnings Per Average Common Share Equivalent:
Net income (loss):
Basic $ 0.81 $ 0.53
------------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.81 $ 0.52
------------------------------------------------------------------------------------------------------------------------------
(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.
55
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended
-------------------------------------------------------------------------------------------------------------------------
September 30, 2008 June 30, 2008 March 31, 2008
-------------------------------------------------------------------------------------------------------------------------
Average Revenue/ Yield / Average Revenue/ Yield / Average Revenue/ Yield /
Balance Expense(1) Rate Balance Expense(1) Rate Balance Expense(1) Rate
-------------------------------------------------------------------------------------------------------------------------
$ 6,056,909 $ 78,030 5.09% $ 6,026,769 $ 75,959 5.08% $ 5,624,430 $ 72,055 5.11%
254,803 4,166 6.64 259,410 4,165 6.46 264,398 4,189 6.38
-------------------------------------------------------------------------------------------------------------------------
6,311,712 82,196 5.15 6,286,179 80,124 5.14 5,888,828 76,244 5.17
-------------------------------------------------------------------------------------------------------------------------
66,419 937 5.61 74,058 1,267 6.88 74,957 1,433 7.69
79,862 290 1.44 72,444 355 1.97 80,735 840 4.18
12,713,356 181,862 5.69 12,527,011 180,424 5.79 12,181,279 199,678 6.59
182,844 - - 145,524 - - 131,709 - -
-------------------------------------------------------------------------------------------------------------------------
12,530,512 181,862 5.77 12,381,487 180,424 5.86 12,049,570 199,678 6.66
-------------------------------------------------------------------------------------------------------------------------
18,988,505 265,285 5.55 18,814,168 262,170 5.61 18,094,090 278,195 6.17
-------------------------------------------------------------------------------------------------------------------------
2,832,658 2,794,132 2,402,963
-------------------------------------------------------------------------------------------------------------------------
$ 21,821,163 $ 21,608,300 $ 20,497,053
-------------------------------------------------------------------------------------------------------------------------
$ 6,565,935 $ 28,312 1.72% $ 6,420,291 $ 27,755 1.74% $ 6,267,021 $ 42,175 2.71%
159,856 147 0.37 159,798 148 0.37 156,953 238 0.61
4,792,366 40,810 3.39 4,076,167 38,211 3.77 4,225,141 45,734 4.35
-------------------------------------------------------------------------------------------------------------------------
11,518,157 69,269 2.39 10,656,256 66,114 2.50 10,649,115 88,147 3.33
-------------------------------------------------------------------------------------------------------------------------
3,061,186 15,253 1.98 3,126,110 15,180 1.95 3,061,783 23,649 3.11
1,390,233 8,935 2.56 2,267,076 14,032 2.49 1,340,846 11,718 3.51
398,361 5,553 5.55 398,336 5,821 5.88 398,241 5,399 5.45
-------------------------------------------------------------------------------------------------------------------------
16,367,937 99,010 2.41 16,447,778 101,147 2.47 15,449,985 128,913 3.36
-------------------------------------------------------------------------------------------------------------------------
2,739,209 2,634,038 2,443,201
767,832 521,867 599,654
1,946,185 2,004,617 2,004,213
-------------------------------------------------------------------------------------------------------------------------
$ 21,821,163 $ 21,608,300 $ 20,497,053
-------------------------------------------------------------------------------------------------------------------------
$ 166,275 3.14% $ 161,023 3.14% $ 149,282 2.81%
3.48 3.44 3.31
1,927 2,084 2,154
-------------------------------------------------------------------------------------------------------------------------
164,348 158,939 147,128
52,711 59,310 17,571
132,286 54,397 120,594
164,290 159,268 153,404
-------------------------------------------------------------------------------------------------------------------------
79,633 (5,242) 96,747
22,958 (2,862) 34,450
10 1,219 (32)
-------------------------------------------------------------------------------------------------------------------------
$ 56,685 $ (1,161) $ 62,265
-------------------------------------------------------------------------------------------------------------------------
$ 0.84 $ (0.02) $ 0.92
-------------------------------------------------------------------------------------------------------------------------
$ 0.84 $ (0.02) $ 0.92
-------------------------------------------------------------------------------------------------------------------------
56
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 March 31, 2009.
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
Total Number Average Price Total Number of Shares Purchased Maximum Number of Shares
of Shares Paid per Share as Part of Publicly Announced that May Yet Be Purchased
Period Purchased (2) Plans or Programs (1) Under the Plans
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
January 1, 2009 to 3,693 $40.62 - 1,215,927
January 31, 2009
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
February 1, 2009 to - - - 1,215,927
February 28, 2009
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
March 1, 2009 to - - - 1,215,927
March 31, 2009
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
Total 3,693 -
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
(1) The Company had a stock repurchase plan that was initially authorized
by the Company's board of directors on February 24, 1998 and amended on
May 25, 1999. Under the terms of that plan, the Company could
repurchase up to 800,000 shares of its common stock. As of March 31,
2005, the Company had repurchased 638,642 shares under that plan. On
April 26, 2005, the Company's board of directors terminated this
authorization and replaced it with a new stock repurchase plan
authorizing the Company to repurchase up to two million shares of the
Company's common stock. As of March 31, 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.
Item 6. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Items 1A, 3, 4 and 5 are not applicable and have been omitted.
57
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: April 29, 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