As filed with the Securities and Exchange Commission on February 28, 2007
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2006
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)
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Oklahoma 73-1373454
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the registrant's common stock ("Common
Stock") held by non-affiliates is approximately $1,071,281,120 (based on the
June 30, 2006 closing price of Common Stock of $49.67 per share). As of January
31, 2007, there were 67,501,413 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
Registrant's Proxy Statement for the 2007 Annual Meeting of Shareholders.
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BOK FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
INDEX
ITEM PAGE
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PART I
1. Business 1
1A. Risk Factors 5
1B. Unresolved Staff Comments 7
2. Properties 7
3. Legal Proceedings 7
4. Submission of Matters to a Vote of Security Holders 7
PART II
5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 8
6. Selected Financial Data 9
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
7A. Quantitative and Qualitative Disclosures About Market Risk 44
8. Financial Statements and Supplementary Data 46
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 94
9A. Controls and Procedures 94
9B. Other Information 94
PART III
10. Directors, Executive Officers and Corporate Governace 95
11. Executive Compensation 95
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 95
13. Certain Relationships and Related Transactions, and
Director Independence 96
14. Principal Accounting Fees and Services 96
PART IV
15. Exhibits, Financial Statement Schedules 96
Signatures 102
Chief Executive Officer Section 302 Certification, Exhibit 31.1 104
Chief Financial Officer Section 302 Certification, Exhibit 31.2 105
Section 906 Certifications, Exhibit 32 106
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 and Houston, Texas, Albuquerque, New Mexico,
Northwest Arkansas, Denver, Colorado, Phoenix, Arizona, and Kansas City, 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 are not significant.
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 and Houston, Texas, Albuquerque, New Mexico, Denver,
Colorado, Phoenix, Arizona, and Kansas City, Kansas. We are currently exploring
opportunities for further growth in our regional markets and expansion into new
markets through acquisitions or de novo banking operations.
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 43% of our revenue comes 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
through the boards of directors for each of our bank subsidiaries.
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 five principal lines of business: Oklahoma corporate
banking, Oklahoma consumer banking, mortgage banking, wealth management, and
regional banking. Mortgage banking activities include loan origination and
servicing across all markets served by the Company. Wealth management provides
brokerage and trading, private financial services and investment advisory
services in all markets. Wealth management also provides fiduciary services in
all markets except Colorado. Fiduciary services in Colorado are included in
regional banking. Regional banking consists primarily of corporate and consumer
banking activities in the respective local markets. 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 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,
2006.
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 25% and 9% 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
1
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, 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 1% in each of the Dallas-Fort
Worth and Houston areas. Bank of Albuquerque has a number four market share
position with 12% 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, 2006, BOK Financial and its subsidiaries employed 3,958
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. The likelihood and timing of any 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 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.
2
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 National Association of Securities Dealers, Inc., the Federal
Reserve Board, the National Futures Association 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, 2006, BOK
Financial's Tier 1 and total capital ratios under these guidelines were 9.78%
and 11.58%, 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, 2006 was 8.79%.
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, 2006.
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 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).
The comment periods for both of the agencies' notices of proposed rulemakings
expire on March 26, 2007. The agencies have indicated their intent that 2008 be
the first allowable year for a parallel run of Basel II, with transitional
floors in place for approximately three years thereafter.
3
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.
Further discussion of regulatory capital, including regulatory capital amounts
and ratios, is set forth under the heading "Borrowings 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 of BOK Financial 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.
BOK Financial was not required to pay any deposit insurance premiums in 2006;
however, it is possible that the FDIC could impose assessment rates in the
future in connection with declines in the insurance funds or increases in the
amount of insurance coverage. An increase in the assessment rate could have a
material adverse effect on the Company's earnings, depending on the amount of
the increase. Under the Federal Deposit Insurance Reform Act of 2005, which
became law in 2006, BOK Financial received a one-time assessment credit of $6.0
million that can be applied against future premiums, subject to certain
limitations. During 2006, BOK Financial paid $1.5 million in Financing
Corporation ("FICO") assessments related to outstanding FICO bonds to the FDIC
as collection agent. 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
$107 million of dividends without regulatory approval as of December 31, 2006.
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 $32
million as of December 31, 2006. These amounts are not necessarily indicative of
amounts that may be available to be paid in future periods.
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.
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.
4
ITEM 1A. RISK FACTORS
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. In addition, BOK Financial's loan
portfolio includes commercial real estate loans. A downturn in the 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 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.
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.
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
5
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.
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
you 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 decreases in net interest margins;
o increases in competition;
o adverse regulatory developments.
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 bank 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
6
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 common stock,
sales of substantial amounts of BOK Financial's common stock, or the perception
that such sales could occur, would 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 $130 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-Forth Worth and Houston, Texas, Albuquerque, New Mexico,
Denver, Colorado, Phoenix, Arizona, and Kansas City, Kansas. Primary operations
facilities are located in Tulsa, 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,
2006.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
BOK Financial's $.00006 par value common stock is traded on the Nasdaq Stock
Market under the symbol BOKF. As of January 31, 2007, common shareholders of
record numbered 1,138 with 67,501,413 shares outstanding.
The highest and lowest closing bid price for shares of BOK Financial common
stock follows:
First Second Third Fourth
---------------------------------------------------
2006:
Low $44.40 $46.85 $48.13 $50.40
High 47.65 49.60 53.30 54.98
2005:
Low $39.79 $40.09 $45.26 $43.54
High 48.97 46.02 49.30 48.53
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, 2001 and ending December 31, 2006.*
Comparison of Cumulative Total Return
[LINE GRAPH OMITTED]
=================================================================================================================
12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006
=================================================================================================================
BOKF 100.00 $ 105.97 $ 130.60 $ 169.55 $ 159.01 $ 193.09
-----------------------------------------------------------------------------------------------------------------
NASDQ Bank Stocks 100.00 $ 102.37 $ 131.69 $ 150.71 $ 147.23 $ 165.21
-----------------------------------------------------------------------------------------------------------------
KBW 50 Bank 100.00 $ 92.95 $ 124.59 $ 137.11 $ 138.72 $ 165.63
-----------------------------------------------------------------------------------------------------------------
NASDQ (CRSP U.S. Company) 100.00 $ 69.13 $ 103.36 $ 112.49 $ 114.88 $ 126.22
=================================================================================================================
* Graph assumes value of an investment in the Company's Common Stock for
each index was $100 on December 31, 2001. 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 (i) on May 18, 2001, the Company paid a
3% dividend on BOK Financial Common Stock outstanding as of May 7, 2001,
(ii) on May 29, 2002, the Company paid a 3% dividend on BOK Financial
Common Stock outstanding as of May 13, 2002, (iii) on May 31, 2003, the
Company paid a 3% dividend on BOK Financial Common Stock outstanding as of
May 10, 2003, (iv) and 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.
8
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. The specific timing and amount of shares repurchased will vary
based upon 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. As of December 31, 2006, the Company had repurchased
278,677 shares under the new plan for $13.4 million.
During the second quarter of 2005, the board of directors approved the Company's
first quarterly cash dividend of $0.10 per common share. The quarterly cash
dividend replaced the annual dividend historically paid in shares of common
stock. Concurrent with the first quarterly cash dividend, holders of the
Company's convertible preferred stock exercised their conversion rights. All of
the Series A Preferred Stock was converted into 6,920,666 common shares. The
Company declared cash dividends of $0.55 and $0.30 per common share in 2006 and
2005, respectively. For the year ended December 31, 2006, the Company's payout
ratio of common dividends to earnings was 17.27%.
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, 2005.
-----------------------------------------------------------------------------------------------------------------------
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, 2006 to October 31, 2006 11,173 $53.15 -- 1,728,823
-----------------------------------------------------------------------------------------------------------------------
November 1, 2006 to November 30, 2006 15,273 $52.62 7,500 1,721,323
-----------------------------------------------------------------------------------------------------------------------
December 1, 2006 to December 31, 2006 49,018 $53.49 -- 1,721,323
-----------------------------------------------------------------------------------------------------------------------
Total 75,464 7,500
-----------------------------------------------------------------------------------------------------------------------
(1) On April 26, 2005, the Company's board of directors authorized a new stock
repurchase plan to repurchase up to two million shares of the Company's
common stock. As of December 31, 2006, the Company had repurchased 278,677
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.
BOK Financial entered into a limited price guarantee on a portion of the shares
issued in the Bank of Tanglewood acquisition on October 25, 2002. Additional
discussion of this price guarantee is set forth under the "Off-Balance Sheet
Arrangements" section of "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.
For additional disclosure regarding stockholder matters, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and Notes 13 and 16 of the Company's Notes to Consolidated
Financial Statements, both of which appear elsewhere herein.
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."
9
10
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,
--------------------------------------------------------------------
2006 2005 2004 2003 2002
--------------------------------------------------------------------
Selected Financial Data
For the year:
Interest revenue $ 986,429 $ 769,934 $ 614,284 $ 565,173 $ 574,913
Interest expense 499,741 320,593 191,041 173,678 205,581
Net interest revenue 486,688 449,341 423,243 391,495 369,332
Provision for credit losses 18,402 12,441 20,439 35,636 33,730
Net income 212,977 201,505 179,023 158,360 147,871
Period-end:
Loans, net of reserve 10,606,306 9,036,102 7,820,349 7,369,105 6,797,132
Assets 18,059,624 16,327,069 14,145,660 13,595,598 12,263,233
Deposits 12,386,705 11,375,318 9,674,398 9,219,863 8,128,525
Subordinated debentures 297,800 295,964 151,594 154,332 155,419
Shareholders' equity 1,721,022 1,539,154 1,398,494 1,228,630 1,099,526
Nonperforming assets(2) 35,652 33,638 56,423 59,867 56,574
Profitability Statistics
Earnings per share (based on average equivalent shares):
Basic $ 3.19 $ 3.14 $ 3.00 $ 2.67 $ 2.59
Diluted 3.16 3.01 2.68 2.38 2.30
Percentages (based on daily averages):
Return on average assets 1.27% 1.29% 1.28% 1.24% 1.31%
Return on average shareholders' equity 13.23 13.78 13.80 13.66 15.75
Average shareholders' equity to average assets 9.58 9.38 9.25 9.07 8.30
Common Stock Performance
Per Share:
Book value per common share(5) $ 25.66 $ 23.07 $ 23.28 $ 20.60 $ 18.56
Market price: December 31 close 54.98 45.43 48.76 38.72 32.39
Market range - High close 54.98 49.31 49.18 41.02 36.52
- Low close 44.43 39.79 37.29 31.00 26.80
Cash dividends declared 0.55 0.30 -- -- --
Selected Balance Sheet Statistics
Period-end:
Tier 1 capital ratio 9.78% 9.84% 10.02% 9.15% 8.98%
Total capital ratio 11.58 12.10 11.67 11.31 11.95
Leverage ratio 8.79 8.30 7.94 7.17 6.88
Reserve for loan losses to nonperforming loans 403.07 412.83 206.26 217.89 208.31
Reserve for loan losses to loans(1) 1.03 1.14 1.38 1.55 1.53
Combined reserves for credit losses to loans(1), (4) 1.22 1.37 1.61 1.73 1.72
Miscellaneous (at December 31)
Number of employees (full-time equivalent) 3,958 3,825 3,548 3,449 3,402
Number of banking locations 163 150 149 142 130
Number of TransFund locations 1,649 1,421 1,389 1,442 1,390
Trust assets $31,704,091 $28,464,745 $24,589,053 $21,283,791 $15,804,222
Mortgage loan servicing portfolio(3) 4,988,611 4,492,524 4,486,513 4,746,279 5,754,548
====================================================================================================================================
(1) Excludes residential mortgage loans held for sale.
(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.
11
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 and Houston, Texas, Albuquerque, New Mexico, Denver, Colorado,
Phoenix, Arizona and Kansas City, 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. 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. Since
1997, we have expanded into Dallas and Houston, Texas, Albuquerque, New Mexico,
Denver, Colorado and Phoenix, Arizona. During 2006, we began full-service
banking operations in Kansas City, Kansas. We are currently exploring
opportunities for further growth in our regional markets and expansion into new
markets through acquisitions or de novo banking operations.
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 43% of our revenue comes 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
through the boards of directors for each of our bank subsidiaries.
BOK Financial operates five principal lines of business: Oklahoma corporate
banking, Oklahoma consumer banking, mortgage banking, wealth management, and
regional banking. Mortgage banking activities include loan origination and
servicing across all markets served by the Company. Wealth management provides
private financial services, brokerage and trading, and investment advisory
services in all markets. Wealth management also provides fiduciary services in
all markets except Colorado. Fiduciary services in Colorado are included in
regional banking. Regional banking consists primarily of corporate and consumer
banking activities in the respective local markets.
Performance Summary
BOK Financial's net income for 2006 totaled $213.0 million or $3.16 per diluted
share compared with $201.5 million or $3.01 per diluted share in 2005. Returns
on average assets and shareholders' equity were 1.27% and 13.23%, respectively,
for 2006 compared with 1.29% and 13.78%, respectively, for 2005. The decrease in
return on average shareholders' equity primarily reflected growth in average
equity from 9.38% of assets for 2005 to 9.58% of assets in 2006. We generally
retain capital necessary to support continued asset and earnings growth.
Net income growth for 2006 was attributed primarily to increases in both net
interest revenue and fees and commissions revenue. Net interest revenue grew
$37.3 million or 8% during 2006 while fees and commissions revenue increased
$26.8 million or 8%. Revenue growth was partially offset by a $6.0 million
increase in the provision for credit losses and higher operating expenses.
Average earning assets increased $1.3 billion for 2006, including a $1.2 billion
increase in average outstanding loans. Growth in average earning assets was
funded by a $1.4 billion increase in interest-bearing liabilities. Growth in
average interest-bearing liabilities also funded a $134 million decrease in
average demand deposits. Net interest margin was 3.36% for 2006, down 3 basis
points from the previous year.
Fees and commissions totaled $371.7 million, an 8% increase over 2005. Brokerage
and trading revenue, transaction card revenue and trust fees grew 8%, 9% and 9%,
respectively due primarily to increases in transaction volumes or the value of
assets managed. Other revenue increased $10.7 million or 31% due largely to fees
earned on margin assets carried in support of the Company's derivatives business
and income earned on investments in bank-owned life insurance. Mortgage banking
revenue decreased $3.7 million or 12% due primarily to lower loan production
volume and originated servicing right values.
Operating expenses increased $43.2 million or 9% compared with 2005 due
primarily to increased personnel costs. Personnel costs increased $37.3 million
or 14%. Total employment and average compensation per employee grew. Incentive
compensation also increased over last year. All other operating expenses
combined were up $5.9 million or 3% over 2005.
Net income for the fourth quarter of 2006 totaled $50.6 million or 75 cents per
diluted share compared with $48.2 million or 72 cents per diluted share for the
fourth quarter of 2005. Net interest revenue grew $7.9 million or 7% due to
earning asset growth, partially offset by a 9 basis point reduction in net
interest margin. Fees and commissions revenue increased $6.1 million or 7% due
primarily to fees earned on
12
customer derivative accounts and revenue earned on bank-owned life insurance.
Operating expenses increased $10.1 million or 8% due to higher personnel costs.
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. Application of these critical accounting policies and
estimates has been discussed with the appropriate committees of the Board of
Directors. New accounting policies first adopted in 2006 included Statement of
Financial Accounting Standards No. 156, "Accounting for Servicing of Financial
Assets" ("FAS 156") and Statement of Financial Accounting Standards No. 158,
"Employers' Accounting for Defined-Benefit Pension and Other Post-retirement
Plans" ("FAS 158") .
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 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.
All significant loans and commitments that exhibit weaknesses or deteriorating
trends are reviewed quarterly. Specific reserves for impairment are determined
through evaluation of estimated future cash flows and collateral values 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.
General reserves for commercial and commercial real estate loan losses, and
related commitments, 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, real
estate and agriculture, 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
either purchased from other lenders or retained from sales of loans we have
originated. Effective January 1, 2006, the Company elected the fair value method
of accounting for mortgage servicing rights as permitted by FAS 156. Originated
mortgage servicing rights are initially recognized at fair value. Subsequent
changes in fair value are recognized in earnings as they occur. Previously,
originated mortgage servicing rights were initially recognized based on the
relative fair value of the servicing rights retained and subsequently carried at
the lower of amortized cost or fair value. A valuation allowance was provided
for the excess of amortized cost over fair value of the servicing rights
stratified by interest rate and loan type.
There is no active market for trading in mortgage servicing rights. We use a
cash flow model to determine fair value. Key assumptions and estimates used by
this model include projected prepayment speeds and assumed servicing costs,
earnings on escrow deposits, ancillary
13
income and discount rates and are based on current market sources. 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. Prepayment projections determined by this model are adjusted
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. 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
$3.2 million. A 50 basis point decrease in mortgage interest rates is expected
to decrease the fair value of our servicing rights by $4.7 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 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 five years 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.
At December 31, 2006, Bank of Texas had $155 million or 65% of total goodwill
and Colorado State Bank & Trust had $42 million or 18% of total goodwill.
Because of the large concentration of goodwill in these business units, 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. In addition, 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.
Intangible assets with finite lives, such as core deposit intangible assets, are
amortized over their estimated useful lives. 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. Interest rate,
commodity and foreign exchange contracts used in our customer hedging programs
are either provided by third-party dealers or based on valuations generated
internally by a third-party provided pricing model. This model uses market
inputs to estimate fair values. Changes in assumptions used in this pricing
model could significantly affect the reported fair values of derivative assets
and liabilities, though the net effect of these changes should not significantly
affect earnings. Fair values determined by the internal model are corroborated
by comparison against an independent valuation.
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.
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.
We recognize the benefit of uncertain 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 maintains a defined-benefit, cash-balance pension plan to all
employees who satisfy certain age and length of service requirements. Benefits
were curtailed as of April 1, 2006. No participants may be added to the plan and
no additional service benefits will be accrued. Accounting for this plan
requires management to make assumptions regarding the expected long-term rate of
return on plan assets
14
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.
All plan assets are invested in the American Performance 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 discount rate is based on current yields of
high-quality fixed income securities such as AA rate industrial and utility
bonds with terms that approximate the average remaining life of plan
participants. A 25 basis point decrease in the discount rate increases the
pension liability by approximately $1.2 million or 2% and has no significant
effect on pension expense because of the curtailment of benefits in 2006.
FAS 158 was issued during 2006 and, for the Company, was effective December 31,
2006. Among other things, FAS 158 required that financial statements recognize
the funded status of the 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. The Company was required to
reduce its prepaid pension asset to the net funded status of the pension plan
and charge $18.6 million, less deferred income taxes, against shareholders'
equity. FAS 158 had no effect on pension expense recognition.
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 is 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 input to determine fair value. 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 $15.6 million. Future compensation cost ranges
from approximately $7.2 million if none of the performance conditions are met to
$21.2 million if all of the performance conditions are met.
BOK Financial adopted Statement of Financial Accounting Standards No. 123R,
"Share-Based Payments" ("FAS 123R") as of January 1, 2006. In 2003, the Company
had adopted the expense recognition provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" by
restating prior years' financial statements. Adoption of FAS 123R did not
significantly affect the Company's financial statements. Excess tax benefits
from share-based payments recognized in capital surplus were determined by the
excess of tax benefits recognized over the tax effect of compensation cost
recognized.
15
Assessment of Operations
Net Interest Revenue
Tax-equivalent net interest revenue totaled $493.7 million for 2006 compared
with $454.5 million for 2005. Net interest revenue growth was driven primarily
by a $1.3 billion increase in average earning assets. Average outstanding loans
increased $1.2 billion. Growth in average earning assets was funded primarily by
a $1.4 billion increase in interest-bearing liabilities, partially offset by a
$134 million decrease in average demand deposit accounts. 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.
Yields on average earning assets and rates paid on average interest-bearing
liabilities both increased during 2006 due primarily to rising short-term
interest rates. Net interest margin, the ratio of tax-equivalent net interest
revenue to average earning assets decreased to 3.36% in 2006 compared with 3.39%
in 2005. The decrease in net interest margin reflected loan spread compression,
a shift in certain deposit types to higher costing products and a stagnant
non-rate funds gap. Beginning in late 2004, the weighted average spread of our
commercial loan portfolio over LIBOR funding sources decreased from
approximately 290 basis points to approximately 250 basis points due largely to
competitive pricing pressure. Over the same period, deposit account balances
have been steadily migrating to higher costing products as depositors became
more aware of rising rates. In addition, while earning assets have grown
significantly over the past year, the non-rate funds gap has declined as a
percent of earning assets. Non-rate funds, which include demand deposits, other
liabilities and shareholders' equity, decreased from 25% of total liabilities
and equity in 2005 to 22% in 2006.
Table 2 Volume/Rate Analysis
(In Thousands)
2006/2005 2005/2004
--------------------------------------- ---------------------------------------
Change Due To(1) Change Due To(1)
------------------------ ------------------------
Change Volume Yield/Rate Change Volume Yield/Rate
--------------------------------------- ---------------------------------------
Tax-equivalent interest revenue:
Securities $ 20,564 $ 4,262 $ 16,302 $ 7,983 $ 5,232 $ 2,751
Trading securities 274 260 14 141 (6) 147
Loans 196,884 86,991 109,893 146,735 50,282 96,453
Funds sold and resell agreements 554 (98) 652 934 475 459
----------------------------------------------------------------------------------------------------------------------------------
Total 218,276 91,415 126,861 155,793 55,983 99,810
----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Transaction deposits 76,265 23,499 52,766 37,204 6,936 30,268
Savings deposits 302 (89) 391 131 (64) 195
Time deposits 49,941 15,148 34,793 28,632 10,101 18,531
Funds purchased and repurchase agreements 43,877 8,455 35,422 40,466 7,301 33,165
Other borrowings 2,850 (11,577) 14,427 16,513 (285) 16,798
Subordinated debentures 5,913 3,779 2,134 6,606 4,659 1,947
----------------------------------------------------------------------------------------------------------------------------------
Total 179,148 39,215 139,933 129,552 28,648 100,904
----------------------------------------------------------------------------------------------------------------------------------
Tax-equivalent net interest revenue 39,128 $ 52,200 $ (13,072) 26,241 $ 27,335 $ (1,094)
======================= ========================
Increase in tax-equivalent
adjustment (1,781) (143)
--------------------------------------------------------- ---------
Net interest revenue $ 37,347 $ 26,098
========================================================= =========
4th Qtr 2006/4th Qtr 2005
----------------------------------
Change Due To(1)
----------------------
Change Volume Yield/Rate
-------- -------- ----------
Tax-equivalent interest revenue:
Securities $ 4,278 $ 1,030 $ 3,248
Trading securities 79 27 52
Loans 48,935 25,496 23,439
Funds sold and resell agreements (35) (214) 179
-------------------------------------------------------------------------------------------------
Total 53,257 26,339 26,918
-------------------------------------------------------------------------------------------------
Interest expense:
Transaction deposits 19,336 5,925 13,411
Savings deposits 73 (33) 106
Time deposits 11,698 2,131 9,567
Funds purchased and repurchase agreements 15,822 8,849 6,973
Other borrowings (2,679) (5,589) 2,910
Subordinated debentures 542 40 502
-------------------------------------------------------------------------------------------------
Total 44,792 11,323 33,469
-------------------------------------------------------------------------------------------------
Tax-equivalent net interest revenue 8,465 $ 15,016 $(6,551)
=====================
Increase in tax-equivalent adjustment (573)
-----------------------------------------------------------------------
Net interest revenue $ 7,892
=======================================================================
(1) Changes attributable to both volume and yield/rate are allocated to both
volume and yield/rate on an equal basis.
16
Management regularly models the effects of changes in interest rate on net
interest revenue. Based on this modeling, we expect net interest revenue to
decline slightly from rising interest rates over a one-year forward looking
period. However, other factors such as loan spread compression, deposit product
mix and overall balance sheet composition may affect this general expectation.
For example, throughout 2006 the loan portfolio's yield increased less than
rates paid on interest-bearing liabilities increased. Additionally, we have a
large portion of our securities portfolio in mortgage-backed securities. These
securities reprice as cash flow received is reinvested at current market rates.
The resulting change in yield of the securities portfolio occurs more slowly
than changes in market rates. The tax-equivalent yield on the securities
portfolio increased 33 basis points over 2005 while the average loan yield
increased 121 basis points and the cost of interest-bearing liabilities
increased 106 basis points.
Our overall objective is to manage the Company's balance sheet to be essentially
neutral to changes in interest rate. Approximately 69% of our commercial loan
portfolio is either variable rate or fixed rate that will reprice within one
year. These loans are funded primarily by deposit accounts that are either
non-interest bearing, or that reprice more slowly than the loans. The result is
a balance sheet that would be asset sensitive, which means that assets generally
reprice more quickly than liabilities. Among the strategies that we use to
achieve a rate-neutral position, we purchase fixed-rate, mortgage-backed
securities, which are funded with short-term wholesale funds. The
liability-sensitive nature of this strategy provides an offset to the
asset-sensitive characteristics of our loan portfolio. The expected duration of
these securities is approximately 2.6 years based on a range of interest rate
and prepayment assumptions.
We also use derivative instruments to manage our interest rate risk. Interest
rate swaps with a combined notional amount of $817 million convert fixed rate
liabilities to floating rate based on LIBOR. The purpose of these derivatives,
which include interest rate swaps designated as fair value hedges, is to
position our balance sheet to be neutral to changes in interest rates. We also
have interest rate swaps with a notional amount of $100 million that convert
prime-based loans to fixed rate. The purpose of these derivatives, which have
been designated as cash flow hedges, also is to position our balance sheet to be
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 the Market Risk section of
this report.
Fourth Quarter 2006 Net Interest Revenue
Tax-equivalent net interest revenue for the fourth quarter of 2006 totaled
$126.2 million compared with $117.8 million for the fourth quarter of 2005.
Average earning assets increased $1.3 billion or 10%. Average outstanding loans
were up $1.4 billion or 15%. Growth in average earning assets was funded by a
$1.4 billion increase in interest-bearing liabilities, including a $1.1 billion
increase in average interest-bearing deposits. The increase in interest-bearing
liabilities also funded a $49 million decrease in average demand deposits. Net
interest margin was 3.25%, down 9 basis points from the fourth quarter of 2005
due primarily to an investment in bank-owned life insurance at the end of the
third quarter of 2006. While this investment increases net income, it reduces
net interest revenue and net interest margin. Revenue from this investment,
which totaled $2.3 million for the fourth quarter of 2006, is recognized in
other revenue. Related funding costs are included in interest expense, which
reduced the net interest margin by 7 basis points.
2005 Net Interest Revenue
Tax-equivalent net interest revenue for 2005 was $454.5 million, a $26.2 million
or 6% increase from 2004. Average earning assets increased $1.0 billion or 8%,
including an $846 million increase in average outstanding loans. As shown in
Table 2, net interest revenue increased $27.3 million due to changes in earning
assets and interest bearing liabilities. Net interest revenue growth due to
earning assets was partially offset by a $1.1 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 $24.7 million compared with last year due
primarily to a $26.8 million or 8% increase in fees and commission revenue.
Other operating revenue also includes gains or losses on securities, derivatives
and other assets. Diversified sources of fees and commission revenue are a
significant part of our business strategy and represented 43% 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, increased competition and saturation in our existing
markets could affect the rate of future increases.
17
Table 3 Other Operating Revenue
(In Thousands)
Years ended December 31,
--------------------------------------------------------------------
2006 2005 2004 2003 2002
--------------------------------------------------------------------
Brokerage and trading revenue $ 47,560 $ 44,222 $ 41,107 $ 41,152 $ 26,290
Transaction card revenue 78,622 72,036 64,816 57,352 52,213
Trust fees and commissions 71,037 65,187 57,532 45,763 40,092
Deposit service charges and fees 102,436 98,361 93,712 82,042 67,632
Mortgage banking revenue 26,996 30,681 28,189 52,336 48,910
Other revenue 45,045 34,377 26,871 26,120 22,424
----------------------------------------------------------------------------------------------------------
Total fees and commissions 371,696 344,864 312,227 304,765 257,561
----------------------------------------------------------------------------------------------------------
Gain on sales of assets 1,499 7,798 1,225 2,275 1,157
Gain (loss) on securities, net (950) (6,895) (3,088) 7,188 58,704
Gain (loss) on derivatives, net (622) 1,179 (1,474) (9,375) 5,236
----------------------------------------------------------------------------------------------------------
Total other operating revenue $ 371,623 $ 346,946 $ 308,890 $ 304,853 $322,658
==========================================================================================================
Fees and Commissions Revenue
Brokerage and trading revenue grew $3.3 million or 8% compared with 2005.
Revenue from customer hedging activities increased $5.2 million or 60% over
2005, including $5.0 million from energy hedging activities. Volatility in the
energy markets prompted our energy customers to continue active hedging of their
gas and oil production during 2006. Retail brokerage revenue increased $1.2
million to $13.4 million, up 10% over 2005. Securities trading revenue totaled
$20.4 million, down $3.1 million from the previous year. Revenue generated from
sales of financial instruments to mortgage-banking customers was down $3.1
million, consistent with the current mortgage-banking environment.
Transaction card revenue increased $6.6 million or 9%. Check card revenue
increased $3.7 million or 23% due to growth in transaction volume. The number of
check card transactions processed during 2006 increased 19% over 2005. ATM fees
grew $2.7 million or 9% compared to the previous year. During 2006, we signed
contracts to add 140 TransFund ATMs in convenience stores located in the Dallas
/ Fort Worth, Texas market and in locations across Arkansas, Oklahoma, Kansas,
Missouri and Nebraska. Merchant discount revenue totaled $25.7 million, up 1%
over 2005.
Trust fees increased $5.9 million or 9%. The fair value of all trust
relationships overseen by the Company, which is the basis for a significant
portion of trust fees increased to $31.7 billion at December 31, 2006 compared
with $28.5 billion at December 31, 2005. We have sole or joint discretionary
authority over $11.9 billion of trust assets at December 31, 2006 compared with
$10.9 billion at December 31, 2005. Approximately 30% of trust fees are earned
on personal trust relationships. Additionally, 19% of trust fees are earned by
managing employee benefit plan assets and 21% are based on mutual fund
activities.
Service charges on deposit accounts increased $4.1 million, or 4% compared with
2005. Overdraft fees increased 9% to $68.5 million while commercial account
service charge revenue decreased 3% to $27.8 million. The volume of overdraft
items processed increased modestly in 2006. Service charges on retail deposit
accounts decreased 13% to $6.2 million due to growth in service-charge free
products. In addition, the decrease in commercial service charge revenue
reflected an increase 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, increases when
interest rates rise.
Other revenue totaled $45.0 million, up 31% over 2005 due primarily to fees on
margin assets, revenue on bank-owned life insurance and investment banking fees.
The Company is required to pledge margin assets to secure derivative
liabilities. Fees earned on margin assets in 2006, which are based on average
balances and short-term interest rates totaled $10.2 million, up $3.2 million or
46% over 2005. Margin assets averaged $238 million in 2006 compared to $233
million in 2005. In addition, the Company invested $202 million in bank-owned
life insurance at the end of the third quarter of 2006. This investment
generated revenue of $2.6 million. Investment banking fees increased $2.1
million or 54% over the previous year.
Gains on Sales of Assets
Net gains on asset sales decreased to $1.5 million in 2006 from $7.8 million in
2005. Net gains on asset sales in 2005, included $4.8 million from the sale of
the Company's interest in an Oklahoma City office building and $1.2 million from
the sale of loans from the community development mortgage loan portfolio.
Neither of these sales was expected to recur in 2006.
Securities and Derivatives
Net losses on securities totaled $950 thousand in 2006 and $6.9 million in 2005.
Net losses on securities in 2006 consisted of losses of $1.1 million on
securities held as economic hedges of mortgage servicing rights, partially
offset by net gains of $152 thousand on other securities. During 2005, net
losses on securities consisted of losses of $5.2 million on securities held as
an economic hedge of mortgage servicing rights and $1.7 million on other
securities. The Company's use of securities as an economic hedge of mortgage
servicing rights is more fully
18
discussed in the Line of Business - Mortgage Banking section of this report.
Other securities are bought and sold as necessary to maximize the portfolio's
total return and to manage prepayment or extension risk.
Net losses on derivatives totaled $622 thousand in 2006, compared with net gains
of $1.2 million in 2005. Net gains and losses on derivatives consist primarily
of fair value adjustments of derivatives used to manage interest rate risk and
related hedged liabilities. The Company's use of derivatives to manage interest
rate risk is more fully discussed in the Deposits and Borrowings and Capital
sections of this report.
Fourth Quarter 2006 Other Operating Revenue
Other operating revenue for the fourth quarter of 2006 totaled $93.7 million, a
$6.4 million or 7% increase over the fourth quarter of 2005. Fees and
commissions revenue increased $6.1 million or 7%. Growth in fourth quarter fee
revenue was due primarily to brokerage and trading revenue and bank-owned life
insurance. Brokerage and trading revenue increased $2.0 million due largely to
growth in energy derivative fees. Several customers closed out positions at year
end which accelerated revenue recognition into the fourth quarter. Revenue on
customer derivative contracts is generally recognized as fair value changes over
the life of the contract. In addition, the Company recognized $2.3 million of
revenue in the fourth quarter from its investment in bank-owned life insurance.
2005 Other Operating Revenue
Other operating revenue totaled $346.9 million for 2005, up $38.1 million over
2004. Fees and commissions revenue increased $32.6 million or 10%. Strong growth
in trust fees and transaction card revenue, along with $7.0 million of fees on
margin assets, increased total fees and commissions revenue. Trust fees
increased $7.7 million or 13%. The fair value of trust relationships overseen by
the Company, which is the basis for a significant portion of trust fees,
increased from $24.6 billion at December 31, 2004 to $28.5 billion at December
31, 2005. Transaction card revenue grew $7.2 million or 11% due to an 11%
increase in merchant discount fees and a 32% increase in check card revenue.
Merchant locations serviced increased by 485 or 7% during 2005.
The Company recognized net gains on asset sales of $7.8 million in 2005,
including $4.8 million from the sale of its interest in an Oklahoma City office
building and $1.2 million from the sale of loans from the community development
mortgage loan portfolio. The Company also recognized net losses on securities of
$6.9 million during 2005, including $5.2 million on securities held as an
economic hedge of mortgage servicing rights. Net gains on derivatives totaled
$1.2 million consisting primarily of fair value adjustments of derivatives used
to manage interest rate risk and related hedged liabilities.
Other Operating Expense
Other operating expense for 2006 totaled $512.3 million, a $43.2 million or 9%
increase over 2005. This increase resulted primarily from personnel expense.
Growth in personnel expense was driven largely by total employment, average
compensation per employee and incentive compensation expense.
Table 4 Other Operating Expense
(In Thousands)
Years ended December 31,
--------------------------------------------------------------------
2006 2005 2004 2003 2002
--------------------------------------------------------------------
Personnel expense $ 296,260 $ 258,971 $ 240,661 $ 222,922 $187,439
Business promotion 19,351 17,964 15,618 12,937 11,367
Contribution of stock to BOK Charitable Foundation -- -- 5,561 -- --
Professional fees and services 17,744 16,596 15,487 17,935 12,987
Net occupancy and equipment 52,188 50,195 47,289 45,967 42,347
Data processing and communications 66,926 67,026 60,025 53,398 45,912
Printing, postage and supplies 15,862 15,066 14,034 13,930 12,665
Net (gains) losses and operating expenses of
repossessed assets 474 572 (4,016) 271 1,014
Amortization of intangible assets 5,327 6,943 8,138 8,101 7,638
Mortgage banking costs 11,829 14,562 18,167 40,296 42,271
Change in fair value of mortgage servicing rights (3,009) -- -- -- --
Provision (recovery) for impairment of
mortgage servicing rights -- (3,915) (1,567) (22,923) 45,923
Other expense 29,355 25,126 21,827 20,604 19,991
----------------------------------------------------------------------------------------------------------------------------
Total $ 512,307 $ 469,106 $ 441,224 $ 413,438 $429,554
===========================================================================================================================
19
Personnel Expense
Personnel expense increased $37.3 million or 14% to $296.3 million. Regular
compensation expense, which consists of salary and wages, overtime pay and
temporary personnel costs, totaled $185.5 million, up $19.9 million, or 12%
increase over 2005. The increase in regular compensation expense was due to an
8% increase in average regular compensation per full-time equivalent employee
and a 4% increase in average staffing. Throughout 2006, the Company filled key
leadership positions in Wealth Management, Treasury Services, International
Banking and Bank Operations. Experienced bankers were added in the existing
regional markets and investments were made in support staff. We also began
full-service banking operations in Kansas City in the fourth quarter.
Incentive compensation increased $15.4 million, or 31% to $65.2 million. Expense
for cash-based incentive compensation plans increased $9.6 million or 21%. These
plans are intended to provide current rewards to employees who generate
long-term business opportunities for the Company based on growth in loans,
deposits, customer relationships and other measurable metrics. Stock-based
compensation expense increased $5.8 million or 134%. The Company's stock-based
compensation plans include both equity awards and liability awards. Compensation
expense associated with liability award plans increased $4.9 million. This
increase reflected changes in the market value of BOK Financial common stock at
December 31, 2006 compared with December 31, 2005. Compensation expense for
equity awards increased $848 thousand or 15% over 2005. Additional information
about our stock-based compensation plans is provided in Note 13 to the
Consolidated Financial Statements.
Employee benefit expenses increased $2.0 million or 5% to $45.6 million.
Employee insurance costs increased $975 thousand or 6% and payroll taxes
increased $1.2 million or 8%. Retirement benefit costs decreased $572 thousand
or 5%. The decrease in retirement benefit costs was due to previously announced
changes to the thrift and pension plans which were effective April 1, 2006.
These changes curtailed accruals for service under the pension plan, though
interest continues to accrue on employee balances. At the same time, employee
contributions to the thrift plan eligible for Company matching increased from 5%
of base compensation to 6% of base compensation. The Company's matching
contribution rate was increased and we accrued a $1.0 million non-elective
contribution for eligible employees who earn less than $40 thousand annually.
Data Processing and Communications Expense
Data processing and communication expenses totaled $66.9 million, consistent
with the prior year. This expense consists of two broad categories, data
processing systems and transaction card processing. Data processing systems
costs decreased $769 thousand or 2%. The Company negotiated cost reductions on
its primary data processing contract during 2006 in exchange for a three-year
contract extension. The benefit of these cost reductions is being recognized
over the remaining contract term. Transaction card processing costs increased
$669 thousand or 3% due to growth in processing volumes.
Other Operating Expenses
Business promotion expense increased $1.4 million or 8% compared with last year.
Promotional activities in support of regional banking growth increased $876
thousand while support for wealth management initiatives increased $600
thousand. Other expenses were up $4.2 million over 2006. This increase included
a $1.8 million non-cash charge related to premium taxes on the Company's
investment in bank-owned life insurance and a $1.7 million increase in employee
recruiting costs.
Mortgage banking expenses, including changes in the fair value of mortgage
servicing rights decreased $1.8 million. These expenses are discussed more fully
in the Line of Business - Mortgage Banking section of this report.
Fourth Quarter 2006 Operating Expenses
Operating expenses for the fourth quarter of 2006 totaled $134.0 million, up
$10.1 million or 8% over the same period in 2005. Personnel costs increased $9.4
million or 14%. Regular compensation expense increase $5.2 million or 12% due to
a 9% increase in average compensation per employee and a 3% increase in
staffing. Incentive compensation expense rose $4.6 million or 32%, including
$3.0 million for cash-based incentive compensation expense and $1.6 million for
stock-based incentive compensation expense.
The combined growth in all other operating expenses for the fourth quarter of
2006 was 1% over the same period of 2005.
2005 Operating Expenses
Operating expenses for 2005 totaled $469.1 million, up $27.9 million or 6%
increase over 2004. This increase resulted primarily from personnel costs and
data processing expenses
Personnel costs increased $18.3 million or 8%. Regular compensation increased
$17.1 million or 11% to $165.5 million due primarily to a 6% increase in average
regular compensation per employee and a 5% increase in average staffing.
Incentive compensation decreased $4.6 million to $49.8 million. The cost of
cash-based incentive compensation plans increased $2.0 million or 5% while the
cost of stock-based incentive compensation plans decreased $6.6 million or 56%.
Stock-based incentive compensation plans include both equity awards and
liability awards. Compensation expense associated with liability award plans
decreased $8.4 million due to a decrease in the market value of BOK Financial
common stock and a reduction in the number of executive officers eligible to
participate in the liability award plans.
20
Employee benefit expenses increased $5.8 million or 15% due primarily to higher
employee insurance costs. The Company self-insures a portion of its employee
health care coverage.
Data processing and communication expenses increased $7.0 million or 12%. Data
processing systems costs increased $3.5 million or 10% due primarily to
maintenance and communications costs. Transaction card processing costs
increased $3.5 million or 15% due to a 17% increase in the number of
transactions processed. Business promotion expense increased $2.3 million or 15%
over 2004. Promotional activities in support of consumer banking initiatives
accounted for $1.5 million of the increase.
Income Taxes
Income tax expense was $114.6 million for 2006, $113.2 million for 2005 and
$91.4 million for 2004. This represented 35%, 36% and 34%, respectively, of book
taxable income. Tax expense currently payable totaled $122.1 million in 2006
compared with $112.7 million in 2005 and $91.3 million in 2004.
The statute of limitations expired on an uncertain state income tax position
during 2006. Income tax expense was reduced by $2.2 million from the reversal of
a reserve previously established for this uncertainty. Excluding the reversal of
this reserve, income tax expense would have been $116.8 million or 36% of book
taxable income for 2006. Income tax expense for 2004 was reduced by $3.0 million
due to the expiration of the statute of limitations on an uncertain state income
tax position and by $2.4 million from the contribution of appreciated securities
to the BOk Charitable Foundation. Excluding these items, income tax expense for
2004 would have been $96.9 million, or 36% of book taxable income.
21
Table 5 Selected Quarterly Financial Data
(In Thousands Except Per Share Data)
Fourth Third Second First
------------------------------------------------------
2006
------------------------------------------------------
Interest revenue $ 266,924 $ 255,480 $ 240,440 $ 223,585
Interest expense 142,646 131,502 119,334 106,259
-----------------------------------------------------------------------------------------------------------------
Net interest revenue 124,278 123,978 121,106 117,326
Provision for credit losses 5,953 5,254 3,795 3,400
-----------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 118,325 118,724 117,311 113,926
Other operating revenue 95,107 93,486 93,635 90,967
Gain (loss) on securities, net (864) 3,718 (2,583) (1,221)
Gain (loss) on derivatives, net (520) 379 (172) (309)
Other operating expense 134,227 130,889 125,740 124,460
Change in fair value of mortgage servicing rights (236) 7,921 (3,613) (7,081)
-----------------------------------------------------------------------------------------------------------------
Income before taxes 78,057 77,497 86,064 85,984
Income tax expense 27,472 24,837 31,080 31,236
-----------------------------------------------------------------------------------------------------------------
Net income $ 50,585 $ 52,660 $ 54,984 $ 54,748
=================================================================================================================
Earnings per share:
Basic $ 0.76 $ 0.79 $ 0.82 $ 0.82
=================================================================================================================
Diluted $ 0.75 $ 0.78 $ 0.82 $ 0.81
=================================================================================================================
Average shares:
Basic 66,814 66,756 66,775 66,715
=================================================================================================================
Diluted 67,359 67,325 67,318 67,261
=================================================================================================================
2005
------------------------------------------------------
Interest revenue $ 214,240 $ 199,056 $ 186,334 $ 170,304
Interest expense 97,854 86,228 73,801 62,710
-----------------------------------------------------------------------------------------------------------------
Net interest revenue 116,386 112,828 112,533 107,594
Provision for credit losses 4,450 3,976 2,015 2,000
-----------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 111,936 108,852 110,518 105,594
Other operating revenue 89,018 90,993 92,636 80,015
Gain (loss) on securities, net (1,780) (4,744) 2,266 (2,637)
Gain (loss) on derivatives, net 106 606 (311) 778
Other operating expense 124,611 121,705 118,922 107,783
Provision (recovery) for impairment of mortgage
servicing rights (708) (4,671) 7,088 (5,624)
-----------------------------------------------------------------------------------------------------------------
Income before taxes 75,377 78,673 79,099 81,591
Income tax expense 27,219 27,846 28,634 29,536
-----------------------------------------------------------------------------------------------------------------
Net income $ 48,158 $ 50,827 $ 50,465 $ 52,055
=================================================================================================================
Earnings per share:
Basic $ 0.72 $ 0.77 $ 0.79 $ 0.87
=================================================================================================================
Diluted $ 0.72 $ 0.76 $ 0.75 $ 0.78
=================================================================================================================
Average shares:
Basic 66,527 66,427 63,779 59,433
=================================================================================================================
Diluted 67,147 67,106 66,986 66,947
=================================================================================================================
Lines of Business
BOK Financial operates five principal lines of business: Oklahoma corporate
banking, Oklahoma consumer banking, mortgage banking, wealth management, and
regional banking. Mortgage banking activities include loan origination and
servicing across all markets served by the Company. Wealth management provides
brokerage and trading, private financial services and investment advisory
services in all markets. It also provides fiduciary services in all markets
except Colorado. Fiduciary services in Colorado are included in regional
banking. Regional banking consists primarily of corporate and consumer banking
activities in the respective local markets.
In addition to its lines of business, BOK Financial has a funds management unit.
The primary purpose of this unit is to manage the 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, tax-exempt income and tax credits and certain executive
compensation costs that are not attributed to the lines of business.
22
BOK Financial allocates resources and evaluates performance of its lines of
business after allocation of funds, certain indirect expenses, taxes and capital
costs. The cost of funds borrowed from the funds management unit by the
operating lines of business is transfer priced at rates that approximate market
for funds with similar duration. Market is generally based on the applicable
LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of
transfer-pricing funds that support assets of the operating lines of business
tends to insulate them from interest rate risk.
The value of funds provided by the operating lines of business to the funds
management unit is based on applicable Federal Home Loan Bank advance rates.
Deposit accounts with indeterminate maturities, such as demand deposit accounts
and interest-bearing transaction accounts, are transfer-priced at a rolling
average based on expected duration of the accounts. The expected duration ranges
from 90 days for certain rate-sensitive deposits to five years.
Economic capital is assigned to the business units by a 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. Additional capital is assigned to the
regional banking line of business based on our investment in those entities.
As shown in Table 6, regional banking continued to increase its contribution to
consolidated net income. The growth of the regional banking segment is
consistent with our corporate strategy of expansion into high growth markets
outside of Oklahoma. The Oklahoma corporate banking segment, which has been a
stable source of earnings over the past three years, also continued to grow. The
Oklahoma consumer banking unit's contribution to consolidated earnings increased
significantly in 2006. Rising short-term interest rates increased the internal
transfer pricing credit provided to units that generate lower-costing funds for
the Company. The 2006 loss in Funds Management and Other was due largely to the
transfer pricing credit provided to operating units that generate lower-costing
funds for the Company.
During 2006, operating results for the indirect lending unit was transferred
from Oklahoma Consumer Banking to Oklahoma Corporate Banking which better aligns
with management responsibility for this unit. Operating results for 2005 and
2004 have been restated for this change.
Table 6 Net Income by Line of Business
(In Thousands)
Years ended December 31,
2006 2005 2004
-------------------------------------
Oklahoma corporate banking $ 77,173 $ 68,150 $ 61,956
Oklahoma consumer banking 35,703 24,511 11,854
Mortgage banking 1,960 1,841 2,681
Wealth management 25,212 21,903 13,587
Regional banking 92,438 77,488 57,706
----------------------------------------------------------------------------------------------
Subtotal 232,486 193,893 147,784
Funds management and all other (19,509) 7,612 31,239
----------------------------------------------------------------------------------------------
Total $212,977 $201,505 $179,023
==============================================================================================
23
Oklahoma Corporate Banking
The Oklahoma Corporate Banking Division provides loan and lease financing and
treasury and cash management services to businesses throughout Oklahoma and
certain relationships in surrounding states. In addition to serving the banking
needs of small businesses, middle market and larger customers, this Division has
specialized groups that serve customers in the energy, agriculture, healthcare
and banking/finance industries, and includes the TransFund electronic funds
transfer network. The Oklahoma Corporate Banking Division contributed $77.2
million or 36% to consolidated net income for 2006. This Division contributed
$68.2 million or 34% to consolidated net income in 2005, including an after-tax
gain of $2.9 million from the sale of the Company's interest in an Oklahoma City
office building. Net interest revenue increased $11.7 million or 8% due
primarily to asset growth. Average earnings assets attributed to this division,
which consist primarily of commercial loans, increased $585 million or 13% over
2005. Average loans increased $328 million or 8% and average funds provided to
funds management unit increased $235 million. Growth in funds provided to the
funds management unit by the Oklahoma Corporate Banking Division was due to a
$147 million increase in average deposits and growth in Treasury Service funds.
Operating revenue grew $7.6 million or 9%. TransFund provided $3.6 million of
the increase in operating revenue. Operating expenses, which consist primarily
of personnel and data processing costs, increased 4%. Personnel costs increased
$5.6 million or 17%; all other operating expenses decreased $698 thousand.
Growth in net income also included a $4.9 million decrease in net loan
charge-offs.
Table 7 Oklahoma Corporate Banking
(Dollars in Thousands)
Years ended December 31,
-----------------------------------------------
2006 2005 2004
-----------------------------------------------
NIR (expense) from
external sources $ 253,266 $ 208,044 $ 148,919
NIR (expense) from
internal sources (101,432) (67,875) (26,049)
-----------------------------------------------
Total net interest
revenue 151,834 140,169 122,870
Other operating
revenue 91,250 83,619 86,493
Gain on sale of assets -- 4,758 --
Operating expense 115,306 110,395 99,007
Net loans charged off 1,586 6,481 8,956
Net income $ 77,173 $ 68,150 $ 61,956
Average assets $ 5,328,041 $ 4,722,030 $ 4,380,491
Average economic
capital 398,430 338,470 313,250
Return on assets 1.45% 1.44% 1.41%
Return on economic
capital 19.37 20.13 19.78
Efficiency ratio 47.43 48.30 47.29
24
Oklahoma Consumer Banking
The Oklahoma Consumer Banking Division provides a full line of deposit, loan and
fee-based services to customers throughout Oklahoma through four major
distribution channels: traditional branches, supermarket branches, the 24-hour
ExpressBank call center and the Internet. Additionally, the division is a
significant referral source for the Bank of Oklahoma Mortgage Division and
BOSC's retail brokerage division. This Division contributed $35.7 million or 17%
to consolidated net income for 2006, compared to $24.5 million or 12% of
consolidated net income for 2005. Net interest revenue grew $13.8 million or 25%
over 2005 due primarily to an increase in the internal transfer pricing credit.
Additionally, average deposits provided by the Oklahoma Consumer Banking
division grew $177 million or 7%. Average demand deposits were up $34 million or
12% over 2005. Interest bearing deposits increased $143 million or 6%, including
a $129 million or 10% increase in time deposits and a $14 million or 1% increase
in interest bearing transaction accounts. Other operating revenue was up $6.5
million or 10% over 2005 resulting largely from check card revenue and overdraft
fees.
Oklahoma Consumer Banking opened four branches during 2006, including two in the
Tulsa and two in the Oklahoma City areas. Plans for 2007 include opening six new
banking locations in Tulsa and Oklahoma City.
Table 8 Oklahoma Consumer Banking
(Dollars in Thousands)
Years ended December 31,
---------------------------------------------
2006 2005 2004
---------------------------------------------
NIR (expense) from
external sources $ (62,447) $ (43,411) $ (19,061)
NIR (expense) from
internal sources 131,131 98,291 64,873
---------------------------------------------
Total net interest
revenue 68,684 54,880 45,812
Other operating
revenue 72,699 66,174 56,611
Operating expense 80,250 77,757 76,057
Net loans charged
off 2,780 3,094 6,964
Net income $ 35,703 $ 24,511 $ 11,854
Average assets $ 2,836,692 $ 2,657,824 $ 2,746,279
Average economic capital 59,700 51,480 46,620
Return on assets 1.26% 0.92% 0.43%
Return on economic capital 59.80 47.61 25.43
Efficiency ratio 56.76 64.23 74.26
25
Mortgage Banking
BOK Financial engages in mortgage banking activities through the BOk Mortgage
Division of Bank of Oklahoma. These activities include the origination,
marketing and servicing of conventional and government-sponsored mortgage loans.
Mortgage banking activities contributed $2.0 million to consolidated net income
in 2006 compared to $1.8 million in 2005. Net income for 2005 included $753
thousand from the sale of mortgage loans from the Company's community
development loan portfolio.
Mortgage banking activities consisted of two sectors, loan production and loan
servicing.
The loan production sector generally performs best when mortgage rates are
relatively low and loan origination volumes are high. Conversely, the loan
servicing sector generally performs best when mortgage rates are relatively high
and prepayments are low.
Table 9 Mortgage Banking
(Dollars in Thousands)
Years ended December 31,
-----------------------------------------
2006 2005 2004
-----------------------------------------
NIR (expense) from
external sources $ 23,638 $ 20,237 $ 21,647
NIR (expense) from
internal sources (20,307) (14,882) (11,423)
-----------------------------------------
Total net interest
revenue 3,331 5,355 10,224
Capitalized mortgage
servicing rights 11,917 17,402 11,365
Other operating
revenue 17,287 15,347 22,055
Gain on sale of assets -- 1,232 --
Operating expense 30,731 34,736 35,415
Change in fair value of
mortgage servicing rights 3,009 -- --
Recovery for impairment
of mortgage
servicing rights -- (3,915) (1,567)
Gain (loss) on financial
instruments, net (1,102) (5,087) (5,068)
Net income $ 1,960 $ 1,841 $ 2,681
Average assets $ 519,371 $ 514,530 $ 559,034
Average economic capital 23,880 23,580 26,830
Return on assets 0.38% 0.36% 0.48%
Return on economic capital 8.21 7.81 9.99
Efficiency ratio 94.46 88.31 81.15
Loan Production Sector
Loan production revenue totaled $11.2 million in 2006. Capitalized mortgage
servicing rights provided $11.9 million, partially offset by a net loss on
mortgage loans sold. Loan production revenue totaled $17.6 million in 2005,
including $17.4 million of capitalized mortgage servicing rights. The average
initial value of servicing rights on mortgage loans funded during 2006 declined
to 1.81% from 1.91% for 2005 due to competitive pricing and rate volatility.
Mortgage loans funded totaled $874 million in 2006, including $632 million for
home purchases and $242 million of refinanced loans. Mortgage loans funded in
2005 totaled $910 million, including $664 million for home purchases and $246
million of refinanced loans. Approximately 68% of the loans funded during 2006
were in Oklahoma. Pre-tax income from loan production totaled $142 thousand for
2006 compared with $5.6 million for the previous year. The pipeline of mortgage
loan applications totaled $199 million at December 31, 2006, compared to $233
million at December 31, 2005.
Loan Servicing Sector
The loan servicing sector had pre-tax income of $1.6 million for 2006 compared
to a pre-tax loss of $3.2 million for the same period of 2005. Operating results
of the loan servicing sector is greatly affected by the effect of changes in
interest rates on prepayment speeds and the value of mortgage servicing rights.
Mortgage interest rates increased 64 basis points during the first half of the
year, then declined 52 basis points through year end. Changes in mortgage
commitment rates, prepayment speed assumptions and other estimates increased the
value of mortgage servicing rights recognized in earnings by $3.0 million in
2006 and $3.9 million in 2005. Increased value of servicing rights due to
changes in assumptions and estimates was offset by economic hedging losses of
$1.1 million in 2006 and $5.1 million in 2005.
26
Servicing revenue, including revenue on loans serviced for affiliates, totaled
$18.5 million in 2006 compared to $18.6 million in 2005. The average outstanding
balance of loans serviced was $4.9 billion during 2006 compared to $4.5 billion
during 2005. The increase in loans serviced was primarily due to purchased
servicing rights. In the first quarter of 2006, we paid $6.8 million to acquire
the rights to service approximately $480 million of mortgage loans.
Substantially all of these loans were to borrowers in our primary market areas.
Servicing revenue per outstanding loan principal was 38 basis points in 2006
compared with 42 basis points in 2005. Approximately 88% of loans serviced was
in our primary market areas at December 31, 2006, compared to 80% at December
31, 2005. Servicing costs totaled $8.1 million for 2006 and $8.5 million for
2005.
The fair value of mortgage servicing rights decreased $10.4 million during 2006
due to runoff of the underlying loans serviced. This reduction in fair value is
included in mortgage banking costs in the Consolidated Statement of Earnings.
Prior to the adoption of FAS 156, mortgage servicing rights were amortized in
proportion to projected cash flows over the estimated lives of the loans
serviced. Projected cash flows considered both actual and estimated runoff of
the underlying loans serviced. Amortization expense recognized in mortgage
banking costs during 2005 totaled $12.9 million. The decrease in expense related
to the runoff of loans serviced was due primarily to lower prepayment speeds
that resulted from higher mortgage interest rates.
BOK Financial designated a portion of its securities portfolio as an economic
hedge against the risk of loss on its mortgage servicing rights. These
securities, which are identified as mortgage trading securities are carried at
fair value. Changes in fair value are recognized in earnings as they occur.
Additionally, mortgage-related derivative contracts may also be designated as an
economic hedge of the risk of loss on mortgage servicing rights. Because the
fair values of these instruments are expected to vary inversely to the fair
value of the servicing rights, they are expected to partially offset risk. No
special hedge accounting treatment is applicable to either the mortgage
servicing rights or the financial instruments designated as an economic hedge.
We recognized net gains of $1.9 million in 2006 and net losses of $1.2 million
in 2005 from changes in the value of mortgage servicing rights and economic
hedging activities.
Our hedging strategy presents certain risks. A well-developed market determines
the fair value for the securities and derivatives, however there is no
comparable market for mortgage servicing rights. Therefore, the computed change
in value of the servicing rights for a specified change in interest rates may
not correlate to the change in value of the securities.
At December 31, 2006, financial instruments with a fair value of $163 million
and an unrealized loss of $257 thousand were held for the economic hedge
program. The interest rate sensitivity of the mortgage servicing rights and
securities held as a hedge is modeled over a range of +/- 50 basis points. At
December 31, 2006, the pre-tax results of this modeling on reported earnings
were:
Table 10 Interest Rate Sensitivity - Mortgage Servicing
(Dollars in Thousands)
50 bp 50 bp
Increase Decrease
-------- --------
Anticipated change in:
Fair value of mortgage
servicing rights $ 3,214 $ (4,691)
Fair value of hedging securities (4,267) 4,047
-----------------------------------------------------------
Net $ (1,053) $ (644)
===========================================================
Table 10 shows the non-linear effect of changes in mortgage commitment rates on
the value of mortgage servicing rights. A 50 basis point increase in rates is
expected to increase value by $3.2 million while a 50 basis point decrease is
expected to reduce value by $4.7 million. This considers that there is an upper
limit to appreciation in the value of servicing rights as rates rise due to the
contractual repayment terms of the loans and other factors. This is much less of
a limit of the speed at which mortgage loans may prepay in a declining rate
environment.
Modeling changes in the value of mortgage servicing rights due to changes in
interest rates assumes stable relationships between mortgage commitment rates
and discount rates used to determine the present value of future cash flows. It
also assumes a stable relationship between the assumed loan prepayment speeds
and actual prepayments of our loans. Changes in market conditions can increase
or decrease the discount spread over benchmark rates expected by investors in
mortgage servicing rights and actual prepayments may increase or decrease due to
factors other than changes in interest rates. These factors and others may cause
changes in the value of our mortgage servicing rights to differ from our
expectations.
27
Wealth Management
BOK Financial provides a wide range of private financial services through its
Wealth Management line of business, including banking, fiduciary and brokerage
services. Clients include affluent individuals, businesses, not-for-profit
organizations and government agencies. Wealth Management services are provided
primarily to clients in Oklahoma, Texas and New Mexico. Wealth Management
services to clients in Colorado are included in our Regional Banking line of
business. Additionally, Wealth Management includes a nationally-competitive,
self-directed 401-(k) program and administration and advisory services for the
American Performance family of mutual funds. Activities within the Wealth
Management line of business also consist of retail sales of mutual funds,
securities and annuities, institutional sales of securities, bond underwriting
and other financial advisory services and customer risk management programs.
Wealth Management contributed $25.2 million or 12% to consolidated net income
for 2006. This compared to $21.9 million or 11% of consolidated net income for
2005. Private financial services provided $21.6 million of net income in 2006,
up $2.3 million or 12% increase over 2005. The increased contribution by private
financial services is attributable primarily to net interest revenue. Net
interest revenue generated by private financial services grew $8.5 million or
33% compared with 2005. Average loan balances increased $195 million or 39%. In
addition, trust fees and commissions for the Wealth Management segment totaled
$61.6 million, a $4.1 million or 7% increase over last year. At December 31,
2006 and 2005, the Wealth Management line of business was responsible for trust
assets with aggregate market values of $29.0 billion and $26.0 billion,
respectively, under various fiduciary arrangements. The growth in trust assets
reflected increased market value of assets managed in addition to new business
generated during the year. We have sole or joint discretionary authority over
$10.9 billion of trust assets at December 31, 2006 compared to $10.0 billion of
trust assets at December 31, 2005. The fair value of non-managed assets
increased $2.0 billion to $11.5 billion at year-end 2006. Assets held in
safekeeping totaled $6.8 billion. Operating expenses increased $9.3 million or
17%, including $7.4 million or 24% from personnel expenses.
Brokerage and trading activities provided $3.6 million of net income in 2006
compared to $2.7 million in the previous year. Operating revenue increased $5.3
million or 10% due to a $3.4 million increase in revenue from customer hedging
programs. Operating expenses, which consisted primarily of compensation expense
increased $2.3 million or 6%. During 2006, the Company committed over $3.3
million to upgrade systems technology to support further growth in the customer
hedging programs.
Table 11 Wealth Management
(Dollars in Thousands)
Years ended December 31,
------------------------------------------
2006 2005 2004
------------------------------------------
NIR (expense) from
external sources $ 15,148 $ 12,488 $ 4,001
NIR (expense) from
internal sources 13,030 8,504 8,888
------------------------------------------
Total net interest
revenue 28,178 20,992 12,889
Other operating
revenue 119,200 109,405 93,193
Operating expense 105,906 94,338 83,784
Net income $ 25,212 $ 21,903 $ 13,587
Average assets $1,831,377 $1,748,104 $1,122,147
Average economic capital 128,920 106,590 83,570
Return on assets 1.38% 1.25% 1.21%
Return on economic capital 19.56 20.55 16.26
Efficiency ratio 71.86 72.35 78.98
Regional Banking
Regional banking consists primarily of the corporate and consumer banking
services provided by Bank of Texas, Bank of Albuquerque, Bank of Arkansas,
Colorado State Bank and Trust and Bank of Arizona in their respective markets.
It also includes fiduciary services provided by Colorado State Bank and Trust.
Small businesses and middle-market corporations are the regional banks' primary
customer focus. Regional banking contributed $92.4 million or 43% to
consolidated net income during 2006. This compares with $77.5 million or 38% of
consolidated net income in 2005. Growth in net income contributed by the
regional banking came primarily from operations in Texas and Colorado. Net
income for 2006 in Texas and Colorado increased $6.5 million or 14% and $6.6
million or 94%, respectively, from the previous year. In addition, net income
from Arizona totaled $1.8 million, up 357% in its first full year since
acquisition in 2005. Economic capital attributed to the Regional Banking units
in 2006 increased by more than their asset growth due to higher concentration in
energy and commercial real estate loans.
Texas growth resulted from an increase in net interest revenue. Net interest
revenue increased $14.8 million or 11%. Average earning assets increased $480
million, including $399 million of loans. Average middle market loans were up
$132 million or 35% with solid growth in both Dallas and Houston. Energy loans
grew $91 million or 23% and real estate loans increased $60 million or 21%.
Community banking loans increased $104 million or 14% over last year. The growth
in average earning assets was funded primarily by a $397 million increase in
28
average deposits. Corporate banking and community banking deposits were up $213
million or 55% and $100 million or 10%, respectively, over last year. Consumer
banking deposits also increased, up $87 million or 11%. We opened two branch
offices in the Texas market during 2006 and plan to open nine locations in 2007,
seven in the Dallas / Fort Worth market and two in the Houston market.
Net income continued to increase at our Colorado operations, up $6.6 million or
94% in third full-year of operations as a BOK Financial unit. Average earning
assets attributed to our Colorado operations increased $424 million or 61%.
Securities and funds sold to the funds management unit increased $297 million.
Average loans were up $128 million or 32% over 2005. Average deposits increased
$275 million or 62%, including consumer deposit growth of $185 million and
wealth management deposit growth of $93 million. These factors combined to
increase net interest revenue $8.9 million or 32%. Other operating revenue
increased $2.0 million or 20% due primarily to growth in trust fees. The fair
value of trust assets overseen by Colorado State Bank and Trust was $2.7 billion
at December 31, 2006, a 10% increase from December 31, 2005. Net loans
charged-off totaled $2.5 million in 2005 from the resolution of several
commercial lending relationships that pre-dated our acquisition of Colorado
State Bank and Trust.
Net income growth from our New Mexico operations slowed to $1.1 million or 6% in
2006 after a 37% increase the previous year. Net interest revenue increased $2.0
million or 4% while operating revenue was up $869 thousand or 6%. Operating
expenses decreased $158 thousand. New Mexico provided deposit growth of $112
million or 13% during 2006, including $103 million of consumer deposits.
Operating results for 2006 included a $1.2 million increase in net loans charged
off due largely to losses on a single credit.
Net income at Bank of Arizona increased more than three times over 2005 in its
first full year of operations as a BOK Financial unit. Net income for 2006
totaled $1.8 million, up from $386 thousand last year. Net interest revenue
provided the earnings growth, up $7.6 million. Average loans increased $178
million or 131%. Average commercial and residential real estate loans increased
$154 million to $254 million. Growth in average real estate loans consisted of
$94 million and $60 million, respectively, in the Phoenix and Tucson markets.
Average commercial loans increased $25 million or 105% compared with 2005.
Operating expenses increased $4.7 million, including $4.1 million of personnel
costs as we continue to expand in these markets.
Operating results of Bank of Kansas City, which began full-service operations in
the fourth quarter of 2006, were not significant to the Company.
Table 12 Bank of Texas
(Dollars in Thousands)
Years ended December 31,
-----------------------------------------------
2006 2005 2004
-----------------------------------------------
NIR (expense) from external sources $ 168,486 $ 143,081 $ 120,813
NIR (expense) from internal sources (22,848) (12,269) (5,206)
-----------------------------------------------
Total net interest revenue 145,638 130,812 115,607
Other operating revenue 26,762 23,719 22,406
Operating expense 84,628 79,371 73,548
Net loans charged off 5,081 2,719 3,928
Net income $ 53,844 $ 47,350 $ 39,388
Average assets $ 3,734,953 $ 3,235,236 $ 3,143,625
Average economic capital 246,140 183,430 163,090
Average invested capital 413,220 350,510 330,170
Return on assets 1.44% 1.46% 1.25%
Return on economic capital 21.88 25.81 24.15
Return on average invested capital 13.03 13.51 11.93
Efficiency ratio 49.09 51.36 53.29
29
Table 13 Bank of Albuquerque
(Dollars in Thousands)
Years ended December 31,
-----------------------------------------------
2006 2005 2004
-----------------------------------------------
NIR (expense) from external sources $ 64,695 $ 57,169 $ 46,888
NIR (expense) from internal sources (17,332) (11,764) (5,065)
-----------------------------------------------
Total net interest revenue 47,363 45,405 41,823
Other operating revenue 16,152 15,282 14,701
Operating expense 27,891 28,049 31,904
Net loans charged off 2,117 932 1,471
Net income $ 20,489 $ 19,385 $ 14,144
Average assets $ 1,463,374 $ 1,549,928 $ 1,652,557
Average economic capital 82,330 76,760 71,010
Average invested capital 101,420 95,850 90,100
Return on assets 1.40% 1.25% 0.86%
Return on economic capital 24.89 25.25 19.92
Return on average invested capital 20.20 20.22 15.70
Efficiency ratio 43.91 46.22 56.44
Table 14 Bank of Arkansas
(Dollars in Thousands)
Years ended December 31,
-----------------------------------------------
2006 2005 2004
-----------------------------------------------
NIR (expense) from external sources $ 10,442 $ 11,100 $ 9,046
NIR (expense) from internal sources (3,389) (3,603) (2,170)
-----------------------------------------------
Total net interest revenue 7,053 7,497 6,876
Other operating revenue 1,547 1,605 1,394
Operating expense 3,859 3,543 4,115
Net loans charged off / (recovered) 205 53 (26)
Net income $ 2,747 $ 3,376 $ 2,555
Average assets $ 202,018 $ 250,863 $ 273,700
Average economic capital 15,780 11,950 11,090
Average invested capital 15,780 11,950 11,090
Return on assets 1.36% 1.35% 0.93%
Return on economic capital 17.41 28.25 23.04
Return on average invested capital 17.41 28.25 23.04
Efficiency ratio 44.87 38.93 49.76
30
Table 15 Colorado State Bank and Trust
(Dollars in Thousands)
Years ended December 31,
-----------------------------------------------
2006 2005 2004
-----------------------------------------------
NIR (expense) from external sources $ 54,722 $ 35,302 $ 24,034
NIR (expense) from internal sources (18,227) (7,679) (7,312)
-----------------------------------------------
Total net interest revenue 36,495 27,623 16,722
Other operating revenue 11,916 9,912 8,516
Operating expense 26,195 23,507 22,455
Net loans charged off / (recovered) (36) 2,517 134
Net income $ 13,595 $ 6,991 $ 1,619
Average assets $ 1,214,161 $ 783,269 $ 684,329
Average economic capital 71,860 47,440 26,760
Average invested capital 113,840 89,430 68,750
Return on assets 1.12% 0.89% 0.24%
Return on economic capital 18.92 14.74 6.05
Return on average invested capital 11.94 7.82 2.35
Efficiency ratio 54.11 62.63 88.97
Table 16 Bank of Arizona
(Dollars in Thousands)
Years ended December 31,
-----------------------------------------------
2006 2005 2004
-----------------------------------------------
NIR (expense) from external sources $ 27,818 $ 10,855 ***
NIR (expense) from internal sources (12,119) (2,796) ***
-----------------------------------------------
Total net interest revenue 15,699 8,059 ***
Other operating revenue 532 956 ***
Operating expense 13,238 8,556 ***
Net loans charged off / (recovered) 9 (31) ***
Net income $ 1,763 $ 386 ***
Average assets $ 404,920 $ 199,224 ***
Average economic capital 25,220 7,070 ***
Average invested capital 41,870 23,720 ***
Return on assets 0.44% 0.19% ***
Return on economic capital 6.99 5.46 ***
Return on average invested capital 4.21 1.63 ***
Efficiency ratio 81.56 94.91 ***
*** Data not applicable due to acquisition of Bank of Arizona in April 2005.
31
Assessment of Financial Condition
Securities
BOK Financial maintains a securities portfolio to support its interest rate risk
management strategies, provide liquidity and profitability and comply with
regulatory requirements. Securities are classified as either held for
investment, available for sale or trading.
Table 17 Securities
(Dollars in Thousands)
December 31,
-------------------------------------------------------------------------------------
2006 2005 2004
-------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-------------------------------------------------------------------------------------
Investment:
U.S. Treasury $ 1,999 $ 1,995 $ 1,994 $ 1,976 $ -- $ --
Municipal and other tax-exempt 240,976 238,869 240,359 238,649 216,986 218,465
Mortgage-backed U.S. agency securities -- -- -- -- 1,287 1,336
Other debt securities 5,714 5,744 2,772 2,781 2,821 2,835
-----------------------------------------------------------------------------------------------------------------------------------
Total $ 248,689 $ 246,608 $ 245,125 $ 243,406 $ 221,094 $ 222,636
===================================================================================================================================
Available for sale:
U.S. Treasury $ 6,014 $ 5,983 $ 16,037 $ 15,827 $ 27,119 $ 27,062
Municipal and other tax-exempt 77,860 78,614 17,153 17,078 414 404
Mortgage-backed securities:
U.S. agencies 3,204,592 3,128,138 3,507,047 3,424,356 3,067,611 3,052,375
Other 1,361,373 1,333,533 1,277,161 1,250,701 1,423,613 1,418,770
-----------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 4,565,965 4,461,671 4,784,208 4,675,057 4,491,224 4,471,145
-----------------------------------------------------------------------------------------------------------------------------------
Other debt securities 46 45 124 124 515 528
Equity securities and mutual funds 101,960 108,748 108,914 113,489 90,343 94,051
-----------------------------------------------------------------------------------------------------------------------------------
Total $4,751,845 $4,655,061 $4,926,436 $4,821,575 $4,609,615 $4,593,190
===================================================================================================================================
Mortgage trading:
Mortgage-backed U.S. agency securities $ 163,094 $ 162,837 -- -- -- --
===================================================================================================================================
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, 2006, investment securities were carried at $249
million and had a fair value of $247 million. Management has the ability and
intent to hold these securities until they mature. None of the unrealized losses
in investment securities is believed to be due to credit concerns.
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 $4.8 billion at December 31, 2006,
down $175 million compared with the previous year-end. Mortgage-backed
securities decreased $218 million and represented 96% of total available for
sale securities at year end. The decrease in available for sale securities
reflected the Company's election to separately designate mortgage trading
securities as permitted by FAS 156 at the beginning of 2006 and decision to
invest in bank-owned life insurance. These factors, along with strong loan
demand, reduced the available for sale securities portfolio.
The primary risk of holding mortgage-backed securities comes from extension
during periods of rising interest rates or prepayment during periods of falling
interest rates. We evaluate this risk through extensive modeling of risk both
before making an investment and throughout the life of the security. The
expected duration of the mortgage-backed securities portfolio was approximately
2.6 years at December 31, 2006. Management estimates that the expected duration
would extend to approximately 3.5 years assuming a 300 basis point immediate
rate shock.
Net unrealized losses on available for sale securities totaled $97 million at
December 31, 2006 compared with net unrealized losses of $105 million at
December 31, 2005. The aggregate gross amount of unrealized losses at December
31, 2006 totaled $108 million. Management evaluated the securities with
unrealized losses to determine if we believe that the losses were temporary.
This evaluation considered factors such as causes of the unrealized losses and
prospects for recovery over various interest rate scenarios and time periods.
Management does not believe that any of the unrealized losses were due to credit
concerns. We also considered our intent and ability to either hold or sell the
securities. It is our belief, based on currently available information and our
evaluation, that the unrealized losses in these securities were temporary.
Certain mortgage-backed securities, identified as mortgage trading securities,
have been designated as economic hedges of mortgage servicing rights. These
securities are carried at fair value with changes in fair value recognized in
current period income. These securities are held with the intent that gains or
losses will offset changes in the fair value of mortgage servicing rights. The
Company also maintains a separate trading portfolio. Trading portfolio
securities, which are also carried at fair value with changes in fair value
recognized in current period income, are acquired and held with the intent to
sell at a profit to the Company.
32
Bank-Owned Life Insurance
The Company invested $202 million in bank-owned life insurance during 2006. This
investment is expected to provide a long-term source of earnings to support
existing employee benefit obligations. Substantially all of the funds are held
in separate accounts and invested in U.S. government, mortgage-backed and
corporate debt securities. 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. The cash surrender value of the
policies, including the value of the stable value wrap, was $196 million at
December 31, 2006. In addition to the investment in the separate accounts, $8
million of the amount invested was used to pay premium taxes on the insurance
premiums. These taxes will be recovered over a ten-year period. At December 31,
2006, a $6.5 million receivable was recorded based on the present value of the
taxes.
Loans
The aggregate loan portfolio before allowance for loan losses totaled $10.7
billion at December 31, 2006, a $1.6 billion or 17% increase since last year.
Loan growth was broadly distributed among the various segments of the portfolio
and across all geographic markets.
The commercial loan portfolio increased $909 million during 2006. Energy loans
totaled $1.8 billion or 16% of total loans. Outstanding energy loans increased
$364 million or 26% during 2006. Approximately $1.5 billion was due to oil and
gas producers, up from $1.1 billion at December 31, 2005. The amount of credit
available to these customers generally depends on a percentage of the value of
their proven energy reserves based on anticipated prices. The energy category
also included loans to borrowers involved in the transportation and sale of oil
and gas and to borrowers that manufacture equipment or provide other services to
the energy industry. The energy category of our loan portfolio is distributed
$1.4 billion in Oklahoma and $356 million in Texas.
The services sector of the loan portfolio totaled $1.6 billion or 15% of total
loans and consists of a large number of loans to a variety of businesses,
including communications, gaming and transportation services. Approximately $1.1
billion of the services category is made up of loans with individual balances of
less than $10 million. Approximately $887 million of the outstanding balance of
loans to the services industry is attributed to Oklahoma, $467 million to Texas
and $132 million to New Mexico.
Other notable loan concentrations by primary industry of the borrowers are
presented in Table 18.
Table 18 Loans
(In Thousands)
December 31,
-----------------------------------------------------------------------
2006 2005 2004 2003 2002
-----------------------------------------------------------------------
Commercial:
Energy $ 1,763,180 $1,399,417 $1,223,195 $1,231,599 $1,132,178
Services 1,555,141 1,425,821 1,190,814 989,906 917,263
Wholesale/retail 932,531 793,032 699,318 668,202 627,422
Manufacturing 609,571 514,792 484,423 482,657 501,506
Healthcare 602,273 520,309 424,257 393,929 332,359
Agriculture 321,380 291,858 262,436 228,222 186,976
Other commercial and industrial 424,808 354,706 291,393 342,187 292,094
-----------------------------------------------------------------------
Total commercial 6,208,884 5,299,935 4,575,836 4,336,702 3,989,798
Commercial real estate:
Construction and land development 889,925 638,366 457,399 436,087 356,227
Multifamily 239,000 204,620 231,985 271,119 307,119
Other real estate loans 1,317,615 1,146,916 931,726 922,886 772,492
-----------------------------------------------------------------------
Total commercial real estate 2,446,540 1,989,902 1,621,110 1,630,092 1,435,838
Residential mortgage:
Secured by 1-4 family residential properties 1,256,259 1,169,331 1,198,918 1,015,643 929,759
Residential mortgages held for sale 64,625 51,666 40,262 56,543 133,421
-----------------------------------------------------------------------
Total residential mortgage 1,320,884 1,220,997 1,239,180 1,072,186 1,063,180
Consumer 739,495 629,144 492,841 444,909 412,167
--------------------------------------------------------------------------------------------------------------------------
Total $10,715,803 $9,139,978 $7,928,967 $7,483,889 $6,900,983
==========================================================================================================================
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, 2006, the
outstanding principal balance of these loans totaled $1.4 billion. Substantially
all of these loans are to borrowers with local market relationships. BOK
Financial serves as the agent lender in approximately 27% 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.
33
Commercial real estate loans totaled $2.4 billion or 23% of the loan portfolio
at December 31, 2006. Over the past five years, the percentage of commercial
real estate loans to our total loan portfolio ranged from 20% to 23%. The
outstanding balance of commercial real estate loans increased $457 million or
23% from the previous year end. Growth in commercial real estate loans was
distributed across all of our markets. Total commercial real estate loans
increased $119 million or 14% in the Oklahoma markets, $101 million or 18% in
the Texas markets and $91 million or 79% in Arizona. Construction and land
development included $699 million for single family residential lots and
premises, up $206 million, or 42% since December 31, 2005. The major components
of other commercial real estate loans were retail facilities - $374 million and
office buildings - $421 million.
Residential mortgage loans, excluding loans held for sale, included $389 million
of home equity loans, $417 million of loans held for business relationship
purposes, $278 million of adjustable rate mortgages and $163 million of loans
held for community development. We have no concentration in sub-prime
residential mortgage loans. At December 31, 2006, consumer loans included $465
million of indirect automobile loans. Approximately $384 million of these loans
were purchased from dealers in Oklahoma and $80 million were purchased from
dealers in Arkansas. Indirect automobile loans grew $108 million during 2006,
including $47 million in Oklahoma and $59 million in Arkansas.
Table 19 Loan Maturity and Interest Rate Sensitivity at December 31, 2006
(In Thousands)
Remaining Maturities of Selected Loans
-----------------------------------------
Total Within 1 Year 1-5 Years After 5 Years
-------------------------------------------------------
Loan maturity:
Commercial $6,208,884 $1,984,118 $3,362,353 $ 862,413
Commercial real estate 2,446,540 995,056 1,102,446 349,038
---------------------------------------------------------------------------------------------------------
Total $8,655,424 $2,979,174 $4,464,799 $1,211,451
---------------------------------------------------------------------------------------------------------
Interest rate sensitivity for selected loans with:
Predetermined interest rates $3,196,399 $ 499,295 $2,154,756 $ 542,348
Floating or adjustable interest rates 5,459,025 2,479,879 2,310,043 669,103
---------------------------------------------------------------------------------------------------------
Total $8,655,424 $2,979,174 $4,464,799 $1,211,451
=========================================================================================================
The Company continued to increase geographic diversification through expansion
into Texas, New Mexico, Colorado and Arizona. The percent of the loan portfolio
attributed to Oklahoma declined to 53% at December 31, 2006 from 58% at December
31, 2005. Table 20 presents the distribution of the major loan categories among
our primary market areas.
34
Table 20 Loans by Principal Market Area
(In Thousands)
December 31,
-----------------------------------------------------------------------
2006 2005 2004 2003 2002
-----------------------------------------------------------------------
Oklahoma:
Commercial $ 3,261,592 $3,091,842 $2,813,591 $2,802,852 $2,677,616
Commercial real estate 979,251 859,829 744,724 789,868 763,469
Residential mortgage 896,567 842,456 901,538 699,274 656,391
Residential mortgage held for sale 64,625 51,666 40,262 56,543 133,421
Consumer 512,032 466,180 367,947 324,305 294,404
-----------------------------------------------------------------------
Total Oklahoma $ 5,714,067 $5,311,973 $4,868,062 $4,672,842 $4,525,301
=======================================================================
Texas:
Commercial $ 1,722,627 $1,356,611 $1,120,069 $ 963,340 $ 866,905
Commercial real estate 670,635 569,921 459,067 477,561 455,364
Residential mortgage 213,801 199,726 191,296 204,481 192,575
Consumer 95,652 89,017 86,732 101,269 104,353
-----------------------------------------------------------------------
Total Texas $ 2,702,715 $2,215,275 $1,857,164 $1,746,651 $1,619,197
=======================================================================
New Mexico:
Commercial $ 411,272 $ 383,325 $ 354,904 $ 297,896 $ 286,622
Commercial real estate 257,079 232,564 196,832 175,745 150,293
Residential mortgage 75,159 65,784 63,043 66,179 76,020
Consumer 13,256 15,137 13,260 11,070 11,399
-----------------------------------------------------------------------
Total New Mexico $ 756,766 $ 696,810 $ 628,039 $ 550,890 $ 524,334
=======================================================================
Arkansas:
Commercial $ 95,483 $ 79,719 $ 61,934 $ 63,480 $ 63,113
Commercial real estate 94,395 75,483 74,478 75,452 66,712
Residential mortgage 23,076 13,044 11,238 6,245 4,773
Consumer 86,017 25,659 3,858 2,671 2,011
-----------------------------------------------------------------------
Total Arkansas $ 298,971 $ 193,905 $ 151,508 $ 147,848 $ 136,609
=======================================================================
Colorado:
Commercial $ 451,046 $ 270,108 $ 191,459 $ 209,134 $ 95,542
Commercial real estate 193,747 133,537 118,134 111,466 --
Residential mortgage 15,812 21,918 31,693 39,464 --
Consumer 26,591 27,871 21,044 5,594 --
-----------------------------------------------------------------------
Total Colorado $ 687,196 $ 453,434 $ 362,330 $ 365,658 $ 95,542
=======================================================================
Arizona:
Commercial $ 96,453 $ 50,489 $ -- $ -- $ --
Commercial real estate 207,035 115,697 27,875 -- --
Residential mortgage 31,280 26,102 -- -- --
Consumer 5,947 5,280 -- -- --
-----------------------------------------------------------------------
Total Arizona $ 340,715 $ 197,568 $ 27,875 $ -- $ --
=======================================================================
Kansas:
Commercial $ 170,411 $ 67,841 $ 33,879 $ -- $ --
Commercial real estate 44,398 2,871 -- -- --
Residential mortgage 564 301 110 -- --
Consumer -- -- -- -- --
-----------------------------------------------------------------------
Total Kansas $ 215,373 $ 71,013 $ 33,989 $ -- $ --
=======================================================================
Total BOK Financial loans $10,715,803 $9,139,978 $7,928,967 $7,483,889 $6,900,983
=======================================================================
Loan Commitments
BOK Financial enters into certain off-balance sheet arrangements in the normal
course of business. These arrangements included loan commitments which totaled
$5.3 billion and standby letters of credit which totaled $528 million at
December 31, 2006. 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.
35
Table 21 Off-Balance Sheet Credit Commitments
(In Thousands)
As of December 31,
2006 2005 2004 2003 2002
-----------------------------------------------------------------
Loan commitments $5,318,257 $4,349,114 $3,459,425 $2,964,694 $2,884,011
Standby letters of credit 527,627 558,907 414,228 374,550 290,069
-------------------------------------------------------------------------------------------------------
Total $5,845,884 $4,908,021 $3,873,653 $3,339,244 $3,174,080
=======================================================================================================
Derivatives with Credit Risk
The Company offers programs that permit its customers to hedge various risks,
including fluctuations in energy and cattle 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.
These programs create credit risk for potential amounts due to the Company from
its customers and from the counterparties. Customer credit risk is monitored
through existing credit policies and procedures. The effects of changes in
commodity prices, interest rates or foreign exchange rates are evaluated across
a range of possible options to determine the maximum exposure we are willing to
have individually to any customer. Customers may also be required to provide
margin collateral to further limit our credit risk.
Counterparty credit risk is evaluated through existing policies and procedures.
This evaluation considers the total relationship between BOK Financial and each
of the counterparties. Individual limits are established by management, approved
by Credit Administration and reviewed by the Asset / Liability Committee. Margin
collateral is required if the exposure between the Company and any counterparty
exceeds established limits. Based on declines in the counterparties' credit
ratings, these limits are reduced and additional margin collateral is required.
A deterioration of the credit standing of one or more of the customers or
counterparties to these contracts may result in BOK Financial recognizing a loss
as the fair value of the affected contracts may no longer move in tandem with
the offsetting contracts. This could occur 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, 2006, the fair
values of derivative contracts reported as assets under these programs totaled
$283 million. This included energy contracts with fair values of $251 million,
interest rate contracts with fair values of $20 million and foreign exchange
contracts with fair values of $11 million. The aggregate fair values of
derivative contracts reported as liabilities totaled $290 million. Approximately
76% of the fair value of asset contracts was with customers. The credit risk of
these contracts is generally backed by energy production. The remaining 24% was
with dealer counterparties, consisting primarily of highly-rated financial
institutions and energy companies. The maximum net exposure to any single
customer or counterparty totaled $51 million.
Summary of Loan Loss Experience
The reserve for loan losses, which is available to absorb losses inherent in the
loan portfolio, totaled $109 million at December 31, 2006 compared to $104
million at December 31, 2005. These amounts represented 1.03% and 1.14% of
outstanding loans, excluding loans held for sale, at December 31, 2006 and 2005,
respectively. Losses on loans held for sale, principally mortgage loans
accumulated for placement into security pools, are charged to earnings through
adjustment in the carrying value. The reserve for loan losses also represented
403% of the outstanding balance of nonperforming loans at year-end 2006 compared
to 413% at year-end 2005. Nonperforming loans at December 31, 2006 totaled $27
million compared with $25 million at the previous year-end. Net loans charged
off during 2006 decreased to $12 million in 2006 compared to $16 million in the
previous year. Net commercial real estate loan charge-offs decreased $2.7
million compared with last year. Consumer loan net charge-offs, which includes
deposit account overdraft losses, were down $592 thousand. Table 22 provides
statistical information regarding the reserve for loan losses for the past five
years.
36
Table 22 Summary of Loan Loss Experience
(Dollars in Thousands)
Years ended December 31,
-----------------------------------------------------------------
Reserve for loan losses: 2006 2005 2004 2003 2002
-----------------------------------------------------------------
Beginning balance $103,876 $108,618 $114,784 $103,851 $ 89,188
Loans charged off:
Commercial 10,517 9,670 13,921 16,331 13,326
Commercial real estate 87 2,619 971 88 286
Residential mortgage 1,265 1,212 1,465 1,721 412
Consumer 12,127 12,257 13,328 13,335 11,881
------------------------------------------------------------------------------------------------------------------------------
Total 23,996 25,758 29,685 31,475 25,905
------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 5,405 4,071 2,283 887 1,276
Commercial real estate 327 117 30 53 118
Residential mortgage 161 180 243 83 146
Consumer 5,638 5,176 5,171 5,102 3,436
------------------------------------------------------------------------------------------------------------------------------
Total 11,531 9,544 7,727 6,125 4,976
------------------------------------------------------------------------------------------------------------------------------
Net loans charged off 12,465 16,214 21,958 25,350 20,929
Provision for loan losses 18,086 10,401 15,792 34,000 34,228
Additions due to acquisitions -- 1,071 -- 2,283 1,364
------------------------------------------------------------------------------------------------------------------------------
Ending balance $109,497 $103,876 $108,618 $114,784 $ 103,851
==============================================================================================================================
Reserve for off-balance sheet credit losses:
Beginning balance $ 20,574 $ 18,502 $ 13,855 $ 12,219 $ 12,717
Provision for off-balance sheet credit losses 316 2,040 4,647 1,636 (498)
Additions due to acquisitions -- 32 -- -- --
------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 20,890 $ 20,574 $ 18,502 $ 13,855 $ 12,219
==============================================================================================================================
Total provision for credit losses $ 18,402 $ 12,441 $ 20,439 $ 35,636 $ 33,730
==============================================================================================================================
Reserve for loan losses to loans outstanding at
year-end(1) 1.03% 1.14% 1.38% 1.55% 1.53%
Net charge-offs to average loans(1) 0.13 0.19 0.29 0.36 0.33
Total provision for credit losses to average
loans(1) 0.19 0.15 0.27 0.50 0.54
Recoveries to gross charge-offs 48.05 37.05 26.03 19.46 19.21
Reserve for off-balance sheet credit losses to
off-balance sheet credit commitments 0.36% 0.42% 0.48% 0.41% 0.38%
Combined reserves for credit losses to loans outstanding
at year-end(1) 1.22% 1.37% 1.61% 1.73% 1.72%
==============================================================================================================================
Problem Loans:
Loans past due (90 days) $ 5,945 $ 8,708 $ 7,649 $ 14,944 $ 8,117
Nonaccrual(2) 26,055 25,162 52,660 52,681 49,855
Renegotiated 1,111 -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
Total $ 33,111 $ 33,870 $ 60,309 $ 67,625 $ 57,972
------------------------------------------------------------------------------------------------------------------------------
Foregone interest on nonaccrual loans(2) $ 2,130 $ 2,515 $ 4,617 $ 4,821 $ 4,770
==============================================================================================================================
(1) Excludes residential mortgage loans held for sale.
(2) Interest collected and recognized on nonaccrual loans was not significant
in 2006 and previous years disclosed.
The Company considers the credit risk from loan commitments and letters of
credit in its evaluation of the adequacy of the reserve for credit losses. A
separate reserve for off-balance sheet credit risk is maintained. Table 22
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.
Specific impairment reserves are determined through evaluation of estimated
future cash flows and collateral value. At December 31, 2006, specific
impairment reserves totaled $1.7 million on total impaired loans of $23 million.
Specific impairment reserves were $2.6 million at December 31, 2005.
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. At December 31,
2006, the ranges of potential losses for the more significant factors were:
General economic conditions - $5.2 million to $9.1 million
Concentration in large loans - $1.4 million to $2.8 million
Allocation of the loan loss reserve to the major loan categories is presented in
Table 23.
37
The provision for credit losses totaled $18.4 million, up $6.0 million over
2005. Factors considered in determining the provision for credit losses included
the application of statistical migration factors to loan growth during the year
and concentrations in commercial real estate and residential homebuilder loans.
The preceding factors that increased the required provision were partially
offset by reductions in the outstanding balances of criticized and classified
loans and potential problem loans.
Table 23 Loan Loss Reserve Allocation
(Dollars in Thousands)
December 31,
------------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------------------------------------------------------------------------------------------------
% 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 $ 44,151 58.29% $ 43,915 58.32% $ 52,325 58.00% $ 58,993 58.39% $ 56,474 58.95%
Commercial real
estate 30,838 22.97 25,529 21.89 21,317 20.55 16,395 21.95 16,037 21.22
Residential mortgage 4,663 11.80 5,302 12.87 5,904 15.20 6,797 13.67 3,956 13.74
Consumer 11,784 6.94 10,929 6.92 12,034 6.25 16,132 5.99 13,922 6.09
Nonspecific allowance 18,061 -- 18,201 -- 17,038 -- 16,467 -- 13,462 --
-----------------------------------------------------------------------------------------------------------------------------------
Total $109,497 100.00% $103,876 100.00% $108,618 100.00% $114,784 100.00% $103,851 100.00%
===================================================================================================================================
(1) Excludes residential mortgage loans held for sale.
(2) Specific allocation for the loan concentration risks are included in the
appropriate category.
Nonperforming Assets
Information regarding nonperforming assets, which totaled $36 million at
December 31, 2006 and $34 million at December 31, 2005 is presented in Table 24.
Nonperforming assets included nonaccrual and renegotiated loans and excluded
loans 90 days or more past due but still accruing interest. Nonaccrual loans
totaled $26 million at December 31, 2006 and $25 million at December 31, 2005.
Newly identified nonaccruing loans totaled $27 million during the year.
Nonaccruing loans decreased $8 million for loans charged off and foreclosed, and
$19 million for cash payments received. Renegotiated loans, which consist of
indirect automobile loans whose original terms have been modified, totaled $1.1
million.
Table 24 Nonperforming Assets
(Dollars in Thousands)
December 31,
-----------------------------------------------------------
2006 2005 2004 2003 2002
-----------------------------------------------------------
Nonperforming loans
Nonaccrual loans:
Commercial $10,737 $11,673 $33,195 $41,360 $39,114
Commercial real estate 4,771 5,370 10,144 2,311 3,395
Residential mortgage 10,325 7,347 8,612 7,821 5,950
Consumer 222 772 709 1,189 1,396
---------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 26,055 25,162 52,660 52,681 49,855
Renegotiated loans 1,111 -- -- -- --
---------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 27,166 25,162 52,660 52,681 49,855
Other nonperforming assets 8,486 8,476 3,763 7,186 6,719
---------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $35,652 $33,638 $56,423 $59,867 $56,574
===========================================================================================================================
Ratios:
Reserve for loan losses to nonperforming loans 403.07% 412.83% 206.26% 217.89% 208.31%
Nonperforming loans to period-end loans(2) 0.26 0.28 0.67 0.71 0.74
===========================================================================================================================
Loans past due (90 days)(1) $ 5,945 $ 8,708 $ 7,649 $14,944 $ 8,117
===========================================================================================================================
(1) Includes residential mortgages guaranteed by agencies
of the U.S. Government. $ 2,233 $ 2,021 $ 2,308 $ 4,132 $ 4,956
(2) Excludes residential mortgage loans held for sale.
The loan review process also identifies 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 concerns
as to the borrowers' ability to comply with current repayment terms. These
potential problem loans totaled $22 million at December 31, 2006 and $28 million
at December 31, 2005. The current composition of potential problem loans by
primary industry included healthcare - $11 million, services - $6 million and
real estate - $3 million.
38
Deposits
Deposit accounts represent our primary funding source. We compete for retail and
commercial deposits by offering a broad range of products and services and
focusing on customer convenience. Retail deposit growth is supported through our
Perfect Banking sales and customer service standards 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.
Average deposits totaled $11.4 billion for 2006, a $1.3 billion or 13% increase
over 2005. Core deposits, which we define as deposits of less than $100,000,
excluding public funds and brokered deposits, increased 6% to $5.5 billion.
Accounts with balances in excess of $100,000 totaled $4.7 billion, an increase
of $818 million or 21%. Average brokered deposits and public funds, which
totaled $1.1 billion, were up $134 million over 2005.
Table 25 Maturity of Domestic CDs and Public
Funds in Amounts of $100,000 or More
(In Thousands)
December 31,
-----------------------
2006 2005
-----------------------
Months to maturity:
3 or less $ 713,463 $ 354,724
Over 3 through 6 517,766 256,919
Over 6 through 12 809,212 631,691
Over 12 603,291 1,226,823
-----------------------------------------------------
Total $2,643,732 $2,470,157
=====================================================
At December 31, 2006, the Company had $512 million in fixed rate, brokered
certificates of deposits. The weighted-average interest rate paid on these
certificates is 4.42%. Interest rate swaps, which may have been designated as
fair value hedges of each of these certificates, modify the certificates from
fixed rate to floating rates based on changes in LIBOR. We receive a weighted
average fixed rate of 4.62% on these swaps and currently pay a floating rate of
5.32%.
The distribution of deposit accounts among our principal markets is shown in
Table 26.
39
Table 26 Deposits by Principal Market Area
(In Thousands)
December 31,
------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------------------------------------------------------------------
Oklahoma:
Demand $ 915,101 $ 1,003,284 $1,095,228 $1,025,483 $1,044,628
Interest-bearing:
Transaction 3,456,322 3,002,610 2,291,089 2,246,675 1,897,353
Savings 83,017 85,837 87,597 98,611 103,749
Time 2,595,890 2,564,337 2,505,849 2,403,293 2,334,949
------------------------------------------------------------------------
Total interest-bearing 6,135,229 5,652,784 4,884,535 4,748,579 4,336,051
------------------------------------------------------------------------
Total Oklahoma $ 7,050,330 $ 6,656,068 $5,979,763 $5,774,062 $5,380,679
========================================================================
Texas:
Demand $ 640,159 $ 615,732 $ 617,808 $ 421,292 $ 394,164
Interest-bearing:
Transaction 1,688,131 1,535,570 1,119,893 1,213,777 953,550
Savings 24,074 27,398 30,331 35,702 33,071
Time 829,255 735,731 571,993 505,463 510,512
------------------------------------------------------------------------
Total interest-bearing 2,541,460 2,298,699 1,722,217 1,754,942 1,497,133
------------------------------------------------------------------------
Total Texas $ 3,181,619 $ 2,914,431 $2,340,025 $2,176,234 $1,891,297
========================================================================
New Mexico:
Demand $ 124,088 $ 129,289 $ 136,599 $ 106,050 $ 79,953
Interest-bearing:
Transaction 432,342 381,099 320,118 370,294 295,174
Savings 16,417 17,839 17,885 20,728 26,704
Time 490,460 453,314 411,939 317,924 287,607
------------------------------------------------------------------------
Total interest-bearing 939,219 852,252 749,942 708,946 609,485
------------------------------------------------------------------------
Total New Mexico $ 1,063,307 $ 981,541 $ 886,541 $ 814,996 $ 689,438
========================================================================
Arkansas:
Demand $ 12,589 $ 10,429 $ 14,489 $ 16,351 $ 12,949
Interest-bearing:
Transaction 17,905 22,354 26,882 28,411 18,025
Savings 1,010 1,058 1,434 1,341 1,214
Time 57,446 75,034 99,677 105,598 134,923
------------------------------------------------------------------------
Total interest-bearing 76,361 98,446 127,993 135,350 154,162
------------------------------------------------------------------------
Total Arkansas $ 88,950 $ 108,875 $ 142,482 $ 151,701 $ 167,111
========================================================================
Colorado:
Demand $ 48,756 $ 61,647 $ 62,995 $ 79,424 $ --
Interest-bearing:
Transaction 328,254 258,668 189,106 162,651 --
Savings 12,632 17,772 19,092 18,347 --
Time 485,200 264,020 54,394 42,448 --
------------------------------------------------------------------------
Total interest-bearing 826,086 540,460 262,592 223,446 --
------------------------------------------------------------------------
Total Colorado $ 874,842 $ 602,107 $ 325,587 $ 302,870 $ --
========================================================================
Arizona:
Demand $ 39,352 $ 45,567 $ -- $ -- $ --
Interest-bearing:
Transaction 73,729 56,994 -- -- --
Savings 1,978 4,111 -- -- --
Time 6,574 5,624 -- -- --
------------------------------------------------------------------------
Total interest-bearing 82,281 66,729 -- -- --
------------------------------------------------------------------------
Total Arizona $ 121,633 $ 112,296 $ -- $ -- $ --
========================================================================
Kansas:
Demand $ 14 $ -- $ -- $ -- $ --
Interest-bearing:
Transaction 287 -- -- -- --
Savings 2 -- -- -- --
Time 5,721 -- -- -- --
------------------------------------------------------------------------
Total interest-bearing 6,010 -- -- -- --
------------------------------------------------------------------------
Total Kansas $ 6,024 $ -- $ -- $ -- $ --
========================================================================
Total BOK Financial deposits $12,386,705 $11,375,318 $9,674,398 $9,219,863 $8,128,525
========================================================================
Average consumer deposits across all of our lines of business increased $542
million or 12% for 2006. Consumer deposits increased $185 million or 69% in
Colorado, $177 million or 6% in Oklahoma and $103 million or 15% in New Mexico.
Average commercial deposits for all markets were up $503 million or 16% over
2005. Commercial deposits in our Texas markets grew $318 million or 23% and
commercial
40
deposits in our Oklahoma markets grew $146 million or 9%. In addition, deposits
attributed to trust and private financial services increased $330 million or 32%
over the previous year.
Borrowings and Capital
Parent Company
BOK Financial (parent company) has a $100 million unsecured revolving line of
credit with certain commercial banks that matures in December 2010. There was no
outstanding principal balance of this credit agreement at December 31, 2006.
Interest is based upon a base rate or LIBOR plus a defined margin that is
determined by the Company's credit rating. This margin ranges from 0.375% to
1.125% or a base rate. The margin currently applicable to borrowings against
this line is 0.500%. The base rate is defined as the greater of the daily
federal funds rate plus 0.500% or the SunTrust Bank prime rate. Interest is
generally paid monthly. Facility fees are paid quarterly on the unused portion
of the commitment at rates that range from 0.100% to 0.250% based on the
Company's credit rating.
This credit agreement includes certain restrictive covenants that limit the
Company's ability to borrow additional funds, to make investments and to pay
cash dividends on common stock. These covenants also require BOK Financial and
subsidiary banks to maintain minimum capital levels. BOK Financial met all of
the restrictive covenants at December 31, 2006.
The primary source of liquidity for BOK Financial is dividends from subsidiary
banks, which are limited by various banking regulations to net profits, as
defined, for the preceding two years. Dividends are further restricted by
minimum capital requirements. Based on the most restrictive limitations, the
subsidiary banks could declare up to $107 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 $32
million under this policy.
Equity capital for BOK Financial increased $182 million to $1.7 billion during
2006. Retained earnings, net income less cash dividends paid, provided $176
million of this increase. Growth in retained earnings was partially offset by a
$6 million increase in accumulated other comprehensive losses. The after-tax
effect of adjusting the prepaid pension expense asset as required by FAS 158
increased accumulated other comprehensive losses $11 million while lower net
unrealized losses on available for sale securities reduced accumulated other
comprehensive losses $5 million. Employee stock option transactions increased
equity capital $23 million during 2006 and treasury stock purchases reduced
capital $12 million.
Capital is managed to maximize long-term value to the shareholders. Factors
considered in managing capital include projections of future earnings, asset
growth and acquisition strategies, and regulatory and debt covenant
requirements. Capital management may include subordinated debt issuance, share
repurchase and stock and cash dividends.
On April 26, 2005, the Board of Directors authorized a share repurchase program,
which replaced a previously authorized program. The maximum of two million
common shares may be repurchased. The specific timing and amount of shares
repurchased will vary based on market conditions, securities law limitations and
other factors. Repurchases may be made over time in open market or privately
negotiated transactions. The repurchase program may be suspended or discontinued
at any time without prior notice. Since this program began, 279 thousand shares
have been repurchased by the Company for $13.4 million. During 2006, 249
thousand shares were repurchased for $12.1 million.
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 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. The capital ratios for BOK Financial and each
subsidiary bank are presented in Note 16 to the Consolidated Financial
Statements.
Subsidiary Banks
BOK Financial's subsidiary banks use borrowings to supplement deposits as a
source of funds for loans and securities growth. Sources of these borrowings
included federal funds purchased, securities repurchase agreements, and advances
from the Federal Home Loan Banks. Interest rates and maturity dates for the
various borrowings are matched with specific asset types in the asset/liability
management process. Note 10 to the Consolidated Financial Statements provides
additional information about the subsidiary banks' borrowings, including
maturity and repricing periods and collateral requirements.
During 2005, Bank of Oklahoma issued $150 million of 10-year, fixed rate
subordinated debt. The cost of this subordinated debt, including issuance
discounts and hedge loss is 5.43%. 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 the fair value
of the subordinated debt due to changes in interest rates. The Company receives
a fixed rate of 5.257% and pays a variable rate based on 1-month LIBOR.
Semi-annual swap settlements coincide with interest payments on the subordinated
debt. The interest rate swap terminates on June 1, 2015, the maturity date of
the subordinated debt.
In 1997, Bank of Oklahoma issued $150 million of 10-year, 7.125% fixed rate
subordinated debt. During 2004, 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
41
Company receives a fixed rate of 3.165% and pays a variable rate based on
1-month LIBOR. Semi-annual swap settlements coincide with interest payments on
the subordinated debt. The interest rate swap terminates on August 15, 2007, the
maturity date of the subordinated debt.
Off-Balance Sheet Arrangements
During 2002, BOK Financial agreed to a limited price guarantee on a portion of
the common shares issued to purchase Bank of Tanglewood. Any holder of BOK
Financial common shares issued in this acquisition may annually make a claim for
the excess of the guaranteed price and the actual sales price of any shares sold
during a 60-day period after each of the first five anniversary dates after
October 25, 2002. The final anniversary date of this guarantee is October 25,
2007. The maximum annual number of shares subject to this guarantee is 210,069.
The price guarantee is non-transferable and non-cumulative. BOK Financial may
elect, in its sole discretion, to issue additional shares of common stock or to
pay cash to satisfy any obligation under the price guarantee. The Company will
have no obligation to issue additional common shares or pay cash to satisfy any
benchmark price protection obligation if the market value per share of BOK
Financial common stock remains above the highest benchmark price of $42.53. The
closing price of the Company's common stock on December 31, 2006 was $54.98.
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, 2006.
Table 27 Contractual Obligations as of December 31, 2006
(In Thousands)
Less Than 1 to 3 4 to 5 More Than
1 Year Years Years 5 Years Total
------------------------------------------------------------------
Time deposits $2,026,886 $1,028,966 $378,965 $ 54,394 $3,489,211
Other borrowings 600,013 234,706 1,362 11,290 847,371
Subordinated debentures 164,180 15,000 15,000 175,625 369,805
Operating lease obligations 16,227 30,494 25,068 30,638 102,427
Derivative contracts 182,747 85,718 11,660 942 281,067
Data processing contracts 13,217 20,351 15,878 12,451 61,897
-----------------------------------------------------------------------------------------------------------
Total $3,003,270 $1,415,235 $447,933 $285,340 $5,151,778
============================================================================================================
Loan commitments $5,318,257
Standby letters of credit 527,627
Unfunded third-party private equity commitments 22,392
Deferred compensation and stock-based compensation obligations 23,963
Payments on time deposits and other borrowed funds include interest which has
been calculated from rates at December 31, 2006. 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.
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. Since some of these commitments are expected to expire before
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
Obligations under derivative contracts 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 $17.7 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.
42
The Company has compensation and employment agreements with its 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 also provide for
settlement in cash or other assets. We currently have recognized a $16.2 million
liability for these plans. This liability would increase to $18.6 million if all
awards were fully vested. We also have obligations with respect to its employee
and executive benefit plans. See Notes 12 and 13 to the Consolidated Financial
Statements.
Recently Issued Accounting Standards
Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 156, "Accounting for Servicing
of Financial Assets" ("FAS 156")
FAS 156 permitted companies that service financial assets to elect to carry
servicing rights either at fair value or at the lower of amortized cost or fair
value. FAS 156 also required initial recognition of originated servicing rights
at fair value. Previously, generally accepted accounting principles required
servicing rights to be carried at the lower of amortized cost or fair value.
Originated mortgage servicing rights were initially recognized based on relative
fair values of the servicing rights and loans sold.
Entities that service financial assets were also permitted to reclassify
securities designated as an economic hedge of the servicing rights from the
available for sale classification to trading without tainting management's
classification of the remaining available for sale securities portfolio.
FAS 156 is effective for fiscal years that begin after September 15, 2006. Early
adoption is permitted as of the beginning of an entity's fiscal year provided
that the entity has not yet issued annual or interim financial statements for
that fiscal year. BOK Financial adopted FAS 156 effective January 1, 2006. All
mortgage loan servicing rights were designated to be carried at fair value.
Certain available for sale securities that had been specifically identified as
an economic hedge of the mortgage servicing rights were reclassified as trading
securities. Adoption of FAS 156 did not significantly affect the Company's 2006
financial statements.
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
("FAS 157")
FAS 157 establishes a single authoritative definition of fair value, sets out a
framework for measuring fair value and requires additional disclosures about
fair value measurements. This statement applies only to fair value measurements
that are already required or permitted by other generally accepted accounting
principles. FAS 157 also nullifies EITF guidance that prohibited recognition of
gains or losses at inception of derivative transactions whose fair value is
estimated by modeling.
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Market participants are assumed to be
independent, knowledgeable buyers and sellers transacting business in the
principal or most advantageous market for the asset or liability.
FAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. Early
application is permitted if no annual or interim financial statements have been
issued for the earlier period. Management adopted FAS 157 effective January 1,
2007.
The Company's policies for determining fair value of derivative contracts and
for recognizing income from its customer hedging programs are based on the EITF
guidance nullified by FAS 157. FAS 157 is not expected to significantly affect
future financial statements.
Statement of Financial Accounting Standards No. 158, "Employers' Accounting for
Defined-Benefit Pension and Other Postretirement Plans" ("FAS 158")
FAS 158 requires an employer to recognize the overfunded or underfunded status
of a defined-benefit postretirement plan as an asset or liability and to
recognize changes in the plan's the funded status through comprehensive income
in the year in which the change occurs. This statement also requires that the
funded status be measured as of the date of the employer's year-end financial
statements.
A plan's funded status is defined as the difference between the fair value of
plan assets and, for a defined-benefit pension plan, the projected benefit
obligation. Actuarial gains and losses and prior service costs or credits that
are not recognized through expense as components of net periodic benefit cost
are recognized as components of comprehensive income, net of tax. FAS 158 does
not change the recognition of net periodic benefit cost determined under FASB
Statements No. 87, 88 and 106.
For employers with publicly traded equity securities, such as the Company, FAS
158 was effective for fiscal years ending after December 15, 2006. As of
December 31, 2006, the Company charged $11.4 million against comprehensive
income for the implementation of FAS 158.
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109" ("FIN 48")
FIN 48 was issued during 2006 to clarify accounting for uncertainty in income
taxes recognized in accordance with FASB Statement No. 109, "Accounting for
Income Taxes." This interpretation establishes a minimum threshold that must be
met for financial statement recognition and prescribes a measurement attribute
for uncertain tax positions. The benefit of uncertain tax positions may only be
recognized when based upon all relevant evidence it is more-likely-than-not that
the position would prevail upon examination, including resolution of related
appeals
43
or litigation based upon the technical merits of the position. A tax position
that meets the more-likely-than-not recognition threshold is measured to
determine the largest amount that is greater than 50% likely of being realized
upon ultimate settlement.
A tabular reconciliation of the total amount of unrecognized tax benefits at the
beginning and end of a period, including changes due to changes in tax positions
taken in prior and current periods, decreases due to settlements with taxing
authorities and decreases due to lapses in the applicable statutes of
limitations will be required. FIN 48 also requires disclosure of the nature of
uncertainties which are expected to significantly increase or decrease within 12
months of the reporting date, including the nature of events that would cause
the change.
FIN 48 is effective for fiscal years beginning after December 15, 2006. The
Company will apply the provisions of FIN 48 to all tax positions. Upon initial
adoption, the effect of FIN 48 is not expected to exceed $1.0 million, which
will be recognized as a reduction of retained earnings. This estimate is subject
to revision as management completes its analysis of uncertain tax positions.
Forward-Looking Statements
This report contains forward-looking statements that are based on management's
beliefs, assumptions, current expectations, estimates and projections about BOK
Financial, the financial services industry and the economy in general. Words
such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans,"
"projects," variations of such words and similar expressions are intended to
identify such forward-looking statements. Management judgments relating to and
discussion of the provision and reserve for loan losses involve judgments as to
expected events and are inherently forward-looking statements. Assessments that
BOK Financial's acquisitions and other growth endeavors will be profitable are
necessary statements of belief as to the outcome of future events, based in part
on information provided by others that BOK Financial has not independently
verified. These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions that are difficult to predict with
regard to timing, extent, likelihood and degree of occurrence. Therefore, actual
results and outcomes may materially differ from what is expressed, implied or
forecasted in such forward-looking statements. Internal and external factors
that might cause such a difference include, but are not limited to: (1) the
ability to fully realize expected cost savings from mergers within the expected
time frames, (2) the ability of other companies on which BOK Financial relies to
provide goods and services in a timely and accurate manner, (3) changes in
interest rates and interest rate relationships, (4) demand for products and
services, (5) the degree of competition by traditional and nontraditional
competitors, (6) changes in banking regulations, tax laws, prices, levies and
assessments, (7) the impact of technological advances and (8) trends in customer
behavior as well as their ability to repay loans. BOK Financial and its
affiliates undertake no obligation to update, amend or clarify forward-looking
statements, whether as a result of new information, future events or otherwise.
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.
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 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
BOK Financial has a large portion of its earning assets in variable rate loans
and a large portion of its liabilities in demand deposit accounts and interest
bearing transaction accounts. Changes in interest rates affect earning assets
more rapidly than interest bearing liabilities in the
44
short term. Management has adopted several strategies to position the balance
sheet to be neutral to interest rate changes. As previously noted in the Net
Interest Revenue section of this report, management acquires securities that are
funded by borrowings in the capital markets. The average duration of these
securities is expected to be approximately 2.6 years based on a range of
interest rate and prepayment assumptions.
BOK Financial also uses interest rate swaps in managing its interest rate
sensitivity. These products are generally used to more closely match interest on
certain variable-rate loans with funding sources and long-term certificates of
deposit with earning assets. Net interest revenue decreased $9.4 million in 2006
and $1.4 million in 2005 from periodic settlements of these contracts. These
contracts are carried on the balance sheet at fair value and changes in fair
value are reported in income as derivatives gains or losses. A net loss of $637
thousand was recognized in 2006 compared with a net gain of $1.1 million in 2005
from adjustments of these swaps and hedged liabilities to fair value. Credit
risk from these swaps is monitored as part of our overall process of managing
credit exposure to other financial institutions. Additional information
regarding interest rate swap contracts is presented in Note 4 to the
Consolidated Financial Statements.
The effectiveness of these strategies in managing the overall interest rate risk
is evaluated through the use of an asset/liability model. BOK Financial performs
a sensitivity analysis to identify more dynamic interest rate risk exposures,
including embedded option positions, on net interest revenue, net income and
economic value of equity. A simulation model is used to estimate the effect of
changes in interest rates over the next twelve and 24 months based on eight
interest rate scenarios. Two specified interest rate scenarios are used to
evaluate interest rate risk against policy guidelines. The first assumes a
sustained parallel 200 basis point increase and the second assumes a sustained
parallel 200 basis point decrease in interest rates. 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 28 due to the extreme volatility over
such a large rate range. The effects of interest rate changes on the value of
mortgage servicing rights and securities identified as economic hedges are
presented in the Lines of Business - Mortgage Banking section of this report.
The simulations used to manage market risk are based on numerous assumptions
regarding the effects of changes in interest rates on the timing and extent of
repricing characteristics, future cash flows and customer behavior. These
assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net interest revenue, net income or economic value of equity
or precisely predict the impact of higher or lower interest rates on net
interest revenue, net income or economic value of equity. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes, market conditions and management strategies, among other factors.
Table 28 Interest Rate Sensitivity
(Dollars in Thousands)
200 bp Increase 200 bp Decrease Most Likely
---------------------- -------------------- --------------------
2006 2005 2006 2005 2006 2005
---------------------- -------------------- --------------------
Anticipated impact over the next twelve months
on net interest revenue $ (7,587) $ 7,334 $ 8,357 (7,295) $ 4,060 $ 5,675
(1.4)% 1.5% 1.5% (1.5)% 0.7% 1.2%
========================================================================= ===================== ====================
Trading Activities
BOK Financial enters into trading activities both as an intermediary for
customers and for its own account. As an intermediary, BOK Financial will take
positions in securities, generally mortgage-backed securities, government agency
securities, and municipal bonds. These securities are purchased for resale to
customers, which include individuals, corporations, foundations and financial
institutions. BOK Financial will also take trading positions in U.S. Treasury
securities, mortgage-backed securities, municipal bonds and financial futures
for its own account. These positions are taken with the objective of generating
trading profits. Both of these activities involve interest rate risk.
A variety of methods are used to manage the interest rate risk of trading
activities. These methods include daily marking of all positions to market
value, independent verification of inventory pricing, and position limits for
each trading activity. Hedges in either the futures or cash markets may be used
to reduce the risk associated with some trading programs.
Management uses a Value at Risk ("VAR") methodology to measure the market risk
inherent in its trading activities. VAR is calculated based upon historical
simulations over the past five years using a variance / covariance matrix of
interest rate changes. It represents an amount of market loss that is likely to
be exceeded only one out of every 100 two-week periods. Trading positions are
managed within guidelines approved by the Board of Directors. These guidelines
limit the VAR to $1.8 million. At December 31, 2006, the VAR was $406 thousand.
The greatest value at risk during 2006 was $1.3 million.
45
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, 2006. 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, 2006.
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). 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, 2006.
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 management's assessment of the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2006. Their report, which expresses unqualified opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting as of December 31, 2006, is included in this
annual report.
46
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, 2006 and 2005, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2006. 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, 2006 and 2005, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, BOK Financial
Corporation changed its method of accounting for mortgage servicing rights as of
January 1, 2006, in accordance with Financial Accounting Standards Board
Statement No. 156, Accounting for Servicing of Financial Assets. Also as
discussed in Note 1 to the consolidated financial statements, BOK Financial
Corporation changed its method of accounting for defined benefit pension plans
as of December 31, 2006, in accordance with Financial Accounting Standards Board
Statement No. 158, Employer's Accounting for Defined Benefit Pension and Other
Postretirement Plans.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of BOK Financial
Corporation's internal control over financial reporting as of December 31, 2006,
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 27, 2007 expressed an unqualified opinion thereon.
Ernst & Young LLP
Tulsa, Oklahoma
February 27, 2007
47
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 management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that BOK
Financial Corporation maintained effective internal control over financial
reporting as of December 31, 2006, 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. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of 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, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, 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, management's assessment that BOK Financial Corporation
maintained effective internal control over financial reporting as of December
31, 2006, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, BOK Financial Corporation maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the 2006 consolidated financial
statements of BOK Financial Corporation and our report dated February 27, 2007
expressed an unqualified opinion thereon.
Ernst & Young LLP
Tulsa, Oklahoma
February 27, 2007
48
Consolidated Statements of Earnings
(In Thousands Except Share And Per Share Data)
2006 2005 2004
------------------------------------------------
Interest Revenue
Loans $ 751,391 $ 554,691 $ 408,115
Taxable securities 222,531 205,952 197,884
Tax-exempt securities 9,819 7,329 7,359
------------------------------------------------------------------------------------------------------------------------------
Total securities 232,350 213,281 205,243
------------------------------------------------------------------------------------------------------------------------------
Trading securities 847 675 573
Funds sold and resell agreements 1,841 1,287 353
------------------------------------------------------------------------------------------------------------------------------
Total interest revenue 986,429 769,934 614,284
------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits 336,908 210,400 144,433
Borrowed funds 142,553 95,826 38,847
Subordinated debentures 20,280 14,367 7,761
------------------------------------------------------------------------------------------------------------------------------
Total interest expense 499,741 320,593 191,041
------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 486,688 449,341 423,243
Provision for Credit Losses 18,402 12,441 20,439
------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue After Provision for Credit Losses 468,286 436,900 402,804
------------------------------------------------------------------------------------------------------------------------------
Other Operating Revenue
Brokerage and trading revenue 47,560 44,222 41,107
Transaction card revenue 78,622 72,036 64,816
Trust fees and commissions 71,037 65,187 57,532
Deposit service charges and fees 102,436 98,361 93,712
Mortgage banking revenue 26,996 30,681 28,189
Other revenue 45,045 34,377 26,871
------------------------------------------------------------------------------------------------------------------------------
Total fees and commissions 371,696 344,864 312,227
------------------------------------------------------------------------------------------------------------------------------
Gain on sales of assets 1,499 7,798 1,225
Gain (loss) on securities, net (950) (6,895) (3,088)
Gain (loss) on derivatives, net (622) 1,179 (1,474)
------------------------------------------------------------------------------------------------------------------------------
Total other operating revenue 371,623 346,946 308,890
------------------------------------------------------------------------------------------------------------------------------
Other Operating Expense
Personnel 296,260 258,971 240,661
Business promotion 19,351 17,964 15,618
Contribution of stock to BOK Charitable Foundation -- -- 5,561
Professional fees and services 17,744 16,596 15,487
Net occupancy and equipment 52,188 50,195 47,289
Data processing and communications 66,926 67,026 60,025
Printing, postage and supplies 15,862 15,066 14,034
Net (gains) losses and operating expenses of repossessed assets 474 572 (4,016)
Amortization of intangible assets 5,327 6,943 8,138
Mortgage banking costs 11,829 14,562 18,167
Change in fair value of mortgage servicing rights (3,009) -- --
Recovery of impairment of mortgage servicing rights -- (3,915) (1,567)
Other expense 29,355 25,126 21,827
------------------------------------------------------------------------------------------------------------------------------
Total other operating expense 512,307 469,106 441,224
------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 327,602 314,740 270,470
Federal and state income tax 114,625 113,235 91,447
------------------------------------------------------------------------------------------------------------------------------
Net Income $ 212,977 $ 201,505 $ 179,023
==============================================================================================================================
Earnings Per Share:
Basic $ 3.19 $ 3.14 $ 3.00
Diluted $ 3.16 $ 3.01 $ 2.68
==============================================================================================================================
Average Shares Used in Computation:
Basic 66,759,384 64,067,873 59,128,395
Diluted 67,310,005 67,047,064 66,732,496
==============================================================================================================================
See accompanying notes to consolidated financial statements.
49
Consolidated Balance Sheets
(In Thousands Except Share Data)
December 31,
------------------------------
2006 2005
------------------------------
Assets
Cash and due from banks $ 775,376 $ 684,857
Funds sold and resell agreements 21,950 14,465
Trading securities 37,076 18,633
Securities:
Available for sale 4,293,938 4,821,575
Available for sale securities pledged to creditors 361,123 --
Investment (fair value: 2006 - $246,608; 2005 - $243,406) 248,689 245,125
Mortgage trading securities 162,837 --
------------------------------------------------------------------------------------------------------------------------------
Total securities 5,066,587 5,066,700
------------------------------------------------------------------------------------------------------------------------------
Loans 10,715,803 9,139,978
Less reserve for loan losses (109,497) (103,876)
------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 10,606,306 9,036,102
------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 188,041 179,627
Accrued revenue receivable 118,236 99,874
Intangible assets, net 258,060 263,022
Mortgage servicing rights, net 65,946 54,097
Real estate and other repossessed assets 8,486 8,476
Bankers' acceptances 43,613 33,001
Derivative contracts 284,239 452,878
Cash surrender value of bank-owned life insurance 212,230 9,279
Other assets 373,478 406,058
------------------------------------------------------------------------------------------------------------------------------
Total assets $ 18,059,624 $ 16,327,069
==============================================================================================================================
Liabilities and Shareholders' Equity
Noninterest-bearing demand deposits $ 1,780,059 $ 1,865,948
Interest-bearing deposits:
Transaction 5,996,970 5,257,295
Savings 139,130 154,015
Time 4,470,546 4,098,060
------------------------------------------------------------------------------------------------------------------------------
Total deposits 12,386,705 11,375,318
------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase agreements 2,348,516 1,337,911
Other borrowings 593,731 1,054,298
Subordinated debentures 297,800 295,964
Accrued interest, taxes and expense 104,752 92,219
Bankers' acceptances 43,613 33,001
Due on unsettled security transactions 107,420 8,429
Derivative contracts 298,679 466,669
Other liabilities 157,386 124,106
------------------------------------------------------------------------------------------------------------------------------
Total liabilities 16,338,602 14,787,915
------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock ($.00006 par value; 2,500,000,000 shares authorized;
shares issued and outstanding: 2006 - 68,704,575; 2005 - 67,904,533) 4 4
Capital surplus 688,861 656,579
Retained earnings 1,166,994 990,422
Treasury stock (shares at cost: 2006 - 1,636,825; 2005 - 1,202,125) (61,393) (40,040)
Accumulated other comprehensive loss (73,444) (67,811)
------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,721,022 1,539,154
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 18,059,624 $ 16,327,069
==============================================================================================================================
See accompanying notes to consolidated financial statements.
50
Consolidated Statements of Cash Flows
(In Thousands)
2006 2005 2004
---------------------------------------------
Cash Flows From Operating Activities:
Net income $ 212,977 $ 201,505 $ 179,023
Adjustments to reconcile net income to cash provided by operations:
Provision for credit losses 18,402 12,441 20,439
Change in fair value of mortgage servicing rights (3,009) -- --
Recovery of mortgage servicing rights impairment -- (3,915) (1,567)
Unrealized (gains) losses from derivatives (1,531) 8,463 6,124
Depreciation and amortization 39,303 44,860 47,298
Change in bank-owned life insurance (964) -- --
Tax benefit on exercise of stock options (4,014) (3,583) (4,609)
Stock-based compensation 10,682 8,431 15,915
Net (accretion) amortization of securities discounts and premiums 1,326 (1,159) (3,116)
Net gain on sale of assets (10,629) (15,230) (11,678)
Contribution of stock to BOK Charitable Foundation -- -- 5,561
Mortgage loans originated for resale (735,432) (783,498) (635,624)
Proceeds from sale of mortgage loans held for resale 741,901 770,115 666,549
Change in trading securities, including mortgage trading securities (131,209) (8,941) (1,869)
Change in accrued revenue receivable (18,362) (20,230) (4,664)
Change in other assets (56,423) 17,592 (48,766)
Change in accrued interest, taxes and expense 12,533 (53,005) (14,722)
Change in other liabilities 70,119 33,102 39,218
--------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 145,670 206,948 253,512
--------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from sales of available for sale securities 646,944 1,537,628 2,652,554
Proceeds from maturities of investment securities 59,099 54,336 61,583
Proceeds from maturities of available for sale securities 686,163 868,401 1,036,014
Purchases of investment securities (62,850) (78,675) (94,947)
Purchases of available for sale securities (1,208,842) (2,731,763) (3,800,015)
Loans originated or acquired net of principal collected (1,727,123) (1,287,158) (554,128)
Net payments or proceeds on derivative asset contracts (20,146) 4,290 (9,368)
Investment in bank-owned life insurance (201,987) -- --
Net change in other investment assets 165 33,718 3,208
Proceeds from disposition of assets 81,731 88,527 69,320
Purchases of other assets (54,520) (49,199) (34,404)
Cash and equivalents of subsidiaries and branches acquired and sold, net 135 (29,093) --
--------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,801,231) (1,588,988) (670,183)
--------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net change in demand deposits, transaction
deposits and savings accounts 638,901 1,246,713 185,409
Net change in time deposits 364,344 457,412 269,126
Net change in other borrowings 550,038 (83,299) (55,811)
Change in amount receivable (due) on unsettled security transactions 98,991 65,302 (65,132)
Pay down of other borrowings -- (95,000) --
Issuance of common and treasury stock, net 12,647 7,032 7,132
Issuance of subordinated debenture -- 147,855 --
Net change in derivative margin accounts 103,188 (167,137) (50,202)
Net payments or proceeds on derivative liability contracts 30,333 (9,407) 10,259
Tax benefit on exercise of stock options 4,014 3,583 4,609
Repurchase of common stock (12,103) (2,439) --
Dividends paid (36,788) (20,344) (1,540)
--------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,753,565 1,550,271 303,850
--------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 98,004 168,231 (112,821)
Cash and cash equivalents at beginning of period 699,322 531,091 643,912
--------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 797,326 $ 699,322 $ 531,091
================================================================================================================================
Cash paid for interest $ 493,873 $ 312,200 $ 192,187
================================================================================================================================
Cash paid for taxes 117,604 104,543 95,282
================================================================================================================================
Net loans transferred to repossessed real estate 7,057 11,633 6,013
================================================================================================================================
Payment of dividends in common stock -- -- 65,899
================================================================================================================================
See accompanying notes to consolidated financial statements.
51
Consolidated Statements of Changes in Shareholders' Equity
(In Thousands)
Preferred Stock Common Stock
----------------- ---------------
Shares Amount Shares Amount
-------------------------------------------------------------------------------------
December 31, 2003 250,000 $ 12 58,056 $ 4
Comprehensive income:
Net income -- -- -- --
Other comprehensive loss, net of tax -- -- -- --
Comprehensive income
Exercise of stock options -- -- 616 --
Conversion of preferred stock to common (25) -- -- --
Tax benefit on exercise of stock options -- -- -- --
Stock-based compensation -- -- -- --
Cash dividends on preferred stock -- -- -- --
Dividends paid in shares of common stock -- -- 1,749 --
-------------------------------------------------------------------------------------
December 31, 2004 249,975 12 60,421 4
Comprehensive income:
Net income -- -- -- --
Other comprehensive loss, net of tax -- -- -- --
Comprehensive income
Treasury stock purchase -- -- -- --
Exercise of stock options -- -- 563 --
Conversion of preferred stock to common (249,975) (12) 6,921 --
Tax benefit on exercise of stock options -- -- -- --
Stock-based compensation -- -- -- --
Cash dividends on:
Preferred stock -- -- -- --
Common stock -- -- -- --
-------------------------------------------------------------------------------------
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
=====================================================================================
See accompanying notes to consolidated financial statements.
52
Accumulated
Other Treasury Stock
Comprehensive Capital Retained --------------------------
Income (Loss) Surplus Earnings Shares Amount Total
-----------------------------------------------------------------------------------------------------------------------------------
December 31, 2003 $ 8,459 $ 546,594 $ 698,052 849 $ (24,491) $ 1,228,630
Comprehensive income:
Net income -- -- 179,023 -- -- 179,023
Other comprehensive loss, net of tax (20,084) -- -- -- -- (20,084)
-----------
Comprehensive income 158,939
-----------
Exercise of stock options -- 12,507 -- 122 (5,375) 7,132
Conversion of preferred stock to common -- -- -- -- -- --
Tax benefit on exercise of stock options -- 4,609 -- -- -- 4,609
Stock-based compensation -- 1,099 -- -- -- 1,099
Cash dividends on preferred stock -- -- (1,875) -- -- (1,875)
Dividends paid in shares of common stock -- 66,938 (65,939) 27 (1,039) (40)
-----------------------------------------------------------------------------------------------------------------------------------
December 31, 2004 (11,625) 631,747 809,261 998 (30,905) 1,398,494
Comprehensive income:
Net income -- -- 201,505 -- -- 201,505
Other comprehensive loss, net of tax (56,186) -- -- -- -- (56,186)
-----------
Comprehensive income 145,319
-----------
Treasury stock purchase -- -- -- 60 (2,439) (2,439)
Exercise of stock options -- 13,728 -- 144 (6,696) 7,032
Conversion of preferred stock to common -- 12 -- -- -- --
Tax benefit on exercise of stock options -- 3,583 -- -- -- 3,583
Stock-based compensation -- 7,509 -- -- -- 7,509
Cash dividends on:
Preferred stock -- -- (375) -- -- (375)
Common stock -- -- (19,969) -- -- (19,969)
-----------------------------------------------------------------------------------------------------------------------------------
December 31, 2005 (67,811) 656,579 990,422 1,202 (40,040) 1,539,154
Effect of implementing FAS 156, net of tax -- -- 383 -- -- 383
Comprehensive income:
Net income -- -- 212,977 -- -- 212,977
Other comprehensive loss, net of tax (5,633) -- -- -- -- (5,633)
-----------
Comprehensive income 207,344
-----------
Treasury stock purchase -- -- -- 249 (12,103) (12,103)
Exercise of stock options -- 21,897 -- 186 (9,250) 12,647
Tax benefit on exercise of stock options -- 4,014 -- -- -- 4,014
Stock-based compensation -- 6,371 -- -- -- 6,371
Cash dividends on common stock -- -- (36,788) -- -- (36,788)
-----------------------------------------------------------------------------------------------------------------------------------
December 31, 2006 $ (73,444) $ 688,861 $ 1,166,994 1,637 $ (61,393) $ 1,721,022
===================================================================================================================================
53
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.
New accounting policies first adopted in 2006 included Statement of
Financial Accounting Standards No. 156, "Accounting for Servicing of Financial
Assets" ("FAS 156") and Statement of Financial Accounting Standards No. 158,
"Employers' Accounting for Defined-Benefit Pension and Other Post-retirement
Plans" ("FAS 158").
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 and
Houston, Texas; Albuquerque, New Mexico; Denver, Colorado; Phoenix, Arizona; and
Kansas City, 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 fair values on the acquisition dates. 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 five-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.
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.
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 and
management's intent and ability to hold the security until the fair value
exceeds amortized cost. An impairment charge is
54
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 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 - gains or losses on derivatives.
In certain circumstances, interest rate swaps may be designated as fair
value hedges and may qualify for hedge accounting. In these circumstances,
changes in the fair value of the hedged asset or liability that are attributable
to the hedged risk are also reported in other operating revenue - gains or
losses on derivatives, and may partially or completely offset the change in fair
value of the interest rate swap. Fair value hedges are considered to be
effective if the cumulative fair value adjustment of the interest rate swap is
within a range of 80% to 120% of the change in fair value of the hedged asset or
liability.
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.
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.
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 collectibility of principal.
Loan origination and commitment fees and direct loan acquisition and
origination costs, when significant, are deferred and amortized as an adjustment
to yield over the life of the loan or over the commitment period, as applicable.
Mortgage loans held for sale 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 includes probable losses on both
outstanding loans and unused commitments to
55
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 or the
fair value of the collateral for certain collateral dependent loans. 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 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.
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 over the lease term.
Mortgage Servicing Rights
Effective January 1, 2006, all mortgage servicing rights were designated
to be carried at fair value as permitted by 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. Changes in the fair value are recognized in earnings as
they occur.
There is no active market for trading in mortgage servicing rights. 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. 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. At least
annually, we request estimates of fair value from outside sources to corroborate
the results of the valuation model.
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.
Current 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 current 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.
56
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 plans ("Thrift Plans") 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 Plans, which match 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. In 2003, the
Company had adopted the expense recognition provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" by
restating prior years' financial statements. Adoption of FAS 123R did not
significantly affect the Company's financial statements. Excess tax benefits
from share-based payments recognized in capital surplus were 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 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 commissions 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.
Effect of Recently Issued Statements of Financial Accounting Standards
Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 156, "Accounting for Servicing
of Financial Assets" ("FAS 156")
FAS 156 permitted companies that service financial assets to elect to
carry servicing rights either at fair value or at the lower of amortized cost or
fair value. FAS 156 also required initial recognition of originated servicing
rights at fair value. Previously, generally accepted accounting principles
required servicing rights to be carried at the lower of amortized cost or fair
value. Originated mortgage servicing rights were initially recognized based on
relative fair values of the servicing rights and loans sold.
Entities that service financial assets were also permitted to reclassify
securities designated as an economic hedge of the servicing rights from the
available for sale classification to trading without tainting management's
classification of the remaining available for sale securities portfolio.
FAS 156 is effective for fiscal years that begin after September 15, 2006.
Early adoption is permitted as of the beginning of an entity's fiscal year
provided that the entity has not yet issued annual or interim financial
statements for that fiscal year. BOK Financial adopted FAS 156 effective January
1, 2006. All mortgage loan servicing rights were designated to be carried at
fair value. Certain available for sale securities that had been specifically
identified as an economic hedge of the mortgage servicing rights were
reclassified as trading securities. Adoption of FAS 156 did not significantly
affect the Company's 2006 financial statements.
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
("FAS 157")
FAS 157 establishes a single authoritative definition of fair value, sets
out a framework for measuring fair value and requires additional disclosures
about fair value measurements. This statement applies only to fair value
measurements that are already required or permitted by other generally accepted
accounting principles. FAS 157 also nullifies EITF guidance that prohibited
recognition of gains or losses at inception of derivative transactions whose
fair value is estimated by modeling.
57
Fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Market participants are assumed to be
independent, knowledgeable buyers and sellers transacting business in the
principal or most advantageous market for the asset or liability.
FAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
Early application is permitted if no annual or interim financial statements have
been issued for the earlier period. Management adopted FAS 157 effective January
1, 2007.
The Company's policies for determining fair value of derivative contracts
and for recognizing income from its customer hedging programs are based on the
EITF guidance nullified by FAS 157. FAS 157 is not expected to significantly
affect future financial statements.
Statement of Financial Accounting Standards No. 158, "Employers' Accounting for
Defined-Benefit Pension and Other Postretirement Plans" ("FAS 158")
FAS 158 requires an employer to recognize the overfunded or underfunded
status of a defined-benefit postretirement plan as an asset or liability and to
recognize changes in the plan's funded status through comprehensive income in
the year in which the change occurs. This statement also requires that the
funded status be measured as of the date of the employer's year-end financial
statements.
A plan's funded status is defined as the difference between the fair value
of plan assets and, for a defined-benefit pension plan, the projected benefit
obligation. Actuarial gains and losses and prior service costs or credits that
are not recognized through expense as components of net periodic benefit cost
are recognized as components of comprehensive income, net of tax. FAS 158 does
not change the recognition of net periodic benefit cost determined under FASB
Statements No. 87, 88 and 106.
For employers with publicly traded equity securities, such as the Company,
FAS 158 was effective for fiscal years ending after December 15, 2006. As of
December 31, 2006, the Company charged $11.4 million against comprehensive
income for the implementation of FAS 158.
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109" ("FIN 48")
FIN 48 was issued during 2006 to clarify accounting for uncertainty in
income taxes recognized in accordance with FASB Statement No. 109, "Accounting
for Income Taxes." This interpretation establishes a minimum threshold that must
be met for financial statement recognition and prescribes a measurement
attribute for uncertain tax positions. The benefit of uncertain tax positions
may only be recognized when based upon all relevant evidence it is
more-likely-than-not that the position would prevail upon examination, including
resolution of related appeals or litigation based upon the technical merits of
the position. A tax position that meets the more-likely-than-not recognition
threshold is measured to determine the largest amount that is greater than 50%
likely of being realized upon ultimate settlement.
A tabular reconciliation of the total amount of unrecognized tax benefits
at the beginning and end of a period, including changes due to changes in tax
positions taken in prior and current periods, decreases due to settlements with
taxing authorities and decreases due to lapses in the applicable statutes of
limitations will be required. FIN 48 also requires disclosure of the nature of
uncertainties which are expected to significantly increase or decrease within 12
months of the reporting date, including the nature of events that would cause
the change.
FIN 48 is effective for fiscal years beginning after December 15, 2006.
The Company will apply the provisions of FIN 48 to all tax positions. Upon
initial adoption, the effect of FIN 48 is not expected to exceed $1.0 million,
which will be recognized as a reduction of retained earnings. This estimate is
subject to revision as management completes its analysis of uncertain tax
positions.
(2) Acquisitions
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.
On April 6, 2005, BOK Financial paid $32.0 million in cash for all the
outstanding stock of Valley Commerce Bancorp, Ltd. and its Valley Commerce Bank
subsidiary. As of August 15, 2005, Valley Commerce Bank was renamed Bank of
Arizona, N.A. The transaction was accounted for by the purchase method of
accounting. Aggregate allocation of the purchase price to the net assets
acquired was as follows (in thousands):
2005
----------
Cash and cash equivalents $ 2,921
Securities 35,355
Loans 92,821
Less reserve for loan losses 1,072
----------
Loans, net 91,749
Identifiable intangible assets 4,380
Other assets 11,334
----------
Total assets acquired 145,739
Deposits 110,217
Other borrowings 18,155
Other liabilities 2,003
----------
Net assets acquired 15,364
Less purchase price 32,014
----------
Goodwill $ 16,650
==========
The results of operations of these acquisitions would not have been
significant to the Company's consolidated results during the pre-acquisition
periods of 2005 and 2004. None of the intangible assets acquired are deductible
for tax purposes.
58
(3) Securities
Investment Securities
The amortized cost and fair values of investment securities are as follows
(in thousands):
December 31,
-------------------------------------------------------------------------------------------
2006 2005
------------------------------------------- -------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Fair ------------------- Amortized Fair ------------------
Cost Value Gain Loss Cost Value Gain Loss
-------------------------------------------------------------------------------------------
U.S. Treasury $ 1,999 $ 1,995 $ -- $ (4) $ 1,994 $ 1,976 $ -- $ (18)
Municipal and other tax-exempt 240,976 238,869 471 (2,578) 240,359 238,649 903 (2,613)
Other debt securities 5,714 5,744 51 (21) 2,772 2,781 9 --
------------------------------------------------------------------------------------------------------------------------------
Total $248,689 $246,608 $522 $(2,603) $245,125 $243,406 $912 $(2,631)
==============================================================================================================================
The amortized cost and fair values of investment securities at December
31, 2006, by contractual maturity, are as shown in the following table (dollars
in thousands):
Weighted
Less than One to Five to Over Average
One Year Five Years Ten Years Ten Years Total Maturity(2)
------------------------------------------------------------------------------------------
U.S. Treasury:
Amortized cost $ 1,999 $ -- $ -- $ -- $ 1,999 0.17
Fair value 1,995 -- -- -- 1,995
Nominal yield 3.64 -- -- -- 3.64
Municipal and other tax-exempt:
Amortized cost $ 57,986 $152,991 $22,579 $7,420 $240,976 2.86
Fair value 57,805 151,342 22,428 7,294 238,869
Nominal yield(1) 5.06 5.37 5.97 6.50 5.38
Other debt securities:
Amortized cost $ 3,848 $ 1,203 $ 650 $ 13 $ 5,714 2.14
Fair value 3,848 1,252 631 13 5,744
Nominal yield 5.36 3.64 5.25 -- 4.97
--------------------------------------------------------------------------------------
Total fixed maturity securities:
Amortized cost $ 63,833 $154,194 $23,229 $7,433 $248,689 2.83
Fair value 63,648 152,594 23,059 7,307 246,608
Nominal yield 5.03 5.35 5.95 6.49 5.36
=========================================================================
Total investment securities:
Amortized cost $248,689
Fair value 246,608
Nominal yield 5.36
========
(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.
59
Available for Sale Securities
The amortized cost and fair value of available for sale securities are as
follows (in thousands):
December 31,
--------------------------------------------------------------------------------------------------
2006 2005
----------------------------------------------- ----------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Fair -------------------- Amortized Fair -------------------
Cost Value Gain Loss Cost Value Gain Loss
--------------------------------------------------------------------------------------------------
U.S. Treasury $ 6,014 $ 5,983 $ -- $ (31) $ 16,037 $ 15,827 $ -- $ (210)
Municipal and other tax-exempt 77,860 78,614 819 (65) 17,153 17,078 3 (78)
Mortgage-backed securities:
U. S. agencies 3,204,592 3,128,138 327 (76,781) 3,507,047 3,424,356 1,416 (84,107)
Other 1,361,373 1,333,533 412 (28,252) 1,277,161 1,250,701 201 (26,661)
------------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 4,565,965 4,461,671 739 (105,033) 4,784,208 4,675,057 1,617 (110,768)
------------------------------------------------------------------------------------------------------------------------------------
Other debt securities 46 45 -- (1) 124 124 1 (1)
Equity securities and mutual
funds 101,960 108,748 6,788 -- 108,914 113,489 4,575 --
====================================================================================================================================
Total $4,751,845 $4,655,061 $8,346 $(105,130) $4,926,436 $4,821,575 $6,196 $(111,057)
====================================================================================================================================
The amortized cost and fair values of available for sale securities at
December 31, 2006, by contractual maturity, are as shown in the following table
(dollars in thousands):
Weighted
Less than One to Five to Over Average
One Year Five Years Ten Years Ten Years Total Maturity(5)
--------------------------------------------------------------------------------
U.S. Treasuries:
Amortized cost $ 6,014 $ -- $ -- $ -- $ 6,014 0.35
Fair value 5,983 -- -- -- 5,983
Nominal yield 3.50 -- -- -- 3.50
Municipal and other tax-exempt:
Amortized cost $ -- $ 416 $ 73,500 $ 3,944 $ 77,860 8.95
Fair value -- 401 74,180 4,033 78,614
Nominal yield(1) -- 2.99 3.92 4.31 3.93
Other debt securities:
Amortized cost $ -- $ 46 $ -- $ -- $ 46 3.96
Fair value -- 45 -- -- 45
Nominal yield(1) -- 6.80 -- -- 6.80
--------------------------------------------------------------------------------
Total fixed maturity securities:
Amortized cost $ 6,014 $ 462 $ 73,500 $ 3,944 $ 83,920 8.33
Fair value 5,983 446 74,180 4,033 84,642
Nominal yield 3.50 3.37 3.92 4.31 3.90
==================================================================
Mortgage-backed securities:
Amortized cost $4,565,965 (2)
Fair value 4,461,671
Nominal yield(4) 4.57
----------
Equity securities and mutual funds:
Amortized cost $ 101,960 (3)
Fair value 108,748
Nominal yield 4.41
----------
Total available-for-sale securities:
Amortized cost $4,751,845
Fair value 4,655,061
Nominal yield 4.56
==========
(1) Calculated on a taxable equivalent basis using a 39% effective tax rate.
(2) The average expected lives of mortgage-backed securities were 3.38 years
based upon current prepayment assumptions.
(3) Primarily common stock and preferred stock of U.S. Government agencies
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.
60
Sales of available for sale securities resulted in gains and losses as
follows (in thousands):
2006 2005 2004
-----------------------------------------
Proceeds $ 646,944 $ 1,537,628 $ 2,652,554
Gross realized gains 2,819 5,145 10,452
Gross realized losses 3,460 12,040 13,540
Related federal and state
income tax benefit (224) (2,480) (1,044)
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, 2006, mortgage trading securities are carried at their $163 million
fair value and had a net unrealized loss of $257 thousand.
In addition to securities that have been reclassified as pledged to
creditors, securities with an amortized cost of $2.5 billion and $2.7 billion at
December 31, 2006 and 2005, 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 totaled $99 million at December 31,
2006 compared with net unrealized losses of $107 million at December 31, 2005
due primarily to rising interest rates. The aggregate gross amount of unrealized
losses at December 31, 2006 totaled $108 million. Unrealized losses were due
primarily to rising interest rates. None of the unrealized losses resulted from
credit quality concerns. Management evaluated the securities with unrealized
losses to determine if the losses were other than temporary. This evaluation
considered factors such as causes of the unrealized losses and prospects for
recovery over various interest rate scenarios and time periods. The Company also
considered the ability and intent to hold the securities until the fair values
exceed amortized cost. Management determined, based on currently available
information and its evaluation, that the unrealized losses in these securities
were temporary.
61
Temporarily Impaired Securities as of December 31, 2006
(In Thousands)
Less Than 12 Months 12 Months or Longer Total
Number ------------------------ ------------------------ -----------------------
of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Loss Value Loss Value Loss
--------------------------------------------------------------------------------------------
Investment:
U.S. Treasury 1 $ -- $ -- $ 1,995 $ 4 $ 1,995 $ 4
Municipal and other tax exempt 327 27,382 87 130,809 2,491 158,191 2,578
Other 1 579 21 -- -- 579 21
------------------------------------------------------------------------------------------------------------------------------------
329 27,961 108 132,804 2,495 160,765 2,603
Available for sale:
U. S. Treasury 2 -- -- 5,983 31 5,983 31
Other debt securities 1 25 1 -- -- 25 1
Municipal and other tax-exempt 40 9,355 35 4,848 30 14,203 65
Mortgage-backed securities:
U. S. agencies 342 1,305,298 34,315 1,599,138 42,466 2,904,436 76,781
Other 60 867,464 15,902 403,059 12,350 1,270,523 28,252
------------------------------------------------------------------------------------------------------------------------------------
445 2,182,142 50,253 2,013,028 54,877 4,195,170 105,130
------------------------------------------------------------------------------------------------------------------------------------
Total 774 $2,210,103 $ 50,361 $2,145,832 $ 57,372 $4,355,935 $107,733
====================================================================================================================================
Temporarily Impaired Securities as of December 31, 2005
(In Thousands)
Less Than 12 Months 12 Months or Longer Total
Number ------------------------ ------------------------ -----------------------
of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Loss Value Loss Value Loss
--------------------------------------------------------------------------------------------
Investment:
U.S. Treasury 1 $ 1,976 $ 18 $ -- $ -- $ 1,976 $ 18
Municipal and other tax exempt 324 110,872 1,464 47,765 1,149 158,637 2,613
------------------------------------------------------------------------------------------------------------------------------------
325 112,848 1,482 47,765 1,149 160,613 2,631
Available for sale:
U. S. Treasury 3 4,950 45 10,877 165 15,827 210
Other debt securities 2 -- -- 34 1 34 1
Municipal and other tax-exempt 23 8,093 59 296 19 8,389 78
Mortgage-backed securities:
U. S. agencies 317 1,188,731 20,262 2,027,695 63,845 3,216,426 84,107
Other 55 299,168 4,399 901,533 22,262 1,200,701 26,661
------------------------------------------------------------------------------------------------------------------------------------
400 1,500,942 24,765 2,940,435 86,292 4,441,377 111,057
------------------------------------------------------------------------------------------------------------------------------------
Total 725 $1,613,790 $ 26,247 $2,988,200 $ 87,441 $4,601,990 $113,688
====================================================================================================================================
62
(4) Derivatives
The fair values of derivative contracts at December 31, 2006 were (in
thousands):
December 31, 2006 December 31, 2005
---------------------------- ---------------------------
Assets Liabilities Assets Liabilities
------------------------------------------------------------
Customer Risk Management Programs:
Interest rate contracts $ 20,063 $ 22,761 $ 18,741 $ 20,309
Energy contracts 250,930 254,513 418,494 416,106
Cattle contracts 1,404 1,404 1,014 970
Foreign exchange contracts 10,801 10,803 14,629 14,629
CD options 49 49 -- --
-----------------------------------------------------------------------------------------------------------
Total Customer Derivatives 283,247 289,530 452,878 452,014
Interest Rate Risk Management Programs 992 9,149 -- 14,655
-----------------------------------------------------------------------------------------------------------
Total Derivative Contracts $284,239 $298,679 $452,878 $466,669
===========================================================================================================
Customer Risk Management Programs
BOK Financial offers programs that permit its customers to manage various
risks, including fluctuations in energy and cattle prices, interest rates and
foreign exchange rates. 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.
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, or specific prime-based loans to fixed rate. Interest rate swaps are
designated as fair value or cash flow hedges when the specific criteria required
by generally accepted accounting principles are met. These criteria include
requirements that derivatives are highly effective in offsetting changes in fair
value or cash flow of the hedged assets or liabilities.
The following table details interest rate swaps and, when applicable, the
associated hedged assets or liabilities at December 31, 2006 (dollars in
thousands):
Hedged Asset / Liability
--------------------------------------------------------------------------
Weighted Average
--------------------------
Fixed Rate Floating Rate Notional
Maturity Description Amount (Paid) Received(2) Amount
-------------------------------------------------------------------------------------
Fair value hedges:
2007 Certificates of deposit $254,858 (5.085)% --% $255,000
2007 Subordinated debt 150,000 (7.125) -- 150,000
2008 Certificates of deposit 16,735 (2.912) -- 17,000
2009 Certificates of deposit 21,787 (3.784) -- 22,500
2010 Certificates of deposit 4,770 (3.750) -- 5,000
2011 Certificates of deposit 28,793 (3.983) -- 30,000
2015 Subordinated debt 150,000 (5.000) -- 150,000
--------------------------------------------------------------------------
Total fair value hedges 626,943 629,500
--------------------------------------------------------------------------
Cash flow hedges:
2008 Prime rate loans 100,000 -- 8.250 100,000
--------------------------------------------------------------------------
Total cash flow hedges 100,000 100,000
--------------------------------------------------------------------------
Not designated as hedges:
2007 -- -- -- 130,000
2008 -- -- -- 5,000
2009 -- -- -- 47,500
2010 -- -- -- 5,000
2011 -- -- -- 10,345
-------- --------
Total $726,943 $927,345
======== ========
Interest Rate Swap
-------------------------------------------------------------------------------------------
Weighted Average
------------------------------------
Fixed Rate Floating Rate Positive Negative
Maturity Description Received (Paid) Received (Paid) (1) Fair Value Fair Value
------------------------------------------------------------------------------------------------------
Fair value hedges:
2007 Certificates of deposit 5.389% (5.322)% $14 $207
2007 Subordinated debt 3.165 (5.322) -- 2,029
2008 Certificates of deposit 2.985 (5.322) -- 467
2009 Certificates of deposit 3.886 (5.322) -- 603
2010 Certificates of deposit 3.774 (5.322) -- 196
2011 Certificates of deposit 4.013 (5.322) -- 1,158
2015 Subordinated debt 5.257 (5.322) 978 --
-------------------------------------------------------------------------------------------
Total fair value hedges 992 4,660
-------------------------------------------------------------------------------------------
Cash flow hedges:
2008 Prime rate loans 5.926 (8.250)(2) -- 2,354
-------------------------------------------------------------------------------------------
Total cash flow hedges -- 2,354
-------------------------------------------------------------------------------------------
Not designated as hedges:
2007 3.849 (5.322) -- 798
2008 3.458 (5.322) -- 114
2009 4.251 (5.322) -- 899
2010 3.540 (5.322) -- 228
2011 5.322 (5.495) -- 96
------------------
Total $992 $9,149
==================
(1) Floating rates are based on 30-day LIBOR, unless otherwise noted.
(2) Floating rate based on prime.
During 2006 and 2005, net interest revenue was decreased by $9.4 million and
$1.4 million, respectively, from the settlement of amounts receivable or payable
on interest rate swaps.
63
(5) Loans
Significant components of the loan portfolio are as follows (in thousands):
December 31,
-----------------------------------------------------------------------------------------------------
2006 2005
-------------------------------------------------- ------------------------------------------------
Fixed Variable Non- Fixed Variable Non-
Rate Rate accrual Total Rate Rate accrual Total
-------------------------------------------------- ------------------------------------------------
Commercial $2,402,503 $3,795,644 $10,737 $ 6,208,884 $2,040,799 $3,247,463 $11,673 $5,299,935
Commercial real estate 791,708 1,650,061 4,771 2,446,540 588,128 1,396,404 5,370 1,989,902
Residential mortgage 675,301 570,633 10,325 1,256,259 624,685 537,299 7,347 1,169,331
Residential mortgage
held for sale 64,625 -- -- 64,625 51,666 -- -- 51,666
Consumer 554,501 184,772 222 739,495 422,799 205,573 772 629,144
------------------------------------------------------------------------------------------------------------------------------------
Total $4,488,638 $6,201,110 $26,055 $10,715,803 $3,728,077 $5,386,739 $25,162 $9,139,978
====================================================================================================================================
Loans past due (90 days) $ 5,945 $ 8,708
====================================================================================================================================
Foregone interest on
nonaccrual loans $ 2,130 $ 2,515
====================================================================================================================================
Approximately 51% of the commercial and consumer loan portfolios and
approximately 71% 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 $1.8 billion or 16% of total loans as of December 31, 2006.
Other notable segments include wholesale/retail, $933 million; manufacturing,
$610 million; agriculture, $321 million, which includes $286 million of loans to
the cattle industry; and services, $1.6 billion. Approximately $1.1 billion of
the services category is made up of loans with individual balances of less than
$10 million.
Approximately 28% of commercial real estate loans are secured by
properties located in Oklahoma, primarily in the Tulsa and Oklahoma City
metropolitan areas. An additional 24% of commercial real estate loans are
secured by property located in Texas. The major components of these properties
are multifamily residences, $239 million; construction and land development,
$890 million; retail facilities, $374 million; and office buildings, $421
million.
During 2004, interest rate swaps with $100 million notional amounts were
designated cash flow hedges of prime-based loans and they remained outstanding
through 2006. The objective of the hedge is to protect against the variability
of interest cash flows on the first $100 million of then existing prime-based
loans. The Company receives settlements based on a fixed rate of 5.93% and pays
settlements based on the U.S. prime rate. Amounts due are settled monthly. As of
December 31, 2006 and 2005, a net loss of approximately $2.4 million and $2.1
million, respectively, related to these swaps was included in accumulated other
comprehensive income and expected to be reclassified into earnings based on the
current interest rate environment.
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, 2006, outstanding commitments totaled
$5.3 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, 2006, outstanding standby letters of
credit totaled $528 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, 2006, outstanding commercial letters
of credit totaled $17 million.
Reserves for Credit Losses
The activity in the reserve for loan losses is summarized as follows (in
thousands):
2006 2005 2004
-----------------------------------
Beginning balance $ 103,876 $ 108,618 $ 114,784
Provision for loan losses 18,086 10,401 15,792
Loans charged off (23,996) (25,758) (29,685)
Recoveries 11,531 9,544 7,727
Addition due to
acquisitions -- 1,071 --
--------------------------------------------------------------
Ending balance $ 109,497 $ 103,876 $ 108,618
==============================================================
64
The activity in the reserve for off-balance sheet credit losses is
summarized as follows (in thousands):
2006 2005 2004
-----------------------------
Beginning balance $20,574 $18,502 $13,855
Provision for off-balance
sheet credit losses 316 2,040 4,647
Additions due to acquisitions -- 32 --
Ending balance $20,890 $20,574 $18,502
==============================================================
Provision for credit losses $18,402 $12,441 $20,439
==============================================================
Impaired Loans
Investments in loans considered to be impaired under FAS 114 were as
follows (in thousands):
December 31,
------------------------------
2006 2005 2004
------------------------------
Investment in loans impaired
under FAS 114 (all of
which were on a
nonaccrual basis) $22,586 $19,857 $45,424
Loans with specific reserves
for loss 4,694 5,686 14,881
Specific reserve balance 1,670 2,632 6,994
No specific related reserve
for loss 17,892 14,171 30,543
Average recorded investment
in impaired loans 26,435 32,722 46,386
Interest income recognized on impaired loans during 2006, 2005 and 2004
was not significant.
(6) Premises and Equipment
Premises and equipment at December 31 are summarized as follows (in
thousands):
December 31,
--------------------
2006 2005
--------------------
Land $ 47,278 $ 43,875
Buildings and improvements 149,052 143,051
Software 33,389 31,250
Furniture and equipment 113,822 107,675
---------------------------------------------------------
Subtotal 343,541 325,851
Less accumulated depreciation 155,500 146,224
---------------------------------------------------------
Total $188,041 $179,627
=========================================================
Depreciation expense of premises and equipment was $23.7 million, $24.0
million and $23.4 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
65
(7) Intangible Assets
The following table presents the original cost and accumulated
amortization of intangible assets (in thousands):
December 31,
-----------------------
2006 2005
-----------------------
Core deposit premiums $ 90,637 $ 90,637
Less accumulated amortization 81,669 77,111
----------------------------------------------------------------
Net core deposit premiums 8,968 13,526
Other identifiable intangible assets 18,231 17,866
Less accumulated amortization 6,007 5,238
----------------------------------------------------------------
Net other identifiable intangible assets 12,224 12,628
Goodwill 290,003 290,003
Less accumulated amortization 53,135 53,135
----------------------------------------------------------------
Net goodwill 236,868 236,868
----------------------------------------------------------------
Total intangible assets, net $258,060 $263,022
================================================================
Expected amortization expense for intangible assets that will continue to
be amortized (in thousands):
Core Other
Deposit Identifiable
Premiums Intangible Assets Total
----------------------------------------
2007 $ 3,782 $ 763 $ 4,545
2008 2,314 780 3,094
2009 1,871 1,137 3,008
2010 846 1,163 2,009
2011 125 1,190 1,315
Thereafter 30 7,191 7,221
------------------------------------------------------------
$ 8,968 $12,224 $21,192
============================================================
The net amortized cost of intangible assets at December 31, 2006 is
assigned to reporting units as follows (in thousands):
Core deposit premiums:
Bank of Texas $ 2,125
Colorado State Bank and Trust 4,176
Bank of Arizona 2,667
-------------------------------------------------
$ 8,968
=================================================
Other identifiable intangible assets:
Bank of Oklahoma $ 6,341
Colorado State Bank and Trust 5,518
Bank of Kansas City 365
-------------------------------------------------
$ 12,224
=================================================
Goodwill:
Bank of Oklahoma $ 8,173
Bank of Texas 154,741
Bank of Albuquerque 15,273
Colorado State Bank and Trust 42,031
Bank of Arizona 16,650
-------------------------------------------------
$236,868
=================================================
During 2005, the Company acquired the naming rights to the BOk Center, a
new arena to be built in Tulsa, Oklahoma, and other related intangible rights.
Under an agreement with the City of Tulsa, the Company will pay $11.0 million
over 20 years. One or more installment payments may be accelerated by paying a
discounted amount based on the average yield of 20-year U.S. Treasury bonds. The
Company recognized a $6.3 million intangible asset and an interest-bearing
liability from this transaction. The intangible asset will be amortized over the
life of the agreement.
66
(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 $65
million and $52 million, and outstanding mortgage loan commitments totaled $199
million and $233 million at December 31, 2006 and 2005, 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 hedged 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, 2006, the
unrealized gain on forward sales contracts used to hedge the mortgage pipeline
was approximately $94 thousand. Gains on mortgage loans sold, including
capitalized mortgage servicing rights, totaled $10.5 million in 2006, $16.0
million in 2005 and $10.4 million in 2004.
At December 31, 2006, BOK Financial owned the rights to service 55,803
mortgage loans with outstanding principal balances of $5.0 billion, including
$498 million serviced for affiliates, and held related funds of $53 million for
investors and borrowers. The weighted average interest rate and remaining term
was 6.14% and 277 months, respectively. Mortgage loans sold with recourse
totaled $330 million at December 31, 2006, and $5.5 million of loans sold with
recourse were 90 days or more delinquent. At December 31, 2005, BOK Financial
owned the rights to service 53,897 mortgage loans with outstanding principal
balances of $4.5 billion, including $462 million serviced for affiliates, and
held related funds of $56 million for investors and borrowers. The weighted
average interest rate and remaining term was 6.13% and 275 months, respectively.
Mortgage loans sold with recourse totaled $248 million at December 31, 2005.
Servicing revenue and late charges on loans serviced for others, which are
included in mortgage banking revenue in the Consolidated Statements of Earnings
totaled $16.5 million for 2006, $16.3 million for 2005 and $17.8 million for
2004.
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 2004, 2005 and 2006 are as follows (in thousands):
Capitalized Mortgage Servicing Rights
------------------------------------- Valuation Hedging
Purchased Originated Total Allowance Loss(2) Net
-------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 22,380 $ 54,456 $ 76,836 $(31,995) $ 3,709 $ 48,550
Additions, net -- 11,365 11,365 -- -- 11,365
Amortization expense (4,695) (10,753) (15,448) -- (356) (15,804)
Write-off (6,291) (7,012) (13,303) 16,656 (3,353) --
Recovery of impairment -- -- -- 1,567 -- 1,567
-------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004(1) $ 11,394 $ 48,056 $ 59,450 $(13,772) $ -- $ 45,678
Additions, net -- 17,402 17,402 -- -- 17,402
Amortization expense (2,788) (10,110) (12,898) -- -- (12,898)
Write-off -- (2,443) (2,443) 2,443 -- --
Recovery of impairment -- -- -- 3,915 -- 3,915
-------------------------------------------------------------------------------------------------------------------------------
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
===============================================================================================================================
(1) Excludes approximately $0.8 million, $1.0 million and $1.1 million at
December 31, 2006, 2005 and 2004, respectively, of loan servicing rights
on mortgage loans originated prior to the adoption of FAS 122.
(2) Hedging loss represents the deferred loss on a derivatives-based hedging
program prior to the adoption of FAS 133.
67
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, 2006 was 9.91%.
Prepayment rate - Annual prepayment estimates ranging from 8.7% to 18.0%
based upon loan interest rate, original term and loan type.
Loan servicing costs - $41 to $58 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, 2006 was
5.49%.
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 $3.2 million.
Stratification of the mortgage loan-servicing portfolio, outstanding
principal of loans serviced, and related hedging information by interest rate at
December 31, 2006 follows (in thousands):
< 5.51% 5.51% - 6.50% 6.51% - 7.50% => 7.51% Total
=========================================================================================================================
Fair value $ 15,189 $ 33,993 $ 13,309 $ 3,455 $ 65,946
=========================================================================================================================
Outstanding principal of loans serviced(1) $1,028,600 $2,261,800 $ 926,300 $ 222,700 $4,439,400
=========================================================================================================================
(1) Excludes outstanding principal of $498 million for loans serviced for
affiliates and $52 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):
2006 2005 2004
--------------------------------
Transaction deposits $148,986 $ 72,721 $ 35,517
Savings 1,408 1,106 975
Time:
Certificates of deposits
under $100,000 69,844 50,129 41,978
Certificates of deposits
$100,000 and over 100,916 73,248 53,918
Other time deposits 15,754 13,196 12,045
---------------------------------------------------------------
Total time 186,514 136,573 107,941
===============================================================
Total $336,908 $210,400 $144,433
===============================================================
The aggregate amounts of time deposits in denominations of $100,000 or
more at December 31, 2006 and 2005 were $2.6 billion and $2.5 billion,
respectively.
Time deposit maturities are as follows: 2007 - $3.2 billion, 2008 - $374
million, 2009 - $291 million, 2010 - $261 million, 2011 - $280 million and $90
million thereafter.
At December 31, 2006, the Company had $512 million in fixed rate, brokered
certificates of deposits. The weighted-average interest rate paid on these
certificates is 4.42%. Interest rate swaps, which may have been designated as
fair value hedges of each of these certificates, modify the certificates from
fixed rate to floating rates based on changes in LIBOR. We receive a weighted
average fixed rate of 4.62% on these swaps and currently pay a floating rate of
5.32%.
Interest expense on time deposits during 2006 and 2005 was reduced by the
net accrued settlement from interest rate swaps of $4.8 million and $700
thousand, respectively.
68
(10) Other Borrowings
Information relating to other borrowings is summarized as follows (dollars
in thousands):
December 31
----------------------------------------------------------------------------------------------------
2006 2005 2004
----------------------------------------------------------------------------------------------------
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 $ -- --% $ -- $ -- --% $ 95,000 $ 95,000 2.91% $ 95,000
Subsidiary Banks:
Funds purchased and
repurchase agreements 2,348,516 5.52 2,688,175 1,337,911 4.53 2,291,509 1,555,507 2.18 1,900,810
Federal Home Loan Bank
advances 566,017 5.36 841,159 1,020,871 4.26 1,031,821 894,354 2.31 899,350
Subordinated debentures 297,800 6.91 300,230 295,964 6.30 297,980 151,594 5.18 154,230
Other 27,714 4.00 36,534 33,427 3.13 33,427 25,646 0.98 28,748
---------- ---------- ----------
Total subsidiary banks 3,240,047 5.63 2,688,173 4.61 2,627,101 2.39
---------- ---------- ----------
Total other borrowings $3,240,047 5.63 $2,688,173 4.61 $2,722,101 2.41
========== ========== ==========
Aggregate annual principal repayments of long-term debt at December 31,
2006 are as follows (in thousands):
Parent Subsidiary
Company Banks
----------------------
2007 $ -- $3,069,160
2008 -- 1,676
2009 -- 8,524
2010 -- 475
2011 -- 698
Thereafter -- 159,514
----------------------
Total $ -- $3,240,047
======================
Funds purchased generally mature within one to ninety days from the
transaction date. At December 31, 2006, securities sold under agreements to
repurchase totaled $1.3 billion with related accrued interest payable of $987
thousand.
Additional information relating to repurchase agreements at December 31,
2006 is as follows (dollars in thousands):
Amortized Market Repurchase Average
Security Sold/Maturity Cost Value Liability(1) Rate
--------------------------------------------------------------------------------------------------------
U.S. Agency Securities:
Overnight $1,057,104 $ 1,026,525 $ 946,895 4.62%
Long-term 368,795 361,123 307,286 5.86
--------------------------------------------------------------------------------------------------------
Total Agency Securities $1,425,899 $ 1,387,648 $1,254,181 4.92%
========================================================================================================
(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 $308 million to secure BOK Financial's obligations to
depositors of public funds. The unused credit available to BOK Financial at
December 31, 2006 pursuant to the Federal Home Loan Bank's collateral policies
is $956 million.
BOK Financial has a $100 million unsecured revolving line of credit with
certain commercial banks that expires in December 2010. There was no outstanding
principal balance of this credit agreement at December 31, 2006. Interest is
based upon a base rate or LIBOR plus a defined margin that is determined by the
Company's credit rating. This margin ranges from 0.375% to 1.125%. The margin
currently applicable to borrowings against this line is 0.500%. The base rate is
defined as the greater of the daily federal funds rate plus 0.500% or the
SunTrust Bank prime rate. Interest is generally paid monthly. Facility fees are
paid quarterly on the unused portion of the commitment at rates that range from
0.100% to 0.250% based on the Company's credit rating. This credit agreement
includes certain restrictive covenants that limit the Company's ability to
borrow additional funds, to make investments and to pay cash dividends on common
stock. These covenants also require BOK Financial and subsidiary banks to
maintain minimum capital levels. BOK Financial met all of the restrictive
covenants at December 31, 2006.
69
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 5.43%. 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 receives a fixed rate of
5.257% and pays a variable rate based on 1-month LIBOR, or 5.322% at December
31, 2006. The interest rate swap terminates on June 1, 2015, the maturity of the
subordinated debenture.
In 1997, BOk issued a $150 million 7.125% fixed rate subordinated
debenture that matures in 2007. During 2004, 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 receives a fixed
rate of 3.165% and pays a variable rate based on 1-month LIBOR, or 5.322% at
December 31, 2006. Semi-annual swap settlements coincide with interest payments
on the subordinated debenture. The interest rate swap terminates on August 15,
2007, the maturity date of the subordinated debenture.
(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,
--------------------
2006 2005
--------------------
Deferred tax liabilities:
Pension contributions in excess
of book expense $ 2,000 $ 9,900
Valuation adjustments 28,900 27,600
Mortgage servicing rights 23,500 22,000
Lease financing 14,000 15,500
Other 3,500 3,300
-----------------------------------------------------------
Total deferred tax liabilities 71,900 78,300
-----------------------------------------------------------
Deferred tax assets:
Available for sale securities
mark-to-market 37,600 40,700
Stock-based compensation 5,500 4,700
Credit loss reserves 49,900 48,000
Valuation adjustments 5,900 7,700
Deferred book income 27,100 26,000
Deferred compensation 9,100 6,900
Other 14,100 12,500
-----------------------------------------------------------
Total deferred tax assets 149,200 146,500
-----------------------------------------------------------
Deferred tax assets in excess of
deferred tax liabilities $ 77,300 $ 68,200
===========================================================
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,
---------------------------------
2006 2005 2004
---------------------------------
Current:
Federal $ 113,554 $105,403 $84,514
State 8,518 7,341 6,743
----------------------------------------------------------
Total current 122,072 112,744 91,257
----------------------------------------------------------
Deferred:
Federal (7,001) 415 161
State (446) 76 29
----------------------------------------------------------
Total deferred (7,447) 491 190
----------------------------------------------------------
Total income tax $ 114,625 $113,235 $91,447
==========================================================
70
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,
------------------------------------
2006 2005 2004
------------------------------------
Amount:
Federal statutory tax $ 114,660 $ 110,158 $ 94,671
Tax exempt revenue (3,529) (2,592) (2,705)
Effect of state income
taxes,
net of federal benefit 4,805 4,729 4,220
Intangible amortization 82 216 397
Charitable contribution -- -- (2,446)
Utilization of tax credits (1,040) (929) (784)
Reduction of tax accrual (2,200) -- (3,000)
Other, net 1,847 1,653 1,094
---------------------------------------------------------------------
Total $ 114,625 $ 113,235 $ 91,447
=====================================================================
Due to the favorable resolution of certain state tax issues for the tax
period ended December 31, 2000 and December 31, 2002, BOK Financial reduced its
tax accrual by $3 million and $2.2 million, which was credited against current
federal income tax expense in 2004 and 2006, respectively.
Years ended December 31,
------------------------------
2006 2005 2004
------------------------------
Percent of pretax income:
Federal statutory rate 35% 35% 35%
Tax-exempt revenue (1) (1) (1)
Effect of state income
taxes,
net of federal benefit 1 1 2
Intangible amortization -- -- --
Charitable contribution -- -- (1)
Utilization of tax credits -- -- --
Reduction of tax accrual (1) -- (1)
Other, net 1 1 --
------------------------------------------------------------------
Total 35% 36% 34%
==================================================================
71
(12) Employee Benefits
BOK Financial sponsors a defined benefit cash balance Pension Plan for all
employees who satisfy certain age and service requirements. The following table
presents information regarding this plan (dollars in thousands):
December 31,
---------------------
2006 2005
---------------------
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $57,657 $44,688
Service cost 1,981 6,766
Interest cost 3,096 2,488
Actuarial loss 871 6,599
Benefits paid (5,385) (2,884)
--------------------------------------------------------------------------------
Projected benefit obligation at end of year(1,2) $58,220 $57,657
================================================================================
Change in plan assets:
Plan assets at fair value at beginning of year $58,989 $52,246
Actual return on plan assets 6,612 3,298
Company contributions 2,822 6,329
Benefits paid (5,385) (2,884)
--------------------------------------------------------------------------------
Plan assets at fair value at end of year $63,038 $58,989
================================================================================
Funded status of the plan $ 4,818 $ 1,332
Unrecognized net loss -- 20,555
--------------------------------------------------------------------------------
Prepaid pension costs $ 4,818 $21,887
================================================================================
Components of net periodic benefit costs:
Service cost $ 1,981 $ 6,766
Interest cost 3,096 2,488
Expected return on plan assets (4,785) (4,122)
Amortization of unrecognized amounts:
Net loss 1,425 1,094
Prior service cost -- 60
--------------------------------------------------------------------------------
Net periodic pension cost $ 1,717 $ 6,286
================================================================================
(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 5.50% 5.50%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 5.25% 5.25%
As of December 31, 2006, expected future benefit payments related to the
Pension Plan were as follows (in thousands):
2007 $ 3,651
2008 3,514
2009 3,803
2010 3,635
2011 4,536
2012 through 2015 19,680
-------
$38,819
=======
Assets of the Pension Plan consist primarily of shares in the American
Performance 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
inception-to-date return on the fund, which is used as an indicator when setting
the expected return on plan assets, was 8.72%. The maximum allowed and minimum
required Pension Plan contributions for 2006 were $11.0 million and $0,
respectively. Amounts contributed to the Pension Plan during 2006 included $2.8
million attributable to 2005. No contribution was made for the current year.
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%. A
charge of $384 thousand was recognized in 2005 for the curtailment of the
Pension Plan.
FAS 158 was issued during 2006 and, for the Company, was effective
December 31, 2006. Among other things, FAS 158 required that financial
statements recognize the funded status of the 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. The
Company was required to reduce its prepaid pension asset to the net funded
status of the pension plan and charge $18.6 million, less deferred income taxes,
against shareholders' equity for the adoption of FAS 158. FAS 158 had no effect
on pension expense recognition. The Company will continue to have a funding
obligation to the pension plan and will continue to recognize pension expense
based on plan asset performance, discount rates and other factors.
Effective April 1, 2006, the Company enhanced benefits offered through its
Thrift Plans. Employee contributions to the Thrift Plans eligible for Company
matching equal 6% of base compensation, as defined in the plans. The
Company-provided matching contribution rates
72
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.
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 Plans expenses were $9.1 million, $4.6 million and $3.9
million for 2006, 2005 and 2004, 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. Eligibility
for the post-retirement 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 $2.1 million at December 31, 2006.
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. Cash settlements paid 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 $57.5
million in 2006, $48.7 million in 2005 and $46.4 million in 2004 for incentive
compensation plans.
73
(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 granted
to other officers and employees 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 2004, 2005 and
2006 under these plans:
Weighted-
Average
Exercise
Number Price
--------------------------
Options outstanding at
December 31, 2003 3,388,462 23.58
Options awarded 857,951 40.37
Options exercised (693,199) 19.65
Options forfeited (212,844) 27.15
Options expired (2,322) 14.94
-------------------------------------------------------------------------------
Options outstanding at
December 31, 2004 3,338,048 $28.53
Options awarded 900,126 47.02
Options exercised (668,990) 24.10
Options forfeited (79,856) 33.67
Options expired (616) 30.11
-------------------------------------------------------------------------------
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 vested at
December 31, 2006 796,121 $26.88
===============================================================================
The following table summarizes information concerning currently
outstanding and vested stock options:
Options Outstanding Options Vested
-------------------------------------------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (years) Price Vested Price
$16.17 27,876 0.92 $16.17 27,876 $16.17
17.37 - 19.02 434,751 2.15 17.93 355,205 18.06
28.27 - 30.87 704,557 3.28 29.77 249,859 29.32
37.74 530,389 4.00 37.74 62,908 37.74
49.00 - 49.09 50,487 0.12 49.03 50,487 49.03
45.15 - 47.34 653,801 5.00 47.32 49,786 47.30
44.00 - 47.99 209,200 1.00 46.04 -- --
47.05 - 48.53 682,522 6.00 47.06 -- --
50.61 - 54.00 203,042 2.00 52.52 -- --
--------------------------------------------------------------------------------
74
Compensation expense for stock options is generally recognized based on
the fair value of options granted over the options' vesting period. No
compensation expense is recognized for options that are forfeited before
vesting. 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:
2006 2005 2004
---------------------------------------
Average risk-free interest rate 4.42% 3.69% 3.27%
Dividend yield 0.90% 0.90% None
Volatility factors .161 .168 .178
Weighted average expected life 4.9 years 4.9 years 4.9 years
Weighted average fair value $9.56 $10.01 $8.53
Compensation cost of stock options granted that may be recognized as
compensation expense in future years totaled $11.5 million at December 31, 2006.
Subject to adjustments for forfeitures, we expect to recognize compensation
expense for current outstanding options of $4.9 million in 2007, $3.2 million in
2008, $1.7 million in 2009, $1.0 million in 2010 and $675 thousand thereafter.
Stock option expense for the years ended December 31, 2006, 2005 and 2004 was
$6.4 million, $5.5 million and $3.7 million, respectively. The intrinsic value
of options exercised during the years ended December 31, 2006 and 2005 was $16.6
million and $14.9 million, respectively. The aggregate intrinsic value of
options outstanding as of December 31, 2006 and 2005 was $132.6 million and
$105.0 million, respectively. The aggregate intrinsic value of options
exercisable as of December 31, 2006 and 2005 was $21.2 million and $20.8
million, respectively.
BOK Financial also issues non-vested common shares under the various
stock-based compensation plans. At December 31, 2006, a total of 101,403
non-vested common shares have been awarded, including 43,697 awarded in 2006.
The weighted average grant date fair value of non-vested shares awarded in 2006
was $47.33 per share. Unrecognized compensation cost of non-vested shares
totaled $1.8 million at December 31, 2006. Subject to adjustment for
forfeitures, we expect to recognize compensation expense of $514 thousand in
2007, $511 thousand in 2008, $407 thousand in 2009 and $349 thousand thereafter.
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, 2006, the recorded obligation for liability awards was $6.0 million.
Compensation expense for liability awards was $4.7 million in 2006, a credit of
$632 thousand in 2005 and an expense of $7.6 million in 2004. The reduction in
2005 expense resulted from the termination of future deferral rights for all
executive officers except the President and Chief Executive Officer and a
decrease in the period end market value of BOK Financial common stock.
During January 2007, BOK Financial awarded the following stock-based
compensation:
------------------------------------------
Exercise Fair Value /
Number Price Award
------------------------------------------
Equity awards:
Stock options 679,911 $54.33 $ 10.67
Nonvested stock 19,261 - 54.28
---------
Total Equity awards 699,172
Liability awards:
Stock options 46,551 54.33 10.67
Nonvested stock 12,201 - 54.33
---------
Total Liability awards 58,752
---------
Total stock-based awards 757,924
================================================================================
The aggregate compensation cost of these awards totaled approximately $9.0
million. This cost will be recognized over the vesting periods, subject to
adjustments for forfeitures and changes in the fair value of liability awards.
75
(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, 2006 or 2005.
Activity in loans to related parties is summarized as follows (in
thousands):
2006 2005
-------------------------
Beginning balance
$ 130,364 $ 104,845
Advances 562,994 691,848
Payments (560,009) (678,098)
Adjustments(1) 27,552 11,769
-------------------------------------------------------------------------------
Ending balance $ 160,901 $ 130,364
===============================================================================
(1) Adjustments generally consist of changes in status as a related party.
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. There are no other material
related party transactions that require disclosure.
(15) Commitments and Contingent Liabilities
AXIA Investment Management, Inc. ("AXIA"), a wholly-owned subsidiary of
BOk, is the administrator to and investment advisor for the American Performance
Funds ("AP Funds"). AP Funds is a diversified, open-ended investment company
established in 1987 as a business trust under the Investment Company Act of 1940
(the "1940 Act"). AP Fund's products are offered to customers, employee benefit
plans, trusts and the general public in the ordinary course of business.
Approximately 98% of AP Fund's assets of $3.4 billion is held for BOK
Financial's clients.
On October 10, 2006, the Securities and Exchange Commission (the "SEC")
started a special examination of AXIA. The examination is focused on the BISYS
Fund Services Ohio, Inc. ("BISYS") marketing assistance agreements with AXIA
that were terminated in 2004. In September 2006, BISYS settled the SEC's
two-year investigation of it by consenting to an order in which the SEC
determined that BISYS had "willfully aided and abetted and caused" (1) the
investment advisors to 27 different families of mutual funds to violate
provisions of the Investment Advisors Act of 1940 that prohibit fraudulent
conduct; (2) the investment advisors to the 27 fund families to 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 (3) the 27 fund families to 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. AXIA is one of the 27 advisors and the AP Funds one
of the mutual fund families to which the SEC referred. AXIA is not bound by the
SEC BISYS Order and disagrees with its findings as they relate to AXIA. Although
the SEC's examination of AXIA is ongoing, BOK Financial does not expect the
examination or any action the SEC may take based upon it to have a material
adverse effect on the Company.
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.
BOk is obligated under a long-term lease for its bank premises located in
downtown Tulsa. 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 2007 through 2009 and $195 thousand in 2010. Net rent expense on this
lease was $3.0 million in 2006 and $2.9 million in years 2005 and 2004. Total
rent expense for BOK Financial was $16.5 million in 2006, $15.3 million in 2005,
and $14.3 million in 2004.
At December 31, 2006, future minimum lease payments for equipment and
premises under operating leases were as follows: $16.2 million in 2007, $15.8
million in 2008, $14.7 million in 2009, $14.0 million in 2010, $11.1 million in
2011 and a total of $95.1 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 $299 million and $316
million at December 31, 2006 and 2005, respectively.
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 $1.1 million at December
31, 2006.
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 $17.7 million as of
December 31, 2006. Substantially all of those contingent obligations are offset
by commitments of BOK Financial customers.
76
(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. During the
second quarter of 2005, holders of the Company's convertible preferred stock
exercised their conversion rights. All of the Series A Preferred Stock was
converted into 6,920,666 common shares. In 2004, cash dividends declared on
preferred stock totaled $1.9 million. George B. Kaiser, the Company's Chairman
and principal shareholder, owned substantially all Series A Preferred Stock.
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. No common
stock dividends can be paid unless all accrued dividends on the Series A
Preferred Stock have been paid. Additionally, regulations restrict the ability
of national banks and bank holding companies to pay dividends, and BOK
Financial's credit agreement restricts the payment of dividends by the holding
company.
Cash dividends paid on common stock totaled $37 million and $20 million in
2006 and 2005, respectively. During the second quarter of 2005, the Board of
Directors approved the Company's first quarterly cash dividend of $0.10 per
common share. The quarterly cash dividend replaced the annual dividend
historically paid in shares of common stock. During 2004, 3% dividends payable
in shares of BOK Financial common stock were declared and paid. The shares
issued were valued at $66 million based on the average closing bid/ask prices on
the day preceding declaration. Per share data has been restated to reflect these
stock dividends.
During 2002, BOK Financial agreed to a limited price guarantee on a
portion of the shares issued to purchase Bank of Tanglewood. The fair value of
this price guarantee, estimated to be $3 million based upon the Black-Scholes
option pricing model, was included in the purchase price. Any holder of BOK
Financial common shares issued in this acquisition may annually make a claim for
the excess of the guaranteed price and the actual sales price of any shares sold
during a 60-day period after each of the first five anniversary dates after
October 25, 2002. The maximum annual number of shares subject to this guarantee
is 210,069. The guaranteed price for the 2007 anniversary date is $42.53. The
price guarantee is nontransferable and noncumulative. BOK Financial may elect,
in its sole discretion, to issue additional shares of common stock to satisfy
any obligation under the price guarantee or to pay cash. The maximum aggregate
number of common shares that may be issued to satisfy any price guarantee
obligations is 10 million. If, as of any benchmark date, BOK Financial has
already issued 10 million shares, BOK Financial is not obligated to make any
further benchmark payments. BOK Financial's ability to pay cash to satisfy any
price guarantee obligations is limited by applicable bank holding company and
bank capital and dividend regulations.
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, 2006, BOK
Financial's subsidiary banks could declare dividends up to $107 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, 2006, the subsidiary banks
could declare dividends of up to $32 million under this policy. The subsidiary
banks declared and paid dividends of $81 million in 2006 and $151 million in
2005. During 2004, the subsidiary banks did not declare any dividends.
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, 2006, these loans
totaled $29 million. As of December 31, 2005, these loans had no outstanding
balance. Total loan commitments to affiliates at December 31, 2006 were $147
million.
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. As directed by the Federal
Reserve Bank, Tier I capital excludes $10 million, the combined value of common
shares issued subject to the market value protection program and the value of
the market value guarantee. These values will be restored to Tier I capital as
the market price guarantee expires. 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.
77
December 31,
-----------------------------------------------------------------
2006 2005
----------------------------- -----------------------------
Amount Ratio Amount Ratio
----------------------------- -----------------------------
(Dollars in thousands)
Total Capital (to Risk Weighted Assets):
Consolidated $ 1,801,876 11.58% $ 1,625,832 12.10%
BOk 1,246,534 10.51 1,162,091 10.91
Bank of Texas 305,957 10.98 275,507 11.29
Bank of Albuquerque 96,594 16.22 95,134 16.47
Bank of Arkansas 19,640 11.75 18,372 19.53
Colorado State Bank and Trust 53,981 14.96 40,249 13.17
Bank of Arizona 17,266 13.34 18,194 18.44
Bank of Kansas City 19,915 329.76 N/A N/A
Tier I Capital (to Risk Weighted Assets):
Consolidated $ 1,521,504 9.78% $ 1,322,570 9.84%
BOk 1,006,372 8.49 895,653 8.41
Bank of Texas 280,294 10.06 252,316 10.34
Bank of Albuquerque 90,418 15.18 88,439 15.31
Bank of Arkansas 17,549 10.50 17,194 18.27
Colorado State Bank and Trust 51,061 14.15 36,935 12.09
Bank of Arizona 15,954 12.33 17,113 17.35
Bank of Kansas City 19,915 329.76 N/A N/A
Tier I Capital (to Average Assets):
Consolidated $ 1,521,504 8.79% $ 1,322,570 8.30%
BOk 1,006,372 8.26 895,653 6.88
Bank of Texas 280,294 7.95 252,316 8.09
Bank of Albuquerque 90,418 7.28 88,439 6.76
Bank of Arkansas 17,549 10.95 17,194 10.98
Colorado State Bank and Trust 51,061 5.68 36,935 6.10
Bank of Arizona 15,954 9.98 17,113 11.67
Bank of Kansas City 19,915 136.27 N/A N/A
78
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 cash flow hedges of prime-based loans of $2.4 million will
be reclassified into income over two years. 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 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, 2003 $ 8,459 $ -- $ -- $ 8,459
Unrealized losses on securities (31,806) -- -- (31,806)
Unrealized losses on cash flow hedges -- (2,664) -- (2,664)
Tax benefit on unrealized losses 11,303 1,039 -- 12,342
Reclassification adjustment for losses
realized and included in net income 3,088 -- -- 3,088
Reclassification adjustment for tax benefit
on realized losses (1,044) -- -- (1,044)
---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 (10,000) (1,625) -- (11,625)
Unrealized losses on securities (92,551) -- -- (92,551)
Unrealized losses on cash flow hedges -- 684 -- 684
Loss on rate lock hedge of subordinated debt issuance -- (2,788) -- (2,788)
Tax benefit (expense) on unrealized gains (losses) 34,129 (75) -- 34,054
Reclassification adjustment for losses
realized and included in net income 6,772 123 -- 6,895
Reclassification adjustment for tax benefit
on realized losses (2,432) (48) -- (2,480)
---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 (64,082) (3,729) -- (67,811)
Unrealized gains (losses) 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)
===========================================================================================================================
79
(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,
---------------------------------------------
2006 2005 2004
---------------------------------------------
Numerator:
Net income $ 212,977 $ 201,505 $ 179,023
Preferred stock dividends -- (375) (1,875)
------------------------------------------------------------------------------------------------------------------------------
Numerator for basic earnings per share - income
available to common stockholders 212,977 201,130 177,148
------------------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock dividends -- 375 1,875
------------------------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share - income available
to common stockholders after assumed conversion $ 212,977 $ 201,505 $ 179,023
==============================================================================================================================
Denominator:
Denominator for basic earnings per share - weighted average shares 66,759,384 64,067,873 59,128,395
Effect of dilutive securities:
Employee stock compensation plans(1) 550,621 628,060 669,857
Convertible preferred stock -- 2,351,131 6,921,083
Tanglewood market value guarantee (see Note 16) -- -- 13,161
------------------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 550,621 2,979,191 7,604,101
------------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 67,310,005 67,047,064 66,732,496
==============================================================================================================================
Basic earnings per share $ 3.19 $ 3.14 $ 3.00
==============================================================================================================================
Diluted earnings per share $ 3.16 $ 3.01 $ 2.68
==============================================================================================================================
(1) Excludes employee stock options with exercise prices greater than the
current market price. 440,216 855,326 31,970
80
(18) Reportable Segments
BOK Financial operates five principal lines of business: Oklahoma
corporate banking, Oklahoma consumer banking, mortgage banking, wealth
management, and regional banking. Mortgage banking activities include loan
origination and servicing across all markets served by the Company. Wealth
management provides brokerage and trading, private financial services and
investment advisory services in all markets. It also provides fiduciary services
in all markets except Colorado. Fiduciary services in Colorado are included in
regional banking. Regional banking consists primarily of corporate and consumer
banking activities in the respective local markets. In addition to its lines of
business, BOK Financial has a funds management unit. The primary purpose of this
unit is to manage the 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,
tax-exempt income and tax credits, and certain executive compensation costs that
are not attributed to the lines of business.
The Oklahoma Corporate Banking segment provides loan and lease financing
and treasury and cash management services to businesses throughout Oklahoma and
certain relationships in surrounding states. Oklahoma Corporate Banking also
includes our TransFund unit, which provides ATM and merchant deposit services.
The Oklahoma Consumer Banking segment provides a full line of deposit, loan and
fee-based services to customers throughout Oklahoma through four major
distribution channels: traditional branches, supermarket branches, the 24-hour
ExpressBank call center and the Internet. The Mortgage Banking segment consists
of two operating sectors that originate a full range of mortgage products from
federally sponsored programs to "jumbo loans" on higher priced homes in BOK
Financial's primary market areas. The Mortgage Banking segment also services
mortgage loans acquired from throughout the United States. The Wealth Management
segment provides a wide range of financial services, including trust and private
financial services and brokerage and trading services. This segment includes the
activities of BOSC, Inc., a registered broker/dealer. Trust and private
financial services include sales of institutional, investment and retirement
products, loans and other services to affluent individuals, businesses,
not-for-profit organizations, and governmental agencies. Trust services are
primarily provided to clients in Oklahoma, Texas and New Mexico. Regional
banking includes Bank of Texas, Bank of Albuquerque, Bank of Arkansas, Colorado
State Bank and Trust, Bank of Arizona and Bank of Kansas City. Each of these
banks provides a full range of corporate and consumer banking services in their
respective markets. Fiduciary services provided through Colorado State Bank and
Trust are included in the Regional Banking segment.
BOK Financial identifies reportable segments by type of service provided
for the Mortgage Banking and the Wealth Management segments and by type of
customer for the Oklahoma Corporate Banking and Oklahoma Consumer Banking
segments. Regional Banking is identified by legal entity. Operating results are
adjusted for intercompany loan participations, allocated service costs and
management fees, interest rate risk positions and risk management activities.
BOK Financial allocates resources and evaluates performance of its lines
of business after allocation of funds, certain indirect expenses, taxes and
capital costs. The cost of funds borrowed from the funds management unit by the
operating lines of business is transfer priced at rates that approximate market
for funds with similar duration. Market rates are generally based on the
applicable LIBOR or interest rate swap rates, adjusted for prepayment risk. This
method of transfer pricing funds that support assets of the operating lines of
business tends to insulate them from interest rate risk.
The value of funds provided by the operating lines of business to the
funds management unit is based on applicable Federal Home Loan Bank advance
rates. Deposit accounts with indeterminate maturities, such as demand deposit
accounts and interest-bearing transaction accounts, are transfer priced at a
rolling average based on expected duration of the accounts. The expected
duration ranges from 90 days for certain rate-sensitive deposits to five years.
The accounting policies of the reportable segments generally follow those
described in the summary of significant accounting policies, except that
interest income is reported on a fully tax-equivalent basis, loan losses are
based on actual net amounts charged off and the amortization of intangible
assets is generally excluded.
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 the business lines and recognizes the diversification
benefits among the units. The level of assigned economic capital is a
combination of the risk taken by each business line, based on its actual
exposures and calibrated to its own loss history where possible. Additional
capital is assigned to the regional banking line of business based on BOK
Financial's investment in those entities.
Substantially all revenue is from domestic customers. No single external
customer accounts for more than 10% of total revenue.
81
Oklahoma Oklahoma All
Corporate Consumer Mortgage Wealth Regional Other/
(In Thousands) Banking Banking Banking Management Banking Eliminations Total
-----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2006
Net interest revenue/(expense)
from external sources $ 253,266 $ (62,447) $ 23,638 $ 15,148 $ 326,163 $ (69,080) $ 486,688
Net interest revenue/(expense)
from internal sources (101,432) 131,131 (20,307) 13,030 (73,915) 51,493 --
-----------------------------------------------------------------------------------------------------------------------------------
Total net interest revenue 151,834 68,684 3,331 28,178 252,248 (17,587) 486,688
Provision for credit losses 1,586 2,780 504 222 7,376 5,934 18,402
Other operating revenue 91,250 72,699 17,287 119,200 56,909 3,933 361,278
Capitalized mortgage
servicing rights -- -- 11,917 -- -- -- 11,917
Financial instruments
gains (losses) 113 80 (1,102) 15 35 (713) (1,572)
Operating expense 115,306 80,250 30,731 105,906 155,811 27,312 515,316
Change in fair value of
mortgage servicing rights -- -- (3,009) -- -- -- (3,009)
Income taxes 49,132 22,730 1,247 16,053 53,567 (28,104) 114,625
-----------------------------------------------------------------------------------------------------------------------------------
Net income $ 77,173 $ 35,703 $ 1,960 $ 25,212 $ 92,438 $ (19,509) $ 212,977
===================================================================================================================================
Average assets $ 5,328,041 $ 2,836,692 $ 519,371 $ 1,831,377 $ 7,019,426 $ (727,316) $16,807,591
Average economic capital 384,810 58,680 23,510 125,720 441,330 575,309 1,609,359
Average invested capital -- -- -- -- 686,130 -- --
Performance measurements:
Return on assets 1.45% 1.26% 0.38% 1.38% 1.32% -- 1.27%
Return on economic capital 20.05 60.84 8.34 20.05 20.95 -- 13.23
Return on invested capital -- -- -- -- 13.47 -- --
Efficiency ratio 47.43 56.76 94.46 71.86 50.40 -- 59.93
Reconciliation to Consolidated Financial Statements
Other Other
Net Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
---------------------------------------------------------------------
Total reportable segments $ 504,275 $ 369,262 $ 484,995 $ 232,486 $17,534,907
Unallocated items:
Tax-equivalent adjustment 6,963 -- -- 6,963 --
Funds management and other
(including eliminations), net (24,550) 3,933 27,312 (26,472) (727,316)
----------------------------------------------------------------------------------------------------------
BOK Financial consolidated $ 486,688 $ 373,195 $ 512,307 $ 212,977 $16,807,591
==========================================================================================================
82
Oklahoma Oklahoma All
Corporate Consumer Mortgage Wealth Regional Other/
(In Thousands) Banking Banking Banking Management Banking Eliminations Total
---------------------------------------------------------------------------------------------------
Year ended December 31, 2005
Net interest revenue/(expense)
from external sources $ 208,044 $ (43,411) $ 20,237 $ 12,488 $ 257,507 $ (5,524) $ 449,341
Net interest revenue/(expense)
from internal sources (67,875) 98,291 (14,882) 8,504 (38,111) 14,073 --
-----------------------------------------------------------------------------------------------------------------------------------
Total net interest revenue 140,169 54,880 5,355 20,992 219,396 8,549 449,341
Provision for credit losses 6,481 3,094 415 224 6,190 (3,963) 12,441
Other operating revenue 83,619 66,174 15,347 109,405 51,474 3,251 329,270
Gain on sales of assets 4,758 -- 1,232 -- -- -- 5,990
Capitalized mortgage
servicing rights -- -- 17,402 -- -- -- 17,402
Financial instruments
gains (losses) (132) (87) (5,087) 13 519 (942) (5,716)
Operating expense 110,395 77,757 34,736 94,338 143,026 12,769 473,021
Recovery for impairment of
mortgage servicing rights -- -- (3,915) -- -- -- (3,915)
Income taxes 43,388 15,605 1,172 13,945 44,685 (5,560) 113,235
-----------------------------------------------------------------------------------------------------------------------------------
Net income $ 68,150 $ 24,511 $ 1,841 $ 21,903 $ 77,488 $ 7,612 $ 201,505
===================================================================================================================================
Average assets $ 4,722,030 $ 2,657,824 $ 514,530 $ 1,748,104 $ 6,018,520 $ (77,321) $15,583,687
Average economic capital 324,840 50,460 23,210 103,390 326,650 633,296 1,461,846
Average invested capital -- -- -- -- 571,460 -- --
Performance measurements:
Return on assets 1.44% 0.92% 0.36% 1.25% 1.29% -- 1.29%
Return on economic capital 20.98 48.58 7.93 21.18 23.72 -- 13.78
Return on invested capital -- -- -- -- 13.56 -- --
Efficiency ratio 48.30 64.23 88.31 72.35 52.80 -- 58.98
Reconciliation to Consolidated Financial Statements
Other Other
Net Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
------------------------------------------------------------------------
Total reportable segments $ 440,792 $ 349,411 $ 456,337 $ 193,893 $ 15,661,008
Unallocated items:
Tax-equivalent adjustment 5,182 -- -- 5,182 --
Funds management and other
(including eliminations), net 3,367 3,251 12,769 2,430 (77,321)
-------------------------------------------------------------------------------------------------------------
BOK Financial consolidated $ 449,341 $ 352,662 $ 469,106 $ 201,505 $ 15,583,687
=============================================================================================================
(1) Excluding financial instrument gains/(losses)
83
Oklahoma Oklahoma All
Corporate Consumer Mortgage Wealth Regional Other/
(In Thousands) Banking Banking Banking Management Banking Eliminations Total
---------------------------------------------------------------------------------------------------
Year ended December 31, 2004
Net interest revenue/(expense)
from external sources $ 148,919 $ (19,061) $ 21,647 $ 4,001 $ 200,781 $ 66,956 $ 423,243
Net interest revenue/(expense)
from internal sources (26,049) 64,873 (11,423) 8,888 (19,753) (16,536) --
-----------------------------------------------------------------------------------------------------------------------------------
Total net interest revenue 122,870 45,812 10,224 12,889 181,028 50,420 423,243
Provision for credit losses 8,956 6,964 340 23 5,507 (1,351) 20,439
Other operating revenue 86,493 56,611 22,055 93,193 47,017 (3,282) 302,087
Capitalized mortgage
servicing rights -- -- 11,365 -- -- -- 11,365
Financial instruments
gains/(losses) -- -- (5,068) -- -- 506 (4,562)
Operating expense 99,007 76,057 35,415 83,784 132,022 16,506 442,791
Recovery for impairment of
mortgage servicing rights -- -- (1,567) -- -- -- (1,567)
Income taxes 39,444 7,548 1,707 8,688 32,810 1,250 91,447
-----------------------------------------------------------------------------------------------------------------------------------
Net income $ 61,956 $ 11,854 $ 2,681 $ 13,587 $ 57,706 $ 31,239 $ 179,023
===================================================================================================================================
Average assets $ 4,380,491 $ 2,746,279 $ 559,034 $ 1,122,147 $ 5,754,211 $ (535,275) $14,026,887
Average economic capital 312,530 64,390 27,270 84,820 271,950 536,597 1,297,557
Average invested capital -- -- -- -- 500,110 -- --
Performance measurements:
Return on assets 1.41% 0.43% 0.48% 1.21% 1.00% -- 1.28%
Return on economic capital 19.82 18.41 9.83 16.02 21.22 -- 13.80
Return on invested capital -- -- -- -- 11.54 -- --
Efficiency ratio 47.29 74.26 81.15 78.98 57.89 -- 60.11
Reconciliation to Consolidated Financial Statements
Other Other
Net Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
-------------------------------------------------------------------------
Total reportable segments $ 372,823 $ 316,734 $ 424,718 $ 147,784 $ 14,562,162
Unallocated items:
Tax-equivalent adjustment 5,039 -- -- 5,039 --
Funds management and other
(including eliminations), net 45,381 (3,282) 16,506 26,200 (535,275)
--------------------------------------------------------------------------------------------------------------
BOK Financial consolidated $ 423,243 $ 313,452 $ 441,224 $ 179,023 $ 14,026,887
==============================================================================================================
(1) Excluding financial instrument gains/(losses)
84
(19) Fair Value of Financial Instruments
The following table presents the carrying values and estimated fair values
of financial instruments as of December 31, 2006 and 2005 (dollars in
thousands):
Range of Average Estimated
Carrying Contractual Repricing Discount Fair
Value Yields (in years) Rate Value
------------------------------------------------------------------------------
2006:
Cash and cash equivalents $ 797,326 $ 797,326
Securities 5,103,663 5,101,582
Loans:
Commercial 6,208,884 1.61 - 18.00% 0.38 5.33 - 8.25% 6,532,426
Commercial real estate 2,446,540 6.00 - 15.00 1.38 8.25 2,410,517
Residential mortgage 1,256,259 3.81 - 12.13 5.74 5.00 - 6.06 1,227,574
Residential mortgage - held for sale 64,625 -- -- -- 64,625
Consumer 739,495 3.00 - 20.15 2.44 8.25 722,170
---------------------------------------------------------------------------------------------------------------------------------
Total loans 10,715,803 10,957,312
Reserve for loan losses (109,497) --
---------------------------------------------------------------------------------------------------------------------------------
Net loans 10,606,306 10,957,312
Derivative instruments with positive
fair value 284,239 284,239
Deposits with no stated maturity 7,916,159 7,916,159
Time deposits 4,470,546 0.95 - 9.00 1.16 4.88 - 5.50 4,431,707
Other borrowings 2,942,247 2.81 - 6.45 0.83 4.85 - 5.33 2,642,381
Subordinated debentures 297,800 7.35 4.51 4.85 298,732
Derivative instruments with negative
fair value 298,679 298,679
=================================================================================================================================
2005:
Cash and cash equivalents $ 699,322 $ 699,322
Securities 5,085,333 5,083,614
Loans:
Commercial 5,299,935 2.75 - 18.00% 0.33 4.61 - 7.25% 5,411,035
Commercial real estate 1,989,902 4.00 - 12.00 1.21 7.25 1,977,936
Residential mortgage 1,169,331 2.82 - 12.13 3.29 4.60 - 6.17 1,146,072
Residential mortgage - held for sale 51,666 -- -- -- 51,666
Consumer 629,144 3.04 - 18.90 2.38 7.25 623,265
---------------------------------------------------------------------------------------------------------------------------------
Total loans 9,139,978 9,209,974
Reserve for loan losses (103,876) --
---------------------------------------------------------------------------------------------------------------------------------
Net loans 9,036,102 9,209,974
Derivative instruments with positive
fair value 452,878 452,878
Deposits with no stated maturity 7,277,258 7,277,258
Time deposits 4,098,060 0.70 - 7.25 1.70 4.25 - 4.90 4,056,480
Other borrowings 2,392,209 2.01 - 4.48 1.54 4.37 - 4.61 2,392,255
Subordinated debentures 295,964 6.71 8.09 4.48 317,779
Derivative instruments with negative
fair value 466,669 466,669
=================================================================================================================================
The preceding table presents the estimated fair values of financial
instruments. The fair values of certain of these instruments were calculated by
discounting expected cash flows, which involved significant judgments by
management. Fair value is the estimated amount at which financial assets or
liabilities could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. 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.
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.
85
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 classified loans
were estimated to approximate their carrying values less loan loss reserves
allocated to these loans of $12 million and $15 million at December 31, 2006 and
2005, 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, 2006 and 2005.
86
(20) Parent Company Only Financial Statements
Summarized financial information for BOK Financial - Parent Company Only
follows:
Balance Sheets
(In Thousands)
December 31,
---------------------------
2006 2005
---------------------------
Assets
Cash and cash equivalents $ 16,507 $ 11,074
Securities - available for sale 14,121 11,910
Investment in subsidiaries 1,692,231 1,517,047
Other assets 1,584 1,729
---------------------------------------------------------------------------------------------------------
Total assets $ 1,724,443 $ 1,541,760
=========================================================================================================
Liabilities and Shareholders' Equity
Other liabilities $ 3,421 $ 2,606
---------------------------------------------------------------------------------------------------------
Total liabilities 3,421 2,606
---------------------------------------------------------------------------------------------------------
Common stock 4 4
Capital surplus 688,861 656,579
Retained earnings 1,166,994 990,422
Treasury stock (61,393) (40,040)
Accumulated other comprehensive loss (73,444) (67,811)
---------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,721,022 1,539,154
---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,724,443 $ 1,541,760
=========================================================================================================
Statements of Earnings
(In Thousands)
2006 2005 2004
-------------------------------------------
Dividends, interest and fees received from subsidiaries $ 80,855 $ 153,462 $ 127
Other operating revenue 476 468 35
---------------------------------------------------------------------------------------------------------
Total revenue 81,331 153,930 162
---------------------------------------------------------------------------------------------------------
Interest expense -- 1,500 2,185
Professional fees and services 506 589 486
Contribution of stock to BOK Charitable Foundation -- -- 4,125
Other operating expense 191 22 2
---------------------------------------------------------------------------------------------------------
Total expense 697 2,111 6,798
---------------------------------------------------------------------------------------------------------
Income (loss) before taxes and equity in undistributed
income of subsidiaries 80,634 151,819 (6,636)
Federal and state income tax credit (28) (682) (3,953)
---------------------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed income of
subsidiaries 80,662 152,501 (2,683)
Equity in undistributed income of subsidiaries 132,315 49,004 181,706
---------------------------------------------------------------------------------------------------------
Net income $ 212,977 $ 201,505 $ 179,023
=========================================================================================================
87
Statements of Cash Flows
(In Thousands)
-------------------------------------------
2006 2005 2004
-------------------------------------------
Cash flows from operating activities:
Net income $ 212,977 $ 201,505 $ 179,023
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries (132,315) (49,004) (181,706)
Tax benefit on exercise of stock options 4,014 3,583 4,609
Contribution of stock to BOK Charitable Foundation -- -- 4,125
Write down of equity securities -- -- 410
Change in other assets (22,949) (12,337) (5,138)
Change in other liabilities 815 (889) 713
---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 62,542 142,858 2,036
---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of available for sale securities -- -- (53)
Investment in subsidiaries (20,865) (34,264) (5,250)
---------------------------------------------------------------------------------------------------------
Net cash used by investing activities (20,865) (34,264) (5,303)
---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Pay down of other borrowings -- (95,000) --
Issuance of common and treasury stock, net 12,647 7,032 7,132
Cash dividends (36,788) (20,343) (1,540)
Other (12,103) (2,439) 24
---------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (36,244) (110,750) 5,616
---------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 5,433 (2,156) 2,349
Cash and cash equivalents at beginning of period 11,074 13,230 10,881
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 16,507 $ 11,074 $ 13,230
=========================================================================================================
Payment of dividends in common stock $ -- $ -- $ 65,899
=========================================================================================================
Cash paid for interest 10 1,698 1,882
=========================================================================================================
88
89
Annual Financial Summary - Unaudited
Consolidated Daily Average Balances,
Average Yields and Rates
(Dollars in Thousands)
2006
--------------------------------------------
Average Revenue/ Yield/
Balance Expense(1) Rate
--------------------------------------------
Assets
Taxable securities(3) $ 4,770,959 $ 222,531 4.67%
Tax-exempt securities(3) 290,356 15,572 5.44
-----------------------------------------------------------------------------------------------------------------------------------
Total securities(3) 5,061,315 238,103 4.71
-----------------------------------------------------------------------------------------------------------------------------------
Trading securities 21,213 1,044 4.92
Funds sold and resell agreements 36,196 1,841 5.09
Loans(2) 9,706,866 752,404 7.75
Less reserve for loan losses 106,689 -- --
-----------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 9,600,177 752,404 7.84
-----------------------------------------------------------------------------------------------------------------------------------
Total earning assets(3) 14,718,901 993,392 6.75
-----------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,088,690
-----------------------------------------------------------------------------------------------------------------------------------
Total assets $16,807,591
===================================================================================================================================
Liabilities and Shareholders' Equity
Transaction deposits $ 5,477,886 $ 148,986 2.72%
Savings deposits 148,656 1,408 0.95
Time deposits 4,279,610 186,514 4.36
-----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 9,906,152 336,908 3.40
-----------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase agreements 2,145,648 105,483 4.92
Other borrowings 725,329 37,070 5.11
Subordinated debentures 294,962 20,280 6.88
-----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 13,072,091 499,741 3.82
-----------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,473,645
Other liabilities 652,496
Shareholders' equity 1,609,359
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $16,807,591
===================================================================================================================================
Tax-equivalent Net Interest Revenue(3) $ 493,651 2.93%
Tax-equivalent Net Interest Revenue to Earning Assets(3) 3.36
Less tax-equivalent adjustment(1) 6,963
-----------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 486,688
Provision for credit losses 18,402
Other operating revenue 371,623
Other operating expense 512,307
-----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 327,602
Federal and state income tax 114,625
-----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 212,977
===================================================================================================================================
(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.
90
2005 2004
------------------------------------------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
---------------------------------- ----------------------------------
Assets
Taxable securities(3) $ 4,769,666 $205,952 4.34% $ 4,656,108 $197,884 4.26%
Tax-exempt securities(3) 226,961 11,587 5.13 207,376 11,672 5.64
-----------------------------------------------------------------------------------------------------------------------------------
Total securities(3) 4,996,627 217,539 4.38 4,863,484 209,556 4.32
-----------------------------------------------------------------------------------------------------------------------------------
Trading securities 15,892 770 4.85 16,025 629 3.93
Funds sold and resell agreements 38,521 1,287 3.34 19,944 353 1.77
Loans(2) 8,489,751 555,520 6.54 7,644,049 408,785 5.35
Less reserve for loan losses 110,158 -- -- 116,076 -- --
-----------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 8,379,593 555,520 6.63 7,527,973 408,785 5.43
-----------------------------------------------------------------------------------------------------------------------------------
Total earning assets(3) 13,430,633 775,116 5.78 12,427,426 619,323 4.99
-----------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,153,054 1,599,461
-----------------------------------------------------------------------------------------------------------------------------------
Total assets $15,583,687 $14,026,887
===================================================================================================================================
Liabilities and Shareholders' Equity
Transaction deposits $ 4,402,810 $ 72,721 1.65% $ 3,863,276 $ 35,517 0.92%
Savings deposits 159,429 1,106 0.69 169,556 975 0.58
Time deposits 3,894,429 136,573 3.51 3,584,496 107,941 3.01
-----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 8,456,668 210,400 2.49 7,617,328 144,433 1.90
-----------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase agreements 1,936,792 61,606 3.18 1,611,771 21,140 1.31
Other borrowings 996,266 34,220 3.43 1,007,237 17,707 1.76
Subordinated debentures 236,589 14,367 6.07 152,983 7,761 5.07
-----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 11,626,315 320,593 2.76 10,389,319 191,041 1.84
-----------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,607,702 1,805,558
Other liabilities 887,824 534,453
Shareholders' equity 1,461,846 1,297,557
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $15,583,687 $14,026,887
===================================================================================================================================
Tax-equivalent Net Interest Revenue(3) $454,523 3.02% $428,282 3.15%
Tax-equivalent Net Interest Revenue to Earning Assets(3) 3.39 3.45
Less tax-equivalent adjustment(1) 5,182 5,039
-----------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 449,341 423,243
Provision for credit losses 12,441 20,439
Other operating revenue 346,946 308,890
Other operating expense 469,106 441,224
-----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 314,740 270,470
Federal and state income tax 113,235 91,447
-----------------------------------------------------------------------------------------------------------------------------------
Net Income $201,505 $179,023
===================================================================================================================================
91
Quarterly Financial Summary - Unaudited
Consolidated Daily Average Balances,
Average Yields and Rates
(Dollars in Thousands Except Per Share Data)
Three Months Ended
-----------------------------------------------------------------------
December 31, 2006 September 30, 2006
--------------------------------- ---------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
--------------------------------- ---------------------------------
Assets
Taxable securities(3) $ 4,745,619 $ 56,264 4.69% $ 4,694,588 $ 54,589 4.63%
Tax-exempt securities(3) 318,969 4,435 5.52 306,170 4,187 5.43
--------------------------------------------------------------------------------------------- ---------------------------------
Total securities(3) 5,064,588 60,699 4.74 5,000,758 58,776 4.68
--------------------------------------------------------------------------------------------- ---------------------------------
Trading securities 22,668 322 5.64 21,721 226 4.13
Funds sold and resell agreements 39,665 546 5.46 51,518 649 5.00
Loans(2) 10,361,841 207,322 7.94 9,813,602 197,665 7.99
Less reserve for loan losses 108,377 -- -- 106,474 -- --
--------------------------------------------------------------------------------------------- ---------------------------------
Loans, net of reserve 10,253,464 207,322 8.02 9,707,128 197,665 8.08
--------------------------------------------------------------------------------------------- ---------------------------------
Total earning assets(3) 15,380,385 268,889 6.93 14,781,125 257,316 6.91
--------------------------------------------------------------------------------------------- ---------------------------------
Cash and other assets 2,158,647 2,049,998
--------------------------------------------------------------------------------------------- ---------------------------------
Total assets $17,539,032 $16,831,123
============================================================================================= =================================
Liabilities and Shareholders' Equity
Transaction deposits $ 5,768,216 $ 43,411 2.99% $ 5,458,280 $ 39,571 2.88%
Savings deposits 139,796 365 1.04 146,276 360 0.98
Time deposits 4,417,427 51,781 4.65 4,314,672 48,540 4.46
--------------------------------------------------------------------------------------------- ---------------------------------
Total interest-bearing deposits 10,325,439 95,557 3.67 9,919,228 88,471 3.54
--------------------------------------------------------------------------------------------- ---------------------------------
Funds purchased and repurchase agreements 2,584,354 33,736 5.18 2,138,749 27,568 5.11
Other borrowings 586,743 8,128 5.50 750,247 10,253 5.42
Subordinated debentures 298,427 5,225 6.95 293,146 5,210 7.05
--------------------------------------------------------------------------------------------- ---------------------------------
Total interest-bearing liabilities 13,794,963 142,646 4.10 13,101,370 131,502 3.98
--------------------------------------------------------------------------------------------- ---------------------------------
Demand deposits 1,481,455 1,453,163
Other liabilities 566,128 657,269
Shareholders' equity 1,696,486 1,619,321
--------------------------------------------------------------------------------------------- ---------------------------------
Total liabilities and shareholders' equity $17,539,032 $16,831,123
============================================================================================= =================================
Tax-equivalent Net Interest Revenue(3) $ 126,243 2.83% $125,814 2.93%
Tax-equivalent Net Interest Revenue to Earning Assets(3) 3.25 3.38
Less tax-equivalent adjustment(1) 1,965 1,836
--------------------------------------------------------------------------------------------- ---------------------------------
Net Interest Revenue 124,278 123,978
Provision for credit losses 5,953 5,254
Other operating revenue 93,723 97,583
Other operating expense 133,991 138,810
--------------------------------------------------------------------------------------------- ---------------------------------
Income before taxes 78,057 77,497
Federal and state income tax 27,472 24,837
--------------------------------------------------------------------------------------------- ---------------------------------
Net Income $ 50,585 $ 52,660
============================================================================================= =================================
Earnings Per Average Common Share Equivalent:
Net income:
Basic $ 0.76 $ 0.79
============================================================================================= =================================
Diluted $ 0.75 $ 0.78
============================================================================================= =================================
(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.
92
Three Months Ended
----------------------------------------------------------------------------
June 30, 2006 March 31, 2006
----------------------------------- -----------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
----------------------------------- -----------------------------------
Assets
Taxable securities(3) $ 4,783,280 $ 56,632 4.75% $ 4,862,313 $ 55,046 4.60%
Tax-exempt securities(3) 273,305 3,485 5.12 262,124 3,465 5.36
------------------------------------------------------------------------------------------- -----------------------------------
Total securities(3) 5,056,585 60,117 4.77 5,124,437 58,511 4.64
------------------------------------------------------------------------------------------- -----------------------------------
Trading securities 23,672 287 4.86 16,722 209 5.07
Funds sold and resell agreements 32,048 407 5.09 21,181 239 4.58
Loans(2) 9,472,309 181,269 7.68 9,164,706 166,148 7.35
Less reserve for loan losses 106,048 -- -- 105,135 -- --
------------------------------------------------------------------------------------------- -----------------------------------
Loans, net of reserve 9,366,261 181,269 7.76 9,059,571 166,148 7.44
------------------------------------------------------------------------------------------- -----------------------------------
Total earning assets(3) 14,478,566 242,080 6.71 14,221,911 225,107 6.42
------------------------------------------------------------------------------------------- -----------------------------------
Cash and other assets 2,085,724 2,048,328
------------------------------------------------------------------------------------------- -----------------------------------
Total assets $16,564,290 $16,270,239
=========================================================================================== ===================================
Liabilities and Shareholders' Equity
Transaction deposits $ 5,353,413 $ 34,875 2.61% $ 5,327,004 $ 31,129 2.37%
Savings deposits 153,200 353 0.92 155,554 330 0.86
Time deposits 4,220,204 44,798 4.26 4,162,952 41,395 4.03
------------------------------------------------------------------------------------------- -----------------------------------
Total interest-bearing deposits 9,726,817 80,026 3.30 9,645,510 72,854 3.06
------------------------------------------------------------------------------------------- -----------------------------------
Funds purchased and repurchase agreements 2,118,211 25,696 4.87 1,731,983 18,483 4.33
Other borrowings 684,431 8,682 5.09 882,878 10,007 4.60
Subordinated debentures 292,474 4,930 6.76 295,792 4,915 6.74
------------------------------------------------------------------------------------------- -----------------------------------
Total interest-bearing liabilities 12,821,933 119,334 3.73 12,556,163 106,259 3.43
------------------------------------------------------------------------------------------- -----------------------------------
Demand deposits 1,474,835 1,485,398
Other liabilities 695,418 680,897
Shareholders' equity 1,572,104 1,547,781
------------------------------------------------------------------------------------------- -----------------------------------
Total liabilities and shareholders' equity $16,564,290 $16,270,239
=========================================================================================== ===================================
Tax-equivalent Net Interest Revenue(3) $122,746 2.98% $118,848 2.99%
Tax-equivalent Net Interest Revenue to Earning Assets(3) 3.40 3.39
Less tax-equivalent adjustment(1) 1,640 1,522
------------------------------------------------------------------------------------------- -----------------------------------
Net Interest Revenue 121,106 117,326
Provision for credit losses 3,795 3,400
Other operating revenue 90,880 89,437
Other operating expense 122,127 117,379
------------------------------------------------------------------------------------------- -----------------------------------
Income before taxes 86,064 85,984
Federal and state income tax 31,080 31,236
------------------------------------------------------------------------------------------- -----------------------------------
Net Income $ 54,984 $ 54,748
=========================================================================================== ===================================
Earnings Per Average Common Share Equivalent:
Net income:
Basic $ 0.82 $ 0.82
=========================================================================================== ===================================
Diluted $ 0.82 $ 0.81
=========================================================================================== ===================================
Three Months Ended
-----------------------------------
December 31, 2005
-----------------------------------
Average Revenue/ Yield/
Balance Expense(1) Rate
-----------------------------------
Assets
Taxable securities(3) $ 4,816,263 $ 53,375 4.44%
Tax-exempt securities(3) 243,521 3,046 5.05
-------------------------------------------------------- -----------------------------------
Total securities(3) 5,059,784 56,421 4.47
-------------------------------------------------------- -----------------------------------
Trading securities 20,595 243 4.68
Funds sold and resell agreements 57,656 581 4.00
Loans(2) 9,005,546 158,387 6.98
Less reserve for loan losses 108,998 -- --
-------------------------------------------------------- -----------------------------------
Loans, net of reserve 8,896,548 158,387 7.06
-------------------------------------------------------- -----------------------------------
Total earning assets(3) 14,034,583 215,632 6.12
-------------------------------------------------------- -----------------------------------
Cash and other assets 2,168,128
-------------------------------------------------------- -----------------------------------
Total assets $16,202,711
======================================================== ===================================
Liabilities and Shareholders' Equity
Transaction deposits $ 4,821,627 $ 24,075 1.98%
Savings deposits 154,316 292 0.75
Time deposits 4,216,625 40,083 3.77
-------------------------------------------------------- -----------------------------------
Total interest-bearing deposits 9,192,568 64,450 2.78
-------------------------------------------------------- -----------------------------------
Funds purchased and repurchase agreements 1,812,752 17,914 3.92
Other borrowings 1,049,635 10,807 4.08
Subordinated debentures 296,021 4,683 6.28
-------------------------------------------------------- -----------------------------------
Total interest-bearing liabilities 12,350,976 97,854 3.14
-------------------------------------------------------- -----------------------------------
Demand deposits 1,530,504
Other liabilities 814,192
Shareholders' equity 1,507,039
-------------------------------------------------------- -----------------------------------
Total liabilities and shareholders' equity $16,202,711
======================================================== ===================================
Tax-equivalent Net Interest Revenue(3) $117,778 2.98%
Tax-equivalent Net Interest Revenue to Earning Assets(3) 3.34
Less tax-equivalent adjustment(1) 1,392
-------------------------------------------------------- -----------------------------------
Net Interest Revenue 116,386
Provision for credit losses 4,450
Other operating revenue 87,344
Other operating expense 123,903
-------------------------------------------------------- -----------------------------------
Income before taxes 75,377
Federal and state income tax 27,219
-------------------------------------------------------- -----------------------------------
Net Income $ 48,158
======================================================== ===================================
Earnings Per Average Common Share Equivalent:
Net income:
Basic $ 0.72
======================================================== ===================================
Diluted $ 0.72
======================================================== ===================================
93
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) 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 management's assessment of the internal
control over financial reporting, which appears therein.
ITEM 9B. OTHER INFORMATION
None.
94
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNACE
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 2007 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 2006
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 2007 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
2007 Annual Proxy Statement is incorporated herein by reference.
Equity Compensation Plan Information
The following table provides information about the Company's equity compensation
plans in effect at December 31, 2006. Plans included in the following table
consist of the BOKF 1997, 2000, 2001 and 2003 Stock Option Plans, as well as the
2003 Executive Incentive Plan and the BOKF Directors Stock Compensation Plan.
The material features of the various stock-based compensation plans are
described within Note 13 of the Company's Notes to Consolidated Financial
Statements, which appear elsewhere herein.
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants, and rights(2) warrants, and rights(2) the first column)(2)
------------- ----------------------- ----------------------- -----------------------
Equity compensation plans
approved by security holders:
Stock options 3,496,625 $38.63 3,355,4211)
Nonvested common shares 101,403 Not applicable 398,597
------------ ------------
Sub-total 3,598,028 3,754,018(1)
Equity compensation plans not
approved by security holders None None None
------------ ------------
Total 3,598,028 3,754,018(1)
------------ ------------
(1) Includes 476,184 shares of common stock which may be awarded pursuant to
the BOKF Directors Stock Compensation Plan.
(2) As of December 31, 2006.
95
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 2007 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 2007 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,
2006, 2005 and 2004
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Cash Flows for the years ended December
31, 2006, 2005 and 2004
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2006, 2005, and 2004
Notes to Consolidated Financial Statements
Annual Financial Summary - Unaudited
Quarterly Financial Summary - Unaudited
Reports of Independent Registered Public Accounting Firm
(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.
96
(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.
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, filed herewith.
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.
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.
97
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.
10.4.4 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.
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
98
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.
10.8 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.
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.
99
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.
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.
100
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.
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.
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.
99.1 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.
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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 28, 2007 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 28, 2007, 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 Director of
Chief Financial Officer Financial Accounting and Reporting
DIRECTORS
/s/ V. Burns Hargis
---------------------------------- ------------------------------------------
Gregory S. Allen V. Burns Hargis
/s/ E. Carey Joullian, IV
---------------------------------- ------------------------------------------
C. Fred Ball, Jr. E. Carey Joullian, IV
/s/ Sharon J. Bell /s/ Judith Z. Kishner
---------------------------------- ------------------------------------------
Sharon J. Bell Judith Z. Kishner
/s/ Peter C. Boylan, III /s/ Thomas L. Kivisto
---------------------------------- ------------------------------------------
Peter C. Boylan, III Thomas L. Kivisto
/s/ Chester Cadieux, III /s/ David L. Kyle
---------------------------------- ------------------------------------------
Chester Cadieux, III David L. Kyle
/s/ Robert J. LaFortune
---------------------------------- ------------------------------------------
William E. Durrett Robert J. LaFortune
/s/ Steven J. Malcolm
---------------------------------- ------------------------------------------
Robert G. Greer Steven J. Malcolm
/s/ David F. Griffin
---------------------------------- ------------------------------------------
David F. Griffin Paula Marshall
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