As filed with the Securities and Exchange Commission on October 30, 2009
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File No. 0-19341
BOK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Oklahoma 73-1373454
(State or other jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
Bank of Oklahoma Tower
P.O. Box 2300
Tulsa, Oklahoma 74192
(Address of Principal Executive Offices) (Zip Code)
(918) 588-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_| ?
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 67,707,547 shares of common
stock ($.00006 par value) as of September 30, 2009.
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2
BOK Financial Corporation
Form 10-Q
Quarter Ended September 30, 2009
Index
Part I. Financial Information
Item 1. Consolidated Financial Statements - Unaudited 3
Item 2. Management's Discussion and Analysis 31
Nine Month Financial Summary - Unaudited 74
Quarterly Financial Summary - Unaudited 75
Quarterly Earnings Trend - Unaudited 77
Item 3. Market Risk 78
Item 4. Controls and Procedures 79
Part II. Other Information
Item 1. Legal Proceedings 80
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 80
Item 6. Exhibits 81
Signatures 82
3
------------------------------------------------------- ----- ------------- -- -------------- -- -------------- ---- --------------
Consolidated Statements of Earnings (Unaudited)
(In thousands, except share and per share data)
Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 2009 2008
Interest revenue ----------- --- -------------- ---- -------------- ---- --------------
Loans $ 139,344 $ 179,847 $ 425,764 $ 557,029
Residential mortgage loans held for sale 2,198 1,743 7,791 4,122
Taxable securities 81,890 78,030 246,605 226,044
Tax-exempt securities 2,203 2,668 7,766 8,009
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Total securities 84,093 80,698 254,371 234,053
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Trading securities 593 780 2,170 2,796
Funds sold and resell agreements 18 290 62 1,485
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Total interest revenue 226,246 263,358 690,158 799,485
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Interest expense
Deposits 36,340 69,269 133,370 223,530
Borrowed funds 3,887 24,188 14,146 88,767
Subordinated debentures 5,558 5,553 16,756 16,773
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Total interest expense 45,785 99,010 164,272 329,070
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Net interest revenue 180,461 164,348 525,886 470,415
Provision for credit losses 55,120 52,711 147,280 129,592
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Net interest revenue after provision for credit losses 125,341 111,637 378,606 340,823
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Other operating revenue
Brokerage and trading revenue 24,944 30,846 71,437 19,297
Transaction card revenue 26,264 25,632 79,225 74,976
Trust fees and commissions 16,315 20,100 49,685 61,836
Deposit service charges and fees 30,464 30,404 86,290 88,289
Mortgage banking revenue 13,197 7,145 51,577 23,382
Bank-owned life insurance 2,634 2,829 7,369 7,999
Margin asset fees 51 1,934 186 8,361
Other revenue 6,087 7,768 18,794 20,124
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Total fees and commissions 119,956 126,658 364,563 304,264
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Gain (loss) on other assets, net 3,223 (841) 4,339 (1,986)
Gain (loss) on derivatives, net (294) 4,366 (2,995) 3,518
Gain on securities, net 12,266 2,103 38,845 6,787
Total other-than-temporary impairment losses (6,133) - (61,764) (5,306)
Portion of loss recognized in other comprehensive income (2,752) - (41,839) -
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Net impairment losses recognized in earnings (3,381) - (19,925) (5,306)
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Total other operating revenue 131,770 132,286 384,827 307,277
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Other operating expense
Personnel 98,012 87,549 286,830 265,252
Business promotion 4,827 5,837 13,824 16,253
Professional fees and services 7,555 6,501 21,430 19,122
Net occupancy and equipment 15,884 15,570 48,115 45,731
Insurance 6,092 2,436 17,628 8,772
FDIC special assessment - - 11,773 -
Data processing and communications 20,413 19,911 60,171 58,327
Printing, postage and supplies 3,716 4,035 12,359 12,610
Net (gains) losses and operating expenses of repossessed assets 3,497 (136) 6,299 13
Amortization of intangible assets 1,686 1,884 5,058 5,694
Mortgage banking costs 8,065 5,811 24,868 17,546
Change in fair value of mortgage servicing rights 2,981 5,554 (6,839) 8,083
Visa retrospective responsibility obligation - 1,700 - (1,067)
Other expense 6,004 7,638 18,780 20,626
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Total other operating expense 178,732 164,290 520,296 476,962
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Income before taxes 78,379 79,633 243,137 171,138
Federal and state income tax 24,772 22,958 81,925 54,546
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Net income before non-controlling interest 53,607 56,675 161,212 116,592
Net income (loss) attributable to non-controlling interest 2,947 (10) 3,405 (1,197)
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Net income attributable to BOK Financial Corp. $ 50,660 $ 56,685 $ 157,807 $ 117,789
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Earnings per share:
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Basic $ 0.75 $ 0.84 $ 2.33 $ 1.75
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Diluted $ 0.75 $ 0.84 $ 2.33 $ 1.74
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Average shares used in computation:
------------------------------------------------------- ----- ----------- --- -------------- ---- -------------- ---- --------------
Basic 67,392,059 67,263,317 67,351,436 67,305,916
------------------------------------------------------- ---- ------------ --- -------------- ---- -------------- ---- --------------
Diluted 67,513,700 67,432,444 67,450,172 67,463,012
------------------------------------------------------- ---- ------------ --- -------------- ---- -------------- ---- --------------
Dividends declared per share $ 0.24 $ 0.225 $ 0.705 $ 0.65
------------------------------------------------------- ---- ------------ --- -------------- ---- -------------- ---- --------------
See accompanying notes to consolidated financial statements.
4
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Consolidated Balance Sheets
(In Thousands Except Share Data)
September 30, December 31, September 30,
2009 2008 2008
---------------------------------------------------
Assets (Unaudited) (Footnote 1) (Unaudited)
Cash and due from banks $ 1,383,244 $ 581,133 $ 669,914
Funds sold and resell agreements 39,465 113,809 105,594
Trading securities 100,898 99,601 92,588
Securities:
Available for sale 8,176,631 5,800,691 5,047,524
Available for sale securities pledged to creditors 181,931 590,760 1,232,006
Investment (fair value: September 30, 2009 - $244,774;
December 31, 2008 - $245,769;
September 30, 2008 - $243,820) 238,101 242,344 243,617
Mortgage trading securities 320,971 399,211 198,201
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Total securities 8,917,634 7,033,006 6,721,348
------------------------------------------------------------------------------------------------------------------------
Residential mortgage loans held for sale 172,301 129,246 113,121
Loans 11,611,564 12,876,006 12,679,970
Less reserve for loan losses (280,902) (233,236) (186,516)
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Loans, net of reserve 11,330,662 12,642,770 12,493,454
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Premises and equipment, net 286,702 277,458 267,749
Accrued revenue receivable 68,617 96,673 118,096
Intangible assets, net 356,152 361,209 363,177
Mortgage servicing rights, net 66,689 42,752 68,680
Real estate and other repossessed assets 89,507 29,179 28,088
Bankers' acceptances 9,882 12,913 23,933
Derivative contracts 397,110 452,604 572,391
Cash surrender value of bank-owned life insurance 244,456 237,006 234,293
Receivable on unsettled securities trades - 239,474 169,494
Other assets 413,522 385,815 335,882
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Total assets $ 23,876,841 $ 22,734,648 $ 22,377,802
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Liabilities and Shareholders' Equity
Noninterest-bearing demand deposits $ 3,462,188 $ 3,082,379 $ 3,005,163
Interest-bearing deposits:
Transaction 7,380,449 6,562,350 6,606,622
Savings 167,896 154,635 156,847
Time (includes deposits carried at fair value: $98,068 at September
30, 2009; $632,754 at December 31, 2008; $528,715 at
September 30, 2008) 4,084,813 5,183,243 4,817,551
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Total deposits 15,095,346 14,982,607 14,586,183
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Funds purchased and repurchase agreements 2,198,900 3,025,399 3,667,225
Other borrowings 3,189,948 1,522,054 1,077,450
Subordinated debentures 398,502 398,407 398,372
Accrued interest, taxes and expense 123,409 133,220 120,280
Bankers' acceptances 9,882 12,913 23,933
Derivative contracts 395,197 667,034 377,973
Due on unsettled securities trades 133,974 - -
Other liabilities 127,689 132,902 166,597
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Total liabilities 21,672,847 20,874,536 20,418,013
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Shareholders' equity:
Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued
and outstanding: September 30, 2009 - 70,137,096; December 31, 2008
- 69,884,749; September 30, 2008 - 69,838,173) 4 4 4
Capital surplus 750,487 743,411 740,578
Retained earnings 1,537,373 1,427,057 1,406,971
Treasury stock (shares at cost: September 30, 2009 - 2,429,549;
December 31, 2008 - 2,411,663; September 30, 2008 - 2,404,336) (102,088) (101,329) (100,801)
Accumulated other comprehensive loss (763) (222,886) (106,249)
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Total shareholders' equity 2,185,013 1,846,257 1,940,503
Non-controlling interest 18,981 13,855 19,286
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Total equity 2,203,994 1,860,112 1,959,789
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Total liabilities and equity $ 23,876,841 $ 22,734,648 $ 22,377,802
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See accompanying notes to consolidated financial statements.
5
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Consolidated Statements of Changes in Equity (Unaudited)
(In Thousands)
Accumulated
Other Total Non-
Common Stock Comprehensive Capital Retained Treasury Stock Shareholders' Controlling Total
----------------- --------------------
Shares Amount Loss Surplus Earnings Shares Amount Equity Interest Equity
------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2007 69,465 $ 4 $(31,234) $722,088 $1,332,954 2,159 $ (88,428) $1,935,384 $ 18,849 $1,954,233
Effect of
implementing FAS
159, net of income taxes - - - - 62 - - 62 - 62
Comprehensive income:
Net income from BOKF - - - - 117,789 - - 117,789 - 117,789
Net income (loss)
attributable to
non-controlling interest - - - - - - - - 1,197 1,197
Other comprehensive
loss, net of tax - - (75,015) - - - - (75,015) - (75,015)
-----------------------------------
Comprehensive income 42,774 1,197 43,971
-----------------------------------
Treasury stock purchase - - - - - 166 (7,992) (7,992) - (7,992)
Exercise of stock options 373 - - 11,359 - 79 (4,381) 6,978 - 6,978
Tax benefit on exercise of
stock options, net - - - 1,004 - - - 1,004 - 1,004
Stock-based compensation - - - 6,127 - - - 6,127 - 6,127
Cash dividends on
common stock - - - - (43,834) - - (43,834) - (43,834)
Capital calls, net - - - - - - - - (760) (760)
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Balances at
September 30, 2008 69,838 $ 4 $(106,249) $740,578 $1,406,971 2,404 $(100,801) $1,940,503 $ 19,286 $1,959,789
-----------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2008 69,885 $ 4 $(222,886) $743,411 $1,427,057 2,412 $(101,329) $1,846,257 $ 13,855 $1,860,112
Comprehensive income:
Net income from BOKF - - - - 157,807 - - 157,807 - 157,807
Net income (loss)
attributable to
non-controlling interest - - - - - - - - (3,405) (3,405)
Other comprehensive
income, net of tax - - 222,123 - - - - 222,123 - 222,123
-----------------------------------
Comprehensive income 379,930 (3,405) 376,525
-----------------------------------
Exercise of stock options 252 - - 3,351 - 18 (759) 2,592 - 2,592
Tax benefit on exercise of
stock options, net - - - (539) - - - (539) - (539)
Stock-based compensation - - - 4,264 - - - 4,264 - 4,264
Cash dividends on
common stock - - - - (47,491) - - (47,491) - (47,491)
Capital calls, net - - - - - - - - 8,531 8,531
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Balances at
September 30, 2009 70,137 $ 4 $ (763) $750,487 $1,537,373 2,430 $(102,088) $2,185,013 $ 18,981 $2,203,994
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
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Consolidated Statements of Cash Flows (Unaudited)
(In Thousands) Nine Months Ended September 30,
---------------------------------------------
2009 2008
---------------------------------------------
Cash Flows From Operating Activities:
Net income before non-controlling interest $ 161,212 $ 116,592
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 147,280 129,592
Change in fair value of mortgage servicing rights (6,839) 8,083
Unrealized losses from derivatives 26,485 71,258
Tax benefit on exercise of stock options 539 (1,004)
Change in bank-owned life insurance (7,450) (4,753)
Stock-based compensation 4,264 5,097
Depreciation and amortization 58,858 38,749
Net (accretion) amortization of securities discounts and premiums 17,930 (12,200)
Realized gains on financial instruments and other assets (47,052) (9,334)
Mortgage loans originated for resale (2,203,732) (902,186)
Proceeds from sale of mortgage loans held for resale 2,186,897 879,728
Capitalized mortgage servicing rights (32,699) (15,406)
Change in trading securities, including mortgage trading securities 43,405 (89,485)
Change in accrued revenue receivable 28,056 10,254
Change in other assets (107,402) (58,373)
Change in accrued interest, taxes and expense (9,811) (3,749)
Change in other liabilities (5,499) 39,827
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 254,442 202,690
---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities 82,513 68,708
Proceeds from maturities of available for sale securities 1,202,911 706,594
Purchases of investment securities (78,753) (65,506)
Purchases of available for sale securities (5,273,635) (3,593,515)
Proceeds from sales of investment securities - 982
Proceeds from sales of available for sale securities 2,481,861 2,158,216
Loans originated or acquired net of principal collected 1,082,051 (841,462)
Net payments or proceeds on derivative asset contracts 415,849 53,779
Net change in other investment assets - 35
Proceeds from disposition of assets 15,442 37,174
Purchases of assets (50,464) (49,796)
---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (122,225) (1,524,791)
---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net change in demand deposits, transaction deposits and savings accounts 1,211,169 639,979
Net change in time deposits (1,090,580) 494,609
Net change in other borrowings 841,395 491,980
Net payments or proceeds on derivative liability contracts (459,840) (140,428)
Net change in derivative margin accounts (234,604) (85,570)
Change in amount receivable (due) on unsettled security transactions 373,448 (149,530)
Issuance of common and treasury stock, net 2,592 6,978
Tax benefit on exercise of stock options (539) 1,004
Repurchase of common stock - (7,992)
Dividends paid (47,491) (43,834)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 595,550 1,207,196
---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 727,767 (114,905)
Cash and cash equivalents at beginning of period 694,942 890,413
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Cash and cash equivalents at end of period $ 1,422,709 $ 775,508
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Cash paid for interest $ 184,734 $ 329,982
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Cash paid for taxes $ 97,689 $ 80,441
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Net loans transferred to repossessed real estate and other assets $ 79,627 $ 25,532
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See accompanying notes to consolidated financial statements.
7
Notes to Consolidated Financial Statements (Unaudited)
(1) Significant Accounting Policies
Basis of Presentation
The unaudited consolidated financial statements of BOK Financial Corporation
("BOK Financial" or "the Company") have been prepared in accordance with
accounting principles for interim financial information generally accepted in
the United States and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Certain prior period amounts have been reclassified to conform to
current period classification. Previously, the Company reported minority
interest as part of other liabilities. This balance is now reported as part of
total equity on the consolidated balance sheet.
The unaudited consolidated financial statements include accounts of BOK
Financial and its subsidiaries, principally Bank of Oklahoma, N.A. and its
subsidiaries ("BOk"), Bank of Texas, N.A., Bank of Arkansas, N.A., Bank of
Albuquerque, N.A., Colorado State Bank and Trust, N.A., Bank of Arizona, N.A.,
Bank of Kansas City, N.A., and BOSC, Inc.
The financial information should be read in conjunction with BOK Financial's
2008 Form 10-K filed with the Securities and Exchange Commission, which contains
audited financial statements. Amounts presented as of December 31, 2008 have
been derived from BOK Financial's 2008 Form 10-K.
Newly Adopted and Pending Accounting Policies
Financial Accounting Standards Board ("FASB")
Accounting Standards Codification 805, "Business Combinations" ("ASC 805" and
formerly Statement of Financial Accounting Standards No. 141, "Business
Combinations (Revised 2007),"("FAS 141R"))
FAS 141R was codified by the FASB as ASC 805 as a replacement to Statement of
Financial Accounting Standards No. 141, "Business Combinations," ("FAS 141") and
applies to all transactions and other events in which one entity obtains control
over one or more other businesses. ASC 805 requires an acquirer, upon initially
obtaining control of another entity, to recognize the assets, liabilities and
any non-controlling interest in the acquiree at fair value as of the acquisition
date. Contingent consideration is required to be recognized and measured at fair
value on the date of acquisition rather than at a later date when the amount of
that consideration may be determinable beyond a reasonable doubt. This fair
value approach replaces the cost-allocation process required under FAS 141
whereby the cost of an acquisition was allocated to the individual assets
acquired and liabilities assumed based on their estimated fair value. ASC 805
requires acquirers to expense acquisition-related costs as incurred rather than
allocating such costs to the assets acquired and liabilities assumed, as was
previously the case under FAS 141. Under ASC 805, the requirements of FASB
Accounting Standards Codification 420, "Exit or Disposal Cost Obligations,"
(formerly Statement of Financial Accounting Standards No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities") would have to be met in
order to accrue for a restructuring plan in purchase accounting. Pre-acquisition
contingencies are to be recognized at fair value, unless it is a non-contractual
contingency that is not likely to materialize, in which case, nothing should be
recognized in purchase accounting and, instead, that contingency would be
subject to the probable and estimable recognition criteria of FASB Accounting
Standards Codification 450, "Contingencies" (formerly Statement of Financial
Accounting Standards No. 5, "Accounting for Contingencies"). ASC 805 is
applicable to the Company's accounting for business combinations closing on or
after January 1, 2009.
Statement of Financial Accounting Standards No. 160,"Non-controlling Interest in
Consolidated Financial Statements - An Amendment of ARB No. 51" ("FAS 160")
Issued during 2007, FAS 160 was codified by FASB into Accounting Standards
Codification 810, "Consolidations," to establish accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a non-controlling interest in
a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among other
requirements, consolidated net income is required to be reported at amounts that
included the amounts attributable to both the parent and the non-controlling
8
interest. It also requires disclosure, on the face of the consolidated income
statement, of the amounts of consolidated net income attributable to the parent
and to the non-controlling interest. The Company adopted this guidance as of
January 1, 2009, and it did not have a significant impact on the Company's
financial statements.
Accounting Standards Codification 815-10-50 "Derivatives and Hedging -
Disclosures" ("ASC 815-10-50" and formerly Statement of Financial Accounting
Standards No. 161, "Disclosure About Derivative Instruments and Hedging
Activities, an Amendment of FASB Statement No. 133," ("FAS 161")
FAS 161 was codified by FASB as ASC 815-10-50 to provide greater transparency
about (i) how and why an entity uses derivative instruments, (ii) how derivative
instruments and related hedge items are accounted for under FASB Accounting
Standards Codification 815, "Derivatives and Hedging" and (iii) how derivative
instruments and related hedged items affect an entity's financial position,
results of operations and cash flows. To meet those objectives, ASC 815-10-50
requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of gains and
losses on derivative instruments and disclosures about credit-risk-related
contingent features in derivative agreements. ASC 815-10-50 was effective for
the Company as of January 1, 2009. It did not have a significant impact on the
Company's financial statements.
Financial Accounting Standards Board Staff Position No. FAS 157-4, "Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That are Not Orderly" ("FSP
157-4")
FSP 157-4 was codified by FASB into the FASB Accounting Standards Codification
820 "Fair Value Measurements." ("ASC 820"). It was issued April 9, 2009 to
provide guidance for determining fair value when there is no active market or
where price inputs represent distressed sales. It reaffirms the fair value
measurement objective that fair value represents how much an asset would be sold
for in an orderly transaction under current market conditions. The guidance was
effective for interim and annual periods ending after June 15, 2009. Early
adoption for interim and annual periods ending after March 15, 2009 was
permitted. The Company adopted this guidance as of March 31, 2009. It did not
have a significant impact on the Company's financial statements.
Financial Accounting Standards Board Staff Position No. FAS 115-2 and FAS 124-2
"Recognition and Presentation of Other-Than-Temporary Impairments" ("FSP No.
115-2")
FSP 115-2 was codified by FASB into the FASB Accounting Standards Codification
320, "Investments - Debt and Equity Securities." It was issued April 9, 2009 to
provide additional guidance and create greater clarity and consistency in
accounting for impairment losses on securities. It replaces the assertion of
intent and ability to hold an impaired debt security until fair value recovers
with assertions that the holder does not intend to sell the security prior to
recovery and that it is more likely than not that the holder will not be
required to sell the impaired security prior to recovery. The full impairment
loss is recognized in earnings if the holder is unable to make these assertions.
Otherwise, a credit loss portion of the impairment is recognized in earnings and
the remaining impairment is recognized in other comprehensive income (equity).
Both the full impairment and credit loss portion are presented on the face of
the income statement. The guidance is effective for interim and annual periods
ending after June 15, 2009 and requires additional disclosures in interim
periods. Early adoption for interim and annual periods ending after March 15,
2009 was permitted. The Company adopted this guidance as of March 31, 2009 and
accordingly reduced the loss recognized in earnings on debt securities
determined to be other-than-temporarily impaired by $39 million.
FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial
Instruments" ("FSP107-1")
FSP 107-1 was codified into the FASB Accounting Standards Codification 820,
"Fair Value Measurements" ("ASC 820") and enhances consistency in financial
reporting by increasing the frequency of fair value disclosures for any
financial instruments that are not currently reflected on the balance sheet at
fair value. It requires disclosures in interim financial statements that were
previously only required in annual financial statements to provide qualitative
and quantitative information about fair value estimates. The guidance included
in ASC 820 was effective for interim and annual periods ending after June 15,
2009. Early adoption for interim and annual periods ending after March 15, 2009
was permitted. The Company adopted the guidance included in ASC 820 as of June
30, 2009. It did not have a significant impact on the Company's financial
statements.
Financial Accounting Standards Board Staff Position No. EITF 03-6-1 "Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities" ("FSP No. EITF 03-6-1")
9
FSP No. EITF 03-6-1 provides that unvested share-based payment awards that
contain non-forfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method. FSP EITF
03-6-1 became effective on January 1, 2009 and was codified by FASB into the
Accounting Standards Codification 260, "Earnings Per Share." See additional
discussion at Note 10 - Earnings Per Share.
Accounting Standards Codification 855 "Subsequent Events" ("ASC 855" and
formerly Statement of Financial Accounting Standards No. 165, "Subsequent
Events" ("FAS 165")
On May 28, 2009, the FASB issued FAS 165 to provide authoritative accounting
guidance on management's assessment of subsequent events. FAS 165 was codified
by FASB into ASC 855 which incorporates existing U.S. auditing literature and
clarifies that management is responsible for evaluating, as of each reporting
period, events or transactions that occur after the balance sheet date through
the date that the financial statements are issued or are available to be issued.
ASC 855 was effective for the Company as of June 30, 2009 and did not have a
significant impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 166, "Accounting for Transfers
of Financial Assets - an amendment to Statement No. 140," ("FAS 166")
FAS 166 amends FAS 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," to enhance reporting about transfers
of financial assets, including securitizations, and where companies have
continuing exposure to the risks related to transferred financial assets. FAS
166 eliminates the concept of a "qualifying special-purpose entity" and changes
the requirements for derecognizing financial assets. FAS 166 also requires
additional disclosures about all continuing involvement with transferred
financial assets including information about gains and losses resulting from
transfers during the period. FAS 166 will be effective January 1, 2010 and is
not expected to have a significant impact on the Company's financial statements.
The FASB has not yet codified FAS 166.
Statement of Financial Accounting Standards No. 167, "Amendments to FASB
Interpretation No. 46(R)," ("FAS 167")
FAS 167 amends FIN 46 (Revised December 2003), "Consolidation of Variable
Interest Entities," to change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a company is
required to consolidate an entity is based on, among other things, an entity's
purpose and design and a company's ability to direct the activities of the
entity that most significantly impact the entity's economic performance. FAS 167
requires additional disclosures about the reporting entity's involvement with
variable-interest entities and any significant changes in risk exposure due to
that involvement as well as its affect on the entity's financial statements. FAS
167 will be effective January 1, 2010 and is not expected to have a significant
impact on the Company's financial statements. The FASB has not yet codified FAS
167.
FASB Accounting Standards Update No. 2009-01, "Topic 105-Generally Accepted
Accounting Principles-amendments based on Statement of Financial Accounting
Standards No. 168, "The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles, a Replacement of FASB Statement No.
162," ("ASU 2009-01")
ASU 2009-01 replaces FAS 162, "The Hierarchy of Generally Accepted Accounting
Principles" and establishes the FASB Accounting Standards Codification (the
"Codification") as the source of authoritative accounting principles recognized
by the FASB to be applied by non-governmental entities in the preparation of
financial statements in conformity with generally accepted accounting
principles. Rules and interpretive releases of the SEC under authority of
federal securities laws are also sources of authoritative guidance for SEC
registrants. All guidance contained in the Codification carries an equal level
of authority. All non-grandfathered, non-SEC accounting literature not included
in the Codification is superseded and deemed non-authoritative. ASU 2009-01 was
effective for the Company's financial statements for periods ending after
September 15, 2009 and did not have a significant impact on the Company's
financial statements.
10
Accounting Standards Update No. 2009-05, "Topic 820 - Fair Value Measurements
and Disclosures - Measuring Liabilities at Fair Value" ("ASU 2009-05")
ASU 2009-05 provides clarification that the fair value measurement of
liabilities in which a quoted price in an active market for the identical
liability is not available should be developed based on a valuation technique
that uses the quoted price of the identical liability when traded as an asset or
quoted prices for similar liabilities when traded as assets or another valuation
technique that is consistent with the principles of Topic 820 - Fair Value
Measurements and Disclosures. ASU 2009-05 also clarifies that there is no
requirement to adjust the fair value related to the existence of a restriction
that prevents the transfer of the liability and that both a quoted price in an
active market for the identical liability at the measurement date and the quoted
price for the identical liability when traded as an asset in an active market
when no adjustments to the quoted price of the asset are required are Level 1
fair value measurements. This guidance was effective for the Company as of
September 30, 2009 and did not have a significant impact on the Company's
financial statements.
Accounting Standards Update No. 2009-12, "Topic 820 - Fair Value Measurements
and Disclosures - Investments in Certain Entities That Calculate Net Asset Value
per Share (or Its Equivalent)" ("ASU 2009-12")
ASU 2009-12 permits, as a practical expedient, fair value of an investment that
is within the scope of the ASU such as hedge funds, private equity funds, real
estate funds, venture capital funds, offshore fund vehicles and fund of funds to
be measured based on the net asset value of the investment or its equivalent as
of the reporting entity's measurement date. It also requires certain disclosures
including any restrictions on the investor's ability to redeem its investments
at the measurement date, any unfunded commitments and the investment strategies
of the investees. ASU 2009-12 is effective for interim and annual periods ending
December 15, 2009. Early application is permitted. The Company will adopt ASU
2009-12 as of December 31, 2009 and it is not expected to have a significant
impact on the Company's financial statements.
11
(2) Securities
Investment Securities
The amortized cost and fair values of investment securities are as follows (in
thousands):
September 30,
-------------------------------------------------------------------------------------------
2009 2008
--------------------------------------------------------------------------------------------
Not Recognized in OCI (1) Not Recognized in OCI (1)
------------------------ -----------------------
Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized
Cost Value Gain Loss Cost Value Gain Loss
------------------------------------------------------------------------------------------------------------------------------
Municipal and other tax-exempt $230,868 $237,520 $6,667 $ (15) $238,042 $238,208 $ 1,530 $ (1,364)
Other debt securities 7,233 7,254 21 - 5,575 5,612 37 -
------------------------------------------------------------------------------------------------------------------------------
Total $238,101 $244,774 $6,688 $ (15) $243,617 $243,820 $ 1,567 $ (1,364)
------------------------------------------------------------------------------------------------------------------------------
December 31, 2008
----------------------------------------------
Not Recognized in OCI (1)
-----------------------
Amortized Fair Gross Unrealized
Cost Value Gain Loss
-------------------------------------------------------------------------------
Municipal and other tax-exempt $235,791 $239,178 $3,736 $(349)
Other debt securities 6,553 6,591 38 -
-------------------------------------------------------------------------------
Total $242,344 $245,769 $3,774 $(349)
-------------------------------------------------------------------------------
(1) Other comprehensive income
The amortized cost and fair values of investment securities at September 30,
2009, by contractual maturity, are as shown in the following table (dollars in
thousands):
Weighted
Less than One to Six to Over Average
One Year Five Years Ten Years Ten Years Total Maturity(2)
------------ -------------- ------------- ------------- ------------- ------------
Municipal and other tax-exempt:
Amortized cost $ 57,991 $ 140,205 $25,395 $ 7,277 $ 230,868 2.98
Fair value 58,808 144,594 26,596 7,522 237,520
Nominal yield(1) 5.29 4.61 5.76 6.44 4.97
Other debt securities:
Amortized cost $ 5,795 $ 1,425 $ - $ 13 $ 7,233 0.94
Fair value 5,811 1,430 - 13 7,254
Nominal yield 1.82 5.09 - - 2.46
------------ -------------- ------------- ------------- ------------- ------------
Total fixed maturity securities:
Amortized cost $ 63,786 $ 141,630 $ 25,395 $ 7,290 $ 238,101 2.92
Fair value 64,619 146,024 26,596 7,535 244,774
Nominal yield 4.97 4.62 5.76 6.43 4.89
------------ -------------- ------------- -------------
Total investment securities:
Amortized cost $ 238,101
Fair value 244,774
Nominal yield 4.89
-------------
(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.
12
Available for Sale Securities
The amortized cost and fair value of available for sale securities are as
follows (in thousands):
September 30,
-----------------------------------------------------------------------------------------------------
2009 2008
-----------------------------------------------------------------------------------------------------
Recognized in OCI (1) Recognized in OCI (1)
---------------------------------- ---------------------
Other Than
Amortized Fair Gross Unrealized Temporary Amortized Fair Gross Unrealized
----------------------- ---------------------
Cost Value Gain Loss Impairment Cost Value Gain Loss
-----------------------------------------------------------------------------------------------------
U.S. Treasury $ 6,995 $ 7,052 $ 57 $ - $ - $ 26,984 $ 27,005 $ 21 $ -
Municipal and other tax-exempt 46,393 47,903 1,730 (220) - 18,832 18,534 57 (355)
Residential mortgage-backed
securities:
U. S. agencies:
FNMA 3,400,688 3,510,572 112,054 (2,170) - 2,110,871 2,106,175 15,233 (19,929)
FHLMC 2,323,379 2,396,767 73,440 (52) - 1,978,890 1,989,648 17,213 (6,455)
GNMA 828,543 846,693 18,559 (409) - 259,826 260,563 1,536 (799)
Other 131,270 132,835 5,047 (3,482) - 203,995 204,201 736 (530)
---------------------------------------------------------------------------------------------------------------------------------
Total U.S. agencies 6,683,880 6,886,867 209,100 (6,113) - 4,553,582 4,560,587 34,718 (27,713)
---------------------------------------------------------------------------------------------------------------------------------
Private issue:
Alt-A loans 298,738 233,976 - (41,377) (23,385) 346,662 285,207 - (61,455)
Jumbo-A loans 1,033,612 906,967 80 (122,156) (4,569) 1,339,080 1,237,813 44 (101,311)
---------------------------------------------------------------------------------------------------------------------------------
Total private issue 1,332,350 1,140,943 80 (163,533) (27,954) 1,685,742 1,523,020 44 (162,766)
---------------------------------------------------------------------------------------------------------------------------------
Total residential
mortgage-backed
securities 8,016,230 8,027,810 209,180 (169,646) (27,954) 6,239,324 6,083,607 34,762 (190,479)
---------------------------------------------------------------------------------------------------------------------------------
Other debt securities 15,883 15,862 - (21) - 38 37 - (1)
Federal Reserve Bank stock 32,526 32,526 - - - 32,078 32,078 - -
Federal Home Loan Bank stock 146,355 146,355 - - - 56,471 56,471 - -
Perpetual preferred stock 19,751 20,038 527 (240) - 32,582 23,871 - (8,711)
Equity securities and
mutual funds 43,531 61,016 18,009 (524) - 31,874 37,927 6,085 (32)
---------------------------------------------------------------------------------------------------------------------------------
Total $8,327,664 $8,358,562 $ 229,503 $(170,651) $ (27,954) $ 6,438,183 $6,279,530 $ 40,925 $(199,578)
---------------------------------------------------------------------------------------------------------------------------------
December 31, 2008
-----------------------------------------------
Recognized in OCI (1)
-----------------------
Amortized Fair Gross Unrealized
-----------------------
Cost Value Gain Loss
-----------------------------------------------
U.S. Treasury $ 6,987 $ 7,126 $ 139 $ -
Municipal and other tax-exempt 19,537 20,163 664 (38)
Residential mortgage-backed
securities:
U. S. agencies:
FNMA 2,194,834 2,225,589 37,855 (7,100)
FHLMC 2,222,253 2,254,989 37,577 (4,841)
GNMA 195,767 200,086 4,319 -
Other 288,041 292,264 4,322 (99)
---------------------------------------------------------------------------
Total U.S. agencies 4,900,895 4,972,928 84,073 (12,040)
---------------------------------------------------------------------------
Private issue:
Alt-A loans 393,118 268,545 - (124,573)
Jumbo-A loans 1,243,816 972,693 28 (271,151)
---------------------------------------------------------------------------
Total private issue 1,636,934 1,241,238 28 (395,724)
---------------------------------------------------------------------------
Total residential
mortgage-backed
securities 6,537,829 6,214,166 84,101 (407,764)
---------------------------------------------------------------------------
Other debt securities 37 36 - (1)
Federal Reserve Bank stock 32,380 32,380 - -
Federal Home Loan Bank stock 61,760 61,760 - -
Perpetual preferred stock 32,472 21,701 - (10,771)
Equity securities and
mutual funds 31,421 34,119 2,698 -
---------------------------------------------------------------------------
Total $6,722,423 $6,391,451 $ 87,602 $(418,574)
---------------------------------------------------------------------------
(1) Other comprehensive income
13
The amortized cost and fair values of available for sale securities at September
30, 2009, by contractual maturity, are as shown in the following table (dollars
in thousands):
Less than One to Six to Over Wtd Avg
One Year Five Years Ten Years Ten Years Total Maturity(5)
------------ -------------- ------------- ------------- -------------- -----------
U.S. Treasuries:
Amortized cost $ 6,995 $ - $ - $ - $ 6,995 0.40
Fair value 7,052 - - - 7,052
Nominal yield 2.16 - - - 2.16
Municipal and other tax-exempt:
Amortized cost $ - $ 4,468 $ 15,717 $ 26,208 $ 46,393 17.27
Fair value - 4,722 17,124 26,057 47,903
Nominal yield(1) - 4.04 4.12 0.65 2.15
Other debt securities:
Amortized cost $ 25 $ 8 $ - $ 15,850 $ 15,883 31.61
Fair value 25 8 - 15,829 15,862
Nominal yield(1) 6.18 7.61 - 1.66 1.67
------------ -------------- ------------- ------------- -------------- -----------
Total fixed maturity securities:
Amortized cost $ 7,020 $ 4,476 $ 15,717 $ 42,058 $ 69,271 18.86
Fair value 7,077 4,730 17,124 41,886 70,817
Nominal yield 2.18 4.05 4.12 1.03 2.04
------------ -------------- ------------- -------------
Residential mortgage-backed securities:
Amortized cost $ 8,016,230 (2)
Fair value 8,027,810
Nominal yield(4) 4.53
--------------
Equity securities and mutual funds:
Amortized cost $ 242,163 (3)
Fair value 259,935
Nominal yield 2.11
--------------
Total available-for-sale securities:
Amortized cost $8,327,664
Fair value 8,358,562
Nominal yield 4.44
--------------
(1) Calculated on a taxable equivalent basis using a 39% effective tax rate.
(2) The average expected lives of mortgage-backed securities were 3.38 years
based upon current prepayment assumptions.
(3) Primarily restricted common stock of U.S. government agencies and preferred
stock of corporate issuers with no stated maturity.
(4) The nominal yield on mortgage-backed securities is based upon prepayment
assumptions at the purchase date. Actual yields earned may differ
significantly based upon actual prepayments.
(5) Expected maturities may differ from contractual maturities, because
borrowers may have the right to call or prepay obligations with or without
penalty.
Sales of available for sale securities resulted in gains and losses as follows
(in thousands):
Three Months Ended Sept. 30 Nine Months Ended Sept. 30,
-------------------------------- ---------------------------------
2009 2008 2009 2008
-- ------------ ---- ----------- --- ------------ --- ------------
Proceeds $ 704,897 $ 687,515 $ 2,481,861 $ 2,158,216
Gross realized gains 15,122 4,256 48,992 12,763
Gross realized losses (1,390) (3,339) (1,390) (8,623)
Related federal and state income
tax expense 2,752 264 16,039 1,310
Gains and losses on sales of available for sale securities are realized on
settlement date.
Gross realized gains for the nine months ended September 30, 2008 exclude $6.8
million gain from the redemption of Visa, Inc. Class B common stock. Gross
realized losses are due to price changes subsequent to June 30, 2009 on $91
million of impaired debt securities. The amortized cost of these securities was
written down to fair value through an other-than-temporary-impairment ("OTTI")
charge of $1.3 million in the second quarter of 2009 based on the Company's
intent to sell the securities.
Mortgage trading securities are mortgage-backed securities issued by U.S.
government agencies that have been designated as an economic hedge of the
mortgage servicing rights and are separately identified on the balance sheet.
These securities are carried at fair value. Changes in fair value are recognized
in earnings as they occur. As of September 30, 2009, mortgage trading securities
are carried at their $321 million fair value and had a net unrealized gain of
$5.0 million. The Company recognized a net gain of $3.6 million on mortgage
trading securities during the third quarter of 2009 and a net loss of $8.8
million for the nine months ended September 30, 2009. The Company recognized a
net gain of $1.2 million on mortgage trading securities during the third quarter
of 2008 and a net loss of $4.1 million for the nine months ended September 30,
2008.
14
Temporarily Impaired Securities as of September 30, 2009
(In Thousands)
Number Less Than 12 Months 12 Months or Longer Total
------------------------- ------------------------- -------------------------
of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Loss Value Loss Value Loss
---------- ------------ ------------ ------------ ------------ ------------ ------------
Investment:
Municipal and other tax exempt 8 $ 3,355 $ 1 $ 2,363 $ 14 $5,718 $ 15
Available for sale:
Municipal and other tax-exempt 14 25,360 220 - - 25,360 220
Residential mortgage-backed
securities:
U. S. agencies:
FNMA 8 152,385 1,012 10,238 1,158 162,623 2,170
FHLMC 3 76,500 52 - - 76,500 52
GNMA 2 50,995 409 - - 50,995 409
Other 3 16,624 3 39,119 3,479 55,743 3,482
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total U.S. agencies 16 296,504 1,476 49,357 4,637 345,861 6,113
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Private issue:
Alt-A loans 25 - - 233,976 64,762 233,976 64,762
Jumbo-A loans 86 16,755 3,277 864,312 123,448 881,067 126,725
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total private issue 111 16,755 3,277 1,098,288 188,210 1,115,043 191,487
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total residential mortgage-backed
securities 127 313,259 4,753 1,147,645 192,847 1,460,904 197,600
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Other debt securities 3 6,878 21 - - 6,878 21
Perpetual preferred stock 3 - - 10,162 240 10,162 240
Equity securities and mutual funds 7 2,681 524 - - 2,681 524
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total available for sale 154 348,178 5,518 1,157,807 193,087 1,505,985 198,605
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total 162 $351,533 $ 5,519 $1,160,170 $ 193,101 $1,511,703 $198,620
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Temporarily Impaired Securities as of December 31, 2008
(In Thousands)
Number Less Than 12 Months 12 Months or Longer Total
------------------------- ------------------------- -------------------------
of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Loss Value Loss Value Loss
---------- ------------ ------------ ------------ ------------ ------------ ------------
Investment:
Municipal and other tax exempt 63 $ 10,331 $ 147 $ 7,914 $ 202 $ 18,245 $ 349
Available for sale:
Municipal and other tax-exempt 4 645 30 1,269 8 1,914 38
Residential mortgage-backed
securities:
U. S. agencies:
FNMA 31 539,121 7,083 10,787 17 549,908 7,100
FHLMC 28 273,165 4,282 152,885 559 426,050 4,841
Other 1 36,444 99 - - 36,444 99
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total U.S. agencies 60 848,730 11,464 163,672 576 1,012,402 12,040
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Private issue:
Alt-A loans 28 148,329 78,258 120,216 46,315 268,545 124,573
Jumbo-A loans 87 283,405 89,715 675,226 181,436 958,631 271,151
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total private issue 115 431,734 167,973 795,442 227,751 1,227,176 395,724
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total residential mortgage-backed
securities 175 1,280,464 179,437 959,114 228,327 2,239,578 407,764
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Other debt securities 2 - - 36 1 36 1
Perpetual preferred stock 14 14,107 8,122 7,594 2,649 21,701 10,771
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total available for sale 195 1,295,216 187,589 968,013 230,985 2,263,229 418,574
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total 258 $1,305,547 $ 187,736 $ 975,927 $ 231,187 $2,281,474 $418,923
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
15
Temporarily Impaired Securities as of September 30, 2008
(In Thousands)
Number Less Than 12 Months 12 Months or Longer Total
------------------------- ------------------------- -------------------------
of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Loss Value Loss Value Loss
---------- ------------ ------------ ------------ ------------ ------------ ------------
Investment:
Municipal and other tax exempt 196 $ 40,891 $ 521 $ 34,595 $ 843 $ 75,486 $ 1,364
Available for sale:
Municipal and other tax-exempt 39 10,898 213 2,745 142 13,643 355
Residential mortgage-backed
securities:
U. S. agencies:
FNMA 106 903,902 15,816 257,153 4,113 1,161,055 19,929
FHLMC 62 276,586 3,537 328,818 2,918 605,404 6,455
GNMA 21 32,428 769 7,938 30 40,366 799
Other 5 114,149 530 - - 114,149 530
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total U.S. agencies 194 1,327,065 20,652 593,909 7,061 1,920,974 27,713
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Private issue:
Alt-A loans 24 195,398 54,124 89,809 7,331 285,207 61,455
Jumbo-A loans 86 369,992 19,687 841,162 81,624 1,211,154 101,311
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total private issue 110 565,390 73,811 930,971 88,955 1,496,361 162,766
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total residential mortgage-backed
securities 304 1,892,455 94,463 1,524,880 96,016 3,417,335 190,479
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Other debt securities 1 - - 25 1 25 1
Perpetual preferred stock 13 4,727 273 19,034 8,438 23,761 8,711
Equity securities and mutual funds 12 - - 10,381 32 10,381 32
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total available for sale 369 1,908,080 94,949 1,557,065 104,629 3,465,145 199,578
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total 565 $ 1,948,971 $ 95,470 $1,591,660 $105,472 $3,540,631 $200,942
------------------------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
On a quarterly basis, the Company performs separate evaluations of impaired debt
and equity securities to determine if the unrealized losses are temporary.
For equity securities, including perpetual preferred stocks, this evaluation
begins with an assessment of management's ability and intent to hold the
securities until fair value recovers. The assessment of the ability and intent
to hold these securities focuses on liquidity needs, asset / liability
management objectives and securities portfolio objectives. Based on the results
of this evaluation, management concluded that as of September 30, 2009, it had
both the intent and ability to hold these equity securities until the fair value
recovers.
For debt securities, management determines whether it intends to sell or if it
is more-likely-than-not that it will be required to sell impaired securities.
This determination considers current and forecasted liquidity requirements,
regulatory and capital requirements and securities portfolio management. Based
on this evaluation as of September 30 2009, we do not intend to sell any
impaired available for sale securities before fair value recovers to our current
amortized cost and it is more-likely-than-not that we will not be required to
sell impaired securities before fair value recovers.
For all impaired debt securities for which there was no intent or expected
requirement to sell, the evaluation considers all available evidence to assess
whether it is more likely than not that all amounts due would not be collected
according to the security's contractual terms.
Impaired debt securities are divided into two groups, those rated investment
grade by all nationally-recognized rating agencies and those rated below
investment grade by at least one of the nationally-recognized rating agencies.
Impairment of debt securities consistently rated investment grade is considered
temporary unless specific contrary information is identified. None of the debt
securities rated investment grade were considered to be other-than-temporarily
impaired at September 30, 2009.
16
As of September 30, 2009 the composition of the Company's securities portfolio
by the lowest current credit rating assigned by any of the three
nationally-recognized rating agencies is as follows (in thousands):
----------------------------------------------------------------------------------------------------------------------------------
U.S. Govt / GSE (1) AAA - AA A - BBB Below Investment Grade Not Rated Total
----------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value Cost Value Cost Value
----------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
Municipal and other
tax-exempt $ - $ - $ 52,172 $53,665 $ 52,060 $ 53,533 $ - $ - $126,636 $130,322 $230,868 $237,520
Other debt securities - - - - 600 600 $ - - 6,633 6,654 7,233 7,254
----------------------------------------------------------------------------------------------------------------------------------
Total $ - $ - $ 52,172 $53,665 $ 52,660 $ 54,133 $ - $ - $133,269 $136,976 $238,101 $244,774
----------------------------------------------------------------------------------------------------------------------------------
Available for Sale:
U.S. Treasury $ 6,995 $ 7,052 $ - $ - $ - $ - $ - $ - $ - $ - $ 6,995 $7,052
Municipal and other
tax-exempt - - 32,246 33,562 7,248 7,399 4,655 4,550 2,244 2,392 46,393 47,903
Residential mortgage-backed
securities:
U. S. agencies:
FNMA 3,400,688 3,510,572 - - - - - - - - 3,400,688 3,510,572
FHLMC 2,323,379 2,396,767 - - - - - - - - 2,323,379 2,396,767
GNMA 828,543 846,693 - - - - - - - - 828,543 846,693
Other 131,270 132,835 - - - - - - - - 131,270 132,835
----------------------------------------------------------------------------------------------------------------------------------
Total U.S. agenci6,683,880 6,886,867 - - - - - - - - 6,683,880 6,886,867
----------------------------------------------------------------------------------------------------------------------------------
Private issue:
Alt-A loans - - 42,155 38,021 13,997 12,968 242,586 182,987 - - 298,738 233,976
Jumbo-A loans - - 504,224 471,403 137,268 121,048 392,120 314,516 - - 1,033,612 906,967
----------------------------------------------------------------------------------------------------------------------------------
Total private issue - - 546,379 509,424 151,265 134,016 634,706 497,503 - - 1,332,350 1,140,943
----------------------------------------------------------------------------------------------------------------------------------
Total residential
mortgage-backed6,683,880 6,886,867 546,379 509,424 151,265 134,016 634,706 497,503 - - 8,016,230 8,027,810
securities
----------------------------------------------------------------------------------------------------------------------------------
Other debt securities - - 13,050 13,034 250 245 2,550 2,550 33 33 15,883 15,862
Federal Reserve Bank 32,526 32,526 - - - - - - - - 32,526 32,526
stock
Federal Home Loan 146,355 146,355 - - - - - - - - 146,355 146,355
Bank stock
Perpetual preferred stock - - - - 19,751 20,038 - - - - 19,751 20,038
Equity securities and - - - - - - - - 43,531 61,016 43,531 61,016
mutual funds
----------------------------------------------------------------------------------------------------------------------------------
Total $6,869,756 $7,072,800 $591,675 $556,020 $178,514 $ 161,698$641,911$504,603 $45,808 $63,441 $8,327,664$8,358,562
----------------------------------------------------------------------------------------------------------------------------------
(1) U.S. government and government sponsored enterprises are not rated by the
nationally-recognized rating agencies as these securities are guaranteed
by agencies of the U.S. government or government-sponsored enterprises.
Approximately $635 million of our portfolio of privately issued mortgage-backed
securities (based on amortized cost before impairment charges) was rated below
investment grade by at least one of the nationally-recognized rating agencies.
The aggregate unrealized loss on these securities totaled $137 million. Ratings
by the nationally recognized rating agencies are subjective in nature and
accordingly ratings can vary significantly amongst the agencies. Limitations
generally expressed by the rating agencies include statements that ratings do
not predict the specific percentage default likelihood over any given period of
time and that ratings do not opine on expected loss severity of an obligation
should the issuer default. As such, the impairment of securities rated below
investment grade by at least one of the nationally-recognized rating agencies
was evaluated to determine if we expect not to recover the entire amortized cost
basis of the security. This evaluation was based on projections of estimated
cash flows based on individual loans underlying each security using current and
anticipated increases in unemployment and default rates, decreases in housing
prices and increases in loss severity at foreclosure. The primary assumptions
used in this evaluation were:
o Unemployment rates - increasing to 10.5% over the next 12 months,
dropping to 8% for the following 12 months, and holding at 8%
thereafter.
o Housing price depreciation - starting with current depreciated housing
prices based on information derived from the Federal Housing Finance
Agency data, decreasing by an additional 7.5% over the next nine
months and holding at that level thereafter.
o Estimated Liquidation Costs - held constant at 27% of the then-current
depreciated housing price at estimated foreclosure date.
17
o Discount rates - estimated cash flows were discounted at rates that
range from 5.50% to 6.14% based on our current expected yields.
These securities were further evaluated based on the loan-to-value ratio and
credit enhancement coverage ratio, with each of these criteria being given equal
weight in the evaluation.
Adjusted loan-to-value ratio is an estimate of the collateral value available to
support the realizable value of the security. The Company calculates the
adjusted loan-to-value ratio for each security using loan-level data that
comprises each security. The adjusted loan-to-value ratio is the original
loan-to-value ratio adjusted for market-specific home price depreciation and the
credit enhancement on the specific tranche of the security owned by the Company.
The home price depreciation is derived from the Federal Housing Finance Agency
("FHFA"). FHFA provides historical information on home price depreciation at
both the Metropolitan Statistical Area ("MSA") and state level. This information
is matched to each loan to calculate the home price depreciation. Data is
accumulated from the loan level to determine the adjusted loan-to-value ratio
for the security as a whole. The Company believes that an adjusted loan-to-value
ratio above 85% provides evidence that the collateral value may not provide
sufficient cash flows to support our carrying value. The 85% guideline provides
for further home price depreciation in future periods beyond our assumptions of
current loss trends for residential real estate loans and is consistent with
underwriting standards used by the Company to originate new residential mortgage
loans. A distribution of the amortized cost (after recognition of the
other-than-temporary impairment) and fair value by adjusted loan to value ratio
is as follows (in thousands):
Adjusted LTV Amortized Cost Fair Value
Ratio
---------------------------------------------------
< 70 % $ 49,249 $ 45,290
70 < 75 73,732 56,108
75 < 80 269,637 214,600
80 < 85 224,646 171,303
>= 85 17,442 10,202
---------------------------------------------------
Total $ 634,706 $ 497,503
---------------------------------------------------
OTTI charges have been recognized through earnings for estimated credit losses
on securities with adjusted loan-to-value ratios in excess of 85%. The remaining
impairment represents unrealized losses attributed to factors other than credit
losses and are recognized in accumulated other comprehensive losses.
Credit enhancement coverage ratio is an estimate of credit enhancement available
to absorb current projected losses within the pool of loans that support the
security. The Company acquires the benefit of credit enhancement by investing in
super-senior tranches for many of our mortgage-backed securities. Subordinated
tranches held by other investors are specifically designed to absorb losses
before the super-senior tranches which effectively doubled the typical credit
support for these types of bonds. Current projected losses consider depreciation
of home prices based on FHFA data, estimated costs and additional losses to
liquidate collateral and delinquency status of the individual loans underlying
the security. Management believes that a credit enhancement coverage ratio below
1.50 provides evidence that current credit enhancement may not provide
sufficient cash flows of the individual loans to support our carrying value at
the security level. The credit enhancement coverage ratio guideline of 1.50
times is based on standard underwriting criteria which consider loans with
coverage ratios of 1.20 to 1.25 times to be well-secured.
Additional evidence considered by the Company is the current loan-to-value ratio
and the FICO score of individual borrowers whose loans are still performing
within the collateral pool as forward-looking indicators of possible future
losses that could affect our evaluation.
We recognized an other-than-temporary impairment loss on certain private-label
residential mortgage-backed securities of $3.4 million in earnings during the
third quarter of 2009; $1.6 million was related to an initial
other-than-impairment charge on one security. The remaining $1.8 million was for
additional other-than-temporary impairment due to declines in the projected cash
flows on securities identified in previous quarters. We recognized an
other-than-temporary impairment loss on mortgage-backed securities of $279
thousand in the second quarter of 2009.
18
The following represents the composition of net impairment losses recognized in
earnings (in thousands):
Three Months Nine Months
Ended Ended
September 30, September 30,
2009 2009
----------------- ----------------
OTTI related to perpetual preferred stocks $ - $ (8,008)
OTTI on debt securities due to change in
intent to sell - (1,263)
OTTI on debt securities not intended for sale (6,133) (52,493)
Less: Portion of OTTI recognized in
other comprehensive income (2,752) (41,839)
--------------------------------------------------- ----------------- ----------------
OTTI recognized in earnings related to
credit losses on debt securities not intended
for sale (3,381) (10,654)
--------------------------------------------------- ----------------- ----------------
Total OTTI recognized in earnings $ (3,381) $ (19,925)
--------------------------------------------------- ----------------- ----------------
The following is a tabular rollforward of the amount of credit-related OTTI
recognized on available-for-sale debt securities in earnings (in thousands):
Three Months Nine Months
Ended Ended
September 30, September 30,
2009 2009
----------------- ----------------
Balance of credit-related OTTI recognized on
available for sale debt securities at July 1, 2009
and January 1, 2009, respectively $ 7,273 $ -
Additions for credit-related OTTI not previously
recognized 1,563 8,557
Additions for increases in credit-related OTTI
previously recognized when there
is no intent to sell and no requirement
to sell before recovery of
amortized cost 1,818 2,097
------------------------------------------------------ ----------------- ----------------
Balance of credit-related OTTI recognized on
available for sale debt securities at September 30, 2009 $10,654 $ 10,654
------------------------------------------------------ ----------------- ----------------
19
(3) Derivatives
The following table summarizes the fair values of derivative contracts recorded
as "derivative contracts" assets and liabilities in the balance sheet at
September 30, 2009 (in thousands):
Gross Basis Net Basis(2)
------------------------------------------------------ ----------------------------------------------------
Assets Liabilities Assets Liabilities
--------------------------- -------------------------- -------------------------- -------------------------
Notional(1) Fair Fair Fair Value Notional(1) Fair
Value Notional(1) Value Notional(1) Value
-------------- ------------ ------------ ------------- ----------- -------------- ------------- -----------
Customer Risk
Management Programs:
Interest rate contracts $4,851,226 $136,625 $4,849,680 $142,008 $4,851,226 $136,625 $ 4,849,680 $142,008
Energy contracts 4,197,005 618,943 4,198,626 613,144 1,117,398 215,144 1,095,988 214,619
Cattle contracts 57,062 1,650 45,192 1,522 57,062 1,650 45,192 1,522
Foreign exchange
contracts 54,068 54,160 54,160 54,160 54,068 54,160 54,160 54,160
CD options 55,938 4,888 55,938 4,888 55,938 4,888 55,938 4,888
----------------------- -------------- ------------ ------------ ------------- ----------- -------------- ------------- -----------
Total Customer Derivatives
before cash collateral 9,215,299 816,266 9,203,596 815,722 6,135,692 412,467 6,100,958 417,197
Less: cash collateral - - - - - (17,089) - (22,000)
----------------------- -------------- ------------ ------------ ------------- ----------- -------------- ------------- -----------
Total customer derivatives 9,215,299 816,266 9,203,596 815,722 6,135,692 395,378 6,100,958 395,197
Interest Rate Risk
Management Programs 98,541 1,732 - - 98,541 1,732 - -
----------------------- -------------- ------------ ------------ ------------- ----------- -------------- ------------- -----------
Total Derivative Contracts$9,313,840 $817,998 $9,203,596 $815,722 $6,234,233 $397,110 $6,100,958 $395,197
----------------------- -------------- ------------ ------------ ------------- ----------- -------------- ------------- -----------
(1) Notional amounts for commodity contracts are converted into
dollar-equivalent amounts based on dollar prices at the inception of the
contract.
(2) Derivative contracts are recorded on a net basis in the balance sheet in
recognition of master netting agreements that enable the Company to settle
all derivative positions with a given counterparty in total and to offset
the net derivative position with the related cash collateral.
The following summarizes the pre-tax net gains (losses) on derivative
instruments and where they are recorded in the income statement (in thousands):
Three Months ended Nine Months ended
September 30, 2009 September 30, 2009
---------------------------- -------------------------
Brokerage Gain (Loss) Brokerage Gain (Loss)
and on and on
Trading Derivatives, Trading Derivatives,
Revenue Net Revenue Net
------------- -------------- ---------- --------------
Customer Risk Management Programs:
Interest rate contracts $ (197) $ - $1,482 $ -
Energy contracts 1,313 - 2,627 -
Cattle contracts 196 - 529 -
Foreign exchange contracts 197 - 371 -
CD options - - - -
------------------------------------ ------------- -------------- ---------- --------------
Total Customer Derivatives 1,509 - 5,009 -
Interest Rate Risk Management Programs - (2,242) - (10,846)
------------------------------------ ------------- -------------- ---------- --------------
Total Derivative Contracts $1,509 $(2,242) $5,009 $(10,846)
------------------------------------ ------------- -------------- ---------- --------------
Interest Rate Risk Management Programs
BOK Financial uses interest rate swaps in managing its interest rate
sensitivity. Interest rate swaps are generally used to reduce overall asset
sensitivity by converting specific fixed rate liabilities to floating rate based
on LIBOR.
For the quarters ended September 30, 2009 and 2008, net interest revenue was
increased by $2.7 million and $2.4 million, respectively, from the settlement of
amounts receivable or payable on interest rate swaps.
The notional and the fair value included in residential mortgage loans held for
sale on the balance sheet and related gain (loss) included in mortgage banking
revenue due to changes in the fair value of derivative contracts not designated
as hedging instruments related to mortgage loan commitments and forward contract
sales as of September 30, 2009 were (in thousands):
Mortgage Loans Held for Sale Mortgage Banking Revenue
---------------------------- --------------------------
Three months Nine months
Notional Fair ended ended
Value Sept. 30, 2009 Sept. 30, 2009
--------------- ------------ ------------ -------------
Mortgage loan commitments $159,598 $3,481 $ 1,634 $ 1,312
Forward sales contracts 310,799 (3,875) (8,960) (1,712)
------------ ------------ -------------
$ (394) $ (7,326) $ (400)
============ ============ =============
20
(4) Impaired Loans
Impaired Loans
Investments in loans considered to be impaired under FAS 114 were as follows (in
thousands):
-------------------------------------------
September 30, December 31, September 30,
2009 2008 2008
-------------------------------------------
Investment in loans impaired
under FAS 114 (all of
which were on a
nonaccrual basis) $357,954 $269,908 $184,333
Loans with specific reserves
for loss 247,309 194,292 119,783
Specific reserve balance 37,739 28,532 15,552
No specific related reserve
for loss 110,645 75,616 64,544
Average recorded investment
in impaired loans 342,921 179,808 150,186
Approximately $123 million of losses on impaired loans with no related specific
reserves at September 30, 2009 were charged off against the allowance for loan
losses. Interest income recognized on impaired loans was not significant.
(5) Reserve for Credit Losses
The activity in the reserve for loan losses is summarized as follows (in
thousands):
Three Months ended Nine Months ended
September 30, September 30,
---------------------------- ----------------------------
2009 2008 2009 2008
------------- -------------- ------------- --------------
Beginning balance $263,309 $154,018 $233,236 $126,677
Provision for loan losses 53,580 52,712 150,461 127,901
Loans charged off (38,581) (33,926) (110,525) (86,530)
Recoveries 2,594 13,712 (1) 7,730 18,468
------------------------------------ ------------- -------------- ------------- --------------
Ending balance $280,902 $186,516 $280,902 $186,516
------------------------------------ ------------- -------------- ------------- --------------
(1) Includes a $7.1 million recovery of a loan charged off in 2005 and a $4.0
million recovery of a loan charged off in 2001.
The activity in the reserve for off-balance sheet credit losses is summarized as
follows (in thousands):
Three Months ended Nine Months ended
September 30, September 30,
---------------------------- ----------------------------
2009 2008 2009 2008
------------- -------------- ------------- --------------
Beginning balance $10,445 $22,545 $15,166 $20,853
Provision for off-balance sheet
credit losses 1,540 (1) (3,181) 1,691
------------------------------------ ------------- -------------- ------------- --------------
Ending balance $11,985 $22,544 $11,985 $22,544
------------------------------------ ------------- -------------- ------------- --------------
Provision for credit losses $55,120 $52,711 $147,280 $129,592
21
(6) Mortgage Banking Activities
Residential mortgage loans held for sale totaled $172 million and $113 million,
and outstanding mortgage loan commitments totaled $216 million and $93 million
at September 30, 2009 and 2008, respectively. Mortgage loan commitments are
generally outstanding for 60 to 90 days and are subject to both credit and
interest rate risk. Credit risk is managed through underwriting policies and
procedures, including collateral requirements, which are generally accepted by
the secondary loan markets. Exposure to interest rate fluctuations is partially
managed through forward sales of mortgage-backed securities and forward sales
contracts. These latter contracts set the price for loans that will be delivered
in the next 60 to 90 days. As of September 30, 2009, the unrealized loss
recognized on forward sales contracts used to manage the mortgage pipeline
interest rate risk was approximately $3.9 million. Gains on mortgage loans sold,
including capitalized mortgage servicing rights, totaled $5.0 million and $26.2
million in the three and nine months ended September 30, 2009. Gains on mortgage
loans sold, including capitalized mortgage servicing rights, totaled $1.7
million and $7.2 million in the three and nine months ended September 30, 2008.
At September 30, 2009, BOK Financial owned the rights to service 62,860 mortgage
loans with outstanding principal balances of $7.1 billion, including $832
million serviced for affiliates. The weighted average interest rate and
remaining term was 5.74% and 289 months, respectively.
For the three and nine months ended September 30, 2009, mortgage banking revenue
includes servicing fee income and late charges on loans serviced for others of
$5.2 million and $14.6 million, respectively. For the three and nine months
ended September 30, 2008, mortgage banking revenue includes servicing fee income
and late charges on loans serviced for others of $4.4 million and $13.0 million,
respectively.
Activity in capitalized mortgage servicing rights during the nine months ending
September 30, 2009 is as follows (in thousands):
Capitalized Mortgage Servicing Rights
----------------------------------------
Purchased Originated Total
--------------- ------------ -----------
Balance at December 31, 2008 $ 6,353 $ 36,399 $ 42,752
Additions, net - 32,699 32,699
Change in fair value due to loan runoff (1,984) (13,617) (15,601)
Change in fair value due to market and
assumption changes 2,141 4,698 6,839
--------------------------------------- -- ---------- -- ---------- -- ---------
Balance at September 30, 2009 $ 6,510 $ 60,179 $ 66,689
--------------------------------------- -- ---------- -- ---------- -- ---------
Activity in capitalized mortgage servicing rights during the nine months ending
September 30, 2008 is as follows (in thousands):
Capitalized Mortgage Servicing Rights
---------------------------------------
Purchased Originated Total
--------------- ------------ ----------
Balance at December 31, 2007 $ 13,906 $ 56,103 $ 70,009
Additions, net - 15,406 15,406
Change in fair value due to loan runoff (1,719) (6,933) (8,652)
Change in fair value due to market and
assumption changes (1,063) (7,020) (8,083)
---------------------------------------- -- ---------- -- ---------- -- --------
Balance at September 30, 2008 $ 11,124 $ 57,556 $ 68,680
---------------------------------------- -- ---------- -- ---------- -- --------
Changes in the fair value of mortgage servicing rights are included in Other
Operating Expense in the Consolidated Statements of Earnings (Unaudited).
Changes in fair value due to loan runoff are included in mortgage banking costs.
Changes in fair value due to market changes are reported separately. Changes in
fair value due to market changes during the period relate to assets held at the
reporting date.
22
Fair value is determined by discounting the projected net cash flows.
Significant assumptions used to determine fair value are:
September 30, 2009 December 31, 2008 September 30, 2008
--------------------- -------------------- -- -----------------------
Discount rate - risk-free rate plus a market premium 10.3% 9.26% 9.89%
-------------
Prepayment rate - based upon loan interest rate,
---------------
original term and loan type 8.9% - 25.0% 8.3% - 38.0% 5.5% - 15.4%
Loan servicing costs - annually per loan based upon
--------------------
loan type $43 - $66 $43 - $73 $43 - $73
Escrow earnings rate - indexed to rates paid on deposit
--------------------
accounts with comparable average life 2.65% 2.08% 3.83%
Stratification of the mortgage loan servicing portfolio and outstanding
principal of loans serviced by interest rate at September 30, 2009 follows (in
thousands):
< 5.51% 5.51% - 6.50% 6.51% - 7.50% > 7.50% Total
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
Fair value $ 36,148 $ 23,006 $ 6,005 $ 1,530 $ 66,689
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
Outstanding principal of loans serviced (1) $3,000,000 $2,339,000 $776,000 $147,000 $ 6,262,000
------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
(1) Excludes outstanding principal of $832 million for loans serviced for
affiliates and $28 million of mortgage loans for which there are no capitalized
mortgage servicing rights.
(7) Employee Benefits
BOK Financial has sponsored a defined benefit Pension Plan for all employees who
satisfied certain age and service requirements. Pension Plan benefits were
curtailed as of April 1, 2006. The Company recognized periodic pension cost of
$0.6 million and $1.8 million during the three and nine months ended September
30, 2009, respectively, and none during the same periods of the prior year. The
Company made no Pension Plan contributions during the nine months ended
September 30, 2009 and September 30, 2008.
Management has been advised that the maximum and minimum allowable contributions
for 2009 are $23 million and $0.4 million, respectively.
(8) Commitments and Contingent Liabilities
BOSC, Inc. has been joined as a defendant in a putative class action brought on
behalf of unit holders of SemGroup Energy Partners, LP in the United States
District Court for the Northern District of Oklahoma. The lawsuit is brought
pursuant to Sections 11 and 12(a)(2) of the Securities Act of 1933 against all
of the underwriters of issuances of partnership units in the Initial Public
Offering in July 2007 and in a Secondary Offering in January 2008. BOSC
underwrote $6.25 million of units in the Initial Public Offering. BOSC was not
an underwriter in the Secondary Offering. Counsel for BOSC believes BOSC has
valid defenses to the claims asserted in the litigation and management does not
anticipate any material loss.
As a member of Visa, BOK Financial is obligated for a proportionate share of
certain covered litigation losses incurred by Visa under a retrospective
responsibility plan. A contingent liability was recognized for the Company's
share of Visa's covered litigation liabilities. This contingent liability
totaled $2.1 million at September 30, 2009. During 2008, Visa funded an escrow
account to cover litigation claims, including covered litigation losses under
the retrospective responsibility plan, with proceeds from its initial public
offering and from available cash. BOK Financial recognized a $2.1 million
receivable for its proportionate share of this escrow account.
23
BOK Financial received 410,562 Visa Class B shares as part of Visa's initial
public offering in the first quarter of 2008. A partial redemption of Class B
shares was completed and the Company received $6.8 million in cash in exchange
for 158,725 Class B shares. The remaining 251,837 Class B shares are convertible
into Visa Class A shares at the later of three years after the date of Visa's
initial public offering or the final settlement of all covered litigation. The
current exchange rate is approximately 0.5824 Class A shares for each Class B
share. However, the Company's Class B shares may be diluted in the future if the
escrow fund is not adequate to cover future covered litigation costs. Therefore,
under currently issued accounting guidance, no value has been currently assigned
to the Class B shares and no value may be assigned until the Class B shares are
converted into a known number of Class A shares.
At September 30, 2009, Cavanal Hill Funds' assets included $924 million of U.S.
Treasury, $1.1 billion of cash management and $594 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
September 30, 2009. An investment in these funds is not insured by the Federal
Deposit Insurance Corporation or guaranteed by BOK Financial or any of its
subsidiaries. BOK Financial may, but is not obligated to purchase assets from
these funds to maintain the net asset value at $1.00.
In the ordinary course of business, BOK Financial and its subsidiaries are
subject to legal actions and complaints. Management believes, based upon the
opinion of counsel, that the actions and liability or loss, if any, resulting
from the final outcomes of the proceedings, will not be material in the
aggregate.
The Company has evaluated events from the date of the consolidated financial
statements on September 30, 2009 through the issuance of those consolidated
financial statements included in this Quarterly Report on Form 10-Q on October
30, 2009. No events were identified requiring recognition in and/or disclosure
in consolidated financial statements.
24
(9) Shareholders' Equity
On October 27, 2009, the Board of Directors of BOK Financial Corporation
approved a $0.24 per share quarterly common stock dividend. The quarterly
dividend will be payable on December 2, 2009 to shareholders of record on
November 16, 2009.
Dividends declared during the three and nine months ended September 30, 2009
were $0.24 per share and $0.705 per share, respectively. Dividends declared
during the three and nine months ended September 30, 2008 were $0.225 per share
and $0.65 per share, respectively.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) ("AOCI") includes unrealized gains
and losses on available for sale securities and accumulated gains or losses on
effective cash flow hedges, including hedges of anticipated transactions. Gains
and losses in AOCI are net of deferred income taxes. Accumulated losses on the
rate lock hedge of the 2005 subordinated debenture issuance will be reclassified
into income over the ten-year life of the debt. Unrealized losses on employee
benefit plans will be reclassified into income as pension plan costs are
recognized over the remaining service period of plan participants.
(In thousands) Unrealized Other Accumulated Unrealized
Gain (Loss) Than (Loss) on (Loss)
On Available Temporary Effective On
For Sale Impairment Cash Flow Employee
Securities Losses Hedges Benefit Plans Total
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007 $ (22,775) $ - $ (1,461) $ (6,998) $ (31,234)
Unrealized losses on securities (103,379) - - - (103,379)
Unrealized gains on cash flow hedges - - 139 - 139
Tax benefit (expense) on unrealized gains (losses) 29,776 - (54) - 29,722
Reclassification adjustment for losses realized
and included in net income (2,317) - 214 - (2,103)
Reclassification adjustment for tax benefit on
realized losses 689 - (83) - 606
-------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2008 $ (98,006) $ - $ (1,245) $ (6,998) $(106,249)
-------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2008 $(204,648) $ - $ (1,199) $ (17,039) $(222,886)
Unrealized gains on securities 381,772 13,885 - - 395,657
Other-than-temporary impairment losses on securities - (41,839) - - (41,839)
Tax benefit (expense) on unrealized gains (losses) (128,568) 9,418 - - (119,150)
Reclassification adjustment for (gains) losses
realized and included in net income (19,089) - 169 - (18,920)
Reclassification adjustment for tax expense (benefit)
on realized gains (losses) 6,441 - (66) - 6,375
-------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2009 $ 35,908 $ (18,536) $ (1,096) $ (17,039) $ (763)
-------------------------------------------------------------------------------------------------------------------------------
25
(10) Earnings Per Share
Effective January 1, 2009, unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. The Corporation has
determined that its outstanding non-vested stock awards are participating
securities. Accordingly, effective January 1, 2009, earnings per common share is
computed using the two-class method. All previously reported earnings per common
share data has been retrospectively adjusted to conform to the new computation
method, the effects of which were not material. The following table presents the
computation of basis and diluted earnings per share (dollar in thousands except
per share data):
Three Months Ended Nine Months Ended
------------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2009 2008 2009 2008
------------------------------------------------------
Numerator:
Net income $ 50,660 $ 56,685 $ 157,807 $ 117,789
Earnings allocated to participating securities (222) (142) (637) (304)
------------------------------------------------------------------------------------------------------------------------
Numerator for basic earnings per share - income
available to common shareholders 50,438 56,543 157,170 117,485
Effect of reallocating undistributed earnings of participating securities - - 1 (40)
------------------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share - income available
to common shareholders $ 50,438 $ 56,543 $ 157,171 $ 117,445
------------------------------------------------------------------------------------------------------------------------
Denominator:
Weighted average shares outstanding 67,689,450 67,432,521 67,625,011 67,421,501
Less: Participating securities included in weighted average
shares outstanding (297,391) (169,204) (273,575) (115,585)
------------------------------------------------------------------------------------------------------------------------
Denominator for basic earnings per common share 67,392,059 67,263,317 67,351,436 67,305,916
Dilutive effect of employee stock compensation plans (1) 121,641 169,127 98,736 157,096
------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per common share 67,513,700 67,432,444 67,450,172 67,463,012
------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.75 $ 0.84 $ 2.33 $ 1.75
------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.75 $ 0.84 $ 2.33 $ 1.74
------------------------------------------------------------------------------------------------------------------------
(1) Excludes employee stock options with exercise prices greater
than current market price. 2,461,878 2,892,091 2,860,087 1,149,905
(11) Reportable Segments
Reportable segments reconciliation to the Consolidated Financial Statements for
the nine months ended September 30, 2009 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Income Average
Revenue Revenue(1) Expense Assets
------------ -- ------------ -- ------------- -- ----------- -- --------------
Total reportable segments $ 352,403 $ 359,222 $ 481,809 $ 72,259 $ 19,136,023
Unallocated items:
Tax-equivalent adjustment 5,879 - - 5,879 -
Funds management and other 167,604 9,680 38,487 79,669 3,813,204
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 525,886 $ 368,902 $ 520,296 $ 157,807 $ 22,949,227
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
26
Reportable segments reconciliation to the Consolidated Financial Statements for
the three months ended September 30, 2009 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Income Average
Revenue Revenue(1) Expense Assets
------------ -- ------------ -- ------------- -- ----------- -- --------------
Total reportable segments $ 111,559 $ 117,214 $ 170,201 $ 15,973 $ 18,542,192
Unallocated items:
Tax-equivalent adjustment 1,982 - - 1,982 -
Funds management and other 66,920 5,965 8,531 32,705 4,508,342
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 180,461 $ 123,179 $ 178,732 $ 50,660 $ 23,050,534
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
Reportable segments reconciliation to the Consolidated Financial Statements for
the nine months ended September 30, 2008 is as follows (in thousands):
Net Other Other Net Income
Interest Operating Operating Average
Revenue Revenue(1) Expense Assets
------------ -- ------------ -- ------------- -- ----------- -- --------------
Total reportable segments $ 383,112 $ 305,395 $ 440,780 $ 111,107 $ 18,576,414
Unallocated items:
Tax-equivalent adjustment 6,165 - - 6,165 -
Funds management and other 81,138 (3,117) 36,182 517 2,806,765
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 470,415 $ 302,278 $ 476,962 $ 117,789 $ 21,383,179
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
Reportable segments reconciliation to the Consolidated Financial Statements for
the three months ended September 30, 2008 is as follows (in thousands):
Net Other Other Net Income
Interest Operating Operating Average
Revenue Revenue(1) Expense Assets
------------ -- ------------ -- ------------- -- ----------- -- --------------
Total reportable segments $ 131,779 $ 73,191 $ 153,404 $ 19,910 $ 18,994,748
Unallocated items:
Tax-equivalent adjustment 1,927 - - 1,927 -
Funds management and other 30,642 52,626 10,886 34,848 2,826,415
------------ -- ------------ -- ------------- -- ----------- -- --------------
BOK Financial consolidated $ 164,348 $ 125,817 $ 164,290 $ 56,685 $ 21,821,163
============ == ============ == ============= == =========== == ==============
(1) Excluding financial instruments gains/(losses).
27
(12) Fair Value Measurements
The following table presents the carrying values and estimated fair values of
financial instruments as of September 30, 2009 (dollars in thousands):
Range of Average Estimated
Carrying Contractual Repricing Discount Fair
Value Yields (in years) Rate Value
---------------------------------------------------------------------
Cash and cash equivalents $1,422,709 $1,422,709
Securities 9,018,532 9,025,205
Residential mortgage - held for sale 172,301 - - - 172,301
Loans:
Commercial 6,370,056 1.16 -18.00% 0.44 0.25 - 3.81% 6,296,169
Commercial real estate 2,560,335 1.50 -18.00 1.19 0.27 - 3.81 2,541,037
Residential mortgage 1,829,824 4.00 -12.75 7.07 1.02 - 4.51 2,014,143
Consumer 851,349 2.00 -21.00 1.35 3.81 877,461
----------------------------------------------------------------------------------------------------------------
Total loans 11,611,564 11,728,810
Reserve for loan losses (280,902) -
----------------------------------------------------------------------------------------------------------------
Net loans 11,330,662 11,728,810
Derivative instruments with positive
fair value, net of cash margin 397,110 397,110
Deposits with no stated maturity 11,010,533 11,010,533
Time deposits 4,084,813 0.03 - 10.00 1.97 0.15 - 2.22 4,103,217
Other borrowings 5,388,848 1.13 - 3.52 0.06 0.08 - 0.29 5,277,731
Subordinated debentures 398,502 5.58 3.80 1.78 446,650
Derivative instruments with negative
fair value, net of cash margin 395,197 395,197
----------------------------------------------------------------------------------------------------------------
The fair value of financial assets and liabilities that are measured on a
recurring basis are as follows as of September 30, 2009 (in thousands):
Quoted Prices Significant
in Active Other Significant
Markets for Observable Unobservable
Total Identical Inputs Inputs
Instruments
----------- ---------------- --------------- ----------------
Assets:
Trading securities $100,898 $ 1,118 $ 89,905 $9,875
Investment securities 244,774 244,774
Available for sale securities:
U.S. Treasury 7,052 7,052 -
Municipal and other tax-exempt 47,903 21,696 26,207
Mortgage-backed securities 8,027,810 8,027,810
Other debt securities 15,862 33 15,829
Federal Reserve Bank stock 32,526 32,526
Federal Home Loan Bank stock 146,355 146,355
Perpetual preferred stock 20,038 20,038
Equity securities and mutual funds 61,016 8,043 52,973
----------- ---------------- --------------- ----------------
8,358,562 15,095 8,301,431 42,036
Mortgage trading securities 320,971 320,971
Mortgage servicing rights 66,689 66,689 (1)
Derivative contracts 397,110 397,110
Liabilities:
Certificates of deposit 98,068 98,068
Derivative contracts 395,197 395,197
(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 6, Mortgage Banking
Activities.
28
The fair value of assets and liabilities based on significant other observable
inputs are generally determined based on a single price for each financial
instrument provided to us by an applicable third-party pricing service and are
based on one or more of the following:
o Quoted prices for similar, but not identical, assets or liabilities in
active markets;
o Quoted prices for identical or similar assets or liabilities in inactive
markets;
o Inputs other than quoted prices that are observable, such as interest rate
and yield curves, volatilities, prepayment speeds, loss severities, credit
risks and default rates;
o Other inputs derived from or corroborated by observable market inputs.
The underlying methods used by the third-party pricing services are considered
in determining the primary inputs used to determine fair values. Management has
evaluated the methodologies employed by the third-party pricing services by
comparing the price provided by the pricing service with other sources,
including brokers' quotes, sales or purchases of similar instruments and
discounted flows to establish a basis for reliance on the pricing service
values. Significant differences between the pricing service provided value and
other sources are discussed with the pricing service to understand the basis for
their values. Based on this evaluation, we determined that the results represent
prices that would be received to sell assets or paid to transfer liabilities in
orderly transactions in the current market. A more detailed description of the
valuation methodologies used for assets and liabilities measured at fair value
is set forth in the Company's 2008 Form 10-K.
The fair value of certain municipal and other debt securities are based on
significant unobservable inputs. The Company transferred approximately $44.7
million of trading securities to significant unobservable inputs and recognized
a loss of $513 thousand against earnings. Independent pricing of these
securities was unavailable due to a lack of observable inputs. These securities
were subsequently transferred from trading to available for sale. Inputs used to
estimate fair value include limited observed trades, projected cash flows,
current credit rating of the issuers and, when applicable, the insurers of the
debt and observed trades of similar debt. All of these securities are currently
paying in accordance with their respective contractual terms.
The fair value of our trading and available for sale securities valued by
significant unobservable inputs is primarily based on reference to interest rate
spreads on comparable securities of similar duration and credit rating as
determined by the nationally recognized rating agencies adjusted for a lack
trading volume. Taxable securities rated investment grade by all nationally
recognized rating agencies are generally valued to yield a range of 1.74% to
2.85%. Comparable short-term taxable securities available in the market
generally yield less than 1%. Tax-exempt securities rated investment grade by
all nationally recognized rating agencies are generally valued using a spread of
44 to 51 basis points over yields of comparable securities. Approximately $4.6
million of our municipal and other tax-exempt securities are rated below
investment grade by at least one of the three nationally recognized rating
agencies and are valued using a yield of approximately 363 basis points over
comparable municipal securities.
The following represents the changes for the three months ended September 30,
2009 related to assets measured at fair value on a recurring basis using
significant unobservable inputs (in thousands):
Available for Sale
Securities
------------ -----------------------------
Municipal
Trading and other Other debt
Securities tax-exempt securities
------------ -------------- --------------
Balance at June 30, 2009 $9,950 $ 22,602 $ 11,650
Purchases, sales, issuances and settlements, net - 3,898 4,200
Trading loss recognized in earnings (75) - -
Other comprehensive income (loss) - (293) (21)
------------ -------------- --------------
Balance at September 30, 2009 $9,875 $ 26,207 $ 15,829
============ ============== ==============
29
The following represents the changes for the nine months ended September 30,
2009 related to assets measured at fair value on a recurring basis using
significant unobservable inputs (in thousands):
Available for Sale
Securities
------------ -------------- --------------
Municipal
Trading and other Other debt
Securities tax-exempt securities
------------ -------------- --------------
Balance at December 31, 2008 $ - $ - $ -
Transfer to significant unobservable inputs 44,715 - -
Transfer from trading to available for sale (34,252) 22,602 11,650
Purchases, sales, issuances and settlements, net - 3,898 4,200
Trading loss recognized in earnings (588) - -
Other comprehensive income (loss) - (293) (21)
------------ -------------- --------------
Balance at September 30, 2009 $9,875 $ 26,207 $ 15,829
============ ============== ==============
Certain certificates of deposit were designated as carried at fair value. These
certificates have been converted from fixed interest rates to variable interest
rates based on LIBOR with interest rate swaps that have not been designated as
hedging instruments. The fair value election for these liabilities better
represents the economic effect of these instruments on the Company. At September
30, 2009, the fair value and contractual principal amount of these certificates
was $98 million and $97 million, respectively. Change in the fair value of these
certificates of deposit resulted in an unrealized gain during the three and nine
months ended September 30, 2009 of $120 thousand and $1.8 million, respectively,
which is included in Gain (Loss) on Derivatives, net on the Consolidated
Statement of Earnings.
Assets measured at fair value on a non-recurring basis include pension plan
assets, which are based on quoted prices in active markets for identical
instruments, collateral for certain impaired loans and real property and other
assets acquired to satisfy loans, which are based primarily on comparisons of
completed sales of similar assets, and goodwill, which is based on significant
unobservable inputs.
The following represents the carrying value of assets measured at fair value on
a non-recurring basis (and related losses) during the period. The carrying value
represents only those assets adjusted to fair value during the quarter ended
September 30, 2009:
Fair Value
Adjustments
Carrying Value at September 30, 2009 for the three months
------------------------------------------
Level 1 Level 2 Level 3 ended Sept. 30, 2009
------------ -------------- -------------- ---------------------
Impaired loans $ - $ 46,933 $ - $19,473
Real estate and other repossessed assets - 10,562 - 3,460
Fair value adjustments of impaired loans are charged against the allowance for
loan losses. Fair value adjustments of real estate and other repossessed assets
are charged against operating expenses as net gains, losses and operating
expenses of repossessed assets.
30
(13) Federal and State Income Taxes
The reconciliations of income (loss) attributable to continuing operations at
the U.S. federal statutory tax rate to income tax expense are as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------
2009 2008 2009 2008
------------------------------------------------
Amount:
Federal statutory tax $ 27,433 $ 27,872 $ 85,098 $ 59,898
Tax exempt revenue (1,127) (1,062) (3,381) (3,186)
Effect of state income
taxes, net of federal 1,283 390 5,899 2,828
benefit
Utilization of tax credits (1,338) (297) (2,095) (890)
Bank-owned life insurance (820) (1,211) (2,460) (2,961)
Other, net (659) (2,734) (1,136) (1,143)
------------------------------------------------------------------------------
Total $ 24,772 $ 22,958 $ 81,925 $ 54,546
------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------
2009 2008 2009 2008
------------------------------------------------
Percent of pretax income:
Federal statutory tax 35% 35% 35% 35%
Tax exempt revenue (1) (1) (1) (2)
Effect of state income
taxes, net of federal 2 1 2 2
benefit
Utilization of tax credits (2) - (1) -
Bank-owned life insurance (1) (2) (1) (2)
Other, net (1) (4) - (1)
------------------------------------------------------------------------------
Total 32% 29% 34% 32%
------------------------------------------------------------------------------
(14) Financial Instruments with Off-Balance Sheet Risk
BOK Financial is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to manage interest rate risk. Those financial instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in BOK
Financial's Consolidated Balance Sheets. Exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the notional
amount of those instruments.
As of September 30, 2009, outstanding commitments and letters of credit were as
follows (in thousands):
September 30,
2009
--------------
Commitments to extend credit $ 4,963,432
Standby letters of credit 580,819
Commercial letters of credit 6,049
31
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Performance Summary
BOK Financial Corporation ("the Company") reported net income for the third
quarter of 2009 of $50.7 million or $0.75 per diluted share. Net income for the
second quarter of 2009 totaled $52.1 million or $0.77 per diluted share and
$56.7 million or $0.84 per diluted share was recognized for the third quarter of
2008.
Net income for the nine months ended September 30, 2009 totaled $157.8 million
or $2.33 per diluted share compared with net income of $117.8 million or $1.74
per diluted share for the nine months ended September 30, 2008. Net income for
the nine months ended September 30, 2008 was impacted by $67.6 million in
pre-tax charges for loan and energy derivative credit exposure related to a
customer bankruptcy filing which reduced net income by approximately $43.9
million or $0.65 per diluted share.
Highlights of the third quarter of 2009 included:
o Net interest revenue totaled $180.5 million, up $4.9 million compared to
the second quarter of 2009. Net interest margin was 3.63% for the third
quarter of 2009, up 8 basis points over the second quarter of 2009 largely
due to higher loan yields and lower funding costs.
o Fees and commissions revenue totaled $120.0 million, down $3.1 million from
the previous quarter. Mortgage banking revenue decreased $6.7 million due
to lower volume of loans originated during the quarter. Brokerage and
trading revenue and deposit service charges increased over the previous
quarter.
o Operating expenses totaled $178.7 million, up $3.0 million over the second
quarter of 2009. Net losses and operating expenses related to repossessed
assets and personnel expenses increased over the previous quarter.
o Combined reserve for credit losses totaled $293 million or 2.52% of
outstanding loans at September 30, 2009, up from $274 million or 2.27% of
outstanding loans at June 30, 2009. Net loans charged off and provision for
credit losses were $36.0 million and $55.1 million, respectively, for the
third quarter of 2009.
o Non-performing assets totaled $490 million or 4.19% of outstanding loans
and repossessed assets at September 30, 2009 compared to $446 million or
3.67% of outstanding loans and repossessed assets at June 30, 2009.
o Available for sale securities totaled $8.4 billion at September 30, 2009,
up $1.1 billion since June 30. The increase consisted of $1.0 billion of
net securities purchased during the quarter and $159 million net increase
in the fair value of securities held in the portfolio. Purchased securities
consisted primarily of residential mortgage-backed securities issued by
U.S. government agencies.
o Outstanding loan balances were $11.6 billion at September 30, 2009, down
$458 million since June 30, 2009. All major loan categories decreased
during the third quarter largely due to reduced customer demand, normal
repayment trends and management decisions to exit certain loan types.
o Average deposit balances totaled $15.1 billion for the third quarter of
2009, down $202 million compared with average deposits for the second
quarter of 2009. Total period-end deposits grew $440 million in the third
quarter of 2009 to $15.1 billion at September 30, 2009. Growth in demand
and interest-bearing transaction deposits was partially offset by decreases
in higher-costing time deposits.
o Tangible common equity ratio and tier 1 common equity ratio increased to
7.78% and 10.45%, respectively, at September 30, 2009 from 7.55% and 9.77%,
respectively, at June 30, 2009 largely due to lower unrealized losses on
securities. The tangible common equity ratio and tier 1 common equity ratio
are non-GAAP measures of capital strength used by the Company and investors
based on shareholders' equity as defined by generally accepted accounting
principles in the United States of America ("GAAP") minus
32
intangible assets and equity that does not benefit common shareholders such
as preferred equity and equity provided by the U.S. Treasury's Troubled
Asset Relief Program ("TARP") Capital Purchase Program. We chose not to
participate in the TARP Capital Purchase Program. Tier 1 capital ratios
were 10.56% at September 30, 2009 and 9.86% at June 30, 2009.
o The Company paid a cash dividend of $16.3 million or $0.24 per common share
during the third quarter of 2009. On October 27, 2009, the board of
directors declared a cash dividend of $0.24 per common share payable on or
about December 2, 2009 to shareholders of record as of November 16, 2009.
Results of Operations
Net Interest Revenue and Net Interest Margin
Net interest revenue totaled $180.5 million for the third quarter of 2009, up
$16.1 million or 10% over the third quarter of 2008 and $4.9 million over the
second quarter of 2009. The increase in net interest revenue over the third
quarter of 2008 was due to growth in average earning assets and a 15 basis point
improvement in net interest margin.
Average earning assets for the third quarter of 2009 increased $1.2 billion or
6% compared to the third quarter of 2008, primarily due to a $2.0 billion
increase in average securities. Average available for sale securities, which
consist largely of U.S. government agency issued mortgage-backed securities,
increased $1.8 billion. We purchase securities to supplement earnings,
especially during periods of declining loan demand, and to manage the Company's
interest rate risk. Average loans, net of allowance for loan losses, decreased
$808 million compared to the third quarter of 2008 primarily due to growth in
residential mortgage loans offset by decreases in commercial, commercial real
estate and consumer loans.
Growth in average earning assets was funded primarily by a $870 million increase
in average deposits and a $416 million decrease in average margin assets held as
part of our customer derivatives programs. Average demand deposits increased
$653 million and average interest-bearing transaction accounts increased $597
million over the third quarter of 2008. Average time deposits decreased $388
million compared with the third quarter of 2008.
Average earning assets for the third quarter of 2009 decreased $237 million
compared to the second quarter of 2009, primarily due to a $406 million increase
in average securities, offset by a $524 million decrease in average loans, net
of allowance for loan losses and a $110 million decrease in residential mortgage
loans held for sale. Growth in average securities was due to purchases of
additional U.S. government agency issued mortgage-backed securities as well as
increases in the fair value of securities held by the Company. The average
balance of all major loan categories declined in the third quarter of 2009.
Average deposits decreased $202 million compared with the second quarter of
2009, including a $209 million increase in average demand deposits, a $308
million increase in average interest-bearing transaction accounts, offset by a
$719 million decrease in average time deposits. We chose not to renew certain
higher-costing time deposits as they matured. Average funds purchased,
repurchase agreements and other borrowed funds increased $189 million from the
second quarter of 2009.
Net interest margin was 3.63% for the third quarter of 2009, 3.55% for the
second quarter of 2009 and 3.48% for the third quarter of 2008. Growth in the
net interest margin was due primarily to lower funding costs and improved loan
yields.
The cost of interest-bearing liabilities was 1.09% for the third quarter of
2009, down 132 basis points from the third quarter of 2008. The cost of interest
bearing deposits decreased 116 basis points to 1.23% and the cost of funds
purchased and other borrowings decreased 160 basis points to 0.77%. The cost of
interest-bearing liabilities for the third quarter of 2009 was also down 22
basis points from the second quarter of 2009. The cost of interest-bearing
deposits decreased 26 basis points and the cost of funds purchased and other
borrowings decreased 9 basis points.
The tax-equivalent yield on earning assets was 4.54% for the third quarter of
2009, down 101 basis points from the third quarter of 2008. Loan yields
decreased 102 basis points from the third quarter of 2008 to 4.67%. However,
loan spreads continue to improve. The securities portfolio yield was 4.21%, down
94 basis points over the third quarter of 2008. Our securities re-price as cash
flow received is reinvested at current market rates. The resulting change in
yield on the securities portfolio occurs more slowly and may not immediately
move in the same direction as changes in market rates. The tax-equivalent yield
on earning assets for the third quarter of 2009 was down 11
33
basis points from the second quarter of 2009. Yield on the securities portfolio
dropped by 33 basis points while yield on the loan portfolio increased by 3
basis points. The benefit to the net interest margin from earning assets funded
by non-interest bearing liabilities was 18 basis points in the third quarter of
2009 compared with 34 basis points in the third quarter of 2008 and 21 basis
points in the preceding quarter.
We regularly model 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 spreads, deposit product mix, the overall balance sheet composition and
changes in the spread among various funding sources may affect our general
expectation.
Our overall objective is to manage the Company's balance sheet to be relatively
neutral to changes in interest rates. Approximately two-thirds of our commercial
and commercial real estate loan portfolios are either variable rate or fixed
rate that will re-price within one year. These loans are funded primarily by
deposit accounts that are either non-interest bearing, or that re-price more
slowly than the loans. The result is a balance sheet that would be asset
sensitive, meaning that assets generally re-price more quickly than liabilities.
Among the strategies that we use to achieve a relatively rate-neutral position,
we purchase fixed-rate, mortgage-backed securities to offset the short-term
nature of the majority of the Company's funding sources. The liability-sensitive
nature of this strategy provides an offset to the asset-sensitive
characteristics of our loan portfolio. We also use derivative instruments to
manage our interest rate risk. Interest rate swaps with a combined notional
amount of $95 million convert certain fixed rate liabilities to floating rate
based on LIBOR. The purpose of these derivatives is to position our balance
sheet to be relatively neutral to changes in interest rates. Net interest
revenue increased $2.7 million in the third quarter of 2009, $3.9 million in the
second quarter of 2009, $2.4 million in the third quarter of 2008 from periodic
settlements of these contracts. This increase in net interest revenue
contributed 5 basis points to net interest margin in the third quarter of 2009,
8 basis points to net interest margin in the second quarter of 2009, and 5 basis
points to the third quarter of 2008. These derivative contracts are carried on
the balance sheet at fair value. Changes in the fair value of these contracts
are reported in income as derivatives gains or losses.
The effectiveness of these strategies is reflected in the overall change in net
interest revenue due to changes in interest rates as shown in the following
table and in the interest rate sensitivity projections as shown in the Market
Risk section of this report.
34
---------------------------------------------------------------------------------------------------------------------
Table 1 - Volume / Rate Analysis
(In thousands)
Three Months Ended Nine Months Ended
September 30, 2009 / 2008 September 30, 2009 / 2008
--------------------------------------------------------------------------
Change Due To (1) Change Due To (1)
--------------------------------------------------------------------------
Yield / Yield
Change Volume Rate Change Volume /Rate
--------------------------------------------------------------------------
Tax-equivalent interest revenue:
Securities $ 3,162 $ 19,970 $ (16,808) $ 19,691 $ 50,198 $ (30,507)
Trading securities (166) (20) (146) (864) 976 (1,840)
Loans (39,781) (8,266) (31,515) (127,016) 3,907 (130,923)
Funds sold and resell agreements (272) (25) (247) (1,423) (292) (1,131)
---------------------------------------------------------------------------------------------------------------------
Total (37,057) 11,659 (48,716) (109,612) 54,789 (164,401)
---------------------------------------------------------------------------------------------------------------------
Interest expense:
Transaction deposits (16,517) 1,792 (18,309) (57,727) 4,853 (62,580)
Savings deposits 56 9 47 (118) 18 (136)
Time deposits (16,409) (2,687) (13,722) (32,315) 12,890 (45,205)
Federal funds purchased and
repurchase agreements (13,436) (2,239) (11,197) (47,385) (7,076) (40,309)
Other borrowings (6,924) 2,879 (9,803) (27,235) 5,236 (32,471)
Subordinated debentures 5 9 (4) (17) (2) (15)
---------------------------------------------------------------------------------------------------------------------
Total (53,225) (237) (52,988) (164,797) 15,919 (180,716)
---------------------------------------------------------------------------------------------------------------------
Tax-equivalent net interest revenue 16,168 11,896 4,272 55,185 38,870 16,315
Change in tax-equivalent adjustment (55) 286
---------------------------------------------------------------------------------------------------------------------
Net interest revenue $ 16,113 $ 55,471
---------------------------------------------------------------------------------------------------------------------
(1) Changes attributable to both volume and yield/rate are allocated to both
volume and yield/rate on an equal basis.
35
Other Operating Revenue
Other operating revenue was $131.8 million for the third quarter of 2009
compared to $132.3 million for the third quarter of 2008. Fees and commissions
revenue decreased $6.7 million or 5% compared with the third quarter of 2008.
Net gains on securities, derivatives and other assets increased $6.2 million
over the third quarter of 2008. Other operating revenue increased $3.8 million
compared to the second quarter of 2009, including a $6.9 million increase in net
gains on securities, derivatives and other assets partially offset by a $3.1
million decrease in fees and commissions revenue.
Fees and commissions revenue
Diversified sources of fees and commissions revenue are a significant part of
our business strategy and represented 40% of total revenue, excluding provision
for credit losses and gains and losses on asset sales, securities and
derivatives, for the third quarter of 2009. We believe that a variety of fee
revenue sources provide an offset to changes in interest rates, values in the
equity markets, commodity prices and consumer spending, all of which can be
volatile. We expect continued growth in other operating revenue through offering
new products and services and by expanding penetration into markets outside of
Oklahoma. However, current and future economic conditions, regulatory
constraints, increased competition and saturation in our existing markets could
affect the rate of future increases.
------------------------------------------------------------- -------------- ------------- ------------ ----------------- --------
Table 2 - Other Operating Revenue
(In thousands)
Three Months Ended Three Months
September 30, Increase % Increase Ended Increase % Increase
----------------------- June 30,
2009 2008 (Decrease) (Decrease) 2009 (Decrease) (Decrease)
----------- ----------- ------------ ------------------------ ------------ ------------
Brokerage and trading revenue $ 24,944 $30,846 $ (5,902) (19%) $ 21,794 $ 3,150 14%
Transaction card revenue 26,264 25,632 632 2% 27,533 (1,269) (5%)
Trust fees and commissions 16,315 20,100 (3,785) (19%) 16,860 (545) (3%)
Deposit service charges and fees 30,464 30,404 60 0% 28,421 2,043 7%
Mortgage banking revenue 13,197 7,145 6,052 85% 19,882 (6,685) (34%)
Bank-owned life insurance 2,634 2,829 (195) (7%) 2,418 216 9%
Margin asset fees 51 1,934 (1,883) (97%) 68 (17) (25%)
Other revenue 6,087 7,768 (1,681) (22%) 6,124 (37) (1%)
----------------------------------------- ----------- ----------- ------------ ------------------------ ------------ ------------
Total fees and commissions revenue 119,956 126,658 (6,702) (5%) 123,100 (3,144) (3%)
----------------------------------------- ----------- ----------- ------------ ------------------------ ------------ ------------
Gain (loss) on other assets 3,223 (841) 4,064 N/A 973 2,250 N/A
Gain (loss) on derivatives, net (294) 4,366 (4,660) N/A (1,037) 743 N/A
Gain on available for sale securities 8,706 917 7,789 N/A 16,670 (7,964) N/A
Gain (loss) on mortgage hedge securities 3,560 1,186 2,374 N/A (10,199) 13,759 N/A
----------------------------------------- ----------- ----------- ------------ ------------------------ ------------ ------------
Gain (loss) on securities, net 12,266 2,103 10,163 N/A 6,471 5,795 N/A
----------------------------------------- ----------- ----------- ------------ ------------------------ ------------ ------------
Total other-than-temporary impairment (6,133) - (6,133) N/A (1,263) (4,870) N/A
Portion of loss recognized in other
comprehensive income (2,752) - (2,752) N/A 279 (3,031) N/A
----------------------------------------- ----------- ----------- ------------ ------------------------ ------------ ------------
Net impairment losses recognized in
earnings (3,381) - (3,381) N/A (1,542) (1,839) N/A
----------------------------------------- ----------- ----------- ------------ ------------------------ ------------ ------------
Total other operating revenue $ 131,770 $ 132,286 $ (516) 0% $ 127,965 $ 3,805 3%
----------------------------------------- ----------- ----------- ------------ ------------------------ ------------ ------------
Gain (loss) on change in fair value
of mortgage servicing rights $(2,981) $ (5,554) $ 2,573 N/A $ 7,865 $(10,846) N/A
----------------------------------------- ----------- ----------- ------------ ------------------------ ------------ ------------
Certain percentage increases (decreases) in non-fees and commissions revenue are
not meaningful for comparison purposes based on the nature of the item.
Brokerage and trading revenue decreased $5.9 million or 19% over the third
quarter of 2008. Revenue for the third quarter of 2008 included a $6.7 million
net benefit from changes in the fair value derivative contracts related to the
SemGroup LP and Lehman Brothers bankruptcies. Securities trading increased $4.4
million or 41% over the third quarter of 2008. Increased mortgage lending
activity increased the level of securities transactions by our mortgage banking
customers. Excluding the impact of the SemGroup LP and Lehman Brothers
bankruptcies, customer
36
hedging revenue decreased $5.5 million compared to the third quarter of 2008.
Customer hedging revenue in the third quarter of 2008 benefitted from strong
market volatility in both crude oil and natural gas. Low commodity prices in the
third quarter 2009 reduced the level of customer hedging activity. Investment
banking revenue and retail brokerage fees increased $1.3 million and $596
thousand, respectively, compared to the third quarter of 2008.
Brokerage and trading revenue increased $3.2 million compared with the second
quarter of 2009, including $2.2 million in increased investment banking activity
and a $773 thousand increase in securities trading revenue. Increased retail
brokerage fees were largely offset by a decrease in derivative fee income in the
third quarter of 2009.
Transaction card revenue depends largely on the volume and amount of
transactions processed, the number of ATM locations and the number of merchants
served. Transaction card revenue increased $632 thousand or 2% over the prior
year primarily due to a $435 thousand increase in ATM network revenue and a $236
thousand increase in check card revenue. Transaction card revenue declined $1.3
million compared the second quarter of 2009, primarily due to a decline in ATM
network revenue.
Trust fees declined $3.8 million or 19% compared to the prior year. In the third
quarter of 2009, approximately $1.1 million of fees related to administration of
the Cavanal Hill Funds and our cash management sweep fund were voluntarily
waived in order to maintain positive yields on these funds in the current low
short-term interest rate environment. The remaining decline is primarily due to
decreases in the fair value of all trust assets administered by the Company,
which is the basis for a significant portion of trust fees and commissions
revenue. The decline in the fair value of trust assets was primarily due to
current market conditions. The fair value of trust assets administered by the
Company totaled $29.9 billion at September 30, 2009 compared with $33.2 billion
at September 30, 2008 and $29.2 billion at June 30, 2009.
Deposit service charges and fees were flat compared to the third quarter of
2008. Increased commercial account service charge revenue was largely offset by
decreases in overdraft fees due to lower transaction volume. Increases in
commercial account service charge revenue was primarily related to a partial
pass-through of the FDIC special assessment. This was partially offset by an
increase in the earnings credit, which provides a non-cash method for commercial
customers to avoid incurring charges for deposit services based on account
balances. Average commercial demand deposit account balances were up $642
million over the third quarter of 2008.
Deposit service charges and fees increased $2.0 million compared to the second
quarter of 2009 primarily due to a $1.7 million increase in overdraft fees as a
result of an increase in the per item fee and marginally higher transaction
volume. Commercial account service charge revenue also increased during the
third quarter of 2009 related to the partial pass-through of the FDIC special
assessment, partially offset by an increase in the earnings credit. Average
commercial demand deposit account balances were up $255 million over the second
quarter of 2009.
Federal legislation is being considered that may significantly reduce future
overdraft fee revenue. The full effect of this legislation, if enacted, cannot
be quantified at this time. Federal legislation is being considered that may
significantly reduce future overdraft fee revenue. The full effect of this
legislation, if enacted, cannot be quantified at this time. Overdraft fee
revenue for the three months and nine months ended September 30, 2009 was $19.9
million and $54.5 million, respectively.
Mortgage banking revenue increased $6.1 million compared to the third quarter of
2008 and declined $6.7 million compared to the second quarter of 2009. Revenue
from originating and marketing mortgage loans increased $5.3 million compared to
the third quarter of 2008. Revenue from originating and marketing mortgage loans
decreased $7.1 million compared to the second quarter of 2009. Mortgage loans
originated for sale in the secondary market totaled $536 million for the third
quarter of 2009, $1.0 billion for the second quarter of 2009 and $258 million in
the third quarter of 2008. Mortgage loan originations slowed in the third
quarter of 2009, but remained well above historical levels due to government
initiatives to lower national mortgage interest rates. Mortgage loan servicing
revenue totaled $5.2 million for the third quarter of 2009, $4.8 million for the
second quarter of 2009 and $4.4 million for the third quarter of 2008. The
outstanding principal balance of mortgage loans serviced for others totaled $6.3
billion at September 30, 2009, $6.1 billion at June 30, 2009, and $5.2 billion
at September 30, 2008. Growth in mortgage loans serviced for others is due to
retaining mortgage servicing rights from mortgage loans originated. No mortgage
loan servicing rights were purchased in 2008 or 2009.
Margin assets which are held primarily as part of the Company's customer
derivatives programs averaged $189 million for the third quarter of 2009
compared with $532 million for the third quarter of 2008. The decrease in
revenue earned on margin assets is offset by an increase in net interest revenue
due to lower costs to fund the margin assets.
37
Net gains on securities, derivatives and other assets
Mortgage hedge securities held as an economic hedge of the changes in fair value
of mortgage servicing rights are carried at fair value. Changes in fair value of
these securities are recognized in earnings as they occur. For the third quarter
of 2009, gains on our mortgage hedge securities of $3.6 million were partially
offset with losses on the change in the fair value of our mortgage servicing
rights of $3.0 million.
We recognized $8.7 million of net gains on sales of $377 million of available
for sale securities in the third quarter of 2009. These securities were
purchased at deep discounts near the beginning of the recent market disruption.
In general, securities sold were low coupon mortgage-backed securities. These
were replaced with higher coupon securities that will have superior future total
return.
We recognized an other-than-temporary impairment loss on certain private-label
residential mortgage-backed securities of $3.4 million in earnings during the
third quarter of 2009; $1.6 million was related to an initial
other-than-temporary-impairment charge on one security. The remaining $1.8
million was for additional other-than-temporary impairment due to declines in
the projected cash flows on securities identified in previous quarters. We
recognized an other-than-temporary impairment loss on mortgage-backed securities
of $279 thousand in the second quarter of 2009.
Net gains or losses on derivatives consist of fair value adjustments of all our
derivatives used to manage interest rate risk and certain liabilities we have
elected to carry at fair value. Derivative instruments generally consist of
interest rate swaps where we pay a variable rate based on LIBOR and receive a
fixed rate. The fair value of these swaps generally decrease in value as
interest rates rise resulting in a loss to the Company and increase in value as
interest rates fall resulting in a gain to the Company. Certain certificates of
deposit have been designated as reported at fair value. This determination is
made when the certificates of deposit are issued based on our intent to swap the
interest rate on the certificates from a fixed rate to a LIBOR-based variable
rate. As interest rates fall, the fair value of these fixed-rate certificates of
deposit generally increases and we recognize a loss. Conversely, as interest
rates rise, the fair value of these fixed-rate certificates of deposit generally
decrease in value and we recognize a gain.
Net gain on other assets is primarily related to a $3.5 million improvement of
the fair value of our private equity funds; $2.9 million of the improvement is
allocated to limited partners through Non-controlling interest, net on the
Statement of Earnings.
38
Other Operating Expense
Other operating expense increased $14.4 million or 9% compared with the third
quarter of last year. Excluding changes in the fair value of mortgage servicing
rights, other operating expense increased $17.0 million or 11%. Personnel
expense increased $10.5 million or 12% compared with the third quarter of 2008
and non-personnel expense, excluding changes in the fair value of mortgage
servicing rights, increased $8.3 million or 12% primarily due to an increase in
FDIC assessments and net losses and operating expenses related to repossessed
assets.
Other operating expense increased $3.0 million or 2% over the second quarter of
2009. Personnel expense increased $1.8 million and net losses and operating
expenses of repossessed assets increased $2.5 million. A decrease in FDIC
special assessment expense was largely offset by changes in the fair value of
mortgage servicing rights.
---------------------------------------------- ---------- ----------- ------------ ------------ ----------- ------------
Table 3 - Other Operating Expense
(In thousands)
Three Months % %
Ended September 30, Increase Increase June 30, Increase Increase
-----------------------
2009 2008 (Decrease) (Decrease) 2009 (Decrease) (Decrease)
------------ ---------- ----------- ------------ ------------ ----------- ------------
Regular compensation $59,227 $55,435 $3,792 7% $ 58,573 $ 654 1%
Incentive compensation:
Cash-based 20,835 20,110 725 4% 20,427 408 2%
Stock-based 3,808 68 3,740 N/A 2,443 1,365 56%
--------------------------------- ------------ ---------- ----------- ------------ ------------ ----------- ------------
Total incentive compensation 24,643 20,178 4,465 22% 22,870 1,773 8%
Employee benefits 14,142 11,936 2,206 18% 14,748 (606) (4%)
--------------------------------- ------------ ---------- ----------- ------------ ------------ ----------- ------------
Total personnel expense 98,012 87,549 10,463 12% 96,191 1,821 2%
Business promotion 4,827 5,837 (1,010) (17%) 4,569 258 6%
Professional fees and services 7,555 6,501 1,054 16% 7,363 192 3%
Net occupancy and equipment 15,884 15,570 314 2% 15,973 (89) (1%)
Insurance 6,092 2,436 3,656 150% 5,898 194 3%
FDIC special assessment - - - N/A 11,773 (11,773) (100%)
Data processing &
communications 20,413 19,911 502 3% 20,452 (39) - %
Printing, postage and supplies 3,716 4,035 (319) (8%) 4,072 (356) (9%)
Net (gains) losses and operating
expenses of repossessed assets 3,497 (136) 3,633 N/A 996 2,501 251%
Amortization of intangible
assets 1,686 1,884 (198) (11%) 1,686 - - %
Mortgage banking costs 8,065 5,811 2,254 39% 9,336 (1,271) (14%)
Change in fair value of
mortgage servicing rights 2,981 5,554 (2,573) (46%) (7,865) 10,846 (138%)
Visa retrospective responsibility
obligation - 1,700 (1,700) (100%) - - N/A
Other expense 6,004 7,638 (1,634) (21%) 5,326 678 13%
--------------------------------- ------------ ---------- ----------- ------------ ------------ ----------- ------------
Total other operating expense $178,732 $ 164,290 $ 14,442 9% $175,770 $ 2,962 2%
--------------------------------- ------------ ---------- ----------- ------------ ------------ ----------- ------------
Number of employees
(full-time equivalent) 4,422 4,231 191 5% 4,434 (12) -%
--------------------------------- ------------ ---------- ----------- ------------ ------------ ----------- ------------
Certain percentage increases (decreases) are not meaningful for comparison
purposes.
Personnel expense
Regular compensation expense, which consists of salaries and wages, overtime pay
and temporary personnel costs, increased $3.8 million or 7% over the third
quarter of 2008 primarily due to head count and standard annual merit
39
increases which were effective in the second quarter of 2009. The Company
generally awards annual merit increases effective April 1st for a majority of
its staff.
Incentive compensation increased $4.5 million or 22% compared to the third
quarter of 2008. Cash-based incentive compensation are either intended to
provide current rewards to employees who generate long-term business
opportunities to the Company based on growth in loans, deposits, customer
relationships and other measurable metrics or intended to compensate employees
with commissions on completed transactions. The increase in cash-based incentive
compensation over the third quarter of 2008 included a $1.8 million decrease in
commissions and incentives related to brokerage and trading revenue, offset by
net increases in all other cash-based incentive compensation.
The Company also provides stock-based incentive compensation plans. Stock-based
compensation plans include both equity and liability awards. Compensation
expense related to liability awards increased $3.6 million compared with the
third quarter of 2008 due to changes in the market value of BOK Financial common
stock and other investments. The market value of BOK Financial common stock
increased $8.83 per share in the third quarter of 2009 and decreased $5.04 per
share in the third quarter of 2008. Compensation expense for equity awards
increased $91 thousand compared with the third quarter of 2008. Expense for
equity awards is based on the grant-date fair value of the awards and is
unaffected by subsequent changes in fair value.
Compared to the third quarter of 2008, employee benefit expense increased
primarily due to increased expenses related to medical insurance costs, employee
retirement plans and payroll taxes. Medical insurance costs were up $1.1 million
or 27%. The Company self-insures a portion of its employee health care coverage
and these costs may be volatile.
Personnel expense increased $1.8 million or 2% compared with the second quarter
of 2009 primarily due an increase in stock-based incentive compensation.
Non-personnel operating expenses
Non-personnel operating expenses, excluding changes in the fair value of
mortgage servicing rights, increased $6.6 million compared to the third quarter
of 2008 primarily due to a $3.6 million increase in regular FDIC insurance
premiums related to previously announced increases in deposit insurance
premiums, a $3.6 million increase in net losses and operating expenses on
repossessed assets and a $2.3 million increase in mortgage banking costs. Growth
in non-personnel operating expense was partially offset by a $1.0 million
decrease in business promotion expense primarily due to timing. Growth in
mortgage banking costs included the effects of actual loan prepayments on
mortgage servicing rights, provision for losses on mortgage loans sold with
recourse and other costs related to increased production volume. Net losses and
operating expenses on repossessed assets increased primarily due to a $61
million increase in real estate and other repossessed assets.
As a member of Visa, we are obligated for a proportionate share of certain
covered litigation costs incurred by Visa under the retrospective responsibility
plan. In the third quarter of 2008, we recognized an accrual of $1.7 million
related to our portion of expected litigation costs which was subsequently
reversed in the fourth quarter of 2008.
Non-personnel operating expenses, excluding changes in the fair value of
mortgage servicing rights, decreased $9.7 million compared to the second quarter
of 2009 primarily due to the $11.8 million FDIC special assessment recognized in
the second quarter of 2009 and lower mortgage banking costs related to decreased
mortgage loan originations in the third quarter of 2009, partially offset by a
$2.5 million increase in net losses and operating expenses on repossessed
assets.
Income Taxes
Income tax expense was $24.8 million or 32% of book taxable income for the third
quarter of 2009 compared with income tax expense of $23.0 million or 29% of book
taxable income for the third quarter of 2008 and income tax expense of $28.3
million or 35% of book taxable income for the second quarter of 2009. Income tax
expense for the third quarter of 2009 was reduced by $2.0 million for the effect
of additional federal and state income tax credits. Income tax expense for the
quarter would have been $26.8 million or 34% of book taxable income excluding
these credits. The statute of limitations expired on an uncertain tax position
and we adjusted our current income tax
40
liability to amounts on filed tax returns for 2007 during the third quarter of
2008. Income tax expense would have been $26.6 million or 33% of book taxable
income for the third quarter of 2008, excluding these items.
We operate in numerous jurisdictions, which requires judgment regarding the
allocation of income, expense and earnings under various laws and regulations of
each of these taxing jurisdictions. Each jurisdiction may audit our tax returns
and may take different positions with respect to these allocations. The reserve
for uncertain tax positions was approximately $13 million at September 30, 2009
and was largely unchanged from December 31, 2008.
Lines of Business
We operate three principal lines of business: commercial banking, consumer
banking and wealth management. Our principal lines of business have been
re-defined from the previous year to better present our organization as it has
grown in markets outside of Oklahoma. The prior year information has been
revised for consistent presentation. Commercial banking includes lending,
treasury and cash management services and customer risk management products to
small businesses, middle market and larger commercial customers. Commercial
banking also includes the TransFund network. Consumer banking includes retail
lending and deposit services, all mortgage banking activities and our indirect
automobile lending products. Wealth management provides fiduciary services,
brokerage and trading, private financial services and investment advisory
services in all markets.
In addition to our lines of business, we have a funds management unit. The
primary purpose of this unit is to manage our overall liquidity needs and
interest rate risk. Each line of business borrows funds from and provides funds
to the funds management unit as needed to support their operations. Operating
results for funds management and other include the effect of interest rate risk
positions and risk management activities, securities gains and losses including
impairment charges, the provision for credit losses in excess of net loans
charged off, tax planning strategies and certain executive compensation costs
that are not attributed to the lines of business. Funds management and other
also included the FDIC special assessment charge in the second quarter of 2009.
Regular increases in FDIC insurance assessments are charged to the business
units.
We allocate resources and evaluate performance of our lines of business after
allocation of funds, certain indirect expenses, taxes based on statutory rates,
actual net credit losses and capital costs. The cost of funds borrowed from the
funds management unit by the operating lines of business is transfer priced at
rates that approximate market for funds with similar duration. Market is
generally based on the applicable LIBOR or interest rate swap rates, adjusted
for prepayment risk. This method of transfer-pricing funds that support assets
of the operating lines of business tends to insulate them from interest rate
risk.
The value of funds provided by the operating lines of business to the funds
management unit is based on applicable Federal Home Loan Bank advance rates.
Deposit accounts with indeterminate maturities, such as demand deposit accounts
and interest-bearing transaction accounts, are transfer-priced at a rolling
average based on expected duration of the accounts. The expected duration ranges
from 30 days for certain rate-sensitive deposits to five years.
Economic capital is assigned to the business units by a capital allocation model
that reflects management's assessment of risk. This model assigns capital based
upon credit, operating, interest rate and market risk inherent in our business
lines and recognizes the diversification benefits among the units. The level of
assigned economic capital is a combination of the risk taken by each business
line, based on its actual exposures and calibrated to its own loss history where
possible. Average invested capital includes economic capital and amounts we have
invested in the lines of business.
As shown in the following table, net income attributable to our lines of
business decreased $3.9 million or 20% compared to the third quarter of 2008.
The decrease was due primarily to less net interest revenue attributed to the
lines of business and more net interest revenue attributed to the funds
management unit. Total tax-equivalent net interest revenue recognized by the
lines of business decreased to $112 million for the third quarter of 2009 from
$132 million for the third quarter of 2008. Tax-equivalent net interest revenue
recognized by the funds management unit increased to $70 million during the
third quarter of 2009 from $34 million in the third quarter of 2008. Lower
market interest rates decrease the transfer pricing credit provided to business
units that generate lower-costing funds for the Company. This tends to shift
revenue from units that provide funds to the Company. In addition, net interest
revenue in the business units was reduced by a decrease in average loan balances
while net interest revenue in the funds management unit increased due to growth
in the securities portfolio. Net income of the business units also decreased due
to higher net loans charged-off and operating expenses.
41
------------------------------------------------------ ------------------------------ ---------------------------
Table 4 - Net Income (Loss) by Line of Business
(In thousands) Three months ended Nine months ended
September 30, September 30,
2009 2008 2009 2008
------------ ----------------- ------------ --------------
Commercial banking $ 10,500 $ 5,192 $ 43,516 $ 59,503
Consumer banking 2,428 6,634 18,478 25,376
Wealth management 3,045 8,084 10,265 26,228
------------------------------------------------------ ------------ ----------------- ------------ --------------
Subtotal 15,973 19,910 72,259 111,107
Funds management and other 34,687 36,775 85,548 6,682
------------------------------------------------------ ------------ ----------------- ------------ --------------
Total $ 50,660 $ 56,685 $157,807 $117,789
------------------------------------------------------ ------------ ----------------- ------------ --------------
Commercial Banking
Commercial banking contributed $10.5 million and $5.2 million to consolidated
net income for the third quarters of 2009 and 2008, respectively. Net interest
revenue decreased $11.1 million compared to the third quarter of 2008. Other
operating revenue increased $36.4 million over the third quarter of 2008, which
was impacted by a $45 million write down of customer hedging derivative
contracts. Commercial banking net income was also reduced by pre-tax charges for
credit losses of $27.8 million in 2009 and $15.5 million in 2008.
Table 5 Commercial Banking
(Dollars in Thousands)
Three Months ended Nine Months ended
September 30, Increase September 30, Increase
----------------------------- -----------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
-------------- -------------- --------------- -------------- -------------- -------------
NIR (expense) from external sources $ 87,022 $ 114,062 $ (27,040) $ 259,637 $ 346,315 $ (86,678)
NIR (expense) from internal sources (15,219) (31,150) 15,931 (41,169) (109,937) 68,768
------------------------------------- -------------- -------------- --------------- -------------- -------------- -------------
Total net interest revenue 71,803 82,912 (11,109) 218,468 236,378 (17,910)
Other operating revenue 32,789 (3,610) 36,399 100,051 72,120 27,931
Operating expense 56,567 55,364 1,203 166,321 160,592 5,729
Net loans charged off 27,819 15,526 12,293 76,832 55,739 21,093
Gain on financial instruments, net - - - - 4,689 (4,689)
Gain (loss) on repossessed
assets, net (3,020) 86 (3,106) (4,145) 531 (4,676)
------------------------------------- -------------- -------------- --------------- -------------- -------------- -------------
Income before taxes 17,186 8,498 8,688 71,221 97,387 (26,166)
Federal and state income tax 6,686 3,306 3,380 27,705 37,884 (10,179)
------------------------------------- -------------- -------------- --------------- -------------- -------------- -------------
Net income $ 10,500 $ 5,192 $ 5,308 $ 43,516 $ 59,503 $ (15,987)
------------------------------------- -------------- -------------- --------------- -------------- -------------- -------------
Average assets $9,580,929 $11,132,506 $(1,551,577) $10,057,700 $10,819,122 $ (761,422)
Average loans 8,932,705 9,770,126 (837,421) 9,387,126 9,595,689 (208,563)
Average deposits 5,663,758 4,926,125 737,633 5,219,094 4,613,055 606,039
Average invested capital 1,045,520 1,098,600 (53,080) 1,031,220 1,094,790 (63,570)
Return on average assets 0.43% 0.19% 25 b.p. 0.58% 0.74% (16 b.p.)
Return on invested capital 3.98% 1.87% 211 b.p. 5.64% 7.27% (162 b.p.)
Efficiency ratio 54.08% 69.81% (1,573 b.p). 52.22% 52.06% 16 b.p.
Net charge-offs (annualized) to
average loans 1.25% 0.64% 61 b.p. 1.64% 1.16 48 b.p.
Average earning assets decreased $1.1 billion or 11% primarily due to decrease
in average loans and average funds sold and resell agreements. The impact of
this decrease was partially offset by improving loan spreads. Decreases in
average earning assets combined with changes in the internal transfer pricing
credit to reduce net interest revenue by $11.1 million.
42
Excluding the impact of the $45 million writedown of customer hedging
derivatives in the third quarter of 2008, other operating revenue decreased $8.8
million compared to the third quarter of 2008. Energy derivative income and
related margin interest fees declined $7.2 million compared to the third quarter
of 2008 due to declines in energy derivative activity and their associated fees
due to low commodity prices. Operating expenses were up $1.2 million compared to
the third quarter of 2008 largely due to increased FDIC insurance expenses as a
result of an increase in deposit balances and the regular assessment rate.
Repossession expenses were also up over the third quarter of 2008 as average
repossessed asset balances increased $60 million over the third quarter of 2008.
The increase in net loans charged off was due primarily to increased losses on
commercial real estate loans.
The average outstanding balance of loans attributed to commercial banking was
$8.9 billion for the third quarter of 2009, down $837 million or 9% compared to
the third quarter of 2008. Energy loans averaged $1.8 billion, an increase of
$41 million or 2% over the third quarter of 2008. Commercial real estate loans
decreased $120 million or 7% compared to the second quarter of 2008 to $1.6
billion. Average commercial and industrial loans, excluding energy, of $3.5
billion were down $106 million or 3% compared to the third quarter of 2008.
Agricultural loans decreased $95 million or 38% compared to the third quarter of
2008 to $158 million. Small business loans averaged $1.7 billion, a decrease of
$514 million or 23% compared to the third quarter of 2008.
Average deposits attributed to commercial banking were $5.7 billion for the
third quarter of 2009, up $738 million or 15% over the third quarter of 2008.
Average balances attributed to our commercial and industrial customers increased
$771 million or 92%. Average balances attributable to our small business
customers increased $188 million or 11% and average deposit balances of our
commercial real estate customers increased $45 million or 23%. Treasury services
deposit balances decreased $163 million or 11%. Deposit balances attributed to
our energy customers decreased by $76 million or 14%.
43
Consumer Banking
Consumer banking services are provided through four primary distribution
channels: traditional branches, supermarket branches, the 24-hour ExpressBank
call center and online internet banking. Consumer banking contributed $2.4
million to consolidated net income for the third quarter of 2009, down $4.2
million compared to the third quarter of 2008.
Table 6 Consumer Banking
(Dollars in Thousands)
Three Months ended Nine Months ended
September 30, Increase September 30, Increase
------------------------------- ----------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
--------------- --------------- ----------- ------------- -------------- ------------
NIR (expense) from external sources $ 15,066 $ 10,223 $ 4,843 $ 40,266 $ 22,243 $ 18,023
NIR (expense) from internal sources 14,892 27,445 (12,553) 61,000 91,662 (30,662)
----------------------------------------- --------------- --------------- ----------- ------------- -------------- ------------
Total net interest revenue 29,958 37,668 (7,710) 101,266 113,905 (12,639)
Other operating revenue 43,578 37,923 5,655 138,495 112,574 25,921
Operating expense 63,755 55,733 8,022 190,143 163,269 26,874
Net loans charged off 7,079 4,638 2,441 18,316 11,050 7,266
Increase (decrease) in fair value of
mortgage service rights (2,981) (5,554) 2,573 6,839 (8,083) 14,922
Gain (loss) on financial instruments, net 3,560 1,186 2,374 (8,758) (2,565) (6,193)
Gain on repossessed assets, net 693 5 688 859 20 839
----------------------------------------- --------------- --------------- ----------- ------------- -------------- ------------
Income before taxes 3,974 10,857 (6,883) 30,242 41,532 (11,290)
Federal and state income tax 1,546 4,223 (2,677) 11,764 16,156 (4,392)
----------------------------------------- --------------- --------------- ----------- ------------- -------------- ------------
Net income $ 2,428 $ 6,634 $ (4,206) $ 18,478 $ 25,376 $ (6,898)
----------------------------------------- --------------- --------------- ----------- ------------- -------------- ------------
Average assets $ 6,155,932 $ 5,746,253 $409,679 $ 6,129,530 $5,707,846 $ 421,684
Average loans 2,303,654 2,531,420 (277,766) 2,524,782 2,496,421 28,361
Average deposits 6,089,389 5,695,593 393,796 6,064,534 5,662,514 402,020
Average invested capital 252,620 243,100 9,520 248,480 229,700 18,780
Return on average assets 0.16% 0.46% (30 b.p.) 0.40% 0.59% (19 b.p.)
Return on invested capital 3.81% 10.83% (702 b.p.) 9.94% 14.77% (483 b.p.)
Efficiency ratio 86.70% 73.73% 1,297 b.p. 79.31% 72.09% 722 b.p.
Net charge-offs (annualized) to average
loans 1.23% 0.73% 50 b.p. 1.45% 0.89% 56 b.p.
Mortgage loans funded $ 536,173 $ 258,171 $278,002 $ 2,268,006 $ 803,725 $ 1,464,281
September 30, September 30, Increase
2009 2008 (Decrease)
-------------- ---------------- ------------
Branch locations 179 173 6
Mortgage loan servicing portfolio $ 6,339,764 $ 5,167,584 $ 1,172,180
Net interest revenue from consumer banking activities decreased $7.7 million or
20% compared to the third quarter of 2008. Average earning assets increased $410
million or 7% from the third quarter of 2008 due to increases in mortgage hedge
securities held as an economic hedge of our mortgage servicing rights and funds
sold to the funds management unit. The favorable impact of this growth was
offset by a $10.0 million decrease related to a lower internal transfer pricing
credit provided to the consumer banking segment for deposits sold to our funds
management unit.
Other operating revenue increased $5.7 million or 15% over the third quarter of
2008 primarily due to increased mortgage banking revenue. Loan refinancing
volumes were up due to government initiatives to lower national mortgage
interest rates. Operating expenses increased $8.0 million or 14% over the third
quarter of 2008, including a $2.4 million increase in personnel cost due to
branch expansion in Arizona, Colorado and Texas. Mortgage banking expenses
increased $2.2 million due to the effect of accelerated actual loan repayments
on the value of our mortgage servicing rights. FDIC insurance premiums grew $1.1
million primarily due to increased deposit balances
44
and FDIC insurance regular assessment rates. In addition, facilities and other
operating expenses increased due to branch expansion in Arizona, Colorado, and
Texas.
Net loans charged off by the consumer banking unit totaled $7.1 million in the
third quarter of 2009 and $4.6 million in the third quarter of 2008. Net
consumer banking charge-offs include residential mortgage loans, indirect
automobile loans, overdrawn deposit accounts and other direct consumer loans.
Our Consumer banking unit originates, markets and services conventional and
government-sponsored mortgage loans for all of our geographical markets. During
the third quarter of 2009, $536 million of mortgage loans were funded compared
to $258 million funded in the third quarter of 2008. Approximately 51% of our
mortgage loans funded were in the Oklahoma market, 13% in the Texas market and
9% in the Colorado market. Revenue from mortgage loan origination and marketing
activities totaled $8.0 million in the third quarter of 2009 and $2.7 million in
the third quarter of 2008. We also service $7.1 billion of mortgage loans as of
September 30, 2009, including $832 million of loans serviced for affiliated
entities. Approximately 95% of the mortgage loans serviced were to borrowers in
our primary geographical market areas. Mortgage loan servicing revenue totaled
$5.2 million in the third quarter of 2009 and $4.4 million in the third quarter
of 2008.
Changes in fair value of our mortgage loan servicing rights, net of economic
hedge, increased consumer banking net income by $479 thousand in the third
quarter of 2009 compared with a decrease in net income of $4.4 million in the
third quarter of 2008. Changes in the fair value of mortgage servicing rights
and securities held as an economic hedge are due to movement in interest rates,
actual and anticipated loan prepayment speeds and related factors.
The interest rate sensitivity of our mortgage servicing rights and securities
held as an economic hedge is modeled over a range of +/- 50 basis points. At
September 30, 2009, a 50 basis point increase in mortgage interest rates is
expected to increase the fair value of our mortgage servicing rights, net of
economic hedging by $1.0 million. A 50 basis point decrease in mortgage interest
rates is expected to decrease the fair value of our mortgage servicing rights,
net of economic hedging by $5.7 million. Modeling changes in the value of our
servicing rights due to changes in interest rates assumes stable relationships
between mortgage commitment rates and discount rates and assumed prepayment
speeds and actual prepayment speeds. Changes in market conditions can cause
variations from these assumptions. These factors and others may cause changes in
the value of our mortgage servicing rights to differ from our expectations.
Average consumer deposits in the third quarter of 2009 increased $394 million or
7% over the third quarter of 2008. Average interest-bearing transaction accounts
in the third quarter of 2009 were up $205 million or 9% and average time
deposits were up $138 million or 5% compared to the third quarter of 2008.
Average demand deposit accounts in the third quarter of 2009 increased $42
million or 6% over the third quarter of 2008. Movement of funds among the
various types of consumer deposits was largely based on interest rates and
product features offered.
Wealth Management
Wealth Management contributed consolidated net income of $3.0 million in the
third quarter of 2009 compared to net income of $8.1 million in the third
quarter of 2008. The decrease in net income was due primarily to increased
operating expenses, market driven decline in trust fee income and lower net
interest revenue.
45
Table 7 Wealth Management
(Dollars in Thousands)
Three Months ended Nine Months ended
September 30, Increase September 30, Increase
------------------------------ ----------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
--------------- -------------- ------------- ------------- -------------- -------------
NIR (expense) from external sources $ 7,772 $ 4,108 $ 3,664 $ 17,317 $ 10,082 $ 7,235
NIR (expense) from internal sources 2,026 7,091 (5,065) 15,352 22,747 (7,395)
-------------------------------------- --------------- -------------- ------------- ------------- -------------- -------------
Total net interest revenue 9,798 11,199 (1,401) 32,669 32,829 (160)
Other operating revenue 40,847 38,878 1,969 120,676 120,701 (25)
Operating expense 44,571 36,844 7,727 128,898 109,387 19,511
Net loans charged off 1,089 3 1,086 7,647 1,208 6,439
Loss on financial instruments, net - - - - (7) 7
-------------------------------------- --------------- -------------- ------------- ------------- -------------- -------------
Income before taxes 4,985 13,230 (8,245) 16,800 42,928 (26,128)
Federal and state income tax 1,940 5,146 (3,206) 6,535 16,700 (10,165)
-------------------------------------- --------------- -------------- ------------- ------------- -------------- -------------
Net income $ 3,045 $ 8,084 $ (5,039) $ 10,265 $ 26,228 $(15,963)
-------------------------------------- --------------- -------------- ------------- ------------- -------------- -------------
Average assets $ 2,805,331 $ 2,115,989 $689,342 $ 2,948,793 $ 2,049,446 $899,347
Average loans 1,067,375 950,614 116,761 1,048,421 923,177 125,244
Average deposits 2,767,139 2,052,911 714,228 2,906,428 1,988,414 918,014
Average invested capital 214,580 200,450 14,130 205,650 201,280 4,370
Return on assets 0.43% 1.52% (109 b.p.) 0.47% 1.71% (124 b.p.)
Return on invested capital 5.63% 16.00% (1,037 b.p.) 6.67% 17.42% (1,075 b.p.)
Efficiency ratio 88.01% 73.57% 1,444 b.p. 84.06% 71.25% 1,281 b.p.
Net charge-offs (annualized) to
average loans 0.41% 0.00% 41 b.p. 1.46% 0.26% 120 b.p.
September 30, September 30, Increase
2009 2008 (Decrease)
Trust assets $ 29,945,585 $ 33,242,296 $ (3,296,711)
Net interest revenue for the third quarter of 2009 decreased $1.4 million or 13%
compared to third quarter of 2008 due to increases in average earning assets
offset by a lower internal transfer pricing credit. Other operating revenue
increased $2.0 million compared to the third quarter of 2008. Increased trading
and brokerage revenue due to higher level of securities transactions by our
mortgage banking customers and increased investment banking and retail brokerage
activity was somewhat offset by declines in trust fees and commissions due to
fee waivers and decreases in the fair value of trust assets. Operating expenses
increased $7.7 million compared to the third quarter of 2008 primarily related
to higher personnel costs due to increased staffing and incentive compensation.
Additional staffing has been added to increase penetration in markets outside of
Oklahoma. Growth in non-personnel expenses was primarily due to increased FDIC
insurance premiums as a result of increased deposit balances and an increase in
the FDIC regular assessment rate in the third quarter of 2009 compared to the
third quarter of 2008.
Growth in average assets was largely due to funds sold to the funds management
unit. Funds provided by wealth management deposits, which are largely sold to
the funds management unit, increased primarily due to an increase in time
deposits and interest bearing transaction accounts, including movement of
customer funds from managed money market products that were not on the Company's
balance sheet, to deposits. Average deposits provided by the wealth management
division increased $714 million in the third quarter of 2009 compared with the
third quarter of 2008. Interest-bearing transaction accounts averaged $1.7
billion for the third quarter of 2009, an increase of $297 million or 21% over
the third quarter of 2008. Average time deposits were $813 million, up $396
million or 95% over last year.
At September 30, 2009 and 2008, the Wealth Management line of business was
responsible for trust assets with aggregate market values of $29.9 billion and
$33.2 billion, respectively, under various fiduciary arrangements. The decrease
in trust assets was primarily due to general market conditions. We have sole or
joint discretionary authority over $11.1 billion of trust assets at September
30, 2009 compared to $12.6 billion of trust assets at September 30, 2008. The
fair value of non-managed assets was $18.8 billion at September 30, 2009 and
$20.7 billion at September
46
30, 2008. The fair value of assets held in safekeeping totaled $8.0 billion at
September 30, 2009 and $8.5 billion at September 30, 2008.
Geographical Market Distribution
The Company also secondarily evaluates performance by primary geographical
market. Loans are generally attributed to geographical markets based on the
location of the customer and may not reflect the location of the underlying
collateral. Brokered deposits and other wholesale funds are not attributed to a
geographical market. Funds management and other also include insignificant
results of operations in locations outside our primary geographic regions.
Table 8 Net Income (Loss) by Geographic Region
(In Thousands)
Three Months ended Nine Months ended
September 30, September 30,
2009 2008 2009 2008
--------------- -------------- ------------- -------------
Oklahoma $18,673 $ 7,122 $ 70,750 $ 52,780
Texas 3,921 12,107 13,290 36,813
New Mexico 873 3,881 4,923 12,405
Arkansas 2,159 2,084 8,485 6,911
Colorado (6,694) (59) (8,167) 6,257
Arizona (4,614) (5,765) (22,064) (4,971)
Kansas / Missouri 1,698 1,071 5,073 2,673
------------------------------------------------------ --------------- -------------- ------------- -------------
Subtotal 16,016 20,441 72,290 112,868
Funds management and other 34,644 36,244 85,517 4,921
------------------------------------------------------ --------------- -------------- ------------- -------------
Total $50,660 $ 56,685 $ 157,807 $ 117,789
------------------------------------------------------ --------------- -------------- ------------- -------------
47
Oklahoma Market
Oklahoma is a significant market to the Company. Our Oklahoma offices are
located primarily in the Tulsa and Oklahoma City metropolitan areas. For the
third quarter of 2009, approximately 50% of our average loans, 52% of our
average deposits and 37% of our consolidated net income is attributed to the
Oklahoma market. In addition, all of our mortgage servicing activity and 75% of
our trust assets are attributed to the Oklahoma market.
Table 9 Oklahoma
(Dollars in Thousands)
Three Months ended Nine Months ended
September 30, Increase September 30, Increase
------------------------------ ------------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
--------------- -------------- ------------- -------------- --------------- ------------
Net interest revenue $ 56,304 $ 62,892 $ (6,588) $ 178,015 $ 181,579 $ (3,564)
Other operating revenue 78,874 41,738 37,136 242,660 207,702 34,958
Operating expense 93,883 87,602 6,281 278,466 257,809 20,657
Net loans charged off 11,652 1,009 10,643 25,041 39,497 (14,456)
Increase (decrease) in fair value of
mortgage service rights (2,981) (5,554) 2,573 6,839 (8,083) 14,922
Gain (loss) on financial instruments, net 3,560 1,186 2,374 (8,758) 2,118 (10,876)
Gain on repossessed assets, net 339 5 334 544 373 171
---------------------------------------- --------------- -------------- ------------- -------------- --------------- ------------
Income before taxes 30,561 11,656 18,905 115,793 86,383 29,410
Federal and state income tax 11,888 4,534 7,354 45,043 33,603 11,441
---------------------------------------- --------------- -------------- ------------- -------------- --------------- ------------
Net income $ 18,673 $ 7,122 $ 11,551 $ 70,750 $ 52,780 $ 17,969
---------------------------------------- --------------- -------------- ------------- -------------- --------------- ------------
Average assets $ 8,679,144 $ 8,286,261 $392,883 $ 8,791,337 $8,187,152 $ 604,185
Average loans 5,888,614 6,402,424 (513,810) 6,222,843 6,408,155 (185,312)
Average deposits 7,889,417 7,072,725 816,692 7,799,795 6,677,961 1,121,834
Average invested capital 818,690 798,910 19,780 780,410 800,190 (19,780)
Return on average assets 0.85% 0.34% 51 b.p. 1.08% 0.86% 22 b.p.
Return on invested capital 9.05% 3.54% 551 b.p. 12.12% 8.82% 330 b.p.
Efficiency ratio 69.45% 83.73% (1,428 b.p.) 66.20% 66.23% (3 b.p.)
Net charge-offs (annualized) to
average loans 0.79% 0.06% 73 b.p 0.80% 1.23% (43 b.p.)
Net income generated in the Oklahoma market increased $11.6 million over the
third quarter of 2008. Other operating revenue for the third quarter of 2008 was
reduced by a $45 million pre-tax charge for losses on customer hedging
derivative contracts. This charge reduced net income in the Oklahoma market by
$27.5 million.
Net interest revenue decreased $6.6 million or 10% compared to the third quarter
of 2008. Net interest revenue was impacted by a decline in average loans of $514
million compared to the third quarter of 2008, offset by improving interest
spreads on loans. Average deposit growth of $817 million compared to the third
quarter of 2008 was offset by lower internal funds transfer credit provided for
deposits sold to the funds management unit.
Other operating revenue, excluding derivative losses in the third quarter of
2008, decreased $8.0 million primarily due to lower derivative and related
margin interest fees, lower trust fees due to fee waivers and lower trust asset
values and lower transaction card revenues. Increased mortgage banking revenue
related to government initiatives to lower national mortgage rates provided a
partial offset.
Operating expenses increased primarily due to personnel costs and mortgage
banking costs. FDIC premiums also were higher as a result of increased deposit
balances and regular assessment rate in the third quarter of 2009.
Changes in the fair value of mortgage servicing rights, net of changes in the
fair value of financial instruments, increased pre-tax income by $579 thousand
in the third quarter of 2009 and reduced net income by $4.4 million in the third
quarter of 2008.
48
Net loans charged off increased by $10.6 million from losses on commercial,
residential mortgage and consumer loans. Annualized net charge-offs were 0.79%
of average loans for the third quarter of 2009.
Average deposits in the Oklahoma market for the third quarter of 2009 increased
$817 million over the third quarter of 2008. The increase came primarily from
commercial and wealth management units, including trust, broker/dealer and
private banking. Consumer banking also contributed to deposit growth.
Texas Market
Texas is our second largest market. Our Texas offices are located primarily in
Dallas, Fort Worth and Houston metropolitan areas. Approximately 29% of our
average loans, 25% of our average deposits and 8% of our consolidated net income
is attributed to the Texas market.
Table 10 Texas
(Dollars in Thousands)
Three Months ended Nine Months Ended
September 30, Increase September 30, Increase
------------------------------ ----------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
--------------- -------------- ------------ -------------- ------------- ------------
Net interest revenue $ 31,830 $ 39,712 $ (7,882) $ 100,378 $ 114,557 $ (14,179)
Other operating revenue 13,684 11,445 2,239 37,276 33,726 3,550
Operating expense 34,631 30,015 4,616 100,342 85,561 14,781
Net loans charged off 4,021 2,262 1,759 15,743 5,337 10,406
Gain (loss) on repossessed assets, net (736) 37 (773) (803) 135 (938)
---------------------------------------- --------------- -------------- ------------ -------------- ------------- ------------
Income before taxes 6,126 18,917 (12,791) 20,766 57,520 (36,754)
Federal and state income tax 2,205 6,810 (4,605) 7,476 20,707 (13,231)
---------------------------------------- --------------- -------------- ------------ -------------- ------------- ------------
Net income $ 3,921 $ 12,107 $ (8,186) $ 13,290 $ 36,813 $(23,523)
---------------------------------------- --------------- -------------- ------------ -------------- ------------- ------------
Average assets $ 3,999,313 $ 3,779,444 $ 219,869 $ 3,831,277 $ 3,604,060 $ 227,217
Average loans 3,504,839 3,729,982 (225,143) 3,679,562 3,558,534 121,028
Average deposits 3,791,236 3,310,615 480,621 3,602,594 3,251,695 350,899
Average invested capital 557,080 540,450 16,630 542,580 538,970 3,610
Return on average assets 0.39% 1.27% (88 b.p.) 0.46% 1.37% (91 b.p.)
Return on invested capital 2.79% 8.89% (610 b.p.) 3.27% 9.13% (586 b.p.)
Efficiency ratio 76.09% 58.67% 1,742 b.p. 72.89% 57.70% 1,519 b.p.
Net charge-offs (annualized) to
average loans 0.46% 0.24% 22 b.p. 0.86% 0.30% 56 b.p.
Net income in the Texas market decreased by $8.2 million compared to the third
quarter of 2008 primarily due to decreased net interest revenue, increased
operating expenses and net loans charged off.
Net interest revenue decreased $7.9 million or 20% compared to the third quarter
of 2008. Average outstanding loans decreased $225 million or 6% compared to the
third quarter of 2008. Average deposits increased $481 million. The benefit of
an increase in average deposits was offset by the average decrease in loans and
reduced the benefit from funds sold to the funds management unit.
Other operating revenue increased $2.2 million or 20% compared to the third
quarter of 2008 primarily due to increased mortgage banking revenue, transaction
card revenue, trading and brokerage revenue and deposit service charges.
Operating expenses increased $4.6 million or 15% over the third quarter of last
year primarily due to higher personnel costs and the FDIC insurance premiums due
to increased deposit balances and assessment rate.
Net loans charged off increased $1.8 million to 0.46% of average loans, compared
to 0.24% of average loans for the third quarter of 2008.
49
Other Markets
For the third quarter of 2009, net income attributable to our New Mexico market
totaled $873 thousand or 2% of consolidated net income, down from $3.9 million
in the third quarter of 2008. The decrease in net income attributed to New
Mexico resulted primarily from higher net loans charged off and lower net
interest revenue due to lower internal funds transfer credit provided for
deposits sold to the funds management unit. Average deposits increased $143
million over the third quarter of 2008. Net loans charged off in the third
quarter of 2009 totaled $2.7 million or 1.35% annualized of average loans.
For the third quarter of 2009, net income attributable to the Arkansas market
totaled $2.2 million, unchanged compared to the third quarter of 2008. Increased
securities trading revenue at our Little Rock office was primarily offset by
higher personnel costs. Average deposits in our Arkansas market were up $102
million or 143% over the third quarter of 2008 due primarily to commercial
banking deposits. Consumer and wealth management deposits also increased over
the third quarter of 2008.
For the third quarter of 2009, we incurred a net loss in the Colorado market of
$6.7 million, a $6.6 million decrease compared to the third quarter of 2008. The
decrease was primarily due to increases in net loans charged off and the FDIC
insurance premiums in the third quarter of 2009. Net loans charged off increased
$7.2 million, of which $8.2 million is related to a single commercial real
estate credit. Average loans decreased $37 million compared to the third quarter
of 2008 and average deposits increased $94 million.
We also incurred a net loss of $4.6 million in the Arizona market in the third
quarter of 2009 compared with a net loss of $5.8 million in the third quarter of
2008. Losses from loan charge-offs totaled $4.7 million, down $6.1 million
compared to the same period last year. This improvement was partially offset by
losses on repossessed assets, decreased net interest revenue and increased
operating expenses related to the opening of 3 branch locations. Net charge-offs
in the Arizona market were down $11.6 million from the previous quarter. Average
loans declined $23 million compared to the third quarter of 2008 and average
deposits grew by $78 million compared to the third quarter of 2008. The positive
deposit growth was offset by lower internal funds transfer credit provided for
deposits sold to the funds management unit.
Consistent with plans when we first acquired Valley Commerce Bank in Phoenix,
the Company's objective is to focus on growth in commercial and small business
lending in the Arizona market. We currently have approximately $17 million of
goodwill in the Arizona market. The majority of this goodwill is attributed to
commercial banking. The estimated fair value of the Arizona market exceeded the
carrying value by 10% as of the date of our latest goodwill impairment test in
the fourth quarter of 2008. This fair value estimate included a period of time
to clear commercial real estate loan losses from the portfolio and to execute
our original growth objective. We will perform our annual goodwill impairment
analysis during the fourth quarter of 2009. Goodwill impairment in the Arizona
market will depend largely on our ability to meet growth projections for the
Arizona market.
We continue to grow in the Kansas City market. Net income for the third quarter
of 2009 increased $627 thousand or 59% over the third quarter of 2008 due
largely to growth in other operating revenue. Total average deposits increased
$136 million over the third quarter of 2008.
50
Table 11 New Mexico
(Dollars in Thousands)
Three Months ended Nine Months ended
September 30, Increase September 30, Increase
------------------------------ ----------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
---------------- ------------- ------------ -------------- ------------- -----------
Net interest revenue $ 7,924 $ 9,717 $ (1,793) $ 24,690 $ 30,359 $ (5,669)
Other operating revenue 6,070 6,082 (12) 17,989 18,218 (229)
Operating expense 9,834 9,155 679 29,016 26,783 2,233
Net loans charged off 2,731 293 2,438 4,680 1,487 3,193
Loss on repossessed assets, net - - - (925) (5) (920)
--------------------------------------- ---------------- ------------- ------------ -------------- ------------- -----------
Income before taxes 1,429 6,351 (4,922) 8,058 20,302 (12,244)
Federal and state income tax 556 2,470 (1,914) 3,135 7,897 (4,762)
--------------------------------------- ---------------- ------------- ------------ -------------- ------------- -----------
Net income $ 873 $ 3,881 $(3,008) $ 4,923 $ 12,405 $ (7,482)
--------------------------------------- ---------------- ------------- ------------ -------------- ------------- -----------
Average assets $ 1,256,065 $ 1,115,530 $140,535 $ 1,237,637 $1,120,729 $116,908
Average loans 807,407 837,447 (30,040) 822,493 844,028 (21,535)
Average deposits 1,169,220 1,025,765 143,455 1,145,099 1,032,847 112,252
Average invested capital 97,390 116,310 (18,920) 99,110 116,310 (17,200)
Return on average assets 0.28% 1.38% (110 b.p.) 0.53% 1.48% (95 b.p.)
Return on invested capital 3.56% 13.24% (968 b.p.) 6.64% 14.26% (762 b.p.)
Efficiency ratio 70.27% 57.95% 1,232 b.p. 67.99% 55.14% 1,285 b.p.
Net charge-offs (annualized) to
average loans 1.35% 0.14% 121 b.p. 1.14% 0.35% 79 b.p.
Table 12 Arkansas
(Dollars in Thousands)
Three Months ended Nine Months ended
September 30, Increase September 30, Increase
------------------------------- -----------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
----------------- ------------- ------------ ---------------- ------------ -----------
Net interest revenue $ 2,908 $ 3,017 $ (109) $ 8,866 $ 8,521 $ 345
Other operating revenue 8,464 6,626 1,838 28,660 21,309 7,351
Operating expense 7,070 5,385 1,685 21,039 16,288 4,751
Net loans charged off 733 847 (114) 2,564 2,231 333
Loss on repossessed assets, net (35) - (35) (36) - (36)
------------------------------------- ----------------- ------------- ------------ ---------------- ------------ -----------
Income before taxes 3,534 3,411 123 13,887 11,311 2,576
Federal and state income tax 1,375 1,327 48 5,402 4,400 1,002
------------------------------------- ----------------- ------------- ------------ ---------------- ------------ -----------
Net income $ 2,159 $ 2,084 $ 75 $ 8,485 $ 6,911 $ 1,574
------------------------------------- ----------------- ------------- ------------ ---------------- ------------ -----------
Average assets $ 415,735 $ 452,423 $(36,688) $ 431,771 $ 444,022 $(12,251)
Average loans 397,159 440,079 (42,920) 418,322 432,749 (14,427)
Average deposits 172,086 70,716 101,370 152,657 67,054 85,603
Average invested capital 34,340 37,480 (3,140) 33,340 34,440 (1,100)
Return on average assets 2.06% 1.83% 23 b.p. 2.63% 2.08% 55 b.p.
Return on invested capital 24.94% 22.06% 288 b.p. 34.03% 26.83% 720 b.p.
Efficiency ratio 62.17% 55.84% 633 b.p. 56.07% 54.60% 147 b.p.
Net charge-offs (annualized) to
average loans 0.74% 0.77% (3 b.p.) 1.23% 1.03% 19 b.p.
51
Table 13 Colorado
(Dollars in Thousands)
Three Months ended Nine Months ended
September 30, Increase September 30, Increase
--------------------------------- -----------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
----------------- --------------- ------------- --------------- ------------- -----------
Net interest revenue $7,803 $ 9,704 $ (1,901) $ 26,199 $ 27,730 $ (1,531)
Other operating revenue 3,780 3,945 (165) 13,042 12,567 475
Operating expense 10,085 8,749 1,336 29,321 24,522 4,799
Net loans charged off 12,196 4,996 7,201 23,086 5,534 17,552
Loss on repossessed assets, net (258) - (258) (201) - (201)
------------------------------------ ----------------- --------------- ------------- --------------- ------------- -----------
Income (loss) before taxes (10,956) (96) (10,861) (13,367) 10,241 (23,608)
Federal and state income tax (4,262) (37) (4,225) (5,200) 3,984 (9,184)
------------------------------------ ----------------- --------------- ------------- --------------- ------------- -----------
Net income (loss) $ (6,694) $ (59) $ (6,636) $ (8,167) $ 6,257 $(14,424)
------------------------------------ ----------------- --------------- ------------- --------------- ------------- -----------
Average assets $ 1,151,882 $ 1,051,773 $100,109 $ 1,166,005 $1,093,449 $72,556
Average loans 855,358 891,923 (36,565) 931,253 836,287 94,966
Average deposits 1,127,381 1,033,674 93,707 1,146,062 1,069,287 76,775
Average invested capital 161,150 150,600 10,550 141,590 129,660 11,930
Return on average assets (2.31%) (0.02%) (229 b.p.) (0.94%) 0.77% (171 b.p.)
Return on invested capital (16.48%) (0.16%) (1,632 b.p.) (7.71%) 6.45% (1,416 b.p)
Efficiency ratio 87.07% 64.10% 2,297 b.p. 74.72% 60.85% 1,387 b.p.
Net charge-offs (annualized) to
average loans 5.70% 2.24% 346 b.p. 4.96% 1.32% 364 b.p.
Table 14 Arizona
(Dollars in Thousands)
Three Months ended Nine Months ended
September 30, Increase September 30, Increase
----------------------------- -----------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
-------------- -------------- ------------ --------------- ------------- ------------
Net interest revenue $ 2,544 $ 4,575 $ (2,031) $ 8,301 $ 14,428 $ (6,127)
Other operating revenue 1,027 248 779 2,176 1,006 1,170
Operating expense 4,833 3,543 1,290 13,774 10,713 3,061
Net loans charged off 4,654 10,764 (6,110) 30,949 12,907 18,042
Gains (losses) on repossessed assets, net (1,636) 49 (1,685) (1,865) 49 (1,914)
------------------------------------ -------------- -------------- ------------ --------------- ------------- ------------
Income (loss) before taxes (7,552) (9,435) 1,883 (36,111) (8,137) (27,974)
Federal and state income tax (2,938) (3,670) 732 (14,047) (3,166) (10,881)
------------------------------------ -------------- -------------- ------------ --------------- ------------- ------------
Net income (loss) $ (4,614) $ (5,765) $ 1,151 $ (22,064) $ (4,971) $(17,093)
------------------------------------ -------------- -------------- ------------ --------------- ------------- ------------
Average assets $ 627,411 $ 586,433 $ 40,978 $ 613,293 $ 584,727 $ 28,566
Average loans 559,227 582,235 (23,008) 574,612 581,092 (6,480)
Average deposits 200,484 122,496 77,988 176,653 128,185 48,468
Average invested capital 81,140 90,630 (9,490) 83,830 81,600 2,230
Return on average assets (2.92%) (3.90%) 98 b.p. (4.81%) (1.14%) (367 b.p.)
Return on invested capital (22.56%) (25.24%) 268 b.p. (35.19%) (8.14%) (2,705 b.p.)
Efficiency ratio 135.34% 73.46% 6,188 b.p. 131.47% 69.41% 6,206 b.p.
Net charge-offs (annualized) to
average loans 3.33% 7.39% (406 b.p.) 10.77% 4.44% 633 b.p.
52
Table 15 Kansas / Missouri
(Dollars in Thousands)
Three Months ended Nine Months ended
September 30, Increase September 30, Increase
------------------------------ ----------------------------
2009 2008 (Decrease) 2009 2008 (Decrease)
--------------- -------------- ------------ -------------- ------------- -----------
Net interest revenue $ 2,245 $ 2,065 $ 180 $ 5,903 $ 5,690 $ 213
Other operating revenue 4,825 2,609 2,216 15,372 9,573 5,799
Operating expense 4,291 2,925 1,366 12,239 9,886 2,353
Net loans charged off - (3) 3 733 1,003 (270)
--------------------------------------- --------------- -------------- ------------ -------------- ------------- -----------
Income before taxes 2,779 1,752 1,027 8,303 4,374 3,929
Federal and state income tax 1,081 681 400 3,230 1,701 1,529
--------------------------------------- --------------- -------------- ------------ -------------- ------------- -----------
Net income $ 1,698 $ 1,071 $ 627 $ 5,073 $ 2,673 $ 2,400
--------------------------------------- --------------- -------------- ------------ -------------- ------------- -----------
Average assets $ 310,941 $ 359,898 $(48,957) $ 317,499 $347,313 $(29,814)
Average loans 291,127 356,758 (65,631) 309,202 344,485 (35,283)
Average deposits 170,458 34,900 135,558 167,193 35,015 132,178
Average invested capital 24,550 36,410 (11,860) 23,950 31,890 (7,940)
Return on average assets 2.17% 1.18% 99 b.p. 2.14% 1.03% 111 b.p.
Return on invested capital 27.44% 11.67% 1,577 b.p. 28.32% 11.21% 1,711 b.p.
Efficiency ratio 60.69% 62.58% (189 b.p.) 57.53% 64.77% (724 b.p.)
Net charge-offs (annualized) to
average loans -% -% - b.p. 0.47% 0.58% (11 b.p.)
Financial Condition
Securities
We maintain a securities portfolio to enhance profitability, support interest
rate risk management strategies, provide liquidity and comply with regulatory
requirements. Securities are classified as held for investment, available for
sale or trading. See Note 2 to the consolidated financial statements for the
composition of the securities portfolio as of September 30, 2009.
Investment securities, which consist primarily of Oklahoma municipal bonds, are
carried at cost and adjusted for amortization of premiums or accretion of
discounts. At September 30, 2009, investment securities were carried at $238
million and had a fair value of $245 million.
Available for sale securities, which may be sold prior to maturity, are carried
at fair value. Unrealized gains or losses, less deferred taxes, are recorded as
accumulated other comprehensive income in shareholders' equity. The amortized
cost of available for sale securities totaled $8.3 billion at September 30,
2009, up $974 million compared with June 30, 2009. We continued a strategy to
increase the available for sale securities portfolio to supplement earnings
during a period of declining loan demand and readily-available liquidity.
Securities purchased consisted of short-duration mortgage-backed securities
issued by U.S. government agencies. Residential mortgage-backed securities
represented 96% of total available for sale securities. We hold no debt
securities of corporate issuers or mortgage-backed securities holding pools of
commercial real estate loans.
A primary risk of holding mortgage-backed securities comes from extension during
periods of rising interest rates or prepayment during periods of falling
interest rates. We evaluate this risk through extensive modeling of risk both
before making an investment and throughout the life of the security. The
expected duration of the mortgage-backed securities portfolio was approximately
1.9 years at September 30, 2009. Management estimates that the expected duration
would extend to approximately 3.3 years assuming an immediate 300 basis point
upward rate shock. The effect of falling interest rates from current low levels
is not expected to be significant.
53
Mortgage-backed securities also have credit risk from delinquency or default of
the underlying loans. We mitigate 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. At September 30,
2009, approximately $6.7 billion of our mortgage-backed securities, based on
amortized cost, were issued by U.S. government agencies. The fair value of these
mortgage-backed securities totaled $6.9 billion at September 30, 2009. We also
hold amortized cost of $1.3 billion in mortgage-backed securities privately
issued by publicly-owned financial institutions. The fair value of our portfolio
of privately issued mortgage-backed securities totaled $1.1 billion at September
30, 2009.
Our portfolio of mortgage-backed securities originated by private issuers
consists primarily of $1.0 billion of Jumbo-A mortgage loans and $299 million of
Alt-A mortgage loans. Jumbo-A mortgage loans generally meet government agency
underwriting standards, but have loan balances that exceed agency maximums.
Alt-A mortgage loans generally do not have sufficient documentation to meet
government agency underwriting standards. Credit risk on mortgage-backed
securities originated by private issuers is mitigated by investment in senior
tranches with additional collateral support. None of the privately-issued
securities are backed by sub-prime mortgage loans, collateralized debt
obligations or collateralized loan obligations. Approximately 84% of the Alt-A
mortgage-backed securities are credit enhanced with additional collateral
support and 100% of the Alt-A mortgage-backed securities originated in 2006 and
2007 have additional credit support. Approximately 85% of our Alt-A
mortgage-backed securities represents pools of fixed-rate mortgage loans. None
of the adjustable rate mortgages are payment option ARMs. Approximately 63% of
our Jumbo-A securities are credit enhanced with additional collateral support
and 80% of the Jumbo A securities originated in 2006 and 2007 have additional
credit support. Approximately 27% of the Jumbo-A mortgage-backed securities
represents pools of fixed rate mortgage loans. None of the adjustable rate
mortgages are payment option ARMS. During the third quarter of 2009, the
amortized cost of the privately issued mortgage-backed securities decreased $112
million from cash received. The unrealized loss on these securities decreased
$82 million.
Our portfolio of available for sale securities also included preferred stocks
issued by six financial institutions. These preferred stocks have certain
debt-like features such as a quarterly dividend based on LIBOR. However, the
issuers of these stocks have no obligation to redeem them. At September 30,
2009, these stocks have a carrying value and an aggregate fair value of $20
million The aggregate unrealized loss of $2.9 million on these preferred stocks
at June 30, 2009 improved to an aggregate unrealized gain of $287 thousand at
September 30, 2009. No additional other-than-temporary impairments were recorded
on these securities in the third quarter of 2009.
On a quarterly basis, we perform separate evaluations on debt and equity
securities to determine if the unrealized losses are temporary as more fully
described in Note 2 to the financial statements. We recognized a $3.4 million
other-than-temporary impairment charge against earnings in the third quarter of
2009 related to certain private-label residential mortgage-backed securities
that the Company does not intend to sell, including $1.6 million related to an
initial other-than-impairment charge on one security during the third quarter.
The remaining $1.8 million was due to additional other-than-temporary impairment
due to declines in the projected cash flows on securities identified in previous
quarters.
Certain government agency issued residential mortgage-backed securities,
identified as mortgage trading securities, have been designated as economic
hedges of mortgage servicing rights. These securities are carried at fair value
with changes in fair value recognized in current period income. These securities
are held with the intent that gains or losses will offset changes in the fair
value of mortgage servicing rights.
We also maintain a separate trading portfolio of securities acquired with the
intent to sell at a profit to the Company which are carried at fair value with
changes in fair value recognized in current period income.
Bank-Owned Life Insurance
We have approximately $244 million of bank-owned life insurance at September 30,
2009. This investment is expected to provide a long-term source of earnings to
support existing employee benefit programs. Approximately $212 million is held
in separate accounts. Our separate account holdings are invested in diversified
portfolios of investment-grade fixed income securities and cash equivalents,
including U.S. Treasury and Agency securities, residential mortgage-backed
securities, corporate debt, asset-backed and commercial mortgage-backed
securities. The portfolios are managed by unaffiliated professional managers
within parameters established in the portfolio's investment guidelines. The cash
surrender value of certain life insurance policies is further supported by a
stable
54
value wrap, which protects against changes in the fair value of the investments.
At September 30, 2009, the cash surrender value represented by the underlying
fair value of investments held in separate accounts was approximately $221
million. As the underlying fair value of the investments held in a separate
account at September 30, 2009 exceeded the net book value of the investments, no
cash surrender value was supported by the stable value wrap. The stable value
wrap is provided by a well-rated, domestic financial institution. The remaining
cash surrender value of $32 million primarily represented the cash surrender
value of policies held in general accounts and other amounts due from various
insurance companies.
Loans
The aggregate loan portfolio before allowance for loan losses totaled $11.6
billion at September 30, 2009, a $458 million decrease since June 30, 2009.
---------------------------------------------------------------------------------------------------------------------
Table 16 - Loans
(In thousands)
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2009 2009 2009 2008 2008
---------------------------------------------------------------------------------
Commercial:
Energy $ 2,093,802 $ 2,203,558 $ 2,329,237 $ 2,311,813 $ 2,099,996
Services 1,768,454 1,884,097 1,962,297 2,038,451 1,975,604
Wholesale/retail 940,258 1,027,532 1,133,275 1,165,099 1,199,216
Manufacturing 442,729 496,496 514,748 497,957 519,485
Healthcare 745,777 765,285 747,299 777,154 778,819
Agriculture 156,997 157,759 193,863 197,629 229,447
Other commercial and industrial 222,039 181,124 220,811 423,500 471,235
---------------------------------------------------------------------------------------------------------------------
Total commercial 6,370,056 6,715,851 7,101,530 7,411,603 7,273,802
---------------------------------------------------------------------------------------------------------------------
Commercial real estate:
Construction and land development 735,196 818,837 879,368 926,226 968,522
Retail 409,775 413,789 424,565 371,228 375,929
Office 488,564 490,044 486,065 459,357 470,383
Multifamily 339,847 306,175 344,227 316,596 268,614
Industrial 127,845 129,239 150,488 149,367 151,187
Other real estate loans 459,108 453,609 447,368 478,474 479,357
---------------------------------------------------------------------------------------------------------------------
Total commercial real estate 2,560,335 2,611,693 2,732,081 2,701,248 2,713,992
---------------------------------------------------------------------------------------------------------------------
Residential mortgage:
Permanent mortgage 1,348,183 1,362,505 1,339,957 1,273,275 1,193,488
Home equity 481,641 471,470 479,993 479,299 476,465
---------------------------------------------------------------------------------------------------------------------
Total residential mortgage 1,829,824 1,833,975 1,819,950 1,752,574 1,669,953
---------------------------------------------------------------------------------------------------------------------
Consumer:
Indirect automobile 516,062 582,380 650,370 692,615 721,390
Other consumer 335,287 326,029 335,985 317,966 300,833
---------------------------------------------------------------------------------------------------------------------
Total consumer 851,349 908,409 986,355 1,010,581 1,022,223
---------------------------------------------------------------------------------------------------------------------
Total $ 11,611,564 $ 12,069,928 $ 12,639,916 $ 12,876,006 $ 12,679,970
---------------------------------------------------------------------------------------------------------------------
55
The decline in outstanding loan balances was broadly distributed among the
various segments of the portfolio and across geographic markets. Generally, the
decline in outstanding loan balances was due to reduced customer demand in
response to current economic conditions, normal repayment trends and management
decisions to mitigate credit risk by exiting certain loan types and
relationships. A breakdown by geographical market follows:
---------------------------------------------------------------------------------------------------------------------
Table 17 - Loans by Principal Market Area
(In thousands)
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2009 2009 2009 2008 2008
---------------------------------------------------------------------------------
Oklahoma:
Commercial $ 2,738,217 $ 2,918,478 $ 3,119,362 $ 3,356,520 $ 3,368,823
Commercial real estate 815,362 855,742 881,620 843,576 827,357
Residential mortgage 1,245,917 1,249,104 1,234,417 1,196,924 1,134,066
Consumer 483,369 521,431 562,021 579,809 580,211
---------------------------------------------------------------------------------
Total Oklahoma $ 5,282,865 $ 5,544,755 $ 5,797,420 $ 5,976,829 $ 5,910,457
---------------------------------------------------------------------------------
Texas:
Commercial $ 2,075,379 $ 2,182,756 $ 2,277,186 $ 2,353,860 $ 2,205,169
Commercial real estate 734,742 741,199 816,830 825,769 853,653
Residential mortgage 335,797 345,780 337,044 315,438 307,655
Consumer 188,374 196,752 214,134 212,820 214,133
---------------------------------------------------------------------------------
Total Texas $ 3,334,292 $ 3,466,487 $ 3,645,194 $ 3,707,887 $ 3,580,610
---------------------------------------------------------------------------------
New Mexico:
Commercial $ 344,910 $ 380,378 $ 393,180 $ 418,732 $ 442,644
Commercial real estate 344,988 313,190 315,511 286,574 281,061
Residential mortgage 88,271 90,944 99,805 98,018 95,165
Consumer 18,176 18,826 19,900 18,616 18,296
---------------------------------------------------------------------------------
Total New Mexico $ 796,345 $ 803,338 $ 828,396 $ 821,940 $ 837,166
---------------------------------------------------------------------------------
Arkansas:
Commercial $ 99,559 $ 97,676 $ 99,955 $ 103,446 $ 104,630
Commercial real estate 128,984 133,026 133,227 134,015 127,925
Residential mortgage 19,128 19,015 17,145 16,875 16,941
Consumer 136,461 152,620 168,971 175,647 183,543
---------------------------------------------------------------------------------
Total Arkansas $ 384,132 $ 402,337 $ 419,298 $ 429,983 $ 433,039
---------------------------------------------------------------------------------
Colorado:
Commercial $ 569,549 $ 595,858 $ 675,223 $ 660,546 $ 598,519
Commercial real estate 249,879 269,923 267,035 261,820 266,739
Residential mortgage 68,667 58,557 59,120 53,875 49,676
Consumer 18,272 14,097 14,599 16,141 18,328
---------------------------------------------------------------------------------
Total Colorado $ 906,367 $ 938,435 $ 1,015,977 $ 992,382 $ 933,262
---------------------------------------------------------------------------------
Arizona:
Commercial $ 219,330 $ 215,540 $ 211,953 $ 211,356 $ 213,861
Commercial real estate 257,169 262,607 285,841 319,525 326,615
Residential mortgage 57,304 58,265 61,605 62,123 58,800
Consumer 4,826 3,229 5,261 6,075 5,551
---------------------------------------------------------------------------------
Total Arizona $ 538,629 $ 539,641 $ 564,660 $ 599,079 $ 604,827
---------------------------------------------------------------------------------
Kansas / Missouri:
Commercial $ 323,112 $ 325,165 $ 324,671 $ 307,143 $ 340,156
Commercial real estate 29,211 36,006 32,017 29,969 30,642
Residential mortgage 14,740 12,310 10,814 9,321 7,650
Consumer 1,871 1,454 1,469 1,473 2,161
---------------------------------------------------------------------------------
Total Kansas / Missouri $ 368,934 $ 374,935 $ 368,971 $ 347,906 $ 380,609
---------------------------------------------------------------------------------
Total BOK Financial loans $ 11,611,564 $ 12,069,928 $ 12,639,916 $ 12,876,006 $ 12,679,970
---------------------------------------------------------------------------------
56
Commercial
Commercial loans represent loans for working capital, facilities acquisition or
expansion, purchases of equipment and other needs of commercial customers
primarily located within our geographical footprint. Commercial loans are
underwritten individually and represent on-going relationships based on a
thorough knowledge of the customer, the customer's industry and market. While
commercial loans are generally secured by the customer's assets including real
property, inventory, accounts receivable, operating equipment, interests in
mineral rights and other property and may also include personal guarantees of
the owners and related parties, the primary source of repayment of the loans is
the on-going cash flow from operations of the customer's business. Inherent
lending risks are centrally monitored on a continuous basis from underwriting
throughout the life of the loan for compliance with commercial lending policies.
The commercial loan portfolio decreased $346 million during the third quarter of
2009 to $6.4 billion at September 30, 2009. The decrease in outstanding
commercial loans was primarily due to decreases of $116 million in service
sector loans, $110 million in energy sector loans and $87 million in
wholesale/retail sector loans. Commercial loan origination activity has slowed
to less than amounts necessary to offset normal repayment trends in the
portfolio. In general, loan demand has softened due to lower working capital
needs and less capital project spending by our customers. The commercial sector
of our loan portfolio is distributed as follows (in thousands):
Table 18 - Commercial Loans by Principal Market Area
Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/ Total
Missouri
------------ ------------ ------------ ---------- ---------- ---------- ------------ ------------
Energy $994,508 $763,857 $ 6,119 $ 2,634 $321,294 $ - $ 5,390 $2,093,802
Services 506,900 603,285 207,229 27,996 155,633 150,563 116,848 1,768,454
Wholesale/retail 471,816 277,055 50,983 52,704 26,198 36,542 24,960 940,258
Manufacturing 226,137 133,828 49,182 1,535 21,777 5,783 4,487 442,729
Healthcare 410,942 258,620 9,706 14,289 28,698 22,812 710 745,777
Agriculture 26,590 3,958 148 32 250 - 126,019 156,997
Other commercial
and industrial 101,324 34,776 21,543 369 15,699 3,630 44,698 222,039
----------------------------- ------------ ------------ ------------ ---------- ---------- ---------- ------------ ------------
Total commercial loans $2,738,217 $2,075,379 $344,910 $ 99,559 $569,549 $219,330 $323,112 $6,370,056
----------------------------- ------------ ------------ ------------ ---------- ---------- ---------- ------------ ------------
Loans to energy producers and borrowers related to the energy industry are the
largest portion of our commercial loan portfolio. In addition, energy production
and related industries have a significant impact on the economy in our primary
markets. We have always been an energy lender and this continues to be an area
of expertise. Loans collateralized by oil and gas properties are subject to a
semi-annual engineering review by our internal staff of petroleum engineers.
This review is utilized as the basis for developing the expected cash flows
supporting the loan amount. The projected cash flows are discounted according to
risk characteristics of the underlying oil and gas properties. Loans are
evaluated to demonstrate with reasonable certainty that crude oil, natural gas
and natural gas liquids can be recovered from known oil and gas reservoirs under
existing economic and operating conditions at current pricing levels and with
existing conventional equipment and operating methods and costs. As part of our
evaluation of credit quality, we analyze rigorous stress tests over a range of
commodity prices and take proactive steps to mitigate risk when appropriate.
Energy loans totaled $2.1 billion or 18% of total loans. Outstanding energy
loans decreased $110 million during the third quarter of 2009 primarily due to
low customer loan demand as a result of low commodity prices which has led to
curtailed exploration and production of oil and gas reserves and reduced
borrowing capacity based upon collateral values. Approximately $1.8 billion of
energy loans were to oil and gas producers, down from $1.9 billion at June 30,
2009. Approximately 52% of the committed amount of energy production loans are
primarily secured by natural gas properties and 48% are primarily secured by oil
properties. The energy category also included approximately $133 million of
loans to borrowers that provide services to the energy industry, $79 million of
loans to borrowers engaged in wholesale or retail energy sales and $53 million
of loans to borrowers that manufacture equipment primarily for the energy
industry.
The services sector of the loan portfolio totaled $1.8 billion or 15% of total
loans and consists of a large number of
57
loans to a variety of businesses, including communications, gaming and
transportation services. Approximately $1.1 billion of the services category is
made up of loans with individual balances of less than $10 million. Service
sector loans are generally secured by the assets of the borrower with repayment
coming from the cash flows of ongoing operations of the customer's business.
Loans in this sector may also be secured by personal guarantees of the owners or
related parties. Outstanding loans to the service sector of the loan portfolio
decreased $116 million during the third quarter of 2009 due to reduced loan
demand as a result of general economic conditions.
We participate 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 September 30, 2009, the outstanding
principal balance of these loans totaled $1.6 billion. Substantially all of
these loans are to borrowers with local market relationships. We serve as the
agent lender in approximately 21% of its shared national credits, based on
dollars committed. We hold shared national credits to the same standard of
analysis and perform the same level of review as internally originated credits.
Our lending policies generally avoid loans in which we do not have the
opportunity to maintain or achieve other business relationships with the
customer. In addition to management's quarterly assessment of credit risk,
grading of shared national credits is provided annually by banking regulators.
Risk grading provided by the regulators in the third quarter of 2009 did not
differ significantly from management's assessment.
Commercial Real Estate
Commercial real estate represents loans for the construction of buildings or
other improvements to real estate and property held by borrowers for investment
purposes within our geographical footprint. We require collateral values in
excess of the loan amounts, demonstrated cash flows in excess of expected debt
service requirements, equity investment in the project and a portion of the
project already sold, leased or permanent financing already secured. The
expected cash flows from all significant new or renewed income producing
property commitments are stress tested to reflect the risks in varying interest
rates, vacancy rates and rental rates. As with commercial loans, inherent
lending risks are centrally monitored on a continuous basis from underwriting
throughout the life of the loan for compliance with applicable lending policies.
Commercial real estate loans totaled $2.6 billion or 22% of the loan portfolio
at September 30, 2009. Over the past five years, the percentage of commercial
real estate loans to our total loan portfolio ranged from 20% to 23%. The
outstanding balance of commercial real estate loans decreased $51 million from
the previous quarter end. The commercial real estate sector of our loan
portfolio is distributed as follows (in thousands):
Table 19 - Commercial Real Estate Loans by Principal Market Area
Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/ Total
Missouri
------------ ------------- ------------ ----------- ----------- ----------- ---------- -------------
Construction and $ 203,266 $ 178,883 $ 84,216 $ 18,409 $142,942 $ 100,270 $7,210 $ 735,196
land development
Retail 138,340 117,567 62,659 17,207 11,292 49,990 12,720 409,775
Office 151,091 132,500 79,255 13,451 65,150 46,716 401 488,564
Multifamily 91,117 133,742 38,210 56,100 4,856 9,106 6,716 339,847
Industrial 62,535 32,205 18,894 716 1,499 11,919 77 127,845
Other real estate loans 169,013 139,845 61,754 23,101 24,140 39,168 2,087 459,108
-------------------------- ------------ ------------- ------------ ----------- ----------- ----------- ---------- -------------
Total commercial
real estate loans $ 815,362 $ 734,742 $ 344,988 $ 128,984 $249,879 $ 257,169 $29,211 $2,560,335
-------------------------- ------------ ------------- ------------ ----------- ----------- ----------- ---------- -------------
Construction and land development loans, which consisted primarily of
residential construction properties and developed building lots, decreased $84
million from June 30, 2009 to $735 million at September 30, 2009 due to
payments, transfers to other real estate owned and charge-offs. This sector of
the loan portfolio is expected to continue to decrease as construction projects
currently in process are completed. This decrease was offset by a $34 million
increase in loans secured by multifamily residential properties, primarily in
the New Mexico and Texas markets.
Residential Mortgage and Consumer
Residential mortgage loans provide funds for our customers to purchase or
refinance their primary residence or to borrow against the equity in their home.
Residential mortgage loans are secured by a first or second-mortgage on the
58
customer's primary residence. Consumer loans include direct loans secured by and
for the purchase of automobiles, recreational and marine equipment as well as
other unsecured loans. Consumer loans also include indirect automobile loans
made through primary dealers. Residential mortgage and consumer loans are made
in accordance with underwriting policies we believe to be conservative and are
fully documented. Credit scoring is assessed based on significant credit
characteristics including credit history, residential and employment stability.
Residential mortgage loans totaled $1.8 billion, essentially unchanged from June
30, 2009. Permanent 1-4 family mortgage loans decreased $14 million and home
equity loans increased $10 million. In general, we sell the majority of our
conforming fixed-rate loan originations in the secondary market. We have no
concentration in sub-prime residential mortgage loans and our mortgage loan
portfolio does not include payment option adjustable rate mortgage loans or
adjustable rate mortgage loans with initial rates that are below market.
The permanent mortgage loan portfolio is primarily composed of various mortgage
programs to support customer relationships including jumbo mortgage loans,
non-builder construction loans and special loans programs for high net worth
individuals or certain professionals. The aggregate outstanding balance of loans
in these programs is $1.1 billion. Jumbo loans may be fixed or variable rate and
are fully amortizing. Jumbo loans generally conform to government sponsored
entity standards, with exception that the loan size exceeds maximums required
under these standards. These loans generally require a minimum FICO score of 720
and a maximum debt-to-income ratio ("DTI") of 38%. Loan-to-value ratios ("LTV")
are tiered from 60% to 100%, depending on the market. Special mortgage programs
include fixed and variable rate fully amortizing loans tailored to the needs of
certain health-care professionals. Variable rate loans are fully indexed at
origination and may have fixed rates for three to ten years, then adjust
annually thereafter. The maximum loan amount of any of our residential mortgage
loans products is $4 million. Jumbo loans generally conform to government
sponsored entity standards, with exception that the loan size exceeds maximums
required under these standards.
Approximately $116 million or 9% of permanent mortgage loans consist of first
lien, fixed rate residential mortgage loans originated under various community
development programs. These loans were underwritten to standards approved by
various U.S. government agencies under these programs and include full
documentation. However, these loans do have a higher risk of delinquency and
losses given default than traditional residential mortgage loans. The initial
maximum LTV of loans in these programs was 103%.
The composition of residential mortgage and consumer loans at September 30, 2009
is as follows (in thousands):
Table 20 - Residential Mortgage and Consumer Loans by Principal Market Area
Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/ Total
Missouri
-------------------------- ------------ ------------- ------------ ----------- ----------- ----------- ---------- -------------
Permanent mortgage $ 948,980 $251,819 $ 23,003 $14,396 $49,754 $48,882 $ 11,349 $ 1,348,183
Home equity 296,937 83,978 65,268 4,732 18,913 8,422 3,391 481,641
-------------------------- ------------ ------------- ------------ ----------- ----------- ----------- ---------- -------------
Total residential mortgage $ 1,245,917 $ 335,797 $88,271 $19,128 $68,667 $57,304 $ 14,740 $ 1,829,824
-------------------------- ------------ ------------- ------------ ----------- ----------- ----------- ---------- -------------
Consumer:
Indirect automobile $313,991 $ 69,678 $ - $132,393 $ - $ - $ - 516,062
Other consumer 169,378 118,696 18,176 4,068 18,272 4,826 1,871 335,287
-------------------------- ------------ ------------- ------------ ----------- ----------- ----------- ---------- -------------
Total consumer $483,369 $188,374 $ 18,176 $136,461 $ 18,272 $ 4,826 $ 1,871 $851,349
-------------------------- ------------ ------------- ------------ ----------- ----------- ----------- ---------- -------------
Indirect automobile loans decreased $66 million since June 30, 2009, primarily
due to the previously-disclosed decision by the Company to exit the business in
the first quarter of 2009 in favor of a customer-focused direct lending
approach.
Loan Commitments
We enter into certain off-balance sheet arrangements in the normal course of
business. These arrangements included loan commitments which totaled $5.0
billion and standby letters of credit which totaled $581 million at September
30, 2009. Loan commitments may be unconditional obligations to provide financing
or conditional obligations that depend on the borrower's financial condition,
collateral value or other factors. Standby letters of credit are
59
unconditional commitments to guarantee the performance of our customer to a
third party. Since some of these commitments are expected to expire before being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Approximately $8.9 million of the outstanding standby letters
of credit were issued on behalf of customers whose loans are non-performing at
September 30, 2009.
We also have 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 September 30, 2009, the principal
balance of loans sold subject to recourse obligations totaled $345 million
compared to $346 million at June 30, 2009. Substantially all of these loans are
to borrowers in our primary markets including $242 million to borrowers in
Oklahoma, $38 million to borrowers in Arkansas, $20 million to borrowers in New
Mexico, $17 million to borrowers in the Kansas City area and $16 million to
borrowers in Texas. The separate reserve for these off-balance sheet commitments
was $11.2 million at September 30, 2009. Approximately 4.81% of the loans sold
with recourse with an outstanding principal balance of $17 million were either
delinquent more than 90 days, in bankruptcy or in foreclosure, and 6.27% were
past due 30 to 89 days. The provision for credit losses on loans sold with
recourse, which is included in mortgage banking costs, was $2.0 million for the
third quarter of 2009. Net losses charged against the reserve totaled $1.5
million for the third quarter of 2009.
Derivatives with Credit Risk
We offer programs that permit our 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 the Company. Offsetting contracts are
executed between the Company and selected counterparties to minimize the risk to
the Company of changes in commodity prices, interest rates or foreign exchange
rates. The counterparty contracts are identical to the customer contracts,
except for a fixed pricing spread or a fee paid to us as compensation for
administrative costs, credit risk and profit.
The customer derivative programs create credit risk for potential amounts due to
the Company from our 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 the Company recognizing a loss
as the fair value of the affected contracts may no longer move in tandem with
the offsetting contracts. This occurs if the credit standing of the customer or
counterparty deteriorated such that either the fair value of underlying
collateral no longer supported the contract or the customer or counterparty's
ability to provide margin collateral was impaired.
Derivative contracts are carried at fair value. At September 30, 2009, the net
fair values of derivative contracts, excluding cash margin, reported as assets
under these programs totaled $412 million, down from $476 million at June 30,
2009 due primarily to cash settlements and reduced transaction volumes. At
September 30, 2009, derivative contracts carried as assets included primarily
energy contracts with fair values of $215 million, interest rate contracts with
fair values of $137 million, and foreign exchange contracts with fair values of
$54 million. The aggregate net fair values of derivative contracts, excluding
cash margin, reported as liabilities totaled $417 million.
At September 30, 2009, total derivative assets were reduced by $17 million of
cash collateral received from
60
counterparties and total derivative liabilities were reduced by $22 million of
cash collateral paid to counterparties related to instruments executed with the
same counterparty under a master netting agreement as permitted by GAAP.
A table showing the notional and the fair value of derivative assets and
liabilities on both a gross and net basis is presented in Note 3 to the
Consolidated Financial Statements (Unaudited).
The fair value of derivative contracts reported as assets under these programs,
net of cash margin held by the Company, by category of debtor at September 30,
2009 was (in thousands):
Table 21 - Fair Value of Derivative Contracts
Customers $ 180,380
Energy companies 123,110
Banks 85,896
Exchanges 175
Other 5,817
---------------------------------------------------------------- -----------
Fair value of customer hedge asset derivative contracts, net $395,378
---------------------------------------------------------------- -----------
The largest net amount due from a single counterparty, a domestic subsidiary of
a major energy company, at September 30, 2009 was $116 million. This amount was
offset by $140 million in letters of credit issued by multiple independent
financial institutions.
Our customer derivative program also introduces liquidity and capital risk. We
are required to provide cash margin to certain counterparties when the net
negative fair value of the contracts exceeds established limits. Also, changes
in commodity prices affect the amount of regulatory capital we are required to
hold as support for the fair value of our derivative assets. These risks are
modeled as part of the management of these programs. Based on current prices, a
decrease in market prices to the equivalent of $35 per barrel of oil would
increase the fair value of derivative assets by $313 million, with dealer
counterparties comprising the bulk of the assets. An increase in prices to the
equivalent of $110 per barrel of oil would increase the fair value of derivative
assets by $465 million as current prices move away from the fixed prices
embedded in our existing contracts. Further increases in prices to the
equivalent of $125 per barrel of oil would increase the fair value of our
derivative assets by $627 million with lending customers comprising the bulk of
the assets.
61
Summary of Loan Loss Experience
We maintain separate reserves for loan losses and reserves for off-balance sheet
credit risk. The combined allowance for loan losses and reserve for off-balance
sheet credit losses totaled $293 million or 2.52% of outstanding loans at
September 30, 2009 and 77% of non-accruing loans at September 30, 2009. The
allowance for loan losses was $281 million and the reserve for off-balance sheet
credit losses was $12 million. At June 30, 2009, the combined allowance for loan
losses and reserve for off-balance sheet credit losses totaled $274 million or
2.27% of outstanding loans and 77% of non-accruing loans.
------------------------------------------------------------------------------------------------------------------------------
Table 22 - Summary of Loan Loss Experience
(In thousands)
Three Months Ended
----------------------------------------------------------------------------------
September 30, June 30, March 31, Dec. 31, Sept. 30,
2009 2009 2009 2008 2008
----------------------------------------------------------------------------------
Reserve for loan losses:
Beginning balance $ 263,309 $ 251,002 $ 233,236 $ 186,516 $ 154,018
Loans charged off:
Commercial 12,026 9,135 15,791 25,837 11,393
Commercial real estate 17,407 17,186 10,215 573 14,394
Residential mortgage 3,479 5,373 1,765 2,476 2,865
Consumer 5,669 5,715 6,764 6,795 5,274
------------------------------------------------------------------------------------------------------------------------------
Total 38,581 37,409 34,535 35,681 33,926
------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 858 692 356 220 11,882 (1)
Commercial real estate 20 83 41 7 175
Residential mortgage 201 179 214 122 65
Consumer 1,515 1,518 2,053 1,673 1,590
------------------------------------------------------------------------------------------------------------------------------
Total 2,594 2,472 2,664 2,022 13,712
------------------------------------------------------------------------------------------------------------------------------
Net loans charged off 35,987 34,937 31,871 33,659 20,214
Provision for loan losses 53,580 47,244 49,637 80,379 52,712
------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 280,902 $ 263,309 $ 251,002 $ 233,236 $ 186,516
------------------------------------------------------------------------------------------------------------------------------
Reserve for off-balance sheet credit losses:
Beginning balance $ 10,445 $ 10,569 $ 15,166 $ 22,544 $ 22,545
Provision for off-balance sheet credit losses 1,540 (124) (4,597) (7,378) (1)
------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 11,985 $ 10,445 $ 10,569 $ 15,166 $ 22,544
------------------------------------------------------------------------------------------------------------------------------
Total provision for credit losses $ 55,120 $ 47,120 $ 45,040 $ 73,001 $ 52,711
------------------------------------------------------------------------------------------------------------------------------
Reserve for loan losses to loans
outstanding at period-end 2.42% 2.18% 1.99% 1.81% 1.47%
Net charge-offs (annualized)
to average loans 1.21 1.13 1.00 1.05 0.64
Total provision for credit losses (annualized)
to average loans 1.85 1.52 1.41 2.28 1.67
Recoveries to gross charge-offs 6.72 6.61 7.71 5.67 40.42
Reserve for loan losses as a multiple of net
charge-offs (annualized) 1.95x 1.88x 1.97x 1.73x 2.31x
Reserve for off-balance sheet credit losses to
off-balance sheet credit commitments 0.22% 0.19% 0.19% 0.27% 0.38%
Combined reserves for credit losses to loans
outstanding at period-end 2.52 2.27 2.07 1.93 1.65
------------------------------------------------------------------------------------------------------------------------------
(1) Includes a $7.1 million recovery of a loan charged off in 2005 and a $4.0
million recovery of a loan charged off in 2001.
Allowance for Loan Losses
The adequacy of the allowance for loan losses is assessed by management based on
an ongoing quarterly evaluation of the probable estimated losses inherent in the
portfolio. The allowance consists of specific reserves attributed to impaired
loans, general reserves based on migration factors and non-specific reserves
based on general economic, risk concentration and related factors. An
independent Credit Administration department is responsible for performing this
evaluation for the entire company to ensure that the methodology is applied
consistently. For the nine months ended September 30, 2009, there have been no
material changes in the approach or techniques utilized
62
in developing the allowance for loan losses.
Specific reserves for impaired loans are determined by evaluation of estimated
future cash flows, collateral value or historical statistics. Loans are
considered to be impaired when it is probable that we will not be able 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 non-accrual status. Generally, all non-accruing commercial
and commercial real estate loans are considered impaired. Substantially all
impaired loans are collateralized. Collateral includes real property, inventory,
accounts receivable, operating equipment, interests in mineral rights, and other
property. Collateral may also include personal guaranties by borrowers and
related parties.
Delinquency status is not a significant consideration in the evaluation of
impairment or risk-grading of commercial or commercial real estate loans. These
evaluations are based on an assessment of the borrowers' paying capacity and
attempt to identify changes in credit risk before payments become delinquent.
Changes in the delinquency trends of residential mortgage loans and consumer
loans may indicate increases or decreases in expected losses.
Impaired loans are charged-off when the loan balance or a portion of the loan
balance is no longer supported by the paying capacity of the borrower based on
an evaluation of available cash resources or collateral value. No reserves are
attributed to the remaining balance of loans that have been charged-down to
amounts management expects to recover. Impaired loans totaled $358 million at
September 30, 2009 and $328 million at June 30, 2009. At September 30, 2009,
$247 million of impaired loans had $38 million of specific reserves and $111
million had no specific reserves. Impaired loans with a gross outstanding
principal balance of $234 million have been charged down to an estimated
recoverable balance of $111 million. Cumulative life-to-date charge-offs of
impaired loans with no specific reserves at September 30, 2009 totaled $123
million, including $24 million charged off in the third quarter of 2009. At June
30, 2009, $229 million of impaired loans had $34 million of specific reserves
and $99 million had no specific reserves.
General reserves for unimpaired loans are based on migration models. Separate
migration models are used to determine general reserves for commercial and
commercial real estate loans, residential mortgage loans, and consumer loans.
All commercial and commercial real estate loans are risk-graded based on an
evaluation of the borrowers' ability to repay the loans. Migration factors are
determined for each risk-grade to determine the inherent loss based on
historical trends. We use an eight-quarter aggregate accumulation of net losses
as a basis for the migration factors. Greater emphasis is placed on losses
incurred in more recent periods. The higher of current loss factors based on
migration trends or a minimum migration factor based upon long-term history is
assigned to each risk grade. The general reserve for residential mortgage loans
is based on an eight-quarter average percent of loss. The general reserve for
consumer loans is based on an eight-quarter average percent of loss with
separate migration factors determined by major product line, such as indirect
automobile loans and direct consumer loans. The aggregate amount of general
reserves determined by migration factors for all unimpaired loans totaled $217
million at September 30, 2009 and $204 million at June 30, 2009.
Nonspecific reserves are maintained for risks beyond factors specific to a
particular loan or identified by the migration models. These factors include
trends in the economy in our primary lending areas, conditions in certain
industries where we have a concentration and overall growth in the loan
portfolio. In addition, migration factors used to determine general reserves
based on historical losses are inherently backward-looking. Evaluation of
nonspecific factors consider the effect of the duration of the business cycle on
migration factors. Nonspecific factors also consider current economic conditions
and other relevant factors. Aggregate of nonspecific reserves totaled $27
million at September 30, 2009 and $25 million at June 30, 2009.
The provision for credit losses is the amount necessary to maintain the
allowance for loan losses at an amount determined by management to be adequate
based on its evaluation. The provision for credit losses totaled $55.1 million
for the third quarter of 2009, $47.1 million for the second quarter of 2009 and
$52.7 million for the third quarter of 2008. Factors considered in determining
the provision for credit losses for the third quarter of 2009 included trends of
net charge-offs, nonperforming loans and risk grading. These trends generally
have indicated increasing credit risk.
Net Loans Charged-Off
Loans are charged off against the allowance for loan losses when the loan
balance or a portion of the loan balance is no longer covered by the paying
capacity of the borrower based on an evaluation of available cash resources and
63
collateral value. Collateral values are generally evaluated annually, or more
frequently for certain collateral types or collateral located in certain
distressed markets. Loans are evaluated quarterly and charge-offs are taken in
the quarter in which the loss is identified.
Net loans charged off during the third quarter of 2009 totaled $36.0 million
compared to $34.9 million in the previous quarter and $20.2 million in the third
quarter of 2008. Net loans charged off in the third quarter of 2008 included
recoveries of $7.1 million from a loan charged off in 2005 and $4.0 million from
a loan charged off in 2001. The ratio of net loans charged off (annualized) to
average outstanding loans was 1.21% for the third quarter of 2009 compared with
1.13% for the second quarter of 2009 and 0.64% for the third quarter of 2008.
Gross loans charged off in the third quarter of 2009 increased to $38.6 million
from $37.4 million in the second quarter of 2009. Recoveries of loans previously
charged off were $2.6 million in the third quarter of 2009, an increase of $122
thousand over the previous quarter.
Net loans charged off by category and principal market area during the third
quarter of 2009 is as follows (in thousands):
Table 23 - Net Loans Charged Off
Oklahoma Texas Colorado Arkansas New Arizona Kansas/ Total
Mexico Missouri
------------ --------- ---------- ----------- --------- --------- ----------- ---------
Commercial $7,003 $1,736 $2,255 $ (12) $ 221 $(35) $ - $11,168
Commercial real estate 497 876 9,815 - 2,041 4,158 - 17,387
Residential mortgage 2,103 328 75 36 210 526 - 3,278
Consumer 2,049 1,081 51 709 259 5 - 4,154
---------------------------- ------------ --------- ---------- ----------- --------- --------- ----------- ---------
Total net loans charged off $ 11,652 $ 4,021 $12,196 $ 733 $ 2,731 $4,654 $ - $35,987
---------------------------- ------------ --------- ---------- ----------- --------- --------- ----------- ---------
Net commercial loans charged off during the third quarter of 2009 increased $2.7
million over the prior quarter and included $9.0 million from the energy sector
of the loan portfolio and $1.3 million from the wholesale / retail sector of the
loan portfolio. Commercial real estate loans charged off during the third
quarter of 2009 included $16.3 million in the land and residential construction
sector of the loan portfolio, primarily composed of $9.8 million in the Colorado
market and $4.1 million in the Arizona market. Net commercial real estate loans
charged off increased $284 thousand over the prior quarter including a $9.3
million reduction in net loans charged off in the Arizona market, largely offset
by increased charge-offs of $9.2 million in the Colorado market. Commercial loan
charge-offs in Colorado largely consisted of a loan to a single borrower.
Residential mortgage net charge-offs declined $1.9 million compared to the
previous quarter, primarily related to a $1.7 million net improvement in the
Texas market. Consumer loan net charge-offs, which includes indirect auto loan
and deposit account overdraft losses, were down slightly compared to the
previous quarter. Net charge-offs of indirect auto loans totaled $2.8 million
for the third quarter of 2009 and $2.2 million for the second quarter of 2009.
The Company considers the credit risk from loan commitments and letters of
credit in its evaluation of the adequacy of the reserve for loan losses. A
separate reserve for off-balance sheet credit risk is maintained. Table 24
presents the trend of reserves for off-balance sheet credit losses and the
relationship between the reserve and loan commitments. The provision for credit
losses included the combined charge to expense for both the reserve for loan
losses and the reserve for off-balance sheet credit losses. All losses incurred
from lending activities will ultimately be reflected in charge-offs against the
reserve for loan losses following funds advanced against outstanding commitments
and after the exhaustion of collection efforts.
64
Nonperforming Assets
----------------------------------------------------------------------------------------------------------------------
Table 24 - Nonperforming Assets
(In thousands)
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2009 2009 2009 2008 2008
-----------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 128,266 $ 126,510 $ 128,501 $ 134,846 $ 105,757
Commercial real estate 212,418 189,586 175,487 137,279 78,235
Residential mortgage 38,220 35,860 34,182 27,387 27,075
Consumer 3,897 1,037 1,065 561 758
----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 382,801 352,993 339,235 300,073 211,825
Renegotiated loans (3) 17,426 17,479 13,623 13,039 12,326
----------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 400,227 370,472 352,858 313,112 224,151
Other nonperforming assets 89,507 75,243 61,383 29,179 28,088
----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 489,734 $ 445,715 $ 414,241 $ 342,291 $ 252,239
----------------------------------------------------------------------------------------------------------------------
Nonaccrual loans by principal market:
Oklahoma $ 112,610 $ 108,490 $ 105,536 $ 108,367 $ 87,885
Texas 65,911 51,582 55,225 42,934 29,141
New Mexico 35,541 29,640 18,046 16,016 12,293
Arkansas 5,911 3,888 4,078 3,263 3,386
Colorado (4) 50,432 45,794 38,567 32,415 20,980
Arizona 108,161 106,076 111,772 80,994 54,832
Kansas / Missouri 4,235 7,523 6,011 16,084 3,308
----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans $ 382,801 $ 352,993 $ 339,235 $ 300,073 $ 211,825
----------------------------------------------------------------------------------------------------------------------
Nonaccrual loans by loan portfolio sector:
Commercial:
Energy $ 48,992 $ 53,842 $ 49,618 $ 49,364 $ 49,839
Manufacturing 17,429 16,975 18,248 7,343 6,479
Wholesale / retail 7,623 10,983 8,650 18,773 7,806
Agriculture 98 105 115 680 755
Services 30,094 24,713 30,226 36,873 26,581
Healthcare 13,758 14,222 14,288 12,118 3,300
Other 10,272 5,670 7,356 9,695 10,997
----------------------------------------------------------------------------------------------------------------------
Total commercial 128,266 126,510 128,501 134,846 105,757
Commercial real estate:
Land development and construction 113,868 97,425 99,922 76,082 53,624
Retail 22,254 17,474 9,893 15,625 13,011
Office 31,406 27,685 23,305 7,637 3,022
Multifamily 28,223 27,827 27,198 24,950 896
Industrial 527 527 575 6,287 390
Other commercial real estate 16,140 18,648 14,594 6,698 7,292
----------------------------------------------------------------------------------------------------------------------
Total commercial real estate 212,418 189,586 175,487 137,279 78,235
Residential mortgage:
Permanent mortgage 36,431 34,149 32,848 26,233 26,401
Home equity 1,789 1,711 1,334 1,154 674
----------------------------------------------------------------------------------------------------------------------
Total residential mortgage 38,220 35,860 34,182 27,387 27,075
Consumer 3,897 1,037 1,065 561 758
----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans $ 382,801 $ 352,993 $ 339,235 $ 300,073 $ 211,825
----------------------------------------------------------------------------------------------------------------------
Ratios:
Reserve for loan losses to nonperforming loans 70.19% 71.07% 71.13% 74.49% 83.21%
Nonperforming loans to period-end loans 3.45 3.07 2.79 2.43 1.77
----------------------------------------------------------------------------------------------------------------------
Loans past due (90 days or more) (1) $ 24,238 $ 32,479 $ 46,123 (2$ 19,123 $ 20,213
----------------------------------------------------------------------------------------------------------------------
(1) Includes residential mortgages guaranteed
by agencies of the U.S. Government. $ 2,589 $ 1,337 $ 395 $ 872 $ 1,210
(2) Includes a $23 million loan that was paid
current after March 31, 2009.
(3) Includes residential mortgages guaranteed
by agencies of the U.S. Government.
These loans have been modified to extend
payment terms and/or reduce interest 11,234 11,079 10,514 10,396 9,604
rates to current market.
(4) Includes loans subject to First United
Bank sellers escrow. 4,173 8,305 11,287 13,181 13,262
----------------------------------------------------------------------------------------------------------------------
65
Non-performing assets totaled $490 million or 4.18% of outstanding loans and
repossessed assets at September 30, 2009, up $44 million since June 30, 2009. In
addition to $383 million of non-accruing loans, non-performing assets included
$17 million of restructured residential mortgage loans and $90 million of real
estate and other repossessed assets. Renegotiated commercial and commercial real
estate loans are reported as non-accruing loans. Non-performing assets included
$11 million of restructured residential mortgage loans guaranteed by agencies of
the U.S. government and $10 million of loans and repossessed assets acquired
with First United Bank in the second quarter of 2007. The Company will be
reimbursed by the sellers up to $5.3 million for any losses incurred during a
three-year period after the June 2007 acquisition date. A roll forward of
non-performing assets as of September 30, 2009 is as follows:
Table 25 - Rollforward of Non-Performing Assets
(In thousands)
For the three months ended September 30, 2009
------------------------------------------------------------
Real estate
and other Total
Non-Accruing Renegotiated repossessed non-performing
Loans Loans assets assets
------------ --------------- --------------- ---------------
Beginning balance $352,993 $ 17,479 $ 75,243 $445,715
Additions 104,522 - - 104,522
Payments (26,637) - - (26,637)
Chargeoffs / Writeoffs (27,948) - (3,130) (31,078)
Foreclosures (20,613) - 20,613 -
Sales - - (3,872) (3,872)
Return to accrual (278) - - (278)
Other, net 762 (53) 653 1,362
----------------------- ------------ --------------- --------------- ---------------
Ending balance $382,801 $ 17,426 $ 89,507 $489,734
----------------------- ------------ --------------- --------------- ---------------
For the nine months ended September 30, 2009
------------------------------------------------------------
Real estate
Non-Accruing Renegotiated and other Total
Loans Loans repossessed non-performing
assets assets
------------ --------------- --------------- ---------------
Beginning balance $300,073 $ 13,039 $ 29,179 $342,291
Additions 287,741 - - 287,741
Payments (51,108) - - (51,108)
Chargeoffs/ (74,951) - (4,055) (79,006)
Writeoffs
Foreclosures (72,955) - 72,955 -
Sales - - (10,529) (10,529)
Return to accrual (653) - - (653)
Other, net (5,346) 4,387 1,957 998
----------------------- ------------ --------------- --------------- ---------------
Ending balance $ 382,801 $ 17,426 $ 89,507 $ 489,734
----------------------- ------------ --------------- --------------- ---------------
66
The distribution of non-accruing loans among our various markets was:
Table 26 - Non-Accruing Loans by Principal Market
(In thousands)
September 30, 2009 June 30, 2009 Change
--------------------------- --------------------------- ---------------------------
Amount % of Amount % of Amount % of
outstanding outstanding outstanding
loans loans loans
-------------------------------------------------------------------------------------
Oklahoma $112,610 2.13% $108,490 1.96% $ 4,120 17 b.p.
Texas 65,911 1.98 51,582 1.49 14,329 49
New Mexico 35,541 4.46 29,640 3.69 5,901 77
Arkansas 5,911 1.54 3,888 0.97 2,023 57
Colorado 50,432 5.56 45,794 4.88 4,638 68
Arizona 108,161 20.08 106,076 19.66 2,085 42
Kansas / Missouri 4,235 1.15 7,523 2.01 (3,288) (86)
----------------------------------------------------------------------------------------------------------
Total $382,801 3.30% $352,993 2.92% $ 29,808 38 b.p.
----------------------------------------------------------------------------------------------------------
The majority of non-accruing loans continued to be in the Oklahoma and Arizona
markets. Non-accruing loans in the Oklahoma market included $34 million of
commercial energy loans related to SemGroup. Non-accruing loans in the Arizona
market consisted primarily of commercial real estate loans. With exception of
Kansas/Missouri, non-accruing loans grew in all geographies during the third
quarter of 2009. The 38 basis point increase in the ratio of non-accruing loans
to period end loans was also impacted by a $458 million decrease in period end
loans at September 30, 2009 compared to June 30, 2009.
Commercial
Non-accruing commercial loans totaled $128 million or 2.01% of total commercial
loans at September 30, 2009 and $127 million or 1.88% of total commercial loans
at June 30, 2009. Newly identified commercial loans totaled $36 million
primarily in the energy and services sector of the portfolio. This was partially
offset by a $13 million decrease in energy loans from the proceeds of a sale of
SemGroup bankruptcy claims. The distribution of non-accruing commercial loans
among our various markets was:
Table 27 - Non-Accruing Commercial Loans by Principal Market
(Dollars in thousands)
September 30, 2009 June 30, 2009 Change
-------------------------- -------------------------- --------------------------
Amount % of Amount % of Amount % of
outstanding outstanding outstanding
loans loans loans
------------- ------------ --- ------------ ------------- -- ------------- ------------
Oklahoma $ 68,523 2.50% $ 69,088 2.37% $ (565) 13 b.p.
Texas 34,807 1.68 34,384 1.58 423 10
New Mexico 10,718 3.11 7,737 2.03 2,981 108
Arkansas 666 0.67 702 0.72 (36) (5)
Colorado 10,472 1.84 12,849 2.16 (2,377) (32)
Arizona 2,855 1.30 532 0.25 2,323 105
Kansas / Missouri 225 0.07 1,218 0.37 (993) (30)
---------------------- ------------- ------------ --- ------------ ------------- -- ------------- ------------
Total commercial $128,266 2.01% $ 126,510 1.88% $ 1,756 13 b.p
---------------------- ------------- ------------ --- ------------ ------------- -- ------------- ------------
67
Approximately $49 million of non-accruing commercial loans are in the energy
sector of the portfolio, including $34 million of remaining amounts due from
SemGroup. SemGroup is expected to distribute cash, debt and equity to its
credits and exit bankruptcy in the fourth quarter of 2009. Based on currently
available information, we expect the fair value of assets received to support
our current carrying value. Excluding sales of SemGroup bankruptcy claims,
non-accruing energy sector loans increased $8.3 million over the second quarter
of 2009. In addition, $30 million of non-accruing commercial loans are in the
services sector of the loan portfolio, a $5.4 million increase over the second
quarter of 2009 and represent 1.70% of outstanding loans in the service sector
at September 30, 2009. Non-accruing loans to the manufacturing sector of the
portfolio totaled $17 million or 3.94% of all loans to the manufacturing sector
at September 30, 2009. Non-accruing loans to the wholesale / retail sector of
the loan portfolio decreased $3.4 million from June 30, 2009 to $7.6 million or
0.81% of all loans in the wholesale /retail sector of the loan portfolio.
Commercial Real Estate
Non-accruing commercial real estate loans remain largely concentrated in the
Arizona market. Approximately $99 million or 47% of total non-accruing
commercial real estate loans are in Arizona and consist primarily of $35 million
of non-accruing residential construction and land development loans, $20 million
of loans secured by office buildings, $17 million of commercial land development
loans and $16 million of loans secured by retail facilities. Total non-accruing
commercial real estate loans increased $23 million during the third quarter of
2009. The increase included $16 million in non-accruing residential construction
and land development loans, $4.8 million net increase in non-accruing loans
secured by retail facilities and $3.7 million in non-accruing loans secured by
office buildings. The increase in non-accruing residential construction and land
development loans included $13 million in the Colorado market and $11 million in
the Texas market partially offset by a $7.1 million decrease in the Arizona
market. Decreases in non-accruing residential construction and land development
loans were primarily related to charge-offs and transfers to other real estate
owned. The distribution of non-accruing commercial real estate loans among our
various markets was:
Table 28 - Non-Accruing Commercial Real Estate Loans by Principal Market
(Dollars in thousands)
September 30, 2009 June 30, 2009 Change
-------------------------- -------------------------- --------------------------
Amount % of Amount % of Amount % of
outstanding outstanding outstanding
loans loans loans
------------- ------------ --- ------------ ------------- -- ------------- ------------
Oklahoma $ 30,716 3.77% $ 27,913 3.26% $2,803 51 bp
Texas 16,427 2.24 5,031 0.68 11,396 156
New Mexico 22,314 6.47 18,328 5.85 3,986 62
Arkansas 1,560 1.21 1,566 1.18 (6) 3
Colorado 38,807 15.53 31,588 11.70 7,219 383
Arizona 98,892 38.45 100,160 38.14 (1,268) 31
Kansas / Missouri 3,702 12.67 5,000 13.89 (1,298) (122)
------------------------------ ------------- ------------ --- ------------ ------------- -- ------------- ------------
Total commercial real estate $ 212,418 8.30% $ 189,586 7.26% $22,832 104 bp
------------------------------ ------------- ------------ --- ------------ ------------- -- ------------- ------------
Residential Mortgage and Consumer
Non-accruing residential mortgage loans primarily consist of permanent
residential mortgage loans which totaled $36 million or 2.70% of outstanding
residential mortgage loans at September 30, 2009, a $2.4 million increase over
June 30, 2009. Home equity loans continued to perform well with only $1.8
million or 0.37% of total home equity loans in non-accrual status. The
distribution of non-accruing residential mortgage loans among our various
markets was:
68
Table 29 - Non-Accruing Residential Mortgage Loans by Principal Market
(Dollars in thousands)
September 30, 2009 June 30, 2009 Change
-------------------------- --------------------------- --------------------------
Amount % of Amount % of Amount % of
outstanding outstanding outstanding
loans loans loans
------------ ------------- -- ------------- ------------- -- ------------ -------------
Oklahoma $11,815 0.95% $11,270 0.90% $545 5 bp
Texas 13,662 4.07 11,699 3.38 1,964 69
New Mexico 2,397 2.72 3,493 3.84 (1,096) (112)
Arkansas 2,627 13.73 1,498 7.88 1,129 585
Colorado 1,127 1.64 1,357 2.32 (230) (68)
Arizona 6,284 10.97 5,238 8.99 1,046 198
Kansas / Missouri 308 2.09 1,305 10.60 (997) (851)
---------------------------------- ------------ ------------- -- ------------- ------------- -- ------------ -------------
Total residential mortgage loans $38,220 2.09% $35,860 1.96% $2,361 13 bp
---------------------------------- ------------ ------------- -- ------------- ------------- -- ------------ -------------
In addition to non-accruing residential mortgage and consumer loans, payments of
residential mortgage loans and consumer loans may be delinquent. The composition
of residential mortgage and consumer loans past due is included in the following
table. Residential mortgage loans less than 90 days past due increased $4.9
million and residential mortgage loans past due 90 days or more decreased $230
thousand during the third quarter. Consumer loans past due 30 to 89 days
increased $1.3 million primarily due to an increase in indirect automobile loans
offset by a decrease in other consumer loans. Consumer loans past due 90 days or
more increased $3.5 million, primarily due to an increase indirect automobile
loans.
-----------------------------------------------------------------------------------
Table 30 - Residential Mortgage and Consumer Loans Past Due
(In Thousands)
September 30, 2009 June 30, 2009
----------------------- -----------------------
90 Days 30 to 89 90 Days 30 to 89
or More Days or More Days
----------- ----------- ----------- -----------
Permanent mortgage $ 2,703 $30,541 $ 2,933 $25,473
Home equity - 1,457 - 1,606
-------------------------------- ----------- ----------- -- ----------- -----------
Total residential mortgage $ 2,703 $31,998 $ 2,933 $27,079
-------------------------------- ----------- ----------- -- ----------- -----------
Consumer:
Indirect automobile $ 469 $21,959 $ 549 $19,454
Other consumer 3,768 4,585 211 5,554
-------------------------------- ----------- ----------- -- ----------- -----------
Total consumer $ 4,237 $26,544 $ 760 $25,008
-------------------------------- ----------- ----------- -- ----------- -----------
Real estate and other repossessed assets totaled $90 million at September 30,
2009, up from $75 million at June 30, 2009. Real estate and other repossessed
assets included $50 million of 1-4 family residential properties and residential
land development properties, $22 million of developed commercial real estate
properties, $8 million of undeveloped land, $7 million of equipment, and $3
million of automobiles. The distribution of real estate owned and other
repossessed assets among our various markets included $35 million in Arizona,
$18 million in Texas, $8 million in New Mexico, $8 million in Colorado,
$7million in Kansas City, $7 million in Oklahoma and $6 million in Arkansas.
Our loan review process also identified loans that possess more than the normal
amount of risk due to deterioration in the financial condition of the borrower
or the value of the collateral. Because the borrowers are still performing in
accordance with the original terms of the loan agreements, and no loss of
principal or interest is anticipated, these loans were not included in
Non-performing Assets. Known information does, however, cause management concern
as to the borrowers' ability to comply with current repayment terms. These
potential problem loans totaled $216 million at September 30, 2009 and $220
million at June 30, 2009. The current composition of potential problem loans by
primary industry included real estate - $83 million, energy production - $41
million, services - $33 million, manufacturing - $18 million and healthcare -
$15 million. Potential problem real estate loans included $57 million of
residential development loans on properties primarily located in Texas, Colorado
and Oklahoma and $13 million of loans secured by completed residential
properties.
69
Liquidity and Capital
Subsidiary Banks
Deposits and borrowed funds are the primary sources of liquidity for the
subsidiary banks. For the third quarter of 2009, approximately 66% of our
funding was provided by average deposit accounts, 19% from average borrowed
funds, 2% from average long-term subordinated debt and 9% from shareholders'
equity. Our funding sources primarily include deposits and borrowings from the
Federal Home Loan Banks and other banks, and may include issuance of qualifying
debt under the U.S. Treasury Liquidity Guarantee Program ("TLGP"). These funding
sources provide adequate liquidity to meet our operating needs.
Deposit accounts represent our largest funding source. We compete for retail and
commercial deposits by offering a broad range of products and services and
focusing on customer convenience. Retail deposit growth is supported through our
sales and customer service program, free checking and online bill paying
services, an extensive network of branch locations and ATMs and a 24-hour
Express Bank call center. Commercial deposit growth is supported by offering
treasury management and lockbox services. We also acquire brokered deposits when
the cost of funds is advantageous to other funding sources.
Average deposits totaled $15.1 billion at September 30, 2009 and represented
approximately 66% of total average liabilities and capital for the third quarter
of 2009, compared with $15.3 billion and 66% of total average liabilities and
capital for the second quarter of 2009.
Average deposits decreased $202 million compared to the second quarter of 2009.
Average interest-bearing transaction deposit accounts continued to grow in the
third quarter of 2009, up $308 million over the second quarter of 2009, as did
average demand deposits, up $209 million over the second quarter of 2009
primarily related to growth in balances held by our commercial banking
customers. Average time deposits decreased $719 million over the second quarter
of 2009. We have been intentionally reducing certain types of higher-costing
time deposits to reduce our overall cost of funds.
Growth in our average interest-bearing transaction deposit accounts over the
second quarter of 2009 included $234 million of commercial deposits, $114
million of consumer banking deposits and $76 million increase in funds
management and other deposits offset by a $116 million decrease in wealth
management deposits.
Average commercial banking deposits were up $429 million, including an increase
of $491 million from our commercial banking units offset by a $69 million
decrease from our treasury services unit. Average consumer banking deposits
decreased $67 million across all of our geographical markets, including $100
million in Oklahoma and $12 million in New Mexico, offset by a $25 million
increase in Texas. Average wealth management deposits decreased $258 million
compared to the second quarter of 2009, including a $144 million decrease in
deposits generated by our broker / dealer network and a $114 million decrease in
deposits generated by our trust division.
Brokered deposits averaged $272 million in the third quarter of 2009, down $242
million from the second quarter of 2009. Brokered deposits were largely added in
2008 to remix wholesale funding sources in order to provide more available
overnight liquidity and are being replaced by other deposit products as they
mature.
The distribution of deposit accounts among our principal markets is shown in the
following table.
70
---------------------------------------------------------------------------------------------------------------------
Table 31 - Deposits by Principal Market Area
(In thousands)
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2009 2009 2009 2008 2008
---------------------------------------------------------------------------------
Oklahoma:
Demand $ 1,895,980 $ 1,451,057 $ 1,651,111 $ 1,683,374 $ 1,681,325
Interest-bearing:
Transaction 4,566,058 4,374,089 4,089,838 4,117,729 4,151,430
Savings 93,443 94,048 95,827 86,476 86,900
Time 1,765,980 2,033,312 2,876,313 3,104,933 3,036,297
---------------------------------------------------------------------------------
Total interest-bearing 6,425,481 6,501,449 7,061,978 7,309,138 7,274,627
---------------------------------------------------------------------------------
Total Oklahoma $ 8,321,461 $ 7,952,506 $ 8,713,089 $ 8,992,512 $ 8,955,952
---------------------------------------------------------------------------------
Texas:
Demand $ 1,138,794 $ 1,002,266 $ 1,021,424 $ 1,067,456 $ 956,846
Interest-bearing:
Transaction 1,716,460 1,660,642 1,527,399 1,460,576 1,543,974
Savings 35,724 33,992 33,867 32,071 32,400
Time 1,007,579 1,035,919 1,054,632 857,416 794,911
---------------------------------------------------------------------------------
Total interest-bearing 2,759,763 2,730,553 2,615,898 2,350,063 2,371,285
---------------------------------------------------------------------------------
Total Texas $ 3,898,557 $ 3,732,819 $ 3,637,322 $ 3,417,519 $ 3,328,131
---------------------------------------------------------------------------------
New Mexico:
Demand $ 216,330 $ 175,033 $ 180,308 $ 155,345 $ 176,477
Interest-bearing:
Transaction 424,528 434,498 401,000 397,382 376,941
Savings 18,039 18,255 17,858 16,289 16,316
Time 511,507 542,388 561,300 522,894 475,560
---------------------------------------------------------------------------------
Total interest-bearing 954,074 995,141 980,158 936,565 868,817
---------------------------------------------------------------------------------
Total New Mexico $ 1,170,404 $ 1,170,174 $ 1,160,466 $ 1,091,910 $ 1,045,294
---------------------------------------------------------------------------------
Arkansas:
Demand $ 19,077 $ 17,261 $ 16,503 $ 16,293 $ 23,565
Interest-bearing:
Transaction 85,061 73,972 63,924 38,566 19,146
Savings 1,131 1,031 1,100 1,083 865
Time 137,109 162,505 150,015 75,579 47,684
---------------------------------------------------------------------------------
Total interest-bearing 223,301 237,508 215,039 115,228 67,695
---------------------------------------------------------------------------------
Total Arkansas $ 242,378 $ 254,769 $ 231,542 $ 131,521 $ 91,260
---------------------------------------------------------------------------------
Colorado:
Demand $ 121,555 $ 113,895 $ 111,048 $ 116,637 $ 115,677
Interest-bearing:
Transaction 477,418 445,521 466,276 480,113 440,888
Savings 18,518 18,144 18,905 17,660 19,300
Time 520,906 579,709 584,971 532,475 428,872
---------------------------------------------------------------------------------
Total interest-bearing 1,016,842 1,043,374 1,070,152 1,030,248 889,060
---------------------------------------------------------------------------------
Total Colorado $ 1,138,397 $ 1,157,269 $ 1,181,200 $ 1,146,885 $ 1,004,737
---------------------------------------------------------------------------------
Arizona:
Demand $ 54,046 $ 55,975 $ 54,362 $ 39,424 $ 45,725
Interest-bearing:
Transaction 95,242 89,842 66,809 56,985 64,463
Savings 971 1,282 970 1,014 1,033
Time 56,809 59,775 54,923 34,290 14,433
---------------------------------------------------------------------------------
Total interest-bearing 153,022 150,899 122,702 92,289 79,929
---------------------------------------------------------------------------------
Total Arizona $ 207,068 $ 206,874 $ 177,064 $ 131,713 $ 125,654
---------------------------------------------------------------------------------
Kansas / Missouri:
Demand $ 16,406 $ 9,692 $ 16,140 $ 3,850 $ 5,548
Interest-bearing:
Transaction 15,682 12,907 11,976 10,999 9,780
Savings 70 54 117 42 33
Time 84,923 158,325 141,505 55,656 19,794
---------------------------------------------------------------------------------
Total interest-bearing 100,675 171,286 153,598 66,697 29,607
---------------------------------------------------------------------------------
Total Kansas / Missouri $ 117,081 $ 180,978 $ 169,738 $ 70,547 $ 35,155
---------------------------------------------------------------------------------
Total BOK Financial deposits $ 15,095,346 $ 14,655,389 $ 15,270,421 $ 14,982,607 $ 14,586,183
---------------------------------------------------------------------------------
71
In addition to deposits, subsidiary bank liquidity is provided primarily by
federal funds purchased, securities repurchase agreements and Federal Home Loan
Bank borrowings. Federal funds purchased consist primarily of unsecured,
overnight funds acquired from other financial institutions. Funds are primarily
purchased from bankers' banks and Federal Home Loan banks from across the
country. The largest single source of Federal funds purchased totaled $200
million at September 30, 2009. Securities repurchase agreements generally mature
within 90 days and are secured by certain available for sale securities. Federal
Home Loan Bank borrowings are generally short term and are secured by a blanket
pledge of eligible collateral (generally unencumbered U.S. Treasury and
mortgage-backed securities, 1-4 family mortgage loans and multifamily mortgage
loans). During the third quarter of 2009, the outstanding balance of federal
funds purchased averaged $1.6 billion, securities repurchase agreements totaled
$717 million and Federal Home Loan Bank borrowings totaled $1.0 billion.
The Company participates in the TLGP, which expanded insurance coverage to
certain qualifying debt issued by eligible financial institutions. In general,
senior unsecured debt newly issued on or before June 30, 2009 will be fully
protected by the FDIC through the earlier of the maturity of the debt or June
30, 2012. Subsequently, the FDIC approved a limited four-month extension of the
Debt Guarantee Program under the TLGP. Participating insured depository
institutions may issue qualifying senior unsecured debt no later than October
31, 2009. The FDIC guarantee of qualifying debt expires on the earliest of the
opt-out date, the mandatory conversion date, the stated maturity date or
December 31, 2012. Collectively, our subsidiary banks may issue up to $1.8
billion of TLGP protected debt. No TLGP guaranteed debt was issued by our
subsidiary banks.
The subsidiary banks also borrow funds under the Federal Reserve Bank Term
Auction Facility program. This is a temporary program which allows banks that
are in generally sound financial condition to bid for funds. Funds are borrowed
for either 28 or 84 days and are secured by a pledge of eligible collateral.
Funds borrowed under this program averaged $1.1 billion at September 30, 2009.
Although designated as a temporary program, no plans have been announced for its
termination.
At September 30, 2009, the estimated unused credit available to the subsidiary
banks from our traditional sources and within our internal policy limits was
approximately $6.8 billion.
During the third quarter of 2009, the Company increased short-term borrowings
and deposits at the Federal Reserve Banks to take advantage of spreads in
short-term interest rates. Deposits in the Federal Reserve Banks are included in
cash and due from banks on the Company's consolidated balance sheet.
Parent Company
The primary source of liquidity for BOK Financial is dividends from subsidiary
banks, which are limited by various banking regulations to net profits, as
defined, for the year plus profits for the two preceding years. Dividends are
further restricted by minimum capital requirements. Based on the most
restrictive limitations, the subsidiary banks could declare up to $184 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 $158 million under this policy. Further losses or increases
in required regulatory capital at the subsidiary banks could affect their
ability to pay dividends to the parent company.
On July 21, 2008, the Company entered into a $188 million, unsecured revolving
credit agreement with George B. Kaiser, its Chairman and principal shareholder.
Interest on the outstanding balance is based on one-month LIBOR plus 125 basis
points and is payable quarterly. Additional interest in the form of a facility
fee is paid quarterly on the unused portion of the commitment at 25 basis
points. This agreement has no restrictive covenants. The credit agreement
matures in December of 2010. No amounts were outstanding under this credit
agreement as of September 30, 2009.
Our equity capital was $2.2 billion at September 30, 2009, up $134 million from
June 30, 2009. Net income less cash dividend paid increased equity $34 million.
Accumulated other comprehensive losses decreased $98 million during the third
quarter of 2009 primarily due to a $159 million decrease in net unrealized
losses on available for sale securities. Capital is managed to maximize
long-term value to the shareholders. Factors considered in
72
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 October 27, 2009, the Company's board of directors
declared a cash dividend of $0.24 per common share payable on or about December
2, 2009 to shareholders of record as of November 16, 2009.
Based on asset size, we are the largest commercial bank that elected not to
participate in the TARP Capital Purchase Program. The decision not to
participate in TARP was based on an evaluation of our capital needs in both the
current environment and in several capital stress environments. We considered
capital requirements for organic growth and potential acquisitions, the cost of
TARP capital and a defined exit strategy when the cost of TARP capital increases
substantially at the end of year five. We also considered reasonable capital and
liquidity support from our majority shareholder.
On April 26, 2005, the Board of Directors authorized a share repurchase program,
which replaced a previously authorized program. The maximum of two million
common shares may be repurchased. The specific timing and amount of shares
repurchased will vary based on market conditions, securities law limitations and
other factors. Repurchases may be made over time in open market or privately
negotiated transactions. The repurchase program may be suspended or discontinued
at any time without prior notice. Since this program began, 784,073 shares have
been repurchased by the Company for $38.7 million. No shares were repurchased in
the third quarter of 2009.
BOK Financial and subsidiary banks are subject to various capital requirements
administered by federal agencies. Failure to meet minimum capital requirements
can result in certain mandatory and possibly additional discretionary actions by
regulators that could have a material impact on operations. These capital
requirements include quantitative measures of assets, liabilities, and
off-balance sheet items. The capital standards are also subject to qualitative
judgments by the regulators.
For a banking institution to qualify as well capitalized, its Tier 1, Total and
Leverage capital ratios must be at least 6%, 10% and 5%, respectively. All of
the Company's banking subsidiaries exceeded the regulatory definitions of well
capitalized. The capital ratios for BOK Financial on a consolidated basis are
presented in the following table.
----------------------------------------------------------------------------------------------------------------------
Table 32 - Capital Ratios Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2009 2009 2009 2008 2008
---------------------------------------------------------------------------
Average total equity to average assets 9.26% 8.70% 8.35% 8.57% 8.92%
Tangible common equity ratio 7.78 7.55 6.84 6.64 7.16
Tier 1 common equity ratio 10.45 9.77 9.58 9.32 9.20
Risk-based capital:
Tier 1 capital 10.56 9.86 9.66 9.40 9.31
Total capital 14.10 13.34 13.08 12.81 12.62
Leverage 8.16 7.97 7.85 7.89 7.94
----------------------------------------------------------------------------------------------------------------------
Capital resources of financial institutions are also regularly measured by the
tangible common equity ratio and tier 1 common equity ratio. Tangible common
equity is shareholders' equity as defined by GAAP less intangible assets and
equity which does not benefit common shareholders. Equity that does not benefit
common shareholders includes preferred equity and equity provided by the U.S.
Treasury's TARP program. Tier 1 common equity is tier 1 equity as defined by
banking regulations, adjusted for other comprehensive income (loss) and equity
which does not benefit common shareholders. These non-GAAP measures are valuable
indicators of a financial institution's capital strength since they eliminate
intangible assets from shareholders' equity and retains the effect of unrealized
losses on securities and other components of accumulated other comprehensive
income (loss) in shareholders' equity. At September 30, 2009, BOK Financial's
tangible common shareholders' equity ratio was 7.78% and tier 1 common equity
ratio was 10.45%.
73
The following table provides a reconciliation of the non-GAAP measures with
financial measures defined by GAAP.
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Table 33 - Non-GAAP Measures Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
(Dollars in thousands) 2009 2009 2009 2008 2008
------------- ---------------- -------------- -------------- ---------------
Tangible common equity ratio:
Total shareholders' equity $ 2,185,013 $2,050,572 $1,931,300 $1,846,257 $1,940,503
Less: Intangible assets, net 356,152 357,838 359,523 361,209 363,177
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Tangible common equity 1,828,861 1,692,734 1,571,777 1,485,048 1,577,326
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Total assets 23,876,841 22,768,319 23,333,442 22,734,648 22,377,802
Less: Intangible assets, net 356,152 357,838 359,523 361,209 363,177
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Tangible assets $23,520,689 $22,410,481 $22,973,919 $22,373,439 $22,014,625
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Tangible common equity ratio 7.78% 7.55% 6.84% 6.64% 7.16%
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Tier 1 common equity ratio:
Tier 1 capital $1,849,254 $1,807,705 $1,773,576 $1,728,926 $1,707,390
Less: Non-controlling interest 18,981 15,590 14,751 13,855 19,205
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Tier 1 common equity 1,830,273 1,792,115 1,758,825 1,715,071 1,688,185
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Risk weighted assets 17,515,147 18,338,540 18,355,862 18,401,051 18,347,504
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Tier 1 common equity ratio 10.45% 9.77% 9.58% 9.32% 9.20%
----------------------------------------------- ------------- ---------------- -------------- -------------- ---------------
Off-Balance Sheet Arrangements
During the third quarter of 2007, Bank of Oklahoma agreed to guarantee rents
totaling $28.4 million over 10 years to the City of Tulsa ("City") as owner of a
building immediately adjacent to the bank's main office. These rents are due for
space rented by third-party tenants in the building as of the date of the
agreement. All guaranteed space has been rented since the date of the agreement.
In return for this guarantee, Bank of Oklahoma will receive 80% of net rent as
defined in an agreement with the City over the next 10 years from space in the
same building that was vacant as of the date of the agreement. The maximum
amount that Bank of Oklahoma may receive under this agreement is $4.5 million.
The fair value of this agreement at inception was zero and no asset or liability
is currently recognized in the Company's financial statements.
74
-------------------------------------------------------------------------------------------------------------------------------
Nine Month Financial Summary - Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share Data)
Nine Months Ended
-------------------------------------------------------------------------------------
September 30, 2009 September 30, 2008
------------------------------------------ ---------------------------------------
Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate
-------------------------------------------------------------------------------------
Assets
Taxable securities (3) $ 7,567,091 $ 246,604 4.51% $ 5,903,319 $ 226,044 5.09%
Tax-exempt securities (3) 270,450 11,650 5.76 259,507 12,520 6.49
-------------------------------------------------------------------------------------------------------------------------------
Total securities (3) 7,837,541 258,254 4.55 6,162,826 238,564 5.15
-------------------------------------------------------------------------------------------------------------------------------
Trading securities 96,389 2,773 3.85 71,792 3,637 6.77
Funds sold and resell agreements 49,063 62 0.17 77,688 1,485 2.55
Residential mortgage loans held for sale 218,425 7,791 4.77 94,337 4,122 5.84
Loans (2) 12,357,814 427,157 4.62 12,380,418 557,842 6.02
Less reserve for loan losses 273,466 - - 153,372 - -
-------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 12,084,348 427,157 4.73 12,227,046 557,842 6.09
-------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 20,285,766 696,037 4.65 18,633,689 805,650 5.77
-------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,663,461 2,749,490
-------------------------------------------------------------------------------------------------------------------------------
Total assets $ 22,949,227 $ 21,383,179
-------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 6,877,782 40,515 0.79% $ 6,418,290 98,242 2.04%
Savings deposits 165,039 415 0.34 158,872 533 0.45
Time deposits 4,911,663 92,440 2.52 4,366,120 124,755 3.82
-------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 11,954,484 133,370 1.49 10,943,282 223,530 2.73
-------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 2,386,998 6,697 0.38 3,084,312 54,082 2.34
Other borrowings 2,094,640 7,449 0.48 1,665,046 34,685 2.78
Subordinated debentures 398,455 16,756 5.62 398,313 16,773 5.63
-------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 16,834,577 164,272 1.30 16,090,953 329,070 2.73
-------------------------------------------------------------------------------------------------------------------------------
Demand deposits 3,148,823 2,605,971
Other liabilities 945,973 720,886
Shareholders' equity 2,019,854 1,965,369
-------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' $ 22,949,227 $ 21,383,179
equity
-------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (3) 531,765 3.34% 476,580 3.04%
Tax-Equivalent Net Interest Revenue
To Earning Assets (3) 3.55 3.41
Less tax-equivalent adjustment (1) 5,879 6,165
-------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 525,886 470,415
Provision for credit losses 147,280 129,592
Other operating revenue 384,827 307,277
Other operating expense 520,296 476,962
-------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 243,137 171,138
Federal and state income tax 81,925 54,546
Non-controlling interest income
(expense), net (3,405) 1,197
-------------------------------------------------------------------------------------------------------------------------------
Net Income $ 157,807 $ 117,789
-------------------------------------------------------------------------------------------------------------------------------
Earnings Per Average Common Share Equivalent:
Net Income:
Basic $ 2.33 $ 1.75
-------------------------------------------------------------------------------------------------------------------------------
Diluted $ 2.33 $ 1.74
-------------------------------------------------------------------------------------------------------------------------------
(1) Tax equivalent at the statutory federal and state rates for the periods
presented. The taxable equivalent adjustments shown are for comparative
purposes.
(2) The loan averages included loans on which the accrual of interest has been
discontinued and are stated net of unearned income.
(3) Yield calculations exclude security trades that have been recorded on trade
date with no corresponding interest income.
75
-----------------------------------------------------------------------------------------------------------------------------
Quarterly Financial Summary - Unaudited
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share Data)
Three Months Ended
-------------------------------------------------------------------------------------
September 30, 2009 June 30, 2009
------------------------------------------- ------------------------------------
Average Revenue/ Yield / Average Revenue/ Yield /
Balance Expense(1) Rate Balance Expense(1) Rate
-------------------------------------------------------------------------------------
Assets
Taxable securities (3) $ 8,012,380 $ 81,890 4.18% $ 7,594,355 $ 80,711 4.50%
Tax-exempt securities (3) 273,432 3,468 5.03 285,078 4,044 5.69
-----------------------------------------------------------------------------------------------------------------------------
Total securities (3) 8,285,812 85,358 4.21 7,879,433 84,755 4.54
-----------------------------------------------------------------------------------------------------------------------------
Trading securities 64,763 771 4.72 112,960 983 3.49
Funds sold and resell agreements 67,032 18 0.11 29,277 14 0.19
Residential mortgage loans held for sale 176,403 2,198 4.94 286,077 3,215 4.51
Loans (2) 11,887,418 139,883 4.67 12,403,050 143,510 4.64
Less reserve for loan losses 281,289 - - 273,335 - -
-----------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 11,606,129 139,883 4.78 12,129,715 143,510 4.75
-----------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 20,200,139 228,228 4.54 20,437,462 232,477 4.65
-----------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,850,395 2,636,569
-----------------------------------------------------------------------------------------------------------------------------
Total assets $ 23,050,534 $ 23,074,031
-----------------------------------------------------------------------------------------------------------------------------
Liabilities and equity
Transaction deposits $ 7,162,477 $ 11,736 0.65% $ 6,854,003 $ 13,362 0.78%
Savings deposits 167,677 203 0.48 167,813 104 0.25
Time deposits 4,404,854 24,401 2.20 5,123,947 31,637 2.48
-----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 11,735,008 36,340 1.23 12,145,763 45,103 1.49
-----------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 2,284,985 1,817 0.32 2,316,990 1,995 0.35
Other borrowings 2,173,103 2,070 0.38 1,951,699 2,375 0.49
Subordinated debentures 398,484 5,558 5.53 398,456 5,632 5.67
-----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 16,591,580 45,785 1.09 16,812,908 55,105 1.31
-----------------------------------------------------------------------------------------------------------------------------
Demand deposits 3,392,578 3,183,338
Other liabilities 931,406 1,071,121
Total equity 2,134,970 2,006,664
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 23,050,534 $ 23,074,031
-----------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (3) $ 182,443 3.45% $ 177,372 3.34%
Tax-Equivalent Net Interest Revenue
To Earning Assets (3) 3.63 3.55
Less tax-equivalent adjustment (1) 1,982 1,792
-----------------------------------------------------------------------------------------------------------------------------
Net interest revenue 180,461 175,580
Provision for credit losses 55,120 47,120
Other operating revenue 131,770 127,965
Other operating expense 178,732 175,770
-----------------------------------------------------------------------------------------------------------------------------
Income before taxes 78,379 80,655
Federal and state income tax 24,772 28,315
Non-controlling interest income
(expense), net (2,947) (225)
-----------------------------------------------------------------------------------------------------------------------------
Net income $ 50,660 $ 52,115
-----------------------------------------------------------------------------------------------------------------------------
Earnings Per Average Common Share Equivalent:
Net income:
Basic $ 0.75 $ 0.77
-----------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.75 $ 0.77
-----------------------------------------------------------------------------------------------------------------------------
(1) Tax equivalent at the statutory federal and state rates for the periods
presented. The taxable equivalent adjustments shown are for comparative
purposes.
(2) The loan averages included loans on which the accrual of interest has been
discontinued and are stated net of unearned income.
(3) Yield calculations exclude security trades that have been recorded on trade
date with no corresponding interest income.
76
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended
-------------------------------------------------------------------------------------------------------------------------
March 31, 2009 December 31, 2008 September 30, 2008
-------------------------------------------------------------------------------------------------------------------------
Average Revenue/ Yield / Average Revenue/ Yield / Average Revenue/ Yield /
Balance Expense(1) Rate Balance Expense(1) Rate Balance Expense(1) Rate
-------------------------------------------------------------------------------------------------------------------------
$ 7,084,340 $ 84,004 4.90% $ 6,634,035 $ 87,317 5.12% $ 6,056,909 $ 78,030 5.09%
252,612 4,138 6.64 255,693 4,133 6.43 254,803 4,166 6.64
-------------------------------------------------------------------------------------------------------------------------
7,336,952 88,142 4.96 6,889,728 91,450 5.17 6,311,712 82,196 5.15
-------------------------------------------------------------------------------------------------------------------------
111,962 1,019 3.69 78,840 1,298 6.55 66,419 937 5.61
50,701 30 0.24 48,246 92 0.76 79,862 290 1.44
201,135 2,378 4.79 121,184 1,683 5.52 116,533 1,743 5.95
12,784,765 143,763 4.56 12,826,696 169,700 5.26 12,596,823 180,119 5.69
252,734 - - 209,319 - - 182,844 - -
-------------------------------------------------------------------------------------------------------------------------
12,532,031 143,763 4.65 12,617,377 169,700 5.35 12,413,979 180,119 5.77
-------------------------------------------------------------------------------------------------------------------------
20,232,781 235,332 4.75 19,755,375 264,223 5.28 18,988,505 265,285 5.55
-------------------------------------------------------------------------------------------------------------------------
2,710,588 2,516,276 2,832,658
-------------------------------------------------------------------------------------------------------------------------
$ 22,943,369 $ 22,271,651 $ 21,821,163
-------------------------------------------------------------------------------------------------------------------------
$ 6,610,805 $ 15,417 0.95% $ 6,116,465 $ 23,161 1.51% $ 6,565,935 $ 28,312 1.72%
159,537 109 0.28 155,784 143 0.37 159,856 147 0.37
5,215,091 36,401 2.83 5,109,303 42,090 3.28 4,792,366 40,810 3.39
-------------------------------------------------------------------------------------------------------------------------
11,985,433 51,927 1.76 11,381,552 65,394 2.29 11,518,157 69,269 2.39
-------------------------------------------------------------------------------------------------------------------------
2,562,066 2,825 0.45 3,095,054 7,289 0.94 3,061,186 15,253 1.98
2,158,963 3,064 0.58 1,986,857 7,541 1.51 1,390,233 8,935 2.56
398,425 5,566 5.67 398,392 5,489 5.48 398,361 5,553 5.55
-------------------------------------------------------------------------------------------------------------------------
17,104,887 63,382 1.50 16,861,855 85,713 2.02 16,367,937 99,010 2.41
-------------------------------------------------------------------------------------------------------------------------
2,864,751 2,712,384 2,739,209
1,058,216 788,530 767,832
1,915,515 1,908,882 1,946,185
-------------------------------------------------------------------------------------------------------------------------
$ 22,943,369 $ 22,271,651 $ 21,821,163
-------------------------------------------------------------------------------------------------------------------------
$ 171,950 3.25% $ 178,510 3.26% $ 166,275 3.14%
3.05
3.47 3.57 3.48
2,105 2,063 1,927
-------------------------------------------------------------------------------------------------------------------------
169,845 176,447 164,348
45,040 73,001 52,711
125,092 121,447 132,286
165,794 185,442 164,290
-------------------------------------------------------------------------------------------------------------------------
84,103 39,451 79,633
28,838 10,363 22,958
(233) 6,355 10
-------------------------------------------------------------------------------------------------------------------------
$ 55,032 $ 35,443 $ 56,685
-------------------------------------------------------------------------------------------------------------------------
$ 0.81 $ 0.53 $ 0.84
-------------------------------------------------------------------------------------------------------------------------
$ 0.81 $ 0.52 $ 0.84
-------------------------------------------------------------------------------------------------------------------------
77
---------------------------------------------------- -- ------------- --- -------------- -- -------------- ---- --------------------
Quarterly Earnings Trends -- Unaudited
(In thousands, except share and per share data)
Three Months Ended
---------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec.31, Sept.30,
2009 2009 2009 2008 2008
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Interest revenue $ 226,246 230,685 $ 233,227 $ 262,160 $ 263,358
Interest expense 45,785 55,105 63,382 85,713 99,010
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Net interest revenue 180,461 175,580 169,845 176,447 164,348
Provision for credit losses 55,120 47,120 45,040 73,001 52,711
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Net interest revenue after provision for credit losses 125,341 128,460 124,805 103,446 111,637
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Other operating revenue
Brokerage and trading revenue 24,944 21,794 24,699 23,507 30,846
Transaction card revenue 26,264 27,533 25,428 25,177 25,632
Trust fees and commissions 16,315 16,860 16,510 17,143 20,100
Deposit service charges and fees 30,464 28,421 27,405 29,239 30,404
Mortgage banking revenue 13,197 19,882 18,498 7,217 7,145
Bank-owned life insurance 2,634 2,418 2,317 2,682 2,829
Margin asset fees 51 68 67 187 1,934
Other revenue 6,087 6,124 6,583 5,778 7,768
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Total fees and commissions 119,956 123,100 121,507 110,930 126,658
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Gain (loss) on other assets, net 3,223 973 143 (7,420) (841)
Gain (loss) on derivatives, net (294) (1,037) (1,664) (2,219) 4,366
Gain on securities, net 12,266 6,471 20,108 20,156 2,103
Total other-than-temporary impairment losses (6,133) (1,263) (54,368) - -
Portion of loss recognized in other comprehensive income (2,752) 279 (39,366) - -
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Net impairment losses recognized in earnings (3,381) (1,542) (15,002) - -
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Total other operating revenue 131,770 127,965 125,092 121,447 132,286
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Other operating expense
Personnel 98,012 96,191 92,627 87,695 87,549
Business promotion 4,827 4,569 4,428 7,283 5,837
Professional fees and services 7,555 7,363 6,512 7,923 6,501
Net occupancy and equipment 15,884 15,973 16,258 14,901 15,570
Insurance 6,092 5,898 5,638 3,216 2,436
FDIC special assessment - 11,773 - - -
Data processing and communications 20,413 20,452 19,306 19,720 19,911
Printing, postage and supplies 3,716 4,072 4,571 3,823 4,035
Net (gains) losses and operating expenses of
repossessed assets 3,497 996 1,806 1,006 (136)
Amortization of intangible assets 1,686 1,686 1,686 1,967 1,884
Mortgage banking costs 8,065 9,336 7,467 4,967 5,811
Change in fair value of mortgage servicing rights 2,981 (7,865) (1,955) 26,432 5,554
Visa retrospective responsibility obligation - - - (1,700) 1,700
Other expense 6,004 5,326 7,450 8,209 7,638
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Total other operating expense 178,732 175,770 165,794 185,442 164,290
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Income before taxes 78,379 80,655 84,103 39,451 79,633
Federal and state income tax 24,772 28,315 28,838 10,363 22,958
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Net income before non-controlling interest 53,607 52,340 55,265 29,088 56,675
Net income (loss) attributable to non-controlling interest 2,947 225 233 (6,355) (10)
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Net income attributable to BOK Financial Corp. $ 50,660 $ 52,115 $ 55,032 $ 35,443 56,685
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Earnings per share:
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Basic $ 0.75 0.77 $ 0.81 $ 0.53 $ 0.84
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Diluted $ 0.75 0.77 $ 0.81 $ 0.52 $ 0.84
---------------------------------------------------- -- ------------ - ------------- --- ---------- --- ----------- --- -----------
Average shares used in computation:
---------------------------------------------------- -- ----------- --- ------------- -- ------------ -- ------------ -- ----------
Basic 67,392,059 67,344,577 67,315,986 67,294,069 67,263,317
---------------------------------------------------- -- ----------- --- ------------- -- ------------ -- ------------ -- ----------
Diluted 67,513,700 67,448,029 67,387,102 67,456,267 67,432,444
---------------------------------------------------- -- ----------- --- ------------- -- ------------ -- ------------ -- ----------
78
Market Risk
Market risk is a broad term for the risk of economic loss due to adverse changes
in the fair value of a financial instrument. These changes may be the result of
various factors, including interest rates, foreign exchange prices, commodity
prices or equity prices. Financial instruments that are subject to market risk
can be classified either as held for trading or held for purposes other than
trading. Market risk excludes changes in fair value due to credit of the
individual issuers of financial instruments.
BOK Financial is subject to market risk primarily through the effect of changes
in interest rates on both its assets held for purposes other than trading and
trading assets. The effects of other changes, such as foreign exchange rates,
commodity prices or equity prices do not pose significant market risk to BOK
Financial. BOK Financial has no material investments in assets that are affected
by changes in foreign exchange rates or equity prices. Energy and agricultural
product derivative contracts, which are affected by changes in commodity prices,
are matched against offsetting contracts as previously discussed.
Responsibility for managing market risk rests with the Asset / Liability
Committee that operates under policy guidelines established by the Board of
Directors. The acceptable negative variation in net interest revenue, net income
or economic value of equity due to a specified basis point increase or decrease
in interest rates is generally limited by these guidelines to +/- 10%. These
guidelines also set maximum levels for short-term borrowings, short-term assets,
public funds, and brokered deposits, and establish minimum levels for un-pledged
assets, among other things. Compliance with these guidelines is reviewed
monthly.
Interest Rate Risk - Other than Trading
As previously noted in the Net Interest Revenue section of this report,
management has implemented strategies to manage the Company's balance sheet to
be relatively neutral to changes in interest rates over a twelve month period.
The effectiveness of these strategies in managing the overall interest rate risk
is evaluated through the use of an asset/liability model. BOK Financial performs
a sensitivity analysis to identify more dynamic interest rate risk exposures,
including embedded option positions, on net interest revenue, net income and
economic value of equity. A simulation model is used to estimate the effect of
changes in interest rates over the next 12 and 24 months based on eight interest
rate scenarios. Two specified interest rate scenarios are used to evaluate
interest rate risk against policy guidelines. The first assumes a sustained
parallel 200 basis point increase and the third assumes a sustained parallel 100
basis point decrease in interest rates. Management historically evaluated
interest rate sensitivity for a sustained 200 basis point decrease in interest
rates. However, the results of a 200 basis point decrease in interest rates in
the current low-rate environment are not meaningful. The Company also performs a
sensitivity analysis based on a "most likely" interest rate scenario, which
includes non-parallel shifts in interest rates. An independent source is used to
determine the most likely interest rate scenario.
The Company's primary interest rate exposures included the Federal Funds rate,
which affects short-term borrowings, and the prime lending rate and LIBOR, which
are the basis for much of the variable-rate loan pricing. Additionally, mortgage
rates directly affect the prepayment speeds for mortgage-backed securities and
mortgage servicing rights. Derivative financial instruments and other financial
instruments used for purposes other than trading are included in this
simulation. The model incorporates assumptions regarding the effects of changes
in interest rates and account balances on indeterminable maturity deposits based
on a combination of historical analysis and expected behavior. The impact of
planned growth and new business activities is factored into the simulation
model. The effects of changes in interest rates on the value of mortgage
servicing rights are excluded from Table 25 due to the extreme volatility over
such a large rate range. The effects of interest rate changes on the value of
mortgage servicing rights and securities identified as economic hedges are
presented in the Lines of Business - Consumer Banking section of this report.
The simulations used to manage market risk are based on numerous assumptions
regarding the effects of changes in interest rates on the timing and extent of
re-pricing characteristics, future cash flows and customer behavior. These
assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net interest revenue, net income or economic value of equity
or precisely predict the impact of higher or lower interest rates on net
interest revenue, net income or economic value of equity. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes, market conditions and management strategies, among other factors.
79
Interest Rate Sensitivity
(Dollars in Thousands)
200 bp Increase 100 bp Decrease Most Likely
-------------------------- --------------------------- -------------------------
2009 2008 2009 2008 2009 2008
------------- ------------ ------------ -------------- ------------ ------------
Anticipated impact over the
next twelve months on
net interest revenue $ (2,096) $(16,405) $ (22,451) $ 6,644 $ 2,746 $29,639
(0.0)% (1.1)% (3.1)% 0.3% 0.4% 3.4%
-------------------------------- --------------- ------------ --- ----------- -------------- -- ----------- ------------
Trading Activities
BOK Financial enters into trading activities both as an intermediary for
customers and for its own account. As an intermediary, BOK Financial will take
positions in securities, generally mortgage-backed securities, government agency
securities, and municipal bonds. These securities are purchased for resale to
customers, which include individuals, corporations, foundations and financial
institutions. BOK Financial will also take trading positions in U.S. Treasury
securities, mortgage-backed securities, municipal bonds and financial futures
for its own account. These positions are taken with the objective of generating
trading profits. Both of these activities involve interest rate risk.
A variety of methods are used to manage the interest rate risk of trading
activities. These methods include daily marking of all positions to market
value, independent verification of inventory pricing, and position limits for
each trading activity. Hedges in either the futures or cash markets may be used
to reduce the risk associated with some trading programs.
Management uses a Value at Risk ("VAR") methodology to measure the market risk
inherent in its trading activities. VAR is calculated based upon historical
simulations over the past five years using a variance / covariance matrix of
interest rate changes. It represents an amount of market loss that is likely to
be exceeded only one out of every 100 two-week periods. Trading positions are
managed within guidelines approved by the Board of Directors. These guidelines
limit the VAR to $3.7 million. At September 30, 2009, the VAR was $1.6 million.
The greatest value at risk during the third quarter of 2009 was $3.6 million.
Controls and Procedures
As required by Rule 13a-15(b), BOK Financial's management, including the Chief
Executive Officer and Chief Financial Officer, conducted an evaluation as of the
end of the period covered by their report, of the effectiveness of the company's
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures were effective as
of the end of the period covered by this report. As required by Rule 13a-15(d),
BOK Financial's management, including the Chief Executive Officer and Chief
Financial Officer, also conducted an evaluation of the company's internal
controls over financial reporting to determine whether any changes occurred
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, the company's internal controls over
financial reporting. Based on that evaluation, there has been no such change
during the quarter covered by this report.
80
Forward-Looking Statements
This report contains forward-looking statements that are based on management's
beliefs, assumptions, current expectations, estimates, and projections about BOK
Financial, the financial services industry and the economy in general. Words
such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans,"
"projects," variations of such words and similar expressions are intended to
identify such forward-looking statements. Management judgments relating to and
discussion of the provision and reserve for loan losses involve judgments as to
expected events and are inherently forward-looking statements. Assessments that
BOK Financial's acquisitions and other growth endeavors will be profitable are
necessary statements of belief as to the outcome of future events, based in part
on information provided by others that BOK Financial has not independently
verified. These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions that are difficult to predict with
regard to timing, extent, likelihood and degree of occurrence. Therefore, actual
results and outcomes may materially differ from what is expressed, implied, or
forecasted in such forward-looking statements. Internal and external factors
that might cause such a difference include, but are not limited to: (1) the
ability to fully realize expected cost savings from mergers within the expected
time frames, (2) the ability of other companies on which BOK Financial relies to
provide goods and services in a timely and accurate manner, (3) changes in
interest rates and interest rate relationships, (4) demand for products and
services, (5) the degree of competition by traditional and nontraditional
competitors, (6) changes in banking regulations, tax laws, prices, levies, and
assessments, (7) the impact of technological advances and (8) trends in customer
behavior as well as their ability to repay loans. BOK Financial and its
affiliates undertake no obligation to update, amend, or clarify forward-looking
statements, whether as a result of new information, future events or otherwise.
PART II. Other Information
Item 1. Legal Proceedings
See discussion of legal proceedings at footnote 8 to the consolidated
financial statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases made by
or on behalf of the Company or any "affiliated purchaser" (as defined in Rule
10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company's common
stock during the three months ended September 30, 2009.
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
Total Number Average Price Total Number of Shares Purchased Maximum Number of Shares
of Shares Paid per Share as Part of Publicly Announced that May Yet Be Purchased
Period Purchased (2) Plans or Programs (1) Under the Plans
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
July 1, 2009 to 4,111 $35.51 - 1,215,927
July 31, 2009
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
August 1, 2009 to 714 $44.97 - 1,215,927
August 31, 2009
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
September 1, 2009 to 6,770 $45.69 - 1,215,927
September 30, 2009
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
Total 11,595 -
------------------------ ---------------- ---------------- ------------------------------------ -----------------------------
(1) The Company had a stock repurchase plan that was initially authorized by
the Company's board of directors on February 24, 1998 and amended on May
25, 1999. Under the terms of that plan, the Company could repurchase up to
800,000 shares of its common stock. As of March 31, 2005, the Company had
repurchased 638,642 shares under that plan. On April 26, 2005, the
Company's board of directors terminated this authorization and replaced it
with a new stock repurchase plan authorizing the Company to repurchase up
to two million shares of the Company's common stock. As of September 30,
2009, the Company had repurchased 784,073 shares under the new plan.
(2) The Company routinely repurchases mature shares from employees to cover the
exercise price and taxes in connection with employee stock option
exercises.
81
Item 6. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Items 1A, 3, 4 and 5 are not applicable and have been omitted.
82
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOK FINANCIAL CORPORATION
(Registrant)
Date: October 30, 2009 /s/ Steven E. Nell
--------------------------- -----------------------------------
Steven E. Nell
Executive Vice President and
Chief Financial Officer
/s/ John C. Morrow
-----------------------------------
John C. Morrow
Senior Vice President and
Chief Accounting Officer