As filed with the Securities and Exchange Commission on February 29, 2008
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2007
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File No. 0-19341
BOK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Oklahoma 73-1373454
(State or other jurisdiction of (IRS Employer 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 $1,175,155,864 (based on the
June 30, 2007 closing price of Common Stock of $53.42 per share). As of January
31, 2008, there were 67,387,053 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
Registrant's Proxy Statement for the 2008 Annual Meeting of Shareholders.
===============================================================================
BOK FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
INDEX
ITEM PAGE
PART I
1. Business 1
1A. Risk Factors 6
1B. Unresolved Staff Comments 8
2. Properties 8
3. Legal Proceedings 9
4. Submission of Matters to a Vote of Security Holders 9
PART II
5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 9
6. Selected Financial Data 10
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
7A. Quantitative and Qualitative Disclosures About Market Risk 50
8. Financial Statements and Supplementary Data 52
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 106
9A. Controls and Procedures 106
9B. Other Information 106
PART III
10. Directors, Executive Officers and Corporate Governance 107
11. Executive Compensation 107
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 107
13. Certain Relationships and Related Transactions, and Director
Independence 107
14. Principal Accounting Fees and Services 107
PART IV
15. Exhibits, Financial Statement Schedules 107
Signatures 114
Chief Executive Officer Section 302 Certification, Exhibit 31.1 116
Chief Financial Officer Section 302 Certification, Exhibit 31.2 117
Section 906 Certifications, Exhibit 32 118
1
PART I
ITEM 1. BUSINESS
General
Developments relating to individual aspects of the business of BOK Financial
Corporation ("BOK Financial" or "the Company") are described below. Additional
discussion of the Company's activities during the current year appears within
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations." Information regarding BOK Financial's acquisitions is set forth
in Note 2 of the Company's Notes to Consolidated Financial Statements, which
appear elsewhere herein.
Description of Business
BOK Financial is a financial holding company whose activities are limited by the
Bank Holding Company Act of 1956 ("BHCA"), as amended by the Financial Services
Modernization Act or Gramm-Leach-Bliley Act. BOK Financial offers full service
banking in Oklahoma, Dallas, Fort Worth and Houston, Texas, Albuquerque, New
Mexico, Northwest Arkansas, Denver, Colorado, Phoenix, Arizona, and Kansas City,
Missouri / Kansas. Principal subsidiaries are Bank of Oklahoma, N.A. ("BOk"),
Bank of Texas, N.A., Bank of Albuquerque, N.A., Bank of Arkansas, N.A., Colorado
State Bank and Trust, N.A., Bank of Arizona, N.A., and Bank of Kansas City, N.A.
(collectively, the "Banks"). Other subsidiaries include BOSC, Inc., a
broker/dealer that engages in retail and institutional securities sales and
municipal bond underwriting. Other non-bank subsidiary operations do not have a
significant effect on BOKF financial statements.
Our overall strategic objective is to emphasize growth in long-term value by
building on our leadership position in Oklahoma and expanding into high-growth
markets. We have a solid position in Oklahoma and are the state's largest
financial institution as measured by deposit market share. Since 1997, we have
expanded into Dallas, Fort Worth and Houston, Texas, Albuquerque, New Mexico,
Denver, Colorado, Phoenix, Arizona, and Kansas City, Missouri / Kansas. We are
currently exploring opportunities for further growth in our regional markets 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 42% 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
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restrictions. All market share information presented below is based upon share
of deposits in specified areas according to SNL DataSource as of December 31,
2007.
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 26% 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 access to
technology resources. BOk also competes with regional and locally owned banks in
both the Tulsa and Oklahoma City areas, as well as in every other community in
which we do business throughout the state.
Through other subsidiary banks, BOK Financial competes in Dallas, Fort Worth and
Houston, Texas, Albuquerque, New Mexico, Denver, Colorado, Phoenix, Arizona,
Northwest Arkansas, and Kansas City, Missouri / Kansas. Bank of Texas competes
against numerous financial institutions, including some of the largest in the
United States, and has a market share of approximately 2% in the Dallas, Fort
Worth area and 1% in the Houston area. Bank of Albuquerque has a number 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, 2007, BOK Financial and its subsidiaries employed 4,110
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.
3
The BHCA requires the Federal Reserve Board's prior approval for the direct or
indirect acquisition of more than five percent of any class of voting stock of
any non-affiliated bank. Under the Federal Bank Merger Act, the prior approval
of the OCC is required for a national bank to merge with another bank or
purchase the assets or assume the deposits of another bank. In reviewing
applications seeking approval of merger and acquisition transactions, the bank
regulatory authorities consider, among other things, the competitive effect and
public benefits of the transactions, the capital position of the combined
organization, the applicant's performance record under the Community
Reinvestment Act and fair housing laws and the effectiveness of the subject
organizations in combating money laundering activities.
A financial holding company and its subsidiaries are prohibited under the BHCA
from engaging in certain tie-in arrangements in connection with the provision of
any credit, property or services. Thus, a subsidiary of a financial holding
company may not extend credit, lease or sell property, furnish any services or
fix or vary the consideration for these activities on the condition that (1) the
customer obtain or provide additional credit, property or services from or to
the financial holding company or any subsidiary thereof, or (2) the customer may
not obtain some other credit, property or services from a competitor, except to
the extent reasonable conditions are imposed to insure the soundness of credit
extended.
The Banks and other non-bank subsidiaries are also subject to other federal and
state laws and regulations. For example, BOSC, Inc., the Company's broker/dealer
subsidiary that engages in retail and institutional securities sales and
municipal bond underwriting, is regulated by the Securities and Exchange
Commission, the Financial Industry Regulatory Authority (FINRA), the Federal
Reserve Board, and state securities regulators. As another example, Bank of
Arkansas is subject to certain consumer-protection laws incorporated in the
Arkansas Constitution, which, among other restrictions, limit the maximum
interest rate on general loans to five percent above the Federal Reserve
Discount Rate and limit the rate on consumer loans to the lower of five percent
above the discount rate or seventeen percent.
Capital Adequacy and Prompt Corrective Action
The Federal Reserve Board, the OCC and the FDIC have issued substantially
similar risk-based and leverage capital guidelines applicable to United States
banking organizations to ensure capital adequacy based upon the risk levels of
assets and off-balance sheet financial instruments. In addition, these
regulatory agencies may from time to time require that a banking organization
maintain capital above the minimum levels, whether because of its financial
condition or actual or anticipated growth. Capital adequacy guidelines and
prompt corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators regarding components, risk weighting and
other factors.
The Federal Reserve Board risk-based guidelines define a three-tier capital
framework. Core capital (Tier 1) includes common shareholders' equity and
qualifying preferred stock, less goodwill, most intangible assets and other
adjustments. Supplementary capital (Tier 2) consists of preferred stock not
qualifying as Tier 1 capital, qualifying mandatory convertible debt securities,
limited amounts of subordinated debt, other qualifying term debt and allowances
for credit losses, subject to limitations. Market risk capital (Tier 3) includes
qualifying unsecured subordinated debt. Assets and off-balance sheet exposures
are assigned to one of four categories of risk-weights, based primarily upon
relative credit risk. Risk-based capital ratios are calculated by dividing Tier
1 and total capital by risk-weighted assets. For a depository institution to be
considered well capitalized under the regulatory framework for prompt corrective
action, the institution's Tier 1 and total capital ratios must be at least 6%
and 10% on a risk-adjusted basis, respectively. As of December 31, 2007, BOK
Financial's Tier 1 and total capital ratios under these guidelines were 9.38%
and 12.54%, 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, 2007 was 8.20%.
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, 2007.
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
4
standardized approach that bases risk weightings on external credit assessments
to a much greater extent than permitted in existing risk-based capital
guidelines. Basel II also would set capital requirements for operational risk
and refine the existing capital requirements for market risk exposures.
The U.S. banking and thrift agencies are developing proposed revisions to their
existing capital adequacy regulations and standards based on Basel II. In
September 2006, the agencies issued a notice of proposed rulemaking setting
forth a definitive proposal for implementing Basel II in the United States that
would apply only to internationally active banking organizations -- defined as
those with consolidated total assets of $250 billion or more or consolidated
on-balance sheet foreign exposures of $10 billion or more -- but that other U.S.
banking organizations could elect but would not be required to apply.
Furthermore, the U.S. agencies are proposing only to implement the most advanced
version of Basel II, the A-IRB option. In December 2006, the agencies issued a
notice of proposed rulemaking describing proposed amendments to their existing
risk-based capital guidelines to make them more risk-sensitive, generally
following aspects of the standardized approach of Basel II. These latter
proposed amendments, often referred to as "Basel I-A", would apply to banking
organizations that are not internationally active banking organizations subject
to the A-IRB approach for internationally active banking organizations and do
not "opt in" to that approach. The agencies previously had issued advance
notices of proposed rulemaking on both proposals (in August 2003 regarding the
A-IRB approach of Basel II for internationally active banking organizations and
in October 2005 regarding Basel I-A).
BOK Financial is not an internationally active banking organization and has not
made a determination as to whether or when it would opt to apply the A-IRB
provisions applicable to internationally active U.S. banking organizations once
they become effective. Recent U.S. bank regulatory proposals indicate that the
U.S. banking system will permit adoption of a "standardized" approach for Basel
II in lieu of the 1-A proposal for non-core Basel II institutions. BOKF expects
more definitive guidance on the matter from U.S. bank regulators in 2008.
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 held by the Banks are insured up to applicable
limits by the Deposit Insurance Fund ("DIF") of the FDIC and are subject to
deposit insurance assessments to maintain the DIF. The FDIC utilizes a
risk-based assessment system that imposes insurance premiums based upon a risk
matrix that takes into account a bank's capital level and supervisory rating
("CAMELS rating"). As of January 1, 2007, the previous nine risk categories
utilized in the risk matrix were condensed into four risk categories, which
continue to be distinguished by capital levels and supervisory ratings. For
large Risk Category 1 institutions (generally those with assets in excess of $10
billion) that have long-term debt issuer ratings, including Bank of Oklahoma,
assessment rates are determined from weighted-average CAMELS component ratings
and long-term debt issuer ratings. The minimum annualized assessment rate for
large institutions is 5 basis points per $100 of deposits and the maximum
annualized assessment rate for large institutions is 7 basis points per $100 of
deposits. Quarterly assessment rates for large institutions in Risk Category 1
may vary within this range depending upon changes in CAMELS component ratings
and long-term debt issuer ratings.
In addition, the Banks are assessed a charge based on deposit balances by the
Financing Corporation ("FICO"). The FICO is a mixed-ownership government
corporation established by the Competitive Equality Banking Act of 1987 whose
sole purpose was to function as a financing vehicle for the now defunct Federal
Savings & Loan Insurance Corporation.
Dividends
The primary source of liquidity for BOK Financial is dividends from the Banks,
which are limited by various banking regulations to net profits, as defined, for
the year plus retained profits for the preceding two years and further
restricted by minimum capital requirements. Based on the most restrictive
limitations, the Banks had excess regulatory capital and could declare up to $93
million of dividends without regulatory approval as of December 31, 2007. 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 $75 million as of
December 31, 2007. 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.
5
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.
6
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 general or in certain segments of the commercial real estate
industry in Oklahoma and the Southwest region could also have an adverse effect
on BOK Financial's operations.
Fluctuations in interest rates could adversely affect BOK Financial's business.
BOK Financial's business is highly sensitive to:
o the monetary policies implemented by the Federal Reserve Board,
including the discount rate on bank borrowings and changes in reserve
requirements, which affect BOK Financial's ability to make loans and
the interest rates we may charge;
o changes in prevailing interest rates, due to the dependency of BOK
Financial's banks on interest income;
o open market operations in U.S. Government securities.
Significant increase in market interest rates, or the perception that an
increase may occur, could adversely affect both BOK Financial's ability to
originate new loans and BOK Financial's ability to grow. Conversely, a decrease
in interest rates could result in acceleration in the payment of loans,
including loans underlying BOK Financial's holdings of mortgage-backed
securities and termination of BOK Financial's mortgage servicing rights. In
addition, changes in market interest rates, changes in the relationships between
short-term and long-term market interest rates or changes in the relationships
between different interest rate indices, could affect the interest rates charged
on interest-earning assets differently than the interest rates paid on
interest-bearing liabilities. This difference could result in an increase in
interest expense relative to interest income. An increase in market interest
rates also could adversely affect the ability of BOK Financial's floating-rate
borrowers to meet their higher payment obligations. If this occurred, it could
cause an increase in nonperforming assets and net charge-offs, which could
adversely affect BOK Financial's business.
BOK Financial's substantial holdings of mortgage-backed securities and mortgage
servicing rights could adversely affect BOK Financial's business.
BOK Financial has invested a substantial amount of its holdings in
mortgage-backed securities, which are investment interests in pools of
mortgages. Mortgage-backed securities are highly sensitive to changes in
interest rates. BOK Financial mitigates this risk somewhat by investing
principally in shorter duration mortgage products, which are less sensitive to
changes in interest rates. A significant decrease in interest rates could lead
mortgage holders to refinance the mortgages constituting the pool backing the
securities, subjecting BOK Financial to a risk of prepayment and decreased
return on investment due to subsequent reinvestment at lower interest rates.
Conversely, a significant increase in interest rates could cause mortgage
holders to extend the term over which they repay their loans, which delays the
Company's opportunity to reinvest funds at higher rates.
Mortgage-backed securities are also subject to credit risk from delinquency or
default of the underlying loans. BOK Financial mitigates this risk somewhat by
investing in securities issued by U.S. government agencies. Principal and
interest payments on the loans underlying these securities are guaranteed, in
whole or in part, by these agencies. Credit risk on mortgage-backed securities
originated by private issuers is mitigated somewhat by investing in senior
tranches with additional collateral support.
In addition, as part of BOK Financial's mortgage banking business, BOK Financial
has substantial holdings of mortgage servicing rights. The value of these rights
is also very sensitive to changes in interest rates. Falling interest rates tend
to increase loan prepayments, which may lead to cancellation of the related
servicing rights. BOK Financial's investments and dealings in mortgage-related
products increase the risk that falling interest rates could adversely affect
BOK Financial's business. BOK Financial attempts to manage this risk by
maintaining an active hedging program for its mortgage servicing rights. BOK
Financial's hedging program has only been partially successful in recent years.
The value of mortgage servicing rights may also
7
decrease due to rising delinquency or default of the loans serviced. This risk
is mitigated somewhat by adherence to underwriting standards on loans originated
for sale.
Substantial competition could adversely affect BOK Financial.
Banking is a competitive business. BOK Financial competes actively for loan,
deposit and other financial services business in Oklahoma, as well as in BOK
Financial's other markets. BOK Financial's competitors include a large number of
small and large local and national banks, savings and loan associations, credit
unions, trust companies, broker-dealers and underwriters, as well as many
financial and nonfinancial firms that offer services similar to BOK Financial's.
Large national financial institutions have entered the Oklahoma market. These
institutions have substantial capital, technology and marketing resources. Such
large financial institutions may have greater access to capital at a lower cost
than BOK Financial does, which may adversely affect BOK Financial's ability to
compete effectively.
BOK Financial has expanded into markets outside of Oklahoma, where it competes
with a large number of financial institutions that have an established customer
base and greater market share than BOK Financial. BOK Financial may not be able
to continue to compete successfully in these markets outside of Oklahoma. With
respect to some of its services, BOK Financial competes with non-bank companies
that are not subject to regulation. The absence of regulatory requirements may
give non-banks a competitive advantage.
Adverse factors could impact BOK Financial's ability to implement its operating
strategy.
Although BOK Financial has developed an operating strategy which it expects to
result in continuing improved financial performance, BOK Financial cannot assure
that it will be successful in fulfilling this strategy or that this operating
strategy will be successful. Achieving success is dependent upon a number of
factors, many of which are beyond BOK Financial's direct control. Factors that
may adversely affect BOK Financial's ability to implement its operating strategy
include:
o deterioration of BOK Financial's asset quality;
o inability to control BOK Financial's noninterest expenses;
o inability to increase noninterest income;
o deterioration in general economic conditions, especially in BOK
Financial's core markets;
o 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.
8
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 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, could adversely affect market prices. If Mr. Kaiser
sells or transfers his shares of BOK Financial's common stock as a block,
another person or entity could become BOK Financial's controlling shareholder.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
BOK Financial and its subsidiaries own and lease improved real estate that is
carried at $187 million, net of depreciation and amortization. The Company's
principal offices are located in leased premises in the Bank of Oklahoma Tower,
Tulsa, Oklahoma. Banking offices are primarily located in Tulsa and Oklahoma
City, Oklahoma, Dallas, Fort Worth and Houston, Texas, Albuquerque, New Mexico,
Denver, Colorado, Phoenix, Arizona, and Kansas City, Missouri / Kansas. Primary
operations facilities are located in Tulsa and Oklahoma City, Oklahoma, Dallas,
Texas, and Albuquerque, New Mexico. The Company's facilities are suitable for
their respective uses and present needs.
The information set forth in Notes 6 and 15 of the Company's Notes to
Consolidated Financial Statements, which appear elsewhere herein, provides
further discussion related to properties.
9
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,
2007.
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, 2008, common shareholders of
record numbered 1,046 with 68,044,438 shares outstanding.
The highest and lowest closing bid price for shares of BOK Financial common
stock follows:
First Second Third Fourth
-------------- --------------- -------------- ---------------
2007:
Low $49.37 $48.59 $47.37 $51.44
High 55.43 54.96 54.20 55.43
2006:
Low $44.40 $46.85 $48.13 $50.40
High 47.65 49.60 53.30 54.98
10
Shareholder Return Performance Graph
Set forth below is a line graph comparing the change in cumulative shareholder
return of the NASDAQ Index, the NASDAQ Bank Index, and the KBW 50 Bank Index for
the period commencing December 31, 2002 and ending December 31, 2007.*
TOTAL RETURN PERFORMANCE graph shown here. Data points are:
Period Ending
-----------------------------------------------------------------------------
Index 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07
----------------------------------------------------------------------------------------------------------
BOK Financial Corporation 100.00 123.13 159.71 149.80 183.29 174.83
NASDAQ Composite 100.00 150.01 162.89 165.13 180.85 198.60
NASDAQ Bank Index 100.00 129.93 144.21 137.97 153.15 119.35
KBW 50 100.00 134.04 149.51 149.24 178.19 139.33
* Graph assumes value of an investment in the Company's Common Stock for each
index was $100 on December 31, 2002. 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.
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."
11
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,
---------------------------------------------------------------------
2007 2006 2005 2004 2003
---------------------------------------------------------------------
Selected Financial Data
For the year:
Interest revenue $1,160,737 $ 986,429 $ 769,934 $ 614,284 $ 565,173
Interest expense 616,252 499,741 320,593 191,041 173,678
Net interest revenue 544,485 486,688 449,341 423,243 391,495
Provision for credit losses 34,721 18,402 12,441 20,439 35,636
Net income 217,664 212,977 201,505 179,023 158,360
Period-end:
Loans, net of reserve 11,890,570 10,606,306 9,036,102 7,820,349 7,369,105
Assets 20,839,864 18,059,624 16,327,069 14,145,660 13,595,598
Deposits 13,459,291 12,386,705 11,375,318 9,674,398 9,219,863
Subordinated debentures 398,273 297,800 295,964 151,594 154,332
Shareholders' equity 1,935,384 1,721,022 1,539,154 1,398,494 1,228,630
Nonperforming assets(2) 104,159 44,343 40,017 61,112 62,330
Profitability Statistics
Earnings per share (based on average equivalent shares):
Basic $ 3.24 $ 3.19 $ 3.14 $ 3.00 $ 2.67
Diluted 3.22 3.16 3.01 2.68 2.38
Percentages (based on daily averages):
Return on average assets 1.14% 1.27% 1.29% 1.28% 1.24%
Return on average shareholders' equity 12.01 13.23 13.78 13.80 13.66
Average shareholders' equity to average assets 9.53 9.58 9.38 9.25 9.07
Common Stock Performance
Per Share:
Book value per common share(5) $ 28.75 $ 25.66 $ 23.07 $ 23.28 $ 20.60
Market price: December 31 close 51.70 54.98 45.43 48.76 38.72
Market range - High close 55.57 54.98 49.31 49.18 41.02
- Low close 47.47 44.43 39.79 37.29 31.00
Cash dividends declared 0.75 0.55 0.30 - -
Selected Balance Sheet Statistics
Period-end:
Tier 1 capital ratio 9.38% 9.78% 9.84% 10.02% 9.15%
Total capital ratio 12.54 11.58 12.10 11.67 11.31
Leverage ratio 8.20 8.79 8.30 7.94 7.17
Tangible capital ratio 7.65 8.22 7.94 8.31 7.33
Reserve for loan losses to nonperforming loans 133.79 305.37 329.34 189.40 208.15
Reserve for loan losses to loans(1) 1.06 1.03 1.14 1.38 1.55
Combined reserves for credit losses to loans (1), (4) 1.24 1.22 1.37 1.61 1.73
Miscellaneous (at December 31)
Number of employees (full-time equivalent) 4,110 3,958 3,825 3,548 3,449
Number of banking locations 189 163 150 149 142
Number of TransFund locations 1,822 1,649 1,421 1,389 1,442
Trust assets $36,288,592 $31,704,091 $28,464,745 $24,589,053 $21,283,791
Mortgage loan servicing portfolio(3) 5,481,736 4,988,611 4,492,524 4,486,513 4,746,279
------------------------------------------------------------------------------------------------------------------------
(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.
12
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, Fort Worth and Houston, Texas, Albuquerque, New Mexico,
Denver, Colorado, Phoenix, Arizona and Kansas City, Missouri. 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, Fort Worth and Houston, Texas, Albuquerque,
New Mexico, Denver, Colorado, Phoenix, Arizona and Kansas City, Missouri /
Kansas. At December 31, 2007, 51% of our outstanding loans and 45% of our
deposits are in markets outside of Oklahoma.
Our primary focus is to provide a broad range of financial products and
services, which includes 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 42% 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. During 2007,
we expanded our presence in local markets through the acquisition of Worth
National Bank in Ft. Worth, Texas and First United Bank in Denver, Colorado. The
Worth National acquisition increased loans and deposits in the Texas market by
$284 million and $369 million, respectively, and added five branch locations.
The First United acquisition increased loans and deposits in the Colorado market
by $94 million and $133 million, respectively, and added eleven branch
locations.
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 consist primarily of corporate and consumer
banking activities in the respective local markets.
Performance Summary
BOK Financial's net income for 2007 totaled $217.7 million or $3.22 per diluted
share compared with $213.0 million or $3.16 per diluted share in 2006. Net
income for 2007 was reduced $7.5 million or $0.11 per diluted share by charges
recognized for the impairment of certain securities and for the Company's share
of contingent liabilities to support Visa's antitrust litigation costs. These
charges are discussed in the Assessment of Financial Conditions - Securities
Portfolio and Assessment of Operations - Other Operating Expense sections of
this report.
Net income growth for 2007 was attributed primarily to increases in both net
interest revenue and fees and commissions revenue. Net interest revenue grew
$57.8 million or 12% during 2007 while fees and commissions revenue increased
$33.9 million or 9%. Revenue growth was partially offset by a $16.3 million
increase in the provision for credit losses and a $62.7 million or 12% increase
in operating expenses.
Average earning assets increased $2.2 billion for 2007, including a $1.7 billion
increase in average outstanding loans and a $447 million increase in average
securities. Growth in average earning assets was funded by a $2.2 billion
increase in interest-bearing liabilities. Average interest-bearing deposits
increased $1.4 billion and other borrowed funds increased $826 million. Growth
in average interest-bearing liabilities also funded a $152 million decrease in
average demand deposits. Net interest margin was 3.28% for 2007, down 8 basis
points from the previous year.
Nonperforming assets totaled $104 million at December 31, 2007, up from $44
million at December 31, 2006. Approximately, $19 million of nonperforming assets
are either guaranteed by U.S. government agencies or supported by a sellers'
escrow fund.
13
Net loans charged off totaled $21.1 million or 0.19% of average loans in 2007
compared with net loans charged off of $12.5 million or 0.13% of average loans
in 2006.
Fees and commissions totaled $405.6 million, a 9% increase over 2006. Brokerage
and trading revenue, transaction card revenue and trust fees grew 17%, 15% and
10%, respectively due primarily to increases in transaction volumes or the value
of assets managed. Other revenue decreased $3.8 million due largely to lower
fees earned on margin assets carried in support of the Company's derivatives
business and leasing revenue. Decreased fees earned on margin assets are
generally offset by an increase in net interest revenue due to lower funding
costs. Mortgage banking revenue decreased $4.7 million or 17% due primarily to
lower value of loans sold in the secondary market as compared to the cost to
originate mortgage loans.
Operating expenses increased $62.7 million or 12% compared with 2006 due
primarily to increased personnel costs. Personnel costs increased $32.4 million
or 11%. Total employment and average compensation per employee grew. Incentive
compensation also increased over last year. Changes in the fair value of
mortgage servicing rights increased operating expenses for 2007 by $5.9 million
over 2006. All other operating expenses combined were up $24.3 million or 11%
over 2006.
Net income for the fourth quarter of 2007 totaled $51.2 million or 76 cents per
diluted share compared with $50.6 million or 75 cents per diluted share for the
fourth quarter of 2006. Net income for the fourth quarter of 2007 was reduced
$7.5 million or $0.11 per diluted share by charges recognized for the impairment
of certain securities and for the Company's share of contingent liabilities to
Visa. Net interest revenue grew $17.0 million or 14% over the fourth quarter of
2006 due to earning asset growth, partially offset by a 3 basis point reduction
in net interest margin. The provision for credit losses was $13.2 million for
the fourth quarter of 2007, up $7.2 million over 2006. Nonperforming assets
totaled $104 million or 0.87% of outstanding loans and repossessed assets at
December 31, 2007, up from $44 million or 0.42% at December 31, 2006. Fees and
commissions revenue increased $18.5 million or 20%. All major categories of fee
income were up over the same period last year. Changes in the fair value of
mortgage servicing rights net of economic hedges reduced pre-tax income by $2.1
million in the fourth quarter of 2007. Operating expenses, excluding changes in
the fair value of mortgage servicing rights increased $20.2 million or 15%.
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 standards first adopted in 2007 included Statement of
Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS 157")
and FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109" ("FIN 48") . Neither of these new
accounting standards had a significant effect on the financial statements for
2007.
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
14
percent of loss. General reserves for consumer loans are based on a migration of
loans from current status to loss. Separate migration factors are determined by
major product line, such as indirect automobile loans and direct consumer loans.
Nonspecific reserves are maintained for risks beyond those factors specific to a
particular loan or those identified by the migration models. These factors
include trends in the general economy in our primary lending areas, conditions
in specific industries where we have a concentration, such as energy, commercial
real estate and homebuilders and agriculture, concentrations in large credits
and overall growth in the loan portfolio. Evaluation of the nonspecific reserves
also considers duration of the business cycle, regulatory examination results,
potential errors in the migration analysis models and the underlying data, and
other relevant factors. A range of potential losses is determined for each
factor identified.
A separate reserve for off-balance sheet credit risk is maintained. The
provision for credit losses includes the combined charge to expense for both the
reserve for loan losses and the reserve for off-balance sheet credit losses. All
losses incurred from lending activities will ultimately be reflected in
charge-offs against the reserve for loan losses after funds are advanced against
outstanding commitments and after the exhaustion of collection efforts.
Valuation of Mortgage Servicing Rights
We have a significant investment in mortgage servicing rights. These rights are
either purchased from other lenders or retained from sales of loans we have
originated. Originated mortgage servicing rights are initially recognized at
fair value. Fair value is based on market quotes for similar servicing rights,
which is a Level 2 input as defined by FAS 157. Subsequent changes in fair value
are recognized in earnings as they occur.
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 income and discount rates, and are based
on current market sources. Assumptions used to value our mortgage servicing
rights are considered Level 3 inputs as defined by FAS 157 and represent our
best estimate of assumptions that market participants would use to value this
asset. A separate third party model is used to estimate prepayment speeds based
on interest rates, housing turnover rates, estimated loan curtailment,
anticipated defaults and other relevant factors. The prepayment model is updated
daily for changes in market conditions. Prepayment projections determined by
this model are adjusted to better reflect 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
$3.3 million. A 50 basis point decrease in mortgage interest rates is expected
to decrease the fair value of our servicing rights by $5.3 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 a five-year period for
each unit and a terminal value is computed. The projected income stream is
converted to current fair value by using a discount rate that reflects a rate of
return required by a willing buyer. Assumptions used to value our business units
are considered Level 3 inputs as defined by FAS 157 and represent our best
estimate of assumptions that market participants would use to determine fair
value.
At December 31, 2007, Bank of Texas had $240 million or 72% of total goodwill
and Colorado State Bank & Trust had $55 million or 16% 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.
15
Valuation of Derivative Instruments
We use interest rate derivative instruments to manage our interest rate risk. We
also offer interest rate, commodity, and foreign exchange derivative contracts
to our customers. All derivative instruments are carried on the balance sheet at
fair value. Fair values for exchange-traded contracts are based on quoted
prices. Fair values for over-the-counter interest rate contracts used to manage
our interest rate risk are provided either by third-party dealers in the
contracts or by quotes provided by independent pricing services. Information
used by these third-party dealers or independent pricing services to determine
fair values are considered Level 2, observable market inputs as defined by FAS
157. Interest rate, commodity and foreign exchange contracts used in our
customer hedging programs are based on valuations generated internally by
third-party provided pricing models. These models use Level 2, observable market
inputs to estimate fair values. Changes in assumptions used in these pricing
models could significantly affect the reported fair values of derivative assets
and liabilities, though the net effect of these changes should not significantly
affect earnings.
Credit risk is considered in determining the fair value of derivative
instruments. Deterioration in the credit rating of customers or dealers reduces
the fair value of asset contracts. The reduction in fair value is recognized in
earnings during the current period.
Income Taxes
Determination of income tax expense and related assets and liabilities is
complex and requires estimates and judgments when applying tax laws, rules,
regulations and interpretations. It also requires judgments as to future
earnings and the timing of future events. Accrued income taxes represent an
estimate of net amounts due to or from taxing jurisdictions based upon these
estimates, interpretations and judgments.
Quarterly, management evaluates the Company's effective tax rate based upon its
current estimate of net income, tax credits and statutory tax rates expected for
the full year. Changes in income tax expense due to changes in the effective tax
rate are recognized on a cumulative basis. Annually, we file tax returns with
each jurisdiction where we conduct business and settle our return liabilities.
We may also provide for estimated liabilities associated with uncertain filing
positions.
On January 1, 2007, we adopted the provisions of FIN 48 accounting for uncertain
income tax positions. We recognize the benefit of uncertain income tax positions
when based upon all relevant evidence it is more-likely-than-not that our
position would prevail upon examination, including resolution of related appeals
or litigation, based upon the technical merits of the position. A reserve for
the uncertain portion of the tax benefit, including estimated interest and
penalties, is part of our current accrued income tax liability. Estimated
penalties and interest are recognized in income tax expense. This reserve for
uncertain tax positions may reduce income tax expense in future periods if the
uncertainty is favorably resolved, generally upon completion of an examination
by the taxing authorities, expiration of a statute of limitations or changes in
facts and circumstances.
Pensions
The Company offers a defined-benefit, cash-balance pension plan to all employees
who satisfied certain age and length of service requirements. Pension plan
benefits were curtailed as of April 1, 2006. No participants may be added to the
plan and no additional service benefits will be accrued. Interest continues to
accrue on employees' account balances at 5.25%. Accounting for this plan
requires management to make assumptions regarding the expected long-term rate of
return on plan assets and the discount rate. Changes in these assumptions affect
pension liability and pension expense. Management, in consultation with
independent actuaries, bases its assumptions on currently available information.
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 expected return on plan assets was reduced to
7.00% for 2007 from 8.00% for 2006.
The discount rate, which is used to determine the present value of our
obligation to provide future benefits to plan participants and the related
interest cost, is based on a spot-rate yield curve of high-quality fixed income
securities such as AA rate industrial and utility bonds. A weighted average
discount rate is determined by matching expected future cash outflows from the
plan to interest rates at various spots along the yield curve. This method of
determining the discount rate was enhanced in 2007, with no significant impact,
and is expected to better represent the cost of future cash flows as the static
participant pool decreases over time. The discount rate was 6.00% as of December
31, 2007 and 5.50% as of December 31, 2006. A 25 basis point decrease in the
discount rate increases the pension liability by approximately $1.5 million or
3% and has no significant effect on pension expense because of the curtailment
of benefits in 2006.
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.
16
The majority of our stock options have graded vesting. One-seventh of the
options awarded vest annually starting one year after the grant date. Options
expire three years after vesting. Each tranche of these options are considered a
separate award when determining fair value.
We use the Black-Scholes option pricing model. This model requires assumptions
of expected volatility of our stock price and expected term between grant date
and exercise date, along with other 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 $15.0 million. Future compensation cost ranges
from approximately $7.7 million, if none of the performance conditions are met,
to $19.9 million if all of the performance conditions are met.
Assessment of Operations
Net Interest Revenue
Tax-equivalent net interest revenue totaled $553.6 million for 2007 compared
with $493.7 million for 2006. Net interest revenue growth was driven primarily
by a $2.2 billion increase in average earning assets. Average outstanding loans
increased $1.7 billion and average securities increased $447 million. Growth in
the securities portfolio generally consisted of highly-rated, fixed-rate
mortgage-backed securities. These securities supplement the Company's earnings
and help to manage the balance sheet to a position that is relatively neutral to
changes in interest rates. Growth in average earning assets was funded primarily
by a $1.4 billion increase in interest-bearing deposits and a $826 million
increase in borrowed funds. Average demand deposit accounts decreased $152
million. Table 2 shows the effects on net interest revenue of changes in average
balances and interest rates for the various types of earning assets and
interest-bearing liabilities.
Yields on average earning assets and rates paid on average interest-bearing
liabilities both increased during 2007 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 3.28% in 2007 compared with 3.36%
in 2006. The decrease in net interest margin reflected loan spread compression,
competition for deposits and a decreasing non-rate funds gap. Loan spread
compression limited the increase in yield on loans to 6 basis points. Beginning
in late 2004, the weighted average spread of our commercial loan portfolio over
funding sources decreased from approximately 290 basis points to approximately
235 basis points due largely to competitive pricing pressure. During 2007, the
spread of our commercial loan portfolio over funding sources ranged between
approximately 235 and 240 basis points. In the second half of 2007, competition
from banks whose wholesale funding sources were affected by credit disruptions
increased market rates on average interest bearing deposits 26 basis points. 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 22% of total liabilities and equity in 2006 to 20% in 2007. The
decrease in non-rate funds reduced 2007 net interest margin 4 basis points
compared with 2006.
17
Table 2 Volume/Rate Analysis
(In Thousands)
2007/2006 2006/2005
------------------------------------- -------------------------------------
Change Due To(1) Change Due To(1)
------------------------ ------------------------
Change Volume Yield/Rate Change Volume Yield/Rate
------------ ----------- ------------ ------------ ----------- ------------
Tax-equivalent interest revenue:
Securities $ 32,162 $ 20,068 $ 12,094 $20,564 $ 4,262 $ 16,302
Trading securities 904 456 448 274 260 14
Loans 140,760 134,830 5,930 196,884 86,991 109,893
Funds sold and resell agreements 2,639 2,260 379 554 (98) 652
------------------------------------------- ------------ ----------- ------------ - ------------ ----------- ------------
Total 176,465 157,614 18,851 218,276 91,415 126,861
------------------------------------------- ------------ ----------- ------------ - ------------ ----------- ------------
Interest expense:
Transaction deposits 45,631 30,668 14,963 76,265 23,499 52,766
Savings deposits 91 158 (67) 302 (89) 391
Time deposits 30,116 13,155 16,961 49,941 15,148 34,793
Funds purchased and repurchase agreements 28,864 29,980 (1,116) 43,877 8,455 35,422
Other borrowings 7,188 5,889 1,299 2,850 (11,577) 14,427
Subordinated debentures 4,621 6,595 (1,974) 5,913 3,779 2,134
------------------------------------------- ------------ ----------- ------------ - ------------ ----------- ------------
Total 116,511 86,445 30,066 179,148 39,215 139,933
------------------------------------------- ------------ - ------------
Tax-equivalent net interest revenue 59,954 $ 71,169 $ (11,215) 39,128 $ 52,200 $ (13,072)
------------------------ -----------------------
Increase in tax-equivalent
adjustment (2,157) (1,781)
------------------------------------------- ------------ - ------------
Net interest revenue $ 57,797 $ 37,347
------------------------------------------- ------------ - ------------
4th Qtr 2007/4th Qtr 2006
------------------------------------
Change Due To(1)
------------------------
Change Volume Yield/Rate
----------- ------------ -----------
Tax-equivalent interest revenue:
Securities $ 13,961 $ 10,353 $ 3,608
Trading securities 167 102 65
Loans 15,824 28,100 (12,276)
Funds sold and resell agreements 757 680 77
----------------------------------------- ----------- ------------ -----------
Total 30,709 39,235 (8,526)
----------------------------------------- ----------- ------------ -----------
Interest expense:
Transaction deposits 5,947 9,085 (3,138)
Savings deposits (17) 49 (66)
Time deposits 1,832 1,498 334
Funds purchased and repurchase agreements 1,433 6,940 (5,507)
Other borrowings 3,483 4,589 (1,106)
Subordinated debentures 483 1,587 (1,104)
----------------------------------------- ----------- ------------ -----------
Total 13,161 23,748 (10,587)
----------------------------------------- ----------- ------------ -----------
Tax-equivalent net interest revenue 17,548 $ 15,487 $ 2,061
------------ -----------
Increase in tax-equivalent adjustment (537)
----------------------------------------- -----------
Net interest revenue $ 17,011
----------------------------------------- -----------
(1) Changes attributable to both volume and yield/rate are allocated to both
volume and yield/rate on an equal basis.
Management regularly models the effects of changes in interest rates on net
interest revenue. Based on this modeling, we expect net interest revenue to
increase slightly over a one-year forward looking period. However, other factors
such as loan spread compression, deposit product mix and overall balance sheet
composition may affect this general expectation. For example, throughout 2007
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 re-price 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 23 basis points over
2006 while the average loan yield increased 6 basis points. The cost of
interest-bearing deposits increased 26 basis points while the average cost of
other interest bearing liabilities decreased 4 basis points.
Our overall objective is to manage the Company's balance sheet to be essentially
neutral to changes in interest rates. Approximately 67% of our commercial loan
portfolio is either variable rate or fixed rate that will re-price within one
year. These loans are funded primarily by deposit accounts that are either
non-interest bearing, or that re-price more slowly than the loans. The result is
a balance sheet that would be asset sensitive, which means that assets generally
re-price more quickly than liabilities. Among the strategies that we use to
achieve a rate-neutral position, we purchase fixed-rate, mortgage-backed
securities to offset the short-term nature of the majority of our funding
sources. The expected duration of these securities is approximately 2.3 years
based on a range of interest rate and prepayment assumptions. The
liability-sensitive nature of this strategy provides an offset to the
asset-sensitive characteristics of our loan portfolio.
We also use derivative instruments to manage our interest rate risk. Interest
rate swaps with a combined notional amount of $372 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 relatively 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
18
purpose of these derivatives, which have been designated as cash flow hedges,
also is to position our balance sheet to be relatively neutral to changes in
interest rates.
The effectiveness of these strategies is reflected in the overall change in net
interest revenue due to changes in interest rates as shown in Table 2 and in the
interest rate sensitivity projections as shown in the Market Risk section of
this report.
Fourth Quarter 2007 Net Interest Revenue
Tax-equivalent net interest revenue for the fourth quarter of 2007 totaled
$143.8 million compared with $126.2 million for the fourth quarter of 2006.
Average earning assets increased $2.4 billion or 15%, including a $1.4 billion
or 14% increase in average loans and an $897 million increase in average
securities. Growth in average earning assets was funded by a $2.4 billion
increase in interest-bearing liabilities, including a $1.4 billion increase in
average interest bearing deposits and a $1.0 billion increase in other
borrowings. The increase in interest bearing liabilities also funded a $188
million decrease in average demand deposits. Net interest margin was 3.22%, down
3 basis points from the fourth quarter of 2006. The spread between the yield on
average earning assets and rates paid on interest-bearing liabilities improved
by 6 basis points. However, the benefit provided by non-interest bearing funding
sources decreased by 9 basis points.
2006 Net Interest Revenue
Tax-equivalent net interest revenue for 2006 was $493.7 million, a $39.1 million
or 9% increase from 2005. Average earning assets increased $1.3 billion or 10%,
including a $1.2 billion increase in average outstanding loans. As shown in
Table 2, net interest revenue increased $52.2 million due to changes in earning
assets and interest bearing liabilities. Net interest revenue growth due to
earning assets was partially offset by a $13.1 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 $27.0 million compared with last year due to a
$33.9 million or 9% increase in fees and commission revenue partially offset by
net losses on securities, derivatives and other assets. Diversified sources of
fees and commission revenue are a significant part of our business strategy and
represented 42% of total revenue, 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.
Table 3 Other Operating Revenue
(In Thousands)
Years ended December 31,
--------------------------------------------------------------
2007 2006 2005 2004 2003
------------- ----------- ----------- ----------- ------------
Brokerage and trading revenue $ 62,542 $ 53,413 $ 48,024 $ 44,221 $ 46,633
Transaction card revenue 90,425 78,622 72,036 64,816 57,352
Trust fees and commissions 78,231 71,037 65,187 57,532 45,763
Deposit service charges and fees 109,218 102,436 98,361 93,712 82,042
Mortgage banking revenue 22,275 26,996 30,681 28,189 52,336
Bank-owned life insurance 10,058 2,558 62 - -
Other revenue 32,873 36,634 30,513 23,757 20,639
---------------------------------------------------- ------------- ----------- ----------- ----------- ------------
Total fees and commissions 405,622 371,696 344,864 312,227 304,765
---------------------------------------------------- ------------- ----------- ----------- ----------- ------------
Gain (loss) on sales of assets (928) 1,499 7,798 1,225 2,275
Gain (loss) on securities, net (8,328) (950) (6,895) (3,088) 7,188
Gain (loss) on derivatives, net 2,282 (622) 1,179 (1,474) (9,375)
---------------------------------------------------- ------------- ----------- ----------- ----------- ------------
Total other operating revenue $ 398,648 $ 371,623 $ 346,946 $ 308,890 $304,853
---------------------------------------------------- ------------- ----------- ----------- ----------- ------------
Fees and Commissions Revenue
Brokerage and trading revenue grew $9.1 million or 17% compared with 2006.
Retail brokerage revenue increased $4.9 million to $18.3 million, up 37% over
2006. Revenue from sales of fixed income investments and annuities were up,
primarily in the Oklahoma and Texas markets. Securities trading revenue totaled
$23.4 million, up $3.7 million or 18% over the previous year. Market conditions
for institutional securities sales improved during 2007 compared with previous
years. Revenue from customer hedging activities increased 4% to $15.0 million
over 2006.
Transaction card revenue increased $11.8 million or 15%. Check card revenue
increased 24% due to growth in transaction volume. The number of check card
transactions processed during 2007 increased 21% over 2006. ATM fees grew $6.3
million or 19% compared to the previous year. During 2006, we signed contracts
to add 140 TransFund ATMs in convenience stores
19
located in the Dallas, Fort Worth, Texas market and in locations across
Arkansas, Oklahoma, Kansas, Missouri and Nebraska. The number of TransFund ATM
locations totaled 1,822 at December 31, 2007, up 10% over last year. Merchant
discount revenue totaled $26.5 million, up 3% over 2006.
Trust fees increased $7.2 million or 10%. The fair value of all trust
relationships overseen by the Company, which is the basis for a significant
portion of trust fees increased to $36.3 billion at December 31, 2007 compared
with $31.7 billion at December 31, 2006. Approximately 31% of trust fees are
earned on personal trust relationships. Additionally, 20% 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 $6.8 million, or 7% compared with
2006. Overdraft fees increased 9% to $74.3 million and commercial account
service charge revenue increased 6% to $29.5 million. The number of overdraft
transactions increased during 2007 and per item charges were increased in
selected markets. In addition, the increase 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. Service charges on retail deposit accounts decreased 13% to
$5.4 million due to growth in service-charge free products.
Mortgage banking revenue decreased $4.7 million compared with 2006. Servicing
revenue was up $592 thousand or 4% to $17.1 million. Gains on mortgage loans
sold, including the value of capitalized mortgage servicing rights, decreased
$5.3 million due to competitive pricing and higher origination costs.
Other revenue totaled $32.9 million, down $3.8 million or 10% from 2006. The
Company is required to pledge margin assets to secure derivative liabilities.
Fees earned on margin assets in 2007, which are based on average balances and
short-term interest rates totaled $4.8 million, down $5.4 million or 53% over
2006. Margin assets averaged $117 million in 2007 and $238 million in 2006.
Reduction in fees earned on margin assets is largely offset by an increase in
net interest revenue due to lower funding costs.
Gains on Sales of Assets
Net gains / losses on asset sales decreased to a $928 thousand loss in 2007 from
a $1.5 million gain in 2006. Net losses on asset sales in 2007 included a $1.0
million charge to reduce the carrying value of a branch facility that is being
held for sale. In addition, gains on student loans sold in 2007 decreased $443
thousand compared to 2006.
Securities and Derivatives
Net losses on securities totaled $8.3 million in 2007 and $950 thousand in 2006.
During the fourth quarter of 2007, the Company recorded an $8.6 million pre-tax
other-than-temporary-impairment charge to recognize the decrease in the fair
value of its holdings of variable rate perpetual preferred stock issued by six
major banks and brokerage houses. In addition, during 2007 we recognized net
losses of $486 thousand on securities held as economic hedges of mortgage
servicing rights and net gains of $799 thousand from sales of other securities.
Use of securities as an economic hedge of mortgage servicing rights is
more-fully discussed in the Line of Business - Mortgage Banking section of this
report.
During 2006, net losses on securities consisted of losses of $1.1 million on
securities held as an economic hedge of mortgage servicing rights, partially
offset by net gains of $152 thousand on sales of other securities. Other
securities are bought and sold as necessary to maximize the portfolio's total
return and to manage prepayment or extension risk.
Net gains on derivatives totaled $2.3 million in 2007, compared with net losses
of $622 thousand in 2006. Net gains and losses on derivatives consist primarily
of fair value adjustments of all derivatives used to manage interest rate risk
and when permitted by Statement of Financial Accounting Standards No. 133,
changes in the fair value of related hedged liabilities. Our fair value hedges
use interest rate swaps to convert fixed rate liabilities to floating rate,
LIBOR based liabilities, and represent hedges of changes in the full fair value,
not only changes in fair value due to the benchmark interest rate, of the hedged
liabilities. Any ineffectiveness of our hedges, including ineffectiveness due to
credit risk is recognized in this line item.
Fourth Quarter 2007 Other Operating Revenue
Other operating revenue for the fourth quarter of 2007 totaled $107.3 million, a
$13.6 million or 15% increase over the fourth quarter of 2006. Fees and
commission revenue increased $18.5 million or 20% compared with the fourth
quarter of 2006. Brokerage and trading revenue was up $6.0 million or 42% for
the fourth quarter due largely to securities trading gains and completion of
investment banking transactions. Deposit service charges and fees increased $4.2
million or 16% due to growth in overdraft fees and commercial account activity
charges. Transaction card revenue increased $3.3 million or 16% compared to 2006
due to ATM fees and debit card processing volumes. Trust revenue increased $1.9
million or 10% due largely to a 15% increase in the fair value of trust assets.
Growth in other operating revenue due to fees and commissions was partially
offset by a $1.0 million charge to reduce the carrying value of a branch
facility that is being held for sale and the $8.6 million charge to reduce the
carrying value of certain preferred stocks.
20
2006 Other Operating Revenue
Other operating revenue totaled $371.6 million for 2006, up $24.7 million over
2005. Fees and commissions revenue increased $26.8 million or 8%. Brokerage and
trading revenue was up $5.4 million or 11% due primarily to growth in customer
hedging activities. Trust fees increased $5.9 million or 9%. The fair value of
trust relationships overseen by the Company, which is the basis for a
significant portion of trust fees, increased from $28.5 billion at December 31,
2005 to $31.7 billion at December 31, 2006. Transaction card revenue grew $6.6
million or 9% due to a $2.7 million or 9% increase in ATM fees and a $3.7
million or 19% increase in check card revenue. Growth in other revenue included
a $3.2 million increase in fees earned on margin assets.
Net gains on asset sales decreased from $7.8 million in 2005 to $1.5 million in
2006. Net gains 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. The Company also
recognized net losses on securities and derivatives of $950 thousand and $622
thousand, respectively, during 2006.
Other Operating Expense
Other operating expense for 2007 totaled $575.0 million, a $62.7 million or 12%
increase over 2006. This increase resulted primarily from a $32.4 million
increase in 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,
--------------------------------------------------------------------
2007 2006 2005 2004 2003
------------- ------------- -------------- ------------ ------------
Personnel expense $328,705 $296,260 $258,971 $240,661 $222,922
Business promotion 21,888 19,351 17,964 15,618 12,937
Contribution of stock to BOK Charitable - - - 5,561 -
Foundation
Professional fees and services 22,795 17,744 16,596 15,487 17,935
Net occupancy and equipment 57,284 52,188 50,195 47,289 45,967
Data processing and communications 72,733 66,926 67,026 60,025 53,398
Printing, postage and supplies 16,570 15,862 15,066 14,034 13,930
Net (gains) losses and operating expenses of
repossessed assets 691 474 572 (4,016) 271
Amortization of intangible assets 7,358 5,327 6,943 8,138 8,101
Mortgage banking costs 12,018 11,829 14,562 18,167 40,296
Change in fair value of mortgage servicing rights 2,893 (3,009) - - -
Recovery for impairment of mortgage servicing rights - - (3,915) (1,567) (22,923)
Other expense 32,052 29,355 25,126 21,827 20,604
-------------------------------------------------- ------------- ------------- -------------- ------------ ------------
Total $ 574,987 $ 512,307 $ 469,106 $ 441,224 $413,438
-------------------------------------------------- ------------- ------------- -------------- ------------ ------------
21
Personnel Expense
Personnel expense increased $32.4 million or 11% to $328.7 million. Severance
and other net charges related to a workforce reduction of 145 employees fully
recognized in the third quarter of 2007 added $2.5 million to personnel expense.
This workforce reduction was an initiative to align personnel expenses with
revenue growth and affected both management and staff level employees throughout
the Company's eight-state region. Management estimates that the workforce
reduction along with the elimination of unfilled positions will result in an
ongoing quarterly pre-tax savings of approximately $4.0 million. The effect of
these costs has been excluded from the following discussion to provide a more
meaningful comparison of expense trends.
Table 5 Personnel Expense
(In Thousands)
Years Ended December 31,
----------------------------------------------------------------------------------
2007 2006 2005 2004 2003
----------------------------------------------------------------------------------
Regular compensation $ 206,857 $ 185,466 $ 165,529 $ 148,468 $ 141,264
Incentive compensation:
Cash-based 62,657 54,093 44,726 42,725 40,023
Stock-based 8,763 11,111 5,097 11,694 5,776
---------------------------------------------------------------------------------------------------------------------
Total incentive compensation 71,420 65,204 49,823 54,419 45,799
Employee benefits 47,929 45,590 43,619 37,774 35,859
Workforce reduction costs, net 2,499 - - - -
---------------------------------------------------------------------------------------------------------------------
Total personnel expense $ 328,705 $ 296,260 $ 258,971 $ 240,661 $ 222,922
---------------------------------------------------------------------------------------------------------------------
Average staffing
(full-time equivalent) 4,106 3,828 3,677 3,509 3,474
---------------------------------------------------------------------------------------------------------------------
Regular compensation expense, which consists of salaries and wages, overtime pay
and temporary personnel costs, totaled $206.9 million, up $21.4 million, or 12%
increase over 2006. The increase in regular compensation expense was due to a 4%
increase in average regular compensation per full-time equivalent employee and a
278 person or 7% increase in average staffing. Acquisitions of First United Bank
and Worth National Bank in the second quarter of 2007 increased average staffing
by 130 employees.
Incentive compensation increased $6.2 million, or 10% to $71.4 million. Expense
for cash-based incentive compensation plans increased $8.6 million or 16%. 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 decreased $2.3 million or 21%. The Company's stock-based
compensation plans include both equity awards and liability awards. Compensation
expense associated with liability award plans decreased $2.9 million. This
decrease reflected changes in the market value of BOK Financial common stock at
December 31, 2007 compared with December 31, 2006. Compensation expense for
equity awards increased $567 thousand or 9% over 2006. Additional information
about our stock-based compensation plans is provided in Note 13 to the
Consolidated Financial Statements.
Employee benefit expenses increased $2.3 million or 5% to $47.9 million.
Employee insurance costs increased $301 thousand or 2% and payroll taxes
increased $2.5 million or 16%. Retirement benefit costs and other benefits
decreased $482 thousand.
Professional Fees
Professional fees increased $5.1 million or 28% to $22.8 million compared with
2006. Growth in other professional fees includes costs related to acquisitions
and subordinated debt issued during 2007, costs related to the Securities and
Exchange Commission's examination of our mutual fund advisory activities
discussed in Note 15 to the Consolidated Financial Statements, and professional
fees related to debt collection activities.
Data Processing and Communications Expense
Data processing and communication expenses totaled $72.7 million, up $5.8
million or 9% from the prior year. This expense consists of two broad
categories, data processing systems and transaction card processing. Data
processing systems costs increased $4.3 million or 11% due to growth in
processing volumes and acquisitions during 2007. Transaction card processing
costs increased $1.5 million or 6% due to growth in processing volumes.
Other Operating Expenses
Business promotion expense increased $2.5 million or 13% compared with last
year. Promotional activities in support of regional banking growth increased
$1.9 million. These activities included support for our new full-service banking
operations in Kansas City and our acquisitions in Fort Worth and Denver. Other
expenses were up over 2006 due to a $2.8 million charge for our contingent
obligation to support Visa's antitrust litigation costs and a $695 thousand
increase in FDIC insurance premiums.
22
In 2006, other operating expenses included a $1.8 million non-cash charge
related to taxes on the Company's investment in bank-owned life insurance.
On November 7, 2007, Visa announced that it had reached a settlement with
American Express related to an antitrust lawsuit, and in a subsequent filing
with the Securities and Exchange Commission, Visa disclosed that it had
recognized a contingent liability for a similar lawsuit with Discover. In
addition, Visa is a party to other litigation matters that could affect BOK
Financial. As a member, we are obligated for a proportionate share of losses
incurred by Visa. Visa intends that payments related to these litigation matters
will be funded by an escrow account to be established with a portion of the
proceeds from its initial public offering, which is currently planned for 2008.
We anticipate that our proportionate share of the proceeds of Visa's initial
public offering will exceed the contingent liabilities related to Visa
litigation based on information available at this time.
In 2006, The Federal Deposit Insurance Corporation determined that the deposit
insurance fund should reach a level of 1.25% of estimated insured deposits. In
order to achieve this objective, starting in 2007 all insured financial
institutions were charged deposit insurance premiums with rates ranging from 5
basis points to 43 basis points per assessable deposit based upon their risk
category. As provided by the Federal Deposit Insurance Reform Act of 2005,
eligible depository institutions were granted a one-time credit which largely
offset deposit insurance premiums in 2007. Deposit insurance expense offset by
this credit totaled $5.6 million. Based on current assessment rates, projected
deposit growth and the remaining unused balance of the one-time credit, we
expect deposit insurance expense, which is included in other operating expenses,
to increase by $1.8 million per quarter in 2008.
Fourth Quarter 2007 Operating Expenses
Operating expenses for the fourth quarter of 2007, excluding changes in the fair
value of mortgage servicing rights totaled $154.4 million, up $20.2 million or
15% over the same period in 2006. Personnel costs increased $6.5 million or 8%.
Regular compensation expense increased $3.5 million or 7% due to a 1% increase
in average compensation per employee and a 6% increase in staffing. Staffing
increase includes the acquisitions of Worth National Bank and First United Bank.
Incentive compensation expense rose $2.6 million or 14%, including a $3.7
million increase for cash-based incentive compensation expense and a $1.1
million decrease for stock-based incentive compensation expense.
Non-personnel operating expenses for the fourth quarter of 2007, excluding
changes in the fair value of mortgage servicing rights, were up $13.7 million or
24% over 2006. Contingent obligations to support Visa's antitrust litigation
increased fourth quarter operating expenses by $2.8 million and the June 2007
acquisitions of Worth National Bank and First United Bank increased
non-personnel operating expenses by $2.9 million.
2006 Operating Expenses
Operating expenses for 2006 totaled $512.3 million, up $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.
Personnel costs increased $37.3 million or 14%. Regular compensation increased
$19.9 million or 12% to $185.5 million due primarily to an 8% increase in
average regular compensation per employee and a 4% increase in average staffing.
Incentive compensation increased $15.4 million or 31% to $65.2 million. The cost
of cash-based incentive compensation plans increased $9.4 million or 21% while
the cost of stock-based incentive compensation plans increased $6.0 million or
118%. Stock-based incentive compensation plans include both equity awards and
liability awards. Compensation expense associated with liability award plans
increased $4.9 million due to an increase in the market value of BOK Financial
common stock. Employee benefit expenses increased $2.0 million or 5% due
primarily to higher employee insurance costs. The Company self-insures a portion
of its employee health care coverage.
Income Taxes
Income tax expense was $115.8 million for 2007, $114.6 million for 2006 and
$113.2 million for 2005. This represented 35%, 35% and 36%, respectively, of
book taxable income. Tax expense currently payable totaled $129.2 million in
2007 compared with $122.1 million in 2006 and $112.7 million in 2005.
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.
Effective January 1, 2007, the Company adopted FIN 48 which provided accounting
guidance for uncertain income tax positions. FIN 48 requires that we recognize
the benefit of uncertain income tax positions only 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. This is substantially the same criteria we
used for uncertain tax positions prior to the adoption of FIN 48. The transition
adjustment increased our reserve for uncertain tax positions by $609 thousand
which was recognized as a reduction of retained earnings.
23
Reserves for uncertain tax positions totaled $13.2 million at December 31, 2007
and $12.6 million at January 1, 2007. BOK Financial operates in numerous
jurisdictions, which requires judgment regarding the allocation of income,
expense and earnings under various laws and regulations of each of these taxing
jurisdictions. Each jurisdiction may audit our tax returns and may take
different positions with respect to these allocations.
Table 6 Selected Quarterly Financial Data
(In Thousands Except Per Share Data)
Fourth Third Second First
------------ ------------ ------------- ------------
2007
----------------------------------------------------
Interest revenue $ 297,096 $300,380 $288,685 $274,576
Interest expense 155,807 160,935 153,772 145,738
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Net interest revenue 141,289 139,445 134,913 128,838
Provision for credit losses 13,200 7,201 7,820 6,500
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Net interest revenue after provision for credit losses 128,089 132,244 127,093 122,338
Other operating revenue 112,038 103,759 96,616 92,281
Gain (loss) on securities, net (6,251) 4,748 (6,262) (563)
Gain (loss) on derivatives, net 1,529 865 (183) 71
Other operating expense 154,383 147,572 139,192 130,947
Change in fair value of mortgage servicing rights 3,344 3,446 (5,061) 1,164
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Income before taxes 77,678 90,598 83,133 82,016
Income tax expense 26,518 30,750 29,270 29,223
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Net income $ 51,160 $59,848 $ 53,863 $ 52,793
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Earnings per share:
Basic $ 0.76 $ 0.89 $ 0.80 $ 0.79
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Diluted $ 0.76 $ 0.89 $ 0.80 $ 0.78
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Average shares:
Basic 67,051 67,078 67,117 67,085
------------------------------------------------------------------ ------------ ------------ ------------- ------------
Diluted 67,483 67,538 67,606 67,575
------------------------------------------------------------------ ------------ ------------ ------------- ------------
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
------------------------------------------------------------------ ------------ ------------ ------------- ------------
24
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 planning strategies and certain executive compensation
costs that are not attributed to the lines of business.
BOK Financial allocates resources and evaluates performance of its lines of
business after allocation of funds, certain indirect expenses, taxes 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 7, net income attributed to our lines of business increased
$2.3 million or 1% over last year. Net losses from funds management and other
activities for 2007 included the other-than-temporary-impairment charge
recognized on certain preferred stocks, the excess of provision for credit
losses over net loans charged off and the contingent obligation to support
Visa's litigation costs.
During 2007, operating results for customer hedging programs were transferred
from Regional Banking to Wealth Management which better aligns with management
responsibility for this unit. In previous years, operating results for the
Wealth Management Division included only hedging programs offered to customers
in the Oklahoma market. Operating results for 2006 and 2005 have been restated
for this change.
Table 7 Net Income by Line of Business
(In Thousands)
Years ended December 31,
2007 2006 2005
------------- -------------- -------------
Oklahoma corporate banking $ 78,306 $ 77,811 $ 68,150
Oklahoma consumer banking 37,194 35,703 24,511
Mortgage banking (325) 1,960 1,841
Wealth management 28,952 28,250 21,903
Regional banking 92,494 90,555 77,488
---------------------------------- ------------- -------------- -------------
Subtotal 236,621 234,279 193,893
Funds management and all other (18,957) (21,302) 7,612
---------------------------------- ------------- -------------- -------------
Total $217,664 $212,977 $201,505
---------------------------------- ------------- -------------- -------------
25
Oklahoma Corporate Banking
The Oklahoma Corporate Banking Division provides loan and lease financing and
treasury and cash management services to businesses throughout Oklahoma and
certain relationships in surrounding states. In addition to serving the banking
needs of small businesses, middle market and larger customers, this Division has
specialized groups that serve customers in the energy, agriculture, healthcare
and banking/finance industries, and includes the TransFund network. The Oklahoma
Corporate Banking Division contributed $78.3 million or 36% to consolidated net
income for 2007. This Division contributed $77.8 million or 37% to consolidated
net income in 2006. Net loans charged off for the Oklahoma Corporate Banking
Division totaled $7.2 million or 0.16% of average loans in 2007. Net recoveries
of loans charged off increased this Division's pre-tax income $495 thousand in
2006. Net interest revenue increased $6.5 million or 4% due primarily to asset
growth. Average earning assets attributed to this division, which consists
primarily of commercial loans, increased $355 million or 8% over 2006 to $4.6
billion. Average loans increased $258 million or 6% to $4.4 billion due largely
to growth in energy, healthcare and indirect automobile loans. Average funds
provided to the funds management unit increased $94 million. Average deposits
attributed to the Oklahoma Corporate Banking Division increased $316 million or
18%. Operating revenue grew $4.8 million or 5%. Operating revenue provided by
TransFund increased $7.1 million or 13%. Growth in fee revenue from TransFund
was partially offset by a $2.9 million decrease in leasing revenue. Operating
expenses, which consist primarily of personnel and data processing costs,
increased $3.7 million or 3%. Personnel costs increased $3.1 million or 8%; all
other operating expenses increased $661 thousand.
Table 8 Oklahoma Corporate Banking
(Dollars in Thousands)
Years ended December 31,
----------------------------------------
2007 2006 2005
----------------------------------------
NIR (expense) from
external sources $ 248,889 $ 244,781 $ 208,044
NIR (expense) from
internal sources (93,375) (95,766) (67,875)
----------------------------------------
Total net interest
revenue 155,514 149,015 140,169
Other operating
revenue 93,865 89,106 83,619
Gain on sale of assets 1,075 - 4,758
Operating expense 115,116 111,380 110,395
Net loans charged off 7,234 (495) 6,481
Net income $ 78,306 $ 77,811 $ 68,150
Average assets $5,841,449 $5,214,916 $4,722,030
Average economic capital 391,920 395,490 338,470
Return on assets 1.34% 1.49% 1.44%
Return on economic capital 19.98 19.67 20.13
Efficiency ratio 45.96 46.77 48.30
26
Oklahoma Consumer Banking
The Oklahoma Consumer Banking Division provides a full line of deposit, loan and
fee-based services to customers throughout Oklahoma through four major
distribution channels: traditional branches, supermarket branches, the 24-hour
ExpressBank call center and the Internet. Additionally, the division is a
significant referral source for the Bank of Oklahoma Mortgage Division and
BOSC's retail brokerage division. Consumer banking services are offered through
34 locations in Tulsa, 32 locations in Oklahoma City and 16 locations throughout
the state. Oklahoma Consumer Banking opened six branches during 2007, including
two in the Tulsa and four in the Oklahoma City areas. Plans for 2008 include
opening four new banking locations, primarily in Tulsa and Oklahoma City.
The Oklahoma Consumer Banking Division contributed $37.2 million or 17% to
consolidated net income for 2007, compared to $35.7 million or 17% of
consolidated net income for 2006. Net interest revenue grew $4.3 million or 6%
over 2006. Average loans attributed to the Oklahoma Consumer Banking Division in
2007 increased $19 million or 7% compared with 2006. Average deposits provided
by the Oklahoma Consumer Banking Division grew $87 million or 3% to $2.9
billion. Average demand deposits were up $24 million or 7% over 2006. Interest
bearing deposits increased $64 million or 3%, including an $85 million or 9%
increase in interest bearing transaction accounts and a $22 million or 2%
decrease in time deposits. Other operating revenue was up $5.6 million or 8%
over 2006 largely from check card revenue and overdraft fees. Operating expenses
increased $7.3 million or 9% over 2006, including a $2.9 million or 10% increase
in personnel expense and a $4.4 million or 9% increase in non-personnel expense.
Net loans charged-off, which consist primarily of overdrawn deposit accounts,
totaled $2.9 million for 2007 and $2.8 million for 2006.
Table 9 Oklahoma Consumer Banking
(Dollars in Thousands)
Years ended December 31,
------------------------------------------
2007 2006 2005
------------ ------------- -------------
NIR (expense) from external sources $(68,034) $ (62,447) $ (43,411)
NIR (expense from internal sources 140,980 131,131 98,291
------------ ------------- -------------
Total net interest
revenue 72,946 68,684 54,880
Other operating
revenue 78,296 72,699 66,174
Operating expense 87,556 80,250 77,757
Net loans charged
off 2,918 2,780 3,094
Net income $ 37,194 $ 35,703 $ 24,511
Average assets $2,927,994 $2,836,692 $2,657,824
Average economic capital 61,780 58,570 51,480
Return on assets 1.27% 1.26% 0.92%
Return on economic capital 60.20 60.96 47.61
Efficiency ratio 57.89 56.76 64.23
27
Mortgage Banking
BOK Financial engages in mortgage banking activities through the BOk Mortgage
Division of Bank of Oklahoma. These activities include the origination,
marketing and servicing of conventional and government-sponsored mortgage loans.
BOk Mortgage incurred a net loss of $325 thousand in 2007 compared to net income
of $2.0 million in 2006. Changes in the fair value of mortgage servicing rights,
net of hedging activity, reduced net income $2.1 million in 2007 and increased
net income $1.2 million in 2006.
Mortgage banking activities consisted primarily of two sectors, loan production
and loan servicing. The loan production sector generally performs best when
mortgage rates are relatively low and loan origination volumes are high.
Conversely, the loan servicing sector generally performs best when mortgage
rates are relatively high and prepayments are low. In addition, the Mortgage
Banking Division holds a permanent portfolio of $422 million of residential
mortgage loans which generated net income of $1.2 million in 2007.
Table 10 Mortgage Banking
(Dollars in Thousands)
Years ended December 31,
-------------------------------------------
2007 2006 2005
-------------------------------------------
NIR (expense) from
external sources $ 36,800 $ 23,638 $ 20,237
NIR (expense) from
internal sources (32,451) (20,307) (14,882)
-------------------------------------------
Total net interest
revenue 4,349 3,331 5,355
Capitalized mortgage
servicing rights 14,080 11,917 17,402
Other operating
revenue 16,732 17,287 15,347
Gain on sale of assets - - 1,232
Operating expense 31,706 30,731 34,736
Change in fair value of
mortgage servicing rights 2,893 (3,009) -
Recovery for
impairment of mortgage
servicing rights - - (3,915)
Gain (loss) on
financial
instruments, net (486) (1,102) (5,087)
Net income (loss) $ (325) $ 1,960 $ 1,841
Average assets $724,378 $519,371 $514,530
Average economic capital 24,100 24,460 23,580
Return on assets (0.04)% 0.38% 0.36%
Return on economic capital (1.35) 8.01 7.81
Efficiency ratio 90.17 94.46 88.31
Loan Production Sector
Loan production revenue totaled $10.5 million in 2007, including $14.1 million
of capitalized mortgage servicing rights, partially offset by net losses on
mortgage loans sold. Loan production revenue totaled $11.2 million in 2006.
Capitalized mortgage servicing rights provided $11.9 million, partially offset
by net losses on mortgage loans sold. The average initial fair value of
servicing rights on mortgage loans funded was 1.39% for 2007 and 1.37% for 2006.
The increased loss on mortgage loans sold was due to competitive pricing during
the year and increased costs of loan originations. During 2007 we increased
compensation rates paid for loan production in our regional markets. Mortgage
loans funded totaled $1.1 billion in 2007, including $777 million for home
purchases and $326 million of refinanced loans. Mortgage loans funded in 2006
totaled $871 million, including $628 million for home purchases and $243 million
of refinanced loans. Approximately 61% and 13% of the loans funded during 2007
were in Oklahoma and Texas, respectively. In 2006, approximately 68% of mortgage
loans funded were in Oklahoma. Operating expenses, excluding direct loan
production costs which are recognized as part of the gain or loss on loans sold,
totaled $11.6 million in 2007 and $11.5 million in 2006. Pre-tax income from
loan production totaled $80 thousand for 2007 compared with $142 thousand for
the previous year. The pipeline of mortgage loan applications totaled $330
million at December 31, 2007, compared to $199 million at December 31, 2006.
28
Loan Servicing Sector
The loan servicing sector had pre-tax loss of $2.6 million for 2007 compared
with pre-tax income of $1.6 million for 2006. We recognized a net pre-tax loss
of $3.4 million in 2007 and a net pre-tax gain of $1.9 million in 2006 from
changes in the value of mortgage servicing rights and economic hedging
activities. Changes in mortgage commitment rates, prepayment speed assumptions,
discount rates and other estimates of future activities decreased the fair value
of mortgage servicing rights recognized in earnings by $2.9 million in 2007.
These same factors increased the fair value of mortgage servicing rights $3.0
million in 2006. Changes in the fair value of securities designated as an
economic hedge of our servicing rights did not offset the decrease in value of
our servicing rights in 2007. Economic hedge activity produced net losses of
$486 thousand in 2007 and $1.1 million in 2006.
Servicing revenue, including revenue on loans serviced for affiliates, totaled
$19.2 million in 2007 compared to $18.5 million in 2006. The average outstanding
balance of loans serviced was $5.2 billion during 2007 compared to $4.9 billion
during 2006. Servicing revenue per outstanding loan principal was 37 basis
points in 2007 compared with 38 basis points in 2006. Approximately 92% of loans
serviced was in our primary market areas at December 31, 2007, compared to 88%
at December 31, 2006. Servicing costs total $7.6 million for 2007 and $8.1
million for 2006. At December 31, 2007, the total number of loans serviced by
BOk Mortgage totaled 58,228. Serviced loans delinquent 90 days or more or in
process of foreclosure totaled 589; 361 of these loans are in Oklahoma, 56 are
in Arkansas and 33 are in Texas.
The fair value of mortgage servicing rights decreased $10.8 million during 2007
and $10.4 million during 2006 due to actual runoff of the underlying loans
serviced. This reduction in fair value is included in mortgage banking costs in
the Consolidated Statement of Earnings.
BOK Financial designated a portion of its securities portfolio as an economic
hedge against the risk of changes in the fair value of its mortgage servicing
rights. These securities, which are identified as mortgage trading securities
are carried at fair value. Changes in fair value are recognized in earnings as
they occur. Additionally, mortgage-related derivative contracts may also be
designated as an economic hedge of the risk of loss on mortgage servicing
rights. Because the fair values of these instruments are expected to vary
inversely to the fair value of the servicing rights, they are expected to
partially offset risk. No special hedge accounting treatment is applicable to
either the mortgage servicing rights or the financial instruments designated as
an economic hedge.
Our hedging strategy presents certain risks. A well-developed market determines
the fair value for the securities and derivatives, however there is no
comparable market for mortgage servicing rights. Therefore, the computed change
in value of the servicing rights for a specified change in interest rates may
not correlate to the change in value of the securities.
At December 31, 2007, financial instruments with a fair value of $155 million
and an unrealized gain of $781 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, 2007, the pre-tax results of this modeling on reported earnings
were:
Table 11 Interest Rate Sensitivity - Mortgage Servicing
(Dollars in Thousands)
50 bp 50 bp
Increase Decrease
------------- -----------
Anticipated change in:
Fair value of mortgage
servicing rights $ 3,327 $ (5,295)
Fair value of hedging securities (3,976) 3,606
----------------------------------- ------------- -----------
Net $ (649) $ (1,689)
----------------------------------- ------------- -----------
Table 11 shows the non-linear effect of changes in mortgage commitment rates on
the value of mortgage servicing rights. A 50 basis point increase in rates is
expected to increase the fair value of our servicing rights $3.3 million while a
50 basis point decrease is expected to reduce the fair value $5.3 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.
29
Wealth Management
BOK Financial provides a wide range of financial services through its wealth
management line of business, including trust and private financial services, and
brokerage and trading activities. This line of business includes the activities
of BOSC, Inc., a registered broker / dealer. Trust and private financial
services includes sales of institutional, investment and retirement products,
loans and other services to affluent individuals, businesses, not-for-profit
organizations, and governmental agencies. Trust services are provided primarily
to clients throughout Oklahoma, Texas and New Mexico. Additionally, trust
services include a nationally competitive, self-directed 401-(k) program and
administrative and advisory services to the American Performance family of
mutual funds. Brokerage and trading activities within the wealth management line
of business consists of retail sales of mutual funds, securities, and annuities,
institutional sales of securities and derivatives, bond underwriting and other
financial advisory services and customer risk management programs.
Wealth Management contributed $29.0 million or 13% to consolidated net income
for 2007. This compared to $28.2 million or 13% of consolidated net income for
2006.
Trust and private financial services provided $20.3 million of net income in
2007, down $1.2 million or 6% from 2006. Trust fees and commissions for the
Wealth Management line of business totaled $67.6 million, a $6.0 million or 10%
increase over last year. At December 31, 2007 and 2006, the Wealth Management
line of business was responsible for trust assets with aggregate market values
of $33.3 billion and $29.0 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 $12.7 billion of trust assets at
December 31, 2007 compared to $10.8 billion of trust assets at December 31,
2006. The fair value of non-managed assets increased $1.3 billion to $12.7
billion at year-end 2007. Assets held in safekeeping totaled $7.9 billion at
December 31, 2007. Operating expenses attributed to trust and private financial
services increased $6.5 million or 10%, including $3.9 million from personnel
expenses. Expenses also included $2.2 million paid to settle claims made by the
American Performance Funds against AXIA Investment Management, Inc., a
wholly-owned subsidiary of BOk whose activities are included in the Wealth
Management line of business. See Note 15 to the Consolidated Financial
Statements for additional information.
Brokerage and trading activities provided $8.6 million of net income in 2007
compared to $6.7 million in the previous year. Operating revenue increased $6.2
million or 10% due to a $4.8 million increase in revenue from retail brokerage
activities. Operating expenses, which consisted primarily of compensation
expense increased $6.1 million or 14%. Incentive compensation expense which is
directly related to revenue growth was up $3.8 million or 25%.
Table 12 Wealth Management
(Dollars in Thousands)
Years ended December 31,
--------------------------------------
2007 2006 2005
------------- ------------ ------------
NIR (expense) from
external sources $ 13,385 $ 15,148 $ 12,488
NIR (expense) from
internal sources 18,781 13,030 8,504
------------- ------------ ------------
Total net interest
revenue 32,166 28,178 20,992
Other operating
revenue 137,057 124,170 109,405
Operating expense 118,493 105,906 94,338
American Performance Fund
settlement 2,232 - -
Net income $ 28,952 $ 28,250 $ 21,903
Average assets $1,894,677 $1,831,377 $1,748,104
Average economic capital 154,540 149,960 114,400
Return on assets 1.53% 1.54% 1.25%
Return on economic capital 18.73 18.84 19.15
Efficiency ratio 71.34 69.52 72.35
30
Regional Banking
Regional banking consists primarily of the corporate and commercial banking
services provided by Bank of Texas, Bank of Albuquerque, Bank of Arkansas,
Colorado State Bank and Trust, Bank of Arizona and Bank of Kansas City in their
respective markets. It also includes fiduciary services provided by Colorado
State Bank and Trust. Small businesses and middle-market corporations are the
regional banks' primary customer focus. Regional banking contributed $92.5
million or 42% to consolidated net income during 2007. This compares with $90.6
million or 43% of consolidated net income in 2006. Growth in net income
contributed by the regional banking came primarily from operations in Texas and
Colorado. Net income for 2007 in Texas and Colorado increased $2.6 million or 5%
and $1.6 million or 12%, respectively, from the previous year. In addition net
income from our Arkansas banking operations grew $711 thousand or 26%. A $74
million increase in average indirect automobile loans helped increase net
interest revenue $2.8 million or 40% over 2006.
Texas growth resulted from an increase in net interest revenue. Net interest
revenue increased $11.9 million or 8%. Average earning assets increased $442
million, including a $569 million increase in loans and a $122 million decrease
in securities. Average loans totaled $2.9 billion for 2007 and $2.3 billion for
2006. Middle market loans were up $245 million or 49% with solid growth in both
Dallas, Fort Worth and Houston. The acquisition of Worth National Bank added
$157 million of average outstanding loans in the Fort Worth market. Energy loans
grew $36 million or 7% and real estate loans increased $72 million or 21%.
Community banking loans increased $47 million or 6% over last year. The growth
in average earning assets was funded primarily by a $294 million increase in
average deposits. Average deposits totaled $3.0 billion for 2007 and $2.7
billion for 2006. Corporate banking deposits were up $162 million or 37%.
Average community banking deposits decreased $16 million or 1% from last year.
Consumer banking deposits also increased, up $53 million or 6%. In addition to
five branches acquired with Worth National Bank, we opened five branch offices
in the Texas market during 2007 and plan to open four locations in 2008.
Other operating revenue in the Texas market increased $4.2 million or 18% over
2006 due primarily to a $3.1 million increase in deposit fees and debit card
revenue. Operating expenses were up $13.4 million or 16%, including an $8.2
million or 18% increase in personnel costs. Approximately $4.5 million of the
increase in personnel costs was due to the Worth National Bank acquisition.
Worth National Bank was fully-integrated into our Texas banking operations upon
completion of the systems conversion in February 2008.
Net income continued to increase at our Colorado operations, up $1.6 million or
12%. Net interest revenue increased $8.0 million or 22% over 2006. Average
earning assets attributed to our Colorado operations increased $467 million or
42%. Securities and funds sold to the funds management unit increased $261
million. Average loans totaled $733 million for 2007, up $206 million or 39%
over 2006. Energy loans in the Colorado market increased $74 million or 39%.
Commercial real estate loans were up $77 million or 57%, including commercial
real estate loans acquired with First United Bank. Average deposits increased
$282 million or 39% to $1.0 billion, including consumer deposit growth of $137
million and wealth management deposit growth of $105 million.
Other operating revenue increased $2.4 million or 21% due primarily to growth in
trust fees and deposit service charges. The fair value of trust assets overseen
by Colorado State Bank and Trust was $3.0 billion at December 31, 2007, up 13%
from December 31, 2006. Operating expenses in Colorado increased $7.5 million or
28% over last year. Personnel expenses were up $3.0 million and occupancy and
equipment expenses were up $1.5 million, including additional expenses from the
First United acquisition. First United Bank was integrated into our Colorado
banking operations upon completion of the systems conversion in September 2007.
We now have 17 banking locations in Colorado, including 15 in metropolitan
Denver, one in Colorado Springs and one in Boulder.
Net income in New Mexico totaled $21.2 million for 2007, up $828 thousand or 4%
over 2006. Net interest revenue increased $4.2 million or 9% while operating
revenue was up $1.6 million or 10%. Average loans increased $111 million or 18%
to $738 million for 2007. Commercial loans were up $81 million and commercial
real estate loans were up $22 million. New Mexico provided deposit growth of $50
million or 5% during 2007, including $41 million of consumer deposits. Average
deposits were $1.0 billion for 2007 and $961 million for 2006. Operating
expenses increased $2.9 million or 10%. Personnel costs in New Mexico increased
$1.0 million or 9% and deposit insurance costs were up $555 thousand. The
one-time credit that offsets deposit insurance expense was not available to our
banking operations in New Mexico. Operating results for 2007 included $3.6
million of net loans charged off, up from $2.1 million of net loans charged off
in 2006.
Net income at Bank of Arizona decreased $597 thousand in its second full year of
operations as a BOK Financial unit. Net income for 2007 totaled $1.2 million,
down from $1.8 million last year. The decrease in net income was due largely to
a $1.6 million increase in net loans charged off. Net interest revenue grew $3.8
million. Average loans increased $202 million to $515 million. Small business
and middle market commercial loans increased $83 million compared to 2006. In
addition, average commercial real estate loans grew $33 million or 28% in
Phoenix and $93 million or 141% in Tucson. Operating expenses increased $3.5
million, including $2.1 million of personnel costs as we continue to expand in
the Arizona market.
We initiated full-service banking operations in the Kansas City market in late
2006. Currently, we have one location in Overland Park, Kansas and one location
in Kansas City, Missouri. During 2007, average loans in the Kansas City market
increased $27 million to $135 million. Operations in the Kansas City market
incurred a $2.6 million net loss due primarily to initial operating costs.
31
Table 13 Bank of Texas
(Dollars in Thousands)
Years ended December 31,
-----------------------------------------
2007 2006 2005
-----------------------------------------
NIR (expense) from external sources $191,235 $168,486 $143,081
NIR (expense) from internal sources (33,727) (22,848) (12,269)
------------- ------------- -------------
Total net interest revenue 157,508 145,638 130,812
Other operating revenue 27,907 23,720 23,719
Operating expense 98,044 84,628 79,371
Net loans charged off 2,602 5,081 2,719
Net income $ 54,498 $ 51,866 $ 47,350
Average assets $4,341,793 $3,734,953 $3,235,236
Average economic capital 192,720 247,710 183,430
Average invested capital 444,980 414,790 350,510
Return on assets 1.26% 1.39% 1.46%
Return on economic capital 28.28 20.94 25.81
Return on average invested capital 12.25 12.50 13.51
Efficiency ratio 52.88 49.97 51.36
Table 14 Bank of Albuquerque
(Dollars in Thousands)
Years ended December 31,
-----------------------------------------
2007 2006 2005
-----------------------------------------
NIR (expense) from external sources $73,501 $ 64,695 $ 57,169
NIR (expense) from internal sources (21,973) (17,332) (11,764)
------------- ------------- -------------
Total net interest revenue 51,528 47,363 45,405
Other operating revenue 17,290 16,023 15,282
Operating expense 30,792 27,891 28,049
Net loans charged off 3,645 2,117 932
Net income $ 21,238 $ 20,410 $ 19,385
Average assets $1,604,217 $1,463,374 $1,549,928
Average economic capital 90,230 82,810 76,760
Average invested capital 109,320 101,900 95,850
Return on assets 1.32% 1.39% 1.25%
Return on economic capital 23.54 24.65 25.25
Return on average invested capital 19.43 20.03 20.22
Efficiency ratio 44.74 44.00 46.22
32
Table 15 Bank of Arkansas
(Dollars in Thousands)
Years ended December 31,
-----------------------------------------
2007 2006 2005
-----------------------------------------
NIR (expense) from external sources $16,798 $ 10,442 $ 11,100
NIR (expense) from internal sources (6,895) (3,389) (3,603)
------------- ------------- -------------
Total net interest revenue 9,903 7,053 7,497
Other operating revenue 1,276 1,538 1,605
Operating expense 4,343 3,859 3,543
Net loans charged off 1,171 205 53
Net income $ 3,453 $ 2,742 $ 3,376
Average assets $344,164 $202,018 $250,863
Average economic capital 18,280 14,940 11,950
Average invested capital 18,280 14,940 11,950
Return on assets 1.00% 1.36% 1.35%
Return on economic capital 18.89 18.35 28.25
Return on average invested capital 18.89 18.35 28.25
Efficiency ratio 38.85 44.92 38.93
Table 16 Colorado State Bank and Trust
(Dollars in Thousands)
Years ended December 31,
-----------------------------------------
2007 2006 2005
-----------------------------------------
NIR (expense) from external sources $ 74,062 $ 54,722 $ 35,302
NIR (expense) from internal sources (29,555) (18,227) (7,679)
------------- ------------- -------------
Total net interest revenue 44,507 36,495 27,623
Other operating revenue 13,449 11,137 9,912
Operating expense 33,655 26,195 23,507
Net loans charged off / (recovered) 209 (36) 2,517
Net income $ 14,742 $ 13,119 $ 6,991
Average assets $1,733,926 $1,214,161 $783,269
Average economic capital 89,500 59,610 47,440
Average invested capital 144,800 114,910 89,430
Return on assets 0.85% 1.08% 0.89%
Return on economic capital 16.47 22.01 14.74
Return on average invested capital 10.18 11.42 7.82
Efficiency ratio 58.07 54.99 62.63
33
Table 17 Bank of Arizona
(Dollars in Thousands)
Years ended December 31,
-----------------------------------------
2007 2006 2005
-----------------------------------------
NIR (expense) from external sources $40,140 $27,818 $10,855
NIR (expense) from internal sources (20,651) (12,119) (2,796)
------------- ------------- -------------
Total net interest revenue 19,489 15,699 8,059
Other operating revenue 771 532 956
Operating expense 16,764 13,238 8,556
Net loans charged off / (recovered) 1,588 9 (31)
Net income $ 1,166 $ 1,763 $ 386
Average assets $583,156 $404,920 $199,224
Average economic capital 47,740 29,370 7,070
Average invested capital 64,390 46,020 23,720
Return on assets 0.20% 0.44% 0.19%
Return on economic capital 2.44 6.00 5.46
Return on average invested capital 1.81 3.83 1.63
Efficiency ratio 82.74 81.56 94.91
Table 18 Bank of Kansas City
(Dollars in Thousands)
Years ended December 31,
------------------------------------
2007 2006 2005
------------------------------------
NIR (expense) from external sources $ 10,651 *** ***
NIR (expense) from internal sources (6,317) *** ***
------------- ------------- --------
Total net interest revenue 4,334 *** ***
Other operating revenue 2,546 *** ***
Operating expense 11,136 *** ***
Net loans charged off 3 *** ***
Net income $ (2,603) *** ***
Average assets $177,773 *** ***
Average economic capital 7,520 *** ***
Average invested capital 7,520 *** ***
Return on assets (1.46)% *** ***
Return on economic capital (34.61) *** ***
Return on average invested capital (34.61) *** ***
Efficiency ratio 161.86 *** ***
*** Data not applicable or meaningful due to commencement of operations in
November 2006.
34
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 19 Securities
(Dollars in Thousands)
December 31,
-----------------------------------------------------------------------------
2007 2006 2005
------------------------- ------------------------- -------------------------
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 242,274 243,061 240,976 238,869 240,359 238,649
Other debt securities 5,675 5,727 5,714 5,744 2,772 2,781
---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Total $ 247,949 $ 248,788 $ 248,689 $ 246,608 $ 245,125 $ 243,406
---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Available for sale:
U.S. Treasury $ 6,961 $ 7,088 $ 6,014 $ 5,983 $ 16,037 $ 15,827
Municipal and other tax-exempt 26,478 26,578 77,860 78,614 17,153 17,078
Mortgage-backed securities:
U.S. agencies 3,838,219 3,817,939 3,204,592 3,128,138 3,507,047 3,424,356
Other 1,664,537 1,641,189 1,361,373 1,333,533 1,277,161 1,250,701
---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Total mortgage-backed securities 5,502,756 5,459,128 4,565,965 4,461,671 4,784,208 4,675,057
---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Other debt securities 42 41 46 45 124 124
Equity securities and mutual funds 151,689 157,705 101,960 108,748 108,914 113,489
---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Total $5,687,926 $5,650,540 $4,751,845 $4,655,061 $ 4,926,436 $4,821,575
---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Mortgage trading:
Mortgage-backed U.S. agency securities$ 153,920 $ 154,701 $ 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, 2007, investment securities were carried at $248
million and had a fair value of $249 million. Management has the ability and
intent to hold these securities until they mature.
Available for sale securities, which may be sold prior to maturity, are carried
at fair value. Unrealized gains or losses, less deferred taxes, are recorded as
accumulated other comprehensive income in shareholders' equity. The amortized
cost of available for sale securities totaled $5.7 billion at December 31, 2007,
up $936 million compared with the previous year-end. Growth in the securities
portfolio generally consisted of highly-rated, fixed rate mortgage-backed
securities. These securities supplement the Company's earnings and help manage
the balance sheet to a position that is essentially neutral to changes in
interest rates. Mortgage-backed securities represented 97% of total available
for sale securities at year end.
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
2.3 years at December 31, 2007. Management estimates that the expected duration
would extend to approximately 3.1 years assuming a 300 basis point immediate
rate shock. Mortgage-backed securities also have credit risk from delinquency or
default of the underlying loans. The Company mitigates this risk by primarily
investing in securities issued by U.S. government agencies. Principal and
interest payments on the underlying loans are either fully or partially
guaranteed. Credit risk on mortgage-backed securities originated by private
issuers is mitigated by investment in senior tranches with additional collateral
support.
During the first half of 2007, the Company invested $41 million in variable rate
perpetual preferred stocks issued by six major banks and brokerage houses.
Although these issuers remain rated investment grade by the major rating
agencies and all scheduled dividend payments have been made, the fair values of
these stocks declined to $33 million at December 31, 2007. Based on widening
credit spreads, the duration and severity of the reduction in fair value and the
market's negative outlook on the financial services sector for 2008, we
determined that a recovery of fair value to at least the cost basis of these
securities was not expected in the near term. An other-than-temporary-impairment
charge of $8.6 million was recognized through earnings.
Net unrealized losses on available for sale securities totaled $37 million at
December 31, 2007 compared with net unrealized losses of $97 million at December
31, 2006. The aggregate gross amount of unrealized losses at December 31, 2007
totaled $62 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
35
scenarios and time periods. The portfolio does not hold any securities backed by
sub-prime mortgage loans, collateralized debt obligations or collateralized loan
obligations. Approximately $395 million of Alt-A mortgage-backed securities were
held at December 31, 2007 with a total unrealized loss of $6.7 million.
Approximately 79% of the Alt-A backed securities, including all Alt-A
mortgage-backed securities originated in 2006 and 2007, are AAA rated and are
credit enhanced with additional collateral support. Approximately 96% of all of
our Alt-A mortgage-backed securities represent pools of fixed-rate mortgage
loans. 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.
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 plans. 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 $207 million at December 31,
2007. In addition to the investment in the separate accounts, $8 million of the
amount invested was used to pay taxes on the insurance premiums. These taxes
will be recovered over a ten-year period. At December 31, 2007, a $5.9 million
receivable was recorded based on the present value of the taxes. The Company
also has life insurance policies obtained through various bank acquisitions with
an aggregate cash surrender value of $17 million.
Loans
The aggregate loan portfolio before allowance for loan losses totaled $12.0
billion at December 31, 2007, a $1.3 billion or 12% 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 $529 million during 2007 to $6.7 billion
at December 31, 2007. Energy loans totaled $2.0 billion or 16% of total loans.
Outstanding energy loans increased $192 million or 11% during 2007.
Approximately $1.6 billion of energy loans was to oil and gas producers, up from
$1.5 billion at December 31, 2006. 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 $1.0 billion
in Oklahoma, $600 million in Texas and $294 million in Colorado.
The services sector of the loan portfolio totaled $1.7 billion or 14% of total
loans and consists of a large number of loans to a variety of businesses,
including communications, gaming and transportation services. Approximately $1.2
billion of the services category is made up of loans with individual balances of
less than $10 million. Approximately $641 million of the outstanding balance of
services loans is attributed to Texas, $563 million to Oklahoma and $231 million
to New Mexico.
Other notable loan concentrations by primary industry of the borrowers are
presented in Table 20.
36
Table 20 Loans
(In Thousands)
December 31,
-----------------------------------------------------------------
2007 2006 2005 2004 2003
------------ ------------ ------------ ------------- ------------
Commercial:
Energy $1,954,967 $1,763,180 $1,399,417 $1,223,195 $1,231,599
Services 1,721,143 1,555,141 1,425,821 1,190,814 989,906
Wholesale/retail 1,081,172 932,531 793,032 699,318 668,202
Manufacturing 493,185 609,571 514,792 484,423 482,657
Healthcare 680,294 602,273 520,309 424,257 393,929
Agriculture 236,860 321,380 291,858 262,436 228,222
Other commercial and industrial 569,884 424,808 354,706 291,393 342,187
------------ ------------ ------------ ------------- ------------
Total commercial 6,737,505 6,208,884 5,299,935 4,575,836 4,336,702
Commercial real estate:
Construction and land development 1,004,547 889,925 638,366 457,399 436,087
Multifamily 214,388 239,000 204,620 231,985 271,119
Other real estate loans 1,531,537 1,317,615 1,146,916 931,726 922,886
------------ ------------ ------------ ------------- ------------
Total commercial real estate 2,750,472 2,446,540 1,989,902 1,621,110 1,630,092
Residential mortgage:
Secured by 1-4 family residential properties 1,531,296 1,256,259 1,169,331 1,198,918 1,015,643
Residential mortgages held for sale 76,677 64,625 51,666 40,262 56,543
------------ ------------ ------------ ------------- ------------
Total residential mortgage 1,607,973 1,320,884 1,220,997 1,239,180 1,072,186
Consumer 921,297 739,495 629,144 492,841 444,909
---------------------------------------------------- ------------ ------------ ------------ ------------- ------------
Total $12,017,247 $10,715,803 $9,139,978 $7,928,967 $7,483,889
---------------------------------------------------- ------------ ------------ ------------ ------------- ------------
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, 2007, the
outstanding principal balance of these loans totaled $1.7 billion. Substantially
all of these loans are to borrowers with local market relationships. BOK
Financial serves as the agent lender in approximately 28% of its shared national
credits, based on dollars committed. The Company's lending policies generally
avoid loans in which we do not have the opportunity to maintain or achieve other
business relationships with the customer.
Commercial real estate loans totaled $2.8 billion or 23% of the loan portfolio
at December 31, 2007. 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 $304 million or
12% from the previous year end. Growth in commercial real estate loans was
located primarily in Texas and Arizona. Commercial real estate loans were up
$176 million in Texas and $111 million in Arizona. In addition, commercial real
estate loans were up $59 million in Colorado and $30 million in Arkansas. Growth
in commercial real estate loans was partially offset by a $72 million reduction
in Oklahoma.
Construction and land development included $756 million of loans for single
family residential lots and premises, up $57 million, or 8% since December 31,
2006. Approximately $246 million of our single family residential lots and
premises loans are in the Oklahoma market, $188 million are in the Texas market,
$131 million are in the Colorado market and $106 million are in the Arizona
market. Other commercial real estate loans included $539 million in Oklahoma,
$525 million in Texas, $163 million in New Mexico and $153 million in Arizona.
The major components of other commercial real estate loans were retail
facilities - $372 million and office buildings $395 million.
Residential mortgage loans, excluding loans held for sale, totaled $1.5 billion,
up $275 million or 22% since December 31, 2006. At December 31, 2007,
residential mortgage loans included $442 million of home equity loans, $447
million of loans held for business relationship purposes, $422 million of
adjustable rate mortgages and $144 million of loans held for community
development. We have no concentration in sub-prime residential mortgage loans.
Home equity loans increased $14 million or 13% compared to December 31, 2006.
Approximately $61 million of home equity loans represent second lien loans where
the proceeds were used to finance the down payment which was applied against the
first lien loan. Adjustable rate mortgage loans increased $17 million or 17%
over 2006. Our portfolio of adjustable rate mortgage loans is generally
underwritten to prime standards and does not include loans with initial rates
that are below market.
At December 31, 2007, consumer loans included $625 million of indirect
automobile loans. Approximately $444 million of these loans were purchased from
dealers in Oklahoma and $156 million were purchased from dealers in Arkansas.
The remaining $25 million were purchased from dealers in Texas. Indirect
automobile loans grew $160 million during 2007, including $76 million in
Arkansas, $61 million in Oklahoma and $23 million in Texas. Approximately 7% of
the outstanding balance at December 31, 2007 is considered near-prime, which is
defined as loans to borrowers that had poor credit in the past but that have
re-established credit over a period of time. We generally do not originate
sub-prime indirect automobile loans.
37
Table 21 Loan Maturity and Interest Rate Sensitivity at December 31, 2007
(In Thousands)
Remaining Maturities of Selected Loans
--------------------------------------
Total Within 1 Year 1-5 Years After 5 Years
-------------- ------------ ------------ ------------
Loan maturity:
Commercial $6,737,505 $2,161,680 $3,708,261 $ 867,564
Commercial real estate 2,750,472 1,306,617 1,062,338 381,517
--------------------------------------------- -------------- ------------ ------------ ------------
Total $9,487,977 $3,468,297 $4,770,599 $1,249,081
--------------------------------------------- -------------- ------------ ------------ ------------
Interest rate sensitivity for selected loans with:
Predetermined interest rates $3,577,620 $ 488,739 $2,477,201 $611,680
Floating or adjustable interest rates 5,910,357 2,979,558 2,293,398 637,401
--------------------------------------------- -------------- ------------ ------------ ------------
Total $9,487,977 $3,468,297 $4,770,599 $1,249,081
--------------------------------------------- -------------- ------------ ------------ ------------
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 49% at December 31, 2007 from 53% at December
31, 2006. Table 22 presents the distribution of the major loan categories among
our primary market areas.
38
Table 22 Loans by Principal Market Area
(In Thousands)
December 31,
-----------------------------------------------------------------
2007 2006 2005 2004 2003
------------ ------------ ------------ ------------- ------------
Oklahoma:
Commercial $3,219,176 $3,186,085 $3,059,441 $2,784,657 $2,782,616
Commercial real estate 907,034 979,251 859,829 744,724 789,868
Residential mortgage 1,080,483 896,567 842,456 901,538 699,274
Residential mortgage held for sale 76,677 64,625 51,666 40,262 56,543
Consumer 576,070 512,032 466,180 367,947 324,305
------------ ------------ ------------ ------------- ------------
Total Oklahoma $5,859,440 $5,638,560 $5,279,572 $4,839,128 $4,652,606
------------ ------------ ------------ ------------- ------------
Texas:
Commercial $1,985,645 $1,722,627 $1,356,611 $1,120,069 $963,340
Commercial real estate 846,303 670,635 569,921 459,067 477,561
Residential mortgage 275,533 213,801 199,726 191,296 204,481
Consumer 142,958 95,652 89,017 86,732 101,269
------------ ------------ ------------ ------------- ------------
Total Texas $3,250,439 $2,702,715 $2,215,275 $1,857,164 $1,746,651
------------ ------------ ------------ ------------- ------------
New Mexico:
Commercial $473,262 $411,272 $383,325 $354,904 $297,896
Commercial real estate 261,056 257,079 232,564 196,832 175,745
Residential mortgage 84,336 75,159 65,784 63,043 66,179
Consumer 16,105 13,256 15,137 13,260 11,070
------------ ------------ ------------ ------------- ------------
Total New Mexico $834,759 $756,766 $696,810 $628,039 $550,890
------------ ------------ ------------ ------------- ------------
Arkansas:
Commercial $106,328 $95,483 $79,719 $61,934 $63,480
Commercial real estate 124,317 94,395 75,483 74,478 75,452
Residential mortgage 16,393 23,076 13,044 11,238 6,245
Consumer 163,626 86,017 25,659 3,858 2,671
------------ ------------ ------------ ------------- ------------
Total Arkansas $410,664 $298,971 $193,905 $151,508 $147,848
------------ ------------ ------------ ------------- ------------
Colorado:
Commercial $490,373 $451,046 $270,108 $191,459 $209,134
Commercial real estate 252,537 193,747 133,537 118,134 111,466
Residential mortgage 26,556 15,812 21,918 31,693 39,464
Consumer 16,457 26,591 27,871 21,044 5,594
------------ ------------ ------------ ------------- ------------
Total Colorado $785,923 $687,196 $453,434 $362,330 $365,658
------------ ------------ ------------ ------------- ------------
Arizona:
Commercial $157,341 $96,453 $50,489 $- $-
Commercial real estate 318,170 207,035 115,697 27,875 -
Residential mortgage 46,269 31,280 26,102 - -
Consumer 5,522 5,947 5,280 - -
------------ ------------ ------------ ------------- ------------
Total Arizona $527,302 $340,715 $197,568 $27,875 $-
------------ ------------ ------------ ------------- ------------
Kansas:
Commercial $305,380 $245,918 $100,242 $62,813 $20,236
Commercial real estate 41,055 44,398 2,871 - -
Residential mortgage 1,726 564 301 110 -
Consumer 559 - - - -
------------ ------------ ------------ ------------- ------------
Total Kansas $348,720 $290,880 $103,414 $62,923 $20,236
------------ ------------ ------------ ------------- ------------
Total BOK Financial loans $12,017,247 $10,715,803 $9,139,978 $7,928,967 $7,483,889
------------ ------------ ------------ ------------- ------------
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 $556 million at
December 31, 2007. 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.
39
Table 23 Off-Balance Sheet Credit Commitments
(In Thousands)
As of December 31,
2007 2006 2005 2004 2003
-------------- ------------- ------------ ------------ -------------
Loan commitments $5,345,736 $5,318,257 $4,349,114 $3,459,425 $2,964,694
Standby letters of credit 555,758 527,627 558,907 414,228 374,550
Mortgage loans sold with recourse 392,534 329,713 248,150 32,134 103,443
------------------------------------ -------------- ------------- ------------ ------------ -------------
The Company also has off-balance sheet commitments for residential mortgage
loans sold with full or partial recourse. These loans consist of first lien,
fixed rate residential mortgage loans originated under various community
development programs and sold to U.S. government agencies. These loans were
underwritten to standards approved by the agencies, including full
documentation. However, these loans have a higher risk of delinquency and losses
given default than traditional residential mortgage loans. A separate recourse
reserve is maintained as part of other liabilities. At December 31, 2007, the
principal balance of loans sold subject to recourse obligations totaled $393
million and the reserve for credit risk from these loans totaled $3.5 million.
Losses incurred during 2007 totaled $1.1 million.
Derivatives with Credit Risk
The Company offers programs that permit its customers to hedge various risks,
including fluctuations in energy, cattle and other agricultural product prices,
interest rates and foreign exchange rates, or to take positions in derivative
contracts. Each of these programs work essentially the same way. Derivative
contracts are executed between the customers and BOK Financial. Offsetting
contracts are executed between the Company and selected counterparties to
minimize the risk to us of changes in commodity prices, interest rates or
foreign exchange rates. The counterparty contracts are identical to the customer
contracts, except for a fixed pricing spread or a fee paid to us as compensation
for administrative costs, credit risk and profit.
The Company adopted Statement of Financial Accounting Standards No. 157, "Fair
Value Measurement" ("FAS 157") as of January 1, 2007. FAS 157 established a
single authoritative definition of fair value, set out a framework for measuring
fair value and required additional disclosures about fair value measurements. It
also nullified EITF guidance that prohibited recognition of gains at inception
for derivative transactions whose fair value is estimated by modeling.
Beginning January 1, 2007, the fair value of customer derivative assets and
liabilities fully reflects the discounted cash flows based on forward curves,
volatilities, credit risks and other market-observable inputs. Changes in the
net fair values of customer derivative contracts are a component of Brokerage
and Trading Revenue. Retained earnings were charged $1.1 million ($679 thousand
after tax) for the initial adoption of FAS 157 on the fair value of customer
derivative assets and liabilities.
The customer derivative programs create credit risk for potential amounts due to
the Company from its customers and from the counterparties. Customer credit risk
is monitored through existing credit policies and procedures. The effects of
changes in commodity prices, interest rates or foreign exchange rates are
evaluated across a range of possible options to determine the maximum exposure
we are willing to have individually to any customer. Customers may also be
required to provide margin collateral to further limit our credit risk.
Counterparty credit risk is evaluated through existing policies and procedures.
This evaluation considers the total relationship between BOK Financial and each
of the counterparties. Individual limits are established by management, approved
by Credit Administration and reviewed by the Asset / Liability Committee. Margin
collateral is required if the exposure between the Company and any counterparty
exceeds established limits. Based on declines in the counterparties' credit
ratings, these limits are reduced and additional margin collateral is required.
A deterioration of the credit standing of one or more of the customers or
counterparties to these contracts may result in BOK Financial recognizing a loss
as the fair value of the affected contracts may no longer move in tandem with
the offsetting contracts. This 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, 2007, the fair
values of derivative contracts reported as assets under these programs totaled
$501 million. This included energy contracts with fair values of $399 million,
interest rate contracts with fair values of $74 million and foreign exchange
contracts with fair values of $20 million. The aggregate fair values of
derivative contracts reported as liabilities totaled $513 million. Approximately
97% of the fair value of asset contracts was with customers. The credit risk of
these contracts is generally backed by energy production or other collateral.
The remaining 3% 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 $130 million.
40
Our maximum net exposure at December 31, 2007 was to SemGroup, LP. Mr. Thomas S.
Kivisto, President and CEO of SemGroup, LP is a member of BOK Financial's board
of directors. Our exposure to SemGroup, LP consists primarily of option
contracts to sell oil and natural gas in varying monthly quantities over the
next seven months. The pricing, collateral and other terms of these contracts
are consistent with terms we offer to similarly risk-graded customers.
Summary of Loan Loss Experience
BOK Financial maintains separate reserves for loan losses and reserves for
off-balance sheet credit risk. Combined, these reserves totaled $148 million or
1.24% of outstanding loans at December 31, 2007 and $130 million or 1.22% of
outstanding loans at December 31, 2006.
The reserve for loan losses, which is available to absorb losses inherent in the
loan portfolio, totaled $127 million at December 31, 2007 compared to $109
million at December 31, 2006. These amounts represented 1.06% and 1.03% of
outstanding loans, excluding loans held for sale, at December 31, 2007 and 2006,
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
134% of outstanding balance of nonperforming loans at year-end 2007 compared to
305% at year-end 2006. Nonperforming loans at December 31, 2007 totaled $95
million compared with $36 million at the previous year-end. Net loans charged
off during 2007 increased to $21 million in 2007 compared to $12 million in the
previous year. This represents the first increase in net loans charged off since
2003. The ratio of net loans charged off to average outstanding loans was 0.19%
for 2007 compared with 0.13% in 2006. Net commercial loan and commercial real
estate loan charge-offs increased $4.7 million and $1.9 million, respectively,
compared with last year. Consumer loan net charge-offs, which includes deposit
account overdraft losses, increased $1.7 million. Table 24 provides statistical
information regarding the reserve for loan losses for the past five years.
41
Table 24 Summary of Loan Loss Experience
(Dollars in Thousands)
Years ended December 31,
-------------------------------------------------------------------
Reserve for loan losses: 2007 2006 2005 2004 2003
-------------------------------------------------------------------
Beginning balance $109,497 $103,876 $108,618 $114,784 $103,851
Loans charged off:
Commercial 14,380 10,517 9,670 13,921 16,331
Commercial real estate 1,795 87 2,619 971 88
Residential mortgage 1,709 1,265 1,212 1,465 1,721
Consumer 13,733 12,127 12,257 13,328 13,335
----------------------------------------------------------------------------------------------------------------------
Total 31,617 23,996 25,758 29,685 31,475
----------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 4,534 5,405 4,071 2,283 887
Commercial real estate 110 327 117 30 53
Residential mortgage 309 161 180 243 83
Consumer 5,558 5,638 5,176 5,171 5,102
----------------------------------------------------------------------------------------------------------------------
Total 10,511 11,531 9,544 7,727 6,125
----------------------------------------------------------------------------------------------------------------------
Net loans charged off 21,106 12,465 16,214 21,958 25,350
Provision for loan losses 34,758 18,086 10,401 15,792 34,000
Additions due to acquisitions 3,528 - 1,071 - 2,283
----------------------------------------------------------------------------------------------------------------------
Ending balance $126,677 $109,497 $103,876 $108,618 $114,784
----------------------------------------------------------------------------------------------------------------------
Reserve for off-balance sheet credit losses:
Beginning balance $20,890 $20,574 $18,502 $13,855 $12,219
Provision for off-balance sheet credit losses (37) 316 2,040 4,647 1,636
Additions due to acquisitions - - 32 - -
----------------------------------------------------------------------------------------------------------------------
Ending balance $20,853 $20,890 $20,574 $18,502 $13,855
----------------------------------------------------------------------------------------------------------------------
Total provision for credit losses $34,721 $18,402 $12,441 $20,439 $35,636
----------------------------------------------------------------------------------------------------------------------
Reserve for loan losses to loans outstanding at
year-end (1) 1.06% 1.03% 1.14% 1.38% 1.55%
Net charge-offs to average loans (1) 0.19 0.13 0.19 0.29 0.36
Total provision for credit losses to average
loans (1) 0.31 0.19 0.15 0.27 0.50
Recoveries to gross charge-offs 33.24 48.05 37.05 26.03 19.46
Reserve for off-balance sheet credit losses to
off-balance sheet credit commitments 0.35% 0.36% 0.42% 0.48% 0.41%
Combined reserves for credit losses to loans
outstanding at year-end (1) 1.24% 1.22% 1.37% 1.61% 1.73%
----------------------------------------------------------------------------------------------------------------------
Problem Loans:
Loans past due (90 days) $ 5,575 $ 5,945 $ 8,708 $ 7,649 $ 14,944
Nonaccrual(2) 84,290 26,055 25,162 52,660 52,681
Renegotiated(3) 10,394 9,802 6,379 4,689 2,463
----------------------------------------------------------------------------------------------------------------------
Total $100,259 $ 41,802 $ 40,249 $ 64,998 $ 70,088
----------------------------------------------------------------------------------------------------------------------
Foregone interest on nonaccrual loans (2) $ 3,011 $ 2,130 $ 2,515 $ 4,617 $ 4,821
----------------------------------------------------------------------------------------------------------------------
(1) Excludes residential mortgage loans held for sale.
(2) Interest collected and recognized on nonaccrual loans was not significant
in 2007 and previous years disclosed.
(3) Includes residential mortgage loans guaranteed by agencies of the U.S.
government. These loans have been modified to extend payment terms and/or
reduce interest rates to current market.
The Company considers the credit risk from loan commitments and letters of
credit in its evaluation of the adequacy of the reserve for loan losses. A
separate reserve for off-balance sheet credit risk is maintained. Table 24
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, 2007, specific
impairment reserves totaled $4.4 million on total impaired loans of $74 million.
Specific impairment reserves were $1.7 million at December 31, 2006.
42
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,
2007 and 2006, the ranges of potential losses for the more significant factors
were:
December 31, 2007 December 31, 2006
------------------ -----------------
General economic conditions $3.8 million to $7.6 million $5.2 million to $9.1 million
Concentration in large loans $1.4 million to $2.8 million $1.4 million to $2.8 million
Nonspecific reserves attributed to general economic conditions had been steadily
decreasing through the third quarter of 2007 based on the overall strength of
the economy in our markets. These reserves began to increase in the fourth
quarter as weakness in the economy became more apparent.
Allocation of the loan loss reserve to the major loan categories is presented in
Table 25.
The provision for credit losses totaled $35 million, up $16 million over 2006.
Factors considered in determining the provision for credit losses included
trends in net losses and nonperforming loans during the year, the application of
statistical migration factors to loan growth during the year and concentrations
in commercial real estate and residential homebuilder loans. In addition, the
outstanding balances of criticized and classified loans and potential problem
loans were up over 2006.
Table 25 Loan Loss Reserve Allocation
(Dollars in Thousands)
December 31,
-------------------------------------------------------------------------------------------------
2007 2006 2005 2004 2003
------------------ ------------------- ------------------- ------------------- ------------------
% 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 $49,961 56.07% $44,151 58.29% $43,915 58.32% $52,325 58.00% $58,993 58.39%
Commercial real
estate 40,807 22.89 30,838 22.97 25,529 21.89 21,317 20.55 16,395 21.95
Residential mortgage 6,156 13.38 4,663 11.80 5,302 12.87 5,904 15.20 6,797 13.67
Consumer 9,962 7.66 11,784 6.94 10,929 6.92 12,034 6.25 16,132 5.99
Nonspecific allowance 19,791 - 18,061 - 18,201 - 17,038 - 16,467 -
-------------------------- --------- -------- --------- --------- --------- --------- --------- --------- --------- --------
Total $126,677 100.00% $109,497 100.00% $103,876 100.00% $108,618 100.00% $114,784 100.00%
-------------------------- --------- -------- --------- --------- --------- --------- --------- --------- --------- --------
(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 $104 million at
December 31, 2007 and $44 million at December 31, 2006, is presented in Table
26. Nonperforming assets included nonaccrual and renegotiated loans and excluded
loans 90 days or more past due but still accruing interest. Total nonperforming
assets were 0.87% of period-end loans and repossessed assets at December 31,
2007, up from 0.42% at December 31, 2006. This represents a return of the
nonperforming assets to outstanding loans and repossessed assets to 2002 and
2003 levels after near historic lows over the past three years.
Nonaccrual loans totaled $84 million at December 31, 2007 and $26 million at
December 31, 2006. Newly identified nonaccrual loans totaled $81 million during
the year, including $43 million identified in the fourth quarter. Nonaccrual
loans also increased $7.8 million from the acquisition of First United Bank.
Nonaccrual loans decreased $16 million for loans charged off and foreclosed, and
$15 million for cash payments received. Approximately $8.4 million of nonaccrual
loans are subject to the First United Bank sellers' escrow.
Nonaccrual commercial loans totaled $43 million at December 31, 2007 and
consisted primarily of loans in the services and manufacturing sectors of the
portfolio. None of the nonaccrual commercial loans exceeded $10 million.
Approximately $29 million of nonaccrual commercial loans are to borrowers in the
Oklahoma market, $5.4 million are in the New Mexico market and $4.8 million are
in the Colorado market.
Nonaccrual commercial real estate loans totaled $25 million at December 31,
2007. Approximately $13 million are loans secured by single-family residential
properties or lots, including $5.9 million in Arizona and $3.8 million in
Colorado. Other significant nonaccrual commercial real estate loans included
$5.3 million of retail facilities in New Mexico and $3.1 million of multifamily
residential properties in Arizona.
43
In addition to nonaccrual loans, nonperforming assets included $11 million of
renegotiated loans and $9.5 million of real estate and other repossessed assets.
Renegotiated loans consisted of residential mortgage loans and indirect
automobile loans whose original terms have been modified. Approximately $7.6
million of renegotiated loans are residential mortgage loans guaranteed by
agencies of the U.S. government. Approximately $2.7 million of real estate and
other repossessed assets are subject to the First United Bank sellers' escrow.
Table 26 Nonperforming Assets
(Dollars in Thousands)
December 31,
-----------------------------------------------------------------
2007 2006 2005 2004 2003
----------- ------------- ------------ ------------- ------------
Nonperforming loans
Nonaccrual loans:
Commercial $ 42,981 $10,737 $ 11,673 $33,195 $41,360
Commercial real estate 25,319 4,771 5,370 10,144 2,311
Residential mortgage 15,272 10,325 7,347 8,612 7,821
Consumer 718 222 772 709 1,189
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Total nonaccrual loans 84,290 26,055 25,162 52,660 52,681
Renegotiated loans(3) 10,394 9,802 6,379 4,689 2,463
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Total nonperforming loans 94,684 35,857 31,541 57,349 55,144
Other nonperforming assets 9,475 8,486 8,476 3,763 7,186
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Total nonperforming assets $104,159 $44,343 $ 40,017 $61,112 $62,330
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Nonaccrual loans by principal market:
Oklahoma $ 47,977 $17,683 $ 16,857 $37,779 $33,865
Texas 4,983 6,096 5,475 2,223 12,972
New Mexico 11,118 871 928 1,463 1,891
Arkansas 1,635 267 - 2,717 3,692
Colorado(4) 9,222 1,138 1,902 8,478 261
Arizona 9,355 - - - -
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Total nonaccrual loans $ 84,290 $26,055 $25,162 $52,660 $52,681
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Nonaccrual loans by loan portfolio sector:
Commercial:
Energy $ 529 $ 535 $ 75 $ 276 $ 7,303
Manufacturing 9,915 101 1,113 13,747 9,725
Wholesale / retail 3,792 2,457 3,036 4,604 8,610
Agriculture 380 93 268 365 4,459
Services 25,468 5,759 5,213 13,274 8,700
Healthcare 2,301 1,600 1,942 743 2,192
Other 596 192 26 186 371
----------- ------------- ------------ ------------- ------------
Total commercial 42,981 10,737 11,673 33,195 41,360
Commercial real estate:
Land development and construction 13,466 2,031 2,081 6,706 -
Multifamily 3,998 320 668 1,235 23
Other commercial real estate 7,855 2,420 2,621 2,203 2,288
----------- ------------- ------------ ------------- ------------
Total commercial real estate 25,319 4,771 5,370 10,144 2,311
Residential mortgage 15,272 10,325 7,347 8,612 7,821
Consumer 718 222 772 709 1,189
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Total nonaccrual loans $84,290 $26,055 $25,162 $52,660 $ 52,681
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Ratios:
Reserve for loan losses to nonperforming loans 133.79% 305.37% 329.34% 189.40% 208.15%
Nonperforming loans to period-end loans(2) 0.79 0.34 0.35 0.73 0.74
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
Loans past due (90 days)(1) $5,575 $ 5,945 $ 8,708 $ 7,649 $14,944
---------------------------------------------------- ----------- ------------- ------------ ------------- ------------
(1) Includes residential mortgages guaranteed by
agencies of the U.S. Government. $ 1,017 $ 2,233 $ 2,021 $ 2,308 $ 4,132
(2) Excludes residential mortgage loans held for
sale.
(3) Includes residential mortgage loans $ 7,550 $ 5,747 $ 3,577 $ 2,131 $ 1,035
guaranteed by agencies of the U.S. government.
These loans have been modified to extend payment
terms and/or reduce interest rates to current
market.
(4) Includes loans subject to First United Bank $ 8,412 $ - $ - $ - $ -
sellers escrow.
44
The loan review process also identified loans that possess more than the normal
amount of risk due to deterioration in the financial condition of the borrower
or the value of the collateral. Because the borrowers are still performing in
accordance with the original terms of the loan agreements, and no loss of
principal or interest is anticipated, these loans were not included in
Nonperforming Assets. Known information does, however, cause management concern
as to the borrowers' ability to comply with current repayment terms. These
potential problem loans totaled $49 million at December 31, 2007 and $22 million
at December 31, 2006. The current composition of potential problem loans by
primary industry included real estate - $20 million, healthcare - $19 million,
manufacturing - $4.2 million and services - $4.0 million. Potential problem real
estate loans consisted primarily of loans to residential builders in the Arizona
market of $12 million.
Deposits
Deposit accounts represent our primary funding source. Average deposits
represented approximately 66% of total liabilities and capital for 2007, down
from 68% for 2006. The decrease in average deposits relative to other funding
sources is due largely to the structuring of our balance sheet to be relatively
neutral to changes in interest rates. Other borrowed funds were up during 2007
to fund a $447 million increase in average securities to implement this interest
rate risk management strategy. 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
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 $12.6 billion for 2007, a $1.2 billion or 11% increase
over 2006. Growth in average deposits included $503 million of deposits acquired
from Worth National Bank and First United Bank in the second quarter of 2007.
Table 27 Maturity of Domestic CDs and Public
Funds in Amounts of $100,000 or More
(In Thousands)
December 31,
---------------------------
2007 2006
---------------------------
Months to maturity:
3 or less $ 820,339 $ 713,463
Over 3 through 6 580,427 517,766
Over 6 through 12 456,103 809,212
Over 12 584,180 603,291
-------------------------------------------------------
Total $2,441,049 $2,643,732
--------------------------------------------------------
Interest-bearing transaction deposit accounts continued to grow in 2007, up $1.1
billion or 20% over 2006. Time deposits increased $289 million or 7%. At the
same time, average demand deposit accounts decreased $152 million compared with
last year. Core deposits, which we define as deposits of less than $100,000,
excluding public funds and brokered deposits, increased 15% to $6.4 billion.
Accounts with balances in excess of $100,000 totaled $5.0 billion, an increase
of $286 million or 6%. Average brokered deposits and public funds, which totaled
$1.2 billion, were up $110 million over 2006.
Average commercial banking deposits were up $431 million or 12% over last year.
The average balance of commercial banking deposits for 2007 was $4.2 billion.
Commercial deposit growth was primarily centered in Oklahoma and Texas. Consumer
deposits averaged $5.3 billion for 2007, up $315 million or 6% over 2006.
Average consumer deposits were up $137 million or 30% in the Colorado market,
including First United Bank deposits. In addition, consumer deposit account
balances increased $87 million in Oklahoma, $51 million in Texas and $41 million
in New Mexico. Wealth management deposit accounts averaged $1.6 billion for
2007, a $235 million increase over 2006. Approximately $105 million of the
increase was in the Colorado market. The remaining increase was distributed
primarily in Oklahoma and Texas.
The distribution of deposit accounts among our principal markets is shown in
Table 28.
45
Table 28 Deposits by Principal Market Area
(In Thousands)
December 31,
-------------------------------------------------------------------
2007 2006 2005 2004 2003
--------------------------------------------------------------------
Oklahoma:
Demand $ 936,160 $ 915,101 $1,003,284 $1,095,228 $1,025,483
Interest-bearing:
Transaction 3,935,909 3,456,322 3,002,610 2,291,089 2,246,675
Savings 80,467 83,017 85,837 87,597 98,611
Time 2,426,822 2,595,890 2,564,337 2,505,849 2,403,293
--------------------------------------------------------------------
Total interest-bearing 6,443,198 6,135,229 5,652,784 4,884,535 4,748,579
--------------------------------------------------------------------
Total Oklahoma $7,379,358 $7,050,330 $6,656,068 $5,979,763 $5,774,062
--------------------------------------------------------------------
Texas:
Demand $ 738,105 $ 640,159 $ 615,732 $ 617,808 $ 421,292
Interest-bearing:
Transaction 2,050,872 1,688,131 1,535,570 1,119,893 1,213,777
Savings 34,618 24,074 27,398 30,331 35,702
Time 800,460 829,255 735,731 571,993 505,463
--------------------------------------------------------------------
Total interest-bearing 2,885,950 2,541,460 2,298,699 1,722,217 1,754,942
--------------------------------------------------------------------
Total Texas $3,624,055 $3,181,619 $2,914,431 $2,340,025 $2,176,234
--------------------------------------------------------------------
New Mexico:
Demand $ 93,923 $ 124,088 $ 129,289 $ 136,599 $ 106,050
Interest-bearing:
Transaction 490,227 432,342 381,099 320,118 370,294
Savings 15,146 16,417 17,839 17,885 20,728
Time 486,868 490,460 453,314 411,939 317,924
--------------------------------------------------------------------
Total interest-bearing 992,241 939,219 852,252 749,942 708,946
--------------------------------------------------------------------
Total New Mexico $ 1,086,164 $ 1,063,307 $ 981,541 $ 886,541 $ 814,996
--------------------------------------------------------------------
Arkansas:
Demand $ 9,755 $ 12,589 $ 10,429 $ 14,489 $ 16,351
Interest-bearing:
Transaction 22,519 17,905 22,354 26,882 28,411
Savings 883 1,010 1,058 1,434 1,341
Time 40,692 57,446 75,034 99,677 105,598
--------------------------------------------------------------------
Total interest-bearing 64,094 76,361 98,446 127,993 135,350
--------------------------------------------------------------------
Total Arkansas $ 73,849 $ 88,950 $ 108,875 $ 142,482 $ 151,701
--------------------------------------------------------------------
Colorado:
Demand $ 60,250 $ 48,756 $ 61,647 $ 62,995 $ 79,424
Interest-bearing:
Transaction 504,116 328,254 258,668 189,106 162,651
Savings 23,806 12,632 17,772 19,092 18,347
Time 539,523 485,200 264,020 54,394 42,448
--------------------------------------------------------------------
Total interest-bearing 1,067,445 826,086 540,460 262,592 223,446
--------------------------------------------------------------------
Total Colorado $1,127,695 $ 874,842 $ 602,107 $ 325,587 $ 302,870
--------------------------------------------------------------------
Arizona:
Demand $ 29,807 $ 39,352 $ 45,567 $ - $ -
Interest-bearing:
Transaction 82,682 73,729 56,994 - -
Savings 1,435 1,978 4,111 - -
Time 11,603 6,574 5,624 - -
--------------------------------------------------------------------
Total interest-bearing 95,720 82,281 66,729 - -
--------------------------------------------------------------------
Total Arizona $ 125,527 $ 121,633 $ 112,296 $ - $ -
--------------------------------------------------------------------
Kansas:
Demand $ 7,946 $ 14 $ - $ - $ -
Interest-bearing:
Transaction 10,014 287 - - -
Savings 13 2 - - -
Time 24,670 5,721 - - -
--------------------------------------------------------------------
Total interest-bearing 34,697 6,010 - - -
--------------------------------------------------------------------
Total Kansas $ 42,643 $ 6,024 $ - $ - $ -
--------------------------------------------------------------------
Total BOK Financial deposits $13,459,291 $12,386,705 $11,375,318 $9,674,398 $9,219,863
--------------------------------------------------------------------
46
Borrowings and Capital
Parent Company
BOK Financial (parent company) has a $188 million unsecured revolving line of
credit with certain commercial banks that matures in December 2010. The
outstanding principal balance of this credit agreement was $50 million at
December 31, 2007. 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 0.375%. The base rate is defined as the greater
of the daily federal funds rate plus 0.5% 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, 2007.
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 $93 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 $75 million
under this policy.
Equity capital for BOK Financial increased $214 million to $1.9 billion during
2007. Retained earnings, net income less cash dividends paid, provided $167
million of this increase. Accumulated other comprehensive losses decreased $42
million during 2007. Lower net unrealized losses on available for sale
securities reduced accumulated other comprehensive losses $36 million and the
after-tax effect of adjusting the prepaid pension expense asset as required by
FAS 158 decreased accumulated other comprehensive losses $4.4 million. Employee
stock option transactions increased equity capital $24 million during 2007 and
treasury stock purchases reduced capital $17 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, 618 thousand shares
have been repurchased by the Company for $30.7 million. During 2007, 340
thousand shares were repurchased for $17.4 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 re-pricing periods and collateral requirements.
During 2007, Bank of Oklahoma issued $250 million of subordinated debt due May
15, 2017. Interest on this debt is based on a fixed rate of 5.75% through May
14, 2012 and on a floating rate of three-month LIBOR plus 0.69% thereafter. The
proceeds of this debt, which qualifies as Tier 2 regulatory capital, was used to
fund the Worth National Bank and First United Bank acquisitions and to fund
continued asset growth.
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 losses is 5.56%. The proceeds of this debt were used to
repay $95 million of BOK Financial's unsecured revolving line of credit and to
provide additional capital to support asset growth. During 2006, a $150 million
notional amount interest rate swap was designated as a hedge of changes in the
fair value of the subordinated debt due to
47
changes in interest rates. The Company receives a fixed rate of 5.257% and pays
a variable rate based on 1-month LIBOR. The fair value hedging relationship was
discontinued and the swap was terminated in April 2007.
Off-Balance Sheet Arrangements
During the third quarter of 2007, Bank of Oklahoma agreed to guarantee rents
totaling $28.4 million over 10 years to the City of Tulsa ("City") as owner of a
building immediately adjacent to the bank's main office. These rents are due for
space currently rented by third-party tenants in the building. In return for
this guarantee, Bank of Oklahoma will receive 80% of net rent as defined in an
agreement with the City over the next 10 years from currently vacant space in
the same building. The maximum amount that Bank of Oklahoma may receive under
this agreement is $4.5 million. The fair value of this agreement at inception is
zero and no asset or liability is currently recognized in the Company's
financial statements.
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. This guarantee expired in the fourth quarter of 2007.
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, 2007.
Table 29 Contractual Obligations as of December 31, 2007
(In Thousands)
Less Than 1 to 3 4 to 5 More Than
1 Year Years Years 5 Years Total
-------------- ------------- ------------ ------------ -------------
Time deposits $1,002,328 $ 939,092 $ 368,269 $ 20,090 $2,329,779
Other borrowings 903,528 322,444 11,033 10,529 1,247,534
Subordinated debentures 21,875 43,750 43,750 480,417 589,792
Operating lease obligations 16,447 30,088 20,435 31,624 98,594
Derivative contracts 301,908 180,017 24,249 1,543 507,717
Data processing contracts 8,685 17,111 15,682 5,117 46,595
------------------------------------ -------------- ------------- ------------ ------------ -------------
Total $2,254,771 $1,532,502 $ 483,418 $549,320 $4,820,011
------------------------------------ -------------- ------------- ------------ ------------ -------------
Loan commitments $ 5,345,736
Standby letters of credit 555,758
Mortgage loans sold with recourse 392,534
Alternative investment commitments 30,651
Unfunded third-party private equity commitments 27,645
Deferred compensation and stock-based compensation obligations 26,582
Payments on time deposits and other borrowed funds include interest which has
been calculated from rates at December 31, 2007. 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.
48
The Company's obligation to repurchase mortgage loans sold with recourse is
subject to performance conditions. The total amount does not necessarily
represent future cash requirements.
Obligations under derivative contracts are used in customer hedging programs. As
previously discussed, we have entered into derivative contracts which are
expected to substantially offset the cash payments due on these obligations.
At December 31, 2007, the Company has funded $30.4 million and has commitments
to fund an additional $30.7 million in various unrelated alternative
investments. Alternative investments generally consist of limited partnership
interests in or loans to entities that invest in distressed real estate loans
and properties, energy development, venture capital and other activities. The
Company is prohibited by banking regulations from controlling or actively
managing the activities of these investments.
The Company has $27.6 million in unfunded third-party equity commitments through
its BOK Financial Private Equity Funds. These commitments generally reflect
customer investment obligations.
The Company has compensation and employment agreements with our President and
Chief Executive Officer. Collectively, these agreements provide, among other
things, that all unvested stock-based compensation shall fully vest upon his
termination, subject to certain conditions. These agreements provide for
settlement in cash or other assets. We currently have recognized a $18.3 million
liability for these plans. This liability would increase to $19.9 million if all
awards were fully vested. We also have obligations with respect to employee and
executive benefit plans. See Notes 12 and 13 to the Consolidated Financial
Statements.
Recently Issued Accounting Standards
Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
("FAS 157")
BOK Financial adopted Statement of Financial Accounting Standards No. 157, "Fair
Value Measurement" (FAS 157") as of January 1, 2007. FAS 157 established a
single authoritative definition of fair value, set out a framework for measuring
fair value and required additional disclosures about fair value measurements. It
also nullified EITF guidance that prohibited recognition of gains at inception
for derivative transactions whose fair value is estimated by modeling.
Beginning January 1, 2007, the fair value of customer derivative assets and
liabilities fully reflects the discounted cash flows based on forward curves,
volatilities, credit risks and other market-observable inputs. Changes in the
net fair values of customer derivative contracts are a component of Brokerage
and Trading Revenue. Retained earnings were charged $1.1 million, or $679
thousand, net of taxes, for effect of the initial adoption of FAS 157 on the
fair value of customer derivative assets and liabilities. FAS 157 did not have a
significant effect on other fair value measurements in the Company's financial
statements.
Statement of Financial Accounting Standards No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("FAS 159")
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities" ("FAS 159") during the first quarter of 2007. The purpose
of FAS 159 is to increase the use of fair value measurements in financial
statements and to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. FAS 159 permits financial statement issuers an option to
measure eligible financial assets and financial liabilities at fair value.
Unrealized gains and losses on assets and liabilities measured at fair value are
reported in earnings. The option to measure eligible assets and liabilities is
applied on an instrument-by-instrument basis, is irrevocable and is applied to
the entire instrument. FAS 159 is effective as of the beginning of the first
fiscal year that begins after November 15, 2007 and may be adopted as of a
fiscal year that begins on or before November 15, 2007, subject to certain
conditions. The Company will adopt FAS 159 as required on January 1, 2008.
BOK Financial expects to elect the fair value option for certain certificates of
deposit. These deposits are either currently designated as hedged or had
previously been designated as hedged, but no longer meet the correlation
requirements of Statement of Financial Accounting Standards No. 133. Management
believes that election of the fair value option for these items more accurately
portrays their economic value. Effective January 1, 2008, retained earnings will
be decreased by $202 thousand to recognize the adjustment of these certificates
to their fair values, net of deferred income taxes.
Management is also evaluating election of the fair value option for certain
other certificates of deposit. If elected, the transition adjustment for the
fair value option is not expected to have a significant effect on the financial
statements.
49
Statement of Financial Accounting Standards No. 141 (Revised), "Business
Combinations" ("FAS 141R")
The Financial Accounting Standards Board issued FAS 141R during 2007 to replace
Statement of Financial Accounting Standards No. 141, "Business Combinations."
FAS 141R applies to all transactions or other events in which an entity obtains
control over one or more businesses, including combinations achieved without the
transfer of consideration. FAS 141R retains the fundamental requirement that all
business combinations must be accounted for under the acquisition or purchase
method of accounting. All assets acquired, including identifiable intangible
assets, liabilities assumed and any non-controlling interests must be recognized
at the acquisition-date fair values. Costs incurred to effect the acquisition
and restructuring costs that the acquirer is expected but not obligated to incur
must be recognized separately from the business combination. Contingent assets
and liabilities generally will be recognized at their acquisition-date fair
values. Changes in the recognized amounts of contingent assets and liabilities
will be recognized in post acquisition-date earnings. FAS 141R will have a
significant effect on the Company's financial statements of business
combinations completed after January 1, 2009.
Statement of Financial Accounting Standards No. 160,"Non-controlling Interest in
Consolidated Financial Statements - An Amendment of ARB No. 51" ("FAS 160")
The Financial Accounting Standards Board issued FAS 160 during 2007 to improve
accounting for non-controlling or minority interest, which is defined as the
portion of equity of a subsidiary not attributable, directly or indirectly, to a
parent. FAS 160 applies to all for-profit entities that prepare consolidated
financial statements, but only affects entities that have an outstanding
non-controlling interest in one or more subsidiaries. Ownership interests held
by parties other than the parent shall be reported in equity, but separate from
the parent's equity. The amount of consolidated net income attributed to the
non-controlling interest and the parent shall be separately disclosed. FAS 160,
which will be adopted on January 1, 2009, is not expected to have a significant
impact on the Company's financial statements.
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109" ("FIN 48")
FIN 48 was issued in 2006 to clarify accounting for uncertainty in income taxes
recognized in accordance with FASB Statement No. 109. 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. FIN 48 also requires tabular
reconciliation of unrecognized tax benefits and changes in unrecognized tax
benefits and disclosure of the nature of uncertainties that are expected to
significantly increase or decrease within twelve months. The Company recognized
a $609 thousand decrease of retained earnings upon adoption of FIN 48 effective
January 1, 2007.
Forward-Looking Statements
This report contains forward-looking statements that are based on management's
beliefs, assumptions, current expectations, estimates, and projections about BOK
Financial, the financial services industry and the economy in general. Words
such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans,"
"projects," variations of such words and similar expressions are intended to
identify such forward-looking statements. Management judgments relating to and
discussion of the provision and reserves for loan losses and off-balance sheet
credit losses, reserves for uncertain tax positions and accruals for loss
contingencies involve judgments as to expected events and are inherently
forward-looking statements. Assessments that BOK Financial's acquisitions and
other growth endeavors will be profitable are necessary statements of belief as
to the outcome of future events, based in part on information provided by others
that BOK Financial has not independently verified. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions that are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and outcomes may
materially differ from what is expressed, implied, or forecasted in such
forward-looking statements. Internal and external factors that might cause such
a difference include, but are not limited to: (1) the ability to fully realize
expected cost savings from mergers within the expected time frames, (2) the
ability of other companies on which BOK Financial relies to provide goods and
services in a timely and accurate manner, (3) changes in interest rates and
interest rate relationships, (4) demand for products and services, (5) the
degree of competition by traditional and nontraditional competitors, (6) changes
in banking regulations, tax laws, prices, levies, and assessments, (7) the
impact of technological advances and (8) trends in customer behavior as well as
their ability to repay loans. BOK Financial and its affiliates undertake no
obligation to update, amend, or clarify forward-looking statements, whether as a
result of new information, future events or otherwise.
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.
50
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 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 2.0 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 $6.8 million in 2007
and $9.4 million in 2006 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 gain of $2.3
million was recognized in 2007 compared with a net loss of $637 thousand in 2006
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 12 and 24 months based on eight interest
rate scenarios. Two specified interest rate scenarios are used to evaluate
interest rate risk against policy guidelines. The first assumes a sustained
parallel 200 basis point increase and the second assumes a sustained parallel
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 30 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.
51
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 30 Interest Rate Sensitivity
(Dollars in Thousands)
200 bp Increase 200 bp Decrease Most Likely
----------------------------------------------------------------------------------
2007 2006 2007 2006 2007 2006
----------------------------------------------------------------------------------
Anticipated impact over the next
twelve months on net interest revenue $(12,424) $ (7,587) $ 3,105 $ 8,357 $ 9,012 $ 4,060
(2.0)% (1.4)% 0.5% 1.5% 1.5% 0.7%
---------------------------------------------------------------------------------------------------------------------
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, 2007, the VAR was $637 thousand.
The greatest value at risk during 2007 was $1.3 million.
52
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, 2007. 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, 2007.
The Risk Oversight and Audit Committee, consisting entirely of independent
directors, meets regularly with management, internal auditors and the
independent registered public accounting firm, Ernst & Young LLP, regarding
management's assessment of internal control over financial reporting.
Report of Management on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
control over financial reporting and for assessing the effectiveness of internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f), as amended. Management has assessed the effectiveness
of the Company's internal control over financial reporting based on the criteria
established in "Internal Control - Integrated Framework," issued by the
Committee of Sponsoring Organizations ("COSO") of the Treadway Commission. Based
on that assessment and criteria, management has determined that the Company
maintained effective internal control over financial reporting as of December
31, 2007.
Ernst & Young LLP, the independent registered public accounting firm that
audited the consolidated financial statements of the Company included in this
annual report has issued an audit report on the effectiveness of the Company's
internal control over financial reporting as of December 31, 2007. Their report,
which expresses unqualified opinions on the effectiveness of the Company's
internal control over financial reporting as of December 31, 2007, is included
in this annual report.
53
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, 2007 and 2006, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2007. 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, 2007 and 2006, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2007, 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 framework for fair value measurements as of January 1,
2007, in accordance with Financial Accounting Standards Board Statement No. 157,
Fair Value Measurement. Also discussed in Note 1 to the consolidated financial
statements, BOK Financial Corporation changed its method of accounting for
uncertainty in income taxes recognized as of January 1, 2007, in accordance with
Financial Accounting Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes- An Interpretation of FASB Statement No. 109. As
discussed in Note 12 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), BOK Financial Corporation's internal
control over financial reporting as of December 31, 2007, 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 29, 2008 expressed an unqualified opinion thereon.
Ernst & Young LLP
Tulsa, Oklahoma
February 29, 2008
54
Report of Independent Registered Public Accounting Firm
Report on Effectiveness of Internal Control over Financial Reporting
The Board of Directors and Shareholders of BOK Financial Corporation
We have audited BOK Financial Corporation's internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). BOK Financial
Corporation's management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Report of
Management on Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the company's internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, BOK Financial Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
BOK Financial Corporation as of December 31, 2007 and 2006, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2007 of BOK Financial
Corporation and our report dated February 29, 2008 expressed an unqualified
opinion thereon.
Ernst & Young LLP
Tulsa, Oklahoma
February 29, 2008
55
Consolidated Statements of Earnings
(In Thousands Except Share And Per Share Data)
2007 2006 2005
----------------- ---------------- -----------------
Interest Revenue
Loans $ 892,024 $ 751,391 $ 554,691
Taxable securities 248,972 222,531 205,952
Tax-exempt securities 13,604 9,819 7,329
----------------------------------------------------------- ----------------- ---------------- -----------------
Total securities 262,576 232,350 213,281
----------------------------------------------------------- ----------------- ---------------- -----------------
Trading securities 1,657 847 675
Funds sold and resell agreements 4,480 1,841 1,287
----------------------------------------------------------- ----------------- ---------------- -----------------
Total interest revenue 1,160,737 986,429 769,934
----------------------------------------------------------- ----------------- ---------------- -----------------
Interest Expense
Deposits 412,746 336,908 210,400
Borrowed funds 178,605 142,553 95,826
Subordinated debentures 24,901 20,280 14,367
----------------------------------------------------------- ----------------- ---------------- -----------------
Total interest expense 616,252 499,741 320,593
----------------------------------------------------------- ----------------- ---------------- -----------------
Net Interest Revenue 544,485 486,688 449,341
Provision for Credit Losses 34,721 18,402 12,441
----------------------------------------------------------- ----------------- ---------------- -----------------
Net Interest Revenue After Provision for Credit Losses 509,764 468,286 436,900
----------------------------------------------------------- ----------------- ---------------- -----------------
Other Operating Revenue
Brokerage and trading revenue 62,542 53,413 48,024
Transaction card revenue 90,425 78,622 72,036
Trust fees and commissions 78,231 71,037 65,187
Deposit service charges and fees 109,218 102,436 98,361
Mortgage banking revenue 22,275 26,996 30,681
Bank-owned life insurance 10,058 2,558 62
Other revenue 32,873 36,634 30,513
----------------------------------------------------------- ----------------- ---------------- -----------------
Total fees and commissions 405,622 371,696 344,864
----------------------------------------------------------- ----------------- ---------------- -----------------
Gain (loss) on sales of assets (928) 1,499 7,798
Loss on securities, net (8,328) (950) (6,895)
Gain (loss) on derivatives, net 2,282 (622) 1,179
----------------------------------------------------------- ----------------- ---------------- -----------------
Total other operating revenue 398,648 371,623 346,946
----------------------------------------------------------- ----------------- ---------------- -----------------
Other Operating Expense
Personnel 328,705 296,260 258,971
Business promotion 21,888 19,351 17,964
Professional fees and services 22,795 17,744 16,596
Net occupancy and equipment 57,284 52,188 50,195
Data processing and communications 72,733 66,926 67,026
Printing, postage and supplies 16,570 15,862 15,066
Net losses and operating expenses of repossessed assets 691 474 572
Amortization of intangible assets 7,358 5,327 6,943
Mortgage banking costs 12,018 11,829 14,562
Change in fair value of mortgage servicing rights 2,893 (3,009) -
Recovery of impairment of mortgage servicing rights - - (3,915)
Other expense 32,052 29,355 25,126
----------------------------------------------------------- ----------------- ---------------- -----------------
Total other operating expense 574,987 512,307 469,106
----------------------------------------------------------- ----------------- ---------------- -----------------
Income Before Taxes 333,425 327,602 314,740
Federal and state income tax 115,761 114,625 113,235
----------------------------------------------------------- ----------------- ---------------- -----------------
Net Income $ 217,664 $ 212,977 $ 201,505
----------------------------------------------------------- ----------------- ---------------- -----------------
Earnings Per Share:
Basic $ 3.24 $ 3.19 $ 3.14
Diluted $ 3.22 $ 3.16 $ 3.01
----------------------------------------------------------- ----------------- ---------------- -----------------
Average Shares Used in Computation:
Basic 67,083,200 66,759,384 64,067,873
Diluted 67,550,538 67,310,005 67,047,064
----------------------------------------------------------- ----------------- ---------------- -----------------
See accompanying notes to consolidated financial statements.
56
Consolidated Balance Sheets
(In Thousands Except Share Data)
December 31,
----------------------------------
2007 2006
---------------- -----------------
Assets
Cash and due from banks $ 717,259 $ 775,376
Funds sold and resell agreements 173,154 21,950
Trading securities 45,724 37,076
Securities:
Available for sale 5,323,001 4,293,938
Available for sale securities pledged to creditors 327,539 361,123
Investment (fair value: 2007 - $248,788; 2006 - $246,608) 247,949 248,689
Mortgage trading securities 154,701 162,837
---------------------------------------------------------------------------------- ---------------- -----------------
Total securities 6,053,190 5,066,587
---------------------------------------------------------------------------------- ---------------- -----------------
Loans 11,940,570 10,651,178
Residential mortgages held for sale 76,677 64,625
Less reserve for loan losses (126,677) (109,497)
---------------------------------------------------------------------------------- ---------------- -----------------
Loans, net of reserve 11,890,570 10,606,306
---------------------------------------------------------------------------------- ---------------- -----------------
Premises and equipment, net 258,786 188,041
Accrued revenue receivable 138,243 118,236
Intangible assets, net 368,353 258,060
Mortgage servicing rights, net 70,009 65,946
Real estate and other repossessed assets 9,475 8,486
Bankers' acceptances 1,780 43,613
Derivative contracts 502,446 284,239
Cash surrender value of bank-owned life insurance 229,540 212,230
Receivable on unsettled securities trades 10,071 -
Other assets 371,264 373,478
---------------------------------------------------------------------------------- ---------------- -----------------
Total assets $ 20,839,864 $ 18,059,624
---------------------------------------------------------------------------------- ---------------- -----------------
Liabilities and Shareholders' Equity
Noninterest-bearing demand deposits $ 1,875,946 $ 1,780,059
Interest-bearing deposits:
Transaction 7,096,339 5,996,970
Savings 156,368 139,130
Time 4,330,638 4,470,546
---------------------------------------------------------------------------------- ---------------- -----------------
Total deposits 13,459,291 12,386,705
---------------------------------------------------------------------------------- ---------------- -----------------
Funds purchased and repurchase agreements 3,225,131 2,348,516
Other borrowings 1,027,564 593,731
Subordinated debentures 398,273 297,800
Accrued interest, taxes and expense 124,029 104,752
Bankers' acceptances 1,780 43,613
Due on unsettled security transactions - 107,420
Derivative contracts 513,840 298,679
Other liabilities 154,572 157,386
---------------------------------------------------------------------------------- ---------------- -----------------
Total liabilities 18,904,480 16,338,602
---------------------------------------------------------------------------------- ---------------- -----------------
Shareholders' equity:
Preferred stock ($.00005 par value; 1,000,000,000 shares authorized; no shares
issued and outstanding) - -
Common stock ($.00006 par value; 2,500,000,000 shares authorized;
shares issued and outstanding: 2007 - 69,465,154; 2006 - 68,704,575) 4 4
Capital surplus 722,088 688,861
Retained earnings 1,332,954 1,166,994
Treasury stock (shares at cost: 2007 - 2,158,774; 2006 - 1,636,825) (88,428) (61,393)
Accumulated other comprehensive loss (31,234) (73,444)
---------------------------------------------------------------------------------- ---------------- -----------------
Total shareholders' equity 1,935,384 1,721,022
---------------------------------------------------------------------------------- ---------------- -----------------
Total liabilities and shareholders' equity $ 20,839,864 $ 18,059,624
---------------------------------------------------------------------------------- ---------------- -----------------
See accompanying notes to consolidated financial statements.
57
Consolidated Statements of Cash Flows
(In Thousands)
2007 2006 2005
--------------- -------------- -------------
Cash Flows From Operating Activities:
Net income $ 217,664 $ 212,977 $ 201,505
Adjustments to reconcile net income to cash provided by operations:
Provision for credit losses 34,721 18,402 12,441
Change in fair value of mortgage servicing rights 2,893 (3,009) -
Recovery of mortgage servicing rights impairment - - (3,915)
Unrealized (gains) losses from derivatives (11,162) (1,531) 8,463
Depreciation and amortization 43,524 39,303 44,860
Change in bank-owned life insurance (17,310) (964) -
Tax benefit on exercise of stock options (3,460) (4,014) (3,583)
Stock-based compensation 8,483 10,682 8,431
Net (accretion) amortization of securities discounts and premiums (2,404) 1,326 (1,159)
Net gain on sale of assets 7,663 (10,629) (15,230)
Mortgage loans originated for resale (1,022,829) (735,432) (783,498)
Proceeds from sale of mortgage loans held for resale 1,008,828 741,901 770,115
Change in trading securities, including mortgage trading securities 896 (131,209) (8,941)
Change in accrued revenue receivable (30,719) (18,362) (20,230)
Change in other assets 14,598 (56,423) 17,592
Change in accrued interest, taxes and expense 19,277 12,533 (53,005)
Change in other liabilities (32,886) 70,119 33,102
------------------------------------------------------------------------------ --------------- -------------- -------------
Net cash provided by operating activities 237,777 145,670 206,948
------------------------------------------------------------------------------ --------------- -------------- -------------
Cash Flows From Investing Activities:
Proceeds from sales of available for sale securities 806,979 646,944 1,537,628
Proceeds from maturities of investment securities 93,245 59,099 54,336
Proceeds from maturities of available for sale securities 1,186,319 686,163 868,401
Purchases of investment securities (92,648) (62,850) (78,675)
Purchases of available for sale securities (2,909,791) (1,208,842) (2,731,763)
Loans originated or acquired net of principal collected (936,018) (1,727,123) (1,287,158)
Net payments or proceeds on derivative asset contracts (143,649) (20,146) 4,290
Investment in bank-owned life insurance - (201,987) -
Net change in other investment assets 67 165 33,718
Proceeds from disposition of assets 48,341 81,731 88,527
Purchases of other assets (44,929) (54,520) (49,199)
Cash and equivalents of subsidiaries and branches acquired and sold, net (47,476) 135 (29,093)
------------------------------------------------------------------------------ --------------- -------------- -------------
Net cash used by investing activities (2,039,560) (1,801,231) (1,588,988)
------------------------------------------------------------------------------ --------------- -------------- -------------
Cash Flows From Financing Activities:
Net change in demand deposits, transaction
deposits and savings accounts 860,612 638,901 1,246,713
Net change in time deposits (291,822) 364,344 457,412
Net change in other borrowings 1,301,093 550,038 (83,299)
Change in amount receivable (due) on unsettled security transactions (117,491) 98,991 65,302
Pay down of other borrowings - - (95,000)
Issuance of common and treasury stock, net 13,747 12,647 7,032
Issuance of subordinated debenture, net 248,618 - 147,855
Pay down of subordinated debentures (150,000) - -
Net change in derivative margin accounts (58,451) 103,188 (167,137)
Net payments or proceeds on derivative liability contracts 152,873 30,333 (9,407)
Tax benefit on exercise of stock options 3,460 4,014 3,583
Repurchase of common stock (17,353) (12,103) (2,439)
Dividends paid (50,416) (36,788) (20,344)
------------------------------------------------------------------------------ --------------- -------------- -------------
Net cash provided by financing activities 1,894,870 1,753,565 1,550,271
------------------------------------------------------------------------------ --------------- -------------- -------------
Net increase in cash and cash equivalents 93,087 98,004 168,231
Cash and cash equivalents at beginning of period 797,326 699,322 531,091
------------------------------------------------------------------------------ --------------- -------------- -------------
Cash and cash equivalents at end of period $ 890,413 $ 797,326 $ 699,322
------------------------------------------------------------------------------ --------------- -------------- -------------
Cash paid for interest $ 608,963 $ 493,873 $ 312,200
------------------------------------------------------------------------------ --------------- -------------- -------------
Cash paid for taxes 115,627 117,604 104,543
------------------------------------------------------------------------------ --------------- -------------- -------------
Net loans transferred to repossessed real estate 9,825 7,057 11,633
------------------------------------------------------------------------------ --------------- -------------- -------------
See accompanying notes to consolidated financial statements.
58
Consolidated Statements of Changes in Shareholders' Equity
(In Thousands)
Preferred Stock Common Stock
------------------------------ ------------------------------
Shares Amount Shares Amount
------------------------------------------------------------------------------------------------------------------------------
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
Effect of implementing FAS 157, net of tax - - - -
Effect of implementing FIN 48 - - - -
Comprehensive income:
Net income - - - -
Other comprehensive income, net of tax - - - -
Comprehensive income
Treasury stock purchase - - - -
Exercise of stock options - - 760 -
Tax benefit on exercise of stock options - - - -
Stock-based compensation - - - -
Cash dividends on common stock - - - -
------------------------------------------------------------------------------------------------------------------------------
December 31, 2007 - $ - 69,465 $4
------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
59
Accumulated
Other
Comprehensive Capital Retained Treasury Stock
------------------------------------
Income (Loss) Surplus Earnings Shares Amount Total
------------------- ------------------ ----------------- ----------------- ------------------ ---------------
$ (11,625) $631,747 $809,261 998 $(30,905) $1,398,494
- - 201,505 - - 201,505
(56,186) - - - - (56,186)
---------------
145,319
---------------
- - - 60 (2,439) (2,439)
- 13,728 - 144 (6,696) 7,032
- 12 - - - -
- 3,583 - - - 3,583
- 7,509 - - - 7,509
- - (375) - - (375)
- - (19,969) - - (19,969)
------------------- ------------------ ----------------- ----------------- ------------------ ---------------
(67,811) 656,579 990,422 1,202 (40,040) 1,539,154
- - 383 - - 383
- - 212,977 - - 212,977
(5,633) - - - - (5,633)
---------------
207,344
---------------
- - - 249 (12,103) (12,103)
- 21,897 - 186 (9,250) 12,647
- 4,014 - - - 4,014
- 6,371 - - - 6,371
- - (36,788) - - (36,788)
------------------- ------------------ ----------------- ----------------- ------------------ ---------------
(73,444) 688,861 1,166,994 1,637 (61,393) 1,721,022
- - (679) - - (679)
- - (609) - - (609)
- - 217,664 - - 217,664
42,210 - - - - 42,210
---------------
259,874
---------------
- - - 340 (17,353) (17,353)
- 23,429 - 182 (9,682) 13,747
- 3,460 - - - 3,460
- 6,338 - - - 6,338
- - (50,416) - - (50,416)
------------------- ------------------ ----------------- ----------------- ------------------ ---------------
$(31,234) $ 722,088 $ 1,332,954 2,159 $ (88,428) $ 1,935,384
------------------- ------------------ ----------------- ----------------- ------------------ ---------------
60
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. Certain prior year amounts have
been reclassified to conform to the current year presentation.
New accounting policies first adopted in 2007 included Statement of Financial
Accounting Standards No. 157, "Fair Value Measurements" ("FAS 157") and FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
The consolidated financial statements would also include the assets,
liabilities, non-controlling interests and results of operations of variable
interest entities ("VIEs") when BOK Financial is determined to be the primary
beneficiary. Variable interest entities are generally defined in FASB
Interpretation No. 46R, "Consolidation of Variable Interest Entities," as
entities that either do not have sufficient equity to finance their activities
without support from other parties or whose equity investors lack a controlling
financial interest. BOK Financial is not the primary beneficiary in any VIE that
would be significant to its operations.
Nature of Operations
BOK Financial, through its subsidiaries, provides a wide range of financial
services to commercial and industrial customers, other financial institutions
and consumers throughout Oklahoma; Northwest Arkansas; Dallas, Fort Worth and
Houston, Texas; Albuquerque, New Mexico; Denver, Colorado; Phoenix, Arizona; and
Kansas City, Missouri / Kansas. These services include depository and cash
management; lending and lease financing; mortgage banking; securities brokerage,
trading and underwriting; and personal and corporate trust.
Use of Estimates
Preparation of BOK Financial's consolidated financial statements requires
management to make estimates of future economic activities, including loan
collectibility, prepayments and cash flows from customer accounts. These
estimates are based upon current conditions and information available to
management. Actual results may differ significantly from these estimates.
Acquisitions
Assets and liabilities acquired, including identifiable intangible assets, are
recorded at present value based on current interest rates, appraised values or
fair values on the acquisition dates. Goodwill is recognized as the excess of
the purchase price over the net fair value of assets acquired and liabilities
assumed. The Consolidated Statements of Earnings include the results of
operations from the dates of acquisition.
Intangible Assets
Intangible assets, which generally result from business combinations, are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," and No. 147,
"Acquisitions of Certain Financial Institutions."
Intangible assets with indefinite lives, such as goodwill, are evaluated for
each of BOK Financial's business units for impairment annually or more
frequently if conditions indicate impairment. The evaluation of possible
impairment of intangible assets involves significant judgment based upon
short-term and long-term projections of future performance.
The fair value of BOK Financial's business units is estimated by the discounted
future earnings method. Income growth is projected over a 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. Assumptions used to determine the fair value
of the Company in the aggregate are based on observable inputs, such as the
market value of BOK Financial common stock. However, attribution of the overall
fair value to individual business units requires significant unobservable
inputs. In total, the fair value measurement for goodwill impairment evaluation
is based on Level 3 inputs as defined by FAS 157. There have been no changes in
the techniques used to value goodwill.
Core deposit intangible assets are amortized using accelerated methods over the
estimated lives of the acquired deposits. These assets generally have a weighted
average life of 5 years. Other intangible assets are amortized using accelerated
or straight-line methods, as appropriate, over the estimated benefit periods.
These periods range from 5 years to 20 years. The net book values of core
deposit intangible assets are evaluated for impairment when economic conditions
indicate impairment may exist.
61
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 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 - gain (loss) on derivatives, net.
In certain circumstances, an interest rate swap may be designated as a fair
value hedge and may qualify for hedge accounting. In these circumstances,
changes in the full fair value of the hedged asset or liability, not only
changes in fair value due to changes in the benchmark interest rate, is also
recognized in earnings and may partially or completely offset changes in fair
value of the interest rate swap. A fair value hedge is considered effective if
the cumulative fair value adjustment of the interest rate swap is within a range
of 80% to 120% of the cumulative change in the fair value of the hedged asset or
liability. Any ineffectiveness, including ineffectiveness due to credit risk or
ineffectiveness created when the fixed rate of the hedged asset or liability
does not match the fixed rate of the interest rate swap, is recognized in
earnings in the income statement line item "Gain (loss) on derivatives, net."
Interest rate swaps may be designated as cash flow hedges of variable rate
assets or liabilities, or of anticipated transactions. Changes in the fair value
of interest rate swaps designated as cash flow hedges are recorded in
accumulated other comprehensive income to the extent they are effective. The
amount recorded in other comprehensive income is reclassified to earnings in the
same periods as the hedged cash flows impact earnings. The ineffective portion
of changes in fair value is reported in current earnings.
If a derivative instrument that had been designated as a fair value hedge is
terminated or if the hedge designation is removed or deemed to no longer be
effective, the difference between the hedged item's carrying value and its face
amount is recognized into income over the remaining original hedge period.
Similarly, if a derivative instrument that had been designated as a cash flow
hedge is terminated or if the hedge designation is removed or deemed to no
longer be effective, the amount remaining in accumulated other comprehensive
income is reclassified to earnings in the same period as the hedged item.
62
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 collectability of principal.
Loan origination and commitment fees and direct loan acquisition and origination
costs are deferred and amortized as an adjustment to yield over the life of the
loan or over the commitment period, as applicable.
Mortgage loans originated by our mortgage banking unit are held for sale and are
carried at the lower of aggregate cost or market value. Mortgage loans held for
sale that are designated as hedged assets are carried at fair value based on
sales commitments or market quotes. Changes in fair value after the date of
designation of an effective hedge are recorded in other operating revenue -
mortgage banking revenue.
Reserve for Loan Losses and Off-Balance Sheet Credit Losses
Reserves for loan losses and off-balance sheet credit losses are assessed by
management, based upon an ongoing quarterly evaluation of the probable estimated
losses inherent in the portfolio, and include probable losses on both
outstanding loans and unused commitments to provide financing. A consistent
methodology has been developed that includes reserves assigned to specific
criticized loans, general reserves that are based upon statistical migration
analyses for each category of loans, and a nonspecific allowance that is based
upon an analysis of current economic conditions, loan concentrations, portfolio
growth and other relevant factors. The reserve for loan losses related to loans
that are identified for evaluation in accordance with Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("FAS 114"), is based on discounted cash flows using the loan's initial
effective interest rate 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.
63
Transfers of Financial Assets
BOK Financial transfers financial assets as part of its mortgage banking
activities and periodically may transfer other financial assets. Transfers are
recorded as sales for financial reporting purposes when the criteria for
surrender of control specified in Statement of Financial Accounting Standards,
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" are met. BOK Financial may retain the right to
service the assets and may incur a recourse obligation. The Company may also
retain a residual interest in excess cash flows generated by the assets. All
assets obtained, including cash, servicing rights and residual interests, and
all liabilities incurred, including recourse obligations, are initially
recognized at fair value, all assets transferred are derecognized and any gain
or loss on the sale is recognized in earnings. Subsequently, servicing rights,
residual interest and recourse obligations are carried at fair value with
changes in fair value recognized in earnings as they occur. A separate reserve
is maintained as part of other liabilities for the Company's credit risk on
loans transferred subject to a recourse obligation.
Real Estate and Other Repossessed Assets
Real estate and other repossessed assets are assets acquired in partial or total
forgiveness of loans. These assets are carried at the lower of cost, which is
determined by fair value at date of foreclosure, or current fair value. Income
generated by these assets is recognized as received, and operating expenses are
recognized as incurred.
Premises and Equipment
Premises and equipment are carried at cost including capitalized interest, when
appropriate, less accumulated depreciation and amortization. Depreciation and
amortization are computed on a straight-line basis over the estimated useful
lives of the assets or, for leasehold improvements, over the shorter of the
estimated useful lives or remaining lease terms. Useful lives range from 5 years
to 40 years for buildings and improvements, 3 years to 7 years for software and
3 years to 10 years for furniture and equipment. Repair and maintenance costs
are charged to expense as incurred.
Rent expense for leased premises is recognized as incurred over the lease term.
The effects of rent holidays, significant rent escalations and other adjustments
to rent payments are recognized on a straight-line basis over the lease term.
Mortgage Servicing Rights
Mortgage servicing rights are carried at fair value as permitted by Statement of
Financial Accounting Standards No. 156, "Accounting for Servicing of Financial
Assets" ("FAS 156"). Mortgage servicing rights may be purchased or may be
recognized when mortgage loans are originated pursuant to an existing plan for
sale or, if no such plan exists, when the mortgage loans are sold. Originated
mortgage servicing rights are initially recognized at fair value. Fair value is
based on market quotes for similar servicing rights, which is a Level 2 input as
defined by FAS 157. Changes in the fair value are recognized in earnings as they
occur.
There is no active market for trading in mortgage servicing rights. A cash flow
model is used to determine fair value. Key assumptions and estimates, including
projected prepayment speeds and assumed servicing costs, earnings on escrow
deposits, ancillary income and discount rates, used by this model are based on
current market sources. Assumptions used to value mortgage servicing rights are
considered Level 3 inputs as defined by FAS 157. A separate third party model is
used to estimate prepayment speeds based on interest rates, housing turnover
rates, estimated loan curtailment, anticipated defaults and other relevant
factors. The prepayment model is updated daily for changes in market conditions.
At least annually, we request estimates of fair value from outside sources to
corroborate the results of the valuation model. There have been no changes in
the techniques used to value mortgage servicing rights.
Federal and State Income Taxes
BOK Financial and its subsidiaries file consolidated tax returns. The
subsidiaries provide for income taxes on a separate return basis and remit to
BOK Financial amounts determined to be currently payable.
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.
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
64
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 commission revenue is recognized at the time the related services are
provided or products are sold and may be accrued when necessary. Accrued fees
and commissions are reversed against revenue if amounts are subsequently deemed
to be uncollectible. As described in EITF Issue 99-19, Reporting Revenue Gross
as a Principal versus Net as an Agent, revenue is recognized on a gross basis
whenever we have primary responsibility and risk in providing the services or
products to our customers and on a net basis whenever we act as a broker for
products or services of others.
Brokerage and trading revenue includes changes in the fair value of securities
held for trading purposes and derivatives held for customer risk management
programs, commissions earned from the retail sale of securities, mutual funds
and other financial instruments, and underwriting and financial advisory fees.
Trust fees and commissions include revenue from asset management, custody,
recordkeeping, investment advisory and administration services. Revenue is
recognized on an accrual basis at the time the services are performed and may be
based on either the fair value of the account or the service provided.
Deposit service charges and fees are recognized at least quarterly in accordance
with our published deposit account agreement and disclosure statement for retail
accounts or contractual agreement for commercial accounts. Item charges for
overdraft or non-sufficient funds items are recognized as items are presented
for payment. Account balance charges and activity fees are accrued monthly and
collected in arrears. Commercial account activity fees may be offset by an
earnings credit based on account balances.
65
Effect of Recently Issued Statements of Financial Accounting Standards
Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
("FAS 157")
BOK Financial adopted Statement of Financial Accounting Standards No. 157, "Fair
Value Measurement" (FAS 157") as of January 1, 2007. FAS 157 established a
single authoritative definition of fair value, set out a framework for measuring
fair value and required additional disclosures about fair value measurements. It
also nullified EITF guidance that prohibited recognition of gains at inception
for derivative transactions whose fair value is estimated by modeling.
Beginning January 1, 2007, the fair value of customer derivative assets and
liabilities fully reflects the discounted cash flows based on forward curves,
volatilities, credit risks and other market-observable inputs. Changes in the
net fair values of customer derivative contracts are a component of Brokerage
and Trading Revenue. Retained earnings were charged $1.1 million, or $679
thousand, net of taxes, for effect of the initial adoption of FAS 157 on the
fair value of customer derivative assets and liabilities. FAS 157 did not have a
significant effect on other fair value measurements in the Company's financial
statements.
Statement of Financial Accounting Standards No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("FAS 159")
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities" ("FAS 159") during the first quarter of 2007. The purpose
of FAS 159 is to increase the use of fair value measurements in financial
statements and to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. FAS 159 permits financial statement issuers an option to
measure eligible financial assets and financial liabilities at fair value.
Unrealized gains and losses on assets and liabilities measured at fair value are
reported in earnings. The option to measure eligible assets and liabilities is
applied on an instrument-by-instrument basis, is irrevocable and is applied to
the entire instrument. FAS 159 is effective as of the beginning of the first
fiscal year that begins after November 15, 2007 and may be adopted as of a
fiscal year that begins on or before November 15, 2007, subject to certain
conditions. The Company will adopt FAS 159 as required on January 1, 2008.
BOK Financial expects to elect the fair value option for certain certificates of
deposit. These deposits are either currently designated as hedged or had
previously been designated as hedged, but no longer meet the correlation
requirements of Statement of Financial Accounting Standards No. 133. Management
believes that election of the fair value option for these items more accurately
portrays their economic value. Effective January 1, 2008, retained earnings will
be decreased by $202 thousand to recognize the adjustment of these certificates
to their fair values, net of deferred income taxes.
Management is also evaluating election of the fair value option for certain
other certificates of deposit. If elected, the transition adjustment for the
fair value option is not expected to have a significant effect on the financial
statements.
Statement of Financial Accounting Standards No. 141 (Revised), "Business
Combinations" ("FAS 141R")
The Financial Accounting Standards Board issued FAS 141R during 2007 to replace
Statement of Financial Accounting Standards No. 141, "Business Combinations."
FAS 141R applies to all transactions or other events in which an entity obtains
control over one or more businesses, including combinations achieved without the
transfer of consideration. FAS 141R retains the fundamental requirement that all
business combinations must be accounted for under the acquisition or purchase
method of accounting. All assets acquired, including identifiable intangible
assets, liabilities assumed and any non-controlling interests must be recognized
at the acquisition-date fair values. Costs incurred to effect the acquisition
and restructuring costs that the acquirer is expected but not obligated to incur
must be recognized separately from the business combination. Contingent assets
and liabilities generally will be recognized at their acquisition-date fair
values. Changes in the recognized amounts of contingent assets and liabilities
will be recognized in post acquisition-date earnings. FAS 141R will have a
significant effect on the Company's financial statements of business
combinations completed after January 1, 2009.
Statement of Financial Accounting Standards No. 160,"Non-controlling Interest in
Consolidated Financial Statements - An Amendment of ARB No. 51" ("FAS 160")
The Financial Accounting Standards Board issued FAS 160 during 2007 to improve
accounting for non-controlling or minority interest, which is defined as the
portion of equity of a subsidiary not attributable, directly or indirectly, to a
parent. FAS 160 applies to all for-profit entities that prepare consolidated
financial statements, but only affects entities that have an outstanding
non-controlling interest in one or more subsidiaries. Ownership interests held
by parties other than the parent shall be reported in equity, but separate from
the parent's equity. The amount of consolidated net income attributed to the
non-controlling interest and the parent shall be separately disclosed. FAS 160,
which will be adopted on January 1, 2009, is not expected to have a significant
impact on the Company's financial statements.
66
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109" ("FIN 48")
FIN 48 was issued in 2006 to clarify accounting for uncertainty in income taxes
recognized in accordance with FASB Statement No. 109. 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. FIN 48 also requires tabular
reconciliation of unrecognized tax benefits and changes in unrecognized tax
benefits and disclosure of the nature of uncertainties that are expected to
significantly increase or decrease within twelve months. The Company recognized
a $609 thousand decrease of retained earnings upon adoption of FIN 48 effective
January 1, 2007.
67
(2) Acquisitions
On June 18, 2007, BOK Financial paid $43 million in cash for all the outstanding
stock of Colorado-based United Banks of Colorado, Inc. The purchase price paid
for United Banks and resulting goodwill reflects performance and operating
issues experienced by the bank in recent years. United Banks had total assets of
approximately $166 million, including loans of $94 million, and total deposits
of $133 million and eleven banking locations in the Denver area. Loans acquired
from United Banks are subject to a guaranty by the sellers through an escrow
fund held in trust by Colorado State Bank and Trust. The Company will be
reimbursed for up to $8 million of losses, including principal, interest and
collection costs, on acquired loans in a three-year period after the acquisition
date. Accordingly, none of the purchase price was allocated to an allowance for
loan losses. An allocation of the purchase price to the net assets acquired is
as follows (in thousands):
Cash and cash equivalents $ 36,249
Securities 2,245
Loans 93,810
Premises and equipment 32,277
Core deposit premium 5,039
Other assets 2,298
----------------
Total assets acquired 171,918
----------------
Deposits 133,342
Other borrowings 2,138
Other liabilities 6,909
----------------
Net assets acquired 29,529
Less purchase price 42,796
----------------
Goodwill $ 13,267
----------------
On September 21, 2007, operations of United Banks' subsidiary, First United
Bank, N.A. were combined with Colorado State Bank and Trust, N.A. through a
purchase and assumption agreement.
On May 31, 2007, BOK Financial paid $127 million in cash for all the outstanding
stock of Texas-based Worth Bancorporation, Inc. Worth had total assets of
approximately $410 million, including net loans of $281 million, and total
deposits of $369 million and five branches in the Fort Worth market. None of
Worth National Bank's loans were impaired at the acquisition date. Therefore,
none of the allowance for loan losses was allocated as a reduction of the
principal balance of the acquired loans. An allocation of the purchase price to
the net assets acquired is as follows (in thousands):
Cash and cash equivalents $ 86,563
Securities 22,676
Loans 284,039
Less reserve for loan losses (3,528)
----------------
Loans, net of reserve 280,511
Premises and equipment 6,214
Core deposit premium 13,741
Other assets 15,029
----------------
Total assets acquired 424,734
----------------
Deposits 369,343
Other borrowings 7,217
Other liabilities 6,285
----------------
Net assets acquired 41,889
Less purchase price 127,067
----------------
Goodwill $ 85,178
----------------
Core deposit premiums are identifiable intangible assets initially recognized at
estimated fair value. Fair value is determined by projecting future cash flows
that may be earned from investing the proceeds of the acquired deposits, less
interest, servicing and other costs over the estimated lives of the acquired
deposits. The projected net cash flow is discounted to determine the current
fair value. The fair value measurement of core deposit premiums is based on
Level 3 inputs as defined by FAS 157.
During the first quarter of 2007, the Company paid approximately $425 thousand
to acquire a charter for Bank of Kansas City in order to begin full-service
banking operations in Missouri. Previously, the Company's full-service banking
rights were restricted to Kansas City, Kansas. The Company currently has two
full-service banking locations in the Kansas City market.
68
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.
The results of operations of these acquisitions would not have been significant
to the Company's consolidated results during the pre-acquisition periods of
2007, 2006 and 2005. None of the intangible assets acquired are deductible for
tax purposes.
69
(3) Securities
Investment Securities
The amortized cost and fair values of investment securities are as follows (in
thousands):
December 31,
----------------------------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------------------------
Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized
------------------------ ------------------------
Cost Value Gain Loss Cost Value Gain Loss
----------------------------------------------------------------------------------------------
U.S. Treasury $ - $ - $ - $ - $ 1,999 $ 1,995 $ - $ (4)
Municipal and other tax-exempt 242,274 243,061 1,439 (651) 240,976 238,869 471 (2,578)
Other debt securities 5,675 5,727 52 (1) 5,714 5,744 51 (21)
--------------------------------------------------------------------------------------------------------------------------
Total $247,949 $248,788 $1,491 $ (652) $248,689 $246,608 $ 522 $ (2,603)
--------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of investment securities at December 31,
2007, by contractual maturity, are as shown in the following table (dollars in
thousands):
Weighted
Less than One to Six to Over Average
One Year Five Years Ten Years Ten Years Total Maturity(2)
------------ -------------- ------------- ------------- ------------- ------------
Municipal and other tax-exempt:
Amortized cost $ 61,625 $ 148,858 $23,485 $ 8,306 $ 242,274 2.80
Fair value 61,671 149,552 23,598 8,240 243,061
Nominal yield(1) 5.40 5.57 5.88 6.51 5.59
Other debt securities:
Amortized cost $ 5,102 $ 573 $ - $ - $ 5,675 0.80
Fair value 5,153 574 - - 5,727
Nominal yield 4.79 4.74 - - 4.79
------------ -------------- ------------- ------------- ------------- ------------
Total fixed maturity securities:
Amortized cost $ 66,727 $ 149,431 $ 23,485 $ 8,306 $ 247,949 2.75
Fair value 66,824 150,126 23,598 8,240 248,788
Nominal yield 5.36 5.57 5.88 6.51 5.57
------------ -------------- ------------- -------------
Total investment securities:
Amortized cost $ 247,949
Fair value 248,788
Nominal yield 5.57
-------------
(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.
70
Available for Sale Securities
The amortized cost and fair value of available for sale securities are as
follows (in thousands):
December 31,
-----------------------------------------------------------------------------------------------
2007 2006
----------------------------------------------- -----------------------------------------------
Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized
----------------------- ----------------------
Cost Value Gain Loss Cost Value Gain Loss
-----------------------------------------------------------------------------------------------
U.S. Treasury $ 6,961 $ 7,088 $ 127 $ - $ 6,014 $ 5,983 $ - $ (31)
Municipal and other tax-exempt 26,478 26,578 133 (33) 77,860 78,614 819 (65)
Mortgage-backed securities:
U. S. agencies 3,838,219 3,817,939 16,120 (36,400) 3,204,592 3,128,138 327 (76,781)
Other 1,664,537 1,641,189 1,225 (24,573) 1,361,373 1,333,533 412 (28,252)
-----------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed
securities 5,502,756 5,459,128 17,345 (60,973) 4,565,965 4,461,671 739 (105,033)
------------------------------------------------------------------------------------------------------------------------------
Other debt securities 42 41 - (1) 46 45 - (1)
Equity securities and mutual
funds 151,689 157,705 6,016 - 101,960 108,748 6,788 -
-----------------------------------------------------------------------------------------------------------------------------
Total $5,687,926 $5,650,540 $23,621 $(61,007) $4,751,845 $4,655,061 $8,346 $(105,130)
-----------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of available for sale securities at December
31, 2007, by contractual maturity, are as shown in the following table (dollars
in thousands):
Weighted
Less than One to Six to Over Average
One Year Five Years Ten Years Ten Years Total Maturity(5)
------------ -------------- ------------- ------------- -------------- -----------
U.S. Treasuries:
Amortized cost $ 6,961 $ - $ - $ - $ 6,961 0.56
Fair value 7,088 - - - 7,088
Nominal yield 4.45 - - - 4.45
Municipal and other tax-exempt:
Amortized cost $ - $ 1,015 $ 11,622 $ 13,841 $ 26,478 10.91
Fair value - 1,015 11,714 13,849 26,578
Nominal yield(1) - 3.65 4.11 4.51 4.30
Other debt securities:
Amortized cost $ - $ 42 $ - $ - $ 42 2.92
Fair value - 41 - - 41
Nominal yield(1) - 6.73 - - 6.73
------------ -------------- ------------- ------------- -------------- -----------
Total fixed maturity securities:
Amortized cost $ 7,046 $ 972 $ 11,622 $ 13,841 $ 33,481 8.75
Fair value 7,088 1,056 11,714 13,849 33,707
Nominal yield 4.45 3.77 4.11 4.51 4.34
------------ -------------- ------------- -------------
Mortgage-backed securities:
Amortized cost $ 5,502,756 (2)
Fair value 5,459,128
Nominal yield(4) 4.74
--------------
Equity securities and mutual funds:
Amortized cost $ 151,689 (3)
Fair value 157,705
Nominal yield 2.91
--------------
Total available-for-sale securities:
Amortized cost $ 5,687,926
Fair value 5,650,540
Nominal yield 4.69
--------------
(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 of U.S. government agencies and preferred stock of
corporate issuers with no stated maturity.
(4) The nominal yield on mortgage-backed securities is based upon prepayment
assumptions at the purchase date. Actual yields earned may differ
significantly based upon actual prepayments.
(5) Expected maturities may differ from contractual maturities, because
borrowers may have the right to call or prepay obligations with or without
penalty.
71
Sales of available for sale securities resulted in gains and losses as follows
(in thousands):
2007 2006 2005
----------- ----------- -----------
Proceeds $806,979 $646,944 $1,537,628
Gross realized gains 3,937 2,819 5,145
Gross realized losses 11,779 3,460 12,040
Related federal and state
income tax benefit (2,723) (224) (2,480)
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, 2007, mortgage trading securities are carried at their $155 million
fair value and had a net unrealized gain of $781 thousand.
In addition to securities that have been reclassified as pledged to creditors,
securities with an amortized cost of $4.1 billion and $3.0 billion at December
31, 2007 and 2006, respectively, have been pledged as collateral for repurchase
agreements, public and trust funds on deposit and for other purposes, as
required by law. The secured parties do not have the right to sell or repledge
these securities.
Net unrealized losses on securities not recognized as an other-than-temporary
impairment totaled $37 million at December 31, 2007 compared with net unrealized
losses of $99 million at December 31, 2006. The aggregate gross amount of
unrealized losses at December 31, 2007 totaled $62 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, other than the securities discussed below.
During the first half of 2007, the Company invested $41 million in variable rate
perpetual preferred stocks issued by six major banks and brokerage houses.
Although these issuers remain rated investment grade by the major rating
agencies and all scheduled dividend payments have been made, the fair values of
these stocks have declined to $33 million at December 31, 2007. Based on
widening credit spreads, the duration and severity of the reduction in fair
value and the market's negative outlook on the financial services sector for
2008, we determined that a recovery of fair value to at least the cost basis of
these securities was not expected in the near term. An other-than-temporary
impairment charge of $8.6 million was recognized through earnings.
72
Temporarily Impaired Securities as of December 31, 2007
(In Thousands)
Number Less Than 12 Months 12 Months or Longer Total
------------------------- ------------------------- -------------------------
of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Loss Value Loss Value Loss
---------- ------------ ------------ ------------ ------------ ------------ ------------
Investment:
Municipal and other tax-exempt 210 $ 1,996 $ 5 $ 91,319 $ 646 $93,315 $ 651
Other 1 - - 600 1 600 1
------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
211 1,996 5 91,919 647 93,915 652
Available for sale:
Other debt securities 2 16 - 25 1 41 1
Municipal and other tax-exempt 9 2,925 22 304 11 3,229 33
Mortgage-backed securities:
U. S. agencies 282 290,657 6,489 1,943,030 29,911 2,233,687 36,400
Other 84 425,527 4,150 1,003,557 20,423 1,429,084 24,573
------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
377 719,125 10,661 2,946,916 50,346 3,666,041 61,007
------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total 588 $721,121 $10,666 $ 3,038,835 $ 50,993 $3,759,956 $ 61,659
------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Temporarily Impaired Securities as of December 31, 2006
(In Thousands)
Number Less Than 12 Months 12 Months or Longer Total
------------------------- ------------------------- -------------------------
of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Loss Value Loss Value Loss
---------- ------------ ------------ ------------ ------------ ------------ ------------
Investment:
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
------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
73
(4) Derivatives
The fair values of derivative contracts at December 31, 2007 were (in
thousands):
December 31, 2007 December 31, 2006
---------------------------- -- ----------------------------
Assets Liabilities Assets Liabilities
----------- -- ------------- -- ------------ --- ------------
Customer Risk Management Programs:
Interest rate contracts $73,946 $78,808 $20,063 $22,761
Energy contracts 399,363 406,740 250,930 254,513
Cattle contracts 3,374 3,242 1,404 1,404
Foreign exchange contracts 20,205 20,205 10,801 10,803
CD options 4,325 4,325 49 49
----------------------------------------- ----------- -- ------------- -- ------------ --- ------------
Total Customer Derivatives 501,213 513,320 283,247 289,530
Interest Rate Risk Management Programs 1,233 520 992 9,149
----------------------------------------- ----------- -- ------------- -- ------------ --- ------------
Total Derivative Contracts $ 502,446 $513,840 $ 284,239 $298,679
----------------------------------------- ----------- -- ------------- -- ------------ --- ------------
Customer Risk Management Programs
BOK Financial offers programs that permit its customers to manage various risks,
including fluctuations in energy and cattle and other agricultural products
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, 2007 (dollars in
thousands):
Hedged Asset / Liability Interest Rate Swap
-----------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average
------------------------- ---------------------------
Fixed Rate Floating Notional Fixed Rate Floating Rate Positive Negative
Rate Received Received Fair Value Fair Value
Maturity Description Amount (Paid) Received(2) Amount (Paid) (Paid) (1)
-------------------------------------------------------------------------------------------------------------------------
Fair value hedges:
2008 Certificates of $131,124 (4.839)% - % $132,000 5.001 % (4.600)% $ 78 $ 103
deposit
2009 Certificates of 67,473 (4.009) - 70,000 4.133 (4.600) 336 95
deposit
2010 Certificates of 8,871 (3.631) - 10,000 3.657 (4.600) - 25
deposit
2011 Certificates of 27,792 (3.983) - 30,000 4.013 (4.600) 92 -
deposit
-----------------------------------------------------------------------------------------------------------------
Total fair 235,260 242,000 506 223
value hedges
-----------------------------------------------------------------------------------------------------------------
Cash flow hedges:
2008 Prime rate loans 100,000 - 7.250 100,000 5.926 (7.250)(2) - 152
-----------------------------------------------------------------------------------------------------------------
Total cash flow 100,000 100,000 - 152
hedges
-----------------------------------------------------------------------------------------------------------------
Not designated as hedges:
2011 - - - 9,528 (5.510) 4.600 - 228
2012 - - - 130,000 (4.600) 2.912 727 -
----------- ------------ ------------------------
Total $335,260 $481,528 $ 1,233 $ 603
----------- ------------ ------------------------
(1) Floating rates are based on 30-day LIBOR, unless otherwise noted.
(2) Floating rate based on prime.
During 2007 and 2006, net interest revenue was decreased by $6.8 million and
$9.4 million, respectively, from the settlement of amounts receivable or payable
on interest rate swaps.
74
(5) Loans
Significant components of the loan portfolio are as follows (in thousands):
December 31,
-----------------------------------------------------------------------------------------------
2007 2006
------------------------------------------------ ----------------------------------------------
Fixed Variable Non- Fixed Variable Non-
Rate Rate accrual Total Rate Rate accrual Total
------------------------------------------------ ----------------------------------------------
Commercial $2,714,050 $3,980,475 $42,981 $6,737,506 $2,402,503 $3,795,644 $ 10,737 $6,208,884
Commercial real estate 857,300 1,867,853 25,319 2,750,472 791,708 1,650,061 4,771 2,446,540
Residential mortgage 757,130 758,894 15,272 1,531,296 675,301 570,633 10,325 1,256,259
Residential mortgage held for sale76,677 - - 76,677 64,625 - - 64,625
Consumer 736,295 184,283 718 921,296 554,501 184,772 222 739,495
----------------------------------------------------------------------------------------------------------------------------
Total $5,141,452 $6,791,505 $84,290 $12,017,247 $4,488,638 $6,201,110 $26,055 $10,715,803
----------------------------------------------------------------------------------------------------------------------------
Loans past due (90 days) $ 5,575 $ 5,945
----------------------------------------------------------------------------------------------------------------------------
Foregone interest on nonaccrual loans $ 3,011 $ 2,130
----------------------------------------------------------------------------------------------------------------------------
Approximately 45% 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 $2.0 billion or 17% of total loans as of December 31, 2007. Other
notable segments include wholesale/retail, $1.1 billion; manufacturing, $493
million; agriculture, $237 million, which includes $189 million of loans to the
cattle industry; and services, $1.7 billion. The services category consists
almost entirely of loans with individual balances of less than $10 million.
Approximately 31% of commercial real estate loans are secured by properties
located in Oklahoma, primarily in the Tulsa and Oklahoma City metropolitan
areas. An additional 29% of commercial real estate loans are secured by property
located in Texas. The major components of these properties are multifamily
residences, $215 million; construction and land development, $1.0 billion;
retail facilities, $372 million; and office buildings, $395 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 2007. 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, 2007 and 2006, a net loss of approximately $152 thousand and $2.4
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. These swaps expire in February 2008.
At December 31, 2007 and 2006, residential mortgage loans included $9.9 million
and $8.7 million, respectively, and consumer loans included $515 thousand and
$1.1 million, respectively, of loans with repayment terms that have been
modified from the original contracts.
Credit Commitments
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of conditions established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. At December 31, 2007, 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, 2007, outstanding standby letters of
credit totaled $556 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, 2007, outstanding commercial letters
of credit totaled $15 million.
The Company also has off-balance sheet credit risk for residential loans sold
with full or partial recourse. These loans consist of first lien, fixed rate
residential mortgage loans originated under various community development
programs and sold to U.S.
75
government agencies. These loans were underwritten to standards approved by the
agencies, including full documentation. However, these loans have a higher risk
of delinquency and losses given default than traditional residential mortgage
loans. A separate recourse reserve is maintained for this off-balance sheet
credit risk. At December 31, 2007, the principal balance of loans sold subject
to recourse obligations totaled $393 million and the reserve for credit risk
from these loans totaled $3.5 million. Losses incurred during 2007 and 2006
totaled $1.1 million and $150 thousand, respectively.
Reserve for Credit Losses
The activity in the reserve for loan losses is summarized as follows (in
thousands):
2007 2006 2005
------------------------------------
Beginning balance $ 109,497 $ 103,876 $ 108,618
Provision for loan losses 34,758 18,086 10,401
Loans charged off (31,617) (23,996) (25,758)
Recoveries 10,511 11,531 9,544
Addition due to acquisitions 3,528 - 1,071
---------------------------------------------------------------
Ending balance $ 126,677 $ 109,497 $ 103,876
---------------------------------------------------------------
The activity in the reserve for off-balance sheet credit losses is summarized as
follows (in thousands):
2007 2006 2005
--------------------------------
Beginning balance $ 20,890 $ 20,574 $ 18,502
Provision for off-balance
sheet credit losses (37) 316 2,040
Additions due to acquisitions - - 32
-----------------------------------------------------------
Ending balance $ 20,853 $ 20,890 $ 20,574
-----------------------------------------------------------
Provision for credit losses $ 34,721 $ 18,402 $ 12,441
-----------------------------------------------------------
Impaired Loans
Investments in loans considered to be impaired under FAS 114 were as follows (in
thousands):
December 31,
--------------------------------
2007 2006 2005
--------------------------------
Investment in loans impaired
under FAS 114 (all of
which were on a
nonaccrual basis) $74,085 $22,586 $19,857
Loans with specific reserves
for loss 22,749 4,694 5,686
Specific reserve balance 4,425 1,670 2,632
No specific related reserve
for loss 51,336 17,892 14,171
Average recorded investment
in impaired loans 44,535 26,435 32,722
Interest income recognized on impaired loans during 2007, 2006 and 2005 was not
significant.
76
(6) Premises and Equipment
Premises and equipment at December 31 are summarized as follows (in thousands):
December 31,
------------------------
2007 2006
----------- ------------
Land $68,496 $47,278
Buildings and improvements 201,171 149,052
Software 44,499 33,389
Furniture and equipment 128,869 113,822
------------------------------------ ----------- ------------
Subtotal 443,035 343,541
Less accumulated depreciation 184,249 155,500
------------------------------------ ----------- ------------
Total $ 258,786 $ 188,041
------------------------------------ ----------- ------------
Depreciation expense of premises and equipment was $25.6 million, $23.7 million
and $24.0 million for the years ended December 31, 2007, 2006 and 2005,
respectively. During 2007, the carrying value of a branch location that is being
held for sale was written down by $1.0 million.
77
(7) Intangible Assets
The following table presents the original cost and accumulated amortization of
intangible assets (in thousands):
December 31,
-----------------------
2007 2006
----------- -----------
Core deposit premiums $109,417 $ 90,637
Less accumulated amortization 88,263 81,669
---------------------------------------- ----------- -----------
Net core deposit premiums 21,154 8,968
Other identifiable intangible assets 18,656 18,231
Less accumulated amortization 6,770 6,007
---------------------------------------- ----------- -----------
Net other identifiable intangible assets 11,886 12,224
Goodwill 388,448 290,003
Less accumulated amortization 53,135 53,135
---------------------------------------- ----------- -----------
Net goodwill 335,313 236,868
---------------------------------------- ----------- -----------
Total intangible assets, net $368,353 $258,060
---------------------------------------- ----------- -----------
Expected amortization expense for intangible assets that will continue to be
amortized (in thousands):
Core Other
Deposit Identifiable
Premiums Intangible Assets Total
-------------- ----------------- -------------
2008 $ 6,635 $ 780 $ 7,415
2009 5,606 1,138 6,744
2010 4,131 1,163 5,294
2011 2,227 1,190 3,417
2012 795 1,218 2,013
Thereafter 1,760 6,397 8,157
---------------- -------------- ----------------- -------------
$21,154 $11,886 $33,040
---------------- -------------- ----------------- -------------
The net amortized cost of intangible assets at December 31, 2007 is assigned to
reporting units as follows (in thousands):
Core deposit premiums:
Bank of Texas $ 12,212
Colorado State Bank and Trust 7,117
Bank of Arizona 1,825
----------------------------------- -----------
$21,154
----------------------------------- -----------
Other identifiable intangible assets:
Bank of Oklahoma $6,341
Colorado State Bank and Trust 4,755
Bank of Kansas City 790
----------------------------------- -----------
$ 11,886
----------------------------------- -----------
Goodwill:
Bank of Oklahoma $8,173
Bank of Texas 239,918
Bank of Albuquerque 15,273
Colorado State Bank and Trust 55,299
Bank of Arizona 16,650
----------------------------------- -----------
$335,313
----------------------------------- -----------
The annual goodwill evaluation did not indicate impairment for any business unit
in 2007, 2006 or 2005. Economic conditions did not indicate that impairment
existed for any identifiable intangible assets and therefore no impairment
evaluation was performed.
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.
78
(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 $77 million
and $65 million, and outstanding mortgage loan commitments totaled $53 million
and $42 million at December 31, 2007 and 2006, 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, 2007, the
unrealized loss on forward sales contracts used to hedge the mortgage pipeline
was approximately $345 thousand. Gains on mortgage loans sold, including
capitalized mortgage servicing rights, totaled $1.3 million in 2007, $10.5
million in 2006 and $16.0 million in 2005.
At December 31, 2007, BOK Financial owned the rights to service 58,227 mortgage
loans with outstanding principal balances of $5.5 billion, including $614
million serviced for affiliates, and held related funds of $63 million for
investors and borrowers. The weighted average interest rate and remaining term
was 6.18% and 280 months, respectively. Mortgage loans sold with recourse
totaled $393 million at December 31, 2007, and $3.7 million of loans sold with
recourse were 90 days or more delinquent. 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.
Servicing revenue and late charges on loans serviced for others, which are
included in mortgage banking revenue in the Consolidated Statements of Earnings
totaled $17.1 million for 2007, $16.5 million for 2006 and $16.3 million for
2005.
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 2005, 2006 and 2007 are as follows (in thousands):
Capitalized Mortgage Servicing Rights
------------------------------------- Valuation
Purchased Originated Total Allowance Net
-------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 $ 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
Additions, net 3,628 14,080 17,708 - 17,708
Change in fair value due to loan runoff (2,478) (8,274) (10,752) - (10,752)
Change in fair value due to market changes (57) (2,836) (2,893) - (2,893)
-------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007(1) $ 13,906 $ 56,103 $ 70,009 $ - $ 70,009
-------------------------------------------------------------------------------------------------------------
(1) Excludes approximately $0.7 million, $0.8 million and $1.0 million at
December 31, 2007, 2006 and 2005, respectively, of loan servicing rights on
mortgage loans originated prior to the adoption of FAS 122.
79
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, 2007 was 10.02%.
Prepayment rate - Annual prepayment estimates ranging from 6.8% to 15.2%
based upon loan interest rate, original term and loan type.
Loan servicing costs - $43 to $70 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, 2007 was
5.01%.
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 $5.3 million.
Stratification of the mortgage loan-servicing portfolio, outstanding principal
of loans serviced, and related hedging information by interest rate at December
31, 2007 follows (in thousands):
< 5.51% 5.51% - 6.50% 6.51% - 7.50% = > 7.51% Total
--------------------------------------------------------------------------------------------------------------------
Fair value $ 13,920 $ 37,709 $ 15,070 $ 3,310 $ 70,009
--------------------------------------------------------------------------------------------------------------------
Outstanding principal of loans
serviced(1) $ 978,700 $2,589,600 $ 1,053,300 $ 204,400 $4,826,000
--------------------------------------------------------------------------------------------------------------------
(1) Excludes outstanding principal of $614 million for loans serviced for
affiliates and $42 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):
2007 2006 2005
-----------------------------------
Transaction deposits $ 194,617 $ 148,986 $ 72,721
Savings 1,499 1,408 1,106
Time:
Certificates of
deposits under $100,000 88,465 69,844 50,129
Certificates of
deposits $100,000
and over 110,791 100,916 73,248
Other time deposits 17,374 15,754 13,196
------------------------------------------------------------
Total time 216,630 186,514 136,573
------------------------------------------------------------
Total $412,746 $336,908 $210,400
------------------------------------------------------------
The aggregate amounts of time deposits in denominations of $100,000 or more at
December 31, 2007 and 2006 were $2.4 billion and $2.6 billion, respectively.
Time deposit maturities are as follows: 2008 - $3.2 billion, 2009 - $339
million, 2010 - $252 million, 2011 - $261 million, 2012 - $272 million and $48
million thereafter.
At December 31, 2007, the Company had $530 million in fixed rate, brokered
certificates of deposits. The weighted-average interest rate paid on these
certificates is 4.50%. Interest rate swaps with notional amounts of $372
million, which may have been designated as fair value hedges of certain
certificates, modify the certificates from fixed rate to floating rates based on
changes in LIBOR. We receive a weighted average fixed rate of 4.31% on these
swaps and currently pay a floating rate of 4.88%.
Interest expense on time deposits during 2007 and 2006 was reduced by the net
accrued settlement from interest rate swaps of $2.6 million and $4.8 million,
respectively.
The aggregate amount of overdrawn transaction deposits that have been
reclassified as loan balances was $91 million at December 31, 2007 and $86
million at December 31, 2006.
80
(10) Other Borrowings
Information relating to other borrowings is summarized as follows (dollars in
thousands):
December 31
-----------------------------------------------------------------------------------------------
2007 2006 2005
-----------------------------------------------------------------------------------------------
Maximum Maximum Maximum
Outstanding Outstanding Outstanding
At Any At Any At Any
Balance Rate Month End Balance Rate Month End Balance Rate Month End
------------------------------------------------------------------------------------------------
Parent Company:
Revolving, unsecured line $ 50,000 5.42% $ 50,000 $ - - % $ - $ - - % $ 95,000
Subsidiary Banks:
Funds purchased and
repurchase agreements 3,225,131 4.30 3,225,131 2,348,516 5.52 2,688,175 1,337,911 4.53 2,291,509
Federal Home Loan Bank
advances 938,168 4.65 938,168 566,017 5.36 841,159 1,020,871 4.26 1,031,821
Subordinated debentures 398,273 5.91 548,187 297,800 6.91 300,230 295,964 6.30 297,980
Other 39,396 4.10 43,985 27,714 4.00 36,534 33,427 3.13 33,427
------------- ------------- -------------
Total subsidiary banks 4,600,968 4.52 3,240,047 5.63 2,688,173 4.61
------------- ------------- -------------
Total other borrowings $4,650,968 4.53 $3,240,047 5.63 $2,688,173 4.61
------------- ------------- -------------
Aggregate annual principal repayments of long-term debt at December 31, 2007 are
as follows (in thousands):
Parent Subsidiary
Company Banks
---------------------------
2008 $ - $4,172,264
2009 - 8,049
2010 50,000 475
2011 - 2,674
2012 - 1,436
Thereafter - 416,070
---------------------------
Total $ 50,000 $4,600,968
---------------------------
Funds purchased generally mature within one to ninety days from the transaction
date. At December 31, 2007, securities sold under agreements to repurchase
totaled $1.4 billion with related accrued interest payable of $835 thousand.
Additional information relating to repurchase agreements at December 31, 2007 is
as follows (dollars in thousands):
Amortized Market Repurchase Average
Security Sold/Maturity Cost Value Liability(1) Rate
-------------------------------------------------------------------------------------------------------------
U.S. Agency Securities:
Overnight(1) $1,132,839 $ 1,117,400 $1,090,104 3.45%
Long-term 329,564 327,539 306,193 4.98
-------------------------------------------------------------------------------------------------------------
Total Agency Securities $1,462,403 $ 1,444,939 $1,396,297 3.79%
-------------------------------------------------------------------------------------------------------------
(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 $414 million to secure BOK Financial's obligations to
depositors of public funds. The unused credit available to BOK Financial at
December 31, 2007 pursuant to the Federal Home Loan Bank's collateral policies
is $582 million.
BOK Financial has a $100 million unsecured revolving line of credit with certain
commercial banks that expires in December 2010. There was an outstanding
principal balance of $50 million on this credit agreement at December 31, 2007.
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
0.375%. 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 without prior approval. These covenants also
81
require BOK Financial and subsidiary banks to maintain minimum capital levels.
BOK Financial met all of the restrictive covenants at December 31, 2007.
In 2007, Bank of Oklahoma issued $250 million of subordinated debt due May 15,
2017. Interest on this debt is based upon a fixed rate of 5.75% through May 14,
2012 and on a floating rate of three-month LIBOR plus 0.69% thereafter. The
proceeds of this debt were used to fund the Worth National Bank and First United
Bank acquisitions and to fund continued asset growth.
In 2005, BOk issued $150 million of 10-year, fixed rate subordinated debt. The
cost of this subordinated debt, including issuance discounts and hedge loss is
5.56%. The proceeds of this debt were used to repay $95 million of BOK
Financial's unsecured revolving line of credit and to provide additional capital
to support asset growth. During 2006, a $150 million notional amount interest
rate swap was designated as a hedge of changes in fair value of the subordinated
debt due to changes in interest rates. The Company received a fixed rate of
5.257% and paid a variable rate based on 1-month LIBOR. This fair value hedging
relationship was discontinued and the interest rate swap was terminated in April
2007.
(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,
----------------------
2007 2006
----------------------
Deferred tax liabilities:
Pension contributions in excess
of book expense $ 4,900 $ 2,000
Valuation adjustments 30,600 28,900
Mortgage servicing rights 25,900 23,500
Lease financing 16,600 14,000
Other 3,700 3,500
------------------------------------------------------------
Total deferred tax liabilities 81,700 71,900
------------------------------------------------------------
Deferred tax assets:
Available for sale securities
mark-to-market 14,600 37,600
Stock-based compensation 5,700 5,500
Credit loss reserves 56,000 49,900
Valuation adjustments 9,400 5,900
Deferred book income 26,000 27,100
Deferred compensation 10,000 9,100
Other 12,500 14,100
------------------------------------------------------------
Total deferred tax assets 134,200 149,200
------------------------------------------------------------
Deferred tax assets in excess of
deferred tax liabilities $52,500 $77,300
------------------------------------------------------------
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,
-----------------------------------
2007 2006 2005
-----------------------------------
Current:
Federal $ 119,025 $ 113,554 $ 105,403
State 10,179 8,518 7,341
-----------------------------------------------------------
Total current 129,204 122,072 112,744
-----------------------------------------------------------
Deferred:
Federal (12,935) (7,001) 415
State (508) (446) 76
-----------------------------------------------------------
Total deferred (13,443) (7,447) 491
-----------------------------------------------------------
Total income tax $ 115,761 $ 114,625 $ 113,235
-----------------------------------------------------------
82
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,
-------------------------------
2007 2006 2005
-------------------------------
Amount:
Federal statutory tax $116,698 $114,660 $110,158
Tax exempt revenue (4,204) (3,529) (2,592)
Effect of state income taxes,
net of federal benefit 5,783 4,805 4,729
Intangible amortization - 82 216
Utilization of tax credits (1,218) (1,040) (929)
Bank-owned life insurance (3,411) (830) -
Reduction of tax accrual - (2,200) -
Other, net 2,113 2,677 1,653
------------------------------------------------------------
Total $115,761 $114,625 $113,235
------------------------------------------------------------
Due to the favorable resolution of certain state tax issues for the tax period
ended December 31, 2002, BOK Financial reduced its tax accrual by $2.2 million,
which was credited against current income tax expense in 2006.
Years ended December 31,
-------------------------------
2007 2006 2005
-------------------------------
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 1
Bank-owned life insurance (1) - -
Reduction of tax accrual - (1) -
Other, net 1 1 1
-------------------------------------------------------------
Total 35% 35% 36%
-------------------------------------------------------------
BOK Financial adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes," on January 1, 2007. As a result of the
implementation of Interpretation No. 48, BOK Financial recognized a $609
thousand increase in the liability for unrecognized tax benefits, which was
accounted for as a reduction to the January 1, 2007 balance of retained
earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):
2007
-----------
Balance as of January 1, 2007 -
before implementation $ 12,030
Addition for implementation 609
-----------------------------------------------
Balance as of January 1, 2007 -
after implementation 12,639
Additions for tax for current year
positions 4,100
Lapses of applicable statute of
limitations (3,539)
-----------------------------------------------
Balance as of December 31, 2007 $ 13,200
-----------------------------------------------
Any of the above unrecognized tax benefits, if recognized, would affect the
effective tax rate.
BOK Financial recognizes interest and penalties accrued related to unrecognized
tax benefits in income tax expense. During the years ended December 31, 2007 and
2006, the Company recognized $1 million during each year in interest and
penalties. The Company had approximately $2.3 million and $2.1 million for the
payment of interest and penalties accrued as of December 31, 2007 and 2006,
respectively. Federal statutes remain open for federal tax returns filed in the
previous three reporting periods. Various state income tax statutes remain open
for the previous three to six reporting periods. One of our acquired entities is
currently under examination by the Internal Revenue Service (IRS) for the year
ending December 31, 2005. The ultimate resolution is unlikely to have a material
impact on the financial statements.
83
(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,
-----------------------
2007 2006
-----------------------
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $ 58,220 $ 57,657
Service cost - 1,981
Interest cost 2,823 3,096
Actuarial (gain) loss (6,474) 871
Benefits paid (8,386) (5,385)
------------------------------------------------------------------------------
Projected benefit obligation at end of year(1,2) $ 46,183 $ 58,220
------------------------------------------------------------------------------
Change in plan assets:
Plan assets at fair value at beginning of year $ 63,038 $ 58,989
Actual return on plan assets 3,437 6,612
Company contributions - 2,822
Benefits paid (8,386) (5,385)
------------------------------------------------------------------------------
Plan assets at fair value at end of year $ 58,089 $ 63,038
------------------------------------------------------------------------------
Funded status of the plan / prepaid pension costs $11,906 $ 4,818
------------------------------------------------------------------------------
Components of net periodic benefit costs:
Service cost $ - $ 1,981
Interest cost 2,823 3,096
Expected return on plan assets (4,165) (4,785)
Amortization of unrecognized net loss 958 1,425
------------------------------------------------------------------------------
Net periodic pension cost $ (384) $ 1,717
------------------------------------------------------------------------------
(1) Projected benefit obligation equals accumulated benefit obligation.
(2) Projected benefit obligation is based on a January 1 measurement date.
Weighted-average assumptions as of December 31:
Discount rate 6.00% 5.50%
Expected return on plan assets 7.00% 8.00%
Rate of compensation increase N/A 5.25%
As of December 31, 2007, expected future benefit payments related to the Pension
Plan were as follows (in thousands):
2008 $ 3,128
2009 3,549
2010 3,508
2011 4,100
2012 3,933
2013 through 2017 18,065
-------------
$36,283
-------------
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 net
asset value of shares in the American Performance Balanced Fund is reported
daily based on market quotations for the Fund's securities. If market quotations
are not readily available, the securities' fair values are determined by the
Fund's pricing committee. The inception-to-date return on the fund, which is
used as an indicator when setting the expected return on plan assets, was 8.51%.
The maximum allowed and minimum required Pension Plan contributions for 2007
were $10.1 million and $0, respectively. Amounts contributed to the Pension Plan
during 2006 included $2.8 million attributable to 2005. No contributions were
made for 2007 or 2006.
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.
84
In 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 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 $11.6 million, $9.1 million and $4.6 million
for 2007, 2006 and 2005, respectively.
BOK Financial also sponsors a defined benefit post-retirement employee medical
plan, which pays 50 percent of annual medical insurance premiums for retirees
who meet certain age and service requirements. Assets of the retiree medical
plan consist primarily of shares in a cash management fund. The post-retirement
medical plan is limited to current retirees and certain employees who were age
60 or older at the time the plan was frozen in 1993. The net obligation
recognized under the plan was $2.1 million at December 31, 2007. A 1% change in
medical expense trends would not significantly affect the net obligation or cost
of this plan.
BOK Financial offers numerous incentive compensation plans that are aligned with
the Company's growth strategy. Compensation awarded under these plans may be
based on defined formulas, other performance criteria or discretionary.
Incentive compensation is designed to motivate and reinforce sales and customer
service behavior in all markets. Earnings were charged $71.4 million in 2007,
$65.2 million in 2006 and $49.8 million in 2005 for incentive compensation
plans.
85
(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 2005, 2006 and 2007
under these plans:
Weighted
Average
Exercise
Number Price
--------------------------
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 awarded 956,475 54.18
Options exercised (703,833) 32.41
Options forfeited (429,848) 43.74
Options expired (1,249) 45.80
------------------------------------------------------------
Options outstanding at
December 31, 2007 3,318,170 $43.50
------------------------------------------------------------
Options vested at
December 31, 2007 743,712 $31.33
------------------------------------------------------------
86
The following table summarizes information concerning currently outstanding and
vested stock options:
Options Outstanding Options Vested
---------------------------------------------------------------
Weighted Weighted
Average Average Weighted
Range of Remaining Exercise Average
Exercise Number Contractual Price Number Exercise
Prices Outstanding Life(years) Vested Price
$16.17 683 0.25 $16.17 683 $16.17
17.37 - 19.02 234,097 1.67 17.89 234,097 17.89
28.27 - 30.87 464,489 2.78 29.82 210,770 29.33
37.74 423,390 3.50 37.74 119,467 37.74
45.15 - 47.34 547,583 4.00 47.32 67,934 47.28
44.00 - 47.99 70,232 0.12 46.90 70,232 46.90
47.05 - 48.53 570,828 5.00 47.06 40,529 47.08
50.61 - 54.00 177,114 1.00 52.52 - -
54.33 653,888 6.00 54.33 - -
52.54 - 54.28 175,866 2.00 53.57 - -
---------------------------------------------------------------
Compensation expense for stock options is generally recognized based on the fair
value of options granted over the options' vesting period. The fair value of
options was determined as of the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions:
2007 2006 2005
---------- ---------- -----------
Average risk-free interest rate 4.68% 4.42% 3.69%
Dividend yield 1.10% 0.90% 0.90%
Volatility factors .143 .161 .168
Weighted average expected life 4.9 years 4.9 years 4.9 years
Weighted average fair value $9.91 $9.56 $10.01
Compensation cost of stock options granted that may be recognized as
compensation expense in future years totaled $11.3 million at December 31, 2007.
Subject to adjustments for forfeitures, we expect to recognize compensation
expense for current outstanding options of $4.8 million in 2008, $3.2 million in
2009, $1.7 million in 2010, $995 thousand in 2011, $497 thousand in 2012 and
$180 thousand thereafter. Stock option expense for the years ended December 31,
2007, 2006 and 2005 was $6.3 million, $6.4 million and $5.5 million,
respectively. The intrinsic value of options exercised during the years ended
December 31, 2007, 2006 and 2005 was $14.9 million, $16.6 million and $14.9
million, respectively. The aggregate intrinsic value of options outstanding as
of December 31, 2007 and 2006 was $27.2 million and $57.2 million, respectively.
The aggregate intrinsic value of options exercisable as of December 31, 2007 and
2006 was $15.1 million and $21.2 million, respectively.
BOK Financial also issues non-vested common shares under the various stock-based
compensation plans. At December 31, 2007, a total of 116,463 non-vested common
shares have been awarded, including 31,462 awarded in 2007. The weighted average
grant date fair value of non-vested shares awarded in 2007 was $54.28 per share.
Unrecognized compensation cost of non-vested shares totaled $2.2 million at
December 31, 2007. Subject to adjustment for forfeitures, we expect to recognize
compensation expense of $754 thousand in 2008, $630 thousand in 2009, $499
thousand in 2010 and $290 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,
2007, the recorded obligation for liability awards was $5.4 million.
Compensation expense for liability awards was $506 thousand in 2007, $4.7
million in 2006, and a credit of $632 thousand in 2005. Reduction in 2007
expense resulted from a decrease in the fair value of BOK Financial common
stock. 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.
87
During January 2008, BOK Financial awarded the following stock-based
compensation:
---------- --------- ------------
Exercise Fair Value /
Number Price Award
---------- --------- ------------
Equity awards:
Stock options 859,679 $48.46 $ 7.54
Nonvested stock 48,853 - 48.46
----------
Total equity awards 908,532
----------
Total stock-based awards 908,532
-------------------------- ---------- --------- ------------
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. None of the stock-based compensation awarded in
January 2008 represents liability awards.
(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, 2007 or 2006.
Activity in loans to related parties is summarized as follows (in thousands):
2007 2006
------------ ------------
Beginning balance $160,901 $130,364
Advances 700,742 562,994
Payments (700,488) (560,009)
Adjustments(1) 90,896 27,552
------------------------------- ------------ ------------
Ending balance $252,051 $160,901
------------------------------- ------------ ------------
(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.
At December 31, 2007, derivative contracts carried as assets included $130
million from SemGroup, LP. Mr. Thomas S. Kivisto, President and CEO of SemGroup,
LP, is a member of BOK Financial's board of directors. Our exposure to SemGroup,
LP consists primarily of option contracts to sell oil and natural gas in varying
monthly quantities over the next seven months. The pricing, collateral and other
terms of these contracts are consistent with terms we offer to similarly
risk-graded customers.
During 2007, the Company invested $7.0 million, pursuant to merchant banking
regulations applicable to bank holding companies, in an entity controlled by Mr.
George Kaiser, BOK Financial's principal shareholder. The Company also rents
office space in facilities owned by affiliates of Mr. Kaiser. Lease payments for
2007 totaled $801 thousand.
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 Funds' products are offered to customers, employee benefit
plans, trusts and the general public in the ordinary course of business.
Approximately 98% of AP Funds' assets of $3.9 billion are held for BOK
Financial's clients.
88
(15) Commitments and Contingent Liabilities
In September 2006, BISYS settled the SEC's two-year investigation of BISYS Fund
Services Ohio, Inc. ("BISYS") marketing assistance agreements with 27 different
families of mutual funds, including a BISYS marketing arrangement with AXIA
which had been terminated in July 2004. In the SEC settlement, BISYS consented
to an order in which the SEC determined that BISYS had "willfully aided and
abetted and caused" the 27 investment advisors to (i) violate provisions of the
Investment Advisors Act of 1940 that prohibit fraudulent conduct; (ii) violate
provisions of the 1940 Act that prohibit the making of any untrue statement of a
material fact in a registration statement filed by the mutual fund with the SEC,
and (iii) violate provisions of the 1940 Act that require the disclosure and
inclusion of all distribution arrangements and expenses in the fund's 12b-1 fee
plan ("the SEC BYSIS Order"). AXIA 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. On
October 10, 2006, the Examinations Division of the Securities and Exchange
Commission (the "SEC") conducted an examination of AXIA. The examination was
concluded in July 2007 with no action taken by the Examinations Division. In
August 2007, AXIA settled all claims relating to the BISYS marketing
arrangements with the AP Funds for $2.2 million. The AP Funds settlement is not
binding on the SEC which is continuing to investigate the matter.
At December 31, 2007, AP Funds' assets included $1.6 billion of U.S. Treasury,
$1.8 billion of cash management and $399 million of tax-free money market funds.
Assets of these funds consist of highly-rated, short-term obligations of the
U.S. Treasury, corporate issuers and U.S. states and municipalities. The net
asset value of units in these funds was $1.00 at December 31, 2007. An
investment in these funds is not insured by the Federal Deposit Insurance
Corporation or guaranteed by BOK Financial or any of its subsidiaries. BOK
Financial may, but is not obligated to purchase assets from these funds to
maintain the net asset value at $1.00.
In the ordinary course of business, BOK Financial and its subsidiaries are
subject to legal actions and complaints. Management believes, based upon the
opinion of counsel, that the actions and liability or loss, if any, resulting
from the final outcomes of the proceedings will not be material in the
aggregate.
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 2008 through 2009 and $195 thousand in 2010. Net rent expense on this
lease was $3.0 million in 2007 and 2006 and $2.9 million in 2005. Total rent
expense for BOK Financial was $18.8 million in 2007, $16.5 million in 2006, and
$15.3 million in 2005.
At December 31, 2007, future minimum lease payments for equipment and premises
under operating leases were as follows: $16.4 million in 2008, $15.4 million in
2009, $14.6 million in 2010, $11.8 million in 2011, $8.6 million in 2012, and a
total of $97.4 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 $315 million and $299
million at December 31, 2007 and 2006, 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 $537 thousand at December 31, 2007.
At December 31, 2007, the Company has funded $30.4 million and has commitments
to fund an additional $30.7 million in various unrelated alternative
investments. Alternative investments generally consist of limited partnership
interests in or loans to entities that invest in distressed real estate loans
and properties, energy development, venture capital and other activities. The
Company is prohibited by banking regulations from controlling or actively
managing the activities of these investments.
BOKF Equity, LLC, indirectly a wholly-owned subsidiary of BOK Financial, is the
general partner in two private equity funds ("the Funds"). The Funds provide
alternative investment opportunities to certain customers, some of which are
related parties, through limited partnerships. The Funds generally invest in
distressed assets, asset buy-out or venture capital limited partnerships or
limited liability companies. The general partner has contingent obligations
through the Funds to make additional investments totaling $27.6 million as of
December 31, 2007. Substantially all of those contingent obligations are offset
by commitments of BOK Financial customers.
During the third quarter of 2007, Bank of Oklahoma agreed to guarantee rents
totaling $28.4 million over 10 years to the City of Tulsa ("City") as owner of a
building immediately adjacent to the Bank's main office. These rents are due for
space currently rented by third-party tenants in the building. In return for
this guarantee, Bank of Oklahoma will receive 80% of net rent as defined in an
agreement with the City over the next 10 years from currently vacant space in
the same building. The maximum
89
amount that Bank of Oklahoma may receive under this agreement is $4.5 million.
The fair value of this agreement at inception is zero and no asset or liability
is currently recognized in the Company's financial statements.
On November 7, 2007, Visa announced that it had reached a settlement with
American Express related to an antitrust lawsuit. In a subsequent filing with
the Securities and Exchange Commission, Visa disclosed that it had recognized a
contingent liability for a similar lawsuit filed by Discover. In addition, Visa
is a party to other litigation matters. As a member of Visa, BOK Financial is
obligated for a proportionate share of losses incurred by Visa. The Company has
accrued $2.8 million to recognize its share of the contingent liabilities
related to the American Express and Discover litigation and has accrued $300
thousand to recognize its guaranty obligation for other litigation. Visa intends
that payments related to these litigation matters will be funded by an escrow
account to be established with a portion of the proceeds from its initial public
offering, which is currently planned for 2008. The Company expects that its
proportionate share of the proceeds of Visa's initial public offering will
exceed its contingent obligations related to Visa's litigation based on
information available at this time.
(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.
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 $50 million, $37 million and $20
million in 2007, 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.
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, 2007, BOK
Financial's subsidiary banks could declare dividends up to $93 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, 2007, the subsidiary banks
could declare dividends of up to $75 million under this policy. The subsidiary
banks declared and paid dividends of $254 million, $81 million and $151 million
in 2007, 2006, and 2005, respectively.
Loans to a single affiliate may not exceed 10% and loans to all affiliates may
not exceed 20% of unimpaired capital and surplus, as defined. Additionally,
loans to affiliates must be fully secured. As of December 31, 2007 and 2006,
outstanding loans totaled $22 million and $29 million, respectively, and
outstanding letters of credit totaled $17 million and $12 million, respectively.
Total loan commitments to affiliates at December 31, 2007 were $161 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. Total capital consists
90
primarily of Tier I capital plus preferred stock, subordinated debt and reserves
for credit losses, subject to certain limitations. All of BOK Financial's
banking subsidiaries exceeded the regulatory definition of well capitalized.
December 31,
------------------------------------------------------------
2007 2006
------------------------------------------------------------
Amount Ratio Amount Ratio
------------------------------------------------------------
(Dollars in thousands)
Total Capital (to Risk Weighted Assets):
Consolidated $ 2,167,763 12.54% $ 1,801,876 11.58%
BOk 1,432,405 11.95 1,246,534 10.51
Bank of Texas 380,221 10.98 305,957 10.98
Bank of Albuquerque 112,693 16.35 96,594 16.22
Bank of Arkansas 28,058 11.31 19,640 11.75
Colorado State Bank and Trust 88,603 15.58 53,981 14.96
Bank of Arizona 21,715 12.07 17,266 13.34
Bank of Kansas City 17,354 47.21 19,915 329.76
Tier I Capital (to Risk Weighted Assets):
Consolidated $ 1,621,583 9.38% $ 1,521,504 9.78%
BOk 937,477 7.82 1,006,372 8.49
Bank of Texas 349,793 10.10 280,294 10.06
Bank of Albuquerque 105,089 15.24 90,418 15.18
Bank of Arkansas 25,198 10.16 17,549 10.50
Colorado State Bank and Trust 85,542 15.04 51,061 14.15
Bank of Arizona 19,644 10.92 15,954 12.33
Bank of Kansas City 17,252 46.93 19,915 329.76
Tier I Capital (to Average Assets):
Consolidated $ 1,621,583 8.20% $ 1,521,504 8.79%
BOk 937,477 6.60 1,006,372 8.26
Bank of Texas 349,793 9.35 280,294 7.95
Bank of Albuquerque 105,089 7.93 90,418 7.28
Bank of Arkansas 25,198 10.05 17,549 10.95
Colorado State Bank and Trust 85,542 6.88 - 51,061 5.68
Bank of Arizona 19,644 10.44 - 15,954 9.98
Bank of Kansas City 17,252 30.92 - 19,915 136.27
91
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 $152 thousand will be reclassified into
income through the February 2008 expiration date of the hedges. 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, 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)
Unrealized gains (losses) on securities 48,308 - - 48,308
Unrealized gains on cash flow hedges - 2,201 - 2,201
Unrealized losses on employee benefit plans - - 7,518 7,518
Tax benefit (expense) on unrealized gains (losses) (17,239) (856) (2,925) (21,020)
Reclassification adjustment for losses
realized and included in net income 8,117 211 (384) 7,944
Reclassification adjustment for tax benefit
on realized losses (2,809) (82) 150 (2,741)
-----------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007 $ (22,775) $ (1,461) $ (6,998) $ (31,234)
-----------------------------------------------------------------------------------------------------------------
92
(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,
--------------------------------------------
2007 2006 2005
--------------------------------------------
Numerator:
Net income $ 217,664 $ 212,977 $ 201,505
Preferred stock dividends - - (375)
---------------------------------------------------------------------------------------------------------------------
Numerator for basic earnings per share - income
available to common stockholders 217,664 212,977 201,130
---------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock dividends - - 375
---------------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share - income available
to common stockholders after assumed conversion $ 217,664 $ 212,977 $ 201,505
---------------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share - weighted average shares 67,083,200 66,759,384 64,067,873
Effect of dilutive securities:
Employee stock compensation plans(1) 467,338 550,621 628,060
Convertible preferred stock - - 2,351,131
---------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 467,338 550,621 2,979,191
---------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 67,550,538 67,310,005 67,047,064
---------------------------------------------------------------------------------------------------------------------
Basic earnings per share $3.24 $3.19 $3.14
---------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $3.22 $3.16 $3.01
---------------------------------------------------------------------------------------------------------------------
(1)Excludes employee stock options with exercise 799,087 440,216 855,326
prices greater than the current market price.
93
(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 consists primarily of the corporate and commercial banking services
provided by Bank of Texas, Bank of Albuquerque, Bank of Arkansas, Colorado State
Bank and Trust, Bank of Arizona and Bank of Kansas City in their respective
markets. It also includes fiduciary services provided by Colorado State Bank and
Trust.
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.
94
Oklahoma Oklahoma All
Corporate Consumer Mortgage Wealth Regional Other/
(In Thousands) Banking Banking Banking Management Banking Eliminations Total
------------------------------------------------------------------------------------------------
Year ended December 31, 2007
Net interest revenue/(expense)
from external sources $ 248,889 $ (68,034) $ 36,800 $ 13,385 $ 406,386 $ (92,941) $ 544,485
Net interest
revenue/(expense)
from internal sources (93,375) 140,980 (32,451) 18,781 (119,118) 85,183 -
----------------------------------------------------------------------------------------------------------------------------
Total net interest revenue 155,514 72,946 4,349 32,166 287,268 (7,758) 544,485
Provision for credit losses 7,234 2,918 608 1,127 9,218 13,616 34,721
Other operating revenue 94,940 78,296 16,732 137,057 67,036 (3,447) 390,614
Capitalized mortgage
servicing rights - - 14,080 - - - 14,080
Financial instruments
gains (losses) 57 107 (486) 13 785 (6,522) (6,046)
Operating expense 115,116 87,556 31,706 120,725 194,734 22,257 572,094
Change in fair value of
mortgage servicing rights - - 2,893 - - - 2,893
Income taxes 49,855 23,681 (207) 18,432 58,643 (34,643) 115,761
----------------------------------------------------------------------------------------------------------------------------
Net income $ 78,306 $ 37,194 $ (325) $ 28,952 $ 92,494 $ (18,957) $ 217,664
----------------------------------------------------------------------------------------------------------------------------
Average assets $5,841,449 $2,927,994 $ 724,378 $1,894,677 $ 8,785,029 $(1,147,759) $19,025,768
Average economic capital 391,920 61,780 24,100 154,540 445,990 734,133 1,812,463
Average invested capital - - - - 789,290 - -
Performance measurements:
Return on assets 1.34% 1.27% (0.04)% 1.53% 1.05% - 1.14%
Return on economic capital 19.98 60.20 (1.35) 18.73 20.74 - 12.01
Return on invested capital - - - - 11.72 - -
Efficiency ratio 45.96 57.89 90.17 71.34 54.96 - 60.27
Reconciliation to Consolidated Financial Statements
Other Other
Net Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
---------------------------------------------------------------------
Total reportable segments $552,243 $ 408,141 $552,730 $236,621 $20,173,527
Unallocated items:
Tax-equivalent adjustment 9,120 - - 9,120 -
Funds management and other
(including
eliminations), net (16,878) (3,447) 22,257 (28,077) (1,147,759)
--------------------------------------------------------------------------------------------------
BOK Financial consolidated $544,485 $ 404,694 $574,987 $217,664 $19,025,768
--------------------------------------------------------------------------------------------------
95
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 $ 244,781 $ (62,447) $ 23,638 $ 15,148 $ 334,648 $ (69,080) $ 486,688
Net interest revenue/(expense)
from internal sources (95,766) 131,131 (20,307) 13,030 (79,581) 51,493 -
----------------------------------------------------------------------------------------------------------------------------
Total net interest revenue 149,015 68,684 3,331 28,178 255,067 (17,587) 486,688
Provision for credit losses (495) 2,780 504 222 7,376 8,015 18,402
Other operating revenue 89,106 72,699 17,287 124,170 55,130 2,886 361,278
Capitalized mortgage
servicing rights - - 11,917 - - - 11,917
Financial instruments
gains (losses) 113 80 (1,102) 15 34 (712) (1,572)
Operating expense 111,380 80,250 30,731 105,906 159,737 27,312 515,316
Change in fair value of
mortgage servicing rights - - (3,009) - - - (3,009)
Income taxes 49,538 22,730 1,247 17,985 52,563 (29,438) 114,625
----------------------------------------------------------------------------------------------------------------------------
Net income $ 77,811 $ 35,703 $ 1,960 $ 28,250 $ 90,555 $ (21,302) $ 212,977
----------------------------------------------------------------------------------------------------------------------------
Average assets $5,214,916 $2,836,692 $ 519,371 $1,831,377 $ 7,019,426 $(614,191) $16,807,591
Average economic capital 395,490 58,570 24,460 149,960 434,440 546,439 1,609,359
Average invested capital - - - - 692,560 - -
Performance measurements:
Return on assets 1.49% 1.26% 0.38% 1.54% 1.29% - 1.27%
Return on economic capital 19.67 60.96 8.01 18.84 20.84 - 13.23
Return on invested capital - - - - 13.08 - -
Efficiency ratio 46.77 56.76 94.46 69.52 51.50 - 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 $ 370,309 $484,995 $234,279 $17,421,782
Unallocated items:
Tax-equivalent adjustment 6,963 - - 6,963 -
Funds management and other
(including
eliminations), net (24,550) 2,886 27,312 (28,265) (614,191)
--------------------------------------------------------------------------------------------------
BOK Financial consolidated $486,688 $ 373,195 $512,307 $212,977 $16,807,591
--------------------------------------------------------------------------------------------------
96
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 338,470 51,480 23,580 114,400 326,650 607,266 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 20.13 47.61 7.81 19.15 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)
97
(19) Fair Value of Financial Instruments
The following table presents the carrying values and estimated fair values of
financial instruments as of December 31, 2007 and 2006 (dollars in thousands):
Range of Average Estimated
Carrying Contractual Repricing Discount Fair
Value Yields (in years) Rate Value
---------------------------------------------------------------------
2007:
Cash and cash equivalents $ 890,413 $ 890,413
Securities 6,098,914 6,099,753
Loans:
Commercial 6,737,505 1.45 -18.00% 0.43 4.57 - 7.25% 7,008,023
Commercial real estate 2,750,472 5.63 -18.00 1.42 7.25 2,749,529
Residential mortgage 1,531,296 3.81 -12.75 7.00 3.98 1,606,663
Residential mortgage - held for sale 76,677 - - - 76,677
Consumer 921,297 4.50 -21.00 1.95 7.25 936,928
---------------------------------------------------------------------------------------------------------------------
Total loans 12,017,247 12,377,820
Reserve for loan losses (126,677) -
---------------------------------------------------------------------------------------------------------------------
Net loans 11,890,570 12,377,820
Derivative instruments with positive
fair value 502,446 502,446
Deposits with no stated maturity 9,128,653 9,128,653
Time deposits 4,330,638 1.84 - 10.00 1.10 3.37 - 5.20 4,431,489
Other borrowings 4,252,695 2.45 - 6.15 0.81 3.41 - 4.95 3,851,863
Subordinated debentures 398,273 5.47 5.52 3.41 368,638
Derivative instruments with negative
fair value 513,840 513,840
---------------------------------------------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------------------------------------------
The preceding table presents the estimated fair values of financial instruments.
Fair value is the estimated price that would be received to sell the financial
assets or paid to transfer the financial liabilities in an orderly transaction
between market participants. Because no market exists for certain of these
financial instruments and management does not intend to sell these financial
instruments, BOK Financial does not know whether the fair values shown above
represent values at which the respective financial instruments could be sold
individually or in the aggregate.
The following methods and assumptions were used in estimating the fair value of
these financial instruments:
Cash and Cash Equivalents
The book value reported in the consolidated balance sheet for cash and
short-term instruments approximates those assets' fair values.
98
Securities
The fair values of securities are based on quoted market prices or dealer
quotes, when available. If quotes are not available, fair values are based on
quoted prices of comparable instruments.
Derivatives
All derivative instruments are carried on the balance sheet at fair value. Fair
values for exchange-traded contracts are based on quoted prices. Fair values for
over-the-counter interest rate, commodity and foreign exchange contracts are
based on valuations provided either by third-party dealers in the contracts,
quotes provided by independent pricing services, or a third-party provided
pricing model.
Loans
The fair value of loans, excluding loans held for sale, are based on discounted
cash flow analyses using interest rates currently being offered for loans with
similar remaining terms to maturity and credit risk, adjusted for the impact of
interest rate floors and ceilings. The fair values of classified loans were
estimated to approximate their carrying values less loan loss reserves allocated
to these loans of $23 million and $12 million at December 31, 2007 and 2006,
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, 2007 and 2006.
Fair value of financial assets and liabilities that are measured on a recurring
basis are as follows as of December 31, 2007 (in thousands):
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Total Instruments Inputs Inputs
----------- ---------------- --------------- ----------------
Assets:
Trading securities $45,724 $ 4,130 $41,594
Available for sale securities 5,650,540 31,862 5,618,678
Mortgage trading securities 154,701 154,701
Mortgage servicing rights 70,009 70,009(1)
Derivative contracts 502,446 502,446
Liabilities:
Hedged certificates of deposit 234,744 234,744
Derivative contracts 513,840 513,840
(1) A reconciliation of the beginning and ending fair value of mortgage
servicing rights and disclosures of significant assumptions used to
determine fair value are presented in Note 5, Mortgage Banking
Activities.
99
The fair value of assets and liabilities based on significant other observable
inputs are generally provided to us by third-party pricing services and are
based on one or more of the following:
o Quoted prices for similar, but not identical, assets or liabilities in
active markets;
o Quoted prices for identical or similar assets or liabilities in inactive
markets;
o Inputs other than quoted prices that are observable, such as interest rate
and yield curves, volatilities, prepayment speeds, loss severities, credit
risks and default rates;
o Other inputs derived from or corroborated by observable market inputs.
The underlying methods used by the third-party pricing services are considered
in determining the primary inputs used to determine fair values.
(20) Parent Company Only Financial Statements
Summarized financial information for BOK Financial - Parent Company Only
follows:
Balance Sheets
(In Thousands) December 31,
----------------------------
2007 2006
----------------------------
Assets
Cash and cash equivalents $ 24,257 $ 16,507
Securities - available for sale 13,361 14,121
Investment in subsidiaries 1,949,099 1,692,231
Other assets 1,503 1,584
---------------------------------------------------------------------------
Total assets $1,988,220 $1,724,443
---------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Other borrowings $ 50,000 $ -
Other liabilities 2,836 3,421
---------------------------------------------------------------------------
Total liabilities 52,836 3,421
---------------------------------------------------------------------------
Common stock 4 4
Capital surplus 722,088 688,861
Retained earnings 1,332,954 1,166,994
Treasury stock (31,234) (61,393)
Accumulated other comprehensive loss (88,428) (73,444)
---------------------------------------------------------------------------
Total shareholders' equity 1,935,384 1,721,022
---------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,988,220 $1,724,443
---------------------------------------------------------------------------
Statements of Earnings
(In Thousands)
2007 2006 2005
-------------------------------------------
Dividends, interest and fees received from $254,256 $ 80,855 $153,462
subsidiaries
Other operating revenue 482 476 468
------------------------------------------------------------------------------------------------
Total revenue 254,738 81,331 153,930
------------------------------------------------------------------------------------------------
Interest expense 715 - 1,500
Professional fees and services 601 506 589
Other operating expense 220 191 22
------------------------------------------------------------------------------------------------
Total expense 1,536 697 2,111
------------------------------------------------------------------------------------------------
Income before taxes and equity in undistributed
income of subsidiaries 253,202 80,634 151,819
Federal and state income tax credit 497 (28) (682)
------------------------------------------------------------------------------------------------
Income before equity in undistributed income of
subsidiaries 252,705 80,662 152,501
Equity in undistributed income of subsidiaries (35,041) 132,315 49,004
------------------------------------------------------------------------------------------------
Net income $217,664 $212,977 $201,505
------------------------------------------------------------------------------------------------
100
Statements of Cash Flows
(In Thousands)
2007 2006 2005
----------------------------------------
Cash flows from operating activities:
Net income $217,664 $212,977 $201,505
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries 35,041 (132,315) (49,004)
Tax benefit on exercise of stock options 3,460 4,014 3,583
Change in other assets (3,090) (22,949) (12,337)
Change in other liabilities (585) 815 (889)
------------------------------------------------------------------------------------------------
Net cash provided by operating activities 252,490 62,542 142,858
------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in subsidiaries (240,718) (20,865) (34,264)
------------------------------------------------------------------------------------------------
Net cash used by investing activities (240,718) (20,865) (34,264)
------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in other borrowings 50,000 - -
Pay down of other borrowings - - (95,000)
Issuance of common and treasury stock, net 13,747 12,647 7,032
Cash dividends (50,416) (36,788) (20,343)
Repurchase of common stock (17,353) (12,103) (2,439)
------------------------------------------------------------------------------------------------
Net cash used by financing activities (4,022) (36,244) (110,750)
------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 7,750 5,433 (2,156)
Cash and cash equivalents at beginning of period 16,507 11,074 13,230
------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 24,257 $ 16,507 $ 11,074
------------------------------------------------------------------------------------------------
Cash paid for interest $ 560 $ 10 $ 1,698
------------------------------------------------------------------------------------------------
101
102
Annual Financial Summary - Unaudited
Consolidated Daily Average Balances,
Average Yields and Rates
(Dollars in Thousands) 2007
-----------------------------------------------
Average Revenue/ Yield/
Balance Expense(1) Rate
-----------------------------------------------
Assets
Taxable securities(3) $ 5,166,218 $248,972 4.85%
Tax-exempt securities(3) 341,913 21,293 6.39
------------------------------------------------------------------------------------------------------------------------------
Total securities(3) 5,508,131 270,265 4.94
------------------------------------------------------------------------------------------------------------------------------
Trading securities 29,043 1,948 6.71
Funds sold and resell agreements 77,890 4,480 5.75
Loans(2) 11,440,045 893,164 7.81
Less reserve for loan losses 120,086 - -
------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 11,319,959 893,164 7.89
------------------------------------------------------------------------------------------------------------------------------
Total earning assets(3) 16,935,023 1,169,857 6.92
------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,090,745
------------------------------------------------------------------------------------------------------------------------------
Total assets $19,025,768
------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Transaction deposits $ 6,556,197 $ 194,617 2.97%
Savings deposits 165,729 1,499 0.90
Time deposits 4,568,738 216,630 4.74
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 11,290,664 412,746 3.66
------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase agreements 2,758,306 134,347 4.87
Other borrowings 838,708 44,258 5.28
Subordinated debentures 395,050 24,901 6.30
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 15,282,728 616,252 4.03
------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,321,531
Other liabilities 609,046
Shareholders' equity 1,812,463
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $19,025,768
------------------------------------------------------------------------------------------------------------------------------
Tax-equivalent Net Interest Revenue(3) $ 553,605 2.89%
Tax-equivalent Net Interest Revenue to Earning Assets(3) 3.28
Less tax-equivalent adjustment(1) 9,120
------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 544,485
Provision for credit losses 34,721
Other operating revenue 398,648
Other operating expense 574,987
------------------------------------------------------------------------------------------------------------------------------
Income before taxes 333,425
Federal and state income tax 115,761
------------------------------------------------------------------------------------------------------------------------------
Net Income $217,664
------------------------------------------------------------------------------------------------------------------------------
(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.
103
2006 2005
------------------------------------------------------------------------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
----------------------------------------------- ------------------------------------------------
$ 4,770,959 $222,531 4.67% $ 4,769,666 $205,952 4.34%
290,356 15,572 5.44 226,961 11,587 5.13
------------------------------------------------------------------------------------------------------
5,061,315 238,103 4.71 4,996,627 217,539 4.38
------------------------------------------------------------------------------------------------------
21,213 1,044 4.92 15,892 770 4.85
36,196 1,841 5.09 38,521 1,287 3.34
9,706,866 752,404 7.75 8,489,751 555,520 6.54
106,689 - - 110,158 - -
------------------------------------------------------------------------------------------------------
9,600,177 752,404 7.84 8,379,593 555,520 6.63
------------------------------------------------------------------------------------------------------
14,718,901 993,392 6.75 13,430,633 775,116 5.78
------------------------------------------------------------------------------------------------------
2,088,690 2,153,054
------------------------------------------------------------------------------------------------------
$16,807,591 $15,583,687
------------------------------------------------------------------------------------------------------
$ 5,477,886 $148,986 2.72% $ 4,402,810 $ 72,721 1.65%
148,656 1,408 0.95 159,429 1,106 0.69
4,279,610 186,514 4.36 3,894,429 136,573 3.51
------------------------------------------------------------------------------------------------------
9,906,152 336,908 3.40 8,456,668 210,400 2.49
------------------------------------------------------------------------------------------------------
2,145,648 105,483 4.92 1,936,792 61,606 3.18
725,329 37,070 5.11 996,266 34,220 3.43
294,962 20,280 6.88 236,589 14,367 6.07
------------------------------------------------------------------------------------------------------
13,072,091 499,741 3.82 11,626,315 320,593 2.76
------------------------------------------------------------------------------------------------------
1,473,645 1,607,702
652,496 887,824
1,609,359 1,461,846
------------------------------------------------------------------------------------------------------
$16,807,591 $15,583,687
------------------------------------------------------------------------------------------------------
$ 493,651 2.93% $ 454,523 3.02%
3.36 3.39
6,963 5,182
------------------------------------------------------------------------------------------------------
486,688 449,341
18,402 12,441
371,623 346,946
512,307 469,106
------------------------------------------------------------------------------------------------------
327,602 314,740
114,625 113,235
------------------------------------------------------------------------------------------------------
$212,977 $201,505
------------------------------------------------------------------------------------------------------
104
Quarterly Financial Summary - Unaudited
Consolidated Daily Average Balances,
Average Yields and Rates
(Dollars in Thousands Except Per Share Data)
Three Months Ended
-------------------------------------------------------------------------
December 31, 2007 September 30, 2007
---------------------------------- -------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
---------------------------------- -------------------------------------
Assets
Taxable securities(3) $ 5,633,173 $68,670 4.86% $ 5,206,482 $ 62,531 4.84%
Tax-exempt securities(3) 328,900 5,990 7.19 360,710 5,820 6.44
-------------------------------------------------------------------------------------- -------------------------------------
Total securities(3) 5,962,073 74,660 4.99 5,567,192 68,351 4.95
-------------------------------------------------------------------------------------- -------------------------------------
Trading securities 29,303 489 6.62 24,413 459 7.46
Funds sold and resell agreements 86,948 1,303 5.95 101,281 1,588 6.22
Loans(2) 11,806,242 223,146 7.50 11,709,638 232,446 7.88
Less reserve for loan losses 125,996 - - 123,059 - -
-------------------------------------------------------------------------------------- -------------------------------------
Loans, net of reserve 11,680,246 223,146 7.58 11,586,579 232,446 7.96
-------------------------------------------------------------------------------------- -------------------------------------
Total earning assets(3) 17,758,570 299,598 6.70 17,279,465 302,844 6.99
-------------------------------------------------------------------------------------- -------------------------------------
Cash and other assets 2,349,856 2,129,713
-------------------------------------------------------------------------------------- -------------------------------------
Total assets $20,108,426 $19,409,178
-------------------------------------------------------------------------------------- -------------------------------------
Liabilities and Shareholders' Equity
Transaction deposits $ 7,016,136 $49,358 2.79% $ 6,683,056 $ 50,650 3.01%
Savings deposits 160,170 348 0.86 200,362 410 0.81
Time deposits 4,544,802 53,613 4.68 4,798,812 58,436 4.83
-------------------------------------------------------------------------------------- -------------------------------------
Total interest-bearing deposits 11,721,108 103,319 3.50 11,682,230 109,496 3.72
-------------------------------------------------------------------------------------- -------------------------------------
Funds purchased and repurchase agreements 3,158,153 35,169 4.42 2,603,372 32,484 4.95
Other borrowings 936,353 11,611 4.92 880,894 11,789 5.31
Subordinated debentures 398,109 5,708 5.69 471,458 7,166 6.03
-------------------------------------------------------------------------------------- -------------------------------------
Total interest-bearing liabilities 16,213,723 155,807 3.81 15,637,954 160,935 4.08
-------------------------------------------------------------------------------------- -------------------------------------
Demand deposits 1,293,419 1,300,280
Other liabilities 706,385 649,964
Shareholders' equity 1,894,899 1,820,980
-------------------------------------------------------------------------------------- -------------------------------------
Total liabilities and shareholders' equity $20,108,426 $ 19,409,178
-------------------------------------------------------------------------------------- -------------------------------------
Tax-equivalent Net Interest Revenue(3) $143,791 2.89% $141,909 2.91%
Tax-equivalent Net Interest Revenue to Earning Assets(3) 3.22 3.27
Less tax-equivalent adjustment(1) 2,502 2,464
-------------------------------------------------------------------------------------- -------------------------------------
Net Interest Revenue 141,289 139,445
Provision for credit losses 13,200 7,201
Other operating revenue 107,316 109,372
Other operating expense 157,727 151,018
-------------------------------------------------------------------------------------- -------------------------------------
Income before taxes 77,678 90,598
Federal and state income tax 26,518 30,750
-------------------------------------------------------------------------------------- -------------------------------------
Net Income $51,160 $ 59,848
-------------------------------------------------------------------------------------- -------------------------------------
Earnings Per Average Common Share Equivalent:
Net income:
Basic $0.76 $0.89
-------------------------------------------------------------------------------------- -------------------------------------
Diluted $0.76 $0.89
-------------------------------------------------------------------------------------- -------------------------------------
(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.
105
Three Months Ended
--------------------------------------------------------------------------------------------------------------
June 30, 2007 March 31, 2007 December 31, 2006
---------------------------------- ----------------------------------- -----------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate Balance Expense(1) Rate
---------------------------------- ----------------------------------- -----------------------------------
$ 5,014,231 $ 60,176 4.85% $ 4,802,768 $ 57,595 4.86% $ 4,745,619 $56,264 4.69%
354,956 4,681 5.81 322,202 4,802 6.09 318,969 4,435 5.52
---------------------------------- ----------------------------------- -----------------------------------
5,369,187 64,857 4.90 5,124,970 62,397 4.93 5,064,588 60,699 4.74
---------------------------------- ----------------------------------- -----------------------------------
32,897 481 5.86 29,613 519 7.11 22,668 322 5.64
67,057 924 5.53 55,674 665 4.84 39,665 546 5.46
11,338,140 224,492 7.94 10,893,163 213,080 7.93 10,361,841 207,322 7.94
118,505 - - 113,379 - - 108,377 - -
---------------------------------- ----------------------------------- -----------------------------------
11,219,635 224,492 8.03 10,779,784 213,080 8.02 10,253,464 207,322 8.02
---------------------------------- ----------------------------------- -----------------------------------
16,688,776 290,754 7.00 15,990,041 276,661 7.02 15,380,385 268,889 6.93
---------------------------------- ----------------------------------- -----------------------------------
1,940,686 1,949,917 2,158,647
---------------------------------- ----------------------------------- -----------------------------------
$ 18,629,462 $ 17,939,958 $17,539,032
---------------------------------- ----------------------------------- -----------------------------------
$ 6,414,014 $ 48,242 3.02% $ 6,100,117 $ 46,367 3.08% $ 5,768,216 $43,411 2.99%
158,718 377 0.95 143,101 364 1.03 139,796 365 1.04
4,507,053 53,440 4.76 4,420,390 51,141 4.69 4,417,427 51,781 4.65
---------------------------------- ----------------------------------- -----------------------------------
11,079,785 102,059 3.69 10,663,608 97,872 3.72 10,325,439 95,557 3.67
---------------------------------- ----------------------------------- -----------------------------------
2,627,230 33,129 5.06 2,640,485 33,565 5.16 2,584,354 33,736 5.18
866,096 11,760 5.45 668,078 9,098 5.52 586,743 8,128 5.50
410,883 6,824 6.66 297,806 5,203 7.09 298,427 5,225 6.95
---------------------------------- ----------------------------------- -----------------------------------
14,983,994 153,772 4.12 14,269,977 145,738 4.14 13,794,963 142,646 4.10
---------------------------------- ----------------------------------- -----------------------------------
1,295,930 1,397,874 1,481,455
558,792 530,659 566,128
1,790,746 1,741,448 1,696,486
---------------------------------- ----------------------------------- -----------------------------------
$ 18,629,462 $ 17,939,958 $17,539,032
---------------------------------- ----------------------------------- -----------------------------------
$136,982 2.88% $130,923 2.88% $126,243 2.83%
3.31 3.32 3.25
2,069 2,085 1,965
---------------------------------- ----------------------------------- -----------------------------------
134,913 128,838 124,278
7,820 6,500 5,953
90,171 91,789 93,723
134,131 132,111 133,991
---------------------------------- ----------------------------------- -----------------------------------
83,133 82,016 78,057
29,270 29,223 27,472
---------------------------------- ----------------------------------- -----------------------------------
$ 53,863 $52,793 $50,585
---------------------------------- ----------------------------------- -----------------------------------
$0.80 $0.79 $0.76
---------------------------------- ----------------------------------- -----------------------------------
$0.80 $0.78 $0.75
---------------------------------- ----------------------------------- -----------------------------------
106
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report and pursuant to Rule 13a-15
of the Securities Exchange Act of 1934 (the "Exchange Act"), the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness and design of the Company's
disclosure controls and procedures (as that term is defined in Rules 13a-15(e)
and 15d-15(e) of the Exchange Act). Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded, as of the end of
the period covered by this report, that the Company's disclosure controls and
procedures were effective in recording, processing, summarizing and reporting
information required to be disclosed by the Company, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
In addition and as of the end of the period covered by this report, there have
been no changes in internal control over financial reporting (as defined in Rule
13a-15(f) and 15d-15(f), as amended, of the Exchange Act) during the Company's
fourth fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the internal control over financial reporting.
The Report of Management on Financial Statements and Management's Report on
Internal Control over Financial Reporting appear within Item 8, "Financial
Statements and Supplementary Data." The independent registered public accounting
firm, Ernst & Young LLP, has audited the financial statements included in Item 8
and has issued an audit report on the Company's internal control over financial
reporting, which appears therein.
ITEM 9B. OTHER INFORMATION
None.
107
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information set forth under the headings "Election of Directors," "Executive
Officers, "Insider Reporting," "Director Nominations," and "Risk Oversight and
Audit Committee" in BOK Financial's 2008 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 2007
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 2008 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
2008 Annual Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information regarding related parties is set forth in Note 14 of the Company's
Notes to Consolidated Financial Statements, which appears elsewhere herein.
Additionally, the information set forth under the heading "Certain
Transactions," "Director Independence" and "Related Party Transaction Review and
Approval Process" in BOK Financial's 2008 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 2008 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, 2007,
2006 and 2005
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Cash Flows for the years ended December 31,
2007, 2006 and 2005
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2007, 2006, and 2005
Notes to Consolidated Financial Statements
Annual Financial Summary - Unaudited
Quarterly Financial Summary - Unaudited
Reports of Independent Registered Public Accounting Firm
108
(a) (2) Financial Statement Schedules
The schedules to the consolidated financial statements required by Regulation
S-X are not required under the related instructions or are inapplicable and are
therefore omitted.
(a) (3) Exhibits
Exhibit Number Description of Exhibit
3.0 The Articles of Incorporation of BOK Financial, incorporated by
reference to (i) Amended and Restated Certificate of Incorporation of
BOK Financial filed with the Oklahoma Secretary of State on May 28,
1991, filed as Exhibit 3.0 to S-1 Registration Statement No. 33-90450,
and (ii) Amendment attached as Exhibit A to Information Statement and
Prospectus Supplement filed November 20, 1991.
3.1 Bylaws of BOK Financial, incorporated by reference to Exhibit 3.1 of
S-1 Registration Statement No. 33-90450.
3.1(a) Bylaws of BOK Financial, as amended and restated as of October 30,
2007, incorporated by reference to Exhibit 3.1 of Form 8-K filed on
November 5, 2007.
4.0 The rights of the holders of the Common Stock and Preferred Stock of
BOK Financial are set forth in its Certificate of Incorporation.
10.0 Purchase and Sale Agreement dated October 25, 1990, among BOK
Financial, Kaiser, and the FDIC, incorporated by reference to Exhibit
2.0 of S-1 Registration Statement No. 33-90450.
10.1 Amendment to Purchase and Sale Agreement effective March 29, 1991,
among BOK Financial, Kaiser, and the FDIC, incorporated by reference
to Exhibit 2.2 of S-1 Registration Statement No. 33-90450
10.2 Letter agreement dated April 12, 1991, among BOK Financial, Kaiser,
and the FDIC, incorporated by reference to Exhibit 2.3 of S-1
Registration Statement No. 33-90450.
10.3 Second Amendment to Purchase and Sale Agreement effective April 15,
1991, among BOK Financial, Kaiser, and the FDIC, incorporated by
reference to Exhibit 2.4 of S-1 Registration Statement No. 33-90450.
10.4 Employment and Compensation Agreements.
10.4(a) Employment Agreement between BOK Financial and Stanley A. Lybarger,
incorporated by reference to Exhibit 10.4(a) of Form 10-K for the
fiscal year ended December 31, 1991.
10.4(b) Amendment to 1991 Employment Agreement between BOK Financial and
Stanley A. Lybarger, incorporated by reference to Exhibit 10.4(b) of
Form 10-K for the fiscal year ended December 31, 2001.
10.4(c) Amended and Restated Deferred Compensation Agreement (Amended as of
September 1, 2003) between Stanley A. Lybarger and BOK Financial
Corporation, incorporated by reference to Exhibit 10.4 (c) of Form
10-Q for the quarter ended September 30, 2003.
10.4 (d) 409A Deferred Compensation Agreement between Stanley A. Lybarger
and BOK Financial Corporation dated December 31, 2004, incorporated by
reference to Exhibit 10.4 (d) of Form 8-K filed on January 5, 2005.
10.4 (e) Guaranty by George B. Kaiser in favor of Stanley A. Lybarger dated
March 7, 2005, incorporated by reference to Exhibit 10.4 (e) of Form
10-K for the fiscal year ended December 31, 2004.
10.4 (f) Third Amendment to 1991 Employment Agreement between Stanley A.
Lybarger and Bank of Oklahoma, National Association, incorporated by
reference to Exhibit 10.4 (f) of Form 10-K for the fiscal year ended
December 31, 2006.
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.
109
10.4.2 (a) 409A Deferred Compensation Agreement between Steven G. Bradshaw
and BOK Financial Corporation dated December 31, 2004, incorporated by
reference to Exhibit 10.4.2 (a) of Form 8-K filed on January 5, 2005.
10.4.2 (b) Employment Agreement between BOK Financial and Steven G.
Bradshaw dated September 29, 2003, incorporated by reference to
Exhibit 10.4.2 (b) of Form 10-K for the fiscal year ended December 31,
2004.
10.4.3 Amended and Restated Deferred Compensation Agreement (Amended as of
December 1, 2003) between William Jeffrey Pickryl and BOK Financial
Corporation, incorporated by reference to Exhibit 10.4.3 of Form 10-K
for the fiscal year ended December 31, 2003.
10.4.3 (a) 409A Deferred Compensation Agreement between William Jeffrey
Pickryl and BOK Financial Corporation dated December 31, 2004,
incorporated by reference to Exhibit 10.4.3 (a) of Form 8-K filed on
January 5, 2005.
10.4.3 (b) Employment Agreement between BOK Financial and W. Jeffrey
Pickryl dated September 29, 2003, incorporated by reference to Exhibit
10.4.3 (b) of Form 10-K for the fiscal year ended December 31, 2004.
10.4.3 (c) Amendment to Employment Agreement between BOK Financial and W.
Jeffrey Pickryl dated August 30, 2004, incorporated by reference to
Exhibit 10.4.3 (c) of Form 10-K for the fiscal year ended December 31,
2004.
10.4.3 (d) Supplemental Executive Income Agreement dated December 20, 2005
between W. Jeffrey Pickryl and BOK Financial Corporation, incorporated
by reference to Exhibit 99 (a) of Form 8-K filed on December 22, 2005.
10.4.3 (e) Amendment to Employment Agreement dated November 27, 2007
between BOK Financial Corporation and W. Jeffrey Pickryl, incorporated
by reference to Exhibit 99 (a) of Form 8-K filed on November 30, 2007.
10.4.4 Amended and Restated Employment Agreement (Amended as of June 14,
2002) among First National Bank of Park Cities, BOK Financial
Corporation and C. Fred Ball, Jr., incorporated by reference to
Exhibit 10.4.4 of Form 10-K for the fiscal year ended December 31,
2003.
10.4.5 409A Deferred Compensation Agreement between Daniel H. Ellinor and
BOK Financial Corporation dated December 31, 2004, incorporated by
reference to Exhibit 10.4.5 of Form 8-K filed on January 5, 2005.
10.4.5 (a) Employment Agreement between BOK Financial and Dan H. Ellinor
dated August 29, 2003, incorporated by reference to Exhibit 10.4.5 (a)
of Form 10-K for the fiscal year ended December 31, 2004.
10.4.5 (b) Deferred Compensation Agreement dated November 28, 2003 between
Daniel H. Ellinor and BOK Financial Corporation, incorporated by
reference to Exhibit 10.4.5 (b) of Form 10-K for the fiscal year ended
December 31, 2004.
10.4.6 409A Deferred Compensation Agreement between Mark W. Funke and BOK
Financial Corporation dated December 31, 2004, incorporated by
reference to Exhibit 10.4.6 of Form 8-K filed on January 5, 2005.
10.4.6 (a) Amended and Restated Deferred Compensation Agreement (Amended as
of December 1, 2003) between Mark W. Funke and BOK Financial
Corporation, incorporated by reference to Exhibit 10.4.6 (a) of Form
10-K for the fiscal year ended December 31, 2004.
10.4.7 409A Deferred Compensation Agreement between Steven E. Nell and BOK
Financial Corporation dated December 31, 2004, incorporated by
reference to Exhibit 10.4.7 of Form 8-K filed on January 5, 2005.
10.4.7 (a) Amended and Restated Deferred Compensation Agreement (Amended as
of December 1, 2003) between Steven E. Nell and BOK Financial
Corporation, incorporated by reference to Exhibit 10.4.7 (a) of Form
10-K for the fiscal year ended December 31, 2004.
10.4.8 Employment Agreement dated August 1, 2005 between BOK Financial
Corporation and Donald T. Parker, incorporated by reference to Exhibit
99 (a) of Form 8-K filed on February 1, 2006.
110
10.5 Director indemnification agreement dated June 30, 1987, between BOk
and Kaiser, incorporated by reference to Exhibit 10.5 of S-1
Registration Statement No. 33-90450. Substantially similar director
indemnification agreements were executed between BOk and the
following:
Date of Agreement
James E. Barnes June 30, 1987
William H. Bell June 30, 1987
James S. Boese June 30, 1987
Dennis L. Brand June 30, 1987
Chester E. Cadieux June 30, 1987
William B. Cleary June 30, 1987
Glenn A. Cox June 30, 1987
William E. Durrett June 30, 1987
Leonard J. Eaton, Jr. June 30, 1987
William B. Fader December 5, 1990
Gregory J. Flanagan June 30, 1987
Jerry L. Goodman June 30, 1987
David A. Hentschel July 7, 1987
Philip N. Hughes July 8, 1987
Thomas J. Hughes, III June 30, 1987
William G. Kerr June 30, 1987
Philip C. Lauinger, Jr. June 30, 1987
Stanley A. Lybarger December 5, 1990
Patricia McGee Maino June 30, 1987
Robert L. Parker, Sr. June 30, 1987
James A. Robinson June 30, 1987
William P. Sweich June 30, 1987
10.6 Capitalization and Stock Purchase Agreement dated May 20, 1991,
between BOK Financial and Kaiser, incorporated by reference to Exhibit
10.6 of S-1 Registration Statement No. 33-90450.
10.7.3 BOK Financial Corporation 1994 Stock Option Plan, incorporated by
reference to Exhibit 4.0 of S-8 Registration Statement No. 33-79834.
10.7.4 BOK Financial Corporation 1994 Stock Option Plan (Typographical
Error Corrected January 16, 1995), incorporated by reference to
Exhibit 10.7.4 of Form 10-K for the fiscal year ended December 31,
1994.
10.7.5 BOK Financial Corporation 1997 Stock Option Plan, incorporated by
reference to Exhibit 4.0 of S-8 Registration Statement No. 333-32649.
10.7.6 BOK Financial Corporation 2000 Stock Option Plan, incorporated by
reference to Exhibit 4.0 of S-8 Registration Statement No. 333-93957.
10.7.7 BOK Financial Corporation 2001 Stock Option Plan, incorporated by
reference to Exhibit 4.0 of S-8 Registration Statement No. 333-62578.
10.7.8 BOK Financial Corporation Directors' Stock Compensation Plan,
incorporated by reference to Exhibit 4.0 of S-8 Registration Statement
No. 33-79836.
10.7.9 Bank of Oklahoma Thrift Plan (Amended and Restated Effective as of
January 1, 1995), incorporated by reference to Exhibit 10.7.6 of Form
10-K for the year ended December 31, 1994.
10.7.10 Trust Agreement for the Bank of Oklahoma Thrift Plan (December 30,
1994), incorporated by reference to Exhibit 10.7.7 of Form 10-K for
the year ended December 31, 1994.
10.7.11 BOK Financial Corporation 2003 Stock Option Plan, incorporated by
reference to Exhibit 4.0 of S-8 Registration Statement No. 333-106531.
10.7.12 BOK Financial Corporation 2003 Executive Incentive Plan,
incorporated by reference to Exhibit 4.0 of S-8 Registration Statement
No. 333-106530.
10.8 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.
111
10.10 Asset Purchase Agreement (OREO and other assets) between BOk and
Phi-Lea-Em Corporation dated April 30, 1991, incorporated by reference
to Exhibit 10.11 of S-1 Registration Statement No. 33-90450.
10.11 Asset Purchase Agreement (Tanker Assets) between BOk and Green River
Exploration Company dated April 30, 1991, incorporated by reference to
Exhibit 10.12 of S-1 Registration Statement No. 33-90450.
10.12 Asset Purchase Agreement (Recovery Rights) between BOk and Kaiser
dated April 30, 1991, incorporated by reference to Exhibit 10.13 of
S-1 Registration Statement No. 33-90450.
10.13 Purchase and Assumption Agreement dated August 7, 1992 among First
Gibraltar Bank, FSB, Fourth Financial Corporation and BOk, as amended,
incorporated by reference to Exhibit 10.14 of Form 10-K for the fiscal
year ended December 31, 1992.
10.13.1 Allocation Agreement dated August 7, 1992 between BOk and Fourth
Financial Corporation, incorporated by reference to Exhibit 10.14.1 of
Form 10-K for the fiscal year ended December 31, 1992.
10.14 Merger Agreement among BOK Financial, BOKF Merger Corporation Number
Two, Brookside Bancshares, Inc., The Shareholders of Brookside
Bancshares, Inc. and Brookside State Bank dated December 22, 1992, as
amended, incorporated by reference to Exhibit 10.15 of Form 10-K for
the fiscal year ended December 31, 1992.
10.14.1 Agreement to Merge between BOk and Brookside State Bank dated
January 27, 1993, incorporated by reference to Exhibit 10.15.1 of Form
10-K for the fiscal year ended December 31, 1992.
10.15 Merger Agreement among BOK Financial, BOKF Merger Corporation Number
Three, Sand Springs Bancshares, Inc., The Shareholders of Sand Springs
Bancshares, Inc. and Sand Springs State Bank dated December 22, 1992,
as amended, incorporated by reference to Exhibit 10.16 of Form 10-K
for the fiscal year ended December 31, 1992.
10.15.1 Agreement to Merge between BOk and Sand Springs State Bank dated
January 27, 1993, incorporated by reference to Exhibit 10.16.1 of Form
10-K for the fiscal year ended December 31, 1992.
10.16 Partnership Agreement between Kaiser-Francis Oil Company and BOK
Financial dated December 1, 1992, incorporated by reference to Exhibit
10.16 of Form 10-K for the fiscal year ended December 31, 1993.
10.16.1 Amendment to Partnership Agreement between Kaiser-Francis Oil
Company and BOK Financial dated May 17, 1993, incorporated by
reference to Exhibit 10.16.1 of Form 10-K for the fiscal year ended
December 31, 1993.
10.17 Purchase and Assumption Agreement between BOk and FDIC, Receiver of
Heartland Federal Savings and Loan Association dated October 9, 1993,
incorporated by reference to Exhibit 10.17 of Form 10-K for the fiscal
year ended December 31, 1993.
10.18 Merger Agreement among BOk, Plaza National Bank and The Shareholders
of Plaza National Bank dated December 20, 1993, incorporated by
reference to Exhibit 10.18 of Form 10-K for the fiscal year ended
December 31, 1993.
10.18.1 Amendment to Merger Agreement among BOk, Plaza National Bank and
The Shareholders of Plaza National Bank dated January 14, 1994,
incorporated by reference to Exhibit 10.18.1 of Form 10-K for the
fiscal year ended December 31, 1993.
10.19 Stock Purchase Agreement between Texas Commerce Bank, National
Association and BOk dated March 11, 1994, incorporated by reference to
Exhibit 10.19 of Form 10-K for the fiscal year ended December 31,
1993.
10.20 Merger Agreement among BOK Financial Corporation, BOKF Merger
Corporation Number Four, Citizens Holding Company and others dated May
11, 1994, incorporated by reference to Exhibit 10.20 of Form 10-K for
the fiscal year ended December 31, 1994.
10.21 Stock Purchase and Merger Agreement among Northwest Bank of Enid, BOk
and The Shareholders of Northwest Bank of Enid effective as of May 16,
1994, incorporated by reference to Exhibit 10.21 of Form 10-K for the
fiscal year ended December 31, 1994.
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.
112
10.23 Agreement and Plan of Merger among BOK Financial Corporation and
First TexCorp., Inc. dated December 18, 1996, incorporated by
reference to Exhibit 10.24 of S-4 Registration Statement No.
333-16337.
10.24 Purchase and Assumption Agreement between Bank of America National
Trust and Savings Association and BOK Financial Corporation dated July
27, 1998.
10.25 Merger Agreement among BOK Financial Corporation, BOKF Merger
Corporation No. Seven, First Bancshares of Muskogee, Inc., First
National Bank and Trust Company of Muskogee, and Certain Shareholders
of First Bancshares of Muskogee, Inc. dated December 30, 1998.
10.26 Merger Agreement among BOK Financial Corporation, BOKF Merger
Corporation Number Nine, and Chaparral Bancshares, Inc. dated February
19, 1999.
10.27 Merger Agreement among BOK Financial Corporation, Park Cities
Bancshares, Inc., Mid-Cities Bancshares, Inc. and Mid-Cities National
Bank dated February 24, 1999.
10.28 Merger Agreement among BOK Financial Corporation, Park Cities
Bancshares, Inc., PC Interim State Bank, Swiss Avenue State Bank and
Certain Shareholders of Swiss Avenue State Bank dated March 4, 1999.
10.29 Merger Agreement among BOK Financial Corporation, Park Cities
Bancshares, Inc. and CNBT Bancshares, Inc. dated August 18, 2000,
incorporated by reference to Exhibit 10.29 of Form 10-K for the fiscal
year ended December 31, 2000.
10.30 Merger Agreement among BOK Financial Corporation, Bank of Tanglewood,
N.A. and TW Interim Bank dated October 25, 2002, incorporated by
reference to Exhibit 2.0 of S-4 Registration Statement No. 333-98685.
10.31 Remote Outsourcing Services Agreement between Bank of Oklahoma, N.A.
and Alltel Information Services, Inc., dated September 1, 2002,
incorporated by reference to Exhibit 10.30 of the September 30, 2002
10-Q filed on November 13, 2002.
10.32 Merger Agreement among BOK Financial Corporation, BOKF Merger
Corporation Number Eleven, Colorado Funding Company, Colorado State
Bank and Trust and Certain Shareholders of Colorado Funding Company
dated July 8, 2003, incorporated by reference to Exhibit 10.32 of Form
10-K for the fiscal year ended December 31, 2003.
10.33 Merger Agreement between BOK Financial Corporation, BOKF Merger
Corporation Number Eight, Valley Commerce Bank, and Valley Commerce
Bancorp, Ltd. dated December 20, 2004, incorporated by reference to
Exhibit 10.1 of the Form 8-K filed on December 22, 2004.
10.34 Merger Agreement among BOK Financial Corporation, BOKF Merger
Corporation Number Twelve, Worth Bancorporation, Inc., and Worth
National Bank dated March 9, 2007, incorporated by reference to
Exhibit 99.2 of the Form 8-K filed on March 12, 2007.
10.35 Stock Purchase Agreement among BOK Financial Corporation, BOKF Stock
Corporation Number Thirteen, United Banks of Colorado, Inc., First
United Bank, NA and Baltz Family Partners, Ltd. dated May 23, 2007,
incorporated by reference to Exhibit 99.2 of the Form 8-K filed on May
24, 2007.
21.0 Subsidiaries of BOK Financial, filed herewith.
23.0 Consent of independent registered public accounting firm - Ernst &
Young LLP, filed herewith.
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, filed herewith.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, filed herewith.
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, filed herewith.
99.0 Additional Exhibits.
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.
113
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.
114
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 29, 2008 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 29, 2008, 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/ Gregory S. Allen /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
-------------------------------------- -------------------------------------
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/ Robert J. LaFortune
-------------------------------------- -------------------------------------
Chester Cadieux, III Robert J. LaFortune
/s/ Joseph W. Craft, III /s/ Steven J. Malcolm
-------------------------------------- -------------------------------------
Joseph W. Craft, III Steven J. Malcolm
-------------------------------------- -------------------------------------
William E. Durrett Paula Marshall
/s/ David F. Griffin
--------------------------------------
David F. Griffin