As filed with the Securities and Exchange Commission on February 27, 2009
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2008
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File No. 0-19341
BOK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Oklahoma 73-1373454
(State or other jurisdiction of (IRS Employer
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)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common stock, $0.00006 par value
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes |X| No |_|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15 (d) of the Act. Yes |_| No |X|
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definitions of "larger accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Smaller reporting company |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the registrant's common stock ("Common
Stock") held by non-affiliates is approximately $1,196,113,935 (based on the
June 30, 2008 closing price of Common Stock of $53.45 per share). As of January
31, 2009, there were 67,482,730 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
Registrant's Proxy Statement for the 2009 Annual Meeting of Shareholders.
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START HERE
BOK FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
INDEX
ITEM PAGE
PART I
1. Business 1
1A. Risk Factors 6
1B. Unresolved Staff Comments 9
2. Properties 9
3. Legal Proceedings 9
4. Submission of Matters to a Vote of Security Holders 9
PART II
5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities 9
6. Selected Financial Data 11
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
7A.Quantitative and Qualitative Disclosures About Market Risk 55
8. Financial Statements and Supplementary Data 58
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 110
9A. Controls and Procedures 110
9B. Other Information 110
PART III
10. Directors, Executive Officers and Corporate Governance 111
11. Executive Compensation 111
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 111
13. Certain Relationships and Related Transactions, and Director
Independence 111
14. Principal Accountant Fees and Services 111
PART IV
15. Exhibits, Financial Statement Schedules 111
Signatures 118
Chief Executive Officer Section 302 Certification Exhibit 31.1
Chief Financial Officer Section 302 Certification Exhibit 31.2
Section 906 Certifications Exhibit 32
1
PART I
ITEM 1. BUSINESS
General
Developments relating to individual aspects of the business of BOK Financial
Corporation ("BOK Financial" or "the Company") are described below. Additional
discussion of the Company's activities during the current year appears within
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations." Information regarding BOK Financial's acquisitions is set forth
in Note 2 of the Company's Notes to Consolidated Financial Statements, which
appear elsewhere herein.
Description of Business
BOK Financial is a financial holding company whose activities are limited by the
Bank Holding Company Act of 1956 ("BHCA"), as amended by the Financial Services
Modernization Act or Gramm-Leach-Bliley Act. BOK Financial offers full service
banking in Oklahoma, Dallas, Fort Worth and Houston, Texas, Albuquerque, New
Mexico, Northwest Arkansas, Denver, Colorado, Phoenix, Arizona, and Kansas City,
Missouri / Kansas. Principal subsidiaries are Bank of Oklahoma, N.A. ("BOk"),
Bank of Texas, N.A., Bank of Albuquerque, N.A., Bank of Arkansas, N.A., Colorado
State Bank and Trust, N.A., Bank of Arizona, N.A., and Bank of Kansas City, N.A.
(collectively, the "Banks"). Other subsidiaries include BOSC, Inc., a
broker/dealer that engages in retail and institutional securities sales and
municipal bond underwriting. Other non-bank subsidiary operations do not have a
significant effect on BOKF financial statements.
Our overall strategic objective is to emphasize growth in long-term value by
building on our leadership position in Oklahoma and expanding into high-growth
markets. We have a solid position in Oklahoma and are the state's largest
financial institution as measured by deposit market share. Since 1997, we have
expanded into Dallas, Fort Worth and Houston, Texas, Albuquerque, New Mexico,
Denver, Colorado, Phoenix, Arizona, and Kansas City, Missouri / Kansas. We are
currently exploring opportunities for further growth in our regional markets.
Our primary focus is to provide a broad range of financial products and
services, including loans and deposits, cash management services, fiduciary
services, mortgage banking and brokerage and trading services to middle-market
businesses, financial institutions and consumers. Our revenue sources are
diversified. Approximately 39% of our 2008 revenue came from commissions and
fees.
Commercial banking is a significant part of our business. Our credit culture
emphasizes building relationships by making high quality loans and providing a
full range of financial products and services to our customers. Our energy
financing expertise enables us to offer commodity derivatives for customers to
use in their risk management and positioning activities.
Our acquisition strategy targets quality organizations that have demonstrated
solid growth in their business lines. We provide additional growth opportunities
by hiring talent to enhance competitiveness, adding locations, and broadening
product offerings. Our operating philosophy embraces local decision-making for
each of our bank subsidiaries. We also consider acquisitions of distressed
financial institutions in selected markets when opportunities become available.
BOK Financial's corporate headquarters is located at Bank of Oklahoma Tower,
P.O. Box 2300, Tulsa, Oklahoma 74192.
The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to those reports are available on the
Company's website at www.bokf.com as soon as reasonably practicable after the
Company electronically files such material with or furnishes it to the
Securities and Exchange Commission.
Operating Segments
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. 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 electronic funds
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 bank
services and investment advisory services in all markets. Discussion of these
principal lines of business appears within the Lines of Business section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and within Note 18 of the Company's Notes to Consolidated Financial
Statements, both of which appear elsewhere herein.
Competition
BOK Financial and its operating segments face competition from other banks,
thrifts, credit unions and other non-bank financial institutions, such as
investment banking firms, investment advisory firms, brokerage firms, investment
companies, government agencies, mortgage brokers and insurance companies. The
Company competes largely on the basis of customer services, interest rates on
loans and deposits, lending limits and customer convenience. Some operating
segments face competition from
2
institutions that are not as closely regulated as banks, and therefore are not
limited by the same capital requirements and other restrictions. All market
share information presented below is based upon share of deposits in specified
areas according to SNL DataSource as of December 31, 2008.
BOk is the largest banking subsidiary of BOK Financial and has the largest
market share in Oklahoma with 12% of the state's total deposits. In the Tulsa
and Oklahoma City areas, BOk has 24% and 11% of the market share, respectively.
BOk competes with two banks that have operations nationwide and have greater
access to funds at lower costs, higher lending limits, and greater access to
technology resources. BOk also competes with regional and locally owned banks in
both the Tulsa and Oklahoma City areas, as well as in every other community in
which we do business throughout the state.
Through other subsidiary banks, BOK Financial competes in Dallas, Fort Worth and
Houston, Texas, Albuquerque, New Mexico, Denver, Colorado, Phoenix, Arizona,
Northwest Arkansas, and Kansas City, Missouri / Kansas. Bank of Texas competes
against numerous financial institutions, including some of the largest in the
United States, and has a market share of approximately 2% in the Dallas, Fort
Worth area and 1% in the Houston area. Bank of Albuquerque has a number 4 market
share position with 10% of deposits in the Albuquerque area and competes with
two large national banks, some regional banks and several locally-owned smaller
community banks. Colorado State Bank and Trust has a market share of
approximately 2% in the Denver area. Bank of Arizona operates as a community
bank with locations in Phoenix, Scottsdale and Tucson. Bank of Arkansas serves
Benton and Washington counties in Arkansas, and Bank of Kansas City serves the
Kansas City market. The Company's ability to expand into additional states
remains subject to various federal and state laws.
Employees
As of December 31, 2008, BOK Financial and its subsidiaries employed 4,300
full-time equivalent employees. None of the Company's employees are represented
by collective bargaining agreements. Management considers its employee relations
to be good.
Supervision and Regulation
BOK Financial and its subsidiaries are subject to extensive regulations under
federal and state laws. These regulations are designed to protect depositors,
the Bank Insurance Fund and the banking system as a whole and not necessarily to
protect shareholders and creditors. As detailed below, these regulations may
restrict the Company's ability to diversify, to acquire other institutions and
to pay dividends on its capital stock. They also may require the Company to
provide financial support to its subsidiaries, maintain certain capital balances
and pay higher deposit insurance premiums.
Proposals to change laws and regulations governing the banking industry are
frequently introduced in Congress, in the state legislatures and before bank
regulatory agencies. It is generally probable that laws and regulations
affecting banks will increase and become more restrictive in the current
economic environment. The likelihood and timing of any specific new proposals or
legislation and the impact they might have on the Company and its subsidiaries
cannot be predicted at this time.
The following information summarizes certain laws and regulations that affect
the Company's operations. It does not discuss all provisions of these laws and
regulations and it does not summarize all laws and regulations that affect the
Company.
General
As a financial holding company, BOK Financial is regulated under the BHCA and is
subject to regular inspection, examination and supervision by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). Under the
BHCA, BOK Financial files quarterly reports and other information with the
Federal Reserve Board.
The Banks are organized as national banking associations under the National
Banking Act, and are subject to regulation, supervision and examination by the
Office of the Comptroller of the Currency (the "OCC"), the Federal Deposit
Insurance Corporation (the "FDIC"), the Federal Reserve Board and other federal
and state regulatory agencies. The OCC has primary supervisory responsibility
for national banks and must approve certain corporate or structural changes,
including changes in capitalization, payment of dividends, change of place of
business, and establishment of a branch or operating subsidiary. The OCC
performs its functions through national bank examiners who provide the OCC with
information concerning the soundness of a national bank, the quality of
management and directors, and compliance with applicable regulations. The
National Banking Act authorizes the OCC to examine every national bank as often
as necessary.
A financial holding company, and the companies under its control, are permitted
to engage in activities considered "financial in nature" as defined by the
Gramm-Leach-Bliley Act and Federal Reserve Board interpretations, and therefore
may engage in a broader range of activities than permitted for bank holding
companies and their subsidiaries. Activities that are "financial in nature"
include securities underwriting and dealing, insurance underwriting, operating a
mortgage company, credit card company or factoring company, performing certain
data processing operations, servicing loans and other extensions of credit,
providing investment and financial advice, owning and operating savings and loan
associations, and leasing personal property on a full pay-out, non-operating
basis. In order for a financial holding company to commence any new activity
permitted by the BHCA, each insured depository institution subsidiary of the
financial holding company must have received a rating of at least satisfactory
in its most recent examination under the Community Reinvestment Act. A financial
holding company is required to notify the
3
Federal Reserve Board within thirty days of engaging in new activities
determined to be "financial in nature." BOK Financial is engaged in some of
these activities and has notified the Federal Reserve Board.
The BHCA requires the Federal Reserve Board's prior approval for the direct or
indirect acquisition of more than five percent of any class of voting stock of
any non-affiliated bank. Under the Federal Bank Merger Act, the prior approval
of the OCC is required for a national bank to merge with another bank or
purchase the assets or assume the deposits of another bank. In reviewing
applications seeking approval of merger and acquisition transactions, the bank
regulatory authorities consider, among other things, the competitive effect and
public benefits of the transactions, the capital position of the combined
organization, the applicant's performance record under the Community
Reinvestment Act and fair housing laws and the effectiveness of the subject
organizations in combating money laundering activities.
A financial holding company and its subsidiaries are prohibited under the BHCA
from engaging in certain tie-in arrangements in connection with the provision of
any credit, property or services. Thus, a subsidiary of a financial holding
company may not extend credit, lease or sell property, furnish any services or
fix or vary the consideration for these activities on the condition that (1) the
customer obtain or provide additional credit, property or services from or to
the financial holding company or any subsidiary thereof, or (2) the customer may
not obtain some other credit, property or services from a competitor, except to
the extent reasonable conditions are imposed to insure the soundness of credit
extended.
The Banks and other non-bank subsidiaries are also subject to other federal and
state laws and regulations. For example, BOSC, Inc., the Company's broker/dealer
subsidiary that engages in retail and institutional securities sales and
municipal bond underwriting, is regulated by the Securities and Exchange
Commission, the Financial Industry Regulatory Authority (FINRA), the Federal
Reserve Board, and state securities regulators. As another example, Bank of
Arkansas is subject to certain consumer-protection laws incorporated in the
Arkansas Constitution, which, among other restrictions, limit the maximum
interest rate on general loans to five percent above the Federal Reserve
Discount Rate and limit the rate on consumer loans to the lower of five percent
above the discount rate or seventeen percent.
Capital Adequacy and Prompt Corrective Action
The Federal Reserve Board, the OCC and the FDIC have issued substantially
similar risk-based and leverage capital guidelines applicable to United States
banking organizations to ensure capital adequacy based upon the risk levels of
assets and off-balance sheet financial instruments. In addition, these
regulatory agencies may from time to time require that a banking organization
maintain capital above the minimum levels, whether because of its financial
condition or actual or anticipated growth. Capital adequacy guidelines and
prompt corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators regarding components, risk weighting and
other factors.
The Federal Reserve Board risk-based guidelines define a three-tier capital
framework. Core capital (Tier 1) includes common shareholders' equity and
qualifying preferred stock, less goodwill, most intangible assets and other
adjustments. Supplementary capital (Tier 2) consists of preferred stock not
qualifying as Tier 1 capital, qualifying mandatory convertible debt securities,
limited amounts of subordinated debt, other qualifying term debt and allowances
for credit losses, subject to limitations. Market risk capital (Tier 3) includes
qualifying unsecured subordinated debt. Assets and off-balance sheet exposures
are assigned to one of four categories of risk-weights, based primarily upon
relative credit risk. Risk-based capital ratios are calculated by dividing Tier
1 and total capital by risk-weighted assets. For a depository institution to be
considered well capitalized under the regulatory framework for prompt corrective
action, the institution's Tier 1 and total capital ratios must be at least 6%
and 10% on a risk-adjusted basis, respectively. As of December 31, 2008, BOK
Financial's Tier 1 and total capital ratios under these guidelines were 9.40%
and 12.81%, respectively.
The leverage ratio is determined by dividing Tier 1 capital by adjusted average
total assets. Banking organizations are required to maintain a ratio of at least
5% to be classified as well capitalized. BOK Financial's leverage ratio at
December 31, 2008 was 7.89%.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA"), among other things, identifies five capital categories for insured
depository institutions from well capitalized to critically undercapitalized and
requires the respective federal regulatory agencies to implement systems for
prompt corrective action for institutions failing to meet minimum capital
requirements within such categories. FDICIA imposes progressively more
restrictive covenants on operations, management and capital distributions,
depending upon the category in which an institution is classified.
The various regulatory agencies have adopted substantially similar regulations
that define the five capital categories identified by FDICIA, using the total
risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the
relevant capital measures. Such regulations establish various degrees of
corrective action to be taken when an institution is considered
undercapitalized. Under these guidelines, each of the Banks was considered well
capitalized as of December 31, 2008.
The federal regulatory authorities' risk-based capital guidelines are based upon
the 1988 capital accord of the Basel Committee on Banking Supervision (the
"BIS"). The BIS is a committee of central banks and bank supervisors/regulators
from the major industrialized countries that develops broad policy guidelines
for use by each country's supervisors in determining the supervisory policies
they apply. In 2004, the BIS published a new capital accord to replace its 1988
capital accord, with an update
4
in November 2005 ("Basel II"). Basel II provides two approaches for setting
capital standards for credit risk -- an internal ratings-based approach tailored
to individual institutions' circumstances (which for many asset classes is
itself broken into a "foundation" approach and an "advanced or A-IRB" approach,
the availability of which is subject to additional restrictions) and a
standardized approach that bases risk weightings on external credit assessments
to a much greater extent than permitted in existing risk-based capital
guidelines. Basel II also would set capital requirements for operational risk
and refine the existing capital requirements for market risk exposures.
The U.S. banking and thrift agencies are developing proposed revisions to their
existing capital adequacy regulations and standards based on Basel II. In
September 2006, the agencies issued a notice of proposed rulemaking setting
forth a definitive proposal for implementing Basel II in the United States that
would apply only to internationally active banking organizations -- defined as
those with consolidated total assets of $250 billion or more or consolidated
on-balance sheet foreign exposures of $10 billion or more -- but that other U.S.
banking organizations could elect but would not be required to apply.
Furthermore, the U.S. agencies are proposing only to implement the most advanced
version of Basel II, the A-IRB option. In December 2006, the agencies issued a
notice of proposed rulemaking describing proposed amendments to their existing
risk-based capital guidelines to make them more risk-sensitive, generally
following aspects of the standardized approach of Basel II. These latter
proposed amendments, often referred to as "Basel I-A", would apply to banking
organizations that are not internationally active banking organizations subject
to the A-IRB approach for internationally active banking organizations and do
not "opt in" to that approach. The agencies previously had issued advance
notices of proposed rulemaking on both proposals (in August 2003 regarding the
A-IRB approach of Basel II for internationally active banking organizations and
in October 2005 regarding Basel I-A).
BOK Financial is not an internationally active banking organization and has not
made a determination as to whether or when it would opt to apply the A-IRB
provisions applicable to internationally active U.S. banking organizations once
they become effective. Recent U.S. bank regulatory proposals indicate that the
U.S. banking system will permit adoption of a "standardized" approach for Basel
II in lieu of the 1-A proposal for non-core Basel II institutions. BOK Financial
does not anticipate any 2009 developments on the regulatory front regarding
regulatory capital models for non-opt in banks. We do believe that previously
authorized approaches toward regulatory capital that permitted reduced
regulatory capital in mandatory and opt-in banks will be modified.
Further discussion of regulatory capital, including regulatory capital amounts
and ratios, is set forth under the heading "Liquidity and Capital" within
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in Note 16 of the Company's Notes to Consolidated Financial
Statements, both of which appear elsewhere herein.
Deposit Insurance
Substantially all of the deposits held by the Banks are insured up to applicable
limits by the Deposit Insurance Fund ("DIF") of the FDIC and are subject to
deposit insurance assessments to maintain the DIF. The FDIC utilizes a
risk-based assessment system that imposes insurance premiums based upon a risk
matrix that takes into account a bank's capital level and supervisory rating
("CAMELS rating"). As of January 1, 2007, the previous nine risk categories
utilized in the risk matrix were condensed into four risk categories, which
continue to be distinguished by capital levels and supervisory ratings. For
large Risk Category 1 institutions (generally those with assets in excess of $10
billion) that have long-term debt issuer ratings, including Bank of Oklahoma,
assessment rates are determined from weighted-average CAMELS component ratings
and long-term debt issuer ratings. The minimum annualized assessment rate for
large institutions is 12 basis points per $100 of deposits and the maximum
annualized assessment rate for large institutions is 50 basis points per $100 of
deposits. Quarterly assessment rates for large institutions in Risk Category 1
may vary within this range depending upon changes in CAMELS component ratings
and long-term debt issuer ratings. Deposit insurance rates are expected to
increase in 2009.
In 2008, the FDIC extended deposit insurance coverage through its Temporary
Liquidity Guaranty Program ("TGLP"). TGLP consists of two basic components, a
guarantee of certain newly issued unsecured debt of eligible financial
institutions and full guarantee of certain deposit accounts as defined by the
program. Eligible debt issued before June 30, 2009 will be fully protected
through the earlier of the maturity of the debt or June 30, 2012. Eligible
deposits will be fully protected until December 31, 2009. The Company's
subsidiary banks have elected to participate in both components of the TGLP. The
Company has not issued any debt under this guaranty program.
In addition, the Banks are assessed a charge based on deposit balances by the
Financing Corporation ("FICO"). The FICO is a mixed-ownership government
corporation established by the Competitive Equality Banking Act of 1987 whose
sole purpose was to function as a financing vehicle for the now defunct Federal
Savings & Loan Insurance Corporation.
Dividends
The primary source of liquidity for BOK Financial is dividends from the Banks,
which are limited by various banking regulations to net profits, as defined, for
the year plus retained profits for the preceding two years and further
restricted by minimum capital requirements. Based on the most restrictive
limitations, the Banks had excess regulatory capital and could declare up to
$171 million of dividends without regulatory approval as of December 31, 2008.
BOK Financial management has developed and the Board of Directors has approved
an internal capital policy that is more restrictive than the regulatory
standards. Under this policy, the Banks could declare dividends of up to $119
million as of December 31, 2008. These amounts are not necessarily indicative of
amounts that may be available to be paid in future periods.
5
Source of Strength Doctrine
According to Federal Reserve Board policy, bank holding companies are expected
to act as a source of financial strength to each subsidiary bank and to commit
resources to support each such subsidiary. This support may be required at times
when a bank holding company may not be able to provide such support. Similarly,
under the cross-guarantee provisions of the Federal Deposit Insurance Act, in
the event of a loss suffered by the FDIC as a result of default of a banking
subsidiary or related to FDIC assistance provided to a subsidiary in danger of
default, the other Banks may be assessed for the FDIC's loss, subject to certain
exceptions.
Governmental Policies and Economic Factors
The operations of BOK Financial and its subsidiaries are affected by legislative
changes and by the policies of various regulatory authorities and, in
particular, the credit policies of the Federal Reserve Board. An important
function of the Federal Reserve Board is to regulate the national supply of bank
credit to moderate recessions and curb inflation. Among the instruments of
monetary policy used by the Federal Reserve Board to implement its objectives
are: open-market operations in U.S. Government securities, changes in the
discount rate and federal funds rate on bank borrowings, and changes in reserve
requirements on bank deposits. The effect of future changes in such policies on
the business and earnings of BOK Financial and its subsidiaries is uncertain.
In response to a significant ongoing recession in business activity which began
in 2007, the U.S. government enacted various programs and continues to enact
programs to stimulate the economy. These programs include the Trouble Assets
Relief Program ("TARP"), which provided capital to eligible financial
institutions and other sectors of the domestic economy, and the TLGP, which
expanded insurance coverage to a larger amount of deposit account balances and
other qualifying debt issued by eligible financial institutions. In addition,
the government recently enacted economic stimulus legislation, which increases
government spending and reduces certain taxes. The immediate and long-term
effects of these programs on the economy in general and on BOK Financial
Corporation in particular are uncertain.
The Company elected not to participate in the TARP Capital Purchase Program. We
believe that current capital sources are sufficient to support organic growth,
acquisitions within our current market areas, cash dividends on our common stock
and periodic stock repurchases.
The Sarbanes-Oxley Act (the "Act") addresses many aspects of financial
reporting, corporate governance and public company disclosure. Among other
things, the Act establishes a comprehensive framework for the oversight of
public company auditing and for strengthening the independence of auditors and
audit committees. Under the Act, audit committees are responsible for the
appointment, compensation and oversight of the work of the auditors. The
non-audit services that can be provided to a company by its auditor are limited.
Audit committee members are subject to specific rules addressing their
independence. The Act also requires enhanced and accelerated financial
disclosures, and it establishes various responsibility measures, such as
requiring the chief executive officer and chief financial officer to certify to
the quality of the company's financial reporting. The Act imposes restrictions
on and accelerated reporting requirements for certain insider trading
activities. It imposes a variety of penalties for fraud and other violations and
creates a federal felony for securities fraud. Various sections of the Act are
applicable to BOK Financial.
Foreign Operations
BOK Financial does not engage in operations in foreign countries, nor does it
lend to foreign governments.
6
ITEM 1A. RISK FACTORS
Since 2007, the United States economy has been in recession. Business activity
across a wide range of industries and geographic regions has decreased and
unemployment has increased significantly. The financial services industry and
capital markets have been adversely affected by significant declines in asset
values, rising delinquencies and defaults, and restricted liquidity. Numerous
financial institutions have either failed or required a significant amount of
government assistance due to credit losses and liquidity shortages. There is no
assurance that these conditions will improve in the near term. Continued
recession in the economy could adversely affect our credit quality, financial
condition and results of operations.
Adverse factors could impact BOK Financial's ability to implement its operating
strategy.
Although BOK Financial has developed an operating strategy which it expects to
result in continuing improved financial performance, BOK Financial cannot assure
that it will be successful in fulfilling this strategy or that this operating
strategy will be successful. Achieving success is dependent upon a number of
factors, many of which are beyond BOK Financial's direct control. Factors that
may adversely affect BOK Financial's ability to implement its operating strategy
include:
o deterioration of BOK Financial's asset quality;
o inability to control BOK Financial's noninterest expenses;
o inability to increase noninterest income;
o deterioration in general economic conditions, especially in BOK Financial's
core markets;
o inability to access capital;
o decreases in net interest margins;
o increases in competition;
o adverse regulatory developments.
Adverse regional economic developments could negatively affect BOK Financial's
business.
A substantial majority of BOK Financial loans are generated in Oklahoma and
other markets in the southwest region. As a result, poor economic conditions in
Oklahoma or other markets in the southwest region may cause BOK Financial to
incur losses associated with higher default rates and decreased collateral
values in BOK Financial's loan portfolio. A regional economic downturn could
also adversely affect revenue from brokerage and trading activities, mortgage
loan originations and other sources of fee-based revenue.
Adverse economic factors affecting particular industries could have a negative
effect on BOK Financial customers and their ability to make payments to BOK
Financial.
Certain industry-specific economic factors also affect BOK Financial. For
example, a portion of BOK Financial's total loan portfolio is comprised of loans
to borrowers in the energy industry, which is historically a cyclical industry.
Low commodity prices may adversely affect that industry and, consequently, may
affect BOK Financial's business negatively. The effect of volatility in
commodity prices on our customer derivatives portfolio could adversely affect
our liquidity and regulatory capital. In addition, BOK Financial's loan
portfolio includes commercial real estate loans. A downturn in the real estate
industry in general or in certain segments of the commercial real estate
industry in Oklahoma and the southwest region could also have an adverse effect
on BOK Financial's operations.
Fluctuations in interest rates could adversely affect BOK Financial's business.
BOK Financial's business is highly sensitive to:
o the monetary policies implemented by the Federal Reserve Board, including
the discount rate on bank borrowings and changes in reserve requirements,
which affect BOK Financial's ability to make loans and the interest rates
we may charge;
o changes in prevailing interest rates, due to the dependency of BOK
Financial's banks on interest income;
o open market operations in U.S. Government securities.
Significant increase in market interest rates, or the perception that an
increase may occur, could adversely affect both BOK Financial's ability to
originate new loans and BOK Financial's ability to grow. Conversely, a decrease
in interest rates could result
7
in acceleration in the payment of loans, including loans underlying BOK
Financial's holdings of mortgage-backed securities and termination of BOK
Financial's mortgage servicing rights. In addition, changes in market interest
rates, changes in the relationships between short-term and long-term market
interest rates or changes in the relationships between different interest rate
indices, could affect the interest rates charged on interest-earning assets
differently than the interest rates paid on interest-bearing liabilities. This
difference could result in an increase in interest expense relative to interest
income. An increase in market interest rates also could adversely affect the
ability of BOK Financial's floating-rate borrowers to meet their higher payment
obligations. If this occurred, it could cause an increase in nonperforming
assets and net charge-offs, which could adversely affect BOK Financial's
business.
BOK Financial's substantial holdings of mortgage-backed securities and mortgage
servicing rights could adversely affect BOK Financial's business.
BOK Financial has invested a substantial amount of its holdings in
mortgage-backed securities, which are investment interests in pools of
mortgages. Mortgage-backed securities are highly sensitive to changes in
interest rates. BOK Financial mitigates this risk somewhat by investing
principally in shorter duration mortgage products, which are less sensitive to
changes in interest rates. A significant decrease in interest rates could lead
mortgage holders to refinance the mortgages constituting the pool backing the
securities, subjecting BOK Financial to a risk of prepayment and decreased
return on investment due to subsequent reinvestment at lower interest rates.
Conversely, a significant increase in interest rates could cause mortgage
holders to extend the term over which they repay their loans, which delays the
Company's opportunity to reinvest funds at higher rates.
Mortgage-backed securities are also subject to credit risk from delinquency or
default of the underlying loans. BOK Financial mitigates this risk somewhat by
investing in securities issued by U.S. government agencies. Principal and
interest payments on the loans underlying these securities are guaranteed by
these agencies. Credit risk on mortgage-backed securities originated by private
issuers is mitigated somewhat by investing in senior tranches with additional
collateral support.
Legislation is being considered that would potentially override the credit
enhancement of some privately issued mortgage-backed securities. The considered
legislation may allow terms of a mortgage loan to be modified in the case of
bankruptcy. In some cases, the reduction of principal owed on the loan would be
applied pro rata to tranches of the mortgage-backed security instead of
following the "water fall" structure of the tranches. The considered
legislation, if enacted, could have a material adverse effect on the fair value
of certain of our mortgage-backed securities.
In addition, as part of BOK Financial's mortgage banking business, BOK Financial
has substantial holdings of mortgage servicing rights. The value of these rights
is also very sensitive to changes in interest rates. Falling interest rates tend
to increase loan prepayments, which may lead to cancellation of the related
servicing rights. BOK Financial's investments and dealings in mortgage-related
products increase the risk that falling interest rates could adversely affect
BOK Financial's business. BOK Financial attempts to manage this risk by
maintaining an active hedging program for its mortgage servicing rights. BOK
Financial's hedging program has only been partially successful in recent years.
The value of mortgage servicing rights may also decrease due to rising
delinquency or default of the loans serviced. This risk is mitigated somewhat by
adherence to underwriting standards on loans originated for sale.
Market disruptions could impact BOK Financial's funding sources.
BOK Financial's subsidiary banks rely on other financial institutions and the
Federal Home Loan Banks of Topeka and Dallas as a significant source of funds.
Our ability to fund loans, manage our interest rate risk and meet other
obligations depends on funds borrowed from these sources. The inability to
borrow funds at market interest rates could have a material adverse effect on
our operations.
Substantial competition could adversely affect BOK Financial.
Banking is a competitive business. BOK Financial competes actively for loan,
deposit and other financial services business in Oklahoma, as well as in BOK
Financial's other markets. BOK Financial's competitors include a large number of
small and large local and national banks, savings and loan associations, credit
unions, trust companies, broker-dealers and underwriters, as well as many
financial and nonfinancial firms that offer services similar to BOK Financial's.
Large national financial institutions have entered the Oklahoma market. These
institutions have substantial capital, technology and marketing resources. Such
large financial institutions may have greater access to capital at a lower cost
than BOK Financial does, which may adversely affect BOK Financial's ability to
compete effectively.
BOK Financial has expanded into markets outside of Oklahoma, where it competes
with a large number of financial institutions that have an established customer
base and greater market share than BOK Financial. BOK Financial may not be able
to continue to compete successfully in these markets outside of Oklahoma. With
respect to some of its services, BOK Financial competes with non-bank companies
that are not subject to regulation. The absence of regulatory requirements may
give non-banks a competitive advantage.
8
Banking regulations could adversely affect BOK Financial.
BOK Financial and its subsidiaries are extensively regulated under both federal
and state law. In particular, BOK Financial is subject to the Bank Holding
Company Act of 1956 and the National Bank Act. These regulations are primarily
for the benefit and protection of BOK Financial's customers and not for the
benefit of BOK Financial's investors. In the past, BOK Financial's business has
been materially affected by these regulations. For example, regulations limit
BOK Financial's business to banking and related businesses, and they limit the
location of BOK Financial's branches and offices, as well as the amount of
deposits that it can hold in a particular state. These regulations may limit BOK
Financial's ability to grow and expand into new markets and businesses.
Additionally, under the Community Reinvestment Act, BOK Financial is required to
provide services in traditionally underserved areas. BOK Financial's ability to
make acquisitions and engage in new business may be limited by these
requirements.
The Federal Deposit Insurance Corporation Improvement Act of 1991 and the Bank
Holding Company Act of 1956, and various regulations of regulatory authorities,
require us to maintain specified capital ratios. Any failure to maintain
required capital ratios would limit the growth potential of BOK Financial's
business.
Under a long-standing policy of the Board of Governors of the Federal Reserve
System, a bank holding company is expected to act as a source of financial
strength for its subsidiary banks. As a result of that policy, BOK Financial may
be required to commit financial and other resources to its subsidiary banks in
circumstances where we might not otherwise do so.
The trend toward extensive regulation is likely to continue in the future. Laws,
regulations or policies currently affecting us and BOK Financial's subsidiaries
may change at any time. Regulatory authorities may also change their
interpretation of these statutes and regulations. Therefore, BOK Financial's
business may be adversely affected by any future changes in laws, regulations,
policies or interpretations.
Statutory restrictions on subsidiary dividends and other distributions and debts
of BOK Financial's subsidiaries could limit amounts BOK Financial's subsidiaries
may pay to BOK Financial.
BOK Financial is a financial holding company, and a substantial portion of BOK
Financial's cash flow typically comes from dividends that BOK Financial's bank
and nonbank subsidiaries pay to BOK Financial. Various statutory provisions
restrict the amount of dividends BOK Financial's subsidiaries can pay to BOK
Financial without regulatory approval. Management also developed, and the BOK
Financial board of directors approved, an internal capital policy that is more
restrictive than the regulatory capital standards. In addition, if any of BOK
Financial's subsidiaries liquidates, that subsidiary's creditors will be
entitled to receive distributions from the assets of that subsidiary to satisfy
their claims against it before BOK Financial, as a holder of an equity interest
in the subsidiary, will be entitled to receive any of the assets of the
subsidiary. If, however, BOK Financial is a creditor of the subsidiary with
recognized claims against it, BOK Financial will be in the same position as
other creditors.
Although publicly traded, BOK Financial's common stock has substantially less
liquidity than the average trading market for a stock quoted on the Nasdaq
National Market System.
A relatively small fraction of BOK Financial's outstanding common stock is
actively traded. The risks of low liquidity include increased volatility of the
price of BOK Financial's common stock. Low liquidity may also limit holders of
BOK Financial's common stock in their ability to sell or transfer BOK
Financial's shares at the price, time and quantity desired.
BOK Financial's principal shareholder controls a majority of BOK Financial's
common stock.
Mr. George B. Kaiser owns a majority of the outstanding shares of BOK
Financial's common stock. Mr. Kaiser is able to elect all of BOK Financial's
directors and effectively control the vote on all matters submitted to a vote of
BOK Financial's common shareholders. Mr. Kaiser's ability to prevent an
unsolicited bid for BOK Financial or any other change in control could have an
adverse effect on the market price for BOK Financial's common stock. A
substantial majority of BOK Financial's directors are not officers or employees
of BOK Financial or any of its affiliates. However, because of Mr. Kaiser's
control over the election of BOK Financial's directors, he could change the
composition of BOK Financial's Board of Directors so that it would not have a
majority of outside directors.
Possible future sales of shares by BOK Financial's principal shareholder could
adversely affect the market price of BOK Financial's common stock.
Mr. Kaiser has the right to sell shares of BOK Financial's common stock in
compliance with the federal securities laws at any time, or from time to time.
The federal securities laws will be the only restrictions on Mr. Kaiser's
ability to sell. Because of his current control of BOK Financial, Mr. Kaiser
could sell large amounts of his shares of BOK Financial's common stock by
causing BOK Financial to file a registration statement that would allow him to
sell shares more easily. In addition, Mr. Kaiser could sell his shares of BOK
Financial's common stock without registration under Rule 144 of the Securities
Act. Although BOK Financial can make no predictions as to the effect, if any,
that such sales would have on the market price of BOK Financial's
9
common stock, sales of substantial amounts of BOK Financial's common stock, or
the perception that such sales could occur, could adversely affect market
prices. If Mr. Kaiser sells or transfers his shares of BOK Financial's common
stock as a block, another person or entity could become BOK Financial's
controlling shareholder.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
BOK Financial and its subsidiaries own and lease improved real estate that is
carried at $198 million, net of depreciation and amortization. The Company's
principal offices are located in leased premises in the Bank of Oklahoma Tower,
Tulsa, Oklahoma. Banking offices are primarily located in Tulsa and Oklahoma
City, Oklahoma, Dallas, Fort Worth and Houston, Texas, Albuquerque, New Mexico,
Denver, Colorado, Phoenix, Arizona, and Kansas City, Missouri / Kansas. Primary
operations facilities are located in Tulsa and Oklahoma City, Oklahoma, Dallas,
Texas, and Albuquerque, New Mexico. The Company's facilities are suitable for
their respective uses and present needs.
The information set forth in Notes 6 and 15 of the Company's Notes to
Consolidated Financial Statements, which appear elsewhere herein, provides
further discussion related to properties.
ITEM 3. LEGAL PROCEEDINGS
The information set forth in Note 15 of the Company's Notes to Consolidated
Financial Statements, which appear elsewhere herein, provides discussion related
to legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the three months ended December 31,
2008.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
BOK Financial's $0.00006 par value common stock is traded on the Nasdaq Stock
Market under the symbol BOKF. As of January 31, 2009, common shareholders of
record numbered 982 with 67,482,730 shares outstanding.
The highest and lowest closing bid price for shares and cash dividends per share
of BOK Financial common stock follows:
First Second Third Fourth
-------------- --------------- -------------- ---------------
2008:
Low $46.82 $49.11 $38.61 $38.40
High 55.23 60.74 53.94 54.42
Cash dividends 0.20 0.225 0.225 0.225
2007:
Low $49.37 $48.59 $47.37 $51.44
High 55.43 54.96 54.20 55.43
Cash dividends 0.15 0.20 0.20 0.20
10
Shareholder Return Performance Graph
Set forth below is a line graph comparing the change in cumulative shareholder
return of the NASDAQ Index, the NASDAQ Bank Index, and the KBW 50 Bank Index for
the period commencing December 31, 2003 and ending December 31, 2008.*
TOTAL RETURN PERFORMANCE graph shown here. Data points are:
Period Ending
-----------------------------------------------------------------------------
Index 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08
--------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
BOK Financial Corporation 100.00 129.71 121.66 148.86 141.99 112.97
NASDAQ Composite 100.00 108.59 110.08 120.56 132.39 78.72
NASDAQ Bank Index 100.00 110.99 106.18 117.87 91.85 69.88
KBW 50 100.00 111.54 111.34 132.94 103.95 54.52
* Graph assumes value of an investment in the Company's Common Stock for each
index was $100 on December 31, 2003. The KBW 50 Bank index is the Keefe,
Bruyette & Woods, Inc. index, which is available only for calendar quarter
end periods. During the periods shown, no dividends were paid on BOK
Financial Common Stock, except on May 31, 2004, the Company paid a 3%
dividend on BOK Financial Common Stock outstanding as of May 10, 2004. Cash
dividends on Common Stock, which were first paid in 2005, are assumed to have
been reinvested in BOK Financial Common Stock.
11
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 December 31, 2008.
------------------------------------- -------------------- ----------------- ------------------------ ---------------
Maximum
Number of
Shares that
Total Number of Shares May Yet Be
Purchased as Part of Purchased
Total Number of Average Price Publicly Announced Under the
Period Shares Purchased (2) Paid per Share Plans or Programs (1) Plans
------------------------------------- -------------------- ----------------- ------------------------ ---------------
October 1, 2008 to October 31, 2008 - - - 1,215,927
------------------------------------- -------------------- ----------------- ------------------------ ---------------
November 1, 2008 to November 30, 2008 4,979 $42.27 - 1,215,927
------------------------------------- -------------------- ----------------- ------------------------ ---------------
December 1, 2008 to December 31, 2008 2,348 $41.88 - 1,215,927
------------------------------------- -------------------- ----------------- ------------------------ ---------------
Total 7,327 -
------------------------------------- -------------------- ----------------- ------------------------ ---------------
(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 December 31,
2008, the Company had repurchased 784,073 shares under the new plan.
(2) The Company routinely repurchases mature shares from employees to cover the
exercise price and taxes in connection with employee stock option
exercises.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data is set forth within Table 1 of Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Table 1 Consolidated Selected Financial Data
(Dollars In Thousands Except Per Share Data)
December 31,
---------------------------------------------------------------------
2008 2007 2006 2005 2004
---------------------------------------------------------------------
Selected Financial Data
For the year:
Interest revenue $1,061,645 $1,160,737 $ 986,429 $ 769,934 $ 614,284
Interest expense 414,783 616,252 499,741 320,593 191,041
Net interest revenue 646,862 544,485 486,688 449,341 423,243
Provision for credit losses 202,593 34,721 18,402 12,441 20,439
Fees and commissions revenue 414,000 405,622 371,696 344,864 312,227
Net income 153,232 217,664 212,977 201,505 179,023
Period-end:
Loans 12,876,006 11,940,570 10,651,178 9,088,312 7,888,705
Assets 22,734,648 20,667,701 18,059,624 16,327,069 14,145,660
Deposits 14,982,607 13,459,291 12,386,705 11,375,318 9,674,398
Subordinated debentures 398,407 398,273 297,800 295,964 151,594
Shareholders' equity 1,846,257 1,935,384 1,721,022 1,539,154 1,398,494
Nonperforming assets(2) 342,291 104,159 44,343 40,017 61,112
Profitability Statistics
Earnings per share (based on average equivalent shares):
Basic $ 2.28 $ 3.24 $ 3.19 $ 3.14 $ 3.00
Diluted 2.27 3.22 3.16 3.01 2.68
Percentages (based on daily averages):
Return on average assets 0.71% 1.14% 1.27% 1.29% 1.28%
Return on average shareholders' equity 7.87 12.01 13.23 13.78 13.80
Average shareholders' equity to average assets 9.01 9.53 9.58 9.38 9.25
Common Stock Performance
Per Share:
Book value per common share(5) $ 27.36 $ 28.75 $ 25.66 $ 23.07 $ 23.28
Market price: December 31 close 40.40 51.70 54.98 45.43 48.76
Market range - High close 60.84 55.57 54.98 49.31 49.18
- Low close 38.48 47.47 44.43 39.79 37.29
Cash dividends declared 0.875 0.75 0.55 0.30 -
Selected Balance Sheet Statistics
Period-end:
Tier 1 capital ratio 9.40% 9.38% 9.78% 9.84% 10.02%
Total capital ratio 12.81 12.54 11.58 12.10 11.67
Leverage ratio 7.89 8.20 8.79 8.30 7.94
Tangible common equity ratio(1) 6.64 7.72 8.22 7.94 8.31
Reserve for loan losses to nonperforming loans 74.49 133.79 305.37 329.34 189.40
Reserve for loan losses to loans 1.81 1.06 1.03 1.14 1.38
Combined reserves for credit losses to loans (4) 1.93 1.24 1.22 1.37 1.61
Miscellaneous (at December 31)
Number of employees (full-time equivalent) 4,300 4,110 3,958 3,825 3,548
Number of banking locations 195 189 163 150 149
Number of TransFund locations 1,933 1,822 1,649 1,421 1,389
Trust assets $30,454,512 $36,288,592 $31,704,091 $28,464,745 $24,589,053
Mortgage loan servicing portfolio(3) 5,983,824 5,481,736 4,988,611 4,492,524 4,486,513
------------------------------------------------------------------------------------------------------------------------
(1) Shareholders' equity less preferred equity, intangible assets and equity
provided by the TARP Capital Program divided by total assets less
intangible assets.
(2) Includes nonaccrual loans, renegotiated loans and assets acquired in
satisfaction of loans. Excludes loans past due 90 days or more and still
accruing.
(3) Includes outstanding principal for loans serviced for affiliates.
(4) Includes reserve for loan losses and reserve for off-balance sheet credit
losses.
(5) Conversion of Series A preferred stock added 6.9 million common shares
outstanding in 2005.
13
Management's Assessment of Operations and Financial Condition
Overview
BOK Financial Corporation ("BOK Financial" or "the Company") is a financial
holding company that offers full service banking in Oklahoma, Northwest
Arkansas, Dallas, Forth Worth and Houston, Texas, Albuquerque, New Mexico,
Denver, Colorado, Phoenix, Arizona and Kansas City, Missouri / Kansas. The
Company was incorporated in 1990 in Oklahoma and is headquartered in Tulsa,
Oklahoma. Activities are governed by the Bank Holding Company Act of 1956, as
amended by the Financial Services Modernization Act or Gramm-Leach-Bliley Act of
1999. Principal banking subsidiaries are Bank of Oklahoma, N.A., Bank of
Albuquerque, N.A., Bank of Arkansas, N.A., Bank of Texas, N.A., Colorado State
Bank and Trust, N.A., Bank of Arizona, N.A. and Bank of Kansas City, N.A. Other
subsidiaries include BOSC, Inc. a broker/dealer that engages in retail and
institutional securities sales and municipal bond underwriting.
Our overall strategic objective is to emphasize growth in long-term value by
building on our leadership position in Oklahoma and expanding into high-growth
markets in contiguous states. We have a solid position in Oklahoma and are the
state's largest financial institution as measured by deposit market share. At
December 31, 2008, 46% of our outstanding loans and 60% of our deposits are
attributed to the Oklahoma market. Since 1997, we have expanded into Dallas,
Fort Worth and Houston, Texas, Albuquerque, New Mexico, Denver, Colorado,
Phoenix, Arizona and Kansas City, Missouri / Kansas. At December 31, 2008, 29%
of our outstanding loans and 23% of our deposits are attributed to Texas. None
of our other regional markets provide more than 10% of our outstanding loans or
deposits. Our acquisition strategy targets quality organizations that have
demonstrated solid growth in their business lines. We provide additional growth
opportunities by hiring talent to enhance competitiveness, adding locations, and
broadening product offerings. Our operating philosophy embraces local
decision-making in each of our geographic markets while adhering to common
Company standards. We also consider acquisitions of distressed financial
institutions in selected markets when opportunities become available.
Our primary focus is to provide a comprehensive range of nationally competitive
financial products and services in a personalized and responsive manner. Our
products and services include loans and deposits, cash management services,
fiduciary services, mortgage banking, and brokerage and trading services to
middle-market businesses, financial institutions, and consumers. Commercial
banking is a significant part of our business. Our credit culture emphasizes
building relationships by making high-quality loans and providing a full range
of financial products and services to our customers. Our energy financing
expertise enables us to offer commodity derivatives for customers to use in
their risk management and positioning activities. Our revenue sources are
diverse. Historically, fees and commissions revenue provide 40% - 45% of our
total revenue. Approximately 39% of our revenue came from commissions and fees
in 2008 due to credit losses incurred on two positions in our customer hedging
program.
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. 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 electronic funds
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 bank
services and investment advisory services in all markets.
The financial services industry experienced significant disruptions during 2008.
Numerous financial institutions either failed or required a significant amount
of government assistance due to credit losses and liquidity shortages. Loan
losses, which initially were limited to residential construction loans in
certain markets, spread to other commercial real estate loans and commercial
loans. Credit spreads on certain financial instruments, such as some
mortgage-backed securities, widened extremely due to uncertainty of the
underlying cash flows. This uncertainty and lack of trading volumes
significantly decreased the fair value of these instruments. Energy prices were
extremely volatile during the year. The price of oil exceeded $140 per barrel in
mid-year then fell to under $40 per barrel by year end. These market events
reduced our net income for 2008, but did not significantly impair our
operations.
Performance Summary
BOK Financial's net income for 2008 totaled $153 million or $2.27 per diluted
share compared with $218 million or $3.22 per diluted share in 2007.
Highlights of 2008 included:
o Net interest revenue increased $102 million or 19% over 2007. Average
earning assets were up $2.0 billion or 12%. Net interest margin was 3.45%
for 2008, up 17 basis points over 2007.
14
o Combined reserves for credit losses totaled $248 million or 1.93% of
outstanding loans at December 31, 2008, up from $148 million or 1.24% of
outstanding loans at December 31, 2007. Provision for credit losses and net
charge-offs were $203 million and $102 million, respectively for 2008 and
$35 million and $21 million, respectively, for 2007.
o Non-performing assets totaled $342 million or 2.65% of outstanding loans
and repossessed assets at December 31, 2008, up from $104 million or 0.87%
of outstanding loans and repossessed assets at December 31, 2007.
o Fees and commissions revenue totaled $414 million for 2008 and $406 million
for 2007. Net credit losses on derivative contracts related to two bankrupt
counterparties reduced fees and commissions revenue by $54 million in 2008.
o The fair value of mortgage servicing rights, net of economic hedging gains
or losses decreased $24 million in 2008 and $3 million in 2007. Anticipated
prepayment speeds increased significantly during the fourth quarter in
response to government programs to lower mortgage interest rates.
o The Company evaluated and elected not to participate in the U.S. Treasury's
TARP Capital Purchase Program. Tier 1 and tangible common equity ratios
were 9.40% and 6.64%, respectively, at December 31, 2008. Tier 1 and
tangible common equity ratios were 9.38% and 7.72%, respectively, at
December 31, 2007. The decrease in tangible common equity ratio was due
largely to a $182 million after-tax increase in unrealized losses on
available for sale securities.
o The Company elected to participate in the FDIC's Temporary Liquidity
Guarantee Program. This Program provides full deposit insurance coverage of
non-interest bearing, transaction deposit accounts and guarantees certain
newly issued senior unsecured debt. The Company has not issued any
guaranteed debt under this program.
Net income for the fourth quarter of 2008 totaled $35 million or $0.53 per
diluted share compared with $51 million or $0.76 per diluted share for the
fourth quarter of 2007.
Highlights of the fourth quarter of 2008 included:
o Net interest revenue totaled $176 million, up $35 million over the fourth
quarter of 2007. Net interest margin was 3.57% for the fourth quarter of
2008 and 3.22% for the fourth quarter of 2007.
o Net loans charged off and provision for credit losses were $34 million and
$73 million, respectively for the fourth quarter of 2008. Net loans charged
off and provision for credit losses were $7.3 million and $13 million,
respectively, for the fourth quarter of 2007.
o The fair value of mortgage servicing rights, net of economic hedging gains
or losses decreased $11 million in 2008 and $2 million in 2007.
Critical Accounting Policies
Application of Critical Accounting Policies
Preparation of our consolidated financial statements is based on the selection
of certain accounting policies, which requires management to make significant
assumptions and estimates. The following discussion addresses the most critical
areas where these assumptions and estimates could affect financial condition and
results of operations. Actual results could differ significantly from these
estimates. Application of these critical accounting policies and estimates has
been discussed with the appropriate committees of the Board of Directors.
Additional accounting policies are described in Note 1 to the Consolidated
Financial Statements.
New accounting standards first adopted in 2008 included Statement of Financial
Accounting Standards No. 159, "Fair Value Option" ("FAS 159"). 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,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), were
designated as being reported at fair value. The initial adoption of FAS 159 did
not significantly affect the Company's financial statements. 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 effect of FAS 159 on our 2008 operations is presented in Note 4 to the
Consolidated Financial Statements.
15
Reserves for Loan Losses and Off-Balance Sheet Credit Losses
Reserves for loan losses and off-balance sheet credit losses are assessed by
management based on an ongoing quarterly evaluation of the probable estimated
losses inherent in the portfolio and probable estimated losses on unused
commitments to provide financing. A consistent, well-documented methodology has
been developed that includes reserves assigned to specific loans and
commitments, general reserves that are based on a statistical migration analysis
and nonspecific reserves that are based on analysis of current economic
conditions, loan concentrations, portfolio growth and other relevant factors.
An independent Credit Administration department is responsible for performing
this evaluation for all of our subsidiaries to ensure that the methodology is
applied consistently.
Specific reserves for impairment are determined through evaluation of estimated
future cash flows, collateral values and historical statistics in accordance
with Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for the Impairment of a Loan", regulatory accounting standards and
other authoritative literature. Commercial and commercial real estate loans and
commitments in excess of $1 million are reviewed for impairment. Significant
loans and commitments that exhibit weaknesses or deteriorating trends are
individually reviewed quarterly.
General reserves for commercial and commercial real estate loan losses and
related commitments not evaluated individually for impairment are determined
primarily through an internally developed migration analysis model. The purpose
of this model is to determine the probability that each credit relationship in
the portfolio has an inherent loss based on historical trends. We use an
eight-quarter aggregate accumulation of net losses as a basis for this model.
Greater emphasis is placed on loan losses in more recent periods. A minimum
reserve level is established for each loan grade based on long-term loss
history. This model assigns a general reserve to all commercial loans and leases
and commercial real estate loans, excluding loans that have a specific
impairment reserve.
Separate models are used to determine the general reserve for residential
mortgage loans, excluding residential mortgage loans held for sale, and consumer
loans. The general reserve for residential mortgage loans is based on an
eight-quarter average percent of loss. General reserves for consumer loans are
based on a migration of loans from current status to loss. Separate migration
factors are determined by major product line, such as indirect automobile loans
and direct consumer loans.
Nonspecific reserves are maintained for risks beyond those factors specific to a
particular loan or those identified by the migration models. These factors
include trends in the general economy in our primary lending areas, conditions
in specific industries where we have a concentration, such as energy, commercial
real estate and homebuilders and agriculture, concentrations in large credits
and overall growth in the loan portfolio. Evaluation of the nonspecific reserves
also considers duration of the business cycle, regulatory examination results,
potential errors in the migration analysis models and the underlying data, and
other relevant factors. A range of potential losses is determined for each
factor identified.
A separate reserve for off-balance sheet credit risk is maintained. The
provision for credit losses includes the combined charge to expense for both the
reserve for loan losses and the reserve for off-balance sheet credit losses. All
losses incurred from lending activities will ultimately be reflected in
charge-offs against the reserve for loan losses after funds are advanced against
outstanding commitments and after the exhaustion of collection efforts.
Valuation of Mortgage Servicing Rights
We have a significant investment in mortgage servicing rights. These rights are
primarily retained from sales of loans we have originated or occasionally
purchased from other lenders. Originated mortgage servicing rights are initially
recognized at fair value. Fair value is based on market quotes for similar
servicing rights, which is a Level 2 input as defined by Statement of Financial
Accounting Standards No. 157, "Fair Value Measurements" ("FAS 157"). Subsequent
changes in fair value are recognized in earnings as they occur.
There is no active market for trading in mortgage servicing rights after
origination. We use a cash flow model to determine fair value. Key assumptions
and estimates including projected prepayment speeds and assumed servicing costs,
earnings on escrow deposits, ancillary income and discount rates, used by this
model are based on current market sources. Assumptions used to value our
mortgage servicing rights are considered Level 3 inputs as defined by FAS 157
and represent our best estimate of assumptions that market participants would
use to value this asset. A separate third party model is used to estimate
prepayment speeds based on interest rates, housing turnover rates, estimated
loan curtailment, anticipated defaults and other relevant factors. The
prepayment model is updated daily for changes in market conditions. We adjusted
the prepayment projections determined by this model to better correlate with
actual performance of our servicing portfolio. The discount rate is based on
benchmark rates for mortgage loans plus a market spread expected by investors in
servicing rights. Significant assumptions used to determine the fair value of
our mortgage servicing rights are presented in Note 8 to the Consolidated
Financial Statements. At least annually, we request estimates of fair value from
outside sources to corroborate the results of the valuation model.
The assumptions used in this model are primarily based on mortgage interest
rates. Evaluation of the effect of a change in one assumption without
considering the effect of that change on other assumptions is not meaningful.
Considering all related assumptions, a 50 basis point increase in mortgage
interest rates is expected to increase the fair value of our servicing rights by
16
$10 million. A 50 basis point decrease in mortgage interest rates is expected to
decrease the fair value of our servicing rights by $11 million.
Intangible Assets
Intangible assets, which consist primarily of goodwill, core deposit intangible
assets and other acquired intangibles, for each business unit are evaluated for
impairment annually as of October 1st or more frequently if conditions indicate
that impairment may have occurred. The evaluation of possible impairment of
intangible assets involves significant judgment based upon short-term and
long-term projections of future performance.
The fair value of each of our business units is estimated by the discounted
future earnings method. Income growth is projected over a seven-year period for
each unit and a terminal value is computed. The projected income stream is
converted to current fair value by using a discount rate that reflects a rate of
return required by a willing buyer. Assumptions used to value our business units
are based on growth rates, volatility, discount rate and market risk premium
inherent in our current stock price. These assumptions are considered Level 3
inputs as defined by FAS 157 and represent our best estimate of assumptions that
market participants would use to determine fair value of the respective business
units. The most critical assumptions in our evaluation were a 7.00% expected
long-term growth rate, a 0.66% volatility factor for BOK Financial common stock,
a 9.36% discount rate and a 11.04% market risk premium.
Approximately $240 million or 72% of total goodwill was attributed to the Texas
market and $56 million or 17% of total goodwill was attributed to the Colorado
market. We also have $17 million of goodwill in the Arizona market and $15
million of goodwill in the New Mexico market. Because of the large concentration
of goodwill in the Texas and Colorado markets, the fair value determined by the
discounted future earnings method was corroborated by comparison to the fair
value of publicly traded banks of similar size and characteristics. No goodwill
impairment was indicated by either valuation method.
The effect of a 10% negative change in assumptions used to evaluate goodwill
impairment using the discounted future earnings method was simulated. No
impairment was indicated by this simulation.
The current market value of BOK Financial common stock, a primary assumption in
our goodwill impairment analysis, is approximately 32% below the market value
used in our most recent annual evaluation. The decline in market value is due
largely to factors affecting the overall economy and the regional banks sector
of the market. It is not due to operating losses, losses of major customers or
market share, or other factors specific to BOK Financial. Therefore, we do not
believe the decline in market value of our stock to be an event that requires a
re-evaluation of our goodwill impairment. Goodwill impairment may be indicated
at our next annual evaluation date if the market value of our stock remains at
or near current prices, or sooner if we incur significant operating losses or if
other factors indicate a significant decline in the value of our business.
Intangible assets with finite lives, such as core deposit intangible assets, are
amortized using accelerated methods over their estimated useful lives. Core
deposit intangible assets generally have a weighted average life of five years
based on the expected lives of the acquired deposit accounts. Such assets are
reviewed for impairment whenever events indicate that the remaining carrying
amount may not be recoverable.
Valuation of Derivative Instruments
We use interest rate derivative instruments to manage our interest rate risk. We
also offer interest rate, commodity, and foreign exchange derivative contracts
to our customers. All derivative instruments are carried on the balance sheet at
fair value. Fair values for exchange-traded contracts are based on quoted
prices. Fair values for over-the-counter interest rate contracts used to manage
our interest rate risk are provided either by third-party dealers in the
contracts or by quotes provided by independent pricing services. Information
used by these third-party dealers or independent pricing services to determine
fair values are considered Level 2, observable market inputs as defined by FAS
157. Interest rate, commodity and foreign exchange contracts used in our
customer hedging programs are based on valuations generated internally by
third-party provided pricing models. These models use Level 2, observable market
inputs to estimate fair values. Changes in assumptions used in these pricing
models could significantly affect the reported fair values of derivative assets
and liabilities, though the net effect of these changes should not significantly
affect earnings.
Credit risk is considered in determining the fair value of derivative
instruments. Deterioration in the credit rating of customers or dealers reduces
the fair value of asset contracts. The reduction in fair value is recognized in
earnings during the current period. Deterioration in our credit rating below
investment grade would affect the fair value of our derivative liabilities. In
the event of a credit down-grade, the fair value of our derivative liabilities
would decrease. The reduction in fair value would be recognized in earnings in
the current period.
Valuation of Securities
The fair value of our securities portfolio is primarily based on a third-party
pricing service. We review the methodologies used by the pricing service and
concluded them to be based on Level 2 observable market inputs. Management
evaluates the fair
17
values provided by the pricing service against other sources, including brokered
quotes, sales or purchases of similar securities, and discounted cash flow
analysis.
Other-than-Temporary Impairment
We perform a quarterly evaluation of unrealized losses on investment and
available for sale securities to determine whether the losses are temporary or
other-than-temporary as required by Statement of Financial Accounting Standards
No 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS
115"). This evaluation assesses the probability of full recovery of the carrying
value of the security and management's ability and intent to hold the security
until fair value recovers. Temporary impairment, net of deferred income taxes,
is recognized as charges against shareholders' equity as part of other
comprehensive income. Other-than-temporary impairment is recognized through a
charge against earnings.
Impairment of debt securities rated investment grade is generally considered to
be temporary. Impairment of debt securities rated below investment grade by any
one of the three nationally-recognized ratings agencies is evaluated further.
Securities rated below investment grade currently consist of mortgage-backed
securities privately issued by publicly owned financial institutions. Other than
temporary impairment is required to be recognized when it is probable that there
has been an adverse change in the amount or timing of estimated cash flows of
these securities as provided by Financial Accounting Standards Board ("FASB")
Staff Position EITF Issue No. 99-20-1, "Amendments to the Impairment and
Interest Income Measurement Guidance of EITF Issue No. 99-20" ("FSP EITF
99-20-1"). We assess the estimated cash flows by computing a loan to value ratio
for each security rated below investment grade based on the original loan to
value ratio inherent in the security, adjusted for changes in housing prices,
prepayment speeds, default rates and credit enhancement. Consideration is given
to other-than-temporary impairment if the adjusted loan to value ratio of a
specific security exceeds 85%.
Equity securities include variable rate, preferred stocks issued by major
commercial and investment banks. Impairment evaluation is based on current and
anticipated market conditions, the financial condition and near term prospects
of each of the issuers and the length of time the security has been impaired. We
assess the probability that spreads over LIBOR on these securities will narrow
and fair values will increase over a 24-month to 36-month period beginning on
the most recent date that fair value equaled our carrying value, June 30, 2008,
and concluded that the impairment was temporary at December 31, 2008.
Income Taxes
Determination of income tax expense and related assets and liabilities is
complex and requires estimates and judgments when applying tax laws, rules,
regulations and interpretations. It also requires judgments as to future
earnings and the timing of future events. Accrued income taxes represent an
estimate of net amounts due to or from taxing jurisdictions based upon these
estimates, interpretations and judgments.
Quarterly, management evaluates the Company's effective tax rate based upon its
current estimate of net income, tax credits and statutory tax rates expected for
the full year. Changes in income tax expense due to changes in the effective tax
rate are recognized on a cumulative basis. Annually, we file tax returns with
each jurisdiction where we conduct business and settle our return liabilities.
We may also provide for estimated liabilities associated with uncertain filing
positions.
Deferred tax assets and liabilities are determined based upon the differences
between the values of assets and liabilities as recognized in the financial
statements and their related tax basis using enacted tax rates in effect for the
year in which the differences are expected to be recovered or settled. A
valuation allowance is provided when it is more likely than not that some
portion of the entire deferred tax asset may not be realized based on taxes
previously paid in net loss carry-back periods and other factors.
We recognize the benefit of uncertain income tax positions when based upon all
relevant evidence it is more-likely-than-not that our position would prevail
upon examination, including resolution of related appeals or litigation, based
upon the technical merits of the position. A reserve for the uncertain portion
of the tax benefit, including estimated interest and penalties, is part of our
current accrued income tax liability. Estimated penalties and interest are
recognized in income tax expense. This reserve for uncertain tax positions may
reduce income tax expense in future periods if the uncertainty is favorably
resolved, generally upon completion of an examination by the taxing authorities,
expiration of a statute of limitations or changes in facts and circumstances.
Pensions
The Company offers a defined-benefit, cash-balance pension plan to all employees
who satisfied certain age and length of service requirements. Pension plan
benefits were curtailed as of April 1, 2006. No participants may be added to the
plan and no additional service benefits will be accrued. Interest continues to
accrue on employees' account balances at 5.25%. Accounting for this plan
requires management to make assumptions regarding the expected long-term rate of
return on plan assets and the discount rate. Changes in these assumptions affect
pension liability and pension expense. Management, in consultation with
independent actuaries, bases its assumptions on currently available information.
18
All plan assets are invested in the Cavanal Hill Balanced Fund. The expected
long-term return on plan assets is based on this fund's life-to-date
performance, adjusted for any known or expected changes in the fund's
compositions or objectives. The expected return on plan assets was 7.00% for
2008 and 2007, and reduced to 5.25% for 2009.
The discount rate, which is used to determine the present value of our
obligation to provide future benefits to plan participants and the related
interest cost, is based on a spot-rate yield curve of high-quality fixed income
securities such as AA rated industrial and utility bonds. A weighted average
discount rate is determined by matching expected future cash outflows from the
plan to interest rates at various spots along the yield curve. This method of
determining the discount rate is expected to better represent the cost of future
cash flows as the static participant pool decreases over time. The discount rate
was 6.50% as December 31, 2008 and 6.00% as of December 31, 2007. A 25 basis
point decrease in the discount rate increases the pension liability by
approximately $800 thousand or 2% and has no significant effect on pension
expense because of the curtailment of benefits.
Stock-Based Compensation
Stock-based compensation consists of stock options and non-vested shares awarded
officers and employees of the Company. Awards may be granted on a discretionary
basis as described in the employee stock option plan or as required by
employment agreements and incentive compensation plans with certain executive
officers. Accounting for stock-based compensation requires management to make
assumptions regarding the valuation of financial instruments for which there are
no readily available market values, achievement of specified performance
conditions and expected forfeiture rates.
The majority of our stock options have graded vesting. One-seventh of the
options awarded vest annually starting one year after the grant date. Options
expire three years after vesting. Each tranche of these options are considered a
separate award when determining fair value.
We use the Black-Scholes option pricing model. This model requires assumptions
of expected volatility of our stock price and expected term between grant date
and exercise date, along with other inputs to determine fair value. Assumptions
used to determine the fair value of stock options are considered Level 2 inputs
as defined by FAS 157. Expected volatility is based on historical changes in our
stock price measured over a period that approximates the expected term of our
stock options. Expected term and forfeitures are based on historical trends.
Information about assumptions used to value stock options can be found in Note
13 to the Consolidated Financial Statements. Non-vested shares, which cliff-vest
five years after the grant date, are valued at the grant-date market price for
BOK Financial common stock.
Stock options are generally granted annually. Certain key terms and conditions
of the awards, such as vesting periods and expiration dates, are defined by the
stock option plan document. The number of options to be awarded to each
individual employee is recommended by management and approved by the Independent
Compensation Committee of the Board of Directors prior to setting the exercise
price. The exercise price of the options is the closing price for the Company's
common stock on the second business Friday of January, which is the grant date.
Executive incentive plans and individual employment agreements include
performance conditions that may increase or decrease the number of awards
granted based on future events. Unrecognized compensation cost, which generally
will be recognized as expense over the service period, based on the probable
outcome of these conditions is $12 million. Future compensation cost ranges from
approximately $5 million if none of the performance conditions are met to $15
million if all of the performance conditions are met.
Assessment of Operations
Net Interest Revenue
Tax-equivalent net interest revenue totaled $655 million for 2008 compared with
$554 million for 2007. Net interest revenue growth was driven primarily by a
$2.0 billion increase in average earning assets and a 17 basis point increase in
net interest margin.
Average outstanding loans increased $1.2 billion and average securities
increased $838 million. Average commercial loans were up $777 million over 2007.
Average residential mortgage loans and consumer loans increased $192 million and
$172 million, respectively. Growth in the securities portfolio generally
consisted of highly-rated, fixed-rate mortgage-backed securities issued by U.S.
government agencies. The addition of these securities supplemented the Company's
earnings in 2008.
Growth in average earning assets was funded primarily by an $810 million
increase in interest-bearing deposits and a $1.2 billion increase in borrowed
funds. In addition, average demand deposit accounts increased $264 million.
Table 2 shows the effects on net interest revenue of changes in average balances
and interest rates for the various types of earning assets and interest-bearing
liabilities.
Growth in deposits and borrowings was also used to fund a $276 million net
increase in average margin assets. Margin assets are placed by the Company to
secure its obligations under various derivative contracts. Margin assets are
generally reported as a
19
reduction of the derivative liabilities which they secure on the Company's
consolidated balance sheet. Fees earned on margin assets are included in fees
and commissions revenue while the related cost of funds reduces net interest
revenue.
Net interest margin, the ratio of tax-equivalent net interest revenue to average
earning assets, increased to 3.45% in 2008 compared with 3.28% in 2007. The
increase in net interest margin reflected a widening of the spread between LIBOR
and the federal funds rates in the second half of 2008. LIBOR is the basis for
interest earned on many of our loans. The federal funds rate is the basis for
interest paid on many of our interest-bearing liabilities. The widening spread
increased net interest margin by approximately 7 basis points in 2008. This
spread has largely narrowed to its historically normal level by year end. In
addition, market uncertainty increased yields on mortgage-backed securities
despite falling interest rates. The average yield on our securities portfolio
for 2008 increased 22 basis points compared with 2007. The increase in net
interest margin from widened spreads was partially offset by a reduction in the
benefit from non-interest bearing funding sources. This benefit decreased from
69 basis points in 2007 to 36 basis points in 2008. Very low market interest
rates, especially in the second half of 2008 reduced the benefit of non-interest
bearing funding sources. Also, the previously noted increase in average margin
assets funded by interest-bearing liabilities decreased net interest margin by 5
basis points.
Management regularly models the effects of changes in interest rate on net
interest revenue. Based on this modeling, we expect net interest revenue to
increase slightly over a one-year forward looking period. However, other factors
such as spreads between benchmark interest rates, loan spread compression,
deposit product mix and overall balance sheet composition may affect this
general expectation.
Our overall objective is to manage the Company's balance sheet to be essentially
neutral to changes in interest rates. Approximately 72% of our commercial loan
portfolio is 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
our 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 $665 million convert fixed rate liabilities
to floating rate based on LIBOR. The purpose of these derivatives is to position
our balance sheet to be relatively neutral to changes in interest rates.
The effectiveness of these strategies is reflected in the overall change in net
interest revenue due to changes in interest rates as shown in Table 2 and in the
interest rate sensitivity projections as shown in Market Risk section of this
report.
20
Table 2 Volume/Rate Analysis
(In Thousands)
2008/2007 2007/2006
------------------------------------- -------------------------------------
Change Due To(1) Change Due To(1)
------------------------ ------------------------
Change Volume Yield/Rate Change Volume Yield/Rate
------------ ----------- ------------ ------------ ----------- ------------
Tax-equivalent interest revenue:
Securities $ 59,749 $ 45,461 $ 14,288 $32,162 $ 20,068 $ 12,094
Trading securities 2,987 2,986 1 904 456 448
Loans (159,817) 78,623 (238,440) 140,760 134,830 5,930
Funds sold and resell agreements (2,903) (304) (2,599) 2,639 2,260 379
------------------------------------------- ------------ ----------- ------------ ------------ ----------- ------------
Total (99,984) 126,766 (226,750) 176,465 157,614 18,851
------------------------------------------- ------------ ----------- ------------ ------------ ----------- ------------
Interest expense:
Transaction deposits (73,214) 12,679 (85,893) 45,631 30,668 14,963
Savings deposits (823) (50) (773) 91 158 (67)
Time deposits (49,785) (664) (49,121) 30,116 13,155 16,961
Funds purchased and repurchase agreements (72,976) 11,273 (84,249) 28,864 29,980 (1,116)
Other borrowings (2,032) 34,907 (36,939) 7,188 5,889 1,299
Subordinated debentures (2,639) 195 (2,834) 4,621 6,595 (1,974)
------------------------------------------- ------------ ----------- ------------ ------------ ----------- ------------
Total (201,469) 58,340 (259,809) 116,511 86,445 30,066
------------------------------------------- ------------ ----------- ------------ ------------ ----------- ------------
Tax-equivalent net interest revenue 101,485 $ 68,426 $ 33,059 59,954 $ 71,169 $(11,215)
----------- ------------ ----------- ------------
(Increase) decrease in tax-equivalent
adjustment 892 (2,157)
------------------------------------------- ------------ ------------
Net interest revenue $ 102,377 $ 57,797
------------------------------------------- ------------ ------------
4th Qtr 2008 / 4th Qtr 2007
------------------------------------
Change Due To(1)
------------------------
Change Volume Yield/Rate
----------- ------------ -----------
Tax-equivalent interest revenue:
Securities $ 16,790 $ 13,402 $ 3,388
Trading securities 809 820 (11)
Loans (51,763) 18,130 (69,893)
Funds sold and resell agreements (1,211) (327) (884)
-------------------------------------------------------------------------- ----------- ------------ -----------
Total (35,375) 32,025 (67,400)
-------------------------------------------------------------------------- ----------- ------------ -----------
Interest expense:
Transaction deposits (26,197) 1,526 (27,723)
Savings deposits (205) (7) (198)
Time deposits (11,523) 5,603 (17,126)
Funds purchased and repurchase agreements (27,880) (436) (27,444)
Other borrowings (4,070) 8,502 (12,572)
Subordinated debentures (219) (4) (215)
-------------------------------------------------------------------------- ----------- ------------ -----------
Total (70,094) 15,184 (85,278)
-------------------------------------------------------------------------- ----------- ------------ -----------
Tax-equivalent net interest revenue 34,719 $ 16,841 $17,878
------------ -----------
Decrease in tax-equivalent adjustment 439
-------------------------------------------------------------------------- -----------
Net interest revenue $ 35,158
-------------------------------------------------------------------------- -----------
(1) Changes attributable to both volume and yield/rate are allocated to both
volume and yield/rate on an equal basis.
Fourth Quarter 2008 Net Interest Revenue
Tax-equivalent net interest revenue for the fourth quarter of 2008 totaled $179
million compared with $144 million for the fourth quarter of 2007. Average
earning assets increase $2.0 billion or 11%, including a $1.1 billion or 9%
increase in average loans, net of allowance for loan losses, and a $928 million
or 16% increase in average securities. Growth in average earning assets was
funded by a $1.8 billion increase in interest-bearing liabilities, including an
$815 million increase in average interest-bearing deposits and a $987 million
increase in other borrowings. In addition, average demand deposits increased
$264 million.
Net interest margin was 3.57% for the fourth quarter of 2008 and 3.22% for the
fourth quarter of 2007. The previously mentioned widening of spread between
LIBOR and federal funds rates added approximately 15 basis points to the fourth
quarter of 2008. In addition, market uncertainty increased yields on
mortgage-backed securities despite falling short-term interest rates. The
benefit provided by non-interest bearing funding sources was 31 basis points in
the fourth quarter of 2008 and 62 basis points in the fourth quarter of 2007.
Very low market interest rates in 2008 reduced the benefit of non-interest
bearing funding sources.
2007 Net Interest Revenue
Tax-equivalent net interest revenue for 2007 was $554 million, a $60 million or
12% increase from 2006. Average earning assets increased $2.2 billion or 15%,
including a $1.7 billion increase in average outstanding loans, net of allowance
for loan losses, and a $447 million increase in average securities. Growth in
the securities portfolio generally consisted of highly-rated, fixed-rate
mortgage backed securities issued by U.S. government agencies. As shown in Table
2, net interest revenue increased $71 million due to changes in earning assets
and interest bearing liabilities. Net interest revenue growth due to earning
assets was partially
21
offset by an $11 million decrease due to changes in interest yields and rates.
Changes in interest rates and yields include the narrowing of spreads due to
competitive pressures and other market conditions.
Other Operating Revenue
Other operating revenue increased $38 million compared with last year due to an
$8.4 million increase in fees and commission revenue and a $29 million increase
in net gains on securities, derivatives and other assets. Fees and commission
revenue was reduced by $54 million from net credit losses on derivative
contracts with two bankrupt counterparties during 2008.
Diversified sources of fees and commission revenue are a significant part of our
business strategy and represented 39% of total revenue, excluding gains and
losses on asset sales, securities and derivatives. We believe that a variety of
fee revenue sources provide an offset to changes in interest rates, values in
the equity markets, commodity prices and consumer spending, all of which can be
volatile. We expect continued growth in other operating revenue through offering
new products and services and by expanding into new markets. However, current
and future economic conditions, increased competition and saturation in our
existing markets could affect the rate of future increases.
Table 3 Other Operating Revenue
(In Thousands)
Years ended December 31,
--------------------------------------------------------------
2008 2007 2006 2005 2004
------------- ----------- ----------- ----------- ------------
Brokerage and trading revenue $ 42,804(1) $ 62,542 $ 53,413 $ 48,024 $ 44,221
Transaction card revenue 100,153 90,425 78,622 72,036 64,816
Trust fees and commissions 78,979 78,231 71,037 65,187 57,532
Deposit service charges and fees 117,528 109,218 102,436 98,361 93,712
Mortgage banking revenue 27,074 22,275 26,996 30,681 28,189
Bank-owned life insurance 10,681 10,058 2,558 62 -
Margin asset fees 8,548 4,800 10,166 5,504 162
Other revenue 28,233 28,073 26,468 25,009 23,595
---------------------------------------------------- ------------- ----------- ----------- ----------- ------------
Total fees and commissions 414,000 405,622 371,696 344,864 312,227
---------------------------------------------------- ------------- ----------- ----------- ----------- ------------
Gain (loss) on sales of assets (660) (928) 1,499 7,798 1,225
Gain (loss) on securities, net 21,637 (8,328) (950) (6,895) (3,088)
Gain (loss) on derivatives, net 1,299 2,282 (622) 1,179 (1,474)
---------------------------------------------------- ------------- ----------- ----------- ----------- ------------
Total other operating revenue $ 436,276 $ 398,648 $ 371,623 $ 346,946 $ 308,890
---------------------------------------------------- ------------- ----------- ----------- ----------- ------------
(1) Includes net derivative credit losses of $54 million.
Fees and Commissions Revenue
Brokerage and trading revenue declined $20 million compared with 2007 due to net
credit losses on derivative contracts with two counterparties in our customer
hedging program. These losses reduced brokerage and trading revenue by $54
million in 2008. As previously disclosed the principal owner of one of these
counterparties, SemGroup, L.P., resigned from our Board of Directors on July 16,
2008. Net credit losses on derivative contracts with SemGroup totaled $41
million. Excluding these credit losses, our brokerage and trading revenue
sources performed well. Securities trading revenue more than doubled, up $26
million over the previous year to $49 million. Retail brokerage revenue
increased $2.8 million to $21 million, up 15% over 2007. Revenue from customer
hedging activities excluding the two credit losses increased $7.2 million or 48%
over 2007. This growth rate of revenue from securities trading and customer
hedging is not expected to continue in 2009.
Transaction card revenue increased $9.7 million or 11% over 2007. Revenue growth
depends largely on the volume and amount of transactions processed, the number
of ATM locations and the number of merchants served. Check card revenue
increased $3.9 million or 16% due to growth in transaction volume. The number of
check card transactions processed during 2008 increased 18% over 2007. ATM fees
grew $4.7 million or 12% compared to the previous year. The number of TransFund
ATM locations totaled 1,933 at December 31, 2008, up 6% over last year. Merchant
discount revenue for 2008 totaled $28 million, up 4% over 2007.
Trust fees increased $746 thousand or 1%. The fair value of all trust
relationships overseen by the Company, which is the basis for a significant
portion of trust fees decreased to $30.5 billion at December 31, 2008 compared
with $36.3 billion at December 31, 2007. The decline in fair value of trust
assets was due to current market conditions. Personal trust management fees,
which provided 23% of total trust fees and commissions increased $495 thousand
or 2% over 2007. Net fees from mutual fund advisory and administrative services,
which provided 20% of total trust fees and commissions decreased $729 thousand
or 4%. Employee benefit plan management fees, which provided 20% of total trust
fees and commissions, increased $437 thousand. Revenue from foundations was down
$1.6 million or 25% from 2007. Revenue from the management of oil and gas
properties, which is more closely related to energy prices than the fair value
of trust assets, increased $2.3 million compared with 2007.
22
Service charges on deposit accounts increased $8.3 million, or 8% compared with
2007. Commercial account service charge revenue increased 23% to $36 million and
overdraft fees increased 2% to $76 million. 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. Service charges on retail deposit accounts
decreased 4% to $5.1 million due to continued migration to service-charge free
checking products.
Mortgage banking revenue increased $4.8 million or 22% over 2007. Servicing fee
revenue totaled $18 million or 0.35% of loans serviced for others in 2008 and
$17 million or 0.37% of loans serviced for others in 2007. The average
outstanding balance of loans serviced for others was $5.0 billion for 2008 and
$4.6 billion for 2007. Net secondary marketing gains totaled $9.5 million for
2008 and $5.2 million for 2007. Mortgage loans sold in the secondary market
totaled $1.2 billion in 2008 and $1.0 billion in 2007.
Margin asset fees totaled $8.5 million for 2008 and $4.8 million for 2007.
Margin assets, which are held primarily as part of the Company's customer
derivatives programs averaged $422 million for 2008 and $117 million for 2007.
The increase in revenue earned on margin assets is offset by a decrease in net
interest revenue due to the cost to fund margin assets.
Securities and Derivatives
Net gains and losses on securities included changes in the fair value of
securities held as an economic hedge of our mortgage servicing rights,
other-than-temporary impairment of variable-rate, perpetual preferred stocks and
realized gains and losses on certain available for sale securities. It also
included gains realized from the sale of equity securities received from initial
public stock offering by Visa, Inc. and Mastercard, Inc.
Table 4 Securities Gains (Losses), Net
(In Thousands)
Years ended December 31,
--------------------------------------------------------------------
2008 2007 2006 2005 2004
------------- ------------- -------------- ------------ ------------
Gains (losses) on available for sale securities $ 9,196 $ (276) $ 152 $ (1,700) $ 1,772
Other-than-temporary impairment of preferred stocks (5,306) (8,641) - - -
Gains on Mastercard and Visa IPO securities 6,799 1,075 - - -
Gains (losses) on mortgage hedging securities 10,948 (486) (1,102) (5,195) (4,860)
-------------------------------------------------- ------------- ------------- -------------- ------------ ------------
Total $ 21,637 $ (8,328) $ (950) $ (6,895) $ (3,088)
-------------------------------------------------- ------------- ------------- -------------- ------------ ------------
Net gains on derivatives totaled $1.3 million for 2008 and $2.3 million in 2007.
Net gains and losses on derivatives consist of fair value adjustments of all
derivatives used to manage interest rate risk and the related hedged liabilities
when adjustments are permitted by generally accepted accounting principles.
Derivative instruments generally consist of interest rate swaps where the
Company pays a variable rate based on LIBOR and receives a fixed rate. The fair
value of these swaps generally decreases when interest rates fall.
The Company adopted 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 FAS 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 when
interest rates fall.
Fourth Quarter 2008 Other Operating Revenue
Other operating revenue for the fourth quarter of 2008 totaled $128 million, a
$20 million or 19% increase over the fourth quarter of 2007. Fees and commission
revenue decreased $3.5 million or 3% compared with the fourth quarter of 2007.
Brokerage and trading revenue was up $3.1 million or 60% for the fourth quarter
due to continued strong securities trading gains, partially offset by reduced
investment banking transactions. Transaction card revenue increased $1.7 million
or 28% compared to the previous year due to ATM fees, merchant discount fees and
debit card processing volumes. Trust revenue decreased $3.0 million or 59%
compared with the fourth quarter of 2007 due largely to a 16% decrease in the
fair value of trust assets. Deposit service charges and fees decreased $699
thousand or 9% due to a reduction in overdraft fees, partially offset by an
increase in commercial account activity charges.
Net securities gains for the fourth quarter of 2008 totaled $20 million,
compared with net securities losses of $6.3 million for the fourth quarter of
2007.
23
Table 5 Securities Gains (Losses), Net
(In Thousands)
Quarter ended December 31,
2008 2007
------------- -------------
Gains on available for sale securities $ 5,067 $ 1,102
Other-than-temporary impairment of preferred stocks - (8,641)
Gains on mortgage hedge securities 15,089 1,288
-------------------------------------------------- ------------- -------------
Total $ 20,156 $ (6,251)
-------------------------------------------------- ------------- -------------
2007 Other Operating Revenue
Other operating revenue totaled $399 million for 2007, up $27 million over 2006.
Fees and commissions revenue increased $34 million or 9%. Transaction card
revenue increased $12 million or 15% due to increases in check card revenue and
ATM fees. Brokerage and trading revenue grew $9.1 million or 17% due to
increased retail brokerage revenue and securities trading gains. Trust fees and
commissions were up $7.2 million or 10% due to a 15% increase in the fair value
of trust assets. Deposit service charges increased $6.8 million or 7% due to a
9% increase in overdraft fees and a 6% increase in commercial account service
charge revenue.
Net securities losses totaled $8.3 million for 2007 and $950 thousand for 2006.
Other-than-temporary impairment charges of $8.6 million were recognized in 2007
on our holdings of variable-rate, perpetual preferred stocks.
Other Operating Expense
Other operating expense totaled $662 million for 2008, up $87 million over 2007.
Personnel expenses increased $24 million or 7% over the previous year. Expenses
for our mortgage-banking activities, which included reduction in the fair value
of our mortgage servicing rights and provision for credit losses on mortgage
loans sold with recourse, increased $41 million. All other operating expenses
increased $22 million or 10%.
Table 6 Other Operating Expense
(In Thousands)
Years ended December 31,
--------------------------------------------------------------------
2008 2007 2006 2005 2004
------------- ------------- -------------- ------------ ------------
Personnel expense $352,947 $328,705 $296,260 $258,971 $240,661
Business promotion 23,536 21,888 19,351 17,964 15,618
Contribution of stock to BOK Charitable Foundation - - - - 5,561
Professional fees and services 27,045 22,795 17,744 16,596 15,487
Net occupancy and equipment 60,632 57,284 52,188 50,195 47,289
Insurance 11,988 3,017 4,270 2,436 2,496
Data processing and communications 78,047 72,733 66,926 67,026 60,025
Printing, postage and supplies 16,433 16,570 15,862 15,066 14,034
Net (gains) losses and operating expenses of
repossessed assets 1,019 691 474 572 (4,016)
Amortization of intangible assets 7,661 7,358 5,327 6,943 8,138
Mortgage banking costs 22,513 13,111 12,898 16,822 18,346
Change in fair value of mortgage servicing rights 34,515 2,893 (3,009) - -
Recovery for impairment of mortgage servicing rights - - - (3,915) (1,567)
Visa retrospective responsibility obligation (2,767) 2,767 - - -
Other expense 28,835 25,175 24,016 20,430 19,152
-------------------------------------------------- ------------- ------------- -------------- ------------ ------------
Total $662,404 $574,987 $512,307 $469,106 $441,224
-------------------------------------------------- ------------- ------------- -------------- ------------ ------------
24
Personnel Expense
Personnel expense totaled $353 million for 2008 and $329 million for 2007.
Regular compensation, which consists of salaries and wages, overtime pay and
temporary personnel costs, totaled $220 million, up $13 million or 6% over 2007.
The increase in regular compensation was primarily due to an increase in the
average regular compensation per full time equivalent employee. Average staffing
levels increased 1% compared with 2007.
Table 7 Personnel Expense
(In Thousands)
Years Ended December 31,
----------------------------------------------------------------------------------
2008 2007 2006 2005 2004
----------------------------------------------------------------------------------
Regular compensation $ 219,629 $ 206,857 $ 185,466 $ 165,529 $ 148,468
Incentive compensation:
Cash-based 79,215 62,657 54,093 44,726 42,725
Stock-based 3,962 8,763 11,111 5,097 11,694
---------------------------------------------------------------------------------------------------------------------
Total incentive compensation 83,177 71,420 65,204 49,823 54,419
Employee benefits 50,141 47,929 45,590 43,619 37,774
Workforce reduction costs, net - 2,499 - - -
---------------------------------------------------------------------------------------------------------------------
Total personnel expense $ 352,947 $ 328,705 $ 296,260 $ 258,971 $ 240,661
---------------------------------------------------------------------------------------------------------------------
Average staffing
(full-time equivalent) 4,140 4,106 3,828 3,677 3,509
---------------------------------------------------------------------------------------------------------------------
Incentive compensation increased $12 million or 16% to $83 million. Expense for
cash-based incentive compensation plans increased $17 million or 26%. These
plans are primarily either intended to provide current rewards to employees who
generate long-term business opportunities to the Company based on growth in
loans, deposits, customer relationships and other measurable metrics or intended
to compensate employees with commissions on completed transactions. The increase
in cash-based incentive compensation over 2007 included a $13 million or 84%
increase in sales 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 $5.2 million compared with 2007.
This decrease reflected changes in the market value of BOK Financial common
stock. The year-end closing market price per share of BOK Financial common stock
decreased $11.30 during 2008 and decreased $3.28 in 2007. Compensation expense
for equity awards increased $538 thousand or 8% compared with 2007. Expense for
equity awards is based on the grant-date fair value of the awards and is
unaffected by subsequent changes in fair value.
Employee benefit expense totaled $50 million, a $2.2 million or 5% increase over
2007 due to growth in payroll taxes, employee insurance expense and training
costs. Employee insurance costs were up $242 thousand or 1%. The Company
self-insures a portion of its employee health care coverage and these costs may
be volatile. The Company expects an increase of approximately $2.0 million in
pension expense for 2009 based on changes in the expected return on plan assets
and discount rate.
Mortgage Banking Costs
Certain mortgage banking costs, including changes in the fair value of mortgage
servicing rights and provision for losses on mortgage loans sold with recourse,
totaled $57 million in 2008 and $16 million in 2007. The fair value of mortgage
servicing rights decreased $35 million in 2008 and $2.9 million in 2007.
Anticipated prepayment speeds increased significantly in the fourth quarter of
2008 in response to government programs to lower mortgage interest rates.
Although we maintain a portfolio of mortgage-backed securities as an economic
hedge against changes in the fair value of our servicing rights, disconnection
between current yields on these securities and current mortgage loan commitment
rates limited the effectiveness of our hedge.
We also maintain a reserve for losses on mortgage loans sold with recourse.
Provision for losses on these loans totaled $8.6 million in 2008 and $1.1
million in 2007. These loans are more fully discussed in the Loan Commitments
section of this report.
Other Operating Expenses
All other operating expenses totaled $252 million for 2008, up $22 million or
10% over 2007. Deposit insurance expense increased $9.0 million over the
previous year due to the full implementation of assessment increases approved by
the FDIC in 2006. The Company expects deposit insurance cost to increase further
in 2009 as recently-announced increases in deposit insurance premiums and costs
of the Temporary Liquidity Guarantee Program become effective.
Professional fees increased $4.2 million or 19% due to legal and other loan
collection costs. Data processing and communications costs increased $5.3
million or 7% due to higher processing volumes. Other operating expenses for
2008 were reduced by $5.5 million compared to the previous year from charges
related to Visa, Inc. retrospective responsibility plan. As a
25
member of Visa, we are obligated for a proportionate share of certain covered
litigation costs incurred by Visa. These costs are expected to be covered by an
escrow account. The Company accrued $2.8 million in 2007 for its estimated
obligation for certain litigation covered by this plan. This accrual was offset
in March, 2008 when Visa funded a litigation escrow account from the proceeds of
its initial public offering of common shares. During 2008, the Company
recognized an additional obligation for settled litigation under the
retrospective responsibility plan and Visa contributed additional funds to the
escrow account. See Note 15 to the Consolidated Financial Statements for
additional information about the Company's contingent obligation under the Visa
retrospective responsibility plan.
Fourth Quarter 2008 Operating Expenses
Other operating expense totaled $185 million for the fourth quarter of 2008, up
$28 million over the fourth quarter of 2007. Excluding the previously discussed
change in fair value of mortgage servicing rights, other operating expenses
increased $4.6 million or 3%. Personnel expense increased $3.2 million and
deposit insurance expense increased $2.4 million. Professional fees increased
$1.7 million due to legal fees and other loan collection costs. Changes in
accruals for the Company's obligation under Visa, Inc. retrospective
responsibility plan reduced other operating expenses by $4.5 million.
2007 Operating Expenses
Other operating expense for 2007 totaled $575 million, a $63 million or 12%
increase over 2006. This increase resulted primarily from a $32 million increase
in personnel expense.
Personnel expense growth was driven largely by total employment, average
compensation per employee and incentive compensation expense. Regular
compensation expense totaled $207 million, up $21 million, or 12% increase over
2006. Incentive compensation increased $6.2 million, or 10% to $71 million.
Expense for cash-based incentive compensation plans increased $8.6 million or
16%. Stock-based compensation expense decreased $2.3 million or 21%. The
Company's stock-based compensation plans include both equity awards and
liability awards. Compensation expense associated with liability award plans
decreased $2.9 million due to changes in the market value of BOK Financial
common stock. Compensation expense for equity awards increased $567 thousand or
9% over 2006. Employee benefit expenses increased $2.3 million or 5% to $48
million.
Professional fees increased $5.1 million or 28% to $23 million compared with
2006. Growth in other professional fees includes costs related to acquisitions
and subordinated debt issued during 2007, costs related to the Securities and
Exchange Commission's examination of our mutual fund advisory activities
discussed in Note 15 to the Consolidated Financial Statements, and professional
fees related to debt collection activities.
Other expenses in 2007 included a $2.8 million charge for our contingent
obligation to support Visa's antitrust litigation costs and a $695 thousand
increase in FDIC insurance premiums.
Income Taxes
Income tax expense was $65 million for 2008, $116 million for 2007 and $115
million for 2006. This represented 30%, 35% and 35%, respectively, of book
taxable income. Tax expense currently payable totaled $116 million in 2008, $129
million in 2007 and $122 million in 2006.
The statute of limitations expired on an uncertain income tax position and the
Company adjusted its current income tax liability to amounts on filed tax
returns for 2007 during 2008. In addition, the Company recognized the tax
benefit from certain appreciated securities contributed to the BOKF Charitable
Foundation in 2008. Income tax expense for 2008 would have been $71 million or
33% of book taxable income excluding these items.
Net deferred tax assets totaled $219 million at December 31, 2008 and $53
million at December 31, 2007. The increase was due primarily to the tax effect
of unrealized losses on available for sale securities and provision for credit
losses in excess of net loans charged off. We have evaluated the recoverability
of our net deferred tax asset based on taxes previously paid in net loss
carry-back periods and other factors and determined that no valuation allowance
was required.
Reserves for uncertain tax positions totaled $13 million at December 31, 2008
and December 31, 2007. 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.
Income taxes expense for the fourth quarter of 2008 totaled $10 million or 23%
of book taxable income. Excluding the previously mentioned tax benefit from the
contribution of appreciated securities and quarterly adjustments to the annual
effective tax rate, income tax expense for the fourth quarter would have been
$15 million or 33% of book taxable income.
26
Table 8 Selected Quarterly Financial Data
(In Thousands Except Per Share Data)
Fourth Third Second First
------------ ------------ ------------- ------------
2008
----------------------------------------------------
Interest revenue $262,160 $263,358 $260,086 $276,041
Interest expense 85,713 99,010 101,147 128,913
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Net interest revenue 176,447 164,348 158,939 147,128
Provision for credit losses 73,001 52,711 59,310 17,571
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Net interest revenue after provision for credit losses 103,446 111,637 99,629 129,557
Other operating revenue 109,865 125,827 63,819 113,829
Gain (loss) on securities, net 20,156 2,103 (5,242) 4,620
Gain (loss) on derivatives, net (2,219) 4,366 (2,961) 2,113
Other operating expense 159,010 158,736 158,501 151,642
Change in fair value of mortgage servicing rights 26,432 5,554 767 1,762
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Income (loss) before taxes 45,806 79,643 (4,023) 96,715
Income tax expense 10,363 22,958 (2,862) 34,450
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Net income (loss) $ 35,443 $56,685 $ (1,161) $ 62,265
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Earnings (loss) per share:
Basic $ 0.53 $0.84 $ (0.02) $ 0.93
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Diluted $ 0.53 $0.84 $ (0.02) $ 0.92
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Average shares:
Basic 67,294 67,263 67,452 67,202
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Diluted 67,490 67,471 67,452 67,550
------------------------------------------------------------------ ------------ ------------ ------------- ------------
2007
----------------------------------------------------
Interest revenue $ 297,096 $300,380 $288,685 $274,576
Interest expense 155,807 160,935 153,772 145,738
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Net interest revenue 141,289 139,445 134,913 128,838
Provision for credit losses 13,200 7,201 7,820 6,500
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Net interest revenue after provision for credit losses 128,089 132,244 127,093 122,338
Other operating revenue 112,038 103,759 96,616 92,281
Gain (loss) on securities, net (6,251) 4,748 (6,262) (563)
Gain (loss) on derivatives, net 1,529 865 (183) 71
Other operating expense 154,383 147,572 139,192 130,947
Change in fair value of mortgage servicing rights 3,344 3,446 (5,061) 1,164
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Income before taxes 77,678 90,598 83,133 82,016
Income tax expense 26,518 30,750 29,270 29,223
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Net income $ 51,160 $59,848 $ 53,863 $ 52,793
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Earnings per share:
Basic $ 0.76 $ 0.89 $ 0.80 $ 0.79
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Diluted $ 0.76 $ 0.89 $ 0.80 $ 0.78
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Average shares:
Basic 67,051 67,078 67,117 67,085
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Diluted 67,483 67,538 67,606 67,575
------------------------------------------------------------------ ------------ ------------ ------------- ------------
27
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. Line of business
information for 2007 and 2006 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 overall liquidity needs and
interest rate risk of the Company. Each line of business borrows funds from and
provides funds to the funds management unit as needed to support their
operations. Operating results for Funds Management and Other include the effect
of interest rate risk positions and risk management activities, the provision
for credit losses 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 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 third-party developed
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 9, net income attributed to our lines of business decreased
$98 million or 42% from last year. The decrease was due primarily to credit
losses attributed to the business units. In addition, falling interest rates
decreased the transfer pricing credit provided to business units that generate
lower-costing funds for the Company.
Table 9 Net Income by Line of Business
(In Thousands)
Years ended December 31,
2008 2007 2006
------------- -------------- -------------
Commercial banking $ 79,490 $150,537 $138,540
Consumer banking 25,749 57,252 61,731
Wealth management 29,737 25,621 27,599
---------------------------------- ------------- -------------- -------------
Subtotal 134,976 233,410 227,870
Funds management and other 18,256 (15,746) (14,893)
---------------------------------- ------------- -------------- -------------
Total $153,232 $217,664 $212,977
---------------------------------- ------------- -------------- -------------
28
Commercial Banking
Commercial banking contributed $79 million to consolidated net income in 2008,
down from $151 million in 2007. The decrease in commercial banking net income
was largely due to a $72 million increase in net loans charged-off and $41
million of net credit losses on a customer's derivatives position. These charges
combined to reduce commercial banking net income by $69 million in 2008.
Net interest revenue decreased $8.4 million or 3% compared with 2007. The
decline was primarily driven by two factors. Falling short-term interest rates
decreased the internal transfer pricing credit provided to the commercial
banking division for deposits sold to our funds management unit by approximately
$21 million. The funding charge for average non-interest earning derivative
assets increased approximately $12 million as those balances grew due to
commodity price volatility. This reduction was largely offset by an increase in
average outstanding balance of commercial loans. Other operating revenue
excluding the previously noted credit losses on derivative contracts, increased
$17 million or 13%, including a $6.3 million increase in deposit account service
charges and a $4.9 million increase in TransFund revenue. Operating expenses
were up $15 million or 8% due to higher personnel expenses, data processing
costs and professional fees to collect problem assets.
Net commercial banking loans charged off in 2008 totaled $82 million or 0.85% of
average loans attributed to this line of business. Commercial and industrial
loans charged off totaled $35 million or 1.47% of average commercial and
industrial loans. Commercial real estate loans charged off totaled $18 million
or 0.84% of average commercial real estate loans and small business banking
loans charged off totaled $11 million or 0.48% of average small business loans.
Net loans charged off in 2008 also included a $26 million energy loan. The
commercial banking division recognized an $11 million recovery of two loans
charged off in 2001 and 2005.
The average outstanding balance of loans attributed to commercial banking was
$9.7 billion for 2008. Average commercial banking division loans increased $903
million or 10% over 2007. Commercial and industrial loans averaged $2.3 billion
for 2008, a $277 million or 13% increase over 2007. Small business loans
averaged $2.2 billion for 2008, up $279 million or 14% over the previous year.
Energy loans averaged $1.8 billion, an increase of $173 million or 11% and
commercial real estate loans averaged $2.2 billion, up $54 million or 3% over
2007.
Average deposits attributed to commercial banking were $4.6 billion for 2008, up
$413 million or 10% over 2007. Treasury services account balances increased $260
million or 24% and deposit balances attributed to our energy customers increased
$92 million or 27%. High energy prices during 2008 provided liquidity to many of
our energy-producing customers.
Table 10 Commercial Banking
(Dollars in Thousands)
Years ended December 31,
--------------------------------------------
2008 2007 2006
--------------------------------------------
NIR (expense) from external sources $ 451,623 $ 526,225 $ 456,497
NIR (expense) from internal sources (134,196) (200,390) (162,537)
--------------------------------------------
Total net interest revenue 317,427 325,835 293,960
Other operating revenue 107,185 131,081 119,891
Operating expense 217,155 201,876 184,385
Net loans charged off 81,966 9,747 2,988
Gains on financial instruments, net 4,689 1,075 10
Gains (losses) on repossessed assets, net (82) 10 255
---------------------------------------------
Income before taxes 130,098 246,378 226,743
Federal and state income tax 50,608 95,841 88,203
---------------------------------------------
Net income $ 79,490 $ 150,537 $ 138,540
=============================================
Average assets $12,920,566 $ 11,274,301 $ 9,993,775
Average loans 9,698,214 8,795,426 7,569,827
Average deposits 4,559,653 4,146,378 3,680,944
Average invested capital 1,036,980 1,059,730 997,210
Return on assets 0.62% 1.34% 1.39%
Return on invested capital 7.67 14.21 13.89
Efficiency ratio 51.14 44.18 44.55
Net charge-offs to average loans 0.85 0.11 0.04
29
Consumer Banking
Consumer banking services are provided through four primary distribution
channels: traditional branches, supermarket branches, the 24-hour ExpressBank
call center and On-line internet banking. We currently have 195 consumer banking
locations, including branch banking locations and mortgage lending offices. Our
consumer banking locations are primarily distributed 84 in Oklahoma, 47 in
Texas, 21 in New Mexico and 16 in Colorado. The Consumer Banking division plans
to open five locations in 2009, two in Phoenix, Arizona and one each in
Albuquerque, New Mexico, Allen, Texas and Kansas City, Missouri.
Consumer banking contributed $26 million to consolidated net income in 2008,
down from $57 million in 2007. The decrease in consumer banking net income was
largely due to a decrease in net interest revenue and a decrease in the fair
value of mortgage servicing rights, net of economic hedges. In addition, net
loans charged off increased $7.5 million due primarily to losses on indirect
automobile loans.
Net interest revenue from consumer banking activities decreased $4.4 million or
3% from 2007. Falling short-term interest rates decreased the internal transfer
pricing credit provided to the consumer banking division for deposits sold to
our funds management unit by $22 million. Other operating revenue increased $4.3
million or 3% over 2007. Deposit service charges were up $2.3 million or 3%.
Operating expenses increased $25 million or 13% over 2007. Personnel expense
increased $7.3 million or 12% due primarily to acquisition of branch locations
in Colorado and Texas in mid-year 2007. Deposit insurance expense was up $2.3
million and charges for mortgage loan foreclosure losses increased $7.5 million.
The decrease in fair value of our mortgage loan servicing rights, net of
economic hedging, reduced consumer banking net income by $14 million in 2008 and
$2.1 million in 2007. Anticipated prepayment speeds increased significantly in
the fourth quarter of 2008 in response to government programs to lower mortgage
interest rates. Although we maintain a portfolio of mortgage-backed securities
as an economic hedge against changes in the fair value of our servicing rights,
disconnection between current yields on these securities and current mortgage
loan commitment rates limited the effectiveness of our hedge.
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
December 31, 2008, a 50 basis point increase in mortgage interest rates is
expected to increase the fair value of our mortgage servicing rights, net of
economic hedging by $1.9 million. A 50 basis point decrease in mortgage interest
rates is expected to decrease the fair value of our mortgage servicing rights,
net of economic hedging by $4.4 million. Modeling changes in the value of our
servicing rights due to changes in interest rates assumes stable relationships
between mortgage commitment rates and discount rates and assumed prepayment
speeds and actual prepayment speeds. Changes in market conditions can cause
variations from these assumptions. These factors and others may cause changes in
the value of our mortgage servicing rights to differ from our expectations.
Average consumer deposits increased $236 million or 4% over 2007.
Interest-bearing transaction accounts were up $302 million or 17% and time
deposits were down $161 million or 6%. Average demand deposit accounts increased
$73 million or 12%. 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 markets. During 2008, we
funded $1.0 billion of mortgage loans, compared with $920 million in 2007.
Approximately 56% of our mortgage loans funded was in the Oklahoma market and
18% of mortgage loans funded was in the Texas market. We also service $6.0
billion of mortgage loans, including $793 million of loans serviced for
affiliated entities. Approximately 93% of the mortgage loans serviced was to
borrowers in our primary market areas.
30
Table 11 Consumer Banking
(Dollars in Thousands)
Years ended December 31,
-------------------------------------------
2008 2007 2006
-------------------------------------------
NIR (expense) from external sources $ 32,076 $ (7,807) $ (5,015)
NIR (expense) from internal sources 118,728 163,028 151,532
-------------------------------------------
Total net interest revenue 150,804 155,221 146,517
Other operating revenue 148,885 144,585 134,261
Operating expense 219,024 193,599 176,649
Net loans charged off 16,726 9,233 5,075
Increase (decrease) in fair value
of mortgage servicing rights (34,515) (2,893) 3,009
Gains(losses)on financial instruments, net 12,525 (486) (1,102)
Gains on repossessed assets, net 193 107 72
-------------------------------------------
Income before taxes 42,142 93,702 101,033
Federal and state income tax 16,393 36,450 39,302
-------------------------------------------
Net income $ 25,749 $ 57,252 $ 61,731
===========================================
Average assets $ 7,974,694 $ 7,514,732 $ 6,966,156
Average loans 2,511,634 2,274,013 2,044,930
Average deposits 5,678,166 5,442,666 5,123,224
Average invested capital 216,810 194,130 192,310
Return on assets 0.32% 0.76% 0.89%
Return on invested capital 11.88 29.49 32.10
Efficiency ratio 73.08 64.57 62.91
Net charge-offs to average loans 0.67 0.41 0.25
Banking locations (period-end) 195 189 163
Mortgage loan servicing portfolio $ 5,983,824 $ 5,481,736 $ 4,988,611
Mortgage loan fundings 1,018,246 919,823 766,458
Wealth Management
The Wealth Management division contributed $30 million of net income in 2008, up
$4.1 million or 16% over 2007. Net interest revenue decreased $719 thousand or
2%. Lower internal funds transfer credit provided for deposits sold to the funds
management unit decreased net interest revenue by $11 million. Other operating
revenue increased $25 million or 19% over 2007. Brokerage and trading revenue
was up $26 million, more than double 2007, due primarily to securities trading
revenue. Growth in trust fees and commissions was limited to $748 thousand or 1%
due primarily to a decrease in the fair value of trust assets.
Operating expenses increased $19 million or 14% over 2007. Personnel expense was
up $14 million or 17%, including a $13 million increase in sales commissions
associated with securities trading. Non-personnel operating expenses increased
$5.1 million or 11% compared with 2007 due to data processing and deposit
insurance costs.
The Wealth Management division provided $2.1 billion of average deposits in 2008
compared with $1.7 billion of average deposits in 2007. Interest-bearing
transaction accounts averaged $1.5 billion for 2008, an increase of $305 million
or 26% over 2007. Average time deposits were $389 million, up $102 million or
35% over last year. Deposit growth for the Wealth Management division was due
largely to movement of customer funds from managed money market products into
deposits.
At December 31, 2008 and 2007, Wealth Management was responsible for trust
assets with aggregate fair values of $30.5 billion and $36.3 billion,
respectively, under various fiduciary arrangements. The decrease in fair value
of trust assets was due primarily to general market conditions. We have sole or
joint discretionary authority over $11.5 billion of trust assets at December 31,
2008 compared to $13.8 billion at December 31, 2007. The fair value of
non-managed assets totaled $11.3 billion at December 31, 2008, down from $13.1
billion at the previous year end. The fair value of assets held in safekeeping
totaled $7.7 billion at December 31, 2008 and $9.4 billion at December 31, 2007.
31
Table 12 Wealth Management
(Dollars in Thousands)
Years ended December 31,
-------------------------------------------
2008 2007 2006
-------------------------------------------
NIR (expense) from external sources $ 12,617 $ 8,562 $ 16,731
NIR (expense) from internal sources 32,853 37,627 29,180
-------------------------------------------
Total net interest revenue 45,470 46,189 45,911
Other operating revenue 156,133 130,681 114,044
Operating expense 149,966 131,205 114,548
Net loans charged off 2,961 1,513 242
Cavanal Hill Funds settlement - 2,232 -
Gains (losses) on financial instruments, net (7) 13 5
-------------------------------------------
Income before taxes 48,669 41,933 45,170
Federal and state income tax 18,932 16,312 17,571
-------------------------------------------
Net income $ 29,737 $ 25,621 $ 27,599
===========================================
Average assets $ 2,505,168 $ 2,020,472 $ 1,710,193
Average loans 933,139 910,568 858,267
Average deposits 2,100,237 1,653,606 1,415,860
Average invested capital 191,830 182,370 163,340
Return on assets 1.19% 1.27% 1.61%
Return on invested capital 15.50 14.05 16.90
Efficiency ratio 74.39 74.18 71.61
Trust assets $30,454,512 $ 36,288,592 $31,704,091
Geographic Market Distribution
The Company also secondarily evaluates performance by primary geographic market.
Loans are generally attributed to geographic 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 geographic
market. Funds management and other also includes insignificant results of
operations in locations outside our primary geographic regions.
Table 13 Net Income by Geographic Region
(In Thousands)
Years ended December 31,
2008 2007 2006
------------- -------------- -------------
Oklahoma $ 69,957 $141,817 $145,176
Texas 42,420 53,772 48,595
New Mexico 14,449 18,474 17,326
Arkansas 9,389 4,774 3,851
Colorado 7,618 13,784 12,361
Arizona (8,083) 4,092 3,743
Kansas City 539 (380) (622)
-------------------------------- ------------- -------------- -------------
Subtotal 136,289 236,333 230,430
Funds management and other 16,943 (18,669) (17,453)
-------------------------------- ------------- -------------- -------------
Total $153,232 $217,664 $212,977
-------------------------------- ------------- -------------- -------------
Oklahoma Market
Oklahoma remains our predominate market. Our Oklahoma offices are located
primarily in the Tulsa and Oklahoma City metropolitan areas. Approximately 51%
of our average loans, 50% 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 77% of our trust assets are attributed to the
Oklahoma market.
Net income generated in the Oklahoma market in 2008 totaled $70 million, down
$72 million from the previous year due primarily to credit losses and a decrease
in the fair value or mortgage servicing rights, net of economic hedges. Credit
losses in the Oklahoma market included a $26 million loan charge off and a $41
million loss on derivative contracts with SemGroup, L.P. The Oklahoma market
also recognized $11 million of recoveries of two loans charged-off in previous
years and a $6.8 million gain from the partial redemption of shares received
from the Visa, Inc. initial public offering.
32
Net interest revenue decreased $17 million or 6% from 2007 due to the lower
internal funds transfer credit provided for deposits sold to the funds
management unit. This was partially offset by the benefit of a $67 million or 1%
increase in average loans in the Oklahoma market.
Other operating revenue, excluding the $41 million loss on derivative contracts
increased $27 million or 9% due primarily to transaction card revenue, mortgage
banking revenue and deposit account service charges. Operating expense increased
$38 million or 12% due primarily to higher personnel costs and deposit insurance
expense.
Net loans charged-off totaled $45 million or 0.70% of average loans in 2008 and
$11 million or 0.18% of average loans in 2007. Net loans charged-off in 2008,
excluding the SemGroup charge-offs and two recoveries that are not expected to
recur, totaled $30 million or 0.47% of average loans.
Table 14 Oklahoma
(Dollars in Thousands)
Years ended December 31,
-------------------------------------------
2008 2007 2006
-------------------------------------------
Net interest revenue $ 244,090 $ 260,649 $ 251,374
Other operating revenue 280,314 294,565 274,811
Operating expense 348,345 309,836 289,766
Net loans charged off 44,783 11,145 929
Increase (decrease) in fair value
of mortgage servicing rights (34,515) (2,893) 3,009
Gains(losses)on financial instruments, net 17,207 602 (1,088)
Gains on repossessed assets, net 527 164 193
-------------------------------------------
Income before taxes 114,495 232,106 237,604
Federal and state income tax 44,538 90,289 92,428
-------------------------------------------
Net income $ 69,957 $ 141,817 $ 145,176
===========================================
Average assets $13,047,213 $ 11,652,430 $10,947,303
Average loans 6,409,208 6,329,310 6,057,379
Average deposits 6,780,539 5,999,478 5,507,046
Average invested capital 780,400 818,360 838,690
Return on assets 0.54% 1.22% 1.33%
Return on invested capital 8.96 17.33 17.31
Efficiency ratio 66.43 55.80 55.07
Net charge-offs to average loans 0.70 0.18 0.02
Texas Market
Texas is our second largest market. Our Texas offices are located primarily in
Dallas, Fort Worth and Houston metropolitan areas. Approximately 29% of our
average loans, 24% of our average deposits and 28% of our consolidated net
income is attributed to the Texas market.
Net interest revenue increased $2.5 million or 2% over 2007. Average outstanding
loans increased $587 million or 19% over 2007. 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 3% and operating expenses increased 7% over
last year. Growth in operating expenses included a full-year's costs of Worth
National Bank, which was acquired in May, 2007, and higher deposit insurance
costs.
Net loans charged-off totaled $17 million or 0.46% of average loans in 2008 and
$2.4 million or 0.08% of average loans in 2007.
33
Table 15 Texas
(Dollars in Thousands)
Years ended December 31,
------------------------------------------
2008 2007 2006
------------------------------------------
Net interest revenue $ 153,703 $ 151,157 $ 138,264
Other operating revenue 45,348 44,177 38,812
Operating expense 116,345 108,831 96,210
Net loans charged off 16,544 2,438 5,081
Gains (losses) on repossessed assets, net 119 (47) 145
------------------------------------------
Income before taxes 66,281 84,018 75,930
Federal and state income tax 23,861 30,246 27,335
------------------------------------------
Net income $ 42,420 $ 53,772 $ 48,595
==========================================
Average assets $ 5,263,108 $ 4,544,447 $ 4,146,532
Average loans 3,635,216 3,046,091 2,559,918
Average deposits 3,222,986 2,959,111 2,803,801
Average invested capital 463,360 471,910 435,010
Return on assets 0.81% 1.18% 1.17%
Return on invested capital 9.15 11.39 11.17
Efficiency ratio 58.45 55.72 54.33
Net charge-offs to average loans 0.46 0.08 0.20
Other Markets
Net income attributed to our New Mexico market totaled $14 million or 9% of
consolidated net income for 2008, down from $18 million in 2007. The decrease in
net income attributed to New Mexico resulted from lower net interest revenue due
to the lower internal funds transfer credit provided for deposits sold to the
funds management unit.
Net income in the Arkansas market increased to $9.4 million in 2008 from $4.8
million in 2007 due primarily to growth in securities trading revenue at our
Little Rock office. This was partially offset by a $2.0 million increase in net
loans charged-off, primarily indirect automobile loans.
Net income attributed to the Colorado market totaled $7.6 million in 2008, down
from $14 million in 2007. Net loans charged-off totaled $8.1 million or 0.95% of
average loans in 2008 and $276 thousand or 0.04% of average loans in 2007.
We incurred a net loss of $8.1 million in the Arizona market in 2008 compared
with net income of $4.1 million in 2007. The loss was largely due to an increase
in net loans charged-off and an increase in operating expenses. Net loans
charged-off totaled $18 million or 3.06% of average loans in 2008 and $1.6
million or 0.30% of average loans in 2007. Most of the net loans charged-off
were land and residential development loans originated in the Tucson market. The
increase in operating expenses are primarily related to personnel costs incurred
to build our commercial banking presence in the Phoenix market.
34
Table 16 New Mexico
(Dollars in Thousands)
Years ended December 31,
------------------------------------------
2008 2007 2006
------------------------------------------
Net interest revenue $ 39,242 $ 45,083 $ 41,999
Other operating revenue 23,788 24,127 21,317
Operating expense 35,662 35,329 32,869
Net loans charged off 3,715 3,645 2,117
Gains (losses) on repossessed assets, net (6) - 27
------------------------------------------
Income before taxes 23,647 30,236 28,357
Federal and state income tax 9,198 11,762 11,031
------------------------------------------
Net income $ 14,449 $ 18,474 $ 17,326
==========================================
Average assets $ 1,736,872 $ 1,784,928 $ 1,666,863
Average loans 828,084 802,916 687,281
Average deposits 1,036,209 1,082,883 1,011,161
Average invested capital 114,150 118,320 107,160
Return on assets 0.83% 1.03% 1.04%
Return on invested capital 12.66 15.61 16.17
Efficiency ratio 56.58 51.05 51.91
Net charge-offs to average loans 0.45 0.45 0.31
Table 17 Arkansas
(Dollars in Thousands)
Years ended December 31,
-------------------------------------------
2008 2007 2006
-------------------------------------------
Net interest revenue $ 11,784 $ 10,075 $ 7,667
Other operating revenue 29,104 17,213 16,523
Operating expense 22,027 18,237 17,645
Net loans charged off 3,253 1,238 205
Losses on repossessed assets, net 242 - 38
-------------------------------------------
Income before taxes 15,366 7,813 6,302
Federal and state income tax 5,977 3,039 2,451
-------------------------------------------
Net income $ 9,389 $ 4,774 $ 3,851
===========================================
Average assets $ 475,794 $ 393,575 $ 281,896
Average loans 434,096 357,286 241,124
Average deposits 73,605 68,659 69,891
Average invested capital 30,290 27,190 22,680
Return on assets 1.97% 1.21% 1.37%
Return on invested capital 31.00 17.56 16.98
Efficiency ratio 53.87 66.83 72.94
Net charge-offs to average loans 0.75 0.35 0.09
35
Table 18 Colorado
(Dollars in Thousands)
Years ended December 31,
-------------------------------------------
2008 2007 2006
-------------------------------------------
Net interest revenue $ 37,009 $ 36,544 $ 30,777
Other operating revenue 16,600 16,276 12,633
Operating expense 32,997 29,985 23,214
Net loans charged off (recovered) 8,145 276 (35)
-------------------------------------------
Income before taxes 12,467 22,559 20,231
Federal and state income tax 4,849 8,775 7,870
-------------------------------------------
Net income $ 7,618 $ 13,784 $ 12,361
===========================================
Average assets $ 1,850,419 $ 1,687,312 $ 1,192,158
Average loans 861,337 738,581 528,289
Average deposits 1,058,816 992,844 713,372
Average invested capital 126,170 115,170 96,360
Return on assets 0.41% 0.82% 1.04%
Return on invested capital 6.04 11.97 12.83
Efficiency ratio 61.55 56.77 53.48
Net charge-offs to average loans 0.95 0.04 (0.01)
Table 19 Arizona
(Dollars in Thousands)
Years ended December 31,
-------------------------------------------
2008 2007 2006
-------------------------------------------
Net interest revenue $ 18,608 $ 19,292 $ 14,687
Other operating revenue 1,300 2,294 1,092
Operating expense 14,741 13,301 9,644
Net loans charged off 18,109 1,588 9
Losses on repossessed assets, net 287 - -
-------------------------------------------
Income (loss) before taxes (13,229) 6,697 6,126
Federal and state income tax (benefit) (5,146) 2,605 2,383
-------------------------------------------
Net income (loss) $ (8,083) $ 4,092 $ 3,743
===========================================
Average assets $ 627,784 $ 553,315 $ 349,171
Average loans 592,067 519,359 314,581
Average deposits 126,313 122,617 113,789
Average invested capital 61,780 30,040 6,970
Return on assets (1.29)% 0.74% 1.07%
Return on invested capital (13.08) 13.62 53.70
Efficiency ratio 74.05 61.62 61.12
Net charge-offs to average loans 3.06 0.31 -
36
Table 20 Kansas City
(Dollars in Thousands)
Years ended December 31,
---------------------------------------
2008 2007 2006
---------------------------------------
Net interest revenue $ 7,692 $ 4,151 $ 1,637
Other operating revenue 13,456 6,533 2,118
Operating expense 13,164 11,144 4,772
Net loans charged off 7,102 162 -
---------------------------------------
Income (loss) before taxes 882 (622) (1,017)
Federal and state income tax (benefit) 343 (242) (395)
---------------------------------------
Net income (loss) $ 539 $ (380) $ (622)
=======================================
Average assets $ 354,703 $ 184,693 $ 85,718
Average loans 338,860 178,169 84,453
Average deposits 37,964 16,936 968
Average invested capital 23,970 13,790 2,310
Return on assets 0.15% (0.21)% (0.73)%
Return on invested capital 2.25 (2.76) (26.93)%
Efficiency ratio 62.25 104.31 127.08
Net charge-offs to average loans 2.10 0.09 -
Assessment of 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.
Table 21 Securities
(Dollars in Thousands)
December 31,
-----------------------------------------------------------------------------
2008 2007 2006
------------------------- ------------------------- -------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------------ ------------ ------------ ------------ ------------ ------------
Investment:
U.S. Treasury $ - $ - $ - $ - $ 1,999 $ 1,995
Municipal and other tax-exempt 235,791 239,178 242,274 243,061 240,976 238,869
Other debt securities 6,553 6,591 5,675 5,727 5,714 5,744
---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Total $ 242,344 $ 245,769 $ 247,949 $ 248,788 $ 248,689 $ 246,608
---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Available for sale:
U.S. Treasury $ 6,987 $ 7,126 $ 6,961 $ 7,088 $ 6,014 $ 5,983
Municipal and other tax-exempt 19,537 20,163 26,478 26,578 77,860 78,614
Mortgage-backed securities:
U.S. agencies 4,900,895 4,972,928 3,838,219 3,817,939 3,204,592 3,128,138
Other 1,636,934 1,241,238 1,664,537 1,641,189 1,361,373 1,333,533
---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Total mortgage-backed securities 6,537,829 6,214,166 5,502,756 5,459,128 4,565,965 4,461,671
---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Other debt securities 37 36 42 41 46 45
Federal Reserve Banks 32,380 32,380 31,299 31,299 23,609 23,609
Federal Home Loan Banks 61,760 61,760 57,265 57,265 50,897 50,897
Perpetual preferred stocks 32,472 21,701 32,778 32,778 - -
Other equity securities and mutual funds 31,421 34,119 30,347 36,363 27,454 34,242
---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Total $6,722,423 $6,391,451 $5,687,926 $5,650,540 $4,751,845 $4,655,061
---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Mortgage trading:
Mortgage-backed U.S. agency securities $ 386,571 $ 399,211 $ 153,920 $ 154,701 $ 163,094 $ 162,837
---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
37
Investment securities, which consist primarily of Oklahoma municipal bonds, are
carried at cost and adjusted for amortization of premiums or accretion of
discounts. At December 31, 2008, investment securities were carried at $242
million and had a fair value of $246 million. Management has the ability and
intent to hold these securities until they mature.
Available for sale securities, which may be sold prior to maturity, are carried
at fair value. Unrealized gains or losses, less deferred taxes, are recorded as
accumulated other comprehensive income in shareholders' equity. The amortized
cost of available for sale securities totaled $6.7 billion at December 31, 2008,
up $1.0 billion compared with December 31, 2007. Mortgage-backed securities
represented 97% of total available for sale securities. The Company holds no
debt securities of corporate issuers.
A primary risk of holding mortgage-backed securities comes from extension during
periods of rising interest rates or prepayment during periods of falling
interest rates. We evaluate this risk through extensive modeling of risk both
before making an investment and throughout the life of the security. The
expected duration of the mortgage-backed securities portfolio was approximately
2.4 years at December 31, 2008. Management estimates that the expected duration
would extend to approximately 2.6 years assuming a 300 basis point immediate
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 December 31, 2008,
approximately $4.9 billion of the amortized cost of the Company's
mortgage-backed securities were issued by U.S. government agencies. The fair
value of these mortgage-backed securities totaled $5.0 billion at December 31,
2008.
The Company also holds approximately $1.6 billion, based on amortized cost, of
mortgage-backed securities privately issued by publicly-owned financial
institutions. The fair value of our portfolio of privately issued
mortgage-backed securities totaled $1.2 billion at December 31, 2008.
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 $390 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 86% of our Alt-A mortgage-backed
securities represented 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 December 31, 2008 totaled $418 million. Management evaluated the securities
with unrealized losses to determine if we believe that the losses were
temporary. This evaluation considered factors such as causes of the unrealized
losses, support for debt securities provided by government guarantees or credit
enhancements, ratings of the respective issuers and other factors to assess the
prospects for recovery over various interest rate scenarios and time periods. We
also considered our intent and ability to either hold or sell the securities. It
is our belief, based on currently available information and our evaluation, that
the unrealized losses in these securities were temporary.
Approximately $252 million of our portfolio of mortgage-backed securities are
rated below investment grade by at least one of the nationally-recognized rating
agencies. The aggregate unrealized loss on these securities totaled $92 million.
We 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.
Consideration is given to other-than-temporary impairment if the adjusted loan
to value ratio of a specific security exceeds 85%. We expect the number of below
investment grade securities to increase as the rating agencies continue their
evaluations in a worsening economy. A distribution of the amortized cost, fair
value and unrealized loss by adjusted loan to value ratio is presented in Table
22.
Table 22 Below Investment Grade Securities at December 31, 2008
(In Thousands)
Adjusted LTV
Ratio Amortized Cost Fair Value
---------------------------------------------------
< 70 % $ 89,244 $ 62,886
70 < 75 66,862 43,522
75 < 80 83,298 46,785
80 < 85 12,702 6,985
---------------------------------------------------
Total $ 252,106 $ 160,178
---------------------------------------------------
Our portfolio of available for sale securities also included preferred stocks
issued by seven financial institutions. These stocks were originally purchased
for $46 million and have a current carrying value of $32 million. Our carrying
value of these stocks has been reduced by $14 million of other-than-temporary
impairment charges. None of the institutions that issued these stocks were in
default. These preferred stocks have certain debt-like features such as a
quarterly dividend based on LIBOR. However,
38
the issuers of these stocks have no obligation to redeem them. The
aggregate fair value of these preferred stocks decreased to $22 million at
December 31, 2008 due to a significant widening of spreads to LIBOR related to
current market disruptions. Management believes that the fair value of these
securities will recover to our carrying value as spreads to LIBOR return to a
range of 400 basis points to 500 basis points.
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 $237 million invested in bank-owned life insurance
at December 31, 2008. These investments are expected to provide a long-term
source of earnings to support existing employee benefit programs. Approximately
$204 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 the life insurance policies is further supported by a stable
value wrap, which protects against changes in the fair value of the investments.
At December 31, 2008, cash surrender value represented by the underlying fair
value of investments held in separate accounts was approximately $199 million
and cash surrender value represented by the value of the stable value wrap was
approximately $4.6 million. The stable value wrap was provided by a
highly-rated, domestic financial institution. The remaining cash surrender value
of $33 million primarily represented the cash surrender value of policies held
in the general accounts and amounts due from various insurance companies.
Loans
The aggregate loan portfolio before allowance for loan losses totaled $12.9
billion at December 31, 2008, a $935 million or 8% increase since December 31,
2008. Commercial loans, residential mortgage loans and consumer loans increased
during the year. Commercial real estate loans decreased during the same period.
In previous years, the Company had reported residential loans held for sale by
its mortgage banking division as part of its loan portfolio. These loans are now
reported separately on the consolidated balance sheet and are excluded from this
discussion. Information for prior periods has been reclassified for consistent
presentation.
The commercial loan portfolio increased $650 million during 2008 to $7.4 billion
at December 31, 2008. Energy loans totaled $2.3 billion or 18% of total loans.
Outstanding energy loans increased $357 million during 2008. Approximately $2.0
billion of energy loans was to oil and gas producers, up from $1.6 billion at
December 31, 2007. 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 $161 million of loans to
borrowers that provide services to the energy industry, $128 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, $728
million in Texas and $433 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
increased $305 million during 2008. Approximately $1.3 billion of the services
category is made up of loans with individual balances of less than $10 million.
Approximately $731 million of the outstanding balance of services loans is
attributed to Texas, $658 million to Oklahoma, $247 million to New Mexico, $135
million to Arizona and $132 million to Colorado.
Other notable loan concentrations by primary industry of the borrowers are
presented in Table 23.
39
Table 23 Loans
(In Thousands)
December 31,
-----------------------------------------------------------------
2008 2007 2006 2005 2004
------------ ------------ ------------ ------------- ------------
Commercial:
Energy $2,311,813 $1,954,967 $1,763,180 $1,399,417 $1,223,195
Services 2,038,451 1,733,569 1,555,141 1,425,821 1,190,814
Wholesale/retail 1,165,099 1,084,379 932,531 793,032 699,318
Manufacturing 497,957 493,185 609,571 514,792 484,423
Healthcare 777,154 685,131 602,273 520,309 424,257
Agriculture 197,629 240,469 321,380 291,858 262,436
Other commercial and industrial 423,500 569,884 424,808 354,706 291,393
------------ ------------ ------------ ------------- ------------
Total commercial 7,411,603 6,761,584 6,208,884 5,299,935 4,575,836
Commercial real estate:
Construction and land development 926,226 1,007,414 889,925 638,366 457,399
Retail 371,228 423,118 374,294 305,217 312,016
Office 459,357 421,163 420,914 499,174 342,950
Multifamily 316,596 214,388 239,000 204,620 231,985
Industrial 149,367 154,255 146,406 90,601 75,884
Other real estate loans 478,474 502,746 376,001 251,924 200,876
------------ ------------ ------------ ------------- ------------
Total commercial real estate 2,701,248 2,723,084 2,446,540 1,989,902 1,621,110
Residential mortgage:
Permanent mortgage 1,273,275 1,092,382 867,748 807,509 847,254
Home equity 479,299 442,223 388,511 361,822 351,664
------------ ------------ ------------ ------------- ------------
Total residential mortgage 1,752,574 1,534,605 1,256,259 1,169,331 1,198,918
Consumer:
Indirect automobile 692,615 625,203 465,622 358,144 234,630
Other consumer 317,966 296,094 273,873 271,000 258,211
------------ ------------ ------------ ------------- ------------
Total consumer 1,010,581 921,297 739,495 629,144 492,841
---------------------------------------------------- ------------ ------------ ------------ ------------- ------------
Total $12,876,006 $11,940,570 $10,651,178 $9,088,312 $7,888,705
---------------------------------------------------- ------------ ------------ ------------ ------------- ------------
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 December 31, 2008, the
outstanding principal balance of these loans totaled $2.2 billion. Substantially
all of these loans are to borrowers with local market relationships. BOK
Financial serves as the agent lender in approximately 21% of its shared national
credits, based on dollars committed. The Company's lending policies generally
avoid loans in which we do not have the opportunity to maintain or achieve other
business relationships with the customer.
Commercial real estate loans totaled $2.7 billion or 21% of the loan portfolio
at December 31, 2008. Over the past five years, the percentage of commercial
real estate loans to our total loan portfolio ranged from 20% to 23%.
The outstanding balance of commercial real estate loans decreased $22 million or
1% from the previous year end. Construction and land development loans decreased
$81 million to $926 million at December 31, 2008. Approximately $244 million of
these loans are attributed to the Oklahoma market, $246 million to the Texas
market, $172 million to the Colorado market and $155 million to the Arizona
market.
Loans secured by multifamily residential properties increased $102 million,
primarily in the Texas and Oklahoma markets. Loans secured by office buildings
increased $38 million, primarily in the Colorado, Texas, Oklahoma and New Mexico
markets. The geographic distribution of the $1.8 billion of commercial real
estate loans excluding construction land and land development loans primarily
consisted of $600 million in Oklahoma, $580 million in Texas, $206 million in
New Mexico, $165 million in Arizona and $90 million in Colorado. Other
commercial real estate loans in the Arizona market included $64 million secured
by retail facilities and $47 million secured by office facilities.
Residential mortgage loans totaled $1.8 billion, up $218 million or 14% since
December 31, 2007. Permanent 1-4 family mortgage loans increased $181 million
and home equity loans increased $37 million. We have no concentration in
sub-prime residential mortgage loans and our mortgage loan portfolio does not
include payment option adjustable rate mortgage loans or loans with initial
rates that are below market. Our portfolio of permanent 1- 4 family mortgage
loans includes $127 million of community development loans. These loans are
generally underwritten to prime standards and require full documentation.
Approximately $1.2 billion of our residential mortgage loan portfolio is
attributed to borrowers in Oklahoma and $315 million to borrowers in Texas.
At December 31, 2008, consumer loans included $693 million of indirect
automobile loans. Approximately $434 million of these loans were purchased from
dealers in Oklahoma and $170 million were purchased from dealers in Arkansas.
The remaining $88 million were purchased from dealers in Texas. Indirect
automobile loans increased $110 million through June 30,
40
2008, then decreased $42 million during the second half of 2008. Approximately
6% of the outstanding balance at December 31, 2008 is considered near-prime,
which is defined as loans to borrowers that had poor credit in the past but have
re-established credit over a period of time. We generally do not originate
sub-prime indirect automobile loans.
Table 24 Loan Maturity and Interest Rate Sensitivity at December 31, 2008
(In Thousands)
Remaining Maturities of Selected Loans
--------------------------------------
Total Within 1 Year 1-5 Years After 5 Years
-------------- ------------ ------------ ------------
Loan maturity:
Commercial $ 7,411,603 $2,482,847 $4,099,164 $ 829,592
Commercial real estate 2,701,248 1,474,211 934,537 292,500
--------------------------------------------- -------------- ------------ ------------ ------------
Total $10,112,851 $3,957,058 $5,033,701 $1,122,092
--------------------------------------------- -------------- ------------ ------------ ------------
Interest rate sensitivity for selected loans with:
Predetermined interest rates $ 3,921,529 $ 614,129 $2,707,477 $ 599,923
Floating or adjustable interest rates 6,191,322 3,342,929 2,326,224 522,169
--------------------------------------------- -------------- ------------ ------------ ------------
Total $10,112,851 $3,957,058 $5,033,701 $1,122,092
--------------------------------------------- -------------- ------------ ------------ ------------
41
Table 25 Loans by Principal Market Area
(In Thousands)
December 31,
-----------------------------------------------------------------
2008 2007 2006 2005 2004
------------ ------------ ------------ ------------- ------------
Oklahoma:
Commercial $3,356,520 $3,224,013 $3,186,085 $3,059,441 $2,784,657
Commercial real estate 843,576 885,866 979,251 859,829 744,724
Residential mortgage 1,196,924 1,080,483 896,567 842,456 901,538
Consumer 579,809 576,070 512,032 466,180 367,947
------------ ------------ ------------ ------------- ------------
Total Oklahoma $5,976,829 $5,766,432 $5,573,935 $5,227,906 $4,798,866
------------ ------------ ------------ ------------- ------------
Texas:
Commercial $2,353,860 $1,997,659 $1,722,627 $1,356,611 $1,120,069
Commercial real estate 825,769 830,980 670,635 569,921 459,067
Residential mortgage 315,438 278,842 213,801 199,726 191,296
Consumer 212,820 142,958 95,652 89,017 86,732
------------ ------------ ------------ ------------- ------------
Total Texas $3,707,887 $3,250,439 $2,702,715 $2,215,275 $1,857,164
------------ ------------ ------------ ------------- ------------
New Mexico:
Commercial $418,732 $473,262 $411,272 $383,325 $354,904
Commercial real estate 286,574 252,884 257,079 232,564 196,832
Residential mortgage 98,018 84,336 75,159 65,784 63,043
Consumer 18,616 16,105 13,256 15,137 13,260
------------ ------------ ------------ ------------- ------------
Total New Mexico $821,940 $826,587 $756,766 $696,810 $628,039
------------ ------------ ------------ ------------- ------------
Arkansas:
Commercial $103,446 $106,328 $95,483 $79,719 $61,934
Commercial real estate 134,015 124,317 94,395 75,483 74,478
Residential mortgage 16,875 16,393 23,076 13,044 11,238
Consumer 175,647 163,626 86,017 25,659 3,858
------------ ------------ ------------ ------------- ------------
Total Arkansas $429,983 $410,664 $298,971 $193,905 $151,508
------------ ------------ ------------ ------------- ------------
Colorado:
Commercial $660,546 $490,373 $451,046 $270,108 $191,459
Commercial real estate 261,820 252,537 193,747 133,537 118,134
Residential mortgage 53,875 26,556 15,812 21,918 31,693
Consumer 16,141 16,457 26,591 27,871 21,044
------------ ------------ ------------ ------------- ------------
Total Colorado $992,382 $785,923 $687,196 $453,434 $362,330
------------ ------------ ------------ ------------- ------------
Arizona:
Commercial $211,356 $157,341 $96,453 $50,489 $ -
Commercial real estate 319,525 342,673 207,035 115,697 27,875
Residential mortgage 62,123 46,269 31,280 26,102 -
Consumer 6,075 5,522 5,947 5,280 -
------------ ------------ ------------ ------------- ------------
Total Arizona $599,079 $551,805 $340,715 $197,568 $27,875
------------ ------------ ------------ ------------- ------------
Kansas:
Commercial $307,143 $312,608 $245,918 $100,242 $62,813
Commercial real estate 29,969 33,827 44,398 2,871 -
Residential mortgage 9,321 1,726 564 301 110
Consumer 1,473 559 - - -
------------ ------------ ------------ ------------- ------------
Total Kansas $347,906 $348,720 $290,880 $103,414 $62,923
------------ ------------ ------------ ------------- ------------
Total BOK Financial loans $12,876,006 $11,940,570 $10,651,178 $9,088,312 $7,888,705
------------ ------------ ------------ ------------- ------------
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 $599 million at
December 31, 2008. Loan commitments may be unconditional obligations to provide
financing or conditional obligations that depend on the borrower's financial
condition, collateral value or other factors. Standby letters of credit are
unconditional commitments to guarantee the performance of our customer to a
third party. Since some of these commitments are expected to expire before being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Approximately $1.6 million of the outstanding standby letters
of credit were issued on behalf of customers whose loans are non-performing at
December 31, 2008.
42
Table 26 Off-Balance Sheet Credit Commitments
(In Thousands)
As of December 31,
2008 2007 2006 2005 2004
-------------- ------------- ------------ ------------ -------------
Loan commitments $5,015,660 $5,345,736 $5,318,257 $4,349,114 $3,459,425
Standby letters of credit 598,618 555,758 527,627 558,907 414,228
Mortgage loans sold with recourse 391,188 392,534 329,713 248,150 32,134
------------------------------------ -------------- ------------- ------------ ------------ -------------
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
from default than traditional residential mortgage loans. A separate recourse
reserve is maintained as part of other liabilities. At December 31, 2008, the
principal balance of loans sold subject to recourse obligations totaled $391
million. Substantially all of these loans are to borrowers in our primary
markets including $274 million to borrowers in Oklahoma, $44 million to
borrowers in Arkansas, $22 million to borrowers in New Mexico, $19 million to
borrowers in the Kansas City area and $18 million to borrowers in Texas. The
separate reserve for this off-balance commitment totaled $8.8 million at
December 31, 2008. Approximately 3.14% 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 $8.6
million for 2008. Net losses charged against the reserve totaled $3.4 million
for 2008.
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 are 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 December 31, 2008, the net
fair values of derivative contracts reported as assets under these programs
totaled $656 million, up from $501 million at December 31, 2007. At December 31,
2008, derivative contracts carried as assets included energy contracts with fair
values of $423 million, interest rate contracts with fair values of $174 million
and foreign exchange contracts with fair values of $52 million. The aggregate
net fair values of derivative contracts held under these programs reported as
liabilities totaled $682 million.
As of January 1, 2008, the Company adopted FASB Staff Position FIN 39-1 which
permits offsetting of cash collateral against the fair value of derivative
instruments executed with the same counterparty under a master netting
agreement. Total derivative assets were reduced by $217 million of cash
collateral received from counterparties and total derivative liabilities were
reduced by $15 million of cash collateral delivered to counterparties at
December 31, 2008.
43
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 December 31,
2008 was (in thousands):
Customers $206,719
Banks 120,516
Energy companies 76,296
Exchanges 30,204
Other 5,319
--------
Fair value of customer hedge asset derivative contracts, net $439,054
========
The largest net reported amount due from a single counterparty, a subsidiary of
a major energy company, at December 31, 2008 was $64 million. Letters of credit
issued by independent financial institutions further reduce our exposure to this
customer to $14 million.
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 exceed 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 $20 per barrel of oil would increase the fair
value of derivative assets by $256 million. An increase in prices equivalent to
$80 per barrel of oil would decrease the fair value of derivative assets by $98
million as current prices move closer to the fixed prices embedded in our
existing contracts. Further increases in prices equivalent to $120 per barrel of
oil would increase the fair value of our derivative assets by $621 million.
Liquidity requirements of this program are also affected by our credit rating. A
decrease in credit rating from A1 to below investment grade would increase our
obligation to post cash margin on existing contracts by approximately $286
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 and off-balance
sheet credit losses totaled $248 million or 1.93% of outstanding loans and 83%
of non-accruing loans at December 31, 2008. At December 31, 2007, the combined
allowance for loan losses and off-balance sheet credit losses was $148 million
or 1.24% of outstanding loans and 175% of non-accruing loans. The reserve for
loan losses totaled $233 million or 1.81% of outstanding loans at December 31,
2008 and $127 million or 1.06% of outstanding loans at December 31, 2007. The
reserve for off-balance sheet credit commitments was $15 million at December 31,
2008, down from $21 million at December 31, 2007 due largely to changes in risk
factors and the funding of existing commitments.
Net loans charged off during 2008 totaled $102 million compared to $21 million
in the previous year. The ratio of net loans charged off to average outstanding
loans was 0.81% for 2008 compared with 0.19% for 2007.
Gross loans charged off in 2008 totaled $122 million, an increase of $91 million
over 2007. The single largest gross amount charged off during 2008 was $26
million from the SemGroup credit. The remaining gross loans charged off included
$49 million of other commercial loans, $19 million of commercial real estate
loans and $21 million of consumer loans. Recoveries of loans previously charged
off increased to $20 million in 2008 from $11 million in the previous year. In
addition to the normal trend of recoveries, we recovered $7.1 million from a
loan charged off in 2005 and $4.0 million from a loan charged off in 2001 during
2008.
Commercial loans charged off in 2008, in addition to SemGroup, included $17
million in the services sector of the loan portfolio. Commercial loans charged
off were distributed across our markets. Commercial real estate loans charged
off were largely concentrated in the Arizona market. Approximately $16 million
of land and residential construction loans in Arizona were charged off in 2008.
Consumer loan net charge-offs, which includes indirect auto loan and deposit
account overdraft losses, totaled $14 million for 2008, up $6.3 million over the
previous year. Net charge-offs of indirect auto loans totaled $8.6 million for
2008 and $2.9 million for 2007. Net indirect auto loans charged off were $4.7
million in the Oklahoma market, $2.9 million in the Arkansas market and $923
thousand in the Texas market.
44
Table 27 Summary of Loan Loss Experience
(Dollars in Thousands)
Years ended December 31,
-------------------------------------------------------------------
Reserve for loan losses: 2008 2007 2006 2005 2004
-------------------------------------------------------------------
Beginning balance $126,677 $109,497 $103,876 $108,618 $114,784
Loans charged off:
Commercial 74,976 14,380 10,517 9,670 13,921
Commercial real estate 19,141 1,795 87 2,619 971
Residential mortgage 7,223 1,709 1,265 1,212 1,465
Consumer 20,871 13,733 12,127 12,257 13,328
----------------------------------------------------------------------------------------------------------------------
Total 122,211 31,617 23,996 25,758 29,685
----------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 13,379 4,534 5,405 4,071 2,283
Commercial real estate 332 110 327 117 30
Residential mortgage 366 309 161 180 243
Consumer 6,413 5,558 5,638 5,176 5,171
----------------------------------------------------------------------------------------------------------------------
Total 20,490 10,511 11,531 9,544 7,727
----------------------------------------------------------------------------------------------------------------------
Net loans charged off 101,721 21,106 12,465 16,214 21,958
Provision for loan losses 208,280 34,758 18,086 10,401 15,792
Additions due to acquisitions - 3,528 - 1,071 -
----------------------------------------------------------------------------------------------------------------------
Ending balance $233,236 $126,677 $109,497 $103,876 $108,618
----------------------------------------------------------------------------------------------------------------------
Reserve for off-balance sheet credit losses:
Beginning balance $20,853 $20,890 $20,574 $18,502 $13,855
Provision for off-balance sheet credit losses (5,687) (37) 316 2,040 4,647
Additions due to acquisitions - - - 32 -
----------------------------------------------------------------------------------------------------------------------
Ending balance $15,166 $20,853 $20,890 $20,574 $18,502
----------------------------------------------------------------------------------------------------------------------
Total provision for credit losses $202,593 $34,721 $18,402 $12,441 $20,439
----------------------------------------------------------------------------------------------------------------------
Reserve for loan losses to loans outstanding at
year-end 1.81% 1.06% 1.03% 1.14% 1.38%
Net charge-offs to average loans 0.81 0.19 0.13 0.19 0.29
Total provision for credit losses to average loans 1.62 0.31 0.19 0.15 0.27
Recoveries to gross charge-offs 16.77 33.24 48.05 37.05 26.03
Reserve for loan losses as a multiple of net
charge-offs 2.29x 6.00x 8.78x 6.41x 4.95x
Reserve for off-balance sheet credit losses to
off-balance sheet credit commitments 0.27% 0.35% 0.36% 0.42% 0.48%
Combined reserves for credit losses to loans
outstanding at year-end 1.93% 1.24% 1.22% 1.37% 1.61%
----------------------------------------------------------------------------------------------------------------------
Problem Loans:
Loans past due (90 days) $ 19,123 $ 5,575 $ 5,945 $ 8,708 $ 7,649
Nonaccrual(1) 300,073 84,290 26,055 25,162 52,660
Renegotiated(2) 13,039 10,394 9,802 6,379 4,689
----------------------------------------------------------------------------------------------------------------------
Total $332,235 $100,259 $ 41,802 $ 40,249 $ 64,998
----------------------------------------------------------------------------------------------------------------------
Foregone interest on nonaccrual loans(1) $ 8,391 $ 3,011 $ 2,130 $ 2,515 $ 4,617
----------------------------------------------------------------------------------------------------------------------
(1) Interest collected and recognized on nonaccrual loans was not significant
in 2008 and previous years disclosed.
(2) Includes residential mortgage loans 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.
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 27
presents the trend of reserves for off-balance sheet credit losses and the
relationship between the reserve and loan commitments. The relationship between
the combined reserve for credit losses and outstanding loans is also presented
for comparison with peer banks and others who have not adopted the preferred
presentation. The provision for credit losses included the combined charge to
expense for both the reserve for loan losses and the reserve for off-balance
sheet credit losses. All losses incurred from lending activities will ultimately
be reflected in charge-offs against the reserve for loan losses following funds
advanced against outstanding commitments and after the exhaustion of collection
efforts.
At December 31, 2008, specific impairment reserves totaled $29 million on total
impaired loans of $270 million. Specific impairment reserves were $4.4 million
on total impaired loans of $74 million at December 31, 2007. Impaired loans with
no specific impairment reserves totaled $76 million at December 31, 2008.
Impairment losses on these loans were charged-off against the allowance for loan
losses as they were identified.
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 during 2008. Weakness in the economy
45
became more apparent due to disruption in the credit markets, lower consumer
confidence and continued weakness in residential real estate markets.
The provision for credit losses totaled $203 million for 2008, compared with $35
million for the previous year. Factors considered in determining the provision
for credit losses for 2008 included trends of increasing net charge-offs and
nonperforming loans, concentrations in 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 in identified
potential problem loans.
Table 28 Loan Loss Reserve Allocation
(Dollars in Thousands)
December 31,
-------------------------------------------------------------------------------------------------
2008 2007 2006 2005 2004
------------------ ------------------- ------------------- ------------------- ------------------
% of % of % of % of % of
Reserve(2)Loans(1) Reserve(2) Loans(1) Reserve(2) Loans(1) Reserve(2) Loans(1) Reserve(2)Loans(1)
--------- -------- --------- --------- --------- --------- --------- --------- --------- --------
Loan category:
Commercial $100,743 57.56% $49,961 56.07% $44,151 58.29% $43,915 58.32% $52,325 58.00%
Commercial real estate 75,555 20.98 40,807 22.89 30,838 22.97 25,529 21.89 21,317 20.55
Residential mortgage 14,017 13.61 6,156 13.38 4,663 11.80 5,302 12.87 5,904 15.20
Consumer 19,819 7.85 9,962 7.66 11,784 6.94 10,929 6.92 12,034 6.25
Nonspecific allowance 23,102 - 19,791 - 18,061 - 18,201 - 17,038 -
-------------------------- --------- -------- --------- --------- --------- --------- --------- --------- --------- --------
Total $233,236 100.00% $126,677 100.00% $109,497 100.00% $103,876 100.00% $108,618 100.00%
-------------------------- --------- -------- --------- --------- --------- --------- --------- --------- --------- --------
(1) Excludes residential mortgage loans held for sale.
(2) Specific allocation for the loan concentration risks are included in the
appropriate category.
Non-performing Assets
Non-performing assets totaled $342 million or 2.65% of outstanding loans and
repossessed assets at December 31, 2008, up $238 million since December 31,
2007. In addition to $300 million of non-accruing loans, non-performing assets
included $13 million of restructured residential mortgage loans and $29 million
of real estate and other repossessed assets. Approximately $10 million of the
restructured residential mortgage loans are guaranteed by agencies of the U.S.
government. Non-performing assets included $15 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 acquisition date. The Company
generally retains non-performing assets to maximize potential recovery which may
cause future non-performing assets to increase.
Non-accruing commercial loans totaled $135 million or 1.82% of total commercial
loans at December 31, 2008. Non-accruing commercial loans increased $92 million
since December 31, 2007. Non-accruing loans in the energy sector of the
commercial loan portfolio increased $49 million, substantially all due to the
SemGroup credit. This represents approximately one-third of our pre-bankruptcy
credit exposure to SemGroup. In addition, wholesale/retail, services and
healthcare sectors of the commercial loan portfolio increased $15 million, $11
million and $10 million, respectively. The distribution of non-accruing
commercial loans among our various markets included $75 million in Oklahoma, $22
million in Colorado, $20 million in Texas and $11 million in Kansas City.
Non-accruing commercial real estate loans totaled $137 million or 5.08% of
outstanding commercial real estate loans at December 31, 2008. Total
non-accruing commercial real estate loans increased $112 million since December
31, 2007, including a $63 million increase in loans secured by land, residential
lots and residential construction properties, a $21 million increase in
multifamily residential loans and a $10 million increase in loans secured by
retail facilities. Non-accruing land and residential construction loans totaled
$76 million or 8.21% of the respective loan portfolio sector at December 31,
2008. Other increases in non-accruing commercial real estate loans are spread
across all sectors of the commercial real estate loan portfolio. Non-accruing
commercial real estate loans attributed to our various markets included $76
million to Arizona, $23 million to Oklahoma, $14 million to Texas, $10 million
to Colorado and $8 million to New Mexico.
At December 31, 2008, non-accruing commercial real estate loans in the Arizona
market totaled $76 million or 23.85% of commercial real estate loans in that
market, up from $9 million or 1.70% at the previous year end. Non-accruing land
and residential lot and construction loans in Arizona totaled $50 million at
December 31, 2008. Other non-accruing commercial real estate loans in the
Arizona market included $12 million of loans secured by retail properties, $6
million of loans secured by industrial properties and $3 million of loans
secured by office properties. These properties are primarily located in the
Phoenix and Tucson areas of Arizona.
46
Our consumer credit exposure consists primarily of permanent residential
mortgage loans, home equity loans and indirect automobile loans. Non-accruing
permanent residential mortgage loans totaled $26 million or 2.06% of outstanding
residential mortgage loans at December 31, 2008. Non-accruing home equity loans
totaled $1.2 million or 0.24% of outstanding home equity loans. The distribution
of non-accruing residential mortgage loans and home equity loans among our
various markets included $11 million in Oklahoma, $8 million in Texas, $3
million in New Mexico and $3 million in Arizona.
At December 31, 2008, the distribution of our $693 million portfolio of indirect
automobile loans among various markets was $434 million in Oklahoma, $170
million in Arkansas and $88 million in Texas. Approximately 3.36% of the
indirect automobile loan portfolio is past due 30 days or more, including 3.25%
in Oklahoma, 3.74% in Arkansas and 3.17% in Texas. At September 30, 2008, the
most recent date for which comparable information is available, approximately
2.29% of our indirect automobile loan portfolio was past due 30 days or more.
This compares to a national average of 3.06% for indirect automobile loans past
due 30 days or more at September 30, 2008.
Real estate and other repossessed assets totaled $29 million at December 31,
2008, up from $9 million at December 31, 2007. Real estate and other repossessed
assets included $18 million of 1-4 family residential properties and residential
land development properties, $5 million of developed commercial real estate
properties, $3 million of undeveloped land and $3 million of automobiles. Real
estate owned and other repossessed assets are primarily located in Oklahoma,
Texas, Arkansas and Colorado. Approximately $2 million of residential and
residential land development properties are supported by the First United Bank
sellers' guaranty.
47
Table 29 Nonperforming Assets
(Dollars in Thousands)
December 31,
-----------------------------------------------------------------
2008 2007 2006 2005 2004
----------- ------------- ------------ ------------- ------------
Nonperforming loans
Nonaccrual loans:
Commercial $134,846 $ 42,981 $10,737 $11,673 $33,195
Commercial real estate 137,279 25,319 4,771 5,370 10,144
Residential mortgage 27,387 15,272 10,325 7,347 8,612
Consumer 561 718 222 772 709
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Total nonaccrual loans 300,073 84,290 26,055 25,162 52,660
Renegotiated loans(2) 13,039 10,394 9,802 6,379 4,689
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Total nonperforming loans 313,112 94,684 35,857 31,541 57,349
Other nonperforming assets 29,179 9,475 8,486 8,476 3,763
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Total nonperforming assets $342,291 $104,159 $44,343 $40,017 $61,112
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Nonaccrual loans by principal market:
Oklahoma $108,367 $47,977 $17,683 $16,857 $37,779
Texas 42,934 4,983 6,096 5,475 2,223
New Mexico 16,016 11,118 871 928 1,463
Arkansas 3,263 1,635 267 - 2,717
Colorado(3) 32,415 9,222 1,138 1,902 8,478
Arizona 80,994 9,355 - - -
Kansas 16,084 - - - -
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Total nonaccrual loans $300,073 $84,290 $26,055 $ 25,162 $52,660
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Nonaccrual loans by loan portfolio sector:
Commercial:
Energy $49,364 $529 $ 535 $ 75 $ 276
Manufacturing 7,343 9,915 101 1,113 13,747
Wholesale / retail 18,773 3,792 2,457 3,036 4,604
Agriculture 680 380 93 268 365
Services 36,873 25,468 5,759 5,213 13,274
Healthcare 12,118 2,301 1,600 1,942 743
Other 9,695 596 192 26 186
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Total commercial 134,846 42,981 10,737 11,673 33,195
Commercial real estate:
Land development and construction 76,082 13,466 2,031 2,081 6,706
Retail 15,625 5,259 - - 1,171
Office 7,637 1,013 732 - 409
Multifamily 24,950 3,998 320 668 1,235
Industrial 6,287 - - - 16
Other commercial real estate 6,698 1,583 1,688 2,621 607
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Total commercial real estate 137,279 25,319 4,771 5,370 10,144
Residential mortgage:
Permanent mortgage 26,233 14,541 9,923 6,844 7,824
Home equity 1,154 731 402 503 788
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Total residential mortgage 27,387 15,272 10,325 7,347 8,612
Consumer 561 718 222 772 709
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Total nonaccrual loans $300,073 $84,290 $26,055 $25,162 $52,660
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Ratios:
Reserve for loan losses to nonperforming loans 74.49% 133.79% 305.37% 329.34% 189.40%
Nonperforming loans to period-end loans 2.43 0.79 0.34 0.35 0.73
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Loans past due (90 days)(1) $19,123 $5,575 $ 5,945 $ 8,708 $ 7,649
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
(1) Includes residential mortgages guaranteed by
agencies of the U.S. Government. $ 872 $ 1,017 $ 2,233 $ 2,021 $ 2,308
(2) Includes residential mortgage loans $10,396 $ 7,550 $ 5,747 $ 3,577 $ 2,131
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.
(3) Includes loans subject to First United Bank $13,181 $ 8,412 $ - $ - $ -
sellers escrow.
48
Our loan review process also identified loans that possess more than the normal
amount of risk due to deterioration in the financial condition of the borrower
or the value of the collateral. Because the borrowers are still performing in
accordance with the original terms of the loan agreements, and no loss of
principal or interest is anticipated, these loans were not included in
Nonperforming Assets. Known information does, however, cause management concern
as to the borrowers' ability to comply with current repayment terms. These
potential problem loans totaled $95 million at December 31, 2008. The current
composition of potential problem loans by primary industry included real estate
- $68 million, healthcare - $17 million and services - $6 million. Potential
problem real estate loans included $37 million of residential development loans
on properties primarily located in Arizona and Colorado, $12 million of loans
secured by undeveloped land located primarily in Arizona and $11 million of
loans secured by office buildings.
Liquidity and Capital
Subsidiary Banks
Deposits and borrowed funds are the primary sources of liquidity for the
subsidiary banks. Approximately 63% of our funding is provided by average
deposit accounts, 22% from borrowed funds, 2% from long-term subordinated debt
and 9% from shareholders' equity. Our funding sources, which primarily include
deposits, borrowings from the Federal Home Loan Banks and other banks, and may
include issuance of qualifying debt under the TLGP, provide adequate liquidity
to meet our operating needs.
Deposit accounts represent our largest funding source. During 2008, the Company
revised the presentation of certain deposit accounts. Previously, demand deposit
accounts were shown net of adjustments made to manage reserve requirements.
These adjustments were excluded from the current presentation to provide a
more-meaningful presentation of the Company's deposit accounts. All prior
periods have been reclassified for a consistent presentation. The
reclassification had no effect on total deposits, interest expense, net interest
revenue or net interest margin.
We compete for retail and commercial deposits by offering a broad range of
products and services and focusing on customer convenience. Retail deposit
growth is supported through our Perfect Banking sales and customer service
program, free checking and on-line Billpay services, an extensive network of
branch locations and ATMs and a 24-hour Express Bank call center. Commercial
deposit growth is supported by offering treasury management and lockbox
services. We also acquire brokered deposits when the cost of funds is
advantageous to other funding sources.
Average deposits represented approximately 63% of total average liabilities and
capital for 2008, compared with 66% for 2007. The decrease in deposits relative
to our other funding sources was due to several factors. Funds purchased,
repurchase agreements and other borrowed funds were lower-costing funding
sources during much of 2008. We increased borrowings to fund our securities
portfolio growth. Additionally, we increased borrowings in mid-year to fund
margin calls related to our derivatives liabilities.
Average deposits totaled $13.7 billion for 2008, up $1.1 billion or 9% over
2007. Average interest-bearing transaction deposit accounts continued to grow in
2008, up $834 million or 15% over 2007. Average demand deposits also increased,
up $264 million or 11% over last year. Average time deposits decreased $16
million from 2007.
Growth in our average interest-bearing transaction deposit accounts included
$305 million of wealth management deposits, $306 million of consumer banking
deposits and $326 million of commercial deposits.
Table 30 Maturity of Domestic CDs and Public
Funds in Amounts of $100,000 or More
(In Thousands)
December 31,
---------------------------
2008 2007
---------------------------
Months to maturity:
3 or less $ 879,792 $ 820,339
Over 3 through 6 844,957 580,427
Over 6 through 12 651,632 456,103
Over 12 710,395 584,180
--------------------------------------------------------
Total $3,086,776 $2,441,049
--------------------------------------------------------
Brokered deposits, which are included in time deposits, averaged $735 million
for 2008, up $120 million or 20% over the previous year. Brokered deposits
totaled $1.0 billion at December 31, 2008. These deposits were largely added to
remix wholesale funding sources in order to provide more available overnight
liquidity. Average wealth management time deposits
49
increased $102 million or 35% compared with 2007. Average retail time deposits
decreased $161 million or 6% compared with 2007.
Core deposits which we define as deposits of less than $100,000 excluding public
funds and brokered deposits, averaged $6.6 billion for 2008 and $6.4 billion for
2007. Accounts with balances in excess of $100,000 excluding brokered deposit
accounts averaged $5.6 billion for 2008 and $5.0 billion for 2007.
The distribution of deposit accounts among our principal markets is shown in
Table 31.
50
Table 31 Deposits by Principal Market Area
(In Thousands)
December 31,
-------------------------------------------------------------------
2008 2007 2006 2005 2004
--------------------------------------------------------------------
Oklahoma:
Demand $1,683,374 $1,394,861 $1,298,593 $1,333,331 $1,233,662
Interest-bearing:
Transaction 4,117,729 3,477,208 3,072,830 2,672,563 2,152,655
Savings 86,476 80,467 83,017 85,837 87,597
Time 3,104,933 2,426,822 2,595,890 2,564,337 2,505,849
--------------------------------------------------------------------
Total interest-bearing 7,309,138 5,984,497 5,751,737 5,322,737 4,746,101
--------------------------------------------------------------------
Total Oklahoma $8,992,512 $7,379,358 $7,050,330 $6,656,068 $5,979,763
--------------------------------------------------------------------
Texas:
Demand $1,067,456 $1,035,134 $ 848,152 $ 841,197 $ 688,353
Interest-bearing:
Transaction 1,460,576 1,753,843 1,480,138 1,310,105 1,049,348
Savings 32,071 34,618 24,074 27,398 30,331
Time 857,416 800,460 829,255 735,731 571,993
--------------------------------------------------------------------
Total interest-bearing 2,350,063 2,588,921 2,333,467 2,073,234 1,651,672
--------------------------------------------------------------------
Total Texas $3,417,519 $3,624,055 $3,181,619 $2,914,431 $2,340,025
--------------------------------------------------------------------
New Mexico:
Demand $ 155,345 $ 151,231 $ 175,980 $ 172,363 $ 153,063
Interest-bearing:
Transaction 397,382 432,919 380,450 338,025 303,654
Savings 16,289 15,146 16,417 17,839 17,885
Time 522,894 486,868 490,460 453,314 411,939
--------------------------------------------------------------------
Total interest-bearing 936,565 934,933 887,327 809,178 733,478
--------------------------------------------------------------------
Total New Mexico $ 1,091,910 $ 1,086,164 $ 1,063,307 $ 981,541 $ 886,541
--------------------------------------------------------------------
Arkansas:
Demand $ 16,293 $ 13,247 $ 15,604 $ 14,414 $ 16,056
Interest-bearing:
Transaction 38,566 19,027 14,890 18,369 25,315
Savings 1,083 883 1,010 1,058 1,434
Time 75,579 40,692 57,446 75,034 99,677
--------------------------------------------------------------------
Total interest-bearing 115,228 60,602 73,346 94,461 126,426
--------------------------------------------------------------------
Total Arkansas $ 131,521 $ 73,849 $ 88,950 $ 108,875 $ 142,482
--------------------------------------------------------------------
Colorado:
Demand $ 116,637 $ 117,939 $ 80,559 $ 91,483 $ 78,756
Interest-bearing:
Transaction 480,113 446,427 296,451 228,832 173,345
Savings 17,660 23,806 12,632 17,772 19,092
Time 532,475 539,523 485,200 264,020 54,394
--------------------------------------------------------------------
Total interest-bearing 1,030,248 1,009,756 794,283 510,624 246,831
--------------------------------------------------------------------
Total Colorado $1,146,885 $1,127,695 $ 874,842 $ 602,107 $ 325,587
--------------------------------------------------------------------
Arizona:
Demand $ 39,424 $ 46,701 $ 51,542 $ 59,689 $ -
Interest-bearing:
Transaction 56,985 65,788 61,539 42,872 -
Savings 1,014 1,435 1,978 4,111 -
Time 34,290 11,603 6,574 5,624 -
--------------------------------------------------------------------
Total interest-bearing 92,289 78,826 70,091 52,607 -
--------------------------------------------------------------------
Total Arizona $ 131,713 $ 125,527 $ 121,633 $ 112,296 $ -
--------------------------------------------------------------------
Kansas:
Demand $ 3,850 $ 9,656 $ 57 $ - $ -
Interest-bearing:
Transaction 10,999 8,304 244 - -
Savings 42 13 2 - -
Time 55,656 24,670 5,721 - -
--------------------------------------------------------------------
Total interest-bearing 66,697 32,987 5,967 - -
--------------------------------------------------------------------
Total Kansas $ 70,547 $ 42,643 $ 6,024 $ - $ -
--------------------------------------------------------------------
Total BOK Financial deposits $14,982,607 $13,459,291 $12,386,705 $11,375,318 $ 9,674,398
--------------------------------------------------------------------
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 $200
million at December 31, 2008. Securities repurchase agreements generally mature
within 90 days and are secured by certain available for sale securities.
51
Federal Home Loan Bank borrowings generally mature within one year 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 December 31, 2008, the outstanding balance of
federal funds purchased totaled $1.6 billion and securities repurchase
agreements totaled $1.4 billion. Amounts borrowed from the Federal Home Loan
Banks of Topeka and Dallas totaled $991 million.
The Company elected to participate in the 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. 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 $450 million at December
31, 2008.
At December 31, 2008, the estimated unused credit available to the subsidiary
banks from our traditional sources and within our internal policy limits was
approximately $4.6 billion.
Parent Company
The primary source of liquidity for BOK Financial is dividends from subsidiary
banks, which are limited by various banking regulations to net profits, as
defined, for the year plus retained profits for the preceding two years.
Dividends are further restricted by minimum capital requirements. Based on the
most restrictive limitations, at December 31, 2008, the subsidiary banks could
declare up to $171 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 $119 million under this policy. Future
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.
The revolving credit agreement with Mr. Kaiser replaced a similar credit
agreement with certain commercial banks that was terminated at the Company's
request. The Company was in compliance with all terms of that credit agreement
when it was terminated. Interest on the outstanding balance due to Mr. Kaiser 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. This credit agreement matures in December, 2010. At
December 31, 2008, the outstanding balance under this credit agreement was $50
million. Subsequent to December 31, 2008, the Company fully repaid the amounts
owed under this credit agreement.
Equity capital for BOK Financial was $1.8 billion at December 31, 2008, down $89
million from December 31, 2007. Net income less cash dividend paid increased
equity $94 million. Accumulated other comprehensive losses increased $192
million during 2008 due primarily to an increase in net unrealized losses on
available for sale securities. Employee stock option transactions increased
equity capital $16 million and common share repurchases reduced shareholders'
equity $8.0 million. Capital is managed to maximize long-term value to the
shareholders. Factors considered in managing capital include projections of
future earnings, asset growth and acquisition strategies, and regulatory and
debt covenant requirements. Capital management may include subordinated debt
issuance, share repurchase and stock and cash dividends.
BOK Financial is the largest commercial bank, based on asset size, that elected
not to participate in the TARP Capital Purchase Program. The decision not to
participate in TARP was based on an evaluation of our capital needs in both the
current environment and in several capital stress environments. We considered
capital requirements for organic growth and potential acquisitions, the cost of
TARP capital and a defined exit strategy when the cost of TARP capital increases
substantially at the end of year five. We also considered reasonable capital and
liquidity support from our majority shareholder.
On April 26, 2005, the Board of Directors authorized a share repurchase program,
which replaced a previously authorized program. The maximum of two million
common shares may be repurchased. The specific timing and amount of shares
repurchased will vary based on market conditions, securities law limitations and
other factors. Repurchases may be made over time in open market or privately
negotiated transactions. The repurchase program may be suspended or discontinued
at any time without prior notice. Since this program began, 784,073 shares have
been repurchased by the Company for $38.7 million. The Company repurchased
166,114 shares for $8.0 million in 2008.
BOK Financial and subsidiary banks are subject to various capital requirements
administered by federal agencies. Failure to meet minimum capital requirements
can result in certain mandatory and possibly additional discretionary actions by
regulators that could have a material impact on operations. These capital
requirements include quantitative measures of assets, liabilities, and
off-balance sheet items. The capital standards are also subject to qualitative
judgments by the regulators.
52
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 and
for each of the subsidiary banks are presented in Note 16 to the Consolidated
Financial Statements.
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 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 measurement 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 December 31, 2008, BOK
Financial's tangible common shareholders' equity ratio was 6.64%.
Off-Balance Sheet Arrangements
During the third quarter of 2007, BOk 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, BOk 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 BOk 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.
Aggregate Contractual Obligations
BOK Financial has numerous contractual obligations in the normal course of
business. These obligations included time deposits and other borrowed funds,
premises used under various operating leases, commitments to extend credit to
borrowers and to purchase securities, derivative contracts and contracts for
services such as data processing that are integral to our operations. The
following table summarizes payments due per these contractual obligations at
December 31, 2008.
Table 32 Contractual Obligations as of December 31, 2008
(In Thousands)
Less Than 1 to 3 4 to 5 More Than
1 Year Years Years 5 Years Total
-------------- ------------- ------------ ------------ -------------
Time deposits $ 966,345 $1,074,944 $ 227,371 $153,838 $2,422,498
Other borrowings 1,064,235 312,870 1,144 9,526 1,387,775
Subordinated debentures 21,875 43,750 43,750 480,417 589,792
Operating lease obligations 17,108 31,224 20,855 29,904 99,091
Derivative contracts 430,036 60,295 173,284 10,503 674,118
Data processing contracts 10,298 18,241 13,660 - 42,199
------------------------------------ -------------- ------------- ------------ ------------ -------------
Total $2,509,897 $1,541,324 $ 480,064 $684,188 $5,215,473
------------------------------------ -------------- ------------- ------------ ------------ -------------
Loan commitments $ 5,015,660
Standby letters of credit 598,618
Mortgage loans sold with recourse 391,188
Alternative investment commitments 13,911
Unfunded third-party private equity commitments 17,531
Deferred compensation and stock-based compensation obligations 22,524
Payments on time deposits and other borrowed funds include interest which has
been calculated from rates at December 31, 2008. Many of these obligations have
variable interest rates and actual payments will differ from the amounts shown
on this table. Obligations under derivative contracts used for interest rate
risk management purposes are included with projected payments from time deposits
and other borrowed funds as appropriate.
Payments on time deposits are based on contractual maturity dates. These funds
may be withdrawn prior to maturity. We may charge the customer a penalty for
early withdrawal.
Operating lease commitments generally represent real property we rent for branch
offices, corporate offices and operations facilities. Payments presented
represent the minimum lease payments and exclude related costs such as utilities
and property taxes.
53
Data processing and communications contracts represent the minimum obligations
under the contracts. Additional payments that are based on the volume of
transactions processed are excluded.
Loan commitments represent legally binding obligations to provide financing to
our customers. Some of these commitments are expected to expire before being
drawn upon and the total commitment amounts do not necessarily represent future
cash requirements. Approximately $2.0 billion of the loan commitments expire
within one year.
Obligations under derivative contracts are used in customer hedging programs. As
previously discussed, we have entered into derivative contracts which are
expected to substantially offset the cash payments due on these obligations.
The Company has funded $43 million and has commitments to fund an additional $14
million for various alternative investments. Alternative investments generally
consist of limited partnership interests in or loans to entities that invest in
distressed assets, energy development, venture capital and other activities. The
Company is prohibited by banking regulations from controlling or actively
managing the activities of these investments.
The Company has $17.5 million of commitments to make investments through its BOK
Financial Private Equity Funds. These commitments, which are included in
unfunded third-party private equity commitments, generally reflect customer
investment obligations.
The Company has compensation and employment agreements with our President and
Chief Executive Officer. Collectively, these agreements provide, among other
things, that all unvested stock-based compensation shall fully vest upon his
termination, subject to certain conditions. These agreements provide for
settlement in cash or other assets. We currently have recognized a $15 million
liability for these plans. This liability would increase to $16 million if all
awards were fully vested. We also have obligations with respect to employee and
executive benefit plans. See Notes 12 and 13 to the Consolidated Financial
Statements for additional information about our employee benefit plans.
Recently Issued Accounting Standards
Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("FAS 159")
The Company adopted 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 FAS 133, were designated as being reported at fair
value. Adoption of FAS 159 increased opening retained earnings for the first
quarter of 2008 by $62 thousand. Interest expense on certificates of deposit
carried at fair value is based on the instruments' contractual interest rates
and outstanding principal balances.
Statement of Financial Accounting Standards No. 141 (Revised), "Business
Combinations" ("FAS 141R")
The FASB issued FAS 141R during 2007 to replace Statement of Financial
Accounting Standards No. 141, Business Combinations. FAS 141R 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.
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
54
to the parent and to the non-controlling interest. FAS 160, which will be
adopted on January 1, 2009, is not expected to 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 hedged 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 is effective for the
Company on January 1, 2009 and is not expected to have a significant impact on
the Company's financial statements.
FASB Staff Position FIN 39-1, "Amendment of FASB Interpretation No. 39"
As of January 1, 2008, the Company adopted FSP FIN 39-1, which permits
offsetting of cash collateral against the fair value of derivative instruments
executed with the same counterparty under a master netting agreement. The total
amount of derivative assets and liabilities as of December 31, 2008 was reduced
by $217 million and $15 million, respectively, of cash collateral. Derivative
liabilities as of December 31, 2007 were reduced by $172 million of cash
collateral.
FASB Staff Position No. EITF 99-20-1, "Amendment to the Impairment and Interest
Income Measurement Guidance of EITF Issue No. 99-20" ("FSP EITF 99-20-1")
FSP EITF 99-20-1 amends the impairment (and related interest income measurement)
guidance for certain beneficial interests in securitized financial assets that
are within the scope of EITF Issue No. 99-20, "Recognition of Interest Income
and Impairment of Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets" ("EITF
99-20"). This FSP eliminates the requirement that a holder's best estimate of
cash flows be based upon those that "a market participant" would use. Instead,
this FSP requires that an other-than-temporary impairment ("OTTI") be recognized
as a realized loss through earnings when it is "probable" there has been an
adverse change in the holder's estimated cash flows from the cash flows
previously projected, which is consistent with the impairment model in FAS 115.
The FSP also reiterates and emphasizes the objective of an OTTI assessment and
the related disclosure requirements in FAS 115 and other related guidance,
including the requirement that the holder consider all available information
when developing the estimate of future cash flows (i.e. past events, current
conditions and expected events). FSP 99-20-1 is effective for the Company as of
December 31, 2008 and did not have a significant impact on the Company's
financial statements.
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 reserves for loan losses and off-balance sheet
credit losses, reserves for uncertain tax positions and accruals for loss
contingencies 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.
55
Legal Notice
As used in this report, the term "BOK Financial" and such terms as "the
Company," "the Corporation," "our," "we" and "us" may refer to one or more of
the consolidated subsidiaries or all of them taken as a whole. All these terms
are used for convenience only and are not intended as a precise description of
any of the separate companies, each of which manages its own affairs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is a broad term for the risk of economic loss due to adverse changes
in the fair value of a financial instrument. These changes may be the result of
various factors, including interest rates, foreign exchange prices, commodity
prices or equity prices. Financial instruments that are subject to market risk
can be classified either as held for trading or held for purposes other than
trading. Market risk excludes changes in fair value due to credit of the
individual issuers of financial instruments.
BOK Financial is subject to market risk primarily through the effect of changes
in interest rates on both its assets held for purposes other than trading and
trading assets. The effects of other changes, such as foreign exchange rates,
commodity prices or equity prices do not pose significant market risk to BOK
Financial. BOK Financial has no material investments in assets that are affected
by changes in foreign exchange rates or equity prices. Energy and agricultural
product derivative contracts, which are affected by changes in commodity prices,
are matched against offsetting contracts as previously discussed.
Responsibility for managing market risk rests with the Asset / Liability
Committee that operates under policy guidelines established by the Board of
Directors. The acceptable negative variation in net interest revenue, net income
or economic value of equity due to a specified basis point increase or decrease
in interest rates is generally limited by these guidelines to +/- 10%. These
guidelines also set maximum levels for short-term borrowings, short-term assets,
public funds, and brokered deposits, and establish minimum levels for un-pledged
assets, among other things. Compliance with these guidelines is reviewed
monthly.
Interest Rate Risk - Other than Trading
As previously noted in the Net Interest Revenue section of this report,
management has implemented strategies to manage the Company's balance sheet to
be relatively neutral to changes in interest rates over a twelve month period.
The effectiveness of these strategies in managing the overall interest rate risk
is evaluated through the use of an asset/liability model. BOK Financial performs
a sensitivity analysis to identify more dynamic interest rate risk exposures,
including embedded option positions, on net interest revenue, net income and
economic value of equity. A simulation model is used to estimate the effect of
changes in interest rates over the next 12 and 24 months based on eight interest
rate scenarios. Two specified interest rate scenarios are used to evaluate
interest rate risk against policy guidelines. The first assumes a sustained
parallel 200 basis point increase and the second assumes a sustained parallel
100 basis point decrease in interest rates. Management historically evaluated
interest rate sensitivity for a sustained 200 basis point decrease in interest
rates. However, the results of a 200 basis point decrease in interest rates in
the current low-rate environment are not meaningful. The Company also performs a
sensitivity analysis based on a "most likely" interest rate scenario, which
includes non-parallel shifts in interest rates. An independent source is used to
determine the most likely interest rate scenario.
The Company's primary interest rate exposures included the Federal Funds rate,
which affects short-term borrowings, and the prime lending rate and LIBOR, which
are the basis for much of the variable-rate loan pricing. Additionally, mortgage
rates directly affect the prepayment speeds for mortgage-backed securities and
mortgage servicing rights. Derivative financial instruments and other financial
instruments used for purposes other than trading are included in this
simulation. The model incorporates assumptions regarding the effects of changes
in interest rates and account balances on indeterminable maturity deposits based
on a combination of historical analysis and expected behavior. The impact of
planned growth and new business activities is factored into the simulation
model. The effects of changes in interest rates on the value of mortgage
servicing rights are excluded from Table 33 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.
56
Table 33 Interest Rate Sensitivity
(Dollars in Thousands)
200 bp Increase 100 bp Decrease Most Likely
----------------------------------------------------------------------------------
2008 2007 2008 2007 2008 2007
----------------------------------------------------------------------------------
Anticipated impact over the next
twelve months on net interest
revenue $ (5,609) $(12,424) $(27,628) *** $ 1,892 $ 9,012
(0.8)% (2.0)% (3.8)% *** 0.3% 1.5%
---------------------------------------------------------------------------------------------------------------------
*** A 100 basis point decrease was not computed in 2007. A 200 basis point
decrease in interest rates was expected to increase net interest revenue by
$3.1 million or 0.5%.
Trading Activities
BOK Financial enters into trading activities both as an intermediary for
customers and for its own account. As an intermediary, BOK Financial will take
positions in securities, generally mortgage-backed securities, government agency
securities, and municipal bonds. These securities are purchased for resale to
customers, which include individuals, corporations, foundations and financial
institutions. BOK Financial will also take trading positions in U.S. Treasury
securities, mortgage-backed securities, municipal bonds and financial futures
for its own account. These positions are taken with the objective of generating
trading profits. Both of these activities involve interest rate risk.
A variety of methods are used to manage the interest rate risk of trading
activities. These methods include daily marking of all positions to market
value, independent verification of inventory pricing, and position limits for
each trading activity. Hedges in either the futures or cash markets may be used
to reduce the risk associated with some trading programs.
Management uses a Value at Risk ("VAR") methodology to measure the market risk
inherent in its trading activities. VAR is calculated based upon historical
simulations over the past five years using a variance / covariance matrix of
interest rate changes. It represents an amount of market loss that is likely to
be exceeded only one out of every 100 two-week periods. Trading positions are
managed within guidelines approved by the Board of Directors. These guidelines
limit the VAR to $3.6 million. At December 31, 2008, the VAR was $1.6 million.
The greatest value at risk during 2008 was $2.7 million. The value at risk
guideline was exceeded with appropriate approvals by management to take
advantage of wide yields available on certain securities during the year.
57
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58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Management on Financial Statements
Management of BOK Financial is responsible for the preparation, integrity and
fair presentation of the consolidated financial statements included in this
annual report. The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
and necessarily include some amounts that are based on our best estimates and
judgments.
Management, under the supervision of the Chief Executive Officer and the Chief
Financial Officer, conducted an assessment of internal control over financial
reporting as of December 31, 2008. Internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Company's consolidated financial
statements for external purposes in accordance with accounting principles
generally accepted in the United States. In establishing internal control over
financial reporting, management assesses risk and designs controls to prevent or
detect financial reporting misstatements that may be consequential to a reader.
Management also assesses the impact of any internal control deficiencies and
oversees efforts to improve internal control over financial reporting. Because
of inherent limitations, it is possible that internal controls may not prevent
or detect misstatements, and it is possible that internal controls may vary over
time based on changing conditions. There have been no material changes in
internal controls subsequent to December 31, 2008.
The Risk Oversight and Audit Committee, consisting entirely of independent
directors, meets regularly with management, internal auditors and the
independent registered public accounting firm, Ernst & Young LLP, regarding
management's assessment of internal control over financial reporting.
Report of Management on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
control over financial reporting and for assessing the effectiveness of internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f), as amended. Management has assessed the effectiveness
of the Company's internal control over financial reporting based on the criteria
established in "Internal Control - Integrated Framework," issued by the
Committee of Sponsoring Organizations ("COSO") of the Treadway Commission. Based
on that assessment and criteria, management has determined that the Company
maintained effective internal control over financial reporting as of December
31, 2008.
Ernst & Young LLP, the independent registered public accounting firm that
audited the consolidated financial statements of the Company included in this
annual report has issued an audit report on the effectiveness of the Company's
internal control over financial reporting as of December 31, 2008. Their report,
which expresses unqualified opinions on the effectiveness of the Company's
internal control over financial reporting as of December 31, 2008, is included
in this annual report.
59
Report of Independent Registered Public Accounting Firm
Report on Consolidated Financial Statements
The Board of Directors and Shareholders of BOK Financial Corporation
We have audited the accompanying consolidated balance sheets of BOK Financial
Corporation as of December 31, 2008 and 2007, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 2008. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BOK Financial
Corporation at December 31, 2008 and 2007, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 11 to the consolidated financial statements, BOK Financial
Corporation changed its method of accounting for uncertainty in income taxes
recognized as of January 1, 2007, in accordance with Financial Accounting
Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes-An Interpretation of FASB Statement No. 109. Also, BOK Financial
Corporation changed its framework for fair value measurements as of January 1,
2007, in accordance with Financial Accounting Standards Board Statement No. 157,
Fair Value Measurement.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), BOK Financial Corporation's internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated
February 26, 2009 expressed an unqualified opinion thereon.
Ernst & Young LLP
Tulsa, Oklahoma
February 26, 2009
60
Report of Independent Registered Public Accounting Firm
Report on Effectiveness of Internal Control over Financial Reporting
The Board of Directors and Shareholders of BOK Financial Corporation
We have audited BOK Financial Corporation's internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). BOK Financial Corporation's
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Report of
Management on Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the company's internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, BOK Financial Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
BOK Financial Corporation as of December 31, 2008 and 2007, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2008 of BOK Financial
Corporation and our report dated February 26, 2009 expressed an unqualified
opinion thereon.
Ernst & Young LLP
Tulsa, Oklahoma
February 26, 2009
61
Consolidated Statements of Earnings
(In Thousands Except Share And Per Share Data)
2008 2007 2006
----------------- ---------------- -----------------
Interest Revenue
Loans $ 732,210 $ 892,024 $ 751,391
Taxable securities 313,360 248,972 222,531
Tax-exempt securities 10,651 13,604 9,819
----------------------------------------------------------- ----------------- ---------------- -----------------
Total securities 324,011 262,576 232,350
----------------------------------------------------------- ----------------- ---------------- -----------------
Trading securities 3,847 1,657 847
Funds sold and resell agreements 1,577 4,480 1,841
----------------------------------------------------------- ----------------- ---------------- -----------------
Total interest revenue 1,061,645 1,160,737 986,429
----------------------------------------------------------- ----------------- ---------------- -----------------
Interest Expense
Deposits 288,924 412,746 336,908
Borrowed funds 103,597 178,605 142,553
Subordinated debentures 22,262 24,901 20,280
----------------------------------------------------------- ----------------- ---------------- -----------------
Total interest expense 414,783 616,252 499,741
----------------------------------------------------------- ----------------- ---------------- -----------------
Net Interest Revenue 646,862 544,485 486,688
Provision for Credit Losses 202,593 34,721 18,402
----------------------------------------------------------- ----------------- ---------------- -----------------
Net Interest Revenue After Provision for Credit Losses 444,269 509,764 468,286
----------------------------------------------------------- ----------------- ---------------- -----------------
Other Operating Revenue
Brokerage and trading revenue 42,804 62,542 53,413
Transaction card revenue 100,153 90,425 78,622
Trust fees and commissions 78,979 78,231 71,037
Deposit service charges and fees 117,528 109,218 102,436
Mortgage banking revenue 27,074 22,275 26,996
Bank-owned life insurance 10,681 10,058 2,558
Margin asset fees 8,548 4,800 10,166
Other revenue 28,233 28,073 26,468
----------------------------------------------------------- ----------------- ---------------- -----------------
Total fees and commissions 414,000 405,622 371,696
----------------------------------------------------------- ----------------- ---------------- -----------------
Gain (loss) on sales of assets (660) (928) 1,499
Gain (loss) on securities, net 21,637 (8,328) (950)
Gain (loss) on derivatives, net 1,299 2,282 (622)
----------------------------------------------------------- ----------------- ---------------- -----------------
Total other operating revenue 436,276 398,648 371,623
----------------------------------------------------------- ----------------- ---------------- -----------------
Other Operating Expense
Personnel 352,947 328,705 296,260
Business promotion 23,536 21,888 19,351
Professional fees and services 27,045 22,795 17,744
Net occupancy and equipment 60,632 57,284 52,188
Insurance 11,988 3,017 4,270
Data processing and communications 78,047 72,733 66,926
Printing, postage and supplies 16,433 16,570 15,862
Net losses and operating expenses of repossessed assets 1,019 691 474
Amortization of intangible assets 7,661 7,358 5,327
Mortgage banking costs 22,513 13,111 12,898
Change in fair value of mortgage servicing rights 34,515 2,893 (3,009)
Visa retrospective responsibility obligation (2,767) 2,767 -
Other expense 28,835 25,175 24,016
----------------------------------------------------------- ----------------- ---------------- -----------------
Total other operating expense 662,404 574,987 512,307
----------------------------------------------------------- ----------------- ---------------- -----------------
Income Before Taxes 218,141 333,425 327,602
Federal and state income tax 64,909 115,761 114,625
----------------------------------------------------------- ----------------- ---------------- -----------------
Net Income $ 153,232 $ 217,664 $ 212,977
----------------------------------------------------------- ----------------- ---------------- -----------------
Earnings Per Share:
Basic $ 2.28 $ 3.24 $ 3.19
Diluted $ 2.27 $ 3.22 $ 3.16
----------------------------------------------------------- ----------------- ---------------- -----------------
Average Shares Used in Computation:
Basic 67,274,457 67,083,200 66,759,384
Diluted 67,557,220 67,550,538 67,310,005
----------------------------------------------------------- ----------------- ---------------- -----------------
See accompanying notes to consolidated financial statements.
62
Consolidated Balance Sheets
(In Thousands Except Share Data)
December 31,
----------------------------------
2008 2007
---------------- -----------------
Assets
Cash and due from banks $ 581,133 $ 717,259
Funds sold and resell agreements 113,809 173,154
Trading securities 99,601 45,724
Securities:
Available for sale 5,800,691 5,323,001
Available for sale securities pledged to creditors 590,760 327,539
Investment (fair value: 2008 - $245,769; 2007 - $248,788) 242,344 247,949
Mortgage trading securities 399,211 154,701
---------------------------------------------------------------------------------- ---------------- -----------------
Total securities 7,033,006 6,053,190
---------------------------------------------------------------------------------- ---------------- -----------------
Residential mortgage loans held for sale 129,246 76,677
Loans 12,876,006 11,940,570
Less reserve for loan losses (233,236) (126,677)
---------------------------------------------------------------------------------- ---------------- -----------------
Loans, net of reserve 12,642,770 11,813,893
---------------------------------------------------------------------------------- ---------------- -----------------
Premises and equipment, net 277,458 258,786
Accrued revenue receivable 96,673 128,350
Intangible assets, net 361,209 368,353
Mortgage servicing rights, net 42,752 70,009
Real estate and other repossessed assets 29,179 9,475
Bankers' acceptances 12,913 1,780
Derivative contracts 452,604 502,446
Cash surrender value of bank-owned life insurance 237,006 229,540
Receivable on unsettled securities trades 239,474 19,964
Other assets 385,815 199,101
---------------------------------------------------------------------------------- ---------------- -----------------
Total assets $ 22,734,648 $ 20,667,701
---------------------------------------------------------------------------------- ---------------- -----------------
Liabilities and Shareholders' Equity
Noninterest-bearing demand deposits $ 3,082,379 $ 2,768,769
Interest-bearing deposits:
Transaction 6,562,350 6,203,516
Savings 154,635 156,368
Time (includes $632,754 at fair value at December 31, 2008) 5,183,243 4,330,638
---------------------------------------------------------------------------------- ---------------- -----------------
Total deposits 14,982,607 13,459,291
---------------------------------------------------------------------------------- ---------------- -----------------
Funds purchased and repurchase agreements 3,025,399 3,225,131
Other borrowings 1,522,054 1,027,564
Subordinated debentures 398,407 398,273
Accrued interest, taxes and expense 133,220 124,029
Bankers' acceptances 12,913 1,780
Derivative contracts 667,034 341,677
Other liabilities 146,757 154,572
---------------------------------------------------------------------------------- ---------------- -----------------
Total liabilities 20,888,391 18,732,317
---------------------------------------------------------------------------------- ---------------- -----------------
Shareholders' equity:
Preferred stock ($.00005 par value; 1,000,000,000 shares authorized; no shares
issued and outstanding) - -
Common stock ($.00006 par value; 2,500,000,000 shares authorized;
shares issued and outstanding: 2008 - 69,884,749; 2007 - 69,465,154) 4 4
Capital surplus 743,411 722,088
Retained earnings 1,427,057 1,332,954
Treasury stock (shares at cost: 2008 - 2,411,663; 2007 - 2,158,774) (101,329) (88,428)
Accumulated other comprehensive loss (222,886) (31,234)
---------------------------------------------------------------------------------- ---------------- -----------------
Total shareholders' equity 1,846,257 1,935,384
---------------------------------------------------------------------------------- ---------------- -----------------
Total liabilities and shareholders' equity $ 22,734,648 $ 20,667,701
---------------------------------------------------------------------------------- ---------------- -----------------
See accompanying notes to consolidated financial statements.
63
Consolidated Statements of Cash Flows
(In Thousands)
2008 2007 2006
--------------- -------------- -------------
Cash Flows From Operating Activities:
Net income $ 153,232 $ 217,664 $ 212,977
Adjustments to reconcile net income to cash provided by operations:
Provision for credit losses 202,593 34,721 18,402
Change in fair value of mortgage servicing rights 34,515 2,893 (3,009)
Unrealized (gains) losses from derivatives 35,408 (11,162) (1,531)
Depreciation and amortization 51,282 43,524 39,303
Change in bank-owned life insurance (7,466) (17,310) (964)
Tax benefit on exercise of stock options (895) (3,460) (4,014)
Stock-based compensation 4,798 8,483 10,682
Net (accretion) amortization of securities discounts and premiums (18,106) (2,404) 1,326
Net (gain) loss on sale of assets (30,981) 7,663 (10,629)
Mortgage loans originated for resale (1,201,613) (1,022,829) (735,432)
Proceeds from sale of mortgage loans held for resale 1,170,722 1,008,828 741,901
Change in trading securities, including mortgage trading securities (297,292) 896 (131,209)
Change in accrued revenue receivable 41,570 (30,719) (18,362)
Change in other assets (82,948) 14,598 (56,423)
Change in accrued interest, taxes and expense 9,191 19,277 12,533
Change in other liabilities 18,055 (32,886) 70,119
------------------------------------------------------------------------------ --------------- -------------- -------------
Net cash provided by operating activities 82,065 237,777 145,670
------------------------------------------------------------------------------ --------------- -------------- -------------
Cash Flows From Investing Activities:
Proceeds from sales of available for sale securities 3,499,128 806,979 646,944
Proceeds from maturities of investment securities 69,931 93,245 59,099
Proceeds from maturities of available for sale securities 1,091,054 1,186,319 686,163
Purchases of investment securities (65,506) (92,648) (62,850)
Purchases of available for sale securities (5,576,035) (2,909,791) (1,208,842)
Loans originated or acquired net of principal collected (1,043,001) (936,018) (1,727,123)
Net payments or proceeds on derivative asset contracts 63,109 (143,649) (20,146)
Investment in bank-owned life insurance - - (201,987)
Net change in other investment assets 33 67 165
Proceeds from disposition of assets 39,522 48,341 81,731
Purchases of other assets (85,943) (44,929) (54,520)
Cash and equivalents of subsidiaries and branches acquired and sold, net - (47,476) 135
------------------------------------------------------------------------------ --------------- -------------- -------------
Net cash used by investing activities (2,007,708) (2,039,560) (1,801,231)
------------------------------------------------------------------------------ --------------- -------------- -------------
Cash Flows From Financing Activities:
Net change in demand deposits, transaction
deposits and savings accounts 670,712 860,612 638,901
Net change in time deposits 842,408 (291,822) 364,344
Net change in other borrowings 294,758 1,301,093 550,038
Change in amount receivable (due) on unsettled security transactions (219,510) (117,491) 98,991
Issuance of common and treasury stock, net 7,743 13,747 12,647
Issuance of other borrowings 50,000 - -
Pay down of other borrowings (50,000) - -
Issuance of subordinated debenture, net - 248,618 -
Pay down of subordinated debentures - (150,000) -
Net change in derivative margin accounts 244,413 (58,451) 103,188
Net payments or proceeds on derivative liability contracts (44,064) 152,873 30,333
Tax benefit on exercise of stock options 895 3,460 4,014
Repurchase of common stock (7,992) (17,353) (12,103)
Dividends paid (59,191) (50,416) (36,788)
------------------------------------------------------------------------------ --------------- -------------- -------------
Net cash provided by financing activities 1,730,172 1,894,870 1,753,565
------------------------------------------------------------------------------ --------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents (195,471) 93,087 98,004
Cash and cash equivalents at beginning of period 890,413 797,326 699,322
------------------------------------------------------------------------------ --------------- -------------- -------------
Cash and cash equivalents at end of period $ 694,942 $ 890,413 $ 797,326
------------------------------------------------------------------------------ --------------- -------------- -------------
Cash paid for interest $ 411,860 $ 608,963 $ 493,873
------------------------------------------------------------------------------ --------------- -------------- -------------
Cash paid for taxes 114,120 115,627 117,604
------------------------------------------------------------------------------ --------------- -------------- -------------
Net loans transferred to repossessed real estate 30,972 9,825 7,057
------------------------------------------------------------------------------ --------------- -------------- -------------
See accompanying notes to consolidated financial statements.
64
Consolidated Statements of Changes in Shareholders' Equity
(In Thousands)
Preferred Stock Common Stock
------------------------------ ------------------------------
Shares Amount Shares Amount
------------------------------------------------------------------------------------------------------------------------------
December 31, 2005 - $ - 67,905 $4
Effect of implementing FAS 156, net of tax - - - -
Comprehensive income:
Net income - - - -
Other comprehensive loss, net of tax - - - -
Comprehensive income
Treasury stock purchase - - - -
Exercise of stock options - - 800 -
Tax benefit on exercise of stock options - - - -
Stock-based compensation - - - -
Cash dividends on common stock - - - -
------------------------------------------------------------------------------------------------------------------------------
December 31, 2006 - - 68,705 4
Effect of implementing FAS 157, net of tax - - - -
Effect of implementing FIN 48 - - - -
Comprehensive income:
Net income - - - -
Other comprehensive income, net of tax - - - -
Comprehensive income
Treasury stock purchase - - - -
Exercise of stock options - - 760 -
Tax benefit on exercise of stock options - - - -
Stock-based compensation - - - -
Cash dividends on common stock - - - -
------------------------------------------------------------------------------------------------------------------------------
December 31, 2007 - - 69,465 4
Effect of implementing FAS 159, net of tax - - - -
Comprehensive income (loss):
Net income - - - -
Other comprehensive loss, net of tax - - - -
Comprehensive loss
Treasury stock purchase - - - -
Exercise of stock options - - 420 -
Tax benefit on exercise of stock options - - - -
Stock-based compensation - - - -
Cash dividends on common stock - - - -
------------------------------------------------------------------------------------------------------------------------------
December 31, 2008 - $ - 69,885 $4
------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
65
Accumulated
Other
Comprehensive Capital Retained Treasury Stock
------------------------------------
Income (Loss) Surplus Earnings Shares Amount Total
------------------- ------------------ ----------------- ----------------- ------------------ ---------------
$(67,811) $656,579 $990,422 1,202 $(40,040) $1,539,154
- - 383 - - 383
- - 212,977 - - 212,977
(5,633) - - - - (5,633)
---------------
207,344
---------------
- - - 249 (12,103) (12,103)
- 21,897 - 186 (9,250) 12,647
- 4,014 - - - 4,014
- 6,371 - - - 6,371
- - (36,788) - - (36,788)
------------------- ------------------ ----------------- ----------------- ------------------ ---------------
(73,444) 688,861 1,166,994 1,637 (61,393) 1,721,022
- - (679) - - (679)
- - (609) - - (609)
- - 217,664 - - 217,664
42,210 - - - - 42,210
---------------
259,874
---------------
- - - 340 (17,353) (17,353)
- 23,429 - 182 (9,682) 13,747
- 3,460 - - - 3,460
- 6,338 - - - 6,338
- - (50,416) - - (50,416)
------------------- ------------------ ----------------- ----------------- ------------------ ---------------
(31,234) 722,088 1,332,954 2,159 (88,428) 1,935,384
- - 62 - - 62
- - 153,232 - - 153,232
(191,652) - - - - (191,652)
---------------
(38,420)
---------------
- - - 166 (7,992) (7,992)
- 12,652 - 87 (4,909) 7,743
- 895 - - - 895
- 7,776 - - - 7,776
- - (59,191) - - (59,191)
------------------- ------------------ ----------------- ----------------- ------------------ ---------------
$(222,886) $ 743,411 $ 1,427,057 2,412 $(101,329) $ 1,846,257
------------------- ------------------ ----------------- ----------------- ------------------ ---------------
66
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements of BOK Financial Corporation ("BOK
Financial" or "the Company") have been prepared in conformity with accounting
principles generally accepted in the United States, including general practices
of the banking industry. The consolidated financial statements include the
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. All significant intercompany
transactions are eliminated in consolidation. During 2008, the Company revised
the presentation of certain deposit accounts. Previously, demand deposit
accounts were shown net of adjustments made to manage reserve requirements.
These adjustments were excluded from the current presentation to provide a more
meaningful presentation of the Company's deposit accounts. All prior periods
have been reclassified for a consistent presentation. The reclassification had
no effect on total deposits, interest expense, net interest revenue or net
interest margin.
The consolidated financial statements would also include the assets,
liabilities, non-controlling interests and results of operations of variable
interest entities ("VIEs") when BOK Financial is determined to be the primary
beneficiary. Variable interest entities are generally defined in FASB
Interpretation No. 46R, "Consolidation of Variable Interest Entities," as
entities that either do not have sufficient equity to finance their activities
without support from other parties or whose equity investors lack a controlling
financial interest. BOK Financial is not the primary beneficiary in any VIE that
would be significant to its operations.
Nature of Operations
BOK Financial, through its subsidiaries, provides a wide range of financial
services to commercial and industrial customers, other financial institutions
and consumers throughout Oklahoma; Northwest Arkansas; Dallas, Fort Worth and
Houston, Texas; Albuquerque, New Mexico; Denver, Colorado; Phoenix, Arizona; and
Kansas City, Missouri / Kansas. These services include depository and cash
management; lending and lease financing; mortgage banking; securities brokerage,
trading and underwriting; and personal and corporate trust.
Use of Estimates
Preparation of BOK Financial's consolidated financial statements requires
management to make estimates of future economic activities, including loan
collectibility, prepayments and cash flows from customer accounts. These
estimates are based upon current conditions and information available to
management. Actual results may differ significantly from these estimates.
Acquisitions
Assets and liabilities acquired, including identifiable intangible assets, are
recorded at present value based on current interest rates, appraised values or
fair values on the acquisition dates. Goodwill is recognized as the excess of
the purchase price over the net fair value of assets acquired and liabilities
assumed. The Consolidated Statements of Earnings include the results of
operations from the dates of acquisition.
Intangible Assets
Intangible assets, which generally result from business combinations, are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," and No. 147,
"Acquisitions of Certain Financial Institutions."
Intangible assets with indefinite lives, such as goodwill, are evaluated for
each of BOK Financial's business units for impairment annually or more
frequently if conditions indicate impairment. The evaluation of possible
impairment of intangible assets involves significant judgment based upon
short-term and long-term projections of future performance.
The fair value of BOK Financial's business units is estimated by the discounted
future earnings method. Income growth is projected over a seven-year period for
each unit and a terminal value is computed. This projected income stream is
converted to current fair value by using a discount rate that reflects a rate of
return required by a willing buyer. Assumptions used to determine the fair value
of the Company in the aggregate are based on observable inputs, such as the
market value of BOK Financial common stock. However, attribution of the overall
fair value to individual business units requires significant unobservable
inputs. In total, the fair value measurement for goodwill impairment evaluation
is based on Level 3 inputs as defined by FAS 157. There have been no changes in
the techniques used to value goodwill.
Core deposit intangible assets are amortized using accelerated methods over the
estimated lives of the acquired deposits. These assets generally have a weighted
average life of 5 years. Other intangible assets are amortized using accelerated
or straight-line methods, as appropriate, over the estimated benefit periods.
These periods range from 5 years to 20 years. The net book values of core
deposit intangible assets are evaluated for impairment when economic conditions
indicate impairment may exist.
67
Cash Equivalents
Due from banks, funds sold (generally federal funds sold for one-day periods)
and resell agreements (which generally mature within one to 30 days) are
considered cash equivalents.
Securities
Securities are identified as trading, investment (held to maturity) or available
for sale at the time of purchase based upon the intent of management, liquidity
and capital requirements, regulatory limitations and other relevant factors.
Trading securities, which are acquired for profit through resale, are carried at
market value with unrealized gains and losses included in current period
earnings. Investment securities are carried at amortized cost. Amortization is
computed by methods that approximate level yield and is adjusted for changes in
prepayment estimates. Investment securities may be sold or transferred to
trading or available for sale classification in certain limited circumstances
specified in generally accepted accounting principles. Securities identified as
available for sale are carried at fair value. Unrealized gains and losses are
recorded, net of deferred income taxes, as accumulated other comprehensive
income (loss) in shareholders' equity. Unrealized losses on securities are
evaluated to determine if the losses are temporary based on various factors,
including the cause of the loss, prospects for recovery, projected cash flows,
collateral values, credit enhancements and other relevant factors, and
management's intent and ability to hold the security until the fair value
exceeds amortized cost. An impairment charge is recorded against earnings if the
loss is determined to be other than temporary. Realized gains and losses on
sales of securities are based upon the amortized cost of the specific security
sold. Available for sale securities are separately identified as pledged to
creditors if the creditor has the right to sell or repledge the collateral.
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 purchase or sale of securities is recognized on a trade date basis. A net
receivable or payable is recognized for subsequent transaction settlement. BOK
Financial will periodically commit to purchase to-be-announced mortgage-backed
securities. These commitments are carried at fair value if they are considered
derivative contracts. These commitments are not reflected in BOK Financial's
balance sheet until settlement date if they meet specific criteria exempting
them from the definition of derivative contracts.
Derivative Instruments
Derivative instruments may be used by the Company as part of its interest rate
risk management programs or may be offered to customers. All derivative
instruments are carried at fair value. The determination of fair value of
derivative instruments considers changes in interest rates, commodity prices,
foreign exchange rates and the Company's and counterparty credit ratings, when
appropriate. Changes in fair value are generally reported in income as they
occur.
Derivative instruments used to manage interest rate risk consist primarily of
interest rate swaps. These contracts modify the interest income or expense of
certain assets or liabilities. Amounts receivable from or payable to
counterparties are reported in interest income or expense using the accrual
method. Changes in fair value of interest rate swaps are reported in other
operating revenue - gain (loss) on derivatives, net.
In certain circumstances, an interest rate swap may be designated as a fair
value hedge and may qualify for hedge accounting. In these circumstances,
changes in the full fair value of the hedged asset or liability, not only
changes in fair value due to changes in the benchmark interest rate, is also
recognized in earnings and may partially or completely offset changes in fair
value of the interest rate swap. A fair value hedge is considered effective if
the cumulative fair value adjustment of the interest rate swap is within a range
of 80% to 120% of the cumulative change in the fair value of the hedged asset or
liability. Any ineffectiveness, including ineffectiveness due to credit risk or
ineffectiveness created when the fixed rate of the hedged asset or liability
does not match the fixed rate of the interest rate swap, is recognized in
earnings in the income statement line item "Gain (loss) on derivatives, net."
Interest rate swaps may be designated as cash flow hedges of variable rate
assets or liabilities, or of anticipated transactions. Changes in the fair value
of interest rate swaps designated as cash flow hedges are recorded in
accumulated other comprehensive income to the extent they are effective. The
amount recorded in other comprehensive income is reclassified to earnings in the
same periods as the hedged cash flows impact earnings. The ineffective portion
of changes in fair value is reported in current earnings.
If a derivative instrument that had been designated as a fair value hedge is
terminated or if the hedge designation is removed or deemed to no longer be
effective, the difference between the hedged item's carrying value and its face
amount is recognized into income over the remaining original hedge period.
Similarly, if a derivative instrument that had been designated as a cash flow
hedge is terminated or if the hedge designation is removed or deemed to no
longer be effective, the amount remaining in accumulated other comprehensive
income is reclassified to earnings in the same period as the hedged item.
68
BOK Financial also enters into mortgage loan commitments that are considered
derivative instruments. Forward sales contracts are used to hedge these mortgage
loan commitments as well as mortgage loans held for sale. Mortgage loan
commitments are carried at fair value based upon quoted prices, excluding the
value of loan servicing rights or other ancillary values. Changes in fair value
of the mortgage loan commitments and forward sales contracts are reported in
other operating revenue - mortgage banking revenue.
Derivative contracts are also offered to customers. BOK Financial serves as an
intermediary between its customers and the markets. Each contract between BOK
Financial and its customers is offset by a contract between BOK Financial and
various counterparties. These contracts are carried at fair value. Compensation
for credit risk and reimbursement of administrative costs are recognized over
the life of the contracts and included in other operating revenue - brokerage
and trading revenue.
When bilateral netting agreements exist between the Company and its
counterparties that create a single legal claim or obligation to pay or receive
the net amount in settlement of the individual derivative contracts, the Company
reports derivative assets and liabilities on a net by counterparty basis.
Derivative contracts may also require the Company to provide or receive cash
margin as collateral for derivative assets and liabilities. Derivative assets
and liabilities are reported net of cash margin when certain conditions are met.
Loans
Loans are either secured or unsecured based on the type of loan and the
financial condition of the borrower. Repayment is generally expected from cash
flow or proceeds from the sale of selected assets of the borrower. BOK Financial
is exposed to risk of loss on loans due to the borrower's difficulties, which
may arise from any number of factors, including problems within the respective
industry or local economic conditions. Access to collateral, in the event of
borrower default, is reasonably assured through adherence to applicable lending
laws and through sound lending standards and credit review procedures.
Interest is accrued at the applicable interest rate on the principal amount
outstanding. Loans are placed on nonaccrual status when, in the opinion of
management, full collection of principal or interest is uncertain, generally
when the collection of principal or interest is 90 days or more past due.
Interest previously accrued but not collected is charged against interest income
when the loan is placed on nonaccrual status. Payments on nonaccrual loans are
applied to principal or reported as interest income, according to management's
judgment as to the collectability of principal.
Loan origination and commitment fees and direct loan acquisition and origination
costs are deferred and amortized as an adjustment to yield over the life of the
loan or over the commitment period, as applicable.
Mortgage loans originated by our mortgage banking unit are held for sale and are
carried at the lower of aggregate cost or market value. Mortgage loans held for
sale that are designated as hedged assets are carried at fair value based on
sales commitments or market quotes. Changes in fair value after the date of
designation of an effective hedge are recorded in other operating revenue -
mortgage banking revenue.
Reserve for Loan Losses and Off-Balance Sheet Credit Losses
Reserves for loan losses and off-balance sheet credit losses are assessed by
management, based upon an ongoing quarterly evaluation of the probable estimated
losses inherent in the portfolio, and include probable losses on both
outstanding loans and unused commitments to provide financing. A consistent
methodology has been developed that includes reserves assigned to specific
criticized loans, general reserves that are based upon statistical migration
analyses for each category of loans, and a nonspecific allowance that is based
upon an analysis of current economic conditions, loan concentrations, portfolio
growth and other relevant factors. The reserve for loan losses related to loans
that are identified for evaluation in accordance with Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("FAS 114"), is based on discounted cash flows using the loan's initial
effective interest rate, the fair value of the collateral for certain collateral
dependent loans, or historical statistics. Loans are considered to be impaired
when it becomes probable that BOK Financial will be unable to collect all
amounts due according to the contractual terms of the loan agreement. This is
substantially the same criteria used to determine when a loan should be placed
on nonaccrual status. This evaluation is inherently subjective as it requires
material estimates including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to significant
change.
In accordance with the provisions of FAS 114, management has excluded small
balance, homogeneous loans from the impairment evaluation specified in FAS 114.
Such loans include 1-4 family mortgage loans, consumer loans and commercial
loans with committed amounts less than $1 million. The adequacy of the reserve
for loan losses applicable to these loans is evaluated in accordance with
generally accepted accounting principles and standards established by the
banking regulatory authorities and adopted as policy by BOK Financial.
A provision for credit losses is charged against earnings in amounts necessary
to maintain adequate reserves for loan and off-balance sheet credit losses.
Loans are charged off when the loan balance or a portion of the loan balance is
no longer covered by the paying capacity of the borrower based on an evaluation
of available cash resources and collateral value. Loans are evaluated quarterly
and charge-offs are taken in the quarter in which the loss is identified.
Additionally, all unsecured or under-secured
69
loans that are past due by 180 days or more are charged off within 30 days.
Recoveries of loans previously charged off are added to the reserve.
Transfers of Financial Assets
BOK Financial transfers financial assets as part of its mortgage banking
activities and periodically may transfer other financial assets. Transfers are
recorded as sales for financial reporting purposes when the criteria for
surrender of control specified in Statement of Financial Accounting Standards,
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" are met. BOK Financial may retain the right to
service the assets and may incur a recourse obligation. The Company may also
retain a residual interest in excess cash flows generated by the assets. All
assets obtained, including cash, servicing rights and residual interests, and
all liabilities incurred, including recourse obligations, are initially
recognized at fair value, all assets transferred are derecognized and any gain
or loss on the sale is recognized in earnings. Subsequently, servicing rights,
residual interest and recourse obligations are carried at fair value with
changes in fair value recognized in earnings as they occur. A separate reserve
is maintained as part of other liabilities for the Company's credit risk on
loans transferred subject to a recourse obligation.
Real Estate and Other Repossessed Assets
Real estate and other repossessed assets are assets acquired in partial or total
forgiveness of loans. These assets are carried at the lower of cost, which is
determined by fair value at date of foreclosure, or current fair value. Income
generated by these assets is recognized as received, and operating expenses are
recognized as incurred.
Premises and Equipment
Premises and equipment are carried at cost including capitalized interest, when
appropriate, less accumulated depreciation and amortization. Depreciation and
amortization are computed on a straight-line basis over the estimated useful
lives of the assets or, for leasehold improvements, over the shorter of the
estimated useful lives or remaining lease terms. Useful lives range from 5 years
to 40 years for buildings and improvements, 3 years to 7 years for software and
3 years to 10 years for furniture and equipment. Repair and maintenance costs
are charged to expense as incurred.
Rent expense for leased premises is recognized as incurred over the lease term.
The effects of rent holidays, significant rent escalations and other adjustments
to rent payments are recognized on a straight-line basis over the lease term.
Mortgage Servicing Rights
Mortgage servicing rights are carried at fair value as permitted by Statement of
Financial Accounting Standards No. 156, "Accounting for Servicing of Financial
Assets" ("FAS 156"). Mortgage servicing rights may be purchased or may be
recognized when mortgage loans are originated pursuant to an existing plan for
sale or, if no such plan exists, when the mortgage loans are sold. Originated
mortgage servicing rights are initially recognized at fair value. Fair value is
based on market quotes for similar servicing rights, which is a Level 2 input as
defined by FAS 157. Changes in the fair value are recognized in earnings as they
occur.
There is no active market for trading in mortgage servicing rights after
origination. A cash flow model is used to determine fair value. Key assumptions
and estimates, including projected prepayment speeds and assumed servicing
costs, earnings on escrow deposits, ancillary income and discount rates, used by
this model are based on current market sources. Assumptions used to value
mortgage servicing rights are considered Level 3 inputs as defined by FAS 157. A
separate third party model is used to estimate prepayment speeds based on
interest rates, housing turnover rates, estimated loan curtailment, anticipated
defaults and other relevant factors. The prepayment model is updated daily for
changes in market conditions and adjusted to better correlate with actual
performance of BOK Financial's servicing portfolio. At least annually, we
request estimates of fair value from outside sources to corroborate the results
of the valuation model. There have been no changes in the techniques used to
value mortgage servicing rights.
Federal and State Income Taxes
BOK Financial and its subsidiaries file consolidated tax returns. The
subsidiaries provide for income taxes on a separate return basis and remit to
BOK Financial amounts determined to be currently payable.
Income tax expense is based on an effective tax rate that considers statutory
federal and state income tax rates and permanent differences between income and
expense recognition for financial reporting and income tax purposes. The amount
of income tax expense recognized in any period may differ from amounts reported
to taxing authorities.
BOK Financial has a reserve for uncertain tax positions, which is included in
accrued current income taxes payable, for the uncertain portion of recorded tax
benefits and related interest. These uncertainties result from the application
of complex tax laws, rules, regulations and interpretations, primarily in state
taxing jurisdictions. The adequacy of this reserve is assessed quarterly and may
be adjusted through current income tax expense in future periods based on
changing facts and circumstances, completion of examinations by taxing
authorities or expiration of a statute of limitations. Estimated penalties and
interest on uncertain tax positions are recognized in income tax expense.
70
Deferred tax assets and liabilities are determined based upon the difference
between the values of the assets and liabilities as reflected in the financial
statements and their related tax basis using enacted tax rates in effect for the
year in which the differences are expected to be recovered or settled. As
changes in tax law or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes. A valuation allowance is
provided when it is more likely than not that some portion or the entire
deferred tax asset will not be realized.
Employee Benefit Plans
BOK Financial sponsors a defined benefit cash balance pension plan ("Pension
Plan"), qualified profit sharing plan ("Thrift Plan") and employee healthcare
plans. Pension Plan costs, which are based upon actuarial computations of
current costs, are expensed annually. Unrecognized prior service cost and net
gains or losses are amortized on a straight-line basis over the lesser of the
average remaining service periods of the participants or 10 years. Employer
contributions to the Pension Plan are in accordance with Federal income tax
regulations. Pension Plan benefits were curtailed as of April 1, 2006. No
participants may be added to the Pension Plan and no additional service benefits
will be accrued.
BOK Financial recognizes the funded status of its employee benefit plans. For a
pension plan, the funded status is the difference between the fair value of plan
assets and the projected benefit obligation measured as of the fiscal year-end
date. Adjustments required to recognize the Pension Plan's net funded status are
made through accumulated other comprehensive income, net of deferred income
taxes.
Employer contributions to the Thrift Plan, which matches employee contributions
subject to percentage and years of service limits, are expensed when incurred.
BOK Financial recognizes the expense of health care benefits on the accrual
method.
Stock Compensation Plans
BOK Financial adopted Statement of Financial Accounting Standards No. 123R,
"Share-Based Payments" ("FAS 123R") as of January 1, 2006. Adoption of FAS 123R
did not significantly affect the Company's financial statements. Excess tax
benefits from share-based payments recognized in capital surplus are determined
by the excess of tax benefits recognized over the tax effect of compensation
cost recognized.
Grant date fair value of stock options is based on the Black-Scholes option
pricing model. Stock options generally have graded vesting over 7 years. Each
tranche is considered a separate award for valuation and compensation cost
recognition. Grant date fair value of non-vested shares is based on the current
market value of BOK Financial common stock. Non-vested shares generally cliff
vest in 5 years.
Compensation cost is recognized as expense over the service period, which is
generally the vesting period of the options to be exercised. Expense is reduced
for estimated forfeitures over the vesting period and adjusted for actual
forfeitures as they occur. Stock-based compensation awarded to certain officers
has performance conditions that affect the number of awards granted.
Compensation cost is adjusted based on the probable outcome of the performance
conditions.
Certain executive officers may defer the recognition of income from stock-based
compensation for income tax purposes and to diversify the deferred income into
alternative investments. Stock-based compensation granted to these officers is
considered liability awards. Changes in the fair value of liability awards are
recognized as compensation expense in the period of the change.
Other Operating Revenue
Fees and commission revenue is recognized at the time the related services are
provided or products are sold and may be accrued when necessary. Accrued fees
and commissions are reversed against revenue if amounts are subsequently deemed
to be uncollectible. As described in FASB EITF Issue 99-19, Reporting Revenue
Gross as a Principal versus Net as an Agent, revenue is recognized on a gross
basis whenever we have primary responsibility and risk in providing the services
or products to our customers and on a net basis whenever we act as a broker for
products or services of others.
Brokerage and trading revenue includes changes in the fair value of securities
held for trading purposes and derivatives held for customer risk management
programs, including credit losses on trading securities and derivatives,
commissions earned from the retail sale of securities, mutual funds and other
financial instruments, and underwriting and financial advisory fees.
Trust fees and commissions include revenue from asset management, custody,
recordkeeping, investment advisory and administration services. Revenue is
recognized on an accrual basis at the time the services are performed and may be
based on either the fair value of the account or the service provided.
Deposit service charges and fees are recognized at least quarterly in accordance
with our published deposit account agreement and disclosure statement for retail
accounts or contractual agreement for commercial accounts. Item charges for
overdraft or non-sufficient funds items are recognized as items are presented
for payment. Account balance charges and activity fees are accrued monthly and
collected in arrears. Commercial account activity fees may be offset by an
earnings credit based on account balances.
71
Effect of Recently Issued Statements of Financial Accounting Standards
Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("FAS 159")
The Company adopted 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,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), were
designated as being reported at fair value. Adoption of FAS 159 increased
opening retained earnings for the first quarter of 2008 by $62 thousand.
Interest expense on certificates of deposit carried at fair value is based on
the instruments' contractual interest rates and outstanding principal balances.
Statement of Financial Accounting Standards No. 141 (Revised), "Business
Combinations" ("FAS 141R")
The FASB issued FAS 141R during 2007 to replace Statement of Financial
Accounting Standards No. 141, Business Combinations. FAS 141R 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.
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. FAS 160, which
will be adopted on January 1, 2009, is not expected to 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 SFAS 133 and its related interpretations, and (iii) how
derivative instruments and related hedged items affect an entity's financial
position, results of operations and cash flows. To meet those objectives, FAS
161 requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of gains and
losses on derivative instruments and disclosures about credit-risk-related
contingent features in derivative agreements. FAS 161 is effective for the
Company on January 1, 2009 and is not expected to have a significant impact on
the Company's financial statements.
FASB Staff Position FIN 39-1, "Amendment of FASB Interpretation No. 39"("FIN
39-1")
As of January 1, 2008, the Company adopted FASB Staff Position FIN 39-1, which
permits offsetting of cash collateral against the fair value of derivative
instruments executed with the same counterparty under a master netting
agreement. The total amount of derivative assets and liabilities as of December
31, 2008 was reduced by $217 million and $15 million, respectively, of cash
collateral.
72
FASB Staff Position No. EITF 99-20-1, "Amendment to the Impairment and Interest
Income Measurement Guidance of EITF Issue No. 99-20" ("FSP EITF 99-20-1")
FSP EITF 99-20-1 amends the impairment (and related interest income measurement)
guidance for certain beneficial interests in securitized financial assets that
are within the scope of EITF Issue No. 99-20, "Recognition of Interest Income
and Impairment of Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets" ("EITF
99-20"). This FSP eliminates the requirement that a holder's best estimate of
cash flows be based upon those that "a market participant" would use. Instead,
this FSP requires that an other-than-temporary impairment ("OTTI") be recognized
as a realized loss through earnings when it is "probable" there has been an
adverse change in the holder's estimated cash flows from the cash flows
previously projected, which is consistent with the impairment model in Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("FAS 115"). The FSP also reiterates and
emphasizes the objective of an OTTI assessment and the related disclosure
requirements in FAS 115 and other related guidance, including the requirement
that the holder consider all available information when developing the estimate
of future cash flows (i.e. past events, current conditions and expected events).
FSP 99-20-1 is effective for the Company as of December 31, 2008 and did not
have a significant impact on the Company's financial statements.
73
(2) Acquisitions
On June 18, 2007, BOK Financial paid $43 million in cash for all the outstanding
stock of Colorado-based United Banks of Colorado, Inc. United Banks had total
assets of approximately $166 million, including loans of $94 million, and total
deposits of $133 million and eleven banking locations in the Denver area. Loans
acquired from United Banks are subject to a guaranty by the sellers through an
escrow fund held in trust by Colorado State Bank and Trust. The Company will be
reimbursed for up to $8.0 million of losses, including principal, interest and
collection costs, on acquired loans in a three-year period after the acquisition
date. Accordingly, none of the purchase price was allocated to an allowance for
loan losses. At December 31, 2008, $5.3 million remains in the escrow fund to
absorb future credit losses. On September 21, 2007, operations of United Banks'
subsidiary, First United Bank, N.A. were combined with Colorado State Bank and
Trust, N.A. through a purchase and assumption agreement.
On May 31, 2007, BOK Financial paid $127 million in cash for all the outstanding
stock of Texas-based Worth Bancorporation, Inc. Worth had total assets of
approximately $410 million, including net loans of $281 million, and total
deposits of $369 million and five branches in the Fort Worth market. None of
Worth National Bank's loans were impaired at the acquisition date. Therefore,
none of the allowance for loan losses was allocated as a reduction of the
principal balance of the acquired loans.
Allocations of the purchase prices to net assets acquired are as follows (in
thousands):
United Banks Worth
of Colorado, Bancorporation,
Inc. Inc.
---------------- -----------------
Cash and cash equivalents $ 36,249 $ 86,563
Securities 2,245 22,676
Loans 93,810 284,039
Less reserve for loan losses - (3,528)
---------------- -----------------
Loans, net of reserve 93,810 280,511
Premises and equipment 32,277 6,214
Core deposit premium 5,039 13,741
Other assets 2,298 15,029
---------------- -----------------
Total assets acquired 171,918 424,734
---------------- -----------------
Deposits 133,342 369,343
Other borrowings 2,138 7,217
Other liabilities 6,909 6,285
---------------- -----------------
Net assets acquired 29,529 41,889
Less purchase price 42,796 127,067
---------------- -----------------
Goodwill $ 13,267 $ 85,178
---------------- -----------------
Core deposit premiums are identifiable intangible assets initially recognized at
estimated fair value. Fair value is determined by projecting future cash flows
that may be earned from investing the proceeds of the acquired deposits, less
interest, servicing and other costs over the estimated lives of the acquired
deposits. The projected net cash flow is discounted to determine the current
fair value. The fair value measurement of core deposit premiums is based on
Level 3 inputs as defined by FAS 157.
During the first quarter of 2007, the Company paid approximately $425 thousand
to acquire a charter for Bank of Kansas City in order to begin full-service
banking operations in Missouri. Previously, the Company's full-service banking
rights were restricted to Kansas City, Kansas.
On November 6, 2006, BOK Financial paid a net amount of $365 thousand in cash to
acquire a state banking charter. The acquired state banking charter was
subsequently converted to a national banking charter and the surviving entity
renamed Bank of Kansas City, N.A. This transaction was necessary to comply with
state restrictions on forming a de novo bank in Kansas.
The results of operations of these acquisitions would not have been significant
to the Company's consolidated results during the pre-acquisition periods of 2007
and 2006. None of the intangible assets acquired are deductible for tax
purposes.
74
(3) Securities
Investment Securities
The amortized cost and fair values of investment securities are as follows (in
thousands):
December 31,
----------------------------------------------------------------------------------------------
2008 2007
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Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized
------------------------ ------------------------
Cost Value Gain Loss Cost Value Gain Loss
----------------------------------------------------------------------------------------------
Municipal and other tax-exempt $235,791 $239,178 $3,736 $ (349) $242,274 $243,061 $1,439 $ (651)
Other debt securities 6,553 6,591 38 - 5,675 5,727 52 (1)
--------------------------------------------------------------------------------------------------------------------------
Total $242,344 $245,769 $3,774 $ (349) $247,949 $248,788 $1,491 $ (652)
--------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of investment securities at December 31,
2008, 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 $ 70,795 $ 128,171 $28,895 $ 7,930 $ 235,791 2.77
Fair value 71,408 130,589 29,469 7,712 239,178
Nominal yield(1) 5.24 5.44 5.83 6.50 5.46
Other debt securities:
Amortized cost $ 4,852 $ 1,689 $ - $ 12 $ 6,553 1.41
Fair value 4,853 1,726 - 12 6,591
Nominal yield 3.66 4.40 - - 3.84
------------ -------------- ------------- ------------- ------------- ------------
Total fixed maturity securities:
Amortized cost $ 75,647 $ 129,860 $ 28,895 $ 7,942 $ 242,344 2.74
Fair value 76,261 132,315 29,469 7,724 245,769
Nominal yield 5.14 5.42 5.83 6.49 5.42
------------ -------------- ------------- -------------
Total investment securities:
Amortized cost $ 242,344
Fair value 245,769
Nominal yield 5.42
-------------
(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.
75
Available for Sale Securities
The amortized cost and fair value of available for sale securities are as
follows (in thousands):
December 31,
-----------------------------------------------------------------------------------------------
2008 2007
----------------------------------------------- -----------------------------------------------
Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized
----------------------- ----------------------
Cost Value Gain Loss Cost Value Gain Loss
-----------------------------------------------------------------------------------------------
U.S. Treasury $ 6,987 $ 7,126 $ 139 $ - $ 6,961 $ 7,088 $ 127 $ -
Municipal and other tax-exempt 19,537 20,163 664 (38) 26,478 26,578 133 (33)
Mortgage-backed securities:
U. S. agencies 4,900,895 4,972,928 84,073 (12,040) 3,838,219 3,817,939 16,120 (36,400)
Other 1,636,934 1,241,238 28 (395,724) 1,664,537 1,641,189 1,225 (24,573)
-----------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed
securities 6,537,829 6,214,166 84,101 (407,764) 5,502,756 5,459,128 17,345 (60,973)
----------------------------------------------------------------------------- -----------------------------------------------
Other debt securities 37 36 - (1) 42 41 - (1)
Equity securities and mutual
funds 158,033 149,960 2,485 (10,558) 151,689 157,705 6,016 -
-----------------------------------------------------------------------------------------------------------------------------
Total $6,722,423 $6,391,451 $87,389 $(418,361) $5,687,926 $5,650,540 $23,621 $(61,007)
-----------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of available for sale securities at December
31, 2008, 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 $ - $ 6,987 $ - $ - $ 6,987 1.17
Fair value - 7,126 - - 7,126
Nominal yield - 2.16 - - 2.16
Municipal and other tax-exempt:
Amortized cost $ - $ 2,404 $ 16,117 $ 1,016 $ 19,537 7.42
Fair value - 2,486 16,659 1,018 20,163
Nominal yield(1) - 3.98 4.11 4.65 4.12
Other debt securities:
Amortized cost $ - $ 37 $ - $ - $ 37 1.87
Fair value - 36 - - 36
Nominal yield(1) - 6.62 - - 6.62
------------ -------------- ------------- ------------- -------------- -----------
Total fixed maturity securities:
Amortized cost $ - $ 9,428 $ 16,117 $ 1,016 $ 26,561 5.77
Fair value - 9,648 16,659 1,018 27,325
Nominal yield - 4.02 4.11 4.65 3.61
------------ -------------- ------------- -------------
Mortgage-backed securities:
Amortized cost $ 6,537,829 (2)
Fair value 6,214,166
Nominal yield(4) 4.78
--------------
Equity securities and mutual funds:
Amortized cost $ 158,033 (3)
Fair value 149,960
Nominal yield 3.19
--------------
Total available-for-sale securities:
Amortized cost $ 6,722,423
Fair value 6,391,451
Nominal yield 4.74
--------------
(1) Calculated on a taxable equivalent basis using a 39% effective tax rate.
(2) The average expected lives of mortgage-backed securities were 1.96 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.
76
Sales of available for sale securities resulted in gains and losses as follows
(in thousands):
2008 2007 2006
----------- ----------- -----------
Proceeds $3,499,128 $806,979 $646,944
Gross realized gains 21,128 2,862 2,454
Gross realized losses 11,932 3,138 2,302
Related federal and state income
tax expense (benefit) 2,736 (96) 53
Gross unrealized losses excludes other-than-temporary charges of $5.3 million in
2008 and $8.6 million in 2007.
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
December 31, 2008, mortgage trading securities are carried at their $399 million
fair value and had a net unrealized gain of $12.6 million.
In addition to securities that have been reclassified as pledged to creditors,
securities with an amortized cost of $5.0 billion and $4.1 billion at December
31, 2008 and 2007, respectively, have been pledged as collateral for repurchase
agreements, public and trust funds on deposit and for other purposes, as
required by law. The secured parties do not have the right to sell or repledge
these securities.
Net unrealized losses on securities not recognized as an other-than-temporary
impairment totaled $328 million at December 31, 2008 compared with net
unrealized losses of $37 million at December 31, 2007. The aggregate gross
amount of unrealized losses at December 31, 2008 totaled $419 million.
Management evaluated the securities with unrealized losses to determine if we
believe that the losses were temporary. This evaluation considered factors such
as causes of the unrealized losses, support for debt securities provided by
government guarantees or credit enhancements, ratings of the respective issuers
and other factors to assess the prospects for recovery over various interest
rate scenarios and time periods. We also considered our intent and ability to
either hold or sell the securities. It is our belief, based on currently
available information and our evaluation, that the unrealized losses in these
securities were temporary.
The Company's portfolio of available for sale securities includes preferred
stocks issued by seven financial institutions. These stocks were originally
purchased for $46 million and have a current carrying value of $32 million. The
carrying value of these stocks has been reduced by $14 million of
other-than-temporary impairment charges, approximately $5 million and $9 million
in 2008 and 2007, respectively. None of the institutions that issued these
stocks are in default. BOK Financial does not own any equity securities issued
by Fannie Mae or Freddie Mac. These preferred stocks have certain debt-like
features such as a quarterly dividends based on LIBOR. However, the issuers of
these stocks have no obligation to redeem them. The aggregate fair value of
these preferred stocks decreased to $22 million at December 31, 2008 due to a
significant widening of spreads to LIBOR related to current market disruptions.
We assessed the probability that spreads over LIBOR on these securities will
narrow and fair values will increase over a 24-month to 36-month period
beginning on the most recent date that fair value equaled our carrying value,
June 30, 2008, and concluded that the impairment was temporary at December 31,
2008.
FSP EITF 99-20-1 became effective for the Company as of December 31, 2008 and
requires that an other-than-temporary impairment be recognized as a realized
loss through earnings when it is "probable" there has been an adverse change in
the holder's estimated cash flows from the cash flows previously projected. It
also emphasizes the objective of an other-than-temporary impairment assessment,
including the requirement that the holder consider all available information
when developing the estimate of future cash flows (i.e. past events, current
conditions and expected events). FSP EITF 99-20-1 did not have a significant
impact on the Company's financial statements.
77
Temporarily Impaired Securities as of December 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 63 $ 10,331 $ 147 $ 7,914 $ 202 $18,245 $ 349
Available for sale:
Other debt securities 2 - - 36 1 36 1
Municipal and other tax-exempt 4 645 30 1,269 8 1,914 38
Mortgage-backed securities:
U. S. agencies 60 794,962 9,778 217,441 2,262 1,012,403 12,040
Other 114 297,736 83,721 936,077 312,003 1,233,813 395,724
Equity securities and mutual funds 18 22,039 10,558 - - 22,039 10,558
---------------------------------- ---------- ------------ ------------- ------------ ------------ ------------ ------------
198 1,115,382 104,087 1,154,823 314,274 2,270,205 418,361
---------------------------------- ---------- ------------ ------------- ------------ ------------ ------------ ------------
Total 261 $1,125,713 $ 104,234 $1,162,737 $ 314,476 $2,288,450 $ 418,710
---------------------------------- ---------- ------------ ------------- ------------ ------------ ------------ ------------
Temporarily Impaired Securities as of December 31, 2007
(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 210 $ 1,996 $ 5 $ 91,319 $ 646 $ 93,315 $ 651
Other 1 - - 600 1 600 1
---------------------------------- ---------- ------------ ------------- ------------ ------------ ------------ ------------
211 1,996 5 91,919 647 93,915 652
Available for sale:
Other debt securities 2 16 - 25 1 41 1
Municipal and other tax-exempt 9 2,925 22 304 11 3,229 33
Mortgage-backed securities:
U. S. agencies 282 290,657 6,489 1,943,030 29,911 2,233,687 36,400
Other 84 425,527 4,150 1,003,557 20,423 1,429,084 24,573
---------------------------------- ---------- ------------ ------------- ------------ ------------ ------------ ------------
377 719,125 10,661 2,946,916 50,346 3,666,041 61,007
---------------------------------- ---------- ------------ ------------- ------------ ------------ ------------ ------------
Total 588 $721,121 $ 10,666 $3,038,835 $ 50,993 $3,759,956 $ 61,659
---------------------------------- ---------- ------------ ------------- ------------ ------------ ------------ ------------
78
(4) Derivatives
The fair values of derivative contracts at December 31, 2008 were (in
thousands):
December 31, 2008 December 31, 2007
---------------------------- -- ----------------------------
Assets Liabilities Assets Liabilities
----------- -- ------------- -- ------------ --- ------------
Customer Risk Management Programs:
Interest rate contracts $174,144 $180,008 $73,946 $78,808
Energy contracts 423,044 442,791 399,363 406,740
Cattle contracts 3,526 3,529 3,374 3,242
Foreign exchange contracts 51,767 51,767 20,205 20,205
CD options 3,655 3,655 4,325 4,325
----------------------------------------- ----------- -- ------------- -- ------------ --- ------------
Fair value before cash collateral 656,136 681,750 501,213 513,320
Less: cash collateral (217,082) (14,716) - (172,163)
----------------------------------------- ----------- -- ------------- -- ------------ --- ------------
Total Customer Derivatives 439,054 667,034 501,213 341,157
Interest Rate Risk Management Programs 13,550 - 1,233 520
----------------------------------------- ----------- -- ------------- -- ------------ --- ------------
Total Derivative Contracts $ 452,604 $667,034 $ 502,446 $341,677
----------------------------------------- ----------- -- ------------- -- ------------ --- ------------
Customer Risk Management Programs
BOK Financial offers programs that permit its customers to manage various risks,
including fluctuations in energy, cattle and other agricultural products prices,
interest rates and foreign exchange rates, or to take positions in derivative
contracts. Derivative contracts are executed between the customers and BOK
Financial. Offsetting contracts are executed between BOK Financial and selected
counterparties to minimize the risk 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 BOK
Financial as compensation for administrative costs, credit risks and profit.
Credit risk is considered in determining the fair value of derivative
instruments. Deterioration in the credit rating of customers or dealers reduces
the fair value of asset contracts. The reduction in fair value is recognized in
earnings during the current period. Deterioration in our credit rating below
investment grade would affect the fair value of our derivative liabilities. In
the event of a credit down-grade, the fair value of our derivative liabilities
would decrease. The reduction in fair value would be recognized in earnings in
the current period.
As of January 1, 2008, the Company adopted FSP FIN 39-1, which permits
offsetting of cash collateral against the fair value of derivative instruments
executed with the same counterparty under a master netting agreement. The total
amount of derivative assets and liabilities at December 31, 2008 were reduced by
$217 million and $15 million, respectively, of cash collateral.
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.
The following table details interest rate swaps and, when applicable, the
associated fair value of liabilities at December 31, 2008 (dollars in
thousands):
Liabilities Carried at Fair Value Interest Rate Swap
----------------------------------------------------- -------------------------------------------------
Weighted Avg Weighted Average
Principal Fair Fixed Rate Notional Fixed Rate Floating Rate
Maturity Description Amount Value(2) (Paid) Amount Received Received Fair Value
(Paid) (Paid) (1)
------------------------------------------------------------- -------------------------------------------------
2009 Certificates of $587,339 595,748 (4.488)% $625,000 4.487% (0.436)% $11,762
deposit
2010 Certificates of 8,851 9,024 (3.631) 10,000 3.657 (0.436) 368
deposit
2011 Certificates of 27,294 27,982 (3.983) 30,000 4.013 (0.436) 1,758
deposit
----------------------- ------------ ------------
623,484 632,754 665,000 13,848
Other derivatives - - 4,046 (5.510) 0.436 (298)
----------------------- ------------ ------------
Total $623,484 $632,754 $669,046 $13,550
----------------------- ------------ ------------
(1) Floating rates are based on 30-day LIBOR, unless otherwise noted.
(2) Fair value of certificates of deposit are based upon brokered certificate of
deposit market rates or Federal Home Loan Bank rates for advances with
similar maturities.
During 2008 and 2007, net interest revenue was decreased by $7.0 million and
$6.8 million, respectively, from the settlement of amounts receivable or payable
on interest rate swaps.
As of January 1, 2008, the Company adopted FAS 159, which 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
79
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 when interest rates fall. Interest on these certificates of deposit
based on contractual interest rates and outstanding principal balances is
included in interest expense on the Consolidated Statement of Earnings. Changes
in the fair value of liabilities carried at fair value which is included in
derivatives gains (losses), net on the Consolidated Statement of Earnings
decreased net income by $10.2 million in 2008. Changes in the fair value of
interest rate swaps, which is included in derivatives gains (losses), net on the
Consolidated Statement of Earnings increased net income by $11.6 million in
2008.
(5) Loans
Significant components of the loan portfolio are as follows (in thousands):
December 31,
-----------------------------------------------------------------------------------------------
2008 2007
------------------------------------------------ ----------------------------------------------
Fixed Variable Non- Fixed Variable Non-
Rate Rate accrual Total Rate Rate accrual Total
------------------------------------------------ ----------------------------------------------
Commercial $3,012,649 $4,264,108 $134,846 $7,411,603 $2,714,050 $4,004,553 $42,981 $6,761,584
Commercial real estate 847,816 1,716,153 137,279 2,701,248 857,300 1,840,465 25,319 2,723,084
Residential mortgage 772,234 952,953 27,387 1,752,574 757,130 762,203 15,272 1,534,605
Consumer 805,136 204,884 561 1,010,581 736,295 184,284 718 921,297
----------------------------------------------------------------------------------------------------------------------------
Total $5,437,835 $7,138,098 $300,073 $12,876,006 $5,064,775 $6,791,505 $84,290 $11,940,570
----------------------------------------------------------------------------------------------------------------------------
Loans past due (90 days) $ 19,123 $ 5,575
----------------------------------------------------------------------------------------------------------------------------
Foregone interest on nonaccrual loans $ 8,391 $ 3,011
----------------------------------------------------------------------------------------------------------------------------
Approximately 43% of the commercial and consumer loan portfolios and
approximately 68% of the residential mortgage loan portfolio (excluding loans
held for sale) are loans to businesses and individuals in Oklahoma. This
geographic concentration subjects the loan portfolio to the general economic
conditions within this area.
Within the commercial loan classification, loans to energy-related businesses
totaled $2.3 billion or 18% of total loans as of December 31, 2008. Other
notable segments include services, $2.0 billion; wholesale/retail, $1.2 billion;
healthcare, $777 million; manufacturing, $498 million; and agriculture, $198
million, which includes $134 million of loans to the cattle industry. The
services category consists almost entirely of loans with individual balances of
less than $10 million.
Approximately 25% of commercial real estate loans are secured by properties
located in Oklahoma, primarily in the Tulsa and Oklahoma City metropolitan
areas. An additional 28% of commercial real estate loans are secured by property
located in Texas, primarily in the Dallas and Houston areas. The major
components of these properties are multifamily residences, $317 million;
construction and land development, $926 million; retail facilities, $371
million; and office buildings, $459 million.
At December 31, 2008 and 2007, residential mortgage loans included $12.8 million
and $9.9 million, respectively, and consumer loans included $254 thousand and
$515 thousand, respectively, of loans with repayment terms that have been
modified from the original contracts.
Credit Commitments
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of conditions established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. At December 31, 2008, outstanding commitments totaled
$5.0 billion. Because some commitments are expected to expire before being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. BOK Financial uses the same credit policies in making commitments
as it does loans.
The amount of collateral obtained, if deemed necessary, is based upon
management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. Because the credit risk involved in
issuing standby letters of credit is essentially the same as that involved in
extending loan commitments, BOK Financial uses the same credit policies in
evaluating the creditworthiness of the customer. Additionally, BOK Financial
uses the same evaluation process in obtaining collateral on standby letters of
credit as it does for loan commitments. The term of these standby letters of
credit is defined in each commitment and typically corresponds with the
underlying loan commitment. At December 31, 2008, outstanding standby letters of
credit totaled $599 million. Commercial letters of credit are used to facilitate
customer trade transactions with the drafts being drawn when the underlying
transaction is consummated. At December 31, 2008, outstanding commercial letters
of credit totaled $18 million.
80
The Company also has off-balance sheet credit risk for residential 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 for this off-balance sheet credit risk. At December 31, 2008, the
principal balance of loans sold subject to recourse obligations totaled $391
million and the reserve for credit risk from these loans totaled $8.8 million.
Losses incurred during 2008 and 2007 totaled $8.6 million and $1.1 million,
respectively.
Reserve for Credit Losses
The activity in the reserve for loan losses is summarized as follows (in
thousands):
2008 2007 2006
------------------------------------
Beginning balance $ 126,677 $ 109,497 $ 103,876
Provision for loan losses 208,280 34,758 18,086
Loans charged off (122,211) (31,617) (23,996)
Recoveries 20,490 10,511 11,531
Addition due to acquisitions - 3,528 -
---------------------------------------------------------------
Ending balance $ 233,236 $ 126,677 $ 109,497
---------------------------------------------------------------
The activity in the reserve for off-balance sheet credit losses is summarized as
follows (in thousands):
2008 2007 2006
--------------------------------
Beginning balance $ 20,853 $20,890 $ 20,574
Provision for off-balance
sheet credit losses (5,687) (37) 316
-----------------------------------------------------------
Ending balance $ 15,166 $20,853 $ 20,890
-----------------------------------------------------------
Provision for credit losses $ 202,593 $34,721 $ 18,402
-----------------------------------------------------------
Reserve for Recourse Loan Losses
The activity in the reserve for recourse loan losses is summarized as follows
(in thousands):
2008 2007 2006
------------------------------------
Beginning balance $ 3,560 $ 2,473 $ 1,861
Provision for loan losses 8,577 1,092 723
Loans charged off, net (3,370) (5) (111)
---------------------------------------------------------------
Ending balance $ 8,767 $ 3,560 $ 2,473
---------------------------------------------------------------
Impaired Loans
Investments in loans considered to be impaired under FAS 114 were as follows (in
thousands):
December 31,
--------------------------------
2008 2007 2006
--------------------------------
Investment in loans impaired
under FAS 114 (all of
which were on a
nonaccrual basis) $269,908 $74,085 $22,586
Loans with specific reserves
for loss 194,292 22,749 4,694
Specific reserve balance 28,532 4,425 1,670
No specific related reserve
for loss 75,616 51,336 17,892
Average recorded investment
in impaired loans 179,808 44,535 26,435
Approximately $76.6 million of losses on impaired loans with no related specific
reserves at December 31, 2008 were charged off against the allowance for loan
losses during 2008. Interest income recognized on impaired loans during 2008,
2007 and 2006 was not significant.
81
(6) Premises and Equipment
Premises and equipment at December 31 are summarized as follows (in thousands):
December 31,
------------------------
2008 2007
----------- ------------
Land $71,306 $68,496
Buildings and improvements 221,035 201,171
Software 55,488 44,499
Furniture and equipment 136,785 128,869
------------------------------------ ----------- ------------
Subtotal 484,614 443,035
Less accumulated depreciation 207,156 184,249
------------------------------------ ----------- ------------
Total $ 277,458 $ 258,786
------------------------------------ ----------- ------------
Depreciation expense of premises and equipment was $28.4 million, $25.6 million
and $23.7 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
82
(7) Intangible Assets
The following table presents the original cost and accumulated amortization of
intangible assets (in thousands):
December 31,
-----------------------
2008 2007
----------- -----------
Core deposit premiums $109,417 $109,417
Less accumulated amortization 95,059 88,263
---------------------------------------- ----------- -----------
Net core deposit premiums 14,358 21,154
Other identifiable intangible assets 16,791 18,656
Less accumulated amortization 5,769 6,770
---------------------------------------- ----------- -----------
Net other identifiable intangible
assets 11,022 11,886
Goodwill 388,964 388,448
Less accumulated amortization 53,135 53,135
---------------------------------------- ----------- -----------
Net goodwill 335,829 335,313
---------------------------------------- ----------- -----------
Total intangible assets, net $361,209 $368,353
---------------------------------------- ----------- -----------
Expected amortization expense for intangible assets that will continue to be
amortized (in thousands):
Core Other
Deposit Identifiable
Premiums Intangible Assets Total
-------------- ----------------- -------------
2009 $ 5,606 $ 1,138 $ 6,744
2010 4,131 1,163 5,294
2011 2,227 1,190 3,417
2012 815 1,218 2,033
2013 485 936 1,421
Thereafter 1,094 5,377 6,471
---------------- -------------- ----------------- -------------
$14,358 $11,022 $25,380
---------------- -------------- ----------------- -------------
The net amortized cost of identifiable intangible assets at December 31, 2008 is
assigned to the Company's subsidiary banks as follows (in thousands):
Core deposit premiums:
Bank of Texas $ 8,621
Colorado State Bank and Trust 4,674
Bank of Arizona 1,063
----------------------------------- -----------
$ 14,358
----------------------------------- -----------
Other identifiable intangible assets:
Bank of Oklahoma $6,257
Colorado State Bank and Trust 3,975
Bank of Kansas City 790
----------------------------------- -----------
$11,022
----------------------------------- -----------
Goodwill:
Bank of Oklahoma $8,173
Bank of Texas 240,122
Bank of Albuquerque 15,273
Colorado State Bank and Trust 55,611
Bank of Arizona 16,650
----------------------------------- -----------
$335,829
----------------------------------- -----------
The annual goodwill evaluation did not indicate impairment for any business unit
in 2008, 2007 or 2006. Economic conditions did not indicate that impairment
existed for any identifiable intangible assets and therefore no impairment
evaluation was performed.
83
(8) Mortgage Banking Activities
BOK Financial engages in mortgage banking activities through the BOk Mortgage
Division of BOk. Residential mortgage loans held for sale totaled $129 million
and $77 million, and outstanding mortgage loan commitments totaled $241 million
and $53 million at December 31, 2008 and 2007, 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 December 31, 2008, the
unrealized loss on forward sales contracts used to manage the mortgage pipeline
interest rate risk was approximately $2.1 million. Gains on mortgage loans sold,
including capitalized mortgage servicing rights, totaled $9.5 million in 2008,
$5.2 million in 2007 and $10.5 million in 2006.
At December 31, 2008, BOK Financial owned the rights to service 58,023 mortgage
loans with outstanding principal balances of $6.0 billion, including $793
million serviced for affiliates, and held related funds of $65 million for
investors and borrowers. The weighted average interest rate and remaining term
was 6.15% and 284 months, respectively. Mortgage loans sold with recourse
totaled $391 million at December 31, 2008, and $13.2 million of loans sold with
recourse were 90 days or more delinquent. At December 31, 2007, BOK Financial
owned the rights to service 58,227 mortgage loans with outstanding principal
balances of $5.5 billion, including $614 million serviced for affiliates, and
held related funds of $63 million for investors and borrowers. The weighted
average interest rate and remaining term was 6.18% and 280 months, respectively.
Mortgage loans sold with recourse totaled $393 million at December 31, 2007, and
$3.7 million of loans sold with recourse were 90 days or more delinquent.
Servicing revenue and late charges on loans serviced for others, which are
included in mortgage banking revenue in the Consolidated Statements of Earnings
totaled $17.6 million for 2008, $17.1 million for 2007 and $16.5 million for
2006.
The portfolio of mortgage servicing rights exposes BOK Financial to interest
rate risk. During periods of falling interest rates, mortgage loan prepayments
increase, reducing the value of the mortgage servicing rights. See Note 1 for
specific accounting policies for mortgage servicing rights.
BOK Financial implemented FAS 156 in the first quarter of 2006. An initial
adjustment of the mortgage servicing rights to fair value of approximately $351
thousand, net of income taxes, was recognized as an increase to retained
earnings in the same period. Also upon implementation of FAS 156, certain
securities designated as an economic hedge of mortgage servicing rights were
transferred from the available for sale classification to trading. Approximately
$32 thousand was transferred from accumulated other comprehensive income to
retained earnings for the net of tax effect of this reclassification.
Activity in capitalized mortgage servicing rights and related valuation
allowance during 2006, 2007 and 2008 are as follows (in thousands):
Capitalized Mortgage Servicing Rights
------------------------------------- Valuation
Purchased Originated Total Allowance Net
-------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005(1) $ 8,606 $ 52,905 $ 61,511 $ (7,414) $ 54,097
Adoption of FAS 156 effective January 1, 2006 (117) (6,747) (6,864) 7,414 550
Additions, net 6,774 11,917 18,691 - 18,691
Change in fair value due to loan runoff (2,448) (7,953) (10,401) - (10,401)
Change in fair value due to market changes (2) 3,011 3,009 - 3,009
-------------------------------------------------------------------------------------------------------------
Balance at December 31, 2006(1) $ 12,813 $ 53,133 $ 65,946 $ - $ 65,946
Additions, net 3,628 14,080 17,708 - 17,708
Change in fair value due to loan runoff (2,478) (8,274) (10,752) - (10,752)
Change in fair value due to market changes (57) (2,836) (2,893) - (2,893)
-------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007(1) $ 13,906 $ 56,103 $ 70,009 $ - $ 70,009
Additions, net - 19,220 19,220 - 19,220
Change in fair value due to loan runoff (2,286) (9,676) (11,962) - (11,962)
Change in fair value due to market changes (5,267) (29,248) (34,515) - (34,515)
-------------------------------------------------------------------------------------------------------------
Balance at December 31, 2008(1) $ 6,353 $ 36,399 $ 42,752 $ - $ 42,752
-------------------------------------------------------------------------------------------------------------
(1) Excludes approximately $0.2 million, $0.7 million and $0.8 million at
December 31, 2008, 2007 and 2006, respectively, of loan servicing rights on
mortgage loans originated prior to the adoption of FAS 122.
84
Fair value is determined by discounting the projected net cash flows.
Significant assumptions are:
Discount rate - Indexed to a risk-free rate commensurate with the average life
of the servicing portfolio plus a market premium. The discount rate at
December 31, 2008 was 9.26%.
Prepayment rate - Annual prepayment estimates ranging from 8.3% to 38% based
upon loan interest rate, original term and loan type.
Loan servicing costs - $43 to $73 annually per loan based upon loan type.
Escrow earnings rate - Indexed to rates paid on deposit accounts with a
comparable average life. The escrow earnings rate at December 31, 2008 was
2.08%.
The effect of a 50 basis point decrease in mortgage interest rates on all
significant assumptions is expected to decrease the fair value of mortgage
servicing rights by $11 million.
Stratification of the mortgage loan-servicing portfolio, outstanding principal
of loans serviced, and related hedging information by interest rate at December
31, 2008 follows (in thousands):
< 5.51% 5.51% - 6.50% 6.51% - 7.50% => 7.51% Total
--------------------------------------------------------------------------------------------------------------------
Fair value $ 9,638 $ 25,866 $ 5,847 $ 1,401 $ 42,752
--------------------------------------------------------------------------------------------------------------------
Outstanding principal of loans
serviced(1) $ 951,800 $2,983,300 $ 1,049,200 $ 172,700 $5,157,000
--------------------------------------------------------------------------------------------------------------------
(1) Excludes outstanding principal of $793 million for loans serviced for
affiliates and $34 million of mortgage loans for which there are no
capitalized mortgage servicing rights.
(9) Deposits
Interest expense on deposits is summarized as follows (in thousands):
2008 2007 2006
-----------------------------------
Transaction deposits $ 121,403 $ 194,617 $ 148,986
Savings 676 1,499 1,408
Time:
Certificates of deposits
under $100,000 70,806 88,465 69,844
Certificates of deposits
$100,000 and over 78,965 110,791 100,916
Other time deposits 17,074 17,374 15,754
------------------------------------------------------------
Total time 166,845 216,630 186,514
------------------------------------------------------------
Total $288,924 $412,746 $336,908
------------------------------------------------------------
The aggregate amounts of time deposits in denominations of $100,000 or more at
December 31, 2008 and 2007 were $3.1 billion and $2.4 billion, respectively.
Time deposit maturities are as follows: 2009 - $3.7 billion, 2010 - $191
million, 2011 - $194 million, 2012 - $279 million, 2013 - $704 million and $117
million thereafter. At December 31, 2008, the Company had $1.0 billion in fixed
rate, brokered certificates of deposits. The weighted-average interest rate paid
on these certificates is 3.55%.
Interest expense on time deposits during 2008 and 2007 was reduced by the net
accrued settlement from interest rate swaps of $6.9 million and $2.6 million,
respectively.
The aggregate amount of overdrawn transaction deposits that have been
reclassified as loan balances was $35 million at December 31, 2008 and $91
million at December 31, 2007.
85
(10) Other Borrowings
Information relating to other borrowings is summarized as follows (dollars in
thousands):
December 31
-----------------------------------------------------------------------------------------------
2008 2007 2006
-----------------------------------------------------------------------------------------------
Maximum Maximum Maximum
Outstanding Outstanding Outstanding
At Any At Any At Any
Balance Rate Month End Balance Rate Month End Balance Rate Month End
------------------------------------------------------------------------------------------------
Parent Company:
Revolving, unsecured line$ 50,000 3.78% $ 50,000 $ 50,000 5.42% $ 50,000 $ - -% $ -
Subsidiary Banks:
Funds purchased and
repurchase agreements 3,025,399 0.72 3,686,019 3,225,131 4.30 3,225,131 2,348,516 5.52 2,688,175
Federal Home Loan Bank
advances 991,401 1.76 2,391,618 938,168 4.65 938,168 566,017 5.36 841,159
Federal Reserve advances 450,000 0.24 450,000 - - - - - -
Subordinated debentures 398,407 5.51 398,407 398,273 5.91 548,187 297,800 6.91 300,230
Other 30,653 2.62 44,227 39,396 4.10 43,985 27,714 4.00 36,534
------------- ------------- -------------
Total subsidiary banks 4,895,860 1.30 4,600,968 4.52 3,240,047 5.63
------------- ------------- -------------
Total other borrowings $4,945,860 1.32 $4,650,968 4.53 $3,240,047 5.63
------------- ------------- -------------
Aggregate annual principal repayments of long-term debt at December 31, 2008 are
as follows (in thousands):
Parent Subsidiary
Company Banks
---------------------------
2009 $ - $4,226,052
2010 50,000 250,475
2011 - 2,372
2012 - 1,418
2013 - 525
Thereafter - 415,018
---------------------------
Total $ 50,000 $4,895,860
---------------------------
Funds purchased generally mature within one to ninety days from the transaction
date. At December 31, 2008, securities sold under agreements to repurchase
totaled $1.9 billion with related accrued interest payable of $4.5 million.
Additional information relating to repurchase agreements at December 31, 2008 is
as follows (dollars in thousands):
Amortized Market Repurchase Average
Security Sold/Maturity Cost Value Liability(1) Rate
-------------------------------------------------------------------------------------------------------------
U.S. Agency Securities:
Overnight(1) $1,364,651 $ 1,233,500 $ 975,131 0.34%
Long-term 573,722 590,760 470,429 2.64
-------------------------------------------------------------------------------------------------------------
Total Agency Securities $1,938,373 $ 1,824,260 $1,445,560 1.09%
-------------------------------------------------------------------------------------------------------------
(1) BOK Financial maintains control over the securities underlying overnight
repurchase agreements and generally transfers control over securities
underlying longer-term dealer repurchase agreements to the respective
counterparty.
Borrowings from the Federal Home Loan Bank are used for funding purposes. In
accordance with policies of the Federal Home Loan Bank, BOK Financial has
granted a blanket pledge of eligible assets (generally unencumbered U.S.
Treasury and mortgage-backed securities, 1-4 family loans and multifamily loans)
as collateral for these advances. The Federal Home Loan Bank has issued letters
of credit totaling $394 million to secure BOK Financial's obligations to
depositors of public funds. The unused credit available to BOK Financial at
December 31, 2008 pursuant to the Federal Home Loan Bank's collateral policies
is $2.3 billion.
The Company elected to participate in the 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. 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
86
either 28 or 84 days and are secured by a pledge of eligible collateral. Funds
borrowed under this program totaled $450 million at December 31, 2008.
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 and matures in December of
2010. At December 31, 2008, the outstanding balance under this credit agreement
was $50 million. Subsequent to December 31, 2008, the Company fully repaid the
amounts owed under this credit agreement.
As of December 31, 2007, BOK Financial had a $188 million unsecured revolving
line of credit with certain commercial banks with an outstanding principal
balance of $50 million. In 2008, that balance was repaid and the agreement was
terminated at the Company's request.
In 2007, Bank of Oklahoma issued $250 million of subordinated debt due May 15,
2017. Interest on this debt is based upon a fixed rate of 5.75% through May 14,
2012 and on a floating rate of three-month LIBOR plus 0.69% thereafter. The
proceeds of this debt were used to fund the Worth National Bank and First United
Bank acquisitions and to fund continued asset growth.
In 2005, BOk issued $150 million of 10-year, fixed rate subordinated debt. The
cost of this subordinated debt, including issuance discounts and hedge loss is
5.56%. The proceeds of this debt were used to repay $95 million of BOK
Financial's unsecured revolving line of credit and to provide additional capital
to support asset growth. During 2006, a $150 million notional amount interest
rate swap was designated as a hedge of changes in fair value of the subordinated
debt due to changes in interest rates. The Company received a fixed rate of
5.257% and paid a variable rate based on 1-month LIBOR. This fair value hedging
relationship was discontinued and the interest rate swap was terminated in April
2007.
87
(11) Federal and State Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred tax assets and liabilities are as follows (in thousands):
December 31,
----------------------
2008 2007
----------------------
Deferred tax liabilities:
Valuation adjustments $33,800 $ 30,600
Mortgage servicing rights 29,500 25,900
Lease financing 19,800 16,600
Pension contributions in excess
of book expense - 4,900
Other 2,300 3,700
------------------------------------------------------------
Total deferred tax liabilities 85,400 81,700
------------------------------------------------------------
Deferred tax assets:
Available for sale securities
mark-to-market 126,300 14,600
Stock-based compensation 6,500 5,700
Credit loss reserves 94,200 56,000
Valuation adjustments 23,900 9,400
Deferred book income 22,300 26,000
Deferred compensation 11,300 10,000
Book expense in excess of pension
contribution 1,200 -
Other 18,800 12,500
------------------------------------------------------------
Total deferred tax assets 304,500 134,200
------------------------------------------------------------
Deferred tax assets in excess of
deferred tax liabilities $219,100 $52,500
------------------------------------------------------------
The significant components of the provision for income taxes attributable to
continuing operations for BOK Financial are shown below (in thousands):
Years ended December 31,
-----------------------------------
2008 2007 2006
-----------------------------------
Current:
Federal $ 108,879 $ 119,025 $ 113,554
State 7,377 10,179 8,518
-----------------------------------------------------------
Total current 116,256 129,204 122,072
-----------------------------------------------------------
Deferred:
Federal (47,685) (12,935) (7,001)
State (3,662) (508) (446)
-----------------------------------------------------------
Total deferred (51,347) (13,443) (7,447)
-----------------------------------------------------------
Total income tax $ 64,909 $ 115,761 $ 114,625
-----------------------------------------------------------
The reconciliations of income attributable to continuing operations computed at
the U.S. federal statutory tax rates to income tax expense are as follows (in
thousands):
Years ended December 31,
-------------------------------
2008 2007 2006
-------------------------------
Amount:
Federal statutory tax $76,353 $116,698 $114,660
Tax exempt revenue (4,173) (4,204) (3,529)
Effect of state income taxes,
net of federal benefit 1,278 5,783 4,805
Intangible amortization - - 82
Utilization of tax credits (1,234) (1,218) (1,040)
Bank-owned life insurance (3,555) (3,411) (830)
Charitable contribution (2,852) - -
Reduction of tax accrual (2,437) - (2,200)
Other, net 1,529 2,113 2,677
------------------------------------------------------------
Total $64,909 $115,761 $114,625
------------------------------------------------------------
88
Due to the favorable resolution of certain tax issues for the tax periods ended
December 31, 2002 and December 31, 2004, BOK Financial reduced its tax accrual
by $2.2 million and $2.4 million in 2006 and 2008, respectively, which was
credited against current income tax expense.
Years ended December 31,
-------------------------------
2008 2007 2006
-------------------------------
Percent of pretax income:
Federal statutory rate 35% 35% 35%
Tax-exempt revenue (2) (1) (1)
Effect of state income taxes
net of federal benefit 1 1 1
Bank-owned life insurance (2) (1) -
Charitable contribution (1) - -
Reduction of tax accrual (1) - (1)
Other, net - 1 1
-------------------------------------------------------------
Total 30% 35% 35%
-------------------------------------------------------------
BOK Financial adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes" ("FIN 48"), on January 1, 2007. As a result of
the implementation of FIN 48, BOK Financial recognized a $609 thousand increase
in the liability for unrecognized tax benefits, which was accounted for as a
reduction to the January 1, 2007 balance of retained earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):
2008 2007
---------------------
Balance as of December 31, 2007 $ 13,200 $ 12,639
Additions for tax for current
year positions 3,800 4,100
Settlements during the period (100) -
Lapses of applicable statute of
limitations (3,700) (3,539)
---------------------------------------------------------
Balance as of December 31, 2008 $ 13,200 $ 13,200
---------------------------------------------------------
Any of the above unrecognized tax benefits, if recognized, would affect the
effective tax rate.
BOK Financial recognizes interest and penalties accrued related to unrecognized
tax benefits in income tax expense. During the years ended December 31, 2008 and
2007, the Company recognized $1.5 million and $1.0 million, respectively, in
interest and penalties. The Company had approximately $3.0 million and $2.3
million for the payment of interest and penalties accrued as of December 31,
2008 and 2007, respectively. Federal statutes remain open for federal tax
returns filed in the previous three reporting periods. Various state income tax
statutes remain open for the previous three to six reporting periods.
One of our acquired entities is currently under examination by the Internal
Revenue Service ("IRS") for the year ending May 31, 2007 and the related
carryback period. Refunds claimed in the carryback period total $3.5 million.
The ultimate resolution is unlikely to have a material impact on the financial
statements. Also during 2008, the IRS exam for the year ended December 31, 2005
for the same acquired entity was closed with no adjustments.
89
(12) Employee Benefits
BOK Financial sponsors a defined benefit cash balance Pension Plan for all
employees who satisfy certain age and service requirements. Pension Plan
benefits were curtailed as of April 1, 2006. No participants may be added to the
plan and no additional service benefits will be accrued. Interest will continue
to accrue on employees' account balances at 5.25%.
The following table presents information regarding this plan (dollars in
thousands):
December 31,
----------------------
2008 2007
----------------------
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $ 46,183 $ 58,220
Service cost - -
Interest cost 2,685 2,823
Actuarial (gain) loss (1,205) (6,474)
Benefits paid (8,564) (8,386)
------------------------------------------------------------------------------
Projected benefit obligation at end of year(1,2) $ 39,099 $ 46,183
------------------------------------------------------------------------------
Change in plan assets:
Plan assets at fair value at beginning of year $ 58,089 $ 63,038
Actual return on plan assets (14,224) 3,437
Company contributions - -
Benefits paid (8,564) (8,386)
------------------------------------------------------------------------------
Plan assets at fair value at end of year $ 35,301 $ 58,089
------------------------------------------------------------------------------
Funded status of the plan / prepaid pension costs $(3,798) $11,906
------------------------------------------------------------------------------
Components of net periodic benefit costs:
Service cost $ - $ -
Interest cost 2,685 2,823
Expected return on plan assets (3,910) (4,165)
Amortization of unrecognized net loss 496 958
------------------------------------------------------------------------------
Net periodic pension cost (benefit) $ (729) $ (384)
------------------------------------------------------------------------------
(1) Projected benefit obligation equals accumulated benefit obligation.
(2) Projected benefit obligation is based on a January 1 measurement date.
Weighted-average assumptions as of December 31:
Discount rate 6.50% 6.00%
Expected return on plan assets 7.00% 7.00%
Rate of compensation increase N/A N/A
As of December 31, 2008, expected future benefit payments related to the Pension
Plan were as follows (in thousands):
2009 $ 3,142
2010 3,531
2011 3,662
2012 4,329
2013 3,705
2014 through 2017 18,770
-------------
$37,139
-------------
Assets of the Pension Plan consist primarily of shares in the Cavanal Hill
Balanced Fund. The stated objective of this fund is to provide an attractive
total return through a broadly diversified mix of equities and bonds. The
typical portfolio mix is approximately 60% equities and 40% bonds. The net asset
value of shares in the Cavanal Hill Funds is reported daily based on market
quotations for the Fund's securities. If market quotations are not readily
available, the securities' fair values are determined by the Fund's pricing
committee. The inception-to-date return on the fund, which is used as an
indicator when setting the expected return on plan assets, was 5.39%. As of
December 31, 2008, the expected return on plan assets for 2009 is 5.25% The
maximum allowed and minimum required Pension Plan contributions for 2008 were
$6.6 million and $0, respectively. No contributions were made for 2007 or 2008.
We expect approximately $2.0 million of net pension costs currently in
accumulated other comprehensive income to be recognized as net periodic pension
cost in 2009.
Employee contributions to the Thrift Plan eligible for Company matching equal 6%
of base compensation, as defined in the plan. The Company-provided matching
contribution rates range from 50% for employees with less than four years of
service to 200% for employees with 15 or more years of service. Additionally, a
maximum Company-provided, non-elective annual contribution of $750 is made for
employees whose annual base compensation is less than $40,000.
90
Participants may direct investments in their accounts to a variety of options,
including a BOK Financial common stock fund. Employer contributions, which are
invested in accordance with the participant's investment options, vest over five
years. Thrift Plan expenses were $12.1 million, $11.6 million and $9.1 million
for 2008, 2007 and 2006, respectively.
BOK Financial also sponsors a defined benefit post-retirement employee medical
plan, which pays 50 percent of annual medical insurance premiums for retirees
who meet certain age and service requirements. Assets of the retiree medical
plan consist primarily of shares in a cash management fund. The post-retirement
medical plan is limited to current retirees and certain employees who were age
60 or older at the time the plan was frozen in 1993. The net obligation
recognized under the plan was $2.2 million at December 31, 2008. A 1% change in
medical expense trends would not significantly affect the net obligation or cost
of this plan.
BOK Financial offers numerous incentive compensation plans that are aligned with
the Company's growth strategy. Compensation awarded under these plans may be
based on defined formulas, other performance criteria or discretionary.
Incentive compensation is designed to motivate and reinforce sales and customer
service behavior in all markets. Earnings were charged $83.2 million in 2008,
$71.4 million in 2007 and $65.2 million in 2006 for incentive compensation
plans.
(13) Stock Compensation Plans
The shareholders and Board of Directors of BOK Financial have approved various
stock-based compensation plans. An independent compensation committee of the
Board of Directors determines the number of awards granted to the Chief
Executive Officer and other senior executives. Stock-based compensation is
granted to other officers and employees and is approved by the independent
compensation committee upon recommendation of the Chairman of the Board and the
Chief Executive Officer.
These awards consist primarily of stock options that are subject to vesting
requirements. Generally, one-seventh of the options awarded vest annually and
expire three years after vesting. Additionally, stock options that vest in two
years and expire 45 days after vesting have been awarded. Non-vested shares may
be granted to the Chief Executive Officer and other senior executives of the
Company. These shares vest five years after the grant date. The holders of these
shares may be required to retain the shares for a three-year period after
vesting.
The Chief Executive Officer and other senior executives participate in an
Executive Incentive Plan. The number of options and non-vested shares may
increase or decrease based upon the Company's growth in earnings per share over
a three-year period compared to the median growth in earnings per share for a
designated peer group of financial institutions and other individual performance
factors.
The following table presents options outstanding during 2006, 2007 and 2008
under these plans:
Weighted-
Average
Exercise
Number Price
--------------------------
Options outstanding at
December 31, 2005 3,488,712 $34.03
Options awarded 900,119 48.30
Options exercised (790,981) 29.50
Options forfeited (100,149) 36.65
Options expired (1,076) 37.35
------------------------------------------------------------
Options outstanding at
December 31, 2006 3,496,625 $38.63
Options awarded 956,475 54.18
Options exercised (703,833) 32.41
Options forfeited (429,848) 43.74
Options expired (1,249) 45.80
------------------------------------------------------------
Options outstanding at
December 31, 2007 3,318,170 $43.50
Options awarded 1,098,172 47.71
Options exercised (498,700) 33.05
Options forfeited (271,250) 47.96
Options expired (70,924) 49.91
------------------------------------------------------------
Options outstanding at
December 31, 2008 3,575,468 $45.77
------------------------------------------------------------
Options vested at
December 31, 2008 846,387 $39.62
------------------------------------------------------------
91
The following table summarizes information concerning currently outstanding and
vested stock options:
Options Outstanding Options Vested
---------------------------------------------- ------------------
Weighted Weighted
Average Average Weighted
Range of Remaining Exercise Average
Exercise Number Contractual Price Number Exercise
Prices Outstanding Life (years) Vested Price
$17.37 - 19.02 100,818 1.24 17.73 100,818 17.73
28.27 - 30.87 315,641 2.30 29.90 196,747 29.35
37.74 310,730 3.00 37.74 104,714 37.74
38.91 - 44.30 107,887 2.00 41.73 - -
45.15 - 47.34 577,139 3.50 47.32 212,325 47.31
47.05 - 48.53 509,099 4.00 47.06 72,424 47.08
48.46 805,163 6.00 48.46 - -
50.61 - 54.00 107,887 0.12 53.51 107,887 53.51
54.33 579,206 5.00 54.33 51,472 54.33
52.54 - 54.28 161,898 1.00 53.57 - -
------------------------------------------------------------------
Compensation expense for stock options is generally recognized based on the fair
value of options granted over the options' vesting period. The fair value of
options was determined as of the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions:
2008 2007 2006
---------- ---------- -----------
Average risk-free interest rate 3.50% 4.68% 4.42%
Dividend yield 1.70% 1.10% 0.90%
Volatility factors .147 .143 .161
Weighted average expected life 4.9 years 4.9 years 4.9 years
Weighted average fair value $7.09 $9.91 $9.56
Compensation cost of stock options granted that may be recognized as
compensation expense in future years totaled $11.0 million at December 31, 2008.
Subject to adjustments for forfeitures, we expect to recognize compensation
expense for current outstanding options of $4.6 million in 2009, $3.0 million in
2010, $1.7 million in 2011, $970 thousand in 2012, $490 thousand in 2013 and
$170 thousand thereafter. Stock option expense for the years ended December 31,
2008, 2007 and 2006 was $7.8 million, $6.3 million and $6.4 million,
respectively. The intrinsic value of options exercised during the years ended
December 31, 2008, 2007 and 2006 was $11.8 million, $14.9 million and $16.6
million, respectively. The aggregate intrinsic value of options outstanding as
of December 31, 2008 and 2007 was $19.2 million and $27.2 million, respectively.
The aggregate intrinsic value of options exercisable as of December 31, 2008 and
2007 was $656 thousand and $15.1 million, respectively.
BOK Financial also issues non-vested common shares under the various stock-based
compensation plans. At December 31, 2008, a total of 137,958 non-vested common
shares have been awarded, including 56,853 awarded in 2008. The weighted average
grant date fair value of non-vested shares awarded in 2008 was $47.62 per share.
Unrecognized compensation cost of non-vested shares totaled $3.4 million at
December 31, 2008. Subject to adjustment for forfeitures, we expect to recognize
compensation expense of $1.1 million in 2009, $950 thousand in 2010, $750
thousand in 2011, $520 thousand in 2012 and $50 thousand in 2013.
BOK Financial permits certain executive officers to defer recognition of taxable
income from their stock-based compensation. Deferred compensation may also be
diversified into investments other than BOK Financial common stock.
Stock-based compensation subject to these deferral plans is recognized as a
liability award rather than as an equity award. Compensation expense is based on
the fair value of the award recognized over the vesting period. At December 31,
2008, the recorded obligation for liability awards was $1.2 million.
Compensation cost of liability awards was a benefit of $471 thousand in 2008,
expense of $506 thousand in 2007 and expense of $4.7 million in 2006.
92
During January 2009, BOK Financial awarded the following stock-based
compensation:
---------- --------- ------------
Exercise Fair Value /
Number Price Award
---------- --------- ------------
Equity awards:
Stock options 779,541 $36.65 $ 5.38
Nonvested stock 139,839 - 36.65
----------
Total equity awards 919,380
----------
Total stock-based awards 919,380
-------------------------- ---------- --------- ------------
The aggregate compensation cost of these awards totaled approximately $9.3
million. This cost will be recognized over the vesting periods, subject to
adjustments for forfeitures. None of the stock-based compensation awards in
January 2009 are subject to deferred compensation plans.
(14) Related Parties
In compliance with applicable regulations, the Company may extend credit to
certain executive officers, directors, principal shareholders and their
affiliates (collectively referred to as "related parties") in the ordinary
course of business under substantially the same terms as comparable third-party
lending arrangements. The Company's loans to related parties do not involve more
than the normal credit risk and there are no non-accrual or impaired related
party loans outstanding at December 31, 2008 or 2007. Activity in loans to
related parties is summarized as follows (in thousands):
2008 2007
------------ ------------
Beginning balance $252,051 $ 160,901
Advances 734,553 700,742
Payments (704,433) (700,488)
Charge-offs(2) (26,000) -
Adjustments(1) (49,031) 90,896
------------------------------- ------------ ------------
Ending balance $207,140 $252,051
------------------------------- ------------ ------------
(1)Adjustments generally consist of changes in status as a related party. In
2008, adjustments include $48 million of loans to SemGroup, L.P., which
ceased to be a related party upon resignation of Thomas L. Kivisto, its
principal owner, from the Company's Board of Directors. These loans remain
outstanding and are non-performing.
(2)In 2008, the Company charged off $26 million of the balance due from
SemGroup, L.P.
Certain related parties are customers of the Company for services other than
loans, including consumer banking, corporate banking, risk management, wealth
management, brokerage and trading, or fiduciary/trust services. The Company
engages in transactions with related parties in the ordinary course of business
in compliance with applicable regulations.
On July 21, 2008, the Company entered into a $188 million, unsecured revolving
credit agreement with George B. Kaiser, its Chairman and principal shareholder.
The revolving credit agreement with Mr. Kaiser replaced a similar credit
agreement with certain commercial banks that was terminated at the Company's
request. The Company was in compliance with all terms of that credit agreement
when it was terminated. Interest on the outstanding balance due to Mr. Kaiser 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 and matures in December of 2010. At December 31, 2008, the
outstanding balance under this credit agreement was $50 million. Subsequent to
December 31, 2008, the Company fully repaid the amounts owed under this credit
agreement.
The Company also rents office space in facilities owned by affiliates of Mr.
Kaiser. Lease payments for 2008 totaled $1.1 million.
In 2008, the Company entered into a $25 million loan commitment with the Tulsa
Community Foundation ("TCF") to be secured by tax-exempt bonds purchased from
the Tulsa Stadium Trust (the "Stadium Trust") by TCF. The Stadium Trust is an
Oklahoma public trust, of which the City of Tulsa is the sole beneficiary.
Stanley A. Lybarger, President and CEO of the Company, is Chairman of the
Stadium Trust.
Cavanal Hill Investment Management, Inc., a wholly-owned subsidiary of BOk, is
the administrator to and investment advisor for the Cavanal Hill Funds (the
"Funds"), a diversified, open-ended investment company established as a business
trust under the Investment Company Act of 1940 (the "1940 Act"). BOk is
custodian and BOSC, Inc. is distributor for the Funds. The Funds' products are
offered to customers, employee benefit plans, trusts and the general public in
the ordinary course of business. Approximately 98% of the Funds' assets of $3.8
billion are held for the Company's clients. A Company executive officer
serves on the Funds' board of trustees and BOk officers serve as president and
secretary of the Funds. A majority of the members of the Funds' board of
trustees are, however, independent of the Company and the Funds are managed by
its board of trustees.
93
(15) 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
share of Visa's covered litigation liabilities. This contingent liability
totaled $2.5 million at December 31, 2008. 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 December 31, 2008, Cavanal Hill Funds' assets included $1.6 billion of U.S.
Treasury, $1.4 billion of cash management and $881 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
December 31, 2008. 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.
BOk is obligated under a long-term lease for its bank premises owned by Williams
Companies, Inc. and located in downtown Tulsa. The Chairman and CEO of the
Williams Companies, Inc. is a director of BOK Financial Corporation. The lease
term, which began November 1, 1976, is for fifty-seven years with options to
terminate in 2014 and 2024. Annual base rent is $3.2 million. BOk subleases
portions of its space for annual rents of $213 thousand in years 2009 and 2010.
Net rent expense on this lease was $3.0 million in 2008, 2007 and 2006. Total
rent expense for BOK Financial was $20.3 million in 2008, $18.8 million in 2007,
and $16.5 million in 2006.
At December 31, 2008, future minimum lease payments for equipment and premises
under operating leases were as follows: $17.4 million in 2009, $17.2 million in
2010, $14.6 million in 2011, $11.9 million in 2012, $9.4 million in 2013, and a
total of $102.7 million thereafter. Premises leases may include options to renew
at then current market rates and may include escalation provisions based upon
changes in the consumer price index or similar benchmarks.
The Federal Reserve Bank requires member banks to maintain certain minimum
average cash balances. These balances were approximately $373 million and $315
million at December 31, 2008 and 2007, respectively.
94
BOSC, Inc., a wholly-owned subsidiary of BOK Financial, is an introducing broker
to Pershing, LLC for retail equity investment transactions. As such, it has
indemnified Pershing, LLC against losses due to a customer's failure to settle a
transaction or to repay a margin loan. All unsettled transactions and margin
loans are secured as required by applicable regulation. The amount of customer
balances subject to indemnification totaled $1.5 million at December 31, 2008.
At December 31, 2008, the Company has funded $42.6 million and has commitments
to fund an additional $13.9 million in various unrelated alternative
investments. Alternative investments generally consist of limited partnership
interests in or loans to entities that invest in distressed real estate loans
and properties, energy development, venture capital and other activities. The
Company is prohibited by banking regulations from controlling or actively
managing the activities of these investments.
BOKF Equity, LLC, indirectly a wholly-owned subsidiary of BOK Financial, is the
general partner in two private equity funds ("the Funds"). The Funds provide
alternative investment opportunities to certain customers, some of which are
related parties, through limited partnerships. The Funds generally invest in
distressed assets, asset buy-out or venture capital limited partnerships or
limited liability companies. The general partner has contingent obligations
through the Funds to make additional investments totaling $17.5 million as of
December 31, 2008. Substantially all of those contingent obligations are offset
by commitments of BOK Financial customers.
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 currently rented by third-party tenants in the building. 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 currently vacant space in
the same building. The maximum amount that Bank of Oklahoma may receive under
this agreement is $4.5 million. The fair value of this agreement at inception is
zero and no asset or liability is currently recognized in the Company's
financial statements.
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.
(16) Shareholders' Equity
Preferred Stock
One billion shares of preferred stock with a par value of $0.00005 per share are
authorized. The Series A Preferred Stock has no voting rights except as
otherwise provided by Oklahoma corporate law and may be converted into one share
of Common Stock for each 36 shares of Series A Preferred Stock at the option of
the holder. Dividends are cumulative at an annual rate of ten percent of the
$0.06 per share liquidation preference value when declared and are payable in
cash. Aggregate liquidation preference is $15 million. No Series A Preferred
Stock was outstanding in 2008, 2007 or 2006.
Common Stock
Common stock consists of 2.5 billion authorized shares with a $0.00006 par
value. Holders of common shares are entitled to one vote per share at the
election of the Board of Directors and on any question arising at any
shareholders' meeting and to receive dividends when and as declared.
Additionally, regulations restrict the ability of national banks and bank
holding companies to pay dividends.
Cash dividends paid on common stock totaled $59 million, $50 million and $37
million in 2008, 2007 and 2006, respectively. Previously, annual dividends were
paid in shares of common stock.
Subsidiary Banks
The amounts of dividends that BOK Financial's subsidiary banks can declare and
the amounts of loans the subsidiary banks can extend to affiliates are limited
by various federal banking regulations and state corporate law. Generally,
dividends declared during a calendar year are limited to net profits, as
defined, for the year plus retained profits for the preceding two years. The
amounts of dividends are further restricted by minimum capital requirements.
Pursuant to the most restrictive of the regulations at December 31, 2008, BOK
Financial's subsidiary banks could declare dividends up to $171 million without
prior 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. As of December 31, 2008, the subsidiary banks
could declare dividends of up to $119 million under this policy. The subsidiary
banks declared and paid dividends of $76 million, $254 million and $81 million
in 2008, 2007, and 2006, respectively.
Loans to a single affiliate may not exceed 10% and loans to all affiliates may
not exceed 20% of unimpaired capital and surplus, as defined. Additionally,
loans to affiliates must be fully secured. As of December 31, 2008 and 2007,
outstanding loans and equity investments totaled $45 million and $22 million,
respectively, and outstanding letters of credit totaled $18 million and $17
million, respectively. Total loan commitments to affiliates at December 31, 2008
were $199 million.
95
Regulatory Capital
BOK Financial and its banking subsidiaries are subject to various capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and additional
discretionary actions by regulators that could have a material effect on BOK
Financial's operations. These capital requirements include quantitative measures
of assets, liabilities and certain off-balance sheet items. The capital
standards are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
For a banking institution to qualify as well capitalized, its Tier I, Total and
Leverage capital ratios must be at least 6%, 10% and 5%, respectively. Tier I
capital consists primarily of common stockholders' equity, excluding unrealized
gains or losses on available for sale securities, less goodwill, core deposit
premiums and certain other intangible assets. Total capital consists primarily
of Tier I capital plus preferred stock, subordinated debt and reserves for
credit losses, subject to certain limitations. All of BOK Financial's banking
subsidiaries exceeded the regulatory definition of well capitalized.
December 31,
------------------------------------------------------------
2008 2007
------------------------------------------------------------
Amount Ratio Amount Ratio
------------------------------------------------------------
(Dollars in thousands)
Total Capital (to Risk Weighted Assets):
Consolidated $ 2,356,948 12.81% $ 2,167,763 12.54%
BOk 1,584,353 12.22 1,432,405 11.95
Bank of Texas 440,303 11.07 380,221 10.98
Bank of Albuquerque 127,910 17.20 112,693 16.35
Bank of Arkansas 34,395 12.18 28,058 11.31
Colorado State Bank and Trust 87,370 12.41 88,603 15.58
Bank of Arizona 25,136 10.65 21,715 12.07
Bank of Kansas City 16,057 28.42 17,354 47.21
Tier I Capital (to Risk Weighted Assets):
Consolidated $ 1,728,926 9.40% $ 1,621,583 9.38%
BOk 1,032,120 7.96 937,477 7.82
Bank of Texas 390,444 9.82 349,793 10.10
Bank of Albuquerque 118,588 15.94 105,089 15.24
Bank of Arkansas 30,842 10.92 25,198 10.16
Colorado State Bank and Trust 80,232 11.39 85,542 15.04
Bank of Arizona 22,133 9.37 19,644 10.92
Bank of Kansas City 15,424 27.30 17,252 46.93
Tier I Capital (to Average Assets):
Consolidated $ 1,728,926 7.89% $ 1,621,583 8.20%
BOk 1,032,120 6.46 937,477 6.60
Bank of Texas 390,444 9.30 349,793 9.35
Bank of Albuquerque 118,588 7.22 105,089 7.93
Bank of Arkansas 30,842 10.80 25,198 10.05
Colorado State Bank and Trust 80,232 6.90 85,542 6.88
Bank of Arizona 22,133 9.55 19,644 10.44
Bank of Kansas City 15,424 23.88 17,252 30.92
96
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 Accumulated Unrealized
Gain (Loss) (Loss) on (Loss)
On Available Effective On
For Sale Cash Flow Employee
Securities Hedges Benefit Plans Total
-----------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 $ (64,082) $ (3,729) $ - $ (67,811)
Unrealized gains on securities 7,061 - - 7,061
Unrealized gains on cash flow hedges - 664 - 664
Unrealized losses on employee benefit plans - - (18,587) (18,587)
Tax benefit (expense) on unrealized gains (losses) (2,619) - 7,230 4,611
Reclassification adjustment for losses
realized and included in net income 739 211 - 950
Reclassification adjustment for tax benefit
on realized losses (251) (81) - (332)
-----------------------------------------------------------------------------------------------------------------
Balance at December 31, 2006 $ (59,152) $ (2,935) $ (11,357) $ (73,444)
Unrealized gains on securities 48,308 - - 48,308
Unrealized gains on cash flow hedges - 2,201 - 2,201
Unrealized gains on employee benefit plans - - 7,518 7,518
Tax benefit (expense) on unrealized gains (losses) (17,239) (856) (2,925) (21,020)
Reclassification adjustment for losses
realized and included in net income 8,117 211 (384) 7,944
Reclassification adjustment for tax benefit
on realized losses (2,809) (82) 150 (2,741)
-----------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007 $ (22,775) $ (1,461) $ (6,998) $ (31,234)
Unrealized losses on securities (236,990) - - (236,990)
Unrealized gains on cash flow hedges - 139 - 139
Unrealized losses on employee benefit plans - - (16,434) (16,434)
Tax benefit (expense) on unrealized gains (losses) 70,492 (54) 6,393 76,831
Reclassification adjustment for (gains) losses
realized and included in net income (21,926) 289 - (21,637)
Reclassification adjustment for tax expense
(benefit) on realized gains (losses) 6,551 (112) - 6,439
-----------------------------------------------------------------------------------------------------------------
Balance at December 31, 2008 $ (204,648) $ (1,199) $ (17,039) $(222,886)
-----------------------------------------------------------------------------------------------------------------
97
(17) Earnings Per Share
The following table presents the computation of basic and diluted earnings per
share (dollars in thousands except per share data):
Years ended December 31,
--------------------------------------------
2008 2007 2006
--------------------------------------------
Numerator:
Net income $ 153,232 $ 217,664 $ 212,977
---------------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share - weighted average shares 67,274,457 67,083,200 66,759,384
Effect of dilutive potential common shares:
Employee stock compensation plans(1) 282,763 467,338 550,621
---------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 67,557,220 67,550,538 67,310,005
---------------------------------------------------------------------------------------------------------------------
Basic earnings per share $2.28 $3.24 $3.19
---------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $2.27 $3.22 $3.16
---------------------------------------------------------------------------------------------------------------------
(1)Excludes employee stock options with exercise 1,571,239 799,087 440,216
prices greater than the current market price.
(18) Reportable Segments
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. 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 bank 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 overall liquidity needs and
interest rate risk of the Company. Each line of business borrows funds from and
provides funds to the funds management unit as needed to support their
operations. Operating results for Funds Management and Other include the effect
of interest rate risk positions and risk management activities, the provision
for credit losses 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 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 third-party developed
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.
Substantially all revenue is from domestic customers. No single external
customer accounts for more than 10% of total revenue.
98
Funds
Commercial Consumer Wealth Management
(In Thousands) Banking Banking Management and Other Total
---------------------------------------------------------------------
Year ended December 31, 2008
Net interest revenue/(expense)
from external sources $ 451,623 $ 32,076 $ 12,617 $ 150,546 $ 646,862
Net interest revenue/(expense)
from internal sources (134,196) 118,728 32,853 (17,385) -
----------------------------------------------------------------------------------------------------
Total net interest revenue 317,427 150,804 45,470 133,161 646,862
Other operating revenue 107,185 148,885 156,133 1,137 413,340
Operating expense 217,155 219,024 149,966 42,233 628,378
Provision for credit losses 81,966 16,726 2,961 100,940 202,593
Increase (decrease) in fair
value of mortgage servicing rights - (34,515) - - (34,515)
Gains (losses) on financial
instruments, net 4,689 12,525 (7) 5,729 22,936
Gains (losses) on repossessed
assets, net (82) 193 - 378 489
----------------------------------------------------------------------------------------------------
Income before taxes 130,098 42,142 48,669 (2,768) 218,141
Federal and state income tax 50,608 16,393 18,932 (21,024) 64,909
----------------------------------------------------------------------------------------------------
Net income $ 79,490 $ 25,749 $ 29,737 $ 18,256 $ 153,232
----------------------------------------------------------------------------------------------------
Average assets $ 12,920,566 $7,974,694 $2,505,168 $(1,790,609) $21,609,819
Average invested capital 1,036,980 216,810 191,830 500,722 1,946,342
Performance measurements:
Return on assets 0.62% 0.32% 1.19% - 0.71%
Return on invested capital 7.67 11.88 15.50 - 7.87
Efficiency ratio 51.14 73.08 74.39 - 59.27
Reconciliation to Consolidated Financial Statements
Other Other
Net Interest Operating Operating Net Average
Revenue Revenue Expense Income Assets
---------------------------------------------------------------------
Total reportable segments $513,701 $ 412,203 $620,549 $134,976 $23,400,427
Unallocated items:
Tax-equivalent adjustment 8,228 - - 8,228 -
Funds management and other
(including eliminations),net 124,933 1,137 41,855 10,028 (1,790,608)
--------------------------------------------------------------------------------------------------
BOK Financial consolidated $646,862 $ 413,340 $662,404 $153,232 $21,609,819
--------------------------------------------------------------------------------------------------
99
Funds
Commercial Consumer Wealth Management
(In Thousands) Banking Banking Management and Other Total
---------------------------------------------------------------------
Year ended December 31, 2007
Net interest revenue/(expense)
from external sources $ 526,225 $ (7,807) $ 8,562 $ 17,505 $ 544,485
Net interest revenue/(expense)
from internal sources (200,390) 163,028 37,627 (265) -
----------------------------------------------------------------------------------------------------
Total net interest revenue 325,835 155,221 46,189 17,240 544,485
Other operating revenue 131,081 144,585 130,681 (1,653) 404,694
Operating expense 201,876 193,599 131,205 43,265 569,945
Provision for credit losses 9,747 9,233 1,513 14,228 34,721
Cavanal Hill Funds settlement - - 2,232 - 2,232
Increase (decrease) in fair
value of mortgage servicing rights - (2,893) - - (2,893)
Gains (losses) on financial
instruments, net 1,075 (486) 13 (6,648) (6,046)
Gains (losses) on repossessed
assets, net 10 107 - (34) 83
----------------------------------------------------------------------------------------------------
Income before taxes 246,378 93,702 41,933 (48,588) 333,425
Federal and state income tax 95,841 36,450 16,312 (32,842) 115,761
----------------------------------------------------------------------------------------------------
Net income $ 150,537 $ 57,252 $ 25,621 $ (15,746) $ 217,664
----------------------------------------------------------------------------------------------------
Average assets $ 11,274,301 $7,514,732 $2,020,472 $(1,783,737) $19,025,768
Average invested capital 1,059,730 194,130 182,370 376,233 1,812,463
Performance measurements:
Return on assets 1.34% 0.76% 1.27% - 1.14%
Return on invested capital 14.21 29.49 14.05 - 12.01
Efficiency ratio 44.18 64.57 74.18 - 60.05
Reconciliation to Consolidated Financial Statements
Other Other
Net Interest Operating Operating Net Average
Revenue Revenue Expense Income Assets
---------------------------------------------------------------------
Total reportable segments $527,245 $ 406,347 $531,688 $233,410 $20,809,505
Unallocated items:
Tax-equivalent adjustment 9,120 - - 9,120 -
Funds management and other
(including eliminations), net 8,120 (1,653) 43,299 (24,866) (1,783,737)
--------------------------------------------------------------------------------------------------
BOK Financial consolidated $544,485 $ 404,694 $574,987 $217,664 $19,025,768
--------------------------------------------------------------------------------------------------
100
Funds
Commercial Consumer Wealth Management
(In Thousands) Banking Banking Management and Other Total
---------------------------------------------------------------------
Year ended December 31, 2006
Net interest revenue/(expense)
from external sources $ 456,497 $ (5,015) $ 16,731 $ 18,475 $ 486,688
Net interest revenue/(expense)
from internal sources (162,537) 151,532 29,180 (18,175) -
----------------------------------------------------------------------------------------------------
Total net interest revenue 293,960 146,517 45,911 300 486,688
Other operating revenue 119,891 134,261 114,044 4,999 373,195
Operating expense 184,385 176,649 114,548 39,962 515,544
Provision for credit losses 2,988 5,075 242 10,097 18,402
Increase (decrease) in fair
value of mortgage servicing rights - 3,009 - - 3,009
Gains (losses) on financial
instruments, net 10 (1,102) 5 (485) (1,572)
Gains (losses) on repossessed
assets, net 255 72 - (99) 228
----------------------------------------------------------------------------------------------------
Income before taxes 226,743 101,033 45,170 (45,344) 327,602
Federal and state income tax 88,203 39,302 17,571 (30,451) 114,625
----------------------------------------------------------------------------------------------------
Net income $ 138,540 $ 61,731 $ 27,599 $ (14,893) $ 212,977
----------------------------------------------------------------------------------------------------
Average assets $ 9,993,775 $6,966,156 $1,710,193 $(1,862,533) $16,807,591
Average invested capital 997,210 192,310 163,340 256,499 1,609,359
Performance measurements:
Return on assets 1.39% 0.89% 1.61% - 1.27%
Return on invested capital 13.89 32.10 16.90 - 13.23
Efficiency ratio 44.55 62.91 71.61 - 59.96
Reconciliation to Consolidated Financial Statements
Other Other
Net Interest Operating Operating Net Average
Revenue Revenue Expense Income Assets
---------------------------------------------------------------------
Total reportable segments $486,388 $ 368,196 $472,246 $227,870 $18,670,124
Unallocated items:
Tax-equivalent adjustment 6,963 - - 6,963 -
Funds management and other
(including eliminations), net (6,663) 4,999 40,061 (21,856) (1,862,533)
--------------------------------------------------------------------------------------------------
BOK Financial consolidated $486,688 $ 373,195 $512,307 $212,977 $16,807,591
--------------------------------------------------------------------------------------------------
101
(19) Fair Value of Financial Instruments
The following table presents the carrying values and estimated fair values of
financial instruments as of December 31, 2008 and 2007 (dollars in thousands):
Range of Average Estimated
Carrying Contractual Repricing Discount Fair
Value Yields (in years) Rate Value
---------------------------------------------------------------------
2008:
Cash and cash equivalents $ 694,942 $ 694,942
Securities 7,132,607 7,136,032
Residential mortgage - held for sale 129,246 - - - 129,246
Loans:
Commercial 7,411,603 0.25 -18.00% 0.35 0.44 - 3.81% 7,344,753
Commercial real estate 2,701,248 1.75 -18.00 1.49 1.00 - 3.81 2,703,146
Residential mortgage 1,752,574 5.00 -10.45 7.10 1.76 - 3.53 2,086,901
Consumer 1,010,581 1.50 -21.00 1.22 3.81 1,063,566
---------------------------------------------------------------------------------------------------------------------
Total loans 12,876,006 13,198,366
Reserve for loan losses (233,236) -
---------------------------------------------------------------------------------------------------------------------
Net loans 12,642,770 13,408,500
Derivative instruments with positive
fair value 452,604 452,604
Deposits with no stated maturity 9,799,364 9,799,364
Time deposits 5,183,243 0.15 - 9.74 1.89 0.13 - 1.66 5,238,740
Other borrowings 4,547,453 1.85 - 4.52 0.54 0.09 - 6.56 4,085,035
Subordinated debentures 398,407 5.59 4.57 1.41 466,280
Derivative instruments with negative
fair value 667,034 667,034
---------------------------------------------------------------------------------------------------------------------
2007:
Cash and cash equivalents $ 890,413 $ 890,413
Securities 6,098,914 6,099,753
Residential mortgage - held for sale 76,677 - - - 76,677
Loans:
Commercial 6,737,505 1.45 -18.00% 0.43 4.57 - 7.25% 6,958,062
Commercial real estate 2,750,472 5.63 -18.00 1.42 7.25 2,708,722
Residential mortgage 1,531,296 3.81 -12.75 7.00 3.98 1,600,507
Consumer 921,297 4.50 -21.00 1.95 7.25 926,967
---------------------------------------------------------------------------------------------------------------------
Total loans 11,940,570 12,194,258
Reserve for loan losses (126,677) -
---------------------------------------------------------------------------------------------------------------------
Net loans 11,813,893 12,301,143
Derivative instruments with positive
fair value 502,446 502,446
Deposits with no stated maturity 9,128,653 9,128,653
Time deposits 4,330,638 1.84 - 10.00 1.10 3.37 - 5.20 4,431,489
Other borrowings 4,252,695 2.45 - 6.15 0.81 3.41 - 4.95 3,851,863
Subordinated debentures 398,273 5.47 5.52 3.41 368,638
Derivative instruments with negative
fair value 513,840 513,840
---------------------------------------------------------------------------------------------------------------------
The preceding table presents the estimated fair values of financial instruments.
Fair value is the estimated price that would be received to sell the financial
assets or paid to transfer the financial liabilities in an orderly transaction
between market participants. Because no market exists for certain of these
financial instruments and management does not intend to sell these financial
instruments, BOK Financial does not know whether the fair values shown above
represent values at which the respective financial instruments could be sold
individually or in the aggregate.
The following methods and assumptions were used in estimating the fair value of
these financial instruments:
Cash and Cash Equivalents
The book value reported in the consolidated balance sheet for cash and
short-term instruments approximates those assets' fair values.
102
Securities
The fair values of securities are based on quoted market prices or dealer
quotes, when available. If quotes are not available, fair values are based on
quoted prices of comparable instruments.
Derivatives
All derivative instruments are carried on the balance sheet at fair value. Fair
values for exchange-traded contracts are based on quoted prices. Fair values for
over-the-counter interest rate, commodity and foreign exchange contracts are
based on valuations provided either by third-party dealers in the contracts,
quotes provided by independent pricing services, or a third-party provided
pricing model.
Loans
The fair value of loans, excluding loans held for sale, are based on discounted
cash flow analyses using interest rates currently being offered for loans with
similar remaining terms to maturity and credit risk, adjusted for the impact of
interest rate floors and ceilings. The fair values of loans were estimated to
approximate their carrying values less loan loss reserves allocated to these
loans of $210 million and $107 million at December 31, 2008 and 2007,
respectively.
The fair values of residential mortgage loans held for sale are based upon
quoted market prices of such loans sold in securitization transactions,
including related unfunded loan commitments and hedging transactions.
Deposits
The fair values of time deposits are based on discounted cash flow analyses
using interest rates currently being offered on similar transactions. Statement
of Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," ("FAS 107") defines the estimated fair value of deposits
with no stated maturity, which includes demand deposits, transaction deposits,
money market deposits and savings accounts, to equal the amount payable on
demand. Although market premiums paid reflect an additional value for these low
cost deposits, FAS 107 prohibits adjusting fair value for the expected benefit
of these deposits. Accordingly, the positive effect of such deposits is not
included in this table.
Other Borrowings and Subordinated Debentures
The fair values of these instruments are based upon discounted cash flow
analyses using interest rates currently being offered on similar instruments.
Off-Balance Sheet Instruments
The fair values of commercial loan commitments are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements. The fair values of these off-balance sheet instruments
were not significant at December 31, 2008 and 2007.
Fair Value of Financial Instruments
Fair value of financial assets and liabilities that are measured on a recurring
basis are as follows as of December 31, 2008 (in thousands):
Quoted Prices
in Active Significant Significant
Markets for Other Unobservable
Total Identical Observable Inputs
Instruments Inputs
----------- ---------------- --------------- ----------------
Assets:
Trading securities $99,601 $ 793 $ 98,808
Available for sale securities 6,391,451 30,420 6,361,031
Mortgage trading securities 399,211 399,211
Residential mortgage loans held for sale 129,246 129,246
Mortgage servicing rights 42,752 42,752(1)
Derivative contracts 452,604 452,604
Liabilities:
Certificates of deposit 632,754 632,754
Derivative contracts 667,034 667,034
(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 8, Mortgage Banking
Activities.
103
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.
Assets and liabilities measured at fair value on a nonrecurring basis generally
include certain impaired loans, real estate and other repossessed assets and
goodwill. The allowance for loan losses related to collateral dependent impaired
loans within the scope of FAS 114 is based on the fair value of the collateral.
Real estate and other repossessed assets are carried at the lower of cost, which
is determined by fair value at the date of foreclosure, or current fair value.
The frequency of nonrecurring fair value measurements of impaired loans and real
estate and other repossessed assets is governed by federal banking regulations.
Fair value measurements are generally based on appraised values which require
significant Level 2 other observable inputs.
Intangible assets, which consist primarily of goodwill, core deposit intangible
assets and other acquired intangibles, for each business unit are evaluated for
impairment annually as of October 1st or more frequently if conditions indicate
that impairment may have occurred. The evaluation of possible impairment of
intangible assets involves significant judgment based upon short-term and
long-term projections of future performance.
The fair value of each of our business units is estimated by the discounted
future earnings method. Income growth is projected over a seven-year period for
each unit and a terminal value is computed. The projected income stream is
converted to current fair value by using a discount rate that reflects a rate of
return required by a willing buyer. Assumptions used to value our business units
are based on growth rates, volatility, discount rate and market risk premium
inherent in our current stock price. These assumptions are considered Level 3
inputs as defined by FAS 157 and represent our best estimate of assumptions that
market participants would use to determine fair value of the respective business
units. The most critical assumptions in our evaluation were a 7.00% expected
long-term growth rate, a 0.66% volatility factor for BOK Financial common stock,
a 9.36% discount rate, and an 11.04% market risk premium.
(20) Parent Company Only Financial Statements
Summarized financial information for BOK Financial - Parent Company Only
follows:
Balance Sheets
(In Thousands) December 31,
----------------------------
2008 2007
----------------------------
Assets
Cash and cash equivalents $ 20,324 $ 24,257
Securities - available for sale 9,900 13,361
Investment in subsidiaries 1,865,514 1,949,099
Other assets 1,623 1,503
------------------------------------------------------------------------------------------------
Total assets $1,897,361 $1,988,220
------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Other borrowings $ 50,000 $ 50,000
Other liabilities 1,104 2,836
------------------------------------------------------------------------------------------------
Total liabilities 51,104 52,836
------------------------------------------------------------------------------------------------
Common stock 4 4
Capital surplus 743,411 722,088
Retained earnings 1,427,057 1,332,954
Treasury stock (101,329) (88,428)
Accumulated other comprehensive loss (222,886) (31,234)
------------------------------------------------------------------------------------------------
Total shareholders' equity 1,846,257 1,935,384
------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,897,361 $1,988,220
------------------------------------------------------------------------------------------------
104
Statements of Earnings
(In Thousands)
2008 2007 2006
-------------------------------------------
Dividends, interest and fees received from subsidiaries $ 76,587 $254,256 $ 80,855
Other operating revenue 359 482 476
------------------------------------------------------------------------------------------------
Total revenue 76,946 254,738 81,331
------------------------------------------------------------------------------------------------
Interest expense 2,131 715 -
Professional fees and services 842 601 506
Other operating expense 290 220 191
------------------------------------------------------------------------------------------------
Total expense 3,263 1,536 697
------------------------------------------------------------------------------------------------
Income before taxes and equity in undistributed
income of subsidiaries 73,683 253,202 80,634
Federal and state income tax expense (credit) (1,505) 497 (28)
------------------------------------------------------------------------------------------------
Income before equity in undistributed income of
subsidiaries 75,188 252,705 80,662
Equity in undistributed income of subsidiaries 78,044 (35,041) 132,315
------------------------------------------------------------------------------------------------
Net income $153,232 $217,664 $212,977
------------------------------------------------------------------------------------------------
Statements of Cash Flows
(In Thousands)
2008 2007 2006
----------------------------------------
Cash flows from operating activities:
Net income $153,232 $217,664 $212,977
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries (78,044) 35,041 (132,315)
Tax benefit on exercise of stock options 895 3,460 4,014
Change in other assets (3,930) (3,090) (22,949)
Change in other liabilities (402) (585) 815
------------------------------------------------------------------------------------------------
Net cash provided by operating activities 71,751 252,490 62,542
------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in subsidiaries (16,244) (240,718) (20,865)
------------------------------------------------------------------------------------------------
Net cash used by investing activities (16,244) (240,718) (20,865)
------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in other borrowings 50,000 50,000 -
Pay down of other borrowings (50,000) - -
Issuance of common and treasury stock, net 7,743 13,747 12,647
Cash dividends (59,191) (50,416) (36,788)
Repurchase of common stock (7,992) (17,353) (12,103)
------------------------------------------------------------------------------------------------
Net cash used by financing activities (59,440) (4,022) (36,244)
------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (3,933) 7,750 5,433
Cash and cash equivalents at beginning of period 24,257 16,507 11,074
------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 20,324 $ 24,257 $ 16,507
------------------------------------------------------------------------------------------------
Cash paid for interest $ 2,282 $ 560 $ 10
------------------------------------------------------------------------------------------------
105
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106
Annual Financial Summary - Unaudited
Consolidated Daily Average Balances,
Average Yields and Rates
(Dollars in Thousands) 2008
-----------------------------------------------
Average Revenue/ Yield/
Balance Expense(1) Rate
-----------------------------------------------
Assets
Taxable securities(3) $ 6,087,167 $313,361 5.10%
Tax-exempt securities(3) 258,552 16,653 6.48
------------------------------------------------------------------------------------------------------------------------------
Total securities(3) 6,345,719 330,014 5.16
------------------------------------------------------------------------------------------------------------------------------
Trading securities 73,563 4,935 6.71
Funds sold and resell agreements 70,287 1,577 2.24
Loans(2) 12,593,683 733,347 5.82
Less reserve for loan losses 168,042 - -
------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 12,425,641 733,347 5.90
------------------------------------------------------------------------------------------------------------------------------
Total earning assets(3) 18,915,210 1,069,873 5.64
------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,694,609
------------------------------------------------------------------------------------------------------------------------------
Total assets $21,609,819
------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Transaction deposits $ 6,342,421 $ 121,403 1.91%
Savings deposits 158,096 676 0.43
Time deposits 4,552,931 166,845 3.66
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 11,053,448 288,924 2.61
------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase agreements 3,087,012 61,371 1.99
Other borrowings 1,745,938 42,226 2.42
Subordinated debentures 398,333 22,262 5.59
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 16,284,731 414,783 2.55
------------------------------------------------------------------------------------------------------------------------------
Demand deposits 2,632,719
Other liabilities 746,027
Shareholders' equity 1,946,342
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $21,609,819
------------------------------------------------------------------------------------------------------------------------------
Tax-equivalent Net Interest Revenue(3) $ 655,090 3.09%
Tax-equivalent Net Interest Revenue to Earning Assets(3) 3.45
Less tax-equivalent adjustment(1) 8,228
------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 646,862
Provision for credit losses 202,593
Other operating revenue 436,276
Other operating expense 662,404
------------------------------------------------------------------------------------------------------------------------------
Income before taxes 218,141
Federal and state income tax 64,909
------------------------------------------------------------------------------------------------------------------------------
Net Income $153,232
------------------------------------------------------------------------------------------------------------------------------
(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. See Note 1 of Notes to
the Consolidated Financial Statements for a description of income
recognition policy.
(3) Yield calculations exclude security trades that have been recorded on trade
date with no corresponding interest income.
107
2007 2006
------------------------------------------------------------------------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
----------------------------------------------- ------------------------------------------------
$ 5,166,218 $248,972 4.85% $ 4,770,959 $222,531 4.67%
341,913 21,293 6.39 290,356 15,572 5.44
------------------------------------------------------------------------------------------------------
5,508,131 270,265 4.94 5,061,315 238,103 4.71
------------------------------------------------------------------------------------------------------
29,043 1,948 6.71 21,213 1,044 4.92
77,890 4,480 5.75 36,196 1,841 5.09
11,440,045 893,164 7.81 9,706,866 752,404 7.75
120,086 - - 106,689 - -
------------------------------------------------------------------------------------------------------
11,319,959 893,164 7.89 9,600,177 752,404 7.84
------------------------------------------------------------------------------------------------------
16,935,023 1,169,857 6.92 14,718,901 993,392 6.75
------------------------------------------------------------------------------------------------------
2,090,745 2,088,690
------------------------------------------------------------------------------------------------------
$19,025,768 $16,807,591
------------------------------------------------------------------------------------------------------
$ 5,508,831 $ 194,617 3.53% $ 4,595,993 $148,986 3.24%
165,729 1,499 0.90 148,656 1,408 0.95
4,568,738 216,630 4.74 4,279,610 186,514 4.36
------------------------------------------------------------------------------------------------------
10,243,298 412,746 4.03 9,024,259 336,908 3.73
------------------------------------------------------------------------------------------------------
2,758,306 134,347 4.87 2,145,648 105,483 4.92
838,708 44,258 5.28 725,329 37,070 5.11
395,050 24,901 6.30 294,962 20,280 6.88
------------------------------------------------------------------------------------------------------
14,235,362 616,252 4.33 12,190,198 499,741 4.10
------------------------------------------------------------------------------------------------------
2,368,897 2,355,538
609,046 652,496
1,812,463 1,609,359
------------------------------------------------------------------------------------------------------
$19,025,768 $16,807,591
------------------------------------------------------------------------------------------------------
$ 553,605 2.59% $ 493,651 2.65%
3.28 3.36
9,120 6,963
------------------------------------------------------------------------------------------------------
544,485 486,688
34,721 18,402
398,648 371,623
574,987 512,307
------------------------------------------------------------------------------------------------------
333,425 327,602
115,761 114,625
------------------------------------------------------------------------------------------------------
$217,664 $212,977
------------------------------------------------------------------------------------------------------
108
Quarterly Financial Summary - Unaudited
Consolidated Daily Average Balances,
Average Yields and Rates
(Dollars in Thousands Except Per Share Data)
Three Months Ended
-------------------------------------------------------------------------
December 31, 2008 September 30, 2008
---------------------------------- -------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
---------------------------------- -------------------------------------
Assets
Taxable securities(3) $ 6,634,035 $87,317 5.12% $ 6,056,909 $ 78,030 5.09%
Tax-exempt securities(3) 255,693 4,133 6.43 254,803 4,166 6.64
-------------------------------------------------------------------------------------- -------------------------------------
Total securities(3) 6,889,728 91,450 5.17 6,311,712 82,196 5.15
-------------------------------------------------------------------------------------- -------------------------------------
Trading securities 78,840 1,298 6.55 66,419 937 5.61
Funds sold and resell agreements 48,246 92 0.76 79,862 290 1.44
Loans(2) 12,947,880 171,383 5.27 12,713,356 181,862 5.69
Less reserve for loan losses 209,319 - - 182,844 - -
-------------------------------------------------------------------------------------- -------------------------------------
Loans, net of reserve 12,738,561 171,383 5.35 12,530,512 181,862 5.77
-------------------------------------------------------------------------------------- -------------------------------------
Total earning assets(3) 19,755,375 264,223 5.28 18,988,505 265,285 5.55
-------------------------------------------------------------------------------------- -------------------------------------
Cash and other assets 2,516,276 2,832,658
-------------------------------------------------------------------------------------- -------------------------------------
Total assets $22,271,651 $21,821,163
-------------------------------------------------------------------------------------- -------------------------------------
Liabilities and Shareholders' Equity
Transaction deposits $ 6,116,465 $23,161 1.51% $ 6,565,935 $ 28,312 1.72%
Savings deposits 155,784 143 0.37 159,856 147 0.37
Time deposits 5,109,303 42,090 3.28 4,792,366 40,810 3.39
-------------------------------------------------------------------------------------- -------------------------------------
-------------------------------------------------------------------------------------- -------------------------------------
Total interest-bearing deposits 11,381,552 65,394 2.29 11,518,157 69,269 2.39
-------------------------------------------------------------------------------------- -------------------------------------
Funds purchased and repurchase agreements 3,095,054 7,289 0.94 3,061,186 15,253 1.98
Other borrowings 1,986,857 7,541 1.51 1,390,233 8,935 2.56
Subordinated debentures 398,392 5,489 5.48 398,361 5,553 5.55
-------------------------------------------------------------------------------------- -------------------------------------
Total interest-bearing liabilities 16,861,855 85,713 2.02 16,367,937 99,010 2.41
-------------------------------------------------------------------------------------- -------------------------------------
Demand deposits 2,712,384 2,739,209
Other liabilities 807,740 787,420
Shareholders' equity 1,889,672 1,926,597
-------------------------------------------------------------------------------------- -------------------------------------
Total liabilities and shareholders' equity $22,271,651 $ 21,821,163
-------------------------------------------------------------------------------------- -------------------------------------
Tax-equivalent Net Interest Revenue(3) $178,510 3.26% $166,275 3.14%
Tax-equivalent Net Interest Revenue to Earning Assets(3) 3.57 3.48
Less tax-equivalent adjustment(1) 2,063 1,927
-------------------------------------------------------------------------------------- -------------------------------------
Net Interest Revenue 176,447 164,348
Provision for credit losses 73,001 52,711
Other operating revenue 127,802 132,296
Other operating expense 185,442 164,290
-------------------------------------------------------------------------------------- -------------------------------------
Income before taxes 45,806 79,643
Federal and state income tax 10,363 22,958
-------------------------------------------------------------------------------------- -------------------------------------
Net Income $35,443 $ 56,685
-------------------------------------------------------------------------------------- -------------------------------------
Earnings Per Average Common Share Equivalent:
Net income:
Basic $0.53 $0.84
-------------------------------------------------------------------------------------- -------------------------------------
Diluted $0.53 $0.84
-------------------------------------------------------------------------------------- -------------------------------------
(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. See Note 1 of Notes to
the Consolidated Financial Statements for a description of income
recognition policy.
(3) Yield calculations exclude security trades that have been recorded on trade
date with no corresponding interest income.
109
Three Months Ended
--------------------------------------------------------------------------------------------------------------
June 30, 2008 March 31, 2008 December 31, 2007
---------------------------------- ----------------------------------- -----------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate Balance Expense(1) Rate
---------------------------------- ----------------------------------- -----------------------------------
$ 6,026,769$ 75,959 5.08% $ 5,624,430 $ 72,055 5.11% $ 5,633,173 $68,670 4.86%
259,410 4,165 6.46 264,398 4,189 6.38 328,900 5,990 7.19
---------------------------------- ----------------------------------- -----------------------------------
6,286,179 80,124 5.14 5,888,828 76,244 5.17 5,962,073 74,660 4.99
---------------------------------- ----------------------------------- -----------------------------------
74,058 1,267 6.88 74,957 1,433 7.69 29,303 489 6.62
72,444 355 1.97 80,735 840 4.18 86,948 1,303 5.95
12,527,011 180,424 5.79 12,181,279 199,678 6.59 11,806,242 223,146 7.50
145,524 - - 131,709 - - 125,996 - -
---------------------------------- ----------------------------------- -----------------------------------
12,381,487 180,424 5.86 12,049,570 199,678 6.66 11,680,246 223,146 7.58
---------------------------------- ----------------------------------- -----------------------------------
18,814,168 262,170 5.61 18,094,090 278,195 6.17 17,758,570 299,598 6.70
---------------------------------- ----------------------------------- -----------------------------------
2,794,132 2,402,963 2,224,045
---------------------------------- ----------------------------------- -----------------------------------
$21,608,300 $ 20,497,053 $19,982,615
---------------------------------- ----------------------------------- -----------------------------------
$ 6,420,291$ 27,755 1.74% $ 6,267,021 $ 42,175 2.71% $ 5,861,544 $49,358 3.34%
159,798 148 0.37 156,953 238 0.61 160,170 348 0.86
4,076,167 38,211 3.77 4,225,141 45,734 4.35 4,544,802 53,613 4.68
---------------------------------- ----------------------------------- -----------------------------------
---------------------------------- ----------------------------------- -----------------------------------
10,656,256 66,114 2.50 10,649,115 88,147 3.33 10,566,516 103,319 3.88
---------------------------------- ----------------------------------- -----------------------------------
3,126,110 15,180 1.95 3,061,783 23,649 3.11 3,158,153 35,169 4.42
2,267,076 14,032 2.49 1,340,846 11,718 3.51 936,353 11,611 4.92
398,336 5,821 5.88 398,241 5,399 5.45 398,109 5,708 5.69
---------------------------------- ----------------------------------- -----------------------------------
16,447,778 101,147 2.47 15,449,985 128,913 3.36 15,059,131 155,807 4.10
---------------------------------- ----------------------------------- -----------------------------------
2,634,038 2,443,201 2,448,011
541,693 618,721 580,574
1,984,791 1,985,146 1,894,899
---------------------------------- ----------------------------------- -----------------------------------
$ 21,608,300 $ 20,497,053 $19,982,615
---------------------------------- ----------------------------------- -----------------------------------
$161,023 3.14% $149,282 2.81% $143,791 2.60%
3.44 3.31 3.22
2,084 2,154 2,502
---------------------------------- ----------------------------------- -----------------------------------
158,939 147,128 141,289
59,310 17,571 13,200
55,616 120,562 107,316
159,268 153,404 157,727
---------------------------------- ----------------------------------- -----------------------------------
(4,023) 96,715 77,678
(2,862) 34,450 26,518
---------------------------------- ----------------------------------- -----------------------------------
$ (1,161) $ 62,265 $51,160
---------------------------------- ----------------------------------- -----------------------------------
$(0.02) $0.93 $0.76
---------------------------------- ----------------------------------- -----------------------------------
$(0.02) $0.92 $0.76
---------------------------------- ----------------------------------- -----------------------------------
110
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report and pursuant to Rule 13a-15
of the Securities Exchange Act of 1934 (the "Exchange Act"), the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness and design of the Company's
disclosure controls and procedures (as that term is defined in Rules 13a-15(e)
and 15d-15(e) of the Exchange Act). Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded, as of the end of
the period covered by this report, that the Company's disclosure controls and
procedures were effective in recording, processing, summarizing and reporting
information required to be disclosed by the Company, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
In addition and as of the end of the period covered by this report, there have
been no changes in internal control over financial reporting (as defined in Rule
13a-15(f) and 15d-15(f), as amended, of the Exchange Act) during the Company's
fourth fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the internal control over financial reporting.
The Report of Management on Financial Statements and Management's Report on
Internal Control over Financial Reporting appear within Item 8, "Financial
Statements and Supplementary Data." The independent registered public accounting
firm, Ernst & Young LLP, has audited the financial statements included in Item 8
and has issued an audit report on the Company's internal control over financial
reporting, which appears therein.
ITEM 9B. OTHER INFORMATION
None.
111
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information set forth under the headings "Election of Directors," "Executive
Officers, "Insider Reporting," "Director Nominations," and "Risk Oversight and
Audit Committee" in BOK Financial's 2009 Annual Proxy Statement is incorporated
herein by reference.
The Company has a Code of Ethics which is applicable to all Directors, officers
and employees of the Company, including the Chief Executive Officer and the
Chief Financial Officer, the principal executive officer and principal financial
and accounting officer, respectively. A copy of the Code of Ethics will be
provided without charge to any person who requests it by writing to the
Company's headquarters at Bank of Oklahoma Tower, P.O. Box 2300, Tulsa, Oklahoma
74192 or telephoning the Chief Auditor at (918) 588-6000. The Company will also
make available amendments to or waivers from its Code of Ethics applicable to
Directors or executive officers, including the Chief Executive Officer and the
Chief Financial Officer, in accordance with all applicable laws and regulations.
There are no material changes to the procedures by which security holders may
recommend nominees to the Company's board of directors since the Company's 2008
Annual Proxy Statement to Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the heading "Compensation Discussion and
Analysis," "Compensation Committee Interlocks and Insider Participation,"
Compensation Committee Report," "Executive Compensation Tables," and "Director
Compensation" in BOK Financial's 2009 Annual Proxy Statement is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information set forth under the headings "Security Ownership of Certain
Beneficial Owners and Management" and "Election of Directors" in BOK Financial's
2009 Annual Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information regarding related parties is set forth in Note 14 of the Company's
Notes to Consolidated Financial Statements, which appears elsewhere herein.
Additionally, the information set forth under the heading "Certain
Transactions," "Director Independence" and "Related Party Transaction Review and
Approval Process" in BOK Financial's 2009 Annual Proxy Statement is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the heading "Principal Accountant Fees and
Services" in BOK Financial's 2009 Annual Proxy Statement is incorporated herein
by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
The following financial statements of BOK Financial Corporation are filed as
part of this Form 10-K in Item 8:
Consolidated Statements of Earnings for the years ended December 31, 2008, 2007
and 2006
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Cash Flows for the years ended December 31, 2008,
2007 and 2006
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2008, 2007, and 2006
Notes to Consolidated Financial Statements
Annual Financial Summary - Unaudited
Quarterly Financial Summary - Unaudited
Reports of Independent Registered Public Accounting Firm
112
(a) (2) Financial Statement Schedules
The schedules to the consolidated financial statements required by Regulation
S-X are not required under the related instructions or are inapplicable and are
therefore omitted.
(a) (3) Exhibits
Exhibit Number Description of Exhibit
3.0 The Articles of Incorporation of BOK Financial, incorporated by reference
to (i) Amended and Restated Certificate of Incorporation of BOK Financial
filed with the Oklahoma Secretary of State on May 28, 1991, filed as
Exhibit 3.0 to S-1 Registration Statement No. 33-90450, and (ii) Amendment
attached as Exhibit A to Information Statement and Prospectus Supplement
filed November 20, 1991.
3.1 Bylaws of BOK Financial, incorporated by reference to Exhibit 3.1 of S-1
Registration Statement No. 33-90450.
3.1(a) Bylaws of BOK Financial, as amended and restated as of October 30, 2007,
incorporated by reference to Exhibit 3.1 of Form 8-K filed on November 5,
2007.
4.0 The rights of the holders of the Common Stock and Preferred Stock of BOK
Financial are set forth in its Certificate of Incorporation.
10.0 Purchase and Sale Agreement dated October 25, 1990, among BOK Financial,
Kaiser, and the FDIC, incorporated by reference to Exhibit 2.0 of S-1
Registration Statement No. 33-90450.
10.1 Amendment to Purchase and Sale Agreement effective March 29, 1991, among
BOK Financial, Kaiser, and the FDIC, incorporated by reference to Exhibit
2.2 of S-1 Registration Statement No. 33-90450
10.2 Letter agreement dated April 12, 1991, among BOK Financial, Kaiser, and the
FDIC, incorporated by reference to Exhibit 2.3 of S-1 Registration
Statement No. 33-90450.
10.3 Second Amendment to Purchase and Sale Agreement effective April 15, 1991,
among BOK Financial, Kaiser, and the FDIC, incorporated by reference to
Exhibit 2.4 of S-1 Registration Statement No. 33-90450.
10.4 Employment and Compensation Agreements.
10.4(a) Employment Agreement between BOK Financial and Stanley A. Lybarger,
incorporated by reference to Exhibit 10.4(a) of Form 10-K for the fiscal
year ended December 31, 1991.
10.4(b) Amendment to 1991 Employment Agreement between BOK Financial and Stanley
A. Lybarger, incorporated by reference to Exhibit 10.4(b) of Form 10-K for
the fiscal year ended December 31, 2001.
10.4(c) Amended and Restated Deferred Compensation Agreement (Amended as of
September 1, 2003) between Stanley A. Lybarger and BOK Financial
Corporation, incorporated by reference to Exhibit 10.4 (c) of Form 10-Q for
the quarter ended September 30, 2003.
10.4 (d) 409A Deferred Compensation Agreement between Stanley A. Lybarger and
BOK Financial Corporation dated December 31, 2004, incorporated by
reference to Exhibit 10.4 (d) of Form 8-K filed on January 5, 2005.
10.4 (e) Guaranty by George B. Kaiser in favor of Stanley A. Lybarger dated
March 7, 2005, incorporated by reference to Exhibit 10.4 (e) of Form 10-K
for the fiscal year ended December 31, 2004.
10.4 (f) Third Amendment to 1991 Employment Agreement between Stanley A.
Lybarger and Bank of Oklahoma, National Association, incorporated by
reference to Exhibit 10.4 (f) of Form 10-K for the fiscal year ended
December 31, 2007.
10.4 (g) Amended and Restated Employment Agreement dated December 26, 2008
between BOK Financial Corporation and Stanley A. Lybarger, incorporated by
reference to Exhibit 99 (a) of Form 8-K filed on December 26, 2008.
10.4.1(a) Employee Agreement between BOK Financial and V. Burns Hargis,
incorporated by reference to Exhibit 10.4.1(a) of Form 10-K for the fiscal
year ended December 31, 2002.
10.4.1(b) Amendment to Employee Agreement between BOK Financial and V. Burns
Hargis, incorporated by reference to Exhibit 10.4.1(b) of Form 10-K for the
fiscal year ended December 31, 2002.
113
10.4.2 Amended and Restated Deferred Compensation Agreement (Amended as of
December 1, 2003) between Steven G. Bradshaw and BOK Financial Corporation,
incorporated by reference to Exhibit 10.4.2 of Form 10-K for the fiscal
year ended December 31, 2003.
10.4.2 (a) 409A Deferred Compensation Agreement between Steven G. Bradshaw and
BOK Financial Corporation dated December 31, 2004, incorporated by
reference to Exhibit 10.4.2 (a) of Form 8-K filed on January 5, 2005.
10.4.2 (b) Employment Agreement between BOK Financial and Steven G. Bradshaw
dated September 29, 2003, incorporated by reference to Exhibit 10.4.2 (b)
of Form 10-K for the fiscal year ended December 31, 2004.
10.4.3 Amended and Restated Deferred Compensation Agreement (Amended as of
December 1, 2003) between William Jeffrey Pickryl and BOK Financial
Corporation, incorporated by reference to Exhibit 10.4.3 of Form 10-K for
the fiscal year ended December 31, 2003.
10.4.3 (a) 409A Deferred Compensation Agreement between William Jeffrey Pickryl
and BOK Financial Corporation dated December 31, 2004, incorporated by
reference to Exhibit 10.4.3 (a) of Form 8-K filed on January 5, 2005.
10.4.3 (b) Employment Agreement between BOK Financial and W. Jeffrey Pickryl
dated September 29, 2003, incorporated by reference to Exhibit 10.4.3 (b)
of Form 10-K for the fiscal year ended December 31, 2004.
10.4.3 (c) Amendment to Employment Agreement between BOK Financial and W.
Jeffrey Pickryl dated August 30, 2004, incorporated by reference to Exhibit
10.4.3 (c) of Form 10-K for the fiscal year ended December 31, 2004.
10.4.3 (d) Supplemental Executive Income Agreement dated December 20, 2005
between W. Jeffrey Pickryl and BOK Financial Corporation, incorporated by
reference to Exhibit 99 (a) of Form 8-K filed on December 22, 2005.
10.4.3 (e) Amendment to Employment Agreement dated November 27, 2007 between BOK
Financial Corporation and W. Jeffrey Pickryl, incorporated by reference to
Exhibit 99 (a) of Form 8-K filed on November 30, 2007.
10.4.4 Amended and Restated Employment Agreement (Amended as of June 14, 2002)
among First National Bank of Park Cities, BOK Financial Corporation and C.
Fred Ball, Jr., incorporated by reference to Exhibit 10.4.4 of Form 10-K
for the fiscal year ended December 31, 2003.
10.4.5 409A Deferred Compensation Agreement between Daniel H. Ellinor and BOK
Financial Corporation dated December 31, 2004, incorporated by reference to
Exhibit 10.4.5 of Form 8-K filed on January 5, 2005.
10.4.5 (a) Employment Agreement between BOK Financial and Dan H. Ellinor dated
August 29, 2003, incorporated by reference to Exhibit 10.4.5 (a) of Form
10-K for the fiscal year ended December 31, 2004.
10.4.5 (b) Deferred Compensation Agreement dated November 28, 2003 between
Daniel H. Ellinor and BOK Financial Corporation, incorporated by reference
to Exhibit 10.4.5 (b) of Form 10-K for the fiscal year ended December 31,
2004.
10.4.6 409A Deferred Compensation Agreement between Mark W. Funke and BOK
Financial Corporation dated December 31, 2004, incorporated by reference to
Exhibit 10.4.6 of Form 8-K filed on January 5, 2005.
10.4.6 (a) Amended and Restated Deferred Compensation Agreement (Amended as of
December 1, 2003) between Mark W. Funke and BOK Financial Corporation,
incorporated by reference to Exhibit 10.4.6 (a) of Form 10-K for the fiscal
year ended December 31, 2004.
10.4.7 409A Deferred Compensation Agreement between Steven E. Nell and BOK
Financial Corporation dated December 31, 2004, incorporated by reference to
Exhibit 10.4.7 of Form 8-K filed on January 5, 2005.
10.4.7 (a) Amended and Restated Deferred Compensation Agreement (Amended as of
December 1, 2003) between Steven E. Nell and BOK Financial Corporation,
incorporated by reference to Exhibit 10.4.7 (a) of Form 10-K for the fiscal
year ended December 31, 2004.
10.4.8 Employment Agreement dated August 1, 2005 between BOK Financial
Corporation and Donald T. Parker, incorporated by reference to Exhibit 99
(a) of Form 8-K filed on February 1, 2006.
114
10.5 Director indemnification agreement dated June 30, 1987, between BOk and
Kaiser, incorporated by reference to Exhibit 10.5 of S-1 Registration
Statement No. 33-90450. Substantially similar director indemnification
agreements were executed between BOk and the following:
Date of Agreement
James E. Barnes June 30, 1987
William H. Bell June 30, 1987
James S. Boese June 30, 1987
Dennis L. Brand June 30, 1987
Chester E. Cadieux June 30, 1987
William B. Cleary June 30, 1987
Glenn A. Cox June 30, 1987
William E. Durrett June 30, 1987
Leonard J. Eaton, Jr. June 30, 1987
William B. Fader December 5, 1990
Gregory J. Flanagan June 30, 1987
Jerry L. Goodman June 30, 1987
David A. Hentschel July 7, 1987
Philip N. Hughes July 8, 1987
Thomas J. Hughes, III June 30, 1987
William G. Kerr June 30, 1987
Philip C. Lauinger, Jr. June 30, 1987
Stanley A. Lybarger December 5, 1990
Patricia McGee Maino June 30, 1987
Robert L. Parker, Sr. June 30, 1987
James A. Robinson June 30, 1987
William P. Sweich June 30, 1987
10.6 Capitalization and Stock Purchase Agreement dated May 20, 1991, between BOK
Financial and Kaiser, incorporated by reference to Exhibit 10.6 of S-1
Registration Statement No. 33-90450.
10.7.3 BOK Financial Corporation 1994 Stock Option Plan, incorporated by
reference to Exhibit 4.0 of S-8 Registration Statement No. 33-79834.
10.7.4 BOK Financial Corporation 1994 Stock Option Plan (Typographical Error
Corrected January 16, 1995), incorporated by reference to Exhibit 10.7.4 of
Form 10-K for the fiscal year ended December 31, 1994.
10.7.5 BOK Financial Corporation 1997 Stock Option Plan, incorporated by
reference to Exhibit 4.0 of S-8 Registration Statement No. 333-32649.
10.7.6 BOK Financial Corporation 2000 Stock Option Plan, incorporated by
reference to Exhibit 4.0 of S-8 Registration Statement No. 333-93957.
10.7.7 BOK Financial Corporation 2001 Stock Option Plan, incorporated by
reference to Exhibit 4.0 of S-8 Registration Statement No. 333-62578.
10.7.8 BOK Financial Corporation Directors' Stock Compensation Plan,
incorporated by reference to Exhibit 4.0 of S-8 Registration Statement No.
33-79836.
10.7.9 Bank of Oklahoma Thrift Plan (Amended and Restated Effective as of
January 1, 1995), incorporated by reference to Exhibit 10.7.6 of Form 10-K
for the year ended December 31, 1994.
10.7.10 Trust Agreement for the Bank of Oklahoma Thrift Plan (December 30,
1994), incorporated by reference to Exhibit 10.7.7 of Form 10-K for the
year ended December 31, 1994.
10.7.11 BOK Financial Corporation 2003 Stock Option Plan, incorporated by
reference to Exhibit 4.0 of S-8 Registration Statement No. 333-106531.
10.7.12 BOK Financial Corporation 2003 Executive Incentive Plan, incorporated by
reference to Exhibit 4.0 of S-8 Registration Statement No. 333-106530.
10.7.13 10b5-1 Repurchase Plan between BOK Financial Corporation and BOSC, Inc.
dated May 27, 2008, incorporated by reference to Exhibit 10.1 of Form 8-K
filed May 27, 2008.
10.8 Lease Agreement between One Williams Center Co. and National Bank of Tulsa
(predecessor to BOk) dated June 18, 1974, incorporated by reference to
Exhibit 10.9 of S-1 Registration Statement No. 33-90450.
115
10.9 Lease Agreement between Security Capital Real Estate Fund and BOk dated
January 1, 1988, incorporated by reference to Exhibit 10.10 of S-1
Registration Statement No. 33-90450.
10.10 Asset Purchase Agreement (OREO and other assets) between BOk and
Phi-Lea-Em Corporation dated April 30, 1991, incorporated by reference to
Exhibit 10.11 of S-1 Registration Statement No. 33-90450.
10.11 Asset Purchase Agreement (Tanker Assets) between BOk and Green River
Exploration Company dated April 30, 1991, incorporated by reference to
Exhibit 10.12 of S-1 Registration Statement No. 33-90450.
10.12 Asset Purchase Agreement (Recovery Rights) between BOk and Kaiser dated
April 30, 1991, incorporated by reference to Exhibit 10.13 of S-1
Registration Statement No. 33-90450.
10.13 Purchase and Assumption Agreement dated August 7, 1992 among First
Gibraltar Bank, FSB, Fourth Financial Corporation and BOk, as amended,
incorporated by reference to Exhibit 10.14 of Form 10-K for the fiscal year
ended December 31, 1992.
10.13.1 Allocation Agreement dated August 7, 1992 between BOk and Fourth
Financial Corporation, incorporated by reference to Exhibit 10.14.1 of Form
10-K for the fiscal year ended December 31, 1992.
10.14 Merger Agreement among BOK Financial, BOKF Merger Corporation Number Two,
Brookside Bancshares, Inc., The Shareholders of Brookside Bancshares, Inc.
and Brookside State Bank dated December 22, 1992, as amended, incorporated
by reference to Exhibit 10.15 of Form 10-K for the fiscal year ended
December 31, 1992.
10.14.1 Agreement to Merge between BOk and Brookside State Bank dated January
27, 1993, incorporated by reference to Exhibit 10.15.1 of Form 10-K for the
fiscal year ended December 31, 1992.
10.15 Merger Agreement among BOK Financial, BOKF Merger Corporation Number
Three, Sand Springs Bancshares, Inc., The Shareholders of Sand Springs
Bancshares, Inc. and Sand Springs State Bank dated December 22, 1992, as
amended, incorporated by reference to Exhibit 10.16 of Form 10-K for the
fiscal year ended December 31, 1992.
10.15.1 Agreement to Merge between BOk and Sand Springs State Bank dated January
27, 1993, incorporated by reference to Exhibit 10.16.1 of Form 10-K for the
fiscal year ended December 31, 1992.
10.16 Partnership Agreement between Kaiser-Francis Oil Company and BOK Financial
dated December 1, 1992, incorporated by reference to Exhibit 10.16 of Form
10-K for the fiscal year ended December 31, 1993.
10.16.1 Amendment to Partnership Agreement between Kaiser-Francis Oil Company
and BOK Financial dated May 17, 1993, incorporated by reference to Exhibit
10.16.1 of Form 10-K for the fiscal year ended December 31, 1993.
10.17 Purchase and Assumption Agreement between BOk and FDIC, Receiver of
Heartland Federal Savings and Loan Association dated October 9, 1993,
incorporated by reference to Exhibit 10.17 of Form 10-K for the fiscal year
ended December 31, 1993.
10.18 Merger Agreement among BOk, Plaza National Bank and The Shareholders of
Plaza National Bank dated December 20, 1993, incorporated by reference to
Exhibit 10.18 of Form 10-K for the fiscal year ended December 31, 1993.
10.18.1 Amendment to Merger Agreement among BOk, Plaza National Bank and The
Shareholders of Plaza National Bank dated January 14, 1994, incorporated by
reference to Exhibit 10.18.1 of Form 10-K for the fiscal year ended
December 31, 1993.
10.19 Stock Purchase Agreement between Texas Commerce Bank, National Association
and BOk dated March 11, 1994, incorporated by reference to Exhibit 10.19 of
Form 10-K for the fiscal year ended December 31, 1993.
10.20 Merger Agreement among BOK Financial Corporation, BOKF Merger Corporation
Number Four, Citizens Holding Company and others dated May 11, 1994,
incorporated by reference to Exhibit 10.20 of Form 10-K for the fiscal year
ended December 31, 1994.
10.21 Stock Purchase and Merger Agreement among Northwest Bank of Enid, BOk and
The Shareholders of Northwest Bank of Enid effective as of May 16, 1994,
incorporated by reference to Exhibit 10.21 of Form 10-K for the fiscal year
ended December 31, 1994.
116
10.22 Agreement and Plan of Merger among BOK Financial Corporation, BOKF Merger
Corporation Number Five and Park Cities Bancshares, Inc. dated October 3,
1996, incorporated by reference to Exhibit C of S-4 Registration Statement
No. 333-16337.
10.23 Agreement and Plan of Merger among BOK Financial Corporation and First
TexCorp., Inc. dated December 18, 1996, incorporated by reference to
Exhibit 10.24 of S-4 Registration Statement No. 333-16337.
10.24 Purchase and Assumption Agreement between Bank of America National Trust
and Savings Association and BOK Financial Corporation dated July 27, 1998.
10.25 Merger Agreement among BOK Financial Corporation, BOKF Merger Corporation
No. Seven, First Bancshares of Muskogee, Inc., First National Bank and
Trust Company of Muskogee, and Certain Shareholders of First Bancshares of
Muskogee, Inc. dated December 30, 1998.
10.26 Merger Agreement among BOK Financial Corporation, BOKF Merger Corporation
Number Nine, and Chaparral Bancshares, Inc. dated February 19, 1999.
10.27 Merger Agreement among BOK Financial Corporation, Park Cities Bancshares,
Inc., Mid-Cities Bancshares, Inc. and Mid-Cities National Bank dated
February 24, 1999.
10.28 Merger Agreement among BOK Financial Corporation, Park Cities Bancshares,
Inc., PC Interim State Bank, Swiss Avenue State Bank and Certain
Shareholders of Swiss Avenue State Bank dated March 4, 1999.
10.29 Merger Agreement among BOK Financial Corporation, Park Cities Bancshares,
Inc. and CNBT Bancshares, Inc. dated August 18, 2000, incorporated by
reference to Exhibit 10.29 of Form 10-K for the fiscal year ended December
31, 2000.
10.30 Merger Agreement among BOK Financial Corporation, Bank of Tanglewood, N.A.
and TW Interim Bank dated October 25, 2002, incorporated by reference to
Exhibit 2.0 of S-4 Registration Statement No. 333-98685.
10.31 Remote Outsourcing Services Agreement between Bank of Oklahoma, N.A. and
Alltel Information Services, Inc., dated September 1, 2002, incorporated by
reference to Exhibit 10.30 of the September 30, 2002 10-Q filed on November
13, 2002.
10.32 Merger Agreement among BOK Financial Corporation, BOKF Merger Corporation
Number Eleven, Colorado Funding Company, Colorado State Bank and Trust and
Certain Shareholders of Colorado Funding Company dated July 8, 2003,
incorporated by reference to Exhibit 10.32 of Form 10-K for the fiscal year
ended December 31, 2003.
10.33 Merger Agreement between BOK Financial Corporation, BOKF Merger
Corporation Number Eight, Valley Commerce Bank, and Valley Commerce
Bancorp, Ltd. dated December 20, 2004, incorporated by reference to Exhibit
10.1 of the Form 8-K filed on December 22, 2004.
10.34 Merger Agreement among BOK Financial Corporation, BOKF Merger Corporation
Number Twelve, Worth Bancorporation, Inc., and Worth National Bank dated
March 9, 2007, incorporated by reference to Exhibit 99.2 of the Form 8-K
filed on March 12, 2007.
10.35 Stock Purchase Agreement among BOK Financial Corporation, BOKF Stock
Corporation Number Thirteen, United Banks of Colorado, Inc., First United
Bank, NA and Baltz Family Partners, Ltd. dated May 23, 2007, incorporated
by reference to Exhibit 99.2 of the Form 8-K filed on May 24, 2007.
21.0 Subsidiaries of BOK Financial, filed herewith.
23.0 Consent of independent registered public accounting firm - Ernst & Young
LLP, filed herewith.
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
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, filed herewith.
99.0 Additional Exhibits.
117
99 (a) Credit Agreement dated December 2, 2005 between BOK Financial
Corporation and participating lenders, incorporated by reference to Exhibit
99 (a) of Form 8-K filed December 6, 2005.
99 (b) Credit Agreement between BOK Financial Corporation and George B. Kaiser
dated July 21, 2008, incorporated by reference to Exhibit 99 (b) of Form
8-K filed July 21, 2008.
99.1 Undertakings incorporated by reference into S-8 Registration Statement No.
33-44121 for Bank of Oklahoma Master Thrift Plan and Trust, incorporated by
reference to Exhibit 99.1 of Form 10-K for the fiscal year ended December
31, 1993.
99.5 Undertakings incorporated by reference into S-8 Registration Statement No.
33-79834 for BOK Financial Corporation 1994 Stock Option Plan, incorporated
by reference to Exhibit 99.5 of Form 10-K for the fiscal year ended
December 31, 1994.
99.6 Undertakings incorporated by reference into S-8 Registration Statement No.
33-79836 for BOK Financial Corporation Directors' Stock Compensation Plan,
incorporated by reference to Exhibit 99.6 of Form 10-K for the fiscal year
ended December 31, 1994.
99.7 Undertakings incorporated by reference into S-8 Registration Statement No.
333-32649 for BOK Financial Corporation 1997 Stock Option Plan,
Incorporated by reference to Exhibit 99.7 of Form 10-K for the fiscal year
ended December 31, 1997.
99.8 Undertakings incorporated by reference into S-8 Registration Statement No.
333-93957 for BOK Financial Corporation 2000 Stock Option Plan,
Incorporated by reference to Exhibit 99.8 of Form 10-K for the fiscal year
ended December 31, 1999.
99.9 Undertakings incorporated by reference into S-8 Registration Statement No.
333-40280 for BOK Financial Corporation Thrift Plan for Hourly Employees,
Incorporated by reference to Exhibit 99.9 of Form 10-K for the fiscal year
ended December 31, 2000.
(b) Exhibits
See Item 15 (a) (3) above.
(c) Financial Statement Schedules
See Item 15 (a) (2) above.
118
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
DATE: February 27, 2009 BY: /s/ George B. Kaiser
------------------------------- -----------------------------
George B. Kaiser
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on February 27, 2009, by the following persons on behalf
of the registrant and in the capacities indicated.
OFFICERS
/s/ George B. Kaiser /s/ Stanley A. Lybarger
---------------------------------- ----------------------------------
George B. Kaiser Stanley A. Lybarger
Chairman of the Board of Directors Director, President and Chief
Executive Officer
/s/ Steven E. Nell /s/ John C. Morrow
---------------------------------- ----------------------------------
Steven E. Nell John C. Morrow
Executive Vice President and Senior Vice President and Chief
Chief Financial Officer Accounting Officer
DIRECTORS
/s/ Gregory S. Allen /s/ David F. Griffin
---------------------------------- ----------------------------------
Gregory S. Allen David F. Griffin
---------------------------------- ----------------------------------
C. Fred Ball, Jr. V. Burns Hargis
/s/ Sharon J. Bell /s/ E. Carey Joullian, IV
---------------------------------- ----------------------------------
Sharon J. Bell E. Carey Joullian, IV
/s/ Robert J. LaFortune
---------------------------------- ----------------------------------
Peter C. Boylan, III Robert J. LaFortune
/s/ Chester Cadieux, III /s/ Steven J. Malcolm
---------------------------------- ----------------------------------
Chester Cadieux, III Steven J. Malcolm
/s/ Joseph W. Craft, III
---------------------------------- ----------------------------------
Joseph W. Craft, III Paula Marshall
/s/ E.C. Richards
---------------------------------- ----------------------------------
William E. Durrett E.C. Richards
/s/ John W. Gibson
----------------------------------
John W. Gibson