BOK Financial
Annual Report 2009

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Plain-text annual report

2009 Annual Report www.bokf.com Table of Contents: Letter to Our Shareholders 2009 Overview Board of Directors Corporate Information 01 03 08 10 LeTTer To our SharehoLderS In 2009, the banking industry continued to face severe recessionary headwinds. 140 banks and thrifts failed and others struggled to make a profit. In fact, nearly half of our peers reported losses for the year. Many banks accepted financial assistance from the federal government. Others, including 70% of our peers, issued additional capital, diluting their shareholders’ interests. Despite this difficult environment, BOK Financial continued to produce superior returns for our shareholders. We ended the year with over $2 billion in shareholder’s equity that was built on retained earnings, not government assistance. We were the largest commercial bank in the country that elected to not participate in the Treasury’s Capital Purchase Program, an element of the Troubled Asset Relief Program (TARP). We had no need to raise external dilutive capital. Our capital ratios remain strong, as tangible common equity increased to 7.99%. BOK Financial generated net income of $201 million or $2.97 per diluted share for 2009. Net interest revenue increased nearly 10%, bolstered by lower funding costs and improved loan pricing. Fees and commission revenue increased nearly 16%, with tremendous growth in mortgage banking and brokerage and trading revenue offsetting decreases in trust and other fee revenue. On the expense side, we implemented several non-personnel expense initiatives which are projected to save nearly $9 million annually. While there has been much speculation in many organizations regarding what went wrong, BOK Financial has continued to be a strong performer. We attribute our success to our adherence to our core strategies and outstanding execution by our talented employees. Though we are a complex organization offering many sophisticated services and products, our strategies are basic and direct. Building diverse revenues is a key element to our strategy. Our particular combination of fee-based services helps produce relatively consistent earnings through economic cycles. This past year when low interest rates and declining market values put pressure on trust revenue, our mortgage banking revenue more than offset the decline. Historically, our fee revenue consistently represents at least 40% of total revenue. A balanced strategy requires discipline. During the years prior to the recession when the economy was growing rapidly, BOK Financial limited growth in higher risk segments of the loan portfolio, helping limit portfolio risk. Many of our peers substantially increased their commercial real estate loan volumes, leading to a series of dramatic losses. Similarly, our pace of expansion has been measured. The result is controlled growth through moderate branching and opportunistic acquisitions. Another key element of our strategy is our focus on talent. The best strategies are of little value, if you lack the talent to successfully execute. We have continued to recruit great talent over the years, and last year, took advantage of the disruption in the industry to add depth and expertise throughout the organization. While we are not immune to declining property values and rising unemployment, we move quickly to identify and address potential credit problems, and work closely with customers to resolve issues. When we do end up with foreclosed assets, we look for the ideal time to sell assets rather than rushing to liquidate assets at a low point in the market. We are confident our approach to dealing with the economic realities will help us emerge from the recession earlier than the industry as a whole, and better positioned to fuel future economic growth. 2010 will be another challenging year. While the outlook has improved from a year ago, there is continued uncertainty about the pace of the recovery and the impact of regulatory reform. We face these challenges with confidence, knowing our core strategies will continue to serve us well in the future. We want to express our appreciation to our loyal customers and talented employees, and for the support from our shareholders and the communities we serve. George B. Kaiser Chairman Stanley A. Lybarger President & CEO 2 CorporaTe profiLe BOK Financial Corporation (BOKF) is a financial holding company headquartered in Tulsa, Oklahoma, that provides commercial and consumer banking, investment and trust services, mortgage origination and servicing and one of the nation’s largest electronic funds networks. BOKF operates seven banks with full service locations in eight states throughout the Midwest, Southwest and Rocky Mountain regions. BOKF remains in a position of financial and organizational strength despite the continued recessionary environment. During 2009, we increased our dividend, opened five new branches, invested in service capabilities and recruited top talent to add depth and expertise throughout the organization. The following metrics highlight our financial performance for the year. • Net income was $200.6 million, up 31% from 2008. • Non-interest income, up nearly 16%, continues to represent over 40% of total revenue. • Tangible common equity was 7.99%. • Shareholders’ equity of $2.2 billion is built on retained earnings, not government assistance. • BOKF has a solid combined reserve for loan losses of 2.72%. • Net charge-offs were 1.14% of average loans for 2009, a level comfortably below our peer median of 1.86%. We define our peers as the ten immediately larger and ten immediately smaller publicly traded U.S. bank holding companies based on total assets. We attribute our success to the balanced strategy which has sustained us throughout varying economic cycles as indicated by the graph below. Key elements of the strategy include a strong stream of diversified fee revenue, controlled loan growth, disciplined branching and acquisition strategies and an exceptionally talented workforce. During the years prior to the recession when the economy was growing rapidly, BOKF deliberately grew the sectors of the loan portfolio proportionately, avoiding concentrations. BOKF’s employees are dedicated to developing relationships with customers and providing unparalleled personalized service. This winning combination has consistently enhanced shareholder value. Net Income and EPS EPS CAGR 12% 250 200 150 100 50 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: SNL Financial EPS have been restated for stock dividends and for a 2-for-1 split Net Income EPS 3.50 3.00 2.50 2.00 1.50 1.00 .50 .00 3 s n o i l l i M n I oVerVieW All information is presented as of December 31, 2009. • Assets of $23.5 billion • Loans of $11.3 billion • Combined reserves for credit losses of 2.72% • Deposits of $15.5 billion • Shareholders’ equity of $2.2 billion • Tangible common equity ratio of 7.99% • Market cap of $3.3 billion • 197 Banking locations LoaNS • Commercial and Industrial loan focus centered around strong middle-market customers • Controlled Commercial Real Estate exposure consistently maintained below 25% of total loans • Energy lending expertise dating back 100 years • Regionally diverse portfolio, including 46% in Oklahoma, 29% in Texas, 8% in Colorado, 7% in New Mexico and the remaining 10% evenly distributed in Kansas, Arkansas and Arizona depoSiTS • Five year compound annual growth rate of 10% • Regionally diverse portfolio including 56% in Oklahoma, 26% in Texas, 8% in New Mexico and 7% in Colorado • Demand deposits represent 24% of total deposits • 60% Consumer and Wealth Management deposits, 40% Commercial deposits 4 Diverse Revenue Net Interest Revenue 59% Mortgage Banking 5% Deposit Service Charges 10% Other 4% Trust Fees 5% Transaction Card 9% Brokerage and Trading 8% Loans by Sector Residential Mortgage 16% Energy 17% Consumer 7% Other CRE 12% Office CRE 4% Construction and Land Dev 6% Services 16% Wholesale/ Retail 8% Healthcare 7% Other Commercial 7% Deposit Composition s n o i l l i B n I $16 $12 $8 $4 $0 2005 2006 2007 2008 2009 Demand Interest Bearing Transaction Savings Time CapiTaL • Capital consists almost entirely of common equity built with retained earnings, not hybrid forms of less secure capital • Largest traditional commercial bank to decline participation in the U.S. Treasury’s Troubled Asset Relief Plan (TARP) • No need to support capital with dilutive common stock issuances • Capital sufficient to support organic growth, maintain dividends and seek acquisitions 16% 14% 12% 10% 8% 6% 4% CoMMerCiaL • Commercial banking continues to be the leading revenue generator • Well established local management reduces turnaround time for loans to commercial customers • Talented relationship managers tailor products to customers’ unique business needs • Broad array of fee businesses including treasury management, international and financial risk management CoNSuMer • Consumers served through 123 traditional branches and 56 supermarket branches • Strong branch network with 71 in Oklahoma metropolitan markets, 33 in Dallas, 15 in Houston, 22 in Albuquerque and 15 in Denver • Over $3 billion of mortgage loans were funded in 2009; 46% were originated in our market states outside of Oklahoma • Top-tier mortgage servicer of $7.4 billion mortgage loans including loans serviced for affiliates Capital Ratios Tier I Total Capital Leverage TCE/TA 2007 2008 2009 Regulatory definition of “well capitalized” Commercial Revenue 2005 2006 2007 2008 2009 Deposits and Fee Income s n o i l l i M n I $500 $400 $300 $200 $100 $0 s n o i l l i B n I $7 $6 $5 $4 $3 $2 $1 $0 2005 2006 2007 2008 2009 Consumer Deposits Fee Income $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 I n M i l l i o n s 5 WeaLTh MaNaGeMeNT • BOSC, our broker-dealer, provides retail brokerage and institutional trading and investment banking services Wealth Management Revenue • Private Banking consists of personalized banking, trust and BOSC 49% investment services • Institutional Wealth Management consists of Corporate Trust and retirement and employee benefit services • Trust assets total $30 billion including $10.8 billion in discretionary assets Private Banking 36% Institutional Wealth Management 15% Stable NIM i n g r a M t s e r e t n I t e N 3.60% 3.50% 3.40% 3.30% 3.20% 3.10% 3.00% 2005 2006 2007 2008 2009 BOKF NIM Prime Rate P r i m e R a t e 10% 9% 8% 7% 6% 5% 4% 3% Total Assets Assets CAGR 13% $25 $20 $15 $10 $5 $0 97 98 99 00 01 02 03 04 05 06 07 08 09 Net Income exceeds $100 million Net Income exceeds $200 million Shareholders’ equity exceeds $2 billion s n o i l l i B n I BaLaNCe SheeT MaNaGeMeNT Our strategy of maintaining an essentially neutral interest rate risk position has produced strong net interest revenue and relatively stable net interest margin over time. • The fixed-rate investment portfolio, consisting of largely U.S. government agency mortgage-backed securities, helps to offset the inherent asset sensitivity of the balance sheet • 64% of the commercial and commercial real estate loan portfolios re-price within one year • Strong bank liquidity driven by 73% loan to deposit ratio, minimal reliance on brokered funds and significant secured borrowing capacity • Limited usage of derivatives to manage balance sheet risk position; customer derivative positions are offset by contracts with high quality counterparties reGioNaL eXpaNSioN Our philosophy has been to seek out top quality banks with proven performance in high growth metropolitan markets that are within close proximity of Oklahoma. • Began regional expansion in 1997 with the purchase of two banks in the Dallas market • Acquired and integrated 12 institutions with total assets of $2.7 billion in four states over the past 12 years • Built on existing strengths and customer base of purchased banks • Continue to seek franchise-building acquisition opportunities in our existing markets 6 aSSeT QuaLiTY All subsidiary banks operate under the same credit policy and are subject to centralized credit administration and oversight. • In response to economic conditions, we quickly moved problem credits to our special assets department for assessment and planned resolution • Our strategy focuses on maximizing long-term economic recoveries of problem assets; we do not sell distressed assets at discounted prices • Non-accruing loans totaled $339 million or 3.0% of total loans • Real estate and other repossessed assets totaled $129 million; 40% are assets located in the distressed Arizona market • Combined reserve for loan losses represents 2.72% of total loans or 90% coverage of non-performing loans • Net charge offs have stabilized over the last three quarters at approximately $35 million per quarter or 1.19% annualized; the loan loss reserve would cover more than eight quarters of this stabilized charge-off rate • Performing loans greater than 90 days past due total only $10 million, showing steady improvement over the last three quarters i s t n o P s i s a B n I 120 100 80 60 40 20 0 2.5% 2.0% 1.5% 1.0% 0.5% 0% Net Charge-Offs 2005 2006 2007 2008 2009 Commercial Residential RE CRE Consumer Nonperforming Assets/Assets 2005 2006 2007 2008 2009 Commercial CRE Residential RE OREO/OAO Renegotiated Loans CrediT raTiNGS BOK Financial Corp. Fitch Moody’s Standard & Poor’s DBRS Long-Term Rating Outlook A- Stable A2 Negative BBB+ Stable A (low) Stable Bank of Oklahoma, N.A. Long-Term Rating Short-Term Rating A- F1 A1 P-1 A- A-2 A R-1 (low) BoK fiNaNCiaL CorporaTioN Board of direCTorS Gregory S. Allen 1 President & CEO Advance Food Co., Inc. C. Fred Ball, Jr. Senior Chairman Bank of Texas, N.A. Sharon J. Bell 1 Managing Partner Rogers & Bell Peter C. Boylan, III 1 CEO Boylan Partners, LLC Chester Cadieux, III 1 Chairman & CEO QuikTrip Corporation Joseph W. Craft, III 1 President & CEO Alliance Resource Partners William E. Durrett Senior Chairman American Fidelity Corp. John Gibson 1 CEO ONEOK, Inc. David F. Griffin 1 President & General Manager Griffin Communications, L.L.C. V. Burns Hargis 1 President Oklahoma State University E. Carey Joullian, IV 1 Chairman, President & CEO Mustang Fuel Corporation George B. Kaiser 1 Chairman BOK Financial Corporation and Bank of Oklahoma, N.A. Robert J. LaFortune Personal Investments Stanley A. Lybarger President & CEO BOK Financial Corporation and Bank of Oklahoma, N.A. Steven J. Malcolm 1 Chairman, President & CEO The Williams Companies, Inc. EC Richards 1 Manager Core Investment Capital, LLC 8 1 Director of BOK Financial Corporation and Bank of Oklahoma, N.A. Tom E. Turner Chairman Emeritus Bank of Texas, N.A. - Dallas John C. Vogt Personal Investments Mark D. Walker Partner Weaver, LLP Colorado State Bank and Trust George P. Caulkins, III Principal Greendeck Capital Ralph W. Christie, Jr. Chairman, President & CEO Merrick & Company Polly B. Lestikow President Closet Factory Richard H. Lewis Personal Investments James M. Mulligan Of Counsel Snell & Wilmer Jeff S. Potter CEO Exclusive Resorts eXTerNaL MeMBerS of The SuBSidiarY BaNKS’ BoardS of direCTorS Bank of Albuquerque Adelmo Archuleta Owner, Professional Engineer Molzen-Corbin & Associates Suzanne Barker-Kalangis, Esq. Executive Director Thornburg Charitable Foundation Rudy A. Davalos Chairman of the Executive Board New Mexico Bowl William E. Garcia Retired Senior Manager, Public Affairs Intel Corporation Robert M. Goodman Retired, Vice Chairman Bank of Albuquerque, N.A. Thomas D. Growney President Tom Growney Equipment, Inc. Michael D. Sivage Chief Executive Officer STH Investments, Inc. Bank of Arizona Sam K. Campana Executive Director Audubon Arizona Shelley M. Cohn Dennis J. Cornelius Cornelius Korte Shum, LLC Susan M. Haugland President Bestbill® Scott P. LeMarr President Palo Cristi Investments Kathleen S. Pushor President Inner Capital Andrew Spillum, CPA Partner Eide Bailly CPA’s & Business Advisors Bank of Arkansas George C. Faucette, Jr. Owner Coldwell Banker Faucette Real Estate Company Dr. Stephen Lee Goss Physician Executive Mercy Health Systems of Northwest Arkansas Bank of Kansas City Donald O. Borgman Retired Lorelei M. Dean President Dean Machinery Timothy A. Johnson Director of Finance Garmin International Susan Stanton President & CEO Kansas City Public Television Bank of Texas* Jan Hart Black Former President Dallas Regional Chamber of Commerce Joe Colonnetta Partner HM Capital Partners David R. Corrigan CEO Corrigan Investments, Inc. H. Lynn Craft President & CEO Baptist Foundation of Texas Charles W. Eisemann Personal Investments Douglas D. Hawthorne President & CEO Texas Health Resources Bill D. Henry Chairman & CEO McQuery Henry Bowles Troy, LLP Albert W. Niemi, Jr. Dean, Cox School of Business Southern Methodist University Charles J. O’Connell Community Volunteer - Houston Whit Perryman CEO Vermeer Equipment of Texas, Inc. Jeff Springmeyer President Geophysical Pursuit, Inc. Jere W. Thompson, Jr. CEO Ambit Energy Robert B. Trainer, Jr. Chief Financial Officer Gyrodata, Inc. *Advisory Directors 9 Morgan Stanley & Co., Inc. MPName NASDAQ Execution Services LLC Octeg, LLC Pershing Advisor Solution LLC Piper Jaffray & Co. RBC Capital Markets Corp Sandler O’Neill & Partners Stephens Inc. Sterne, Agee & Leach, Inc. Stifel Nicolaus & Co. SunTrust Capital Markets Inc Susquehanna Capital Group Susquehanna Financial Group, Thomas Weisel Partners Timber Hill Inc. UBS Securities LLC Vandham Securities Virtu Financial BD LLC Wells Fargo Securities, LLC. Transfer Agent, Registrar and Dividend Disbursing Agent Wells Fargo Shareowner Services P.O. Box 64874 St. Paul, MN 55164-0874 1-800-468-9716 www.wellsfargo.com/shareownerservices Copies of BOK Financial Corporation’s Annual Report to Shareholders, Quarterly Reports and Form 10-K to the Securities and Exchange Commission are available without charge upon written request. Analysts, shareholders and other investors seeking financial information about BOK Financial Corporation are invited to contact Susie Hinkle, Vice President, (918) 588-6752. Information about BOK Financial Corporation is also readily available at: www.bokf.com Registered shareholders of BOK Financial Corporation stock may reinvest dividends and purchase additional shares through the BOK Financial Corporation Dividend Reinvestment Plan. Certain restrictions apply. Shareholders may obtain a plan brochure by writing to Wells Fargo Shareowner Services, P.O. Box 64856, St. Paul, MN 55164-0856, by calling 1-800-468-9716 or by visiting www.shareowneronline.com. SharehoLder iNforMaTioN Corporate Headquarters: Bank of Oklahoma Tower P.O. Box 2300 Tulsa, Oklahoma 74192 (918) 588-6000 Independent Auditors: Ernst & Young LLP 1700 One Williams Center Tulsa, Oklahoma 74172 (918) 560-3600 Legal Counsel: Frederic Dorwart Lawyers Old City Hall 124 E. Fourth St. Tulsa, Oklahoma 74103 (918) 583-9922 Common Shares: Traded NASDAQ National Market NASDAQ Symbol: BOKF Number of common shareholders of record at December 31, 2009: 932 Market Makers: Archipelago Stock Exchange Automated Trading Desk Barclays Capital Inc./Le Bats Trading, Inc. BMO Capital Markets Corp. Cantor, Fitzgerald & Co. Chicago Board Options Exchang Citadel Securities LLC Citigroup Global Markets Inc. Cowen and Company, LLC Credit Suisse Securities USA Deutsche Banc Alex Brown Domestic Securities, Inc. E*Trade Capital Markets Llc FBR Capital Markets & Co. Goldman, Sachs & Co. Howe Barnes Investments Inc Hudson Securities, Inc. Int’l Securities Exchange J.P. Morgan Securities Inc. Jefferies & Company, Inc. JMP Securities LLC Keefe, Bruyette & Woods, Inc. Knight Equity Markets, L.P. Merrill Lynch, Pierce, Fenner 10 As filed with the Securities and Exchange Commission on February 26, 2010 SECURITIES AND EXCHANGE COMMISSION UNITED STATES Washington, D.C. 20549 (Mark One) FORM 10-K ⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT For the fiscal year ended December 31, 2009 OR (cid:133) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 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 (State or other jurisdiction of incorporation or organization) 73-1373454 (IRS Employer Identification No.) Bank of Oklahoma Tower P.O. Box 2300 Tulsa, Oklahoma (Address of principal executive offices) 74192 (Zip code) (918) 588-6000 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common stock, $0.00006 par value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ⌧ No (cid:133) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes (cid:133) No ⌧ 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 ⌧ No (cid:133) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:133) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer or a smaller reporting company. See definitions of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ⌧ Accelerated filer (cid:133) Non-accelerated filer (cid:133) Smaller reporting company (cid:133) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:133) No ⌧ The aggregate market value of the registrant’s common stock (“Common Stock”) held by non-affiliates is approximately $945,143,201 (based on the June 30, 2009 closing price of Common Stock of $37.67 per share). As of January 31, 2010, there were 67,809,896 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates certain information by reference from the Registrant’s Proxy Statement for the 2010 Annual Meeting of Shareholders. BOK FINANCIAL CORPORATION ANNUAL REPORT ON FORM 10-K INDEX ITEM PAGE 1. 1A. 1B. 2. 3. 4. 5. 6. 7. 7A. 8. 9. 9A. 9B. 10. 11. 12. 13. 14. 15. PART I Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Submission of Matters to a Vote of Security Holders PART II Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services PART IV Exhibits, Financial Statement Schedules Signatures Chief Executive Officer Section 302 Certification, Exhibit 31.1 Chief Financial Officer Section 302 Certification, Exhibit 31.2 Section 906 Certifications, Exhibit 32 1 6 9 9 9 9 10 11 12 62 64 122 122 122 123 123 123 123 123 123 130 132 133 134 ITEM 1. BUSINESS PART I General Developments relating to individual aspects of the business of BOK Financial Corporation (“BOK Financial” or “the Company”) are described below. Additional discussion of the Company’s activities during the current year appears within Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Description of Business BOK Financial is a financial holding company whose activities are limited by the Bank Holding Company Act of 1956 (“BHCA”), as amended by the Financial Services Modernization Act or Gramm-Leach-Bliley Act. BOK Financial offers full service banking in Oklahoma, Dallas, Fort Worth and Houston, Texas, Albuquerque, New Mexico, Northwest Arkansas, Denver, Colorado, Phoenix, Arizona, and Kansas City, Kansas/Missouri. Principal subsidiaries are Bank of Oklahoma, N.A. ("BOk"), Bank of Texas, N.A., Bank of Albuquerque, N.A., Bank of Arkansas, N.A., Colorado State Bank and Trust, N.A., Bank of Arizona, N.A., and Bank of Kansas City, N.A. (collectively, the “Banks”). Other subsidiaries include BOSC, Inc., a broker/dealer that engages in retail and institutional securities sales and municipal bond underwriting. Other non- bank subsidiary operations do not have a significant effect on the Company’s financial statements. Our overall strategic objective is to emphasize growth in long-term value by building on our leadership position in Oklahoma and expanding into high-growth markets. We have a solid position in Oklahoma and are the state’s second largest financial institution as measured by deposit market share. Since 1997, we have expanded into Dallas, Fort Worth and Houston, Texas, Albuquerque, New Mexico, Denver, Colorado, Phoenix, Arizona, and Kansas City, Kansas/Missouri. We are currently exploring opportunities for further growth in these markets. Our primary focus is to provide a broad range of financial products and services, including loans and deposits, cash management services, fiduciary services, mortgage banking and brokerage and trading services to middle-market businesses, financial institutions and consumers. Our revenue sources are diversified. Approximately 40% of our 2009 revenue came from commissions and fees. Commercial banking is a significant part of our business. Our credit culture emphasizes building relationships by making high quality loans and providing a full range of financial products and services to our customers. Our energy financing expertise enables us to offer commodity derivatives for customers to use in their risk management and positioning activities. In a more normal operating environment our acquisition strategy targets quality organizations that have demonstrated solid growth in their business lines. We provide additional growth opportunities by hiring talent to enhance competitiveness, adding locations, and broadening product offerings. Our operating philosophy embraces local decision-making for each of our bank subsidiaries while adhering to common standards. In the current distressed operating environment we are actively looking to participate in FDIC-assisted acquisitions in existing markets. BOK Financial’s corporate headquarters is located at Bank of Oklahoma Tower, P.O. Box 2300, Tulsa, Oklahoma 74192. The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are available on the Company’s website at www.bokf.com as soon as reasonably practicable after the Company electronically files such material with or furnishes it to the Securities and Exchange Commission. Operating Segments BOK Financial operates three principal lines of business: commercial banking, consumer banking and wealth management. Commercial banking includes lending, treasury and cash management services and customer risk management products for small businesses, middle market and larger commercial customers. Commercial banking also includes the TransFund electronic funds network. Consumer banking includes retail lending and deposit services and all mortgage banking activities. Wealth management provides fiduciary services, brokerage and trading, private bank services and investment advisory services in all markets. Discussion of these principal lines of business appears within the Lines of Business section of “Management's Discussion and Analysis of Financial Condition and Results of Operations” and within Note 17 of the Company’s Notes to Consolidated Financial Statements, both of which appear elsewhere herein. 1 Competition BOK Financial and its operating segments face competition from other banks, thrifts, credit unions and other non-bank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, investment companies, government agencies, mortgage brokers and insurance companies. The Company competes largely on the basis of customer services, interest rates on loans and deposits, lending limits and customer convenience. Some operating segments face competition from institutions that are not as closely regulated as banks, and therefore are not limited by the same capital requirements and other restrictions. All market share information presented below is based upon share of deposits in specified areas according to SNL DataSource as of December 31, 2009. BOk is the largest banking subsidiary of BOK Financial and has the second largest market share in Oklahoma with 11% of the state’s total deposits. In the Tulsa and Oklahoma City areas, BOk has 24% and 8% of the market share, respectively. BOk competes with two banks that have operations nationwide and have greater access to funds at lower costs, higher lending limits, and greater access to technology resources. BOk also competes with regional and locally owned banks in both the Tulsa and Oklahoma City areas, as well as in every other community in which we do business throughout the state. Through other subsidiary banks, BOK Financial competes in Dallas, Fort Worth and Houston, Texas, Albuquerque, New Mexico, Denver, Colorado, Phoenix, Arizona, Northwest Arkansas, and Kansas City, Kansas/Missouri. Bank of Texas competes against numerous financial institutions, including some of the largest in the United States, and has a market share of approximately 2% in the Dallas, Fort Worth area and 1% in the Houston area. Bank of Albuquerque has a number four market share position with 10% of deposits in the Albuquerque area and competes with two large national banks, some regional banks and several locally-owned smaller community banks. Colorado State Bank and Trust has a market share of approximately 2% in the Denver area. Bank of Arizona operates as a community bank with locations in Phoenix, Mesa and Scottsdale. Bank of Arkansas serves Benton and Washington counties in Arkansas, and Bank of Kansas City serves the Kansas City, Kansas/Missouri market. The Company’s ability to expand into additional states remains subject to various federal and state laws. Employees As of December 31, 2009, BOK Financial and its subsidiaries employed 4,355 full-time equivalent employees. None of the Company’s employees are represented by collective bargaining agreements. Management considers its employee relations to be good. Supervision and Regulation BOK Financial and its subsidiaries are subject to extensive regulations under federal and state laws. These regulations are designed to protect depositors, the Bank Insurance Fund and the banking system as a whole and not necessarily to protect shareholders and creditors. As detailed below, these regulations may restrict the Company’s ability to diversify, to acquire other institutions and to pay dividends on its capital stock. They also may require the Company to provide financial support to its subsidiaries, maintain certain capital balances and pay higher deposit insurance premiums. During 2009, legislation was proposed in Congress to restructure and strengthen supervision and regulation of the financial services industry in the United States. It is generally probable that laws and regulations affecting banks will increase and become more restrictive and costly. The likelihood and timing of any specific new proposals or legislation and the impact they might have on the Company and its subsidiaries cannot be predicted at this time. The following information summarizes certain existing laws and regulations that affect the Company’s operations. It does not discuss all provisions of these laws and regulations and it does not summarize all laws and regulations that affect the Company. General As a financial holding company, BOK Financial is regulated under the BHCA and is subject to regular inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Under the BHCA, BOK Financial files quarterly reports and other information with the Federal Reserve Board. The Banks are organized as national banking associations under the National Banking Act, and are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (the “OCC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Federal Reserve Board and other federal and state regulatory agencies. The OCC has primary supervisory responsibility for national banks and must approve certain corporate or structural changes, including changes in capitalization, payment of dividends, change of place of business, and establishment of a branch or operating subsidiary. The OCC performs its functions through national bank examiners who provide the OCC with information concerning the soundness of a national bank, the quality of management and directors, and compliance with applicable regulations. The National Banking Act authorizes the OCC to examine every national bank as often as necessary. 2 A financial holding company, and the companies under its control, are permitted to engage in activities considered “financial in nature” as defined by the Gramm-Leach-Bliley Act and Federal Reserve Board interpretations, and therefore may engage in a broader range of activities than permitted for bank holding companies and their subsidiaries. Activities that are “financial in nature” include securities underwriting and dealing, insurance underwriting, operating a mortgage company, credit card company or factoring company, performing certain data processing operations, servicing loans and other extensions of credit, providing investment and financial advice, owning and operating savings and loan associations, and leasing personal property on a full pay-out, non-operating basis. In order for a financial holding company to commence any new activity permitted by the BHCA, each insured depository institution subsidiary of the financial holding company must have received a rating of at least satisfactory in its most recent examination under the Community Reinvestment Act. A financial holding company is required to notify the Federal Reserve Board within thirty days of engaging in new activities determined to be “financial in nature.” BOK Financial is engaged in some of these activities and has notified the Federal Reserve Board. The BHCA requires the Federal Reserve Board’s prior approval for the direct or indirect acquisition of more than five percent of any class of voting stock of any non-affiliated bank. Under the Federal Bank Merger Act, the prior approval of the OCC is required for a national bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the applicant’s performance record under the Community Reinvestment Act and fair housing laws and the effectiveness of the subject organizations in combating money laundering activities. A financial holding company and its subsidiaries are prohibited under the BHCA from engaging in certain tie-in arrangements in connection with the provision of any credit, property or services. Thus, a subsidiary of a financial holding company may not extend credit, lease or sell property, furnish any services or fix or vary the consideration for these activities on the condition that (1) the customer obtain or provide additional credit, property or services from or to the financial holding company or any subsidiary thereof, or (2) the customer may not obtain some other credit, property or services from a competitor, except to the extent reasonable conditions are imposed to insure the soundness of credit extended. The Banks and other non-bank subsidiaries are also subject to other federal and state laws and regulations. For example, BOSC, Inc., the Company’s broker/dealer subsidiary that engages in retail and institutional securities sales and municipal bond underwriting, is regulated by the Securities and Exchange Commission, the Financial Industry Regulatory Authority (FINRA), the Federal Reserve Board, and state securities regulators. As another example, Bank of Arkansas is subject to certain consumer-protection laws incorporated in the Arkansas Constitution, which, among other restrictions, limit the maximum interest rate on general loans to five percent above the Federal Reserve Discount Rate and limit the rate on consumer loans to the lower of five percent above the discount rate or seventeen percent. Capital Adequacy and Prompt Corrective Action The Federal Reserve Board, the OCC and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations to ensure capital adequacy based upon the risk levels of assets and off-balance sheet financial instruments. In addition, these regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators regarding components, risk weighting and other factors. The Federal Reserve Board risk-based guidelines define a three-tier capital framework. Core capital (Tier 1) includes common shareholders’ equity and qualifying preferred stock, less goodwill, most intangible assets and other adjustments. Supplementary capital (Tier 2) consists of preferred stock not qualifying as Tier 1 capital, qualifying mandatory convertible debt securities, limited amounts of subordinated debt, other qualifying term debt and allowances for credit losses, subject to limitations. Market risk capital (Tier 3) includes qualifying unsecured subordinated debt. Assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily upon relative credit risk. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. For a depository institution to be considered well capitalized under the regulatory framework for prompt corrective action, the institution’s Tier 1 and total capital ratios must be at least 6% and 10% on a risk-adjusted basis, respectively. As of December 31, 2009, BOK Financial’s Tier 1 and total capital ratios under these guidelines were 10.86% and 14.43%, respectively. The leverage ratio is determined by dividing Tier 1 capital by adjusted average total assets. Banking organizations are required to maintain a ratio of at least 5% to be classified as well capitalized. BOK Financial’s leverage ratio at December 31, 2009 was 8.05%. The Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”), among other things, identifies five capital categories for insured depository institutions from well capitalized to critically undercapitalized and requires the respective federal regulatory agencies to implement systems for prompt corrective action for institutions failing to meet 3 minimum capital requirements within such categories. FDICIA imposes progressively more restrictive covenants on operations, management and capital distributions, depending upon the category in which an institution is classified. The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under these guidelines, each of the Banks was considered well capitalized as of December 31, 2009. The federal regulatory authorities’ risk-based capital guidelines are based upon the 1988 capital accord of the Basel Committee on Banking Supervision (the “BIS”). The BIS is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. In 2004, the BIS published a new capital accord to replace its 1988 capital accord, with an update in November 2005 (“Basel II”). Basel II provides two approaches for setting capital standards for credit risk — an internal ratings-based approach tailored to individual institutions’ circumstances (which for many asset classes is itself broken into a “foundation” approach and an “advanced or A-IRB” approach, the availability of which is subject to additional restrictions) and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than permitted in existing risk-based capital guidelines. Basel II also would set capital requirements for operational risk and refine the existing capital requirements for market risk exposures. In 2009, BIS announced enhancements to the Basel II framework. In general, these enhancements involve higher capital requirements, further supervisory review and guidance, and increased disclosures. Higher capital requirements would apply to certain items such as liquidity facilities and other off-balance sheet exposures. Reputation risk has been added as a specific risk management topic. In addition, future capital requirements will likely include stress tests of relevant values such as credit performance, interest rate moves and funding sources. It is generally probable that the announced enhancements to the Basel II framework, along with changes in laws and regulations affecting banks in the United States will increase capital requirements. The likelihood and timing of any specific changes and the impact they might have on the Company and its subsidiaries cannot be predicted at this time. Further discussion of regulatory capital, including regulatory capital amounts and ratios, is set forth under the heading “Liquidity and Capital” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 15 of the Company’s Notes to Consolidated Financial Statements, both of which appear elsewhere herein. Deposit Insurance Substantially all of the deposits held by the Banks are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating (“CAMELS rating”). As of January 1, 2007, the previous nine risk categories utilized in the risk matrix were condensed into four risk categories, which continue to be distinguished by capital levels and supervisory ratings. For large Risk Category 1 institutions (generally those with assets in excess of $10 billion) that have long-term debt issuer ratings, including Bank of Oklahoma, assessment rates are determined from weighted-average CAMELS component ratings and long-term debt issuer ratings. The minimum annualized assessment rate for large institutions is 12 basis points per $100 of deposits and the maximum annualized assessment rate for large institutions is 50 basis points per $100 of deposits. Quarterly assessment rates for large institutions in Risk Category 1 may vary within this range depending upon changes in CAMELS component ratings and long-term debt issuer ratings. In response to an increase in bank failures, the board of directors of the FDIC approved a special assessment during 2009. This assessment was calculated as 5 basis points times each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. Collectively, the Banks paid $12 million of special assessment charges. On November 12, 2009 the board of directors of the FDIC voted to require insured institutions to prepay over three years of estimated insurance assessments on December 30, 2009 in order to strengthen the cash position of the DIF. As of December 31, 2009 and each quarter thereafter, the regular quarterly assessment will be applied against the prepaid assessment until the asset is exhausted. Any prepaid assessment not exhausted as of June 30, 2013 will be returned. Collectively, the Banks prepaid $78 million of deposit insurance assessments. In addition, the Banks are assessed a charge based on deposit balances by the Financing Corporation (“FICO”). The FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987 whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings & Loan Insurance Corporation. 4 Dividends The primary source of liquidity for BOK Financial is dividends from the Banks, which are limited by various banking regulations to net profits, as defined, for the year plus retained profits for the preceding two years and further restricted by minimum capital requirements. Based on the most restrictive limitations, the Banks had excess regulatory capital and could declare up to $225 million of dividends without regulatory approval as of December 31, 2009. BOK Financial management has developed and the Board of Directors has approved an internal capital policy that is more restrictive than the regulatory standards. Under this policy, the Banks could declare dividends of up to $190 million as of December 31, 2009. These amounts are not necessarily indicative of amounts that may be available to be paid in future periods. Source of Strength Doctrine According to Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, in the event of a loss suffered by the FDIC as a result of default of a banking subsidiary or related to FDIC assistance provided to a subsidiary in danger of default, the other Banks may be assessed for the FDIC’s loss, subject to certain exceptions. Governmental Policies and Economic Factors The operations of BOK Financial and its subsidiaries are affected by legislative changes and by the policies of various regulatory authorities and, in particular, the credit policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the national supply of bank credit to moderate recessions and curb inflation. Among the instruments of monetary policy used by the Federal Reserve Board to implement its objectives are: open-market operations in U.S. Government securities, changes in the discount rate and federal funds rate on bank borrowings, and changes in reserve requirements on bank deposits. The effect of future changes in such policies on the business and earnings of BOK Financial and its subsidiaries is uncertain. In response to a significant ongoing recession in business activity which began in 2007, the U.S. government enacted various programs and continues to enact programs to stimulate the economy. These programs include the Trouble Assets Relief Program (“TARP”), which provided capital to eligible financial institutions and other sectors of the domestic economy, and the TLGP, which expanded insurance coverage to a larger amount of deposit account balances and other qualifying debt issued by eligible financial institutions. In addition, the government recently enacted economic stimulus legislation, which increases government spending and reduces certain taxes. The long-term effects of these programs on the economy in general and on BOK Financial Corporation in particular are uncertain. The Company elected not to participate in the TARP Capital Purchase Program. We believe that current capital sources are sufficient to support organic growth, acquisitions within our current market areas, cash dividends on our common stock and periodic stock repurchases. The Sarbanes-Oxley Act (the “Act”) addresses many aspects of financial reporting, corporate governance and public company disclosure. Among other things, the Act establishes a comprehensive framework for the oversight of public company auditing and for strengthening the independence of auditors and audit committees. Under the Act, audit committees are responsible for the appointment, compensation and oversight of the work of the auditors. The non-audit services that can be provided to a company by its auditor are limited. Audit committee members are subject to specific rules addressing their independence. The Act also requires enhanced and accelerated financial disclosures, and it establishes various responsibility measures, such as requiring the chief executive officer and chief financial officer to certify to the quality of the company’s financial reporting. The Act imposes restrictions on and accelerated reporting requirements for certain insider trading activities. It imposes a variety of penalties for fraud and other violations and creates a federal felony for securities fraud. Various sections of the Act are applicable to BOK Financial. 5 Foreign Operations BOK Financial does not engage in operations in foreign countries, nor does it lend to foreign governments. ITEM 1A. RISK FACTORS Since 2007, the United States economy has been in recession. Business activity across a wide range of industries and geographic regions has decreased and unemployment has increased significantly. The financial services industry and capital markets have been adversely affected by significant declines in asset values, rising delinquencies and defaults, and restricted liquidity. Numerous financial institutions have either failed or required a significant amount of government assistance due to credit losses and liquidity shortages. Although there are indications that the economy has stabilized, there is no assurance that conditions will improve in the near term. Continued recession in the economy could adversely affect our credit quality, financial condition and results of operations. Adverse factors could impact BOK Financial's ability to implement its operating strategy. Although BOK Financial has developed an operating strategy which it expects to result in continuing improved financial performance, BOK Financial cannot assure that it will be successful in fulfilling this strategy or that this operating strategy will be successful. Achieving success is dependent upon a number of factors, many of which are beyond BOK Financial's direct control. Factors that may adversely affect BOK Financial's ability to implement its operating strategy include: • • • • • • • • deterioration of BOK Financial's asset quality; inability to control BOK Financial's noninterest expenses; inability to increase noninterest income; deterioration in general economic conditions, especially in BOK Financial's core markets; inability to access capital; decreases in net interest margins; increases in competition; adverse regulatory developments. Adverse regional economic developments could negatively affect BOK Financial's business. A substantial majority of BOK Financial loans are generated in Oklahoma and other markets in the southwest region. As a result, poor economic conditions in Oklahoma or other markets in the southwest region may cause BOK Financial to incur losses associated with higher default rates and decreased collateral values in BOK Financial's loan portfolio. A regional economic downturn could also adversely affect revenue from brokerage and trading activities, mortgage loan originations and other sources of fee-based revenue. Adverse economic factors affecting particular industries could have a negative effect on BOK Financial customers and their ability to make payments to BOK Financial. Certain industry-specific economic factors also affect BOK Financial. For example, a portion of BOK Financial's total loan portfolio is comprised of loans to borrowers in the energy industry, which is historically a cyclical industry. Low commodity prices may adversely affect that industry and, consequently, may affect BOK Financial's business negatively. The effect of volatility in commodity prices on our customer derivatives portfolio could adversely affect our liquidity and regulatory capital. In addition, BOK Financial's loan portfolio includes commercial real estate loans. A downturn in the real estate industry in general or in certain segments of the commercial real estate industry in Oklahoma and the southwest region could also have an adverse effect on BOK Financial's operations. 6 Fluctuations in interest rates could adversely affect BOK Financial's business. BOK Financial's business is highly sensitive to: • • • the monetary policies implemented by the Federal Reserve Board, including the discount rate on bank borrowings and changes in reserve requirements, which affect BOK Financial's ability to make loans and the interest rates we may charge; changes in prevailing interest rates, due to the dependency of BOK Financial's banks on interest income; open market operations in U.S. Government securities. Significant increase in market interest rates, or the perception that an increase may occur, could adversely affect both BOK Financial's ability to originate new loans and BOK Financial's ability to grow. Conversely, a decrease in interest rates could result in acceleration in the payment of loans, including loans underlying BOK Financial's holdings of mortgage-backed securities and termination of BOK Financial's mortgage servicing rights. In addition, changes in market interest rates, changes in the relationships between short-term and long-term market interest rates or changes in the relationships between different interest rate indices, could affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities. This difference could result in an increase in interest expense relative to interest income. An increase in market interest rates also could adversely affect the ability of BOK Financial's floating-rate borrowers to meet their higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and net charge-offs, which could adversely affect BOK Financial's business. BOK Financial's substantial holdings of mortgage-backed securities and mortgage servicing rights could adversely affect BOK Financial's business. BOK Financial has invested a substantial amount of its holdings in mortgage-backed securities, which are investment interests in pools of mortgages. Mortgage-backed securities are highly sensitive to changes in interest rates. BOK Financial mitigates this risk somewhat by investing principally in shorter duration mortgage products, which are less sensitive to changes in interest rates. A significant decrease in interest rates could lead mortgage holders to refinance the mortgages constituting the pool backing the securities, subjecting BOK Financial to a risk of prepayment and decreased return on investment due to subsequent reinvestment at lower interest rates. A significant decrease in interest rates could also accelerate premium amortization. Conversely, a significant increase in interest rates could cause mortgage holders to extend the term over which they repay their loans, which delays the Company’s opportunity to reinvest funds at higher rates. In an effort to reduce interest rates and stimulate the housing market, the Federal Reserve Bank has purchased a significant amount of mortgage-backed securities. The Federal Reserve Bank has announced that it will curtail purchases in 2010 which may result in rising interest rates and lower fair values of our mortgage-backed securities. Mortgage-backed securities are also subject to credit risk from delinquency or default of the underlying loans. BOK Financial mitigates this risk somewhat by investing in securities issued by U.S. government agencies. Principal and interest payments on the loans underlying these securities are guaranteed by these agencies. Credit risk on mortgage-backed securities originated by private issuers is mitigated somewhat by investing in senior tranches with additional collateral support. In addition, as part of BOK Financial's mortgage banking business, BOK Financial has substantial holdings of mortgage servicing rights. The value of these rights is also very sensitive to changes in interest rates. Falling interest rates tend to increase loan prepayments, which may lead to cancellation of the related servicing rights. BOK Financial's investments and dealings in mortgage-related products increase the risk that falling interest rates could adversely affect BOK Financial's business. BOK Financial attempts to manage this risk by maintaining an active hedging program for its mortgage servicing rights. BOK Financial's hedging program has only been partially successful in recent years. The value of mortgage servicing rights may also decrease due to rising delinquency or default of the loans serviced. This risk is mitigated somewhat by adherence to underwriting standards on loans originated for sale. Market disruptions could impact BOK Financial’s funding sources. BOK Financial’s subsidiary banks rely on other financial institutions and the Federal Home Loan Banks of Topeka and Dallas as a significant source of funds. Our ability to fund loans, manage our interest rate risk and meet other obligations depends on funds borrowed from these sources. The inability to borrow funds at market interest rates could have a material adverse effect on our operations. 7 Substantial competition could adversely affect BOK Financial. Banking is a competitive business. BOK Financial competes actively for loan, deposit and other financial services business in Oklahoma, as well as in BOK Financial's other markets. BOK Financial's competitors include a large number of small and large local and national banks, savings and loan associations, credit unions, trust companies, broker-dealers and underwriters, as well as many financial and nonfinancial firms that offer services similar to BOK Financial's. Large national financial institutions have entered the Oklahoma market. These institutions have substantial capital, technology and marketing resources. Such large financial institutions may have greater access to capital at a lower cost than BOK Financial does, which may adversely affect BOK Financial's ability to compete effectively. BOK Financial has expanded into markets outside of Oklahoma, where it competes with a large number of financial institutions that have an established customer base and greater market share than BOK Financial. BOK Financial may not be able to continue to compete successfully in these markets outside of Oklahoma. With respect to some of its services, BOK Financial competes with non-bank companies that are not subject to regulation. The absence of regulatory requirements may give non-banks a competitive advantage. Banking regulations could adversely affect BOK Financial. BOK Financial and its subsidiaries are extensively regulated under both federal and state law. In particular, BOK Financial is subject to the Bank Holding Company Act of 1956 and the National Bank Act. These regulations are primarily for the benefit and protection of BOK Financial's customers and not for the benefit of BOK Financial's investors. In the past, BOK Financial's business has been materially affected by these regulations. For example, regulations limit BOK Financial's business to banking and related businesses, and they limit the location of BOK Financial's branches and offices, as well as the amount of deposits that it can hold in a particular state. These regulations may limit BOK Financial's ability to grow and expand into new markets and businesses. Additionally, under the Community Reinvestment Act, BOK Financial is required to provide services in traditionally underserved areas. BOK Financial's ability to make acquisitions and engage in new business may be limited by these requirements. The Federal Deposit Insurance Corporation Improvement Act of 1991 and the Bank Holding Company Act of 1956, and various regulations of regulatory authorities, require us to maintain specified capital ratios. Any failure to maintain required capital ratios would limit the growth potential of BOK Financial's business. Under a long-standing policy of the Board of Governors of the Federal Reserve System, a bank holding company is expected to act as a source of financial strength for its subsidiary banks. As a result of that policy, BOK Financial may be required to commit financial and other resources to its subsidiary banks in circumstances where we might not otherwise do so. The trend toward increasingly extensive regulation is likely to continue and become more costly in the future. Laws, regulations or policies currently affecting BOK Financial and its subsidiaries may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, BOK Financial's business may be adversely affected by any future changes in laws, regulations, policies or interpretations. For example, recently approved changes to regulations are expected to significantly reduce fees we can charge overdrawn deposit accounts beginning in the second half of 2010. Statutory restrictions on subsidiary dividends and other distributions and debts of BOK Financial's subsidiaries could limit amounts BOK Financial's subsidiaries may pay to BOK Financial. BOK Financial is a financial holding company, and a substantial portion of BOK Financial's cash flow typically comes from dividends that BOK Financial's bank and nonbank subsidiaries pay to BOK Financial. Various statutory provisions restrict the amount of dividends BOK Financial's subsidiaries can pay to BOK Financial without regulatory approval. Management also developed, and the BOK Financial board of directors approved, an internal capital policy that is more restrictive than the regulatory capital standards. In addition, if any of BOK Financial's subsidiaries liquidates, that subsidiary's creditors will be entitled to receive distributions from the assets of that subsidiary to satisfy their claims against it before BOK Financial, as a holder of an equity interest in the subsidiary, will be entitled to receive any of the assets of the subsidiary. If, however, BOK Financial is a creditor of the subsidiary with recognized claims against it, BOK Financial will be in the same position as other creditors. Although publicly traded, BOK Financial's common stock has substantially less liquidity than the average trading market for a stock quoted on the Nasdaq National Market System. A relatively small fraction of BOK Financial's outstanding common stock is actively traded. The risks of low liquidity include increased volatility of the price of BOK Financial's common stock. Low liquidity may also limit holders of BOK Financial's common stock in their ability to sell or transfer BOK Financial's shares at the price, time and quantity desired. 8 BOK Financial's principal shareholder controls a majority of BOK Financial's common stock. Mr. George B. Kaiser owns a majority of the outstanding shares of BOK Financial's common stock. Mr. Kaiser is able to elect all of BOK Financial's directors and effectively control the vote on all matters submitted to a vote of BOK Financial's common shareholders. Mr. Kaiser's ability to prevent an unsolicited bid for BOK Financial or any other change in control could have an adverse effect on the market price for BOK Financial's common stock. A substantial majority of BOK Financial's directors are not officers or employees of BOK Financial or any of its affiliates. However, because of Mr. Kaiser's control over the election of BOK Financial's directors, he could change the composition of BOK Financial's Board of Directors so that it would not have a majority of outside directors. Possible future sales of shares by BOK Financial's principal shareholder could adversely affect the market price of BOK Financial's common stock. Mr. Kaiser has the right to sell shares of BOK Financial's common stock in compliance with the federal securities laws at any time, or from time to time. The federal securities laws will be the only restrictions on Mr. Kaiser's ability to sell. Because of his current control of BOK Financial, Mr. Kaiser could sell large amounts of his shares of BOK Financial's common stock by causing BOK Financial to file a registration statement that would allow him to sell shares more easily. In addition, Mr. Kaiser could sell his shares of BOK Financial's common stock without registration under Rule 144 of the Securities Act. Although BOK Financial can make no predictions as to the effect, if any, that such sales would have on the market price of BOK Financial's common stock, sales of substantial amounts of BOK Financial's common stock, or the perception that such sales could occur, could adversely affect market prices. If Mr. Kaiser sells or transfers his shares of BOK Financial's common stock as a block, another person or entity could become BOK Financial's controlling shareholder. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES BOK Financial and its subsidiaries own and lease improved real estate that is carried at $207 million, net of depreciation and amortization. The Company’s principal offices are located in leased premises in the Bank of Oklahoma Tower, Tulsa, Oklahoma. Banking offices are primarily located in Tulsa and Oklahoma City, Oklahoma, Dallas, Fort Worth and Houston, Texas, Albuquerque, New Mexico, Denver, Colorado, Phoenix, Arizona, and Kansas City, Kansas/Missouri. Primary operations facilities are located in Tulsa and Oklahoma City, Oklahoma, Dallas, Texas, and Albuquerque, New Mexico. The Company’s facilities are suitable for their respective uses and present needs. The information set forth in Notes 5 and 14 of the Company’s Notes to Consolidated Financial Statements, which appear elsewhere herein, provides further discussion related to properties. ITEM 3. LEGAL PROCEEDINGS The information set forth in Note 14 of the Company’s Notes to Consolidated Financial Statements, which appear elsewhere herein, provides discussion related to legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the three months ended December 31, 2009. 9 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES BOK Financial’s $0.00006 par value common stock is traded on the Nasdaq Stock Market under the symbol BOKF. As of January 31, 2010, common shareholders of record numbered 942 with 67,809,896 shares outstanding. The highest and lowest closing bid price for shares and cash dividends per share of BOK Financial common stock follows: 2009: Low High Cash dividends 2008: Low High Cash dividends First $22.95 40.71 0.225 $46.82 55.23 0.20 Second $34.46 43.02 0.24 $49.11 60.74 0.225 Third $34.81 48.10 0.24 $38.61 53.94 0.225 Fourth $41.87 47.91 0.24 $38.40 54.42 0.225 Shareholder Return Performance Graph Set forth below is a line graph comparing the change in cumulative shareholder return of the NASDAQ Index, the NASDAQ Bank Index, and the KBW 50 Bank Index for the period commencing December 31, 2004 and ending December 31, 2009.* Total Return Performance 140 120 100 80 60 40 20 e u l a V x e d n I BOK Financial Corporation NASDAQ Composite NASDAQ Bank KBW 50 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 Period Ending Index BOK Financial Corporation NASDAQ Composite NASDAQ Bank Index KBW 50 12/31/05 93.79 101.37 95.67 99.82 * Graph assumes value of an investment in the Company’s Common Stock for each index was $100 on December 31, 2004. The KBW 50 Bank index is the Keefe, Bruyette & Woods, Inc. index, which is available only for calendar quarter end periods. During the periods shown, a 3% dividend was paid in shares of BOK Financial Common Stock on May 31, 2004. Cash dividends on Common Stock, which were first paid in 2005, are assumed to have been reinvested in BOK Financial Common Stock. 12/31/04 100.00 100.00 100.00 100.00 12/31/09 104.85 104.31 51.31 48.02 12/31/08 87.10 72.49 62.96 48.88 12/31/07 109.47 121.92 82.76 93.19 12/31/06 114.77 111.03 106.20 119.18 10 The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended December 31, 2009. Period Total Number of Shares Purchased (2) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) October 1, 2009 to October 31, 2009 November 1, 2009 to November 30, 2009 3,520 9,896 December 1, 2009 to December 31, 2009 66,314 Total 79,730 $ 46.18 45.23 47.48 – – – – Maximum Number of Shares that May Yet Be Purchased Under the Plans 1,215,927 1,215,927 1,215,927 (1) On April 26, 2005, the Company’s board of directors authorized the Company to repurchase up to two million shares of the Company’s common stock. As of December 31, 2009, the Company had repurchased 784,073 shares under this plan. (2) The Company routinely repurchases mature shares from employees to cover the exercise price and taxes in connection with employee stock option exercises. ITEM 6. SELECTED FINANCIAL DATA The selected financial data is set forth within Table 1 of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 11 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Table 1 Consolidated Selected Financial Data (Dollars In Thousands Except Per Share Data) Selected Financial Data For the year: Interest revenue Interest expense Net interest revenue Provision for credit losses Fees and commissions revenue Net income Period-end: Loans Assets Deposits Subordinated debentures Shareholders’ equity Nonperforming assets2 December 31, 2009 2008 2007 2006 2005 $ 914,569 204,205 710,364 195,900 480,512 200,578 $ 1,061,645 414,783 646,862 202,593 415,194 153,232 $ 1,160,737 616,252 544,485 34,721 405,622 217,664 $ 986,429 499,741 486,688 18,402 371,696 212,977 $ 769,934 320,593 449,341 12,441 344,864 201,505 11,279,698 23,516,831 15,518,228 398,539 2,205,813 484,295 12,876,006 22,734,648 14,982,607 398,407 1,846,257 342,291 11,940,570 20,667,701 13,459,291 398,273 1,935,384 104,159 10,651,178 18,059,624 12,386,705 297,800 1,721,022 44,343 9,088,312 16,327,069 11,375,318 295,964 1,539,154 40,017 Profitability Statistics Earnings per share (based on average equivalent shares): Basic Diluted $ 2.96 2.96 $ 2.27 2.27 $ $ 3.24 3.22 $ 3.19 3.16 3.14 3.01 Percentages (based on daily averages): Return on average assets Return on average shareholders’ equity Average shareholders’ equity to average assets 0.87% 9.66 8.98 0.71% 7.87 9.01 1.14% 12.01 9.53 1.27% 13.23 9.58 1.29% 13.78 9.38 Common Stock Performance Per Share: Book value per common share5 Market price: December 31 close Market range – High close – Low close Cash dividends declared Dividend payout ratio Selected Balance Sheet Statistics Period-end: $ $ 32.53 47.52 48.13 22.98 0.945 31.93% $ 27.36 40.40 60.84 38.48 0.875 38.55% $ 28.75 51.70 55.57 47.47 0.75 23.29% $ 25.66 54.98 54.98 44.43 0.55 17.41% 23.07 45.43 49.31 39.79 0.30 9.97% Tier 1 capital ratio Total capital ratio Leverage ratio Tangible common equity ratio1 Reserve for loan losses to nonperforming loans Reserve for loan losses to loans Combined reserves for credit losses to loans 4 10.86% 14.43 8.05 7.99 82.22 2.59 2.72 9.40% 9.38% 9.78% 9.84% 12.81 7.89 6.64 74.49 1.81 1.93 12.54 8.20 7.72 133.79 1.06 1.24 11.58 8.79 8.22 305.37 1.03 1.22 12.10 8.30 7.94 329.34 1.14 1.37 Miscellaneous (at December 31) Number of employees (full-time equivalent) Number of banking locations Number of TransFund locations Trust assets Mortgage loan servicing portfolio3 4,355 197 1,896 $30,385,365 7,366,780 4,300 195 1,933 $30,454,512 5,983,824 4,110 189 1,822 $36,288,592 5,481,736 3,958 163 1,649 $31,704,091 4,988,611 3,825 150 1,421 $ 28,464,745 4,492,524 1 2 3 4 5 Shareholders’ equity less preferred equity, intangible assets and equity provided by the TARP Capital Program (none) divided by total assets less intangible assets. Includes nonaccrual loans, renegotiated loans and assets acquired in satisfaction of loans. Excludes loans past due 90 days or more and still accruing. Includes outstanding principal for loans serviced for affiliates. Includes reserve for loan losses and reserve for off-balance sheet credit losses. Conversion of Series A preferred stock added 6.9 million common shares outstanding in 2005. 12 Management’s Assessment of Operations and Financial Condition Overview BOK Financial Corporation (“BOK Financial” or ”the Company”) is a financial holding company that offers full service banking in Oklahoma, Northwest Arkansas, Dallas, Forth Worth and Houston, Texas, Albuquerque, New Mexico, Denver, Colorado, Phoenix, Arizona and Kansas City, Kansas/Missouri. The Company was incorporated in 1990 in Oklahoma and is headquartered in Tulsa, Oklahoma. Activities are governed by the Bank Holding Company Act of 1956, as amended by the Financial Services Modernization Act or Gramm-Leach-Bliley Act of 1999. Principal banking subsidiaries are Bank of Oklahoma, N.A., Bank of Albuquerque, N.A., Bank of Arkansas, N.A., Bank of Texas, N.A., Colorado State Bank and Trust, N.A., Bank of Arizona, N.A. and Bank of Kansas City, N.A. Other subsidiaries include BOSC, Inc. a broker/dealer that engages in retail and institutional securities sales and municipal bond underwriting. Our overall strategic objective is to emphasize growth in long-term value by building on our leadership position in Oklahoma and expanding into high-growth markets in contiguous states. We have a solid position in Oklahoma and are the state’s second largest financial institution as measured by deposit market share. At December 31, 2009, 46% of our outstanding loans and 56% of our deposits are attributed to the Oklahoma market. Since 1997, we have expanded into Dallas, Fort Worth and Houston, Texas, Albuquerque, New Mexico, Denver, Colorado, Phoenix, Arizona and Kansas City, Kansas/Missouri. At December 31, 2009, 29% of our outstanding loans and 26% of our deposits are attributed to Texas. None of our other regional markets provide more than 10% of our outstanding loans or deposits. Our acquisition strategy targets quality organizations that have demonstrated solid growth in their business lines. We provide additional growth opportunities by hiring talent to enhance competitiveness, adding locations, and broadening product offerings. Our operating philosophy embraces local decision-making in each of our geographic markets while adhering to common Company standards. We also consider acquisitions of distressed financial institutions in existing markets when opportunities become available. Our primary focus is to provide a comprehensive range of nationally competitive financial products and services in a personalized and responsive manner. Products and services include loans and deposits, cash management services, fiduciary services, mortgage banking, and brokerage and trading services to middle-market businesses, financial institutions, and consumers. Commercial banking is a significant part of our business. Our credit culture emphasizes building relationships by making high-quality loans and providing a full range of financial products and services to our customers. Energy financing expertise enables us to offer commodity derivatives for customers to use in their risk management and positioning activities. Our revenue sources are diverse. Historically, fees and commissions revenue provide 40% - 45% of our total revenue. Approximately 40% of our revenue came from commissions and fees in 2009. BOK Financial operates three principal lines of business: commercial banking, consumer banking and wealth management. Commercial banking includes lending, treasury and cash management services and customer risk management products to small businesses, middle market and larger commercial customers. Commercial banking also includes the TransFund electronic funds network. Consumer banking includes retail lending and deposit services, and all mortgage banking activities. Wealth management provides fiduciary services, brokerage and trading, private bank services and investment advisory services in all markets. The recession continued to dampen the economy and the financial services industry in 2009. Civilian unemployment rates climbed from just over 7% at the beginning of the year to over 10% by year-end. Credit losses which first were largely concentrated in residential construction loans in the Arizona market spread to other commercial real estate and commercial loans across all markets. In response, the U.S. government has provided significant liquidity to the economy. Interest rates we paid remained at historic lows throughout the year. Along with tax credits available to first-time home buyers, the low interest rates stimulated mortgage lending activity. Interest rates decreased which increased the fair value of many financial instruments, such as mortgage-backed securities. After reaching highs of over $140 per barrel in 2008, oil prices dropped to under $40 per barrel in early 2009 and natural gas prices remained low throughout most of 2009. 13 Performance Summary BOK Financial’s net income for 2009 totaled $201 million or $2.96 per diluted share compared to $153 million or $2.27 per diluted share in 2008. Highlights of 2009 included: • Net interest revenue increased $64 million or 10% over 2008. Average earning assets were up $1.5 billion or 8%. Net interest margin was 3.57% for 2009, up 12 basis points over 2008. • Fees and commissions revenue totaled $481 million for 2009 and $415 million for 2008. Net credit losses on derivative contracts related to two bankrupt counterparties reduced fees and commissions revenue by $54 million in 2008. Mortgage banking revenue increased $34 million compared to 2008. • Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $709 million, up $81 million from the prior year. Personnel costs, FDIC insurance expenses, mortgage banking costs and net losses and expenses of repossessed assets increased over the prior year. • Combined reserves for credit losses totaled $306 million or 2.72% of outstanding loans at December 31, 2009, up from $248 million or 1.93% of outstanding loans at December 31, 2008. Provision for credit losses and net charge-offs were $196 million and $138 million, respectively for 2009 and $203 million and $102 million, respectively for 2008. • Nonperforming assets totaled $484 million or 4.24% of outstanding loans and repossessed assets at December 31, 2009, up from $342 million or 2.65% of outstanding loans and repossessed assets at December 31, 2008. Repossessed assets increased $100 million and nonaccruing loans increased $39 million over last year. • Available for sale securities totaled $8.9 billion at December 31, 2009, up $2.5 billion since the prior year due to purchases of residential mortgage-backed securities issued by U.S. government agencies. Other than temporary impairment charges on certain privately-issued residential mortgage backed securities reduced pre-tax net income by $34 million during 2009. • Outstanding loan balances were $11.3 billion at December 31, 2009, down $1.6 billion from the prior year. Most major loan categories decreased during 2009 due to reduced customer demand and normal repayment trends. • Tangible common equity and Tier 1 capital ratios were 7.99% and 10.86%, respectively, at December 31, 2009 and 6.64% and 9.40%, respectively, at December 31, 2008. Growth in the tangible common equity ratio was due largely to a $211 million after-tax increase in the fair value of available for sale securities. The Company evaluated and elected not to participate in the U.S. Treasury’s TARP Capital Purchase Program. Net income for the fourth quarter of 2009 totaled $43 million or $0.63 per diluted share compared with $35 million or $0.52 per diluted share for the fourth quarter of 2008. Highlights of the fourth quarter of 2009 included: • Net interest revenue totaled $184 million, up $8.0 million over the fourth quarter of 2008. Net interest margin was 3.64% for the fourth quarter of 2009 and 3.57% for the fourth quarter of 2008. • Net loans charged off and provision for credit losses were $35 million and $49 million, respectively for the fourth quarter of 2009. Net loans charged off and provision for credit losses were $34 million and $73 million, respectively for the fourth quarter of 2008. • Fees and commissions revenue totaled $116 million, up $5 million over the fourth quarter of 2008, primarily due to higher mortgage banking revenue partially offset by a decrease in brokerage and trading revenue. • Other than temporary impairment charges on certain privately-issued residential mortgage backed securities reduced pre-tax net income by $14 million during the fourth quarter of 2009. • Other operating expense, excluding changes in the fair value of mortgage servicing rights, increased $23 million over the prior year. Mortgage banking costs, personnel expense, net losses and operating expenses on repossessed assets and FDIC insurance costs increased over the fourth quarter of 2008. 14 Critical Accounting Policies Application of Critical Accounting Policies Preparation of our consolidated financial statements is based on the selection of certain accounting policies, which requires management to make significant assumptions and estimates. The following discussion addresses the most critical areas where these assumptions and estimates could affect financial condition and results of operations. Actual results could differ significantly from these estimates. Application of these critical accounting policies and estimates has been discussed with the appropriate committees of the Board of Directors. Additional accounting policies are described in Note 1 to the Consolidated Financial Statements. Reserves for Loan Losses and Off-Balance Sheet Credit Losses Reserves for loan losses and off-balance sheet credit losses are assessed by management based on an ongoing quarterly evaluation of the probable estimated losses inherent in the portfolio and probable estimated losses on unused commitments to provide financing. A consistent, well-documented methodology has been developed that includes reserves assigned to specific loans and commitments, general reserves that are based on a statistical migration analysis and nonspecific reserves that are based on analysis of current economic conditions, loan concentrations, portfolio growth and other relevant factors. There have been no material changes in the approach or techniques utilized in developing the allowance for loan losses during 2009. An independent Credit Administration department is responsible for performing this evaluation for all of our subsidiaries to ensure that the methodology is applied consistently. Specific reserves for impairment are determined through evaluation of estimated future cash flows, collateral values and historical statistics. 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 agreements. This is substantially the same criteria used to determine when a loan should be placed on nonaccrual status. Generally, all nonaccruing commercial and commercial real estate loans are considered impaired. Substantially all impaired loans are collateralized. Collateral includes real property, inventory, accounts receivable, operating equipment, interest 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. Collateral values are generally evaluated annually, or more frequently for certain collateral types or collateral located in certain distressed markets. 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. Nonspecific reserves are maintained for risks beyond those factors specific to a particular loan or those identified by the migration models. These factors include trends in the general economy in our primary lending areas, conditions in specific industries where we have a concentration, concentrations in large credits and overall growth in the loan portfolio. Evaluation of nonspecific factors considers the effect of the duration of the business cycle on migration factors. Nonspecific factors also consider current economic conditions and other relevant factors. A range of potential losses is determined for each factor identified. A separate reserve for off-balance sheet credit risk is maintained. The provision for credit losses includes the combined charge to expense for both the reserve for loan losses and the reserve for off-balance sheet credit losses. All losses incurred from lending activities will ultimately be reflected in charge-offs against the reserve for loan losses after funds are advanced against outstanding commitments and after the exhaustion of collection efforts. 15 We also maintain a separate credit loss reserve for residential mortgage loans sold with recourse. This reserve is based on the same migration model used for on-balance sheet residential mortgage loans. Migration factors are separately determined from historic loss trends for these loans. 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 provision for losses on mortgage loans sold with recourse is included in mortgage banking costs on the Consolidated Statement of Earnings. Valuation of Mortgage Servicing Rights We have a significant investment in mortgage servicing rights. These rights are primarily retained from sales of loans we have originated or occasionally purchased from other lenders. Originated mortgage servicing rights are initially recognized at fair value. Purchased servicing rights are initially recognized at their purchase price. Subsequent changes in fair value are recognized in earnings as they occur. There is no active market for trading in mortgage servicing rights. We use a cash flow model to determine fair value. Key assumptions and estimates including projected prepayment speeds and assumed servicing costs, earnings on escrow deposits, ancillary income and discount rates, used by this model are based on current market sources. Assumptions used to value our mortgage servicing rights are considered significant unobservable inputs and represent our best estimate of assumptions that market participants would use to value this asset. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors. The prepayment model is updated daily for changes in market conditions. We adjusted the prepayment projections determined by this model to better correlate with actual performance of our servicing portfolio. The discount rate is based on benchmark rates for mortgage loans plus a market spread expected by investors in servicing rights. Significant assumptions used to determine the fair value of our mortgage servicing rights are presented in Note 7 to the Consolidated Financial Statements. At least annually, we request estimates of fair value from outside sources to corroborate the results of the valuation model. The assumptions used in this model are primarily based on mortgage interest rates. Evaluation of the effect of a change in one assumption without considering the effect of that change on other assumptions is not meaningful. Considering all related assumptions, a 50 basis point increase in mortgage interest rates is expected to increase the fair value of our servicing rights by $5.6 million. A 50 basis point decrease in mortgage interest rates is expected to decrease the fair value of our servicing rights by $9.7 million. Intangible Assets Intangible assets, which consist primarily of goodwill, core deposit intangible assets and other acquired intangibles, for each business unit are evaluated for impairment annually as of October 1st or more frequently if conditions indicate that impairment may have occurred. The evaluation of possible impairment of intangible assets involves significant judgment based upon short-term and long-term projections of future performance. The fair value of each of our reporting units is estimated by the discounted future earnings method. Income growth is projected for each of our reporting units for 2010 through 2015 and a terminal value is computed. The projected income stream is converted to current fair value by using a discount rate that reflects a rate of return required by a willing buyer. Assumptions used to value our reporting units are based on growth rates, volatility, discount rate and market risk premium inherent in our current stock price. These assumptions are considered significant unobservable inputs and represent our best estimate of assumptions that market participants would use to determine fair value of the respective reporting units. Critical assumptions in our evaluation were a 12.00% average expected long-term growth rate, a 0.74% volatility factor for BOK Financial common stock, a 10.60% discount rate and a 9.86% market risk premium. The Company identified the geographical market underlying its operating segments as its reporting units for the purpose of performing its annual goodwill impairment test. This is consistent with the manner in which management assesses the performance of the Company and allocates resources. See additional discussion of the operating segments in the Assessment of Operations – Lines of Business section following. 16 The fair value, carrying value and related goodwill of reporting units for which goodwill was attributed as of our annual impairment test performed on October 1, 2009 is as follows (in thousands): Fair Value Carrying Value1 Goodwill $ 580,129 484,261 82,646 117,977 89,520 $ 351,259 432,167 76,794 103,798 73,714 $ 5,140 196,183 11,094 39,458 14,853 394,559 96,275 73,037 19,937 1,184 133,248 60,543 18,934 15,709 1,652 1,683 27,567 2,874 6,899 228 Commercial: Oklahoma Texas New Mexico Colorado Arizona Consumer: Oklahoma Texas New Mexico Colorado Arizona Wealth Management: Oklahoma Texas New Mexico Colorado Arizona 248,328 65,333 19,221 42,820 9,197 102,415 41,352 7,910 20,214 7,964 1,350 16,372 1,305 9,254 1,569 1 Carrying value includes intangible assets attributed to the reporting unit. Based on the results of the test performed as of October 1, 2009, the Company recorded an impairment charge of $228 thousand related to the consumer banking segment in the Arizona market. Approximately $240 million or 72% of total goodwill was attributed to the Texas market and $56 million or 17% of total goodwill was attributed to the Colorado market. Because of the large concentration of goodwill in the Texas and Colorado markets, the fair value determined by the discounted future earnings method was corroborated by comparison to the multiple of the market capitalization over tangible book value or net assets less intangibles of publicly traded banks of similar size and characteristics in our geographical footprint. This valuation method corroborated fair values determined by the discounted future earnings method. As of December 31, 2009, the market value of BOK Financial common stock, a primary assumption in our goodwill impairment analysis, was approximately 3% above the market value used in our most recent annual evaluation. The market value is influenced by factors affecting the overall economy and the regional banks sector of the market. Goodwill impairment may be indicated at our next annual evaluation date if the market value of our stock declines or sooner if we incur significant unanticipated operating losses or if other factors indicate a significant decline in the value of our reporting units. The effect of a 10% negative change in the market value of our common stock on September 30, 2009 was simulated. This simulation indicated that an additional impairment of $2.3 million is possible. Other factors that could affect future impairment analyses include credit losses that exceed projected amounts or failure to meet growth projections. Consistent with plans when we first acquired Valley Commerce Bank in Phoenix, Arizona, our objective is to focus on growth in commercial and small business lending in the Arizona market. As discussed more fully in the Lines of Business section of this report, we have made changes in our Arizona operations to achieve this objective. Future goodwill impairment in the Arizona commercial reporting unit will depend largely on our ability to meet growth projections for this market. Intangible assets with finite lives, such as core deposit intangible assets, are amortized using accelerated methods over their estimated useful lives. Core deposit intangible assets generally have a weighted average life of five years based on the expected lives of the acquired deposit accounts. Such assets are reviewed for impairment whenever events indicate that the remaining carrying amount may not be recoverable. Valuation of Derivative Instruments We use interest rate derivative instruments to manage our interest rate risk. We also offer interest rate, commodity, and foreign exchange derivative contracts to our customers. All derivative instruments are carried on the balance sheet at fair value. Fair values for exchange-traded contracts are based on quoted prices in an active market for identical instruments. Fair values for over-the-counter interest rate contracts used to manage our interest rate risk are provided either by third- party dealers in the contracts or by quotes provided by independent pricing services. Information used by these third-party dealers or independent pricing services to determine fair values are considered significant other observable inputs. Fair 17 values for interest rate, commodity and foreign exchange contracts used in our customer hedging programs are based on valuations generated internally by third-party provided pricing models. These models use significant other observable market inputs to estimate fair values. Changes in assumptions used in these pricing models could significantly affect the reported fair values of derivative assets and liabilities, though the net effect of these changes should not significantly affect earnings. Credit risk is considered in determining the fair value of derivative instruments. Deterioration in the credit rating of customers or dealers reduces the fair value of asset contracts. The reduction in fair value is recognized in earnings during the current period. Deterioration in our credit rating below investment grade would affect the fair value of our derivative liabilities. In the event of a credit down-grade, the fair value of our derivative liabilities would decrease. The reduction in fair value would be recognized in earnings in the current period. Valuation of Securities The fair value of our securities portfolio is generally based on a single price for each financial instrument provided to us by an applicable third-party pricing service determined by one or more of the following: • Quoted prices for similar, but not identical, assets or liabilities in active markets; • Quoted prices for identical or similar assets or liabilities in inactive markets; • 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; • 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 portion of our securities portfolio is comprised of debt securities for which third-party services have discontinued providing price information due primarily to a lack of observable inputs and other relevant data. Management estimates the fair value of these securities based on significant unobservable inputs, including projected cash flows discounted at rates indicated by comparison to securities with similar credit and liquidity risk. Other-Than-Temporary Impairment On a quarterly basis, the Company evaluates impaired debt and equity securities to determine if impairments are temporary or other-than-temporary. For impaired debt securities, management first determines whether it intends to sell or if it is more-likely-than-not that it will be required to sell the impaired securities. This determination considers current and forecasted liquidity requirements, regulatory and capital requirements and securities portfolio management. All impaired debt securities we intend to sell or we expect to be required to sell are considered other-than-temporarily impaired and the full impairment loss is recognized as a charge against earnings. All impaired debt securities we do not intend or expect to be required to sell are evaluated further. Impairment of debt securities consistently rated investment grade by all nationally-recognized rating agencies is considered temporary unless specific contrary information is identified. Impairment of securities rated below investment grade by at least one of the nationally-recognized rating agencies is evaluated to determine if we expect to recover the entire amortized cost basis of the security based on the present value of projected cash flows from individual loans underlying each security. Below investment grade securities we own consist primarily of privately issued mortgage-backed securities. The primary assumptions used to project cash flows are disclosed in Note 2 to the Consolidated Financial Statements. We also consider the adjusted loan-to-value ratio and credit enhancement coverage ratio as part of our assessment of cash flows available to recover the amortized cost of our securities. Adjusted loan-to-value ratio is an estimate of the collateral value available to support the realizable value of the security. We calculate the adjusted loan-to-value ratio for each security using loan-level data. The original loan-to-value ratio is adjusted for market-specific home price depreciation and credit enhancement on the specific tranche of each security we own. The credit enhancement coverage ratio is an estimate of currently remaining subordinated tranches available to absorb losses on pools of loans that support the security. We believe that an adjusted loan-to-value ratio above 85% or a credit enhancement coverage ratio below 1.5 times to be additional indicators that an impairment may be other than temporary. 18 Credit losses, which are defined as the excess of current amortized cost over the present value of projected cash flows, on other-than-temporarily impaired debt securities are recognized as a charge against earnings. Any remaining impairment attributed to factors other than credit losses are recognized in accumulated other comprehensive losses. Credit losses are based on long-term projections of cash flows which are sensitive to changes in assumptions. Changes in assumptions and differences between assumed and actual results regarding unemployment rates, delinquency rates, foreclosures costs and home price depreciation can affect estimated and actual credit losses. Deterioration of these factors beyond those described in Note 2 to the Consolidated Financial Statements could result in the recognition of additional credit losses. We performed a sensitivity analysis of all privately issued mortgage-backed securities rated below AAA. Significant assumptions of this analysis included an increase in the unemployment rate to 12% over the next twelve months, decreasing to 8.5% thereafter and an additional 20% house price depreciation. The results of this analysis indicated $20 million to $25 million of credit losses in addition to credit losses recognized in 2009 are possible. Impaired equity securities, including perpetual preferred stocks, are evaluated based on our ability and intent to hold the securities until fair value recovers over a period not to exceed three years. The assessment of the ability and intent to hold these securities considers liquidity needs, asset / liability management objectives and securities portfolio objectives. Factors considered when assessing recovery include forecasts of general economic conditions and specific performance of the issuer, analyst ratings, and credit spreads for preferred stocks which have debt-like characteristics. Income Taxes Determination of income tax expense and related assets and liabilities is complex and requires estimates and judgments when applying tax laws, rules, regulations and interpretations. It also requires judgments as to future earnings and the timing of future events. Accrued income taxes represent an estimate of net amounts due to or from taxing jurisdictions based upon these estimates, interpretations and judgments. Quarterly, management evaluates the Company’s effective tax rate based upon its current estimate of net income, tax credits and statutory tax rates expected for the full year. Changes in income tax expense due to changes in the effective tax rate are recognized on a cumulative basis. Annually, we file tax returns with each jurisdiction where we conduct business and settle our return liabilities. We may also provide for estimated liabilities associated with uncertain filing positions. Deferred tax assets and liabilities are determined based upon the differences between the values of assets and liabilities as recognized in the financial statements and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. A valuation allowance is provided when it is more likely than not that some portion of the entire deferred tax asset may not be realized based on taxes previously paid in net loss carry-back periods and other factors. We recognize the benefit of uncertain income tax positions when based upon all relevant evidence it is more-likely-than-not that our position would prevail upon examination, including resolution of related appeals or litigation, based upon the technical merits of the position. A reserve for the uncertain portion of the tax benefit, including estimated interest and penalties, is part of our current accrued income tax liability. Estimated penalties and interest are recognized in income tax expense. This reserve for uncertain tax positions may reduce income tax expense in future periods if the uncertainty is favorably resolved, generally upon completion of an examination by the taxing authorities, expiration of a statute of limitations or changes in facts and circumstances. Pensions The Company offers a defined-benefit, cash-balance pension plan to all employees who satisfied certain age and length of service requirements. Pension plan benefits were curtailed as of April 1, 2006. No participants may be added to the plan and no additional service benefits will be accrued. Interest continues to accrue on employees’ account balances at 5.25%. Accounting for this plan requires management to make assumptions regarding the expected long-term rate of return on plan assets and the discount rate. Changes in these assumptions affect pension liability and pension expense. Management, in consultation with independent actuaries, bases its assumptions on currently available information. All plan assets are invested in the Cavanal Hill Balanced Fund. The expected long-term return on plan assets is based on this fund’s life-to-date performance, adjusted for any known or expected changes in the fund’s compositions or objectives. The expected return on plan assets was 7.00% for 2008 and 2007, and 5.25% for 2009. The discount rate, which is used to determine the present value of our obligation to provide future benefits to plan participants and the related interest cost, is based on a spot-rate yield curve of high-quality fixed income securities such as AA rated industrial and utility bonds. A weighted average discount rate is determined by matching expected future cash outflows from the plan to interest rates at various spots along the yield curve. This method of determining the discount rate 19 is expected to better represent the cost of future cash flows as the static participant pool decreases over time. The discount rate was 5.15% at December 31, 2009 and 6.50% at December 31, 2008. A 25 basis point decrease in the discount rate increases the pension liability by approximately $873 thousand or 2% and has no significant effect on pension expense because of the curtailment of benefits. Stock-Based Compensation Stock-based compensation consists of stock options and non-vested shares awarded officers and employees of the Company. Awards may be granted on a discretionary basis as described in the employee stock option plan or as required by employment agreements and incentive compensation plans with certain executive officers. Accounting for stock-based compensation requires management to make assumptions regarding the valuation of financial instruments for which there are no readily available market values, achievement of specified performance conditions and expected forfeiture rates. The majority of our stock options have graded vesting. One-seventh of the options awarded vest annually starting one year after the grant date. Options expire three years after vesting. Each tranche of these options are considered a separate award when determining fair value. We use the Black-Scholes option pricing model. This model requires assumptions of expected volatility of our stock price and expected term between grant date and exercise date, along with other inputs to determine fair value. Assumptions used to determine the fair value of stock options are considered significant other observable inputs. Expected volatility is based on historical changes in our stock price measured over a period that approximates the expected term of our stock options. Expected term and forfeitures are based on historical trends. Information about assumptions used to value stock options can be found in Note 12 to the Consolidated Financial Statements. Non-vested shares, which cliff-vest five years after the grant date, are valued at the grant-date market price for BOK Financial common stock. Stock options are generally granted annually. Certain key terms and conditions of the awards, such as vesting periods and expiration dates, are defined by the stock option plan document. The number of options to be awarded to each individual employee is recommended by management and approved by the Independent Compensation Committee of the Board of Directors prior to setting the exercise price. The exercise price of the options is the closing price for the Company’s common stock on the second business Friday of January, which is the grant date. Executive incentive plans and individual employment agreements include performance conditions that may increase or decrease the number of awards granted based on future events. Unrecognized compensation cost, which generally will be recognized as expense over the service period, based on the probable outcome of these conditions is $16 million. Future compensation cost ranges from approximately $6 million if none of the performance conditions are met to $19 million if all of the performance conditions are met. Assessment of Operations Net Interest Revenue Tax-equivalent net interest revenue totaled $718 million for 2009 compared with $655 million for 2008. Net interest revenue growth was driven primarily by a $1.5 billion increase in average earning assets and a 12 basis point increase in net interest margin. Average earning assets increased $1.5 billion or 8% compared to 2008, primarily due to a $1.8 billion increase in average securities. We purchased U.S. government agency issued residential mortgage-backed securities to supplement earnings during a period of declining loan demand. Average loans, net of allowance for loan losses, decreased $465 million primarily due to decreases in commercial, commercial real estate and consumer loans partially offset by growth in residential mortgage loans. Growth in average earning assets was funded primarily by an $888 million increase in interest-bearing deposits and a $647 million increase in demand deposit account balances. Average interest-bearing transaction accounts were up $751 million and average time deposits were up $130 million. Borrowed funds declined $333 million compared to 2008, including a $230 million decrease in borrowings to fund average margin assets. Margin assets are placed by the Company to secure its obligations under various derivative contracts and are generally reported as a reduction of the derivative liabilities which they secure on the Company’s consolidated balance sheet. Fees earned on margin assets are included in fees and commissions revenue while the related cost of funds reduces net interest revenue. Table 2 shows the effects on net interest revenue of changes in average balances and interest rates for the various types of earning assets and interest-bearing liabilities. Net interest margin, the ratio of tax-equivalent net interest revenue to average earning assets, increased to 3.57% in 2009 compared with 3.45% in 2008 due primarily to lower funding costs. 20 The cost of interest-bearing liabilities was 1.21% for 2009, down 134 basis points from 2008. The cost of interest bearing deposits decreased 123 basis points to 1.38% and the cost of funds purchased and other borrowings decreased 160 basis points to 0.81%. Rates paid on funding sources decreased in 2009 due to market conditions. In addition, we reduced certain types of higher-costing time deposits during the year to lower our funding costs. The tax-equivalent yield on earning assets was 4.59% for 2009, down 105 basis points from 2008. Loan yields decreased 118 basis points from 2008 to 4.65%; however, loan spreads continue to improve. The securities portfolio yield was 4.36%, down 80 basis points from 2008. Our securities portfolio re-prices as cash flow received is reinvested as current market rates. The resulting change in yield of the securities portfolio occurs more slowly than changes in market rates. Our overall objective is to manage the Company’s balance sheet to be relatively neutral to changes in interest rates. Approximately two-thirds of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will re-price within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that re-price more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally re-price more quickly than liabilities. Among the strategies that we use to achieve a relatively rate-neutral position, we purchase fixed-rate, mortgage-backed securities and fund them with market rate sensitive liabilities. 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 $40 million convert fixed rate liabilities to floating rate based on LIBOR. The purpose of these derivatives is to position our balance sheet to be relatively neutral to changes in interest rates. Net interest revenue increased $13 million in 2009 and $7.0 million in 2008 from periodic settlements of derivative contracts. This increase in net interest revenue contributed 6 basis points and 4 basis points to net interest margin in 2009 and 2008, respectively. Derivative contracts are carried on the balance sheet at fair value. Changes in the fair value of these contracts are reported as derivative gains or losses in the Consolidated Statement of Earnings. The effectiveness of these strategies is reflected in the overall change in net interest revenue due to changes in interest rates as shown in Table 2 and in the interest rate sensitivity projections as shown in the Market Risk section of this report. 21 Table 2 Volume/Rate Analysis (In Thousands) Tax-equivalent interest revenue: Securities Trading securities Loans Funds sold and resell agreements Total Interest expense: 2009/2008 Change Due To¹ 2008/2007 Change Due To¹ Change Volume Yield/Rate Change Volume Yield/Rate $ 14,359 (1,235) (158,854) (1,500) (147,230) $ 70,709 851 (12,458) (314) 58,788 $ (56,350) (2,086) (146,396) (1,186) (206,018) $ 59,749 2,987 (159,817) (2,903) (99,984) $ 45,461 2,986 78,623 (304) 126,766 $ 14,288 1 (238,440) (2,599) (226,750) Transaction deposits Savings deposits Time deposits Funds purchased and repurchase agreements Other borrowings Subordinated debentures Total Tax-equivalent net interest revenue Change in tax-equivalent adjustment Net interest revenue (69,796) (62) (54,704) (53,016) (33,036) 36 (210,578) 63,348 154 $ 63,502 Tax-equivalent interest revenue: Securities Trading securities Loans Funds sold and resell agreements Total Interest expense: Transaction deposits Savings deposits Time deposits Funds purchased and repurchase agreements Other borrowings Subordinated debentures Total Tax-equivalent net interest revenue Change in tax-equivalent adjustment Net interest revenue 9,924 30 3,924 (79,720) (92) (58,628) (73,214) (823) (49,785) 12,679 (50) (664) (85,893) (773) (49,121) (8,843) 5,982 9 11,026 $ 47,762 (44,173) (39,018) 27 (221,604) $ 15,586 11,273 34,907 195 58,340 $ 68,426 (84,249) (36,939) (2,834) (259,809) $ 33,059 (72,976) (2,032) (2,639) (201,469) 101,485 892 $ 102,377 4th Qtr 2009 / 4th Qtr 2008 Change Due To¹ Change Volume Yield/Rate $ 20,375 (161) (15,655) (22) 4,537 4,236 13 (7,250) (1,433) 894 9 (3,531) $ 8,068 $ (25,707) (210) (16,182) (54) (42,153) (16,305) 43 (15,140) (4,198) (6,693) 44 (42,249) 96 $ $ (5,332) (371) (31,837) (76) (37,616) (12,069) 56 (22,390) (5,631) (5,799) 53 (45,780) 8,164 (133) $ 8,031 ¹ Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis. Fourth Quarter 2009 Net Interest Revenue Tax-equivalent net interest revenue for the fourth quarter of 2009 totaled $187 million compared with $179 million for the fourth quarter of 2008. Average earning assets increased $894 million or 5%, including a $2.3 billion increase in average securities. Average loans, net of allowance for loan losses, decreased $1.3 billion compared to the fourth quarter of 2008. Average balances in all major loan categories decreased as a result of reduced customer demand and normal repayment trends. Growth in average earning assets was funded primarily by a $954 million increase in average demand deposits. Average interest-bearing deposits increased by $523 million offset by a $527 million decrease in other borrowings. Net interest margin was 3.64% for the fourth quarter of 2009 and 3.57% for the fourth quarter of 2008. Growth in the net interest margin was due primarily to lower funding costs. 2008 Net Interest Revenue Tax-equivalent net interest revenue for 2008 was $655 million for 2008 compared with $554 million for 2007. Average earning assets increased $2.0 billion, including a $1.2 billion increase in average outstanding loans, net of allowance for loan losses, and a $838 million increase in average securities. Growth in the securities portfolio generally consisted of highly-rated, fixed-rate mortgage backed securities issued by U.S. government agencies. As shown in Table 2, net interest revenue increased $68 million due to changes in earning assets and interest bearing liabilities and increased $33 million due to changes in interest yields and rates. The increase in net interest margin reflected a widening of the spread between LIBOR and the federal funds rates in the second half of 2008. LIBOR is the basis for interest earned on many of our loans. The federal funds rate is the basis for interest paid on many of our interest-bearing liabilities. The widening spread increased net interest margin by approximately 7 basis points in 2008. This spread largely narrowed to its historically 22 normal level by the end of 2008. Market uncertainty increased yields on mortgage-backed securities despite falling interest rates. The average yield on our securities portfolio for 2008 increased 22 basis points compared with 2007. The increase in net interest margin from widened spreads was partially offset by a reduction in the benefit from non-interest bearing funding sources. This benefit decreased from 69 basis points in 2007 to 36 basis points in 2008. Very low market interest rates, especially in the second half of 2008 reduced the benefit of non-interest bearing funding sources. Also, an increase in average margin assets funded by interest-bearing liabilities decreased net interest margin by 5 basis points. Other Operating Revenue Other operating revenue increased $64 million compared with 2008 due to a $65 million increase in fees and commissions revenue. Mortgage banking revenue was up $34 million over last year. Trust fees and commissions were down $13 million and margin asset fees were down $8 million from 2008. Brokerage and trading revenue increased $49 million over 2008. Net credit losses on derivative contracts with two bankrupt counterparties reduced brokerage and trading revenue and total fees and commissions by $54 million in 2008. Net gains on securities, derivatives and other assets increased $28 million, offset by a $29 million increase in other-than- temporary impairment charges recognized in earnings. Table 3 Other Operating Revenue (In Thousands) Brokerage and trading revenue Transaction card revenue Trust fees and commissions Deposit service charges and fees Mortgage banking revenue Bank-owned life insurance Margin asset fees Other revenue Total fees and commissions Gain (loss) on other assets, net Gain (loss) on derivatives, net Gain (loss) on available for sales securities, net Gains on Mastercard and Visa IPO securities Gain (loss) on mortgage hedge securities Gain (loss) on securities, net Total other-than-temporary impairment losses Portion of loss recognized in other comprehensive income Net impairment losses recognized in earnings Years ended December 31, 2006 2007 2009 $ 91,677 $ 105,517 66,177 115,791 64,980 10,239 236 25,895 480,512 2008 42,8041 $ 100,153 78,979 117,528 30,599 10,681 8,548 25,902 415,194 62,542 $ 90,425 78,231 109,218 22,275 10,058 4,800 28,073 405,622 53,413 $ 78,622 71,037 102,436 26,996 2,558 10,166 26,468 371,696 4,134 (3,365) 59,320 – (13,198) 46,122 (9,406) 1,299 9,196 6,799 10,948 26,943 2,404 2,282 (276) 1,075 (486) 313 (129,154) (5,306) (8,641) (94,741) (34,413) – (5,306) – (8,641) 1,499 (622) 152 – (1,102) (950) – – – 2005 48,024 72,036 65,187 98,361 30,681 62 5,504 25,009 344,864 7,798 1,179 (1,700) – (5,195) (6,895) – – – Total other operating revenue $ 492,990 $ 428,724 $ 401,980 $ 371,623 $ 346,946 1 Includes net derivative credit losses of $54 million. 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. We believe that a variety of fee revenue sources provide an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. We expect continued growth in other operating revenue through offering new products and services and by expanding into 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. Brokerage and trading revenue decreased $5.1 million compared with 2008, excluding derivative credit losses from 2008 revenue. Customer hedging revenue decreased $15 million or 70% compared to 2008. Lower commodity prices during 2009 reduced the level of customer hedging activity, compared with the strong market volatility experienced in both crude oil and natural gas in 2008. Securities trading revenue increased $7.8 million or 16% over the prior year. Increased mortgage lending activity increased the level of securities transactions by our mortgage banking customers. Investment banking revenue increased $3.1 million or 69% over 2008. Retail brokerage revenue decreased $631 thousand or 3%. 23 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 $5.4 million or 5% over 2008 primarily due to a $4.1 million increase in ATM network revenue and a $1.3 million increase in check card revenue. The number of check card transactions processed during 2009 increased 8% over 2008. The number of TransFund ATM locations totaled 1,896 at December 31, 2009, down 2% compared to last year primarily due to consolidation of some financial institution sites. Merchant discount revenue for 2009 totaled $28 million, up less than 1% over 2008. Trust fees decreased $13 million or 16%. During 2009, approximately $4.7 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. Due to the market conditions present in 2009, the fair value of trust assets remained below prior year levels for the majority of the year. The fair value of trust assets administered by the Company totaled $30.4 billion at December 31, 2009 compared with $30.5 billion at December 31, 2008. Deposit service charges and fees declined $1.7 million, or 1% compared with 2008 primarily related to a decrease in overdraft fees. Overdraft fees declined $1.8 million to $74 million due to a 6% decrease in transaction volume, partially offset by a 4% increase in the average per item fee charged. Commercial account service charge revenue increased slightly over prior year to $37 million. The increase was primarily related to a partial pass-through of the FDIC special assessment during 2009. Customers kept greater commercial account balances to offset the decrease in the earnings credit, which provides a non-cash method for commercial customers to avoid incurring charges for deposit services based on account balances. Service charges on retail deposit accounts decreased 15% to $4.4 million due to continued migration to service- charge free checking products. Changes in Federal banking regulations effective in the second half of 2010 are expected to significantly reduce overdraft fee revenue. The full effect of these regulations cannot be quantified at this time. Mortgage banking revenue increased $34 million or 112% over 2008. Revenue from originating and marketing mortgage loans increased $32 million compared to the prior year. Mortgage loans originated for sale in the secondary market totaled $2.8 billion compared to $1.2 billion in 2008. Mortgage loan originations slowed in the latter half of 2009, but remained well above historical levels due to government initiatives to lower national mortgage interest rates and to stimulate housing markets. Mortgage loan servicing revenue totaled $20 million or 0.32% of loans serviced for others in 2009 and $18 million or 0.35% of loans serviced for others in 2008. The average outstanding balance of loans serviced for others was $5.9 billion for 2009 and $5.0 billion for 2008. Growth in mortgage loans serviced for others was 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 $192 million for 2009 and $422 million for 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. Margin asset fees totaled $236 thousand for 2009 and $8.5 million for 2008. 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 2009, losses on our mortgage hedge securities of $13 million were partially offset with gains on the change in the fair value of our mortgage servicing rights of $12 million. We recognized $59 million of net gains on sales of available for sale securities in 2009. These securities were generally sold either because they had reached their maximum potential total return or to mitigate extension exposure from rising interest rates. As more fully described in the Financial Condition – Securities section of this report, we recognized $34 million of other- than-temporary impairment charges against earnings in 2009 on certain privately issued residential mortgage-backed securities and preferred stocks. We recognized $5.3 million of other-than-temporary impairment charges against earnings in 2008 related to the preferred stocks. Net losses on derivatives totaled $3.4 million for 2009 compared to net gains on derivatives of $1.3 million for 2008. Net gains or losses on derivatives consist of fair value adjustments of all 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 decreases as interest rate rise resulting in a loss to the Company and increases 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 24 the certificates of deposit are issued based on the Company’s intent to swap the interest rate on the certificates from a fixed rate to a LIBOR-based variable rate. 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 decreases and we recognize a gain. Net gains on other assets is primarily due to a $5.1 million improvement in the fair value of our private equity funds; $3.4 million of the improvement is allocated to limited partners through Net income (loss) attributable to non-controlling interest on the Statement of Earnings. Fourth Quarter 2009 Other Operating Revenue Other operating revenue for the fourth quarter of 2009 totaled $108 million compared to $121 million for the fourth quarter of 2008. Fees and commission revenue increased $5.0 million or 5% compared with the fourth quarter of 2008. Mortgage banking revenue increased $6.2 million over the same period last year. Mortgage loans funded totaled $560 million in the fourth quarter of 2009, up from $215 million in the fourth quarter of 2008. Brokerage and trading revenue decreased $3.3 million or 14% due primarily to lower securities trading revenue. Derivative fees and commission revenue decreased on lower volume due to less market volatility in 2009 compared to 2008. Transaction card revenue increased $1.1 million or 4% compared to the previous year due primarily to higher ATM fees and debit card processing volumes. Merchant discount fees were flat compared to prior year. Trust revenue decreased $651 thousand or 4% compared with the fourth quarter of 2008 due largely to the voluntary waiver of $1.7 million of fees related to the administration of the Cavanal Hill Funds and our cash management sweep fund. In addition, the fair value of trust assets was down less than 1% compared to the prior year. Deposit service charges and fees increased $262 thousand or 1% due to a $1.1 million increase in overdraft fees as a result of an increase in the per item fee and marginally higher transaction volume, offset by a $624 thousand decrease in commercial account activity charges. Net securities gains for the fourth quarter of 2009 totaled $7.3 million compared with $20 million in the fourth quarter of 2008. 2008 Other Operating Revenue Other operating revenue totaled $429 million for 2008, up $27 million over 2007. Fees and commissions revenue increased $9.6 million and net gains on securities, derivatives and other assets increased $17 million. Fees and commissions revenue was reduced by $54 million from net credit losses on derivative contracts with two bankrupt counterparties during 2008. Excluding these credit losses, brokerage and trading revenue performed well including a $26 million increase in securities trading revenue, a $7.3 million increase in revenue from customer hedging activities and a $2.8 million increase in retail brokerage revenue. Transaction card revenue increased $9.7 million or 11% due to increases in check card revenue, ATM fees and merchant discount revenue. Trust fees and commissions increased $748 thousand or 1%. Service charges on deposit accounts increased $8.3 million or 8% due to a 23% increase in commercial account service charge revenue and a 2% increase in overdraft fees. Mortgage banking revenue increased $8.3 million or 37% over 2007 due to increases in originating and marketing mortgages and mortgage loan servicing revenue. Margin asset fees totaled $8.5 million for 2008, due to an increase in margin assets primarily held as part of the Company’s customer derivatives programs. Net securities gains totaled $27 million for 2008. Other-than-temporary impairment charges of $5.3 million and $8.6 million were recognized in 2008 and 2007, respectively, on our holdings of variable-rate, perpetual preferred stocks. 25 Other Operating Expense Other operating expense totaled $697 million for 2009, up $34 million over 2008. Personnel expenses increased $28 million or 8% over the previous year. Non-personnel expenses, excluding changes in the fair value of mortgage servicing rights, increased $53 million or 19% primarily due to an increase in FDIC assessments, mortgage banking costs and net losses and operating expenses related to repossessed assets. Changes in the fair value of mortgage servicing rights decreased other operating expenses $47 million compared to 2008. Table 4 Other Operating Expense (In Thousands) Personnel expense Business promotion Professional fees and services Net occupancy and equipment Insurance FDIC special assessment Data processing and communications Printing, postage and supplies Net (gains) losses and operating expenses of repossessed assets Amortization of intangible assets Mortgage banking costs Change in fair value of mortgage servicing rights Recovery for impairment of mortgage servicing rights Visa retrospective responsibility obligation Other expense Total 2009 $ 380,517 19,582 30,243 65,715 24,040 11,773 81,291 15,960 11,401 6,970 36,304 (12,124) – – 25,061 $ 696,733 Personnel Expense Years ended December 31, 2007 2008 2006 $ 352,947 23,536 27,045 60,632 11,988 – 78,047 16,433 1,019 7,661 22,513 34,515 – (2,767) 28,835 $ 662,404 $ 328,705 21,888 22,795 57,284 3,017 – 72,733 16,570 691 7,358 13,111 2,893 – 2,767 25,175 $ 574,987 $ 296,260 19,351 17,744 52,188 4,270 – 66,926 15,862 474 5,327 12,898 (3,009) – – 24,016 $ 512,307 2005 $ 258,971 17,964 16,596 50,195 2,436 – 67,026 15,066 572 6,943 16,822 – (3,915) – 20,430 $ 469,106 Personnel expense totaled $381 million for 2009 and $353 million for 2008. Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs, totaled $232 million, up $12 million or 6% over 2008. The increase in regular compensation was primarily due to an increase in the average regular compensation per full time equivalent employee. Average staffing levels increased 6% compared with 2008. Table 5 (In Thousands) Personnel Expense Regular compensation Incentive compensation: Cash-based Stock-based Total incentive compensation Employee benefits Workforce reduction costs, net Total personnel expense Average staffing (full-time equivalent) 2009 2008 2007 2006 2005 Years Ended December 31, $ 231,897 $ 219,629 $ 206,857 $ 185,466 $ 165,529 80,582 10,572 91,154 57,466 – $ 380,517 79,215 3,962 83,177 50,141 – 352,947 $ 62,657 8,763 71,420 47,929 2,499 328,705 $ 54,093 11,111 65,204 45,590 – 296,260 $ 44,726 5,097 49,823 43,619 – 258,971 $ 4,403 4,140 4,106 3,828 3,677 Incentive compensation increased $8.0 million or 10% to $91 million. Cash-based incentive compensation is 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. Total cash-based incentive compensation for 2009 increased $1.4 million or 2% over the previous year. The increase in cash-based incentive compensation over 2008 included a $5.2 million or 18% increase in sales commissions related to brokerage and trading revenue offset by decreased cash-based incentive compensation for other business lines. 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 $7.7 million compared with 2008. This increase reflected changes in the market value of BOK Financial common stock and other investments. The year-end 26 closing market price per share of BOK Financial common stock increased $7.12 during 2009 and decreased $11.30 during 2008. Compensation expense for equity awards decreased $1.0 million compared with 2008. Expense for equity awards is based on the grant-date fair value of the awards and is unaffected by subsequent changes in fair value. Employee benefit expense totaled $57 million, a $7.3 million or 15% increase over 2008 primarily due to increased expense related to medical insurance costs, employee retirement plans and payroll taxes. Employee medical insurance costs were up $2.5 million or 15%. The Company self-insures a portion of its employee health care coverage and these costs may be volatile. Pension expense increased $3.1 million from 2008 due to changes in the expected return on plan assets and discount rate. Mortgage Banking Costs Mortgage banking costs, excluding changes in the fair value of mortgage servicing rights, totaled $36 million in 2009 and $23 million in 2008. Expense recognized for actual prepayments of mortgage loans serviced totaled $21 million in 2009 and $12 million in 2008. Low mortgage interest rates and other incentives to stimulate the housing market caused an increase in loan prepayments in 2009. We also maintain a reserve for losses on mortgage loans sold with recourse. Provision for losses on these loans totaled $12 million in 2009 and $8.6 million in 2008. Loans sold with recourse are more fully discussed in the Loan Commitments section of this report. Changes in the fair value of mortgage servicing rights due to anticipated prepayment speeds and other assumptions are also included in other operating expense. Changes in fair value of mortgage servicing rights decreased operating expense $12 million in 2009 and increased operating expense $35 million in 2008. We maintain a portfolio of mortgage-backed securities as an economic hedge against changes in the fair value of mortgage servicing rights. Losses on these securities totaled $13 million in 2009 which largely offset the decrease in operating expense. Gains on securities designated as an economic hedge totaled $11 million in 2008. Government programs to lower mortgage interest rates significantly increased anticipated prepayment speeds in the fourth quarter of 2008 which limited the effectiveness of our hedge. Deposit Insurance Expense Deposit insurance expense totaled $35 million for 2009, including a $12 million special assessment, compared to $11 million of total deposit insurance expense for 2008. In addition to the special assessment, the increase was due to an 8 basis point increase in the average assessment rate and a $1.5 billion increase in average assessable deposits. Other Operating Expenses All other operating expenses totaled $257 million for 2009, up $16 million or 7% over 2008. Net losses and operating expenses on repossessed assets increased $10 million and net occupancy and equipment expense increased $5.1 million. Net losses and operating expenses on repossessed assets increased primarily due to a $100 million increase in real estate and other repossessed assets during 2009. Fourth Quarter 2009 Operating Expenses Other operating expense totaled $176 million for the fourth quarter of 2009, down $9.0 million compared to the fourth quarter of 2008. Changes in the fair value of mortgage servicing rights reduced operating expenses by $32 million compared with the fourth quarter of 2008. Excluding the change in fair value of mortgage servicing rights, other operating expenses increased $23 million or 14%. Mortgage banking costs increased $6.5 million due to increased losses on loans previously sold with recourse and loan servicing costs. Personnel expense increased $6.0 million due largely to changes in the cost of liability-based stock compensation. Net losses and operating expenses on repossessed assets increased $4.1 million and deposit insurance expense increased $3.2 million. 2008 Operating Expenses Other operating expense for 2008 totaled $662 million, an $87 million or 13% increase over 2007. Personnel expense increased $24 million. Mortgage banking expenses including changes in the fair value of our mortgage servicing rights and losses on mortgage loans previously sold with recourse increased $41 million. All other operating expenses increased $22 million. Regular compensation expense totaled $220 million, up $13 million, or 6% over 2007. Incentive compensation increased $12 million, or 16% to $83 million. Expense for cash-based incentive compensation plans increased $17 million or 26% including a $13 million or 84% increase in sales commissions related to brokerage and trading revenue. Stock-based compensation expense decreased $4.8 million, reflecting changes in the market value of BOK Financial common stock 27 which decreased $11.30 during 2008. Compensation expense for equity awards increased $538 thousand or 8% over 2007. Employee benefit expenses increased $2.2 million or 5% to $50 million. Mortgage banking costs, including changes in the fair value of mortgage servicing rights and provision for losses on mortgage loans sold with recourse increased $41 million over 2007. The fair value of mortgage servicing rights decreased $35 million in 2008 as anticipated prepayment speeds increased significantly in the fourth quarter of 2008 in response to government programs to lower mortgage interest rates. A disconnection between current yield on our portfolio of mortgage-backed securities held as an economic hedge against the fair value of our servicing rights and mortgage loan commitment rates limited the effectiveness of our hedge. All other operating expenses in 2008 increased $22 million or 10% over 2007, primarily due to a $9.0 million increase in FDIC insurance premiums in addition to increases in professional fees related to legal and other loan collection costs and data processing and communications costs due to higher processing volumes. Income Taxes Income tax expense was $107 million for 2009, $65 million for 2008 and $116 million for 2007. This represented 34%, 31% and 34%, respectively, of book taxable income. Tax expense currently payable totaled $129 million in 2009, $116 million in 2008, and $129 million in 2007. The statute of limitations expired on an uncertain income tax position and the Company adjusted its current income tax liability to amounts on filed tax returns for 2007 during 2008. In addition, the Company recognized the tax benefit from certain appreciated securities contributed to the BOKF Charitable Foundation in 2008. Income tax expense for 2008 would have been $71 million or 34% of book taxable income excluding these items. Net deferred tax assets totaled $107 million at December 31, 2009 and $219 million at December 31, 2008. The decrease was due primarily to the tax effect of unrealized losses on available for sale securities and provision for credit losses in excess of net loans charged off. We have evaluated the recoverability of our net deferred tax asset based on taxes previously paid in net loss carry-back periods and other factors and determined that no valuation allowance was required. Reserves for uncertain tax positions totaled $12 million at December 31, 2009 and $13 million at December 31, 2008. BOK Financial operates in numerous jurisdictions, which requires judgment regarding the allocation of income, expense and earnings under various laws and regulations of each of these taxing jurisdictions. Each jurisdiction may audit our tax returns and may take different positions with respect to these allocations. Income tax expense for the fourth quarter of 2009 totaled $25 million or 37% of book taxable income compared to $10 million or 26% of book taxable income for the fourth quarter of 2008. Excluding the previously mentioned tax benefit from the contribution of appreciated securities and quarterly adjustments to the annual effective tax rate, income tax expense for the fourth quarter of 2008 would have been $15 million or 33% of book taxable income. 28 Table 6 Selected Quarterly Financial Data (In Thousands, Except Per Share Data) Fourth Third Second First 2009 Interest revenue Interest expense Net interest revenue Provision for credit losses Net interest revenue after provision for credit losses Fees and commissions revenue Gain (loss) on other assets, net Loss on derivatives, net Gain on securities, net Total other-than-temporary impairment losses Portion of loss recognized in other comprehensive income Net impairment losses recognized in earnings Other operating expense Change in fair value of mortgage servicing rights Income before taxes Income tax expense Net income before non-controlling interest Net income attributable to non-controlling interest Net income attributable to BOK Financial Corp. $ 224,411 39,933 184,478 48,620 135,858 115,949 (205) (370) 7,277 (67,390) (52,902) (14,488) 181,722 (5,285) 67,584 24,780 42,804 33 $ 42,771 $ 226,246 45,785 180,461 55,120 125,341 119,956 3,223 (294) 12,266 (6,133) (2,752) (3,381) 175,751 2,981 78,379 24,772 53,607 2,947 $ 50,660 $ 230,685 55,105 175,580 47,120 128,460 123,100 973 (1,037) 6,471 (1,263) 279 (1,542) 183,635 (7,865) 80,655 28,315 52,340 225 $ 52,115 $ 233,227 63,382 169,845 45,040 124,805 121,507 143 (1,664) 20,108 (54,368) (39,366) (15,002) 167,749 (1,955) 84,103 28,838 55,265 233 $ 55,032 Earnings per share: Basic Diluted Average shares: Basic Diluted $ 0.63 $ 0.63 $ 0.75 $ 0.75 $ 0.77 $ 0.77 $ 0.81 $ 0.81 67,446 67,600 67,392 67,514 67,345 67,448 67,316 67,387 $ 262,160 Interest revenue 85,713 Interest expense 176,447 Net interest revenue 73,001 Provision for credit losses 103,446 Net interest revenue after provision for credit losses 110,930 Fees and commissions revenue (7,420) Gain (loss) on other assets, net (2,219) Gain (loss) on derivatives, net 20,156 Gain (loss) on securities, net – Total other-than-temporary impairment losses – Portion of loss recognized in other comprehensive income – Net impairment losses recognized in earnings 159,010 Other operating expense 26,432 Change in fair value of mortgage servicing rights 39,451 Income (loss) before taxes 10,363 Income tax expense (benefit) 29,088 Net income (loss) before non-controlling interest (6,355) Net income (loss) attributable to non-controlling interest Net income (loss) attributable to BOK Financial Corp. $ 35,443 2008 $ 263,358 99,010 164,348 52,711 111,637 126,658 (841) 4,366 2,103 – – – 158,736 5,554 79,633 22,958 56,675 (10) $ 56,685 $ 260,086 101,147 158,939 59,310 99,629 63,749 (1,149) (2,961) (5,242) – – – 158,501 767 (5,242) (2,862) (2,380) (1,219) (1,161) $ $ 276,041 128,913 147,128 17,571 129,557 113,857 4 2,113 9,926 (5,306) – (5,306) 151,642 1,762 96,747 34,450 62,297 32 $ 62,265 Earnings (loss) per share: Basic Diluted Average shares: Basic Diluted $ $ 0.53 0.52 $ $ 0.84 0.84 $ $ (0.02) (0.02) $ $ 0.92 0.92 67,294 67,456 67,263 67,432 67,452 67,452 67,202 67,504 29 Lines of Business We operate three principal lines of business: commercial banking, consumer banking and wealth management. 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 and all mortgage banking activities. Wealth management provides fiduciary services, brokerage and trading, private bank services and investment advisory services in all markets. Wealth management also originates loans for high net worth clients. 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 FDIC insurance assessments are charged to the business units. We allocate resources and evaluate the 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 third-party developed capital allocation model that reflects management’s assessment of risk. This model assigns capital based upon credit, operating, interest rate and market risk inherent in our business lines and recognizes the diversification benefits among the units. The level of assigned economic capital is a combination of the risk taken by each business line, based on its actual exposures and calibrated to its own loss history where possible. Average invested capital includes economic capital and amounts we have invested in the lines of business. As shown in Table 7, net income attributed to our lines of business decreased $46 million or 34% from the prior year. Credit losses attributed to the business units decreased their pre-tax income by $35 million. In addition, less net interest revenue was attributed to the lines of business and more net interest revenue was attributed to the funds management unit. Total tax-equivalent net interest revenue recognized by the lines of business in 2009 decreased $45 million from 2008 and tax-equivalent net interest revenue recognized by the funds management unit increased $108 million. Lower market interest rates decreased 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. In addition, net interest revenue in the business units was reduced by a decrease in average loan balances and increased in the funds management unit due to growth in the securities portfolio. Table 7 Net Income by Line of Business (In Thousands) Years ended December 31, 2008 2007 2009 Commercial banking Consumer banking Wealth management Subtotal Funds management and other Total $ 57,536 20,987 11,037 89,560 111,018 $ 200,578 $ 79,799 25,749 29,737 135,285 17,947 $ 153,232 $ 150,537 57,251 25,622 233,410 (15,746) $ 217,664 30 Commercial Banking Commercial banking contributed $58 million to consolidated net income for 2009, down from $80 million in 2008. The decrease in commercial banking net income was largely due to a $25 million decrease in net interest revenue and a $19 million increase in net loans charged-off partially offset by a $27 million increase in other operating revenue. Other operating revenue attributed to commercial banking was reduced by $41 million of net credit losses on a customer’s derivatives position in 2008. Table 8 Commercial Banking (Dollars in Thousands) NIR (expense) from external sources NIR (expense) from internal sources 2009 $ 345,375 (52,598) Years ended December 31, 2008 451,624 (134,191) $ $ Total net interest revenue 292,777 317,433 Other operating revenue 133,703 Operating expense 224,065 Net loans charged off 100,749 Gains on financial instruments, net - Gains (losses) on repossessed assets, net (7,500) Income before taxes 94,166 Federal and state income tax 36,630 107,185 216,655 81,966 4,689 (82) 130,604 50,805 2007 526,225 (200,390) 325,835 131,081 201,876 9,747 1,075 10 246,378 95,841 Net income $ 57,536 $ 79,799 $ 150,537 Average assets Average loans Average deposits Average invested capital Return on assets Return on invested capital Efficiency ratio Net charge-offs to average loans $ 10,116,014 9,184,600 5,365,180 1,042,101 0.57% 5.52 52.54 1.10 $ 11,049,565 9,684,461 4,559,653 1,103,656 0.72% 7.23 51.02 0.85 $ 9,646,637 8,795,426 4,146,378 1,095,314 1.56% 13.74 44.18 0.11 Net interest revenue decreased $25 million or 8% compared with 2008. The decreased internal transfer pricing credit provided to the commercial banking unit on $5.4 billion of average deposits sold to the funds management unit reduced net interest revenue by approximately $40 million. In addition, the average outstanding balance of loans attributed to commercial banking decreased $500 million in 2009 on reduced customer demand and normal repayment trends, which decreased net interest revenue by $12 million. This decrease in net interest revenue was partially offset by loan spreads which improved 22 basis points, increasing net interest revenue by $21 million. Other operating revenue excluding the previously noted credit losses on derivative contracts, decreased $15 million or 10%. Derivative fees and commissions were down $10 million on lower transaction volumes due to lower commodity price volatility in 2009 compared to 2008. Revenue from margin assets was down $8.0 million due to a decrease in margin assets held as part of our customer derivative programs. Transaction card revenues were up $4.2 million over 2008. Service charges on commercial deposit accounts were flat with the prior year. Operating expenses were up $7.4 million or 3% due primarily to increased FDIC insurance expense as a result of an increase in commercial deposit balances and the regular assessment rate in addition to higher professional fees to collect problem assets. The average outstanding balance of loans attributed to commercial banking was $9.2 billion compared to $9.7 billion for 2008. Average commercial banking division loans decreased $500 million or 5% compared to 2008. See Loans section following for additional discussion of changes in commercial and commercial real estate loans which primarily attributed to the commercial banking segment. Net commercial banking loans charged off increased $19 million in 2009 to $101 million or 1.10% of average loans attributed to this line of business. Net commercial banking loans charged off in 2008 totaled $82 million or 0.85% of average loans attributable to this line of business and included a $26 million energy loan and an $11 million recovery on two loans charged off in 2001 and 2005. The increase in net loans charged off was primarily due to increased losses on commercial real estate loans. Average deposits attributed to commercial banking were $5.4 billion for 2008, up $806 million or 18% over 2008. Average balances attributed to our commercial and industrial customers increased $574 million or 69%. Average balances attributed to our small business customers increased $137 million or 8% and average deposit balances attributed to our energy 31 customers increased $32 million or 7%. Treasury services account balances increased $41 million or 3% and average deposit balances of our commercial real estate customers increased $17 million or 8%. Consumer Banking Consumer banking services are provided through four primary distribution channels: traditional branches, supermarket branches, the 24-hour ExpressBank call center and On-line internet banking. We currently have 197 consumer banking locations, including branch banking locations and mortgage lending offices. Our consumer banking locations are primarily distributed 85 in Oklahoma, 48 in Texas, 22 in New Mexico and 15 in Colorado. Consumer banking contributed $21 million to consolidated net income in 2009, down from $26 million in 2008. The decrease in consumer banking net income was largely due to a decrease in net interest revenue, partially offset by higher mortgage revenues and expenses and changes in the fair value of mortgage servicing rights, net of economic hedge. Table 9 Consumer Banking (Dollars in Thousands) NIR (expense) from external sources NIR (expense) from internal sources $ Years ended December 31, 2008 $ 32,076 118,728 $ 2009 57,893 73,565 Total net interest revenue 131,458 150,804 Other operating revenue Operating expense Net loans charged off Increase (decrease) in fair value of mortgage servicing rights Gains (losses) on financial instruments, net Gains on repossessed assets, net Income before taxes Federal and state income tax 182,895 256,337 24,366 12,124 (13,198) 1,773 34,349 13,362 148,885 219,024 16,726 (34,515) 12,525 193 42,142 16,393 2007 (7,807) 163,028 155,221 144,585 193,600 9,233 (2,893) (486) 107 93,701 36,450 Net income $ 20,987 $ 25,749 $ 57,251 Average assets Average loans Average deposits Average invested capital Return on assets Return on invested capital Efficiency ratio Net charge-offs to average loans Banking locations (period-end) Mortgage loan servicing portfolio Mortgage loan fundings $ 6,149,598 2,447,625 6,048,201 225,540 0.34% 9.31 81.54 1.00 197 7,366,780 2,828,260 $ $ 5,764,667 2,508,788 5,678,166 207,586 0.45% 12.40 73.08 0.67 195 5,983,824 1,018,246 5,509,485 2,270,859 5,442,666 180,393 1.04% 31.74 64.58 0.41 189 5,481,736 919,823 Net interest revenue from consumer banking activities decreased $19 million or 13% from 2008. Historically low short- term interest rates decreased the internal transfer pricing credit provided to the consumer banking division for funds sold to our funds management unit by $39 million. This decrease was partially offset by additional net interest revenue generated by asset growth Other operating revenue increased $34 million or 23% over 2008 primarily due to increased mortgage banking revenue. Loan funding volumes were up due to government initiatives to lower national mortgage interest rates and stimulate housing markets. Deposit service charges were down $2.2 million or 3% compared to the prior year and transaction card revenues increased $1.2 million or 4% over 2008. Operating expenses increased $37 million or 17% over 2008. Personnel expense increased $7.6 million or 11% due primarily to branch expansion in Arizona, Colorado and Texas. Mortgage banking expenses increased $9.3 million due to the effect of accelerated actual loan repayments on the value of our mortgage servicing rights. FDIC insurance premiums increased $5.5 million primarily due to increased deposit balances and FDIC regular assessment rates. In addition, facilities and other operating expenses increased due to branch expansion in Arizona, Colorado and Texas. 32 Our Consumer Banking division originates, markets and services conventional and government-sponsored mortgage loans for all of our geographical markets. During 2009, we funded $3.0 billion of mortgage loans compared to $1.0 billion in 2008. Approximately 54% of our mortgage loans funded was in the Oklahoma market, 14% in the Texas market and 12% in the Colorado market. Revenue from mortgage loan origination and marketing activities totaled $45 million in 2009 and $13 million in 2008. As of December 31, 2009, we also service $7.4 billion of mortgage loans, including $828 million of loans serviced for affiliates. Approximately 95% of the mortgage loans serviced was to borrowers in our primary geographical market areas. Mortgage loan servicing revenue totaled $20 million in 2009 and $18 million in 2008. Changes in fair value of our mortgage loan servicing rights, net of securities held as an economic hedge, reduced consumer banking net income by $656 thousand in 2009 and reduced consumer banking net income by $14 million in 2008. The interest rate sensitivity of our mortgage servicing rights and securities held as an economic hedge is modeled over a range of +/- 50 basis points. At December 31, 2009, a 50 basis point increase in mortgage interest rates is expected to decrease the fair value of our mortgage servicing rights, net of economic hedging by $3.6 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 $1.4 million. Modeling changes in the value of our servicing rights due to changes in interest rates assumes stable relationships between mortgage commitment rates and discount rates and assumed prepayment speeds and actual prepayment speeds. Changes in market conditions can cause variations from these assumptions. These factors and others may cause changes in the value of our mortgage servicing rights to differ from our expectations. Average consumer deposits increased $370 million or 7% over 2008. Interest-bearing transaction accounts were up $199 million or 9% and time deposits were up $106 million or 4%. Average demand deposit accounts increased $57 million or 8%. Movement of funds among the various types of consumer deposits was largely based on interest rates and product features offered. Wealth Management The Wealth Management division contributed $11 million to net income in 2009, compared to $30 million in 2008. The decrease in net income was due primarily to increased operating expenses and net loans charged off. Table 10 Wealth Management (Dollars in Thousands) NIR (expense) from external sources NIR (expense) from internal sources $ Years ended December 31, 2008 $ 12,617 32,853 $ 2009 25,899 18,746 Total net interest revenue 44,645 45,470 Other operating revenue Operating expense Net loans charged off Gains (losses) on financial instruments, net Income before taxes Federal and state income tax 156,360 171,543 11,399 – 18,063 7,026 156,133 149,966 2,961 (7) 48,669 18,932 2007 8,562 37,627 46,189 130,681 133,436 1,513 13 41,934 16,312 Net income $ 11,037 $ 29,737 $ 25,622 Average assets Average loans Average deposits Average invested capital Return on assets Return on invested capital Efficiency ratio Net charge-offs (annualized) to average loans $ 3,032,007 1,059,342 2,958,549 194,731 $ 2,193,386 933,020 2,100,237 183,845 $ 0.36% 5.67 85.34 1.08 1.36% 16.18 74.39 0.32 0.17 1,743,943 910,391 1,653,606 171,159 1.47% 14.97 75.44 Trust assets $ 30,385,365 $ 30,454,512 $ 36,288,592 Net interest revenue decreased $825 thousand or 2%. Lower internal funds transfer credit provided for deposits sold to the funds management unit decreased net interest revenue by $19 million. This was primarily offset by increased deposit volume as well as increased loan volume and yields. 33 Other operating revenue increased $227 thousand from the prior year. Increased trading and brokerage revenue due to higher level of securities transactions by our mortgage banking customers and increased investment banking were offset by declines in trust fees and commissions due to fee waivers and decreases in the fair value of trust assets. Operating expenses increased $22 million or 14% over 2008. Personnel expense was up $16 million or 16%, primarily due to increased staffing and incentive compensation related to penetration in markets outside of Oklahoma. Non-personnel operating expenses increased $5.8 million or 11% compared with 2008 primarily due to increased FDIC insurance premiums as a results of an increase in the FDIC regular assessment rate and increased deposit balances. Average loans by the wealth management division increased $126 million or 14% to $1.1 billion at December 31, 2009. Net loans charged off in 2009 were $11 million compared to $3.0 million in 2008. The Wealth Management division provided $3.0 billion of average deposits in 2009, an increase of $858 million or 41% over $2.1 billion in average deposits in 2008. Wealth management deposits are largely sold to the funds management unit and increased primarily due to an increase in time deposits and interest bearing transaction accounts. Interest-bearing transaction accounts averaged $1.9 billion for 2009, an increase of $406 million or 28% over 2008. The growth in interest bearing transaction account reflects continued movement of customer funds from money market products that were not on the Company’s balance sheet to deposits as well as high net worth customer relationship growth. Average time deposits were $828 million, up $439 million or 38% over last year. Time deposits grew during 2009 primarily due to product offerings to institutional customers. At December 31, 2009 and 2008, Wealth Management was responsible for trust assets with aggregate fair values of $30.4 billion and $30.5 billion, respectively, under various fiduciary arrangements. The decrease in fair value of trust assets was due primarily to general market conditions. We have sole or joint discretionary authority over $10.8 billion of trust assets at December 31, 2009 compared to $11.5 billion at December 31, 2008. The fair value of non-managed assets totaled $12.3 billion at December 31, 2009, down from $11.3 billion at December 31, 2008. The fair value of assets held in safekeeping totaled $7.2 billion at December 31, 2009 and $7.7 billion at December 31, 2008. Geographic Market Distribution The Company also secondarily evaluates performance by primary geographic market. Loans are generally attributed to geographic markets based on the location of the customer and may not reflect the location of the underlying collateral. Brokered deposits and other wholesale funds are not attributed to a geographic market. Funds management and other also include insignificant results of operations in locations outside our primary geographic regions. Table 11 Net Income by Geographic Region (In Thousands) Years ended December 31, 2008 2007 2009 Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/Missouri Subtotal Funds management and other Total $ 85,774 17,011 6,142 10,636 (7,811) (28,149) 6,433 90,036 110,542 $ 200,578 $ 70,516 42,526 14,657 9,389 7,617 (8,082) 537 137,160 16,072 $ 153,232 $ 141,812 53,806 18,728 4,775 13,783 4,092 (381) 236,615 (18,951) $ 217,664 34 Oklahoma Market Oklahoma is a significant market to the Company. Our Oklahoma offices are located primarily in the Tulsa and Oklahoma City metropolitan areas. Approximately 51% of our average loans, 52% of our average deposits and 43% of our consolidated net income is attributed to the Oklahoma market. In addition, all of our mortgage servicing activity and 77% of our trust assets are attributed to the Oklahoma market. Table 12 Oklahoma (Dollars in Thousands) Net interest revenue $ Years ended December 31, 2008 245,328 $ $ 2009 235,581 Other operating revenue Operating expense Net loans charged off Increase (decrease) in fair value of mortgage servicing rights Gains (losses) on financial instruments, net Gains (losses) on repossessed assets, net Income before taxes Federal and state income tax 316,541 374,860 35,762 12,124 (13,198) (42) 140,384 54,610 280,323 348,677 44,783 (34,515) 17,207 528 115,411 44,895 2007 260,840 294,569 310,038 11,146 (2,893) 602 164 232,098 90,286 Net income $ 85,774 $ 70,516 $ 141,812 Average assets Average loans Average deposits Average invested capital Return on assets Return on invested capital Efficiency ratio Net charge-offs to average loans $ 8,841,130 6,088,634 7,888,821 728,567 0.97% 11.77 67.89 0.59 $ 8,105,136 6,427,544 6,780,539 788,573 0.87% 8.94 66.33 0.70 $ 7,356,038 6,331,536 5,999,478 826,533 1.93% 17.16 55.82 0.18 Net income generated in the Oklahoma market in 2009 increased $15 million or 22% over 2008. Net interest revenue decreased $9.7 million or 4% from 2008 due to a $339 million decrease in average loans, offset by improving interest spreads on loans. The benefit to net interest revenue from average deposit growth of $1.1 billion compared to the prior year was offset by lower internal funds transfer credit provided for funds sold to the funds management unit. Other operating revenue, excluding $41 million of net credit losses on certain customer derivative contracts in 2008 decreased $5.1 million or 2% due primarily to lower derivative and related margin interest fees, lower trust fees due to fee waivers and a decline in the fair value of trust assets. Increased mortgage banking revenue provided a partial offset. Operating expense increased $26 million or 8% due primarily to higher personnel costs and mortgage banking costs. FDIC insurance premiums were also higher as a result of an increase in the regular assessment rate and deposit balances. Changes in the fair value of mortgage servicing rights, net of changes in the fair value of financial instruments designated as an economic hedge, decreased pre-tax income by $1.1 million in 2009 and $24 million in 2008. Net gains on financial instruments also included $6.8 million from the partial redemption of stock received from the Visa, Inc. initial public offering in 2008. Net loans charged-off totaled $36 million or 0.59% of average loans in 2009 and $45 million or 0.70% of average loans in 2008. Net loans charged-off in 2008, excluding $26 million from the SemGroup charge-off and two recoveries that are not expected to recur, totaled $30 million or 0.47% of average loans. Net charge-offs increased in all loan categories. 35 Texas Market Texas is our second largest market. Our Texas offices are located primarily in the Dallas, Fort Worth and Houston metropolitan areas. Approximately 30% of our average loans, 24% of our average deposits and 8% of our consolidated net income is attributed to the Texas market. Table 13 Texas (Dollars in Thousands) Net interest revenue 2009 $ 134,651 Years ended December 31, 2008 153,278 $ $ Other operating revenue Operating expense Net loans charged off Gains (losses) on repossessed assets, net Income before taxes Federal and state income tax 51,219 134,341 23,607 (1,343) 26,579 9,568 45,348 115,754 16,544 119 66,447 23,921 2007 150,658 44,177 108,278 2,438 (47) 84,072 30,266 Net income $ 17,011 $ 42,526 $ 53,806 Average assets Average loans Average deposits Average invested capital Return on assets Return on invested capital Efficiency ratio Net charge-offs to average loans $ 4,168,652 3,607,661 3,701,415 536,416 0.41% 3.17 72.28 0.65 $ 3,911,535 3,625,751 3,222,986 536,239 1.09% 7.93 58.28 0.46 $ 3,473,968 3,037,589 2,959,111 511,888 1.55% 10.51 55.57 0.08 Net income in the Texas market decreased by $26 million compared to 2008 primarily due to decreased net interest revenue and increased operating expenses. Net interest revenue decreased $19 million or 12% compared to 2008. Average outstanding loans decreased $18 million or less than 1% compared to 2008. Average deposits increased $478 million or 15%. The benefit of an increase in average deposits was offset by the decrease in average loans and reduced benefit from funds sold to the funds management unit. Other operating revenue increased $5.9 million or 13% compared to 2008 primarily related to increased mortgage banking revenue, transaction card revenue and deposit service charges, partially offset by a decrease in brokerage and trading revenue. Operating expenses increased $19 million or 16% over last year primarily related to higher personnel costs and FDIC insurance premiums as a result of an increase in the FDIC regular assessment rate and deposit balances. Net loans charged-off totaled $24 million or 0.65% of average loans in 2009 and $17 million or 0.46% of average loans in 2008. Other Markets Net income attributed to our New Mexico market totaled $6.1 million or 3% of consolidated net income for 2009, down from $15 million in 2008. The decrease in net income attributed to New Mexico resulted from a decrease in net interest revenue, an increase in net loans charged off and an increase in operating expenses in 2009 compared to 2008. Net interest revenue decreased due to the lower internal funds transfer credit provided for funds sold to the funds management unit and decreased loan balances. Higher operating expenses were primarily related to increased FDIC insurance expense due to increased deposit balances and regular assessment rates. Average deposits increased $111 million over 2008. Net loans charged off in 2009 totaled $7.1 million or 0.88% of average loans. Net income in the Arkansas market increased to $10.6 million in 2009 from $9.4 million in 2008 due primarily to growth in securities trading revenue at our Little Rock office, offset by higher personnel costs. Average deposits in our Arkansas market were up $82 million or 112% over the prior year primarily related to commercial banking deposits. Consumer and wealth management deposits also increased over 2008. We incurred a net loss of $7.8 million in the Colorado market compared to net income of $7.6 million in 2008. The decrease in net income was primarily related to increased net loans charged off and higher FDIC insurance premiums. Net loans charged-off totaled $25 million or 2.75% of average loans in 2009 and $8.1 million or 0.95% of average loans in 36 2008. Net loans charged off included $12 million of commercial real estate loans and $5.7 million of service sector commercial loans. Average loans increased $49 million compared to the prior year and average deposits increased $79 million. At December 31, 2009, nonperforming loans in the Colorado market totaled $60 million or 6.91% of total loans consisting primarily of nonaccruing residential construction and land development loans. The Arizona market experienced a net loss of $28 million in 2009 and $8.1 million in 2008. These losses were largely due to an increase in net loans charged-off and decreased net interest revenue. In addition, operating expenses were up due to increased losses on repossessed assets. Net loans charged-off totaled $40 million or 7.04% of average loans in 2009 and $18 million or 3.07% of average loans in 2008. Average loans declined $25 million compared to the prior year due primarily to decreases in commercial real estate loans. Average deposits grew by $56 million. At December 31, 2009, nonperforming loans in the Arizona market totaled $85 million or 17.09% of total loans consisting primarily of nonaccruing residential construction and land development loans. Consistent with plans when we first acquired Valley Commerce Bank in Phoenix in 2005, our objective is to focus on growth in commercial and small business lending in the Arizona market. We have expanded our commercial lending staff in this market and opened three new banking locations in 2009. We have significantly scaled-back commercial real estate lending activities which were not contemplated in our initial expansion into this market. During 2009, we exited the Tucson market which we first entered in 2006. Assets attributed to the Arizona market include $16 million of goodwill that may be impaired in future periods if these growth plans are unsuccessful. The Kansas/Missouri market experienced net income growth of $5.9 million primarily due to a $6.2 million decrease in net loans charged off and a $6.4 million increase in other operating revenue, offset by a $3.2 million increase in operating expenses. Brokerage and trading revenue grew $5.7 million over last year. Personnel costs related to this revenue growth were up $1.3 million. Total average deposits increased $121 million over 2008 and average loans decreased $38 million compared to the prior year. Table 14 New Mexico (Dollars in Thousands) Net interest revenue 2009 $ 32,775 Years ended December 31, 2008 39,673 $ $ Other operating revenue Operating expense Net loans charged off Gains (losses) on repossessed assets, net Income before taxes Federal and state income tax 23,959 38,632 7,125 (925) 10,052 3,910 23,788 35,753 3,715 (5) 23,988 9,331 2007 45,583 24,127 35,412 3,646 – 30,652 11,924 Net income $ 6,142 $ 14,657 $ 18,728 Average assets Average loans Average deposits Average invested capital Return on assets Return on invested capital Efficiency ratio Net charge-offs to average loans $ 1,248,607 810,867 1,146,942 97,655 $ 1,141,031 841,353 1,036,209 110,333 $ 0.49% 6.29 68.09 0.88 1.28% 13.28 56.34 0.44 1,187,667 817,118 1,082,883 114,498 1.58% 16.36 50.80 0.45 37 Table 15 Arkansas (Dollars in Thousands) Net interest revenue Other operating revenue Operating expense Net loans charged off Losses on repossessed assets, net Income before taxes Federal and state income tax 2009 $ 11,751 Years ended December 31, 2008 11,784 $ $ 37,119 27,378 3,665 (419) 17,408 6,772 29,104 22,027 3,253 (242) 15,366 5,977 2007 10,075 17,214 18,237 1,238 – 7,814 3,039 Net income $ 10,636 $ 9,389 $ 4,775 Average assets Average loans Average deposits Average invested capital Return on assets Return on invested capital Efficiency ratio Net charge-offs to average loans $ 425,071 409,339 155,981 32,584 2.50% 32.64 56.02 0.90 $ 446,101 434,339 73,605 30,290 2.10% 31.00 53.87 0.75 $ 367,731 358,387 68,659 27,185 1.30% 17.56 66.83 0.35 Table 16 Colorado (Dollars in Thousands) Net interest revenue 2009 $ 34,966 Years ended December 31, 2008 37,009 $ $ Other operating revenue Operating expense Net loans charged off Losses on repossessed assets, net Income (loss) before taxes Federal and state income tax (benefit) 18,237 40,032 25,000 (955) (12,784) (4,973) 16,600 32,997 8,145 – 12,467 4,850 2007 36,544 16,276 29,985 276 – 22,559 8,776 Net income (loss) $ (7,811) $ 7,617 $ 13,783 Average assets Average loans Average deposits Average invested capital Return on assets Return on invested capital Efficiency ratio Net charge-offs to average loans $ 1,217,498 908,949 1,137,893 135,101 (0.64)% (5.78) 75.24 2.75 $ 1,138,363 859,490 1,058,816 126,337 0.67% 6.03 61.55 0.95 $ 1,076,661 738,503 992,844 109,407 1.28% 12.60 56.77 0.04 38 Table 17 Arizona (Dollars in Thousands) Net interest revenue 2009 $ 11,174 Years ended December 31, 2008 18,608 $ $ Other operating revenue Operating expense Net loans charged off Losses on repossessed assets, net Income (loss) before taxes Federal and state income tax (benefit) 3,384 18,851 39,733 (2,044) (46,070) (17,921) 1,300 14,740 18,109 (287) (13,228) (5,146) 2007 19,292 2,294 13,301 1,588 – 6,697 2,605 Net income (loss) $ (28,149) $ (8,082) $ 4,092 Average assets Average loans Average deposits Average invested capital Return on assets Return on invested capital Efficiency ratio Net charge-offs to average loans $ 631,680 564,730 182,209 82,997 $ 612,785 589,363 126,313 78,425 (4.46)% (33.92) 129.49 7.04 (1.32)% (10.31) 74.04 3.07 $ 539,251 519,209 122,617 46,685 0.76% 8.77 61.62 0.31 Table 18 Kansas/Missouri (Dollars in Thousands) Years ended December 31, 2008 2007 2009 Net interest revenue $ 7,927 $ 7,692 $ 4,151 Other operating revenue Operating expense Net loans charged off Income (loss) before taxes Federal and state income tax (benefit) 19,876 16,358 917 10,528 4,095 13,456 13,165 7,103 880 343 6,533 11,144 163 (623) (242) Net income (loss) $ 6,433 $ 537 $ (381) Average assets Average loans Average deposits Average invested capital Return on assets Return on invested capital Efficiency ratio Net charge-offs to average loans $ 310,648 299,861 158,665 23,145 2.07% 27.79 58.84 0.31 $ $ 341,383 338,047 37,964 23,970 0.16% 179,992 178,161 16,936 13,790 (0.21)% 2.24 62.25 2.10 (2.76) 104.31 0.09 39 Assessment of Financial Condition Securities Investment securities, which consist primarily of Oklahoma municipal bonds, are carried at cost and adjusted for amortization of premiums or accretion of discounts. At December 31, 2009, investment securities were carried at $240 million and had a fair value of $247 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 $8.9 billion at December 31, 2009, up $2.1 billion compared with December 31, 2008. In this period of declining loan demand and readily-available liquidity, we increased our available for sale portfolio to supplement earnings by recognizing attractive spreads over funding costs on these securities. Credit risk is controlled by investing in securities fully backed by U.S. government agencies and interest rate risk is mitigated by investing in short- duration securities that would have limited extension exposure from rising interest rates. At December 31, 2009, residential mortgage-backed securities represented 97% 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 summary of our securities follows in Table 19. Additional details regarding securities concentrations appears in Note 2 to the Consolidated Financial Statements. Table 19 Securities (Dollars in Thousands) 2009 December 31, 2008 2007 Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Investment: Municipal and other tax-exempt Other debt securities Total Available for sale: U.S. Treasury Municipal and other tax-exempt Mortgage-backed securities: U.S. agencies Private issue Total mortgage-backed securities Other debt securities Federal Reserve Banks Federal Home Loan Banks Perpetual preferred stocks Other equity securities and mutual funds Total Mortgage trading: Mortgage-backed U.S. agency securities $ 232,568 7,837 240,405 $ $ 6,998 61,268 $ $ $ 7,645,817 961,378 8,607,195 17,174 32,526 78,999 19,224 238,847 7,857 246,704 $ 235,791 6,553 242,344 $ 7,020 62,201 $ 6,987 19,537 7,809,328 792,362 8,601,690 17,147 32,526 78,999 22,275 4,900,895 1,636,934 6,537,829 37 32,380 61,760 32,472 $ $ $ 239,178 6,591 245,769 $ 242,274 5,675 247,949 $ 7,126 20,163 $ 6,961 26,478 4,972,928 1,241,238 6,214,166 36 32,380 61,760 21,701 3,838,219 1,664,537 5,502,756 42 31,299 57,265 32,778 $ $ $ 243,061 5,727 248,788 7,088 26,578 3,817,939 1,641,189 5,459,128 41 31,299 57,265 32,778 35,414 $ 8,858,798 50,165 $ 8,872,023 31,421 $ 6,722,423 34,119 $ 6,391,451 30,347 $ 5,687,926 36,363 $ 5,650,540 $ 288,076 $ 285,950 $ 386,571 $ 399,211 $ 153,920 $ 154,701 A primary risk of holding mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. We evaluate this risk through extensive modeling of risk both before making an investment and throughout the life of the security. The expected duration of the mortgage-backed securities portfolio was approximately 2.3 years at December 31, 2009. Management estimates that the expected duration would extend to approximately 3.4 years assuming a 300 basis point immediate rate shock. The effect of falling interest rates from current low levels is not expected to be significant. Mortgage-backed securities also have credit risk from delinquency or default of the underlying loans. The Company mitigates this risk by primarily investing in securities issued by U.S. government agencies. Principal and interest payments on the underlying loans are either fully or partially guaranteed. At December 31, 2009, approximately $7.6 billion of the amortized cost of the Company’s residential mortgage-backed securities were issued by U.S. government agencies. The fair value of these mortgage-backed securities totaled $7.8 billion at December 31, 2009. We also hold amortized cost of $961 million in residential mortgage-backed securities privately issued by publicly-owned financial institutions. The fair value of our portfolio of privately issued residential mortgage-backed securities totaled $792 million at December 31, 2009. Approximately $589 million of these privately issued mortgage-backed securities were rated below investment grade at December 31, 2009. The unrealized loss on the below investment grade securities totaled 40 $129 million. The amortized cost of our privately issued residential mortgage-backed securities decreased $676 million during 2009 due primarily to cash received. The unrealized loss on these securities decreased $227 million in 2009. Our portfolio of privately issued residential mortgage-backed securities consists primarily of amortized cost of $699 million of Jumbo-A mortgage loans and $262 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 residential mortgage-backed securities originated by these issuers is mitigated by investment in senior tranches with additional collateral support. None of these securities are backed by sub-prime mortgage loans, collateralized debt obligations or collateralized loan obligations. Approximately 89% of the Alt-A residential mortgage-backed securities are credit enhanced with additional collateral support and 100% of our Alt-A residential mortgage-backed securities originated in 2007 and 2006 have additional collateral support. Approximately 84% of our Alt-A residential mortgage-backed securities represented pools of fixed-rate mortgage loans. None of the adjustable rate mortgages are payment option ARMs. Approximately 28% of our Jumbo-A residential mortgage-backed securities represents pools of fixed rate mortgage loans and none of the adjustable rate mortgages are payment option ARMs. 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 December 31, 2009, these stocks have an aggregate carrying value of $19 million and an aggregate fair value of $22 million. The aggregate gross amount of unrealized losses on available for sale securities totaled $191 million at December 31, 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 of the consolidated financial statements. Other-than-temporary impairment charges of $34 million were recognized in earnings in 2009 including credit losses of $25 million on certain privately issued residential mortgage-backed securities we do not intend to sell, $8.0 million on perpetual preferred stocks with carrying values we do not expect to fully recover, and $1.3 million on certain residential mortgage-backed securities we intend to sell. 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 acquired with the intent to sell at a profit to the Company that are also carried at fair value with changes in fair value recognized in current period income. Bank-Owned Life Insurance We have approximately $247 million invested in bank-owned life insurance at December 31, 2009. These investments are expected to provide a long-term source of earnings to support existing employee benefit programs. Approximately $229 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 the life insurance policies is further supported by a stable value wrap, which protects against changes in the fair value of the investments. At December 31, 2009, cash surrender value represented by the underlying fair value of investments held in separate accounts was approximately $223 million. As the underlying fair value of the investments held in a separate account at December 31, 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 highly-rated, domestic financial institution. The remaining cash surrender value of $18 million primarily represented the cash surrender value of policies held in the general accounts and amounts due from various insurance companies. Loans The aggregate loan portfolio before allowance for loan losses totaled $11.3 billion at December 31, 2009, a $1.6 billion or 12% decrease since December 31, 2008. 41 Table 20 Loans (In Thousands) Commercial: Energy Services Wholesale/retail Manufacturing Healthcare Agriculture Other commercial and industrial Total commercial Commercial real estate: Construction and land development Retail Office Multifamily Industrial Other real estate loans Total commercial real estate Residential mortgage: Permanent mortgage Home equity Total residential mortgage Consumer: Indirect automobile Other consumer Total consumer Total 2009 2008 2007 2006 2005 December 31, $1,911,994 1,807,824 921,830 404,061 792,538 160,549 209,044 6,207,840 $2,311,813 2,038,451 1,165,099 497,957 777,154 197,629 423,500 7,411,603 $1,954,967 1,733,569 1,084,379 493,185 685,131 240,469 569,884 6,761,584 $1,763,180 1,555,141 932,531 609,571 602,273 321,380 424,808 6,208,884 $1,399,417 1,425,821 793,032 514,792 520,309 291,858 354,706 5,299,935 645,295 423,260 463,316 360,436 146,707 452,420 2,491,434 926,226 371,228 459,357 316,596 149,367 478,474 2,701,248 1,007,414 423,118 421,163 214,388 154,255 502,746 2,723,084 889,925 374,294 420,914 239,000 146,406 376,001 2,446,540 638,366 305,217 499,174 204,620 90,601 251,924 1,989,902 1,303,340 490,282 1,793,622 1,273,275 479,299 1,752,574 1,092,382 442,223 1,534,605 867,748 388,511 1,256,259 807,509 361,822 1,169,331 454,508 332,294 786,802 692,615 317,966 1,010,581 625,203 296,094 921,297 465,622 273,873 739,495 358,144 271,000 629,144 $11,279,698 $12,876,006 $11,940,570 $10,651,178 $9,088,312 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. A breakdown by geographical market follows on Table 21. 42 Table 21 Loans by Principal Market Area (In Thousands) Oklahoma: Commercial Commercial real estate Residential mortgage Consumer Total Oklahoma Texas: Commercial Commercial real estate Residential mortgage Consumer Total Texas New Mexico: Commercial Commercial real estate Residential mortgage Consumer Total New Mexico Arkansas: Commercial Commercial real estate Residential mortgage Consumer Total Arkansas Colorado: Commercial Commercial real estate Residential mortgage Consumer Total Colorado Arizona: Commercial Commercial real estate Residential mortgage Consumer Total Arizona Kansas/Missouri: Commercial Commercial real estate Residential mortgage Consumer Total Kansas/Missouri Total BOK Financial loans Commercial 2009 2008 2007 2006 2005 December 31, $ 2,649,252 820,578 1,228,822 451,829 $ 5,150,481 $ 3,356,520 843,576 1,196,924 579,809 $ 5,976,829 $ 3,224,013 885,866 1,080,483 576,070 $ 5,766,432 $ 3,186,085 979,251 896,567 512,032 $ 5,573,935 $ 3,059,441 859,829 842,456 466,180 $ 5,227,906 $ 2,017,081 735,338 313,113 170,062 $ 3,235,594 $ 2,353,860 825,769 315,438 212,820 $ 3,707,887 $ 1,997,659 830,980 278,842 142,958 $ 3,250,439 $ 1,722,627 670,635 213,801 95,652 $ 2,702,715 $ 1,356,611 569,921 199,726 89,017 $ 2,215,275 $ 341,802 305,061 86,415 17,473 $ 750,751 $ 418,732 286,574 98,018 18,616 $ 821,940 $ 473,262 252,884 84,336 16,105 $ 826,587 $ 411,272 257,079 75,159 13,256 $ 756,766 $ 383,325 232,564 65,784 15,137 $ 696,810 $ 103,443 132,436 16,849 124,265 $ 376,993 $ 103,446 134,015 16,875 175,647 $ 429,983 $ 106,328 124,317 16,393 163,626 $ 410,664 $ 95,483 94,395 23,076 86,017 $ 298,971 $ 79,719 75,483 13,044 25,659 $ 193,905 $ 545,724 239,970 66,504 17,362 $ 869,560 $ 660,546 261,820 53,875 16,141 $ 992,382 $ 490,373 252,537 26,556 16,457 $ 785,923 $ 451,046 193,747 15,812 26,591 $ 687,196 $ 270,108 133,537 21,918 27,871 $ 453,434 $ 199,143 227,249 65,047 3,461 $ 494,900 $ 211,356 319,525 62,123 6,075 $ 599,079 $ 157,341 342,673 46,269 5,522 $ 551,805 $ 96,453 207,035 31,280 5,947 $ 340,715 $ 50,489 115,697 26,102 5,280 $ 197,568 $ 351,395 30,802 16,872 2,350 $ 401,419 $11,279,698 $ 307,143 29,969 9,321 1,473 $ 347,906 $12,876,006 $ 312,608 33,827 1,726 559 $ 348,720 $11,940,570 $ 245,918 44,398 564 – $ 290,880 $10,651,178 $ 100,242 2,871 301 – $ 103,414 $ 9,088,312 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 $1.2 billion during 2009 to $6.2 billion at December 31, 2009. The change in outstanding commercial loans was primarily related to a $400 million decrease in energy sector loans, a $243 million decrease in wholesale/retail sector loans, $231 million decrease in service sectors loans and a $214 million decrease in other commercial and industrial 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 43 and less capital project spending by our customers. The commercial sector of our loan portfolio is distributed as follows in Table 22. Table 22 Commercial Loans by Principal Market Area (In Thousands) Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/ Missouri Total $ 894,001 516,548 471,303 202,677 445,993 27,093 $ 725,468 627,778 256,967 131,111 231,148 4,892 $ 1,554 203,552 45,880 42,831 27,467 124 $ 3,052 26,542 55,303 1,522 16,096 284 $ 274,854 175,967 24,121 15,528 46,943 223 $ 905 128,275 35,986 6,180 24,085 – $ 12,160 129,162 32,270 4,212 806 127,933 $ 1,911,994 1,807,824 921,830 404,061 792,538 160,549 91,637 39,717 20,394 644 8,088 3,712 44,852 209,044 $ 2,649,252 $ 2,017,081 $ 341,802 $103,443 $ 545,724 $ 199,143 $ 351,395 $ 6,207,840 Energy Services Wholesale/retail Manufacturing Healthcare Agriculture Other commercial and industrial Total commercial loans 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. 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 $1.9 billion or 17% of total loans. Outstanding energy loans decreased $400 million during 2009 primarily due to lower 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 $1.5 billion of energy loans was to oil and gas producers, down from $2.0 billion at December 31, 2008. Approximately 52% of the committed production loans are secured by properties primarily producing natural gas and 48% are secured by properties primarily producing oil. The energy category also included $74 million of loans to borrowers that provide services to the energy industry, $224 million of loans to borrowers engaged in wholesale or retail energy sales and $26 million of loans to borrowers that manufacture equipment for the energy industry. The services sector of the loan portfolio totaled $1.8 billion or 16% of total loans and consists of a large number of loans to a variety of businesses, including communications, gaming and transportation services. Approximately $1.0 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 $231 million during 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 December 31, 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 20% of our 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 44 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 $2.5 billion or 22% of the loan portfolio at December 31, 2009. Over the past five years, the percentage of commercial real estate loans to our total loan portfolio ranged from 20% to 23%. The outstanding balance of commercial real estate loans decreased $210 million from the previous year. The commercial real estate sector of our loan portfolio is distributed as follows in Table 23. Table 23 Commercial Real Estate Loans by Principal Market Area (In Thousands) Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/ Missouri Total Construction and land development $ 182,742 148,705 Retail $ 161,989 117,992 $ 73,895 59,371 $ 17,127 19,326 $ 133,291 9,914 $ 70,002 54,270 $ 6,249 13,682 $ 645,295 423,260 Office Multifamily Industrial Other real estate loans Total commercial real estate loans 114,749 120,301 70,200 151,804 141,957 39,044 77,908 20,585 22,004 16,812 56,189 688 62,641 4,869 1,064 38,841 9,935 13,620 561 6,600 87 463,316 360,436 146,707 183,881 122,552 51,298 22,294 28,191 40,581 3,623 452,420 $ 820,578 $ 735,338 $ 305,061 $ 132,436 $ 239,970 $ 227,249 $ 30,802 $ 2,491,434 Construction and land development loans, which consist primarily of residential construction properties and developed building lots, decreased $281 million during the year to $645 million at December 31, 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 partially offset by a $52 million increase in loans secured by retail facilities and a $44 million increase in loans secured by multifamily residential properties. 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 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, up $41 million or 2% since December 31, 2008. Permanent 1-4 family mortgage loans increased $30 million and home equity loans increased $11 million. In general, we sell the majority of our conforming fixed-rate loan originations in the secondary market and retain the majority of our non-conforming and adjustable-rate mortgage loans. We have no concentration in sub-prime residential mortgage loans. 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 loan programs for high net worth individuals or certain professionals. The aggregate outstanding balance of loans in these programs at December 31, 2009 is $1.3 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 loan products is $4 million. Approximately $110 million or 8% of permanent mortgage loans at December 31, 2009 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, 45 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 December 31, 2009 is as follows in Table 24. Table 24 Residential Mortgage and Consumer Loans by Principal Market Area (In Thousands) Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas/ Missouri Total $ 927,316 $ 227,276 $ 20,317 $ 12,206 $ 47,725 $ 55,612 $ 12,888 $ 1,303,340 301,506 85,837 66,098 4,643 18,779 9,435 3,984 490,282 $ 1,228,822 $ 313,113 $ 86,415 $ 16,849 $ 66,504 $ 65,047 $ 16,872 $ 1,793,622 Residential mortgage: Permanent mortgage Home equity Total residential mortgage Consumer: Indirect automobile $ 273,728 $ 62,367 $ – $ 118,413 $ – $ – $ – $ 454,508 Other consumer 178,101 107,695 17,473 5,852 17,362 3,461 2,350 332,294 Total consumer $ 451,829 $ 170,062 $ 17,473 $ 124,265 $ 17,362 $ 3,461 $ 2,350 $ 786,802 Indirect automobile loans decreased $238 million since December 31, 2008, 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. Table 25 Loan Maturity and Interest Rate Sensitivity at December 31, 2009 (In Thousands) Loan maturity: Commercial Commercial real estate Total Interest rate sensitivity for selected loans with: Predetermined interest rates Floating or adjustable interest rates Total Total $ 6,207,840 2,491,434 $ 8,699,274 $ 3,770,541 4,928,733 $ 8,699,274 Loan Commitments Remaining Maturities of Selected Loans Within 1 Year 1-5 Years After 5 Years $ 1,913,696 $ 3,369,187 1,131,022 $ 924,957 293,768 $ 4,500,209 $ 1,218,725 1,066,644 $ 2,980,340 $ 633,971 $ 2,401,217 $ 735,353 483,372 $ 2,980,340 $ 4,500,209 $ 1,218,725 2,346,369 2,098,992 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 $588 million at December 31, 2009. Loan commitments may be unconditional obligations to provide financing or conditional obligations that depend on the borrower’s financial condition, collateral value or other factors. Standby letters of credit are unconditional commitments to guarantee the performance of our customer to a third party. Since some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Approximately $3.7 million of the outstanding standby letters of credit were issued on behalf of customers whose loans are nonperforming at December 31, 2009. Table 26 Off-Balance Sheet Credit Commitments (In Thousands) 2009 2008 2007 2006 2005 As of December 31, Loan commitments Standby letters of credit Mortgage loans sold with recourse $ 5,001,338 588,091 330,963 $ 5,015,660 598,618 391,188 $ 5,345,736 $ 5,318,257 $ 4,349,114 558,907 248,150 555,758 392,534 527,627 329,713 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 46 sold to U.S. government agencies. These loans were underwritten to standards approved by the agencies, including full documentation. However, these loans have a higher risk of delinquency and losses from default than traditional residential mortgage loans. A separate recourse reserve is maintained as part of other liabilities. At December 31, 2009, the principal balance of loans sold subject to recourse obligations totaled $331 million. Substantially all of these loans are to borrowers in our primary markets including $233 million to borrowers in Oklahoma, $36 million to borrowers in Arkansas, $19 million to borrowers in New Mexico, $16 million to borrowers in the Kansas/Missouri area and $15 million to borrowers in Texas. The separate reserve for this off-balance commitment totaled $14 million at December 31, 2009. Approximately 5.22% 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 5.55% with an outstanding principal balance of $18 million were past due 30 to 89 days. The provision for loan losses on loans sold with recourse, which is included in mortgage banking costs, was $12 million for 2009 and $8.6 million for 2008. Net losses charged against the reserve totaled $7.2 million for 2009 and $3.4 million for 2008. Customer Derivative Programs 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 us of changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or a fee paid to us as compensation for administrative costs, credit risk and profit. The customer derivative programs create credit risk for potential amounts due to the Company from 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 may be 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 December 31, 2009, the net fair values of derivative contracts reported as assets under these programs totaled $355 million, down from $656 million at December 31, 2008 primarily due to cash settlements and reduced transactions volumes. At December 31, 2009, derivative contracts carried as assets included energy contracts with fair values of $174 million, interest rate contracts with fair values of $110 million and foreign exchange contracts with fair values of $64 million. The aggregate net fair values of derivative contracts held under these programs reported as liabilities totaled $363 million. At December 31, 2009, total derivative assets were reduced by $13 million of cash collateral received from counterparties and total derivative liabilities were reduced by $55 million of cash collateral delivered to counterparties related to instruments executed with the same counterparty under a master netting agreement as permitted by generally accepted accounting principles. The fair value of derivative contracts reported as assets under these programs, net of cash margin held by the Company, by category of debtor at December 31, 2009 is included in Table 27. 47 Table 27 Fair Value of Derivative Contracts by Category of Debtor (In Thousands) Customers Energy companies Banks Exchanges Other Fair value of customer hedge asset derivative contracts, net $ 152,698 87,562 65,721 34,018 2,219 $ 342,218 At December 31, 2009, the largest net reported amount due from a single counterparty, a domestic subsidiary of a major energy company, was $84 million. This amount was offset by $70 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 exceed established limits. Also, changes in commodity prices affect the amount of regulatory capital we are required to hold as support for the fair value of our derivative assets. These risks are modeled as part of the management of these programs. Based on current prices, a decrease in market prices equivalent to $22 per barrel of oil would increase the fair value of derivative assets by $437 million. An increase in prices equivalent to $122 per barrel of oil would decrease the fair value of derivative assets by $253 million as current prices move closer to the fixed prices embedded in our existing contracts. Further increases in prices equivalent to $142 per barrel of oil would increase the fair value of our derivative assets by $417 million. Liquidity requirements of this program are also affected by our credit rating. A decrease in credit rating from A1 to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $204 million. 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 and off-balance sheet credit losses totaled $306 million or 2.72% of outstanding loans and 90% of nonaccruing loans at December 31, 2009. At December 31, 2008, the combined allowance for loan and off-balance sheet credit losses totaled $248 million or 1.93% of outstanding loans and 83% of nonaccruing loans at December 31, 2008. The reserve for loan losses totaled $292 million or 2.59% of outstanding loans at December 31, 2009 and $233 million or 1.81% of outstanding loans at December 31, 2008. The reserve for off-balance sheet credit commitments was $14 million at December 31, 2009 and $15 million at December 31, 2008. The decrease in the reserve for off-balance sheet credit commitments is due largely to changes in risk factors and the funding of existing commitments. 48 Table 28 Summary of Loan Loss Experience (Dollars in Thousands) Reserve for loan losses: Beginning balance Loans charged off: Commercial Commercial real estate Residential mortgage Consumer Total Recoveries of loans previously charged off: Commercial Commercial real estate Residential mortgage Consumer Total Net loans charged off Provision for loan losses Additions due to acquisitions Ending balance Reserve for off-balance sheet credit losses: Beginning balance Provision for off-balance sheet credit losses Additions due to acquisitions Ending balance Total provision for credit losses Reserve for loan losses to loans outstanding at year-end Net charge-offs to average loans Total provision for credit losses to average loans Recoveries to gross charge-offs Reserve for loan losses as a multiple of net charge-offs Reserve for off-balance sheet credit losses to off- balance sheet credit commitments Combined reserves for credit losses to loans outstanding at year-end Problem Loans: Loans past due (90 days) Nonaccrual1 Renegotiated2 Total Foregone interest on nonaccrual loans1 2009 Years ended December 31, 2007 2008 2006 2005 $233,236 $126,677 $109,497 $103,876 $108,618 49,725 57,313 16,672 24,789 148,499 2,546 461 929 6,744 10,680 137,819 196,678 – $292,095 74,976 19,141 7,223 20,871 122,211 13,379 332 366 6,413 20,490 101,721 208,280 – $233,236 14,380 1,795 1,709 13,733 31,617 4,534 110 309 5,558 10,511 21,106 34,758 3,528 $126,677 10,517 87 1,265 12,127 23,996 5,405 327 161 5,638 11,531 12,465 18,086 – $ 109,497 9,670 2,619 1,212 12,257 25,758 4,071 117 180 5,176 9,544 16,214 10,401 1,071 $ 103,876 $15,166 (778) – $14,388 $195,900 $20,853 (5,687) – $15,166 $202,593 $20,890 (37) – $20,853 $20,574 316 – $20,890 $34,721 $18,402 $12,441 $18,502 2,040 32 $20,574 2.59% 1.14 1.61 7.19 2.12x 0.26% 2.72% 1.81% 0.81 1.62 16.77 2.29x 1.06% 0.19 0.31 33.24 6.00x 1.03% 0.13 0.19 48.05 8.78x 1.14% 0.19 0.15 37.05 6.41x 0.27% 0.35% 0.36% 0.42% 1.93% 1.24% 1.22% 1.37% $ 10,308 339,355 15,906 $365,569 $ 17,015 $ 19,123 300,073 13,039 $332,235 $ 8,391 $ 5,575 84,290 10,394 $ 100,259 $ 3,011 $ 5,945 26,055 9,802 $ 41,802 $ 2,130 $ 8,708 25,162 6,379 $ 40,249 $ 2,515 1 2 Interest collected and recognized on nonaccrual loans was not significant in 2009 and previous years disclosed. Includes residential mortgage loans guaranteed by agencies of the U.S. government. These loans have been modified to extend payment terms and/or reduce interest rates to current market. 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 2009, there have been no material changes in the approach or techniques utilized 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 nonaccrual status. Generally, all nonaccruing 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. 49 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 $317 million at December 31, 2009 and $270 million at December 31, 2008. At December 31, 2009, $204 million of impaired loans had specific reserves of $36 million and $113 million of impaired loans had no specific reserves because they had been charged down to amounts we expect to recover. Impaired loans with no specific reserves had aggregate gross outstanding principal balances of $230 million. Cumulative life-to-date charge-offs of impaired loans with no specific reserves at December 31, 2009 totaled $117 million, including $85 million charged off in 2009. At December 31, 2008, $194 million of impaired loans had $29 million of specific reserves and $76 million had no specific reserves because they had been charged down to amounts we expect to recover. 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 $238 million at December 31, 2009 and $182 million at December 31, 2008. 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. Evaluation of nonspecific factors considers the effect of the duration of the business cycle on migration factors. Nonspecific factors also consider current economic conditions and other relevant factors. Nonspecific reserves totaled $18 million at December 31, 2009 and $23 million at December 31, 2008. An allocation of the loan loss reserve by loan category follows in Table 29. Table 29 Loan Loss Reserve Allocation (Dollars in Thousands) 2009 2008 December 31, 2007 2006 2005 Reserve2 % of Loans1 Reserve2 % of Loans1 Reserve2 % of Loans1 Reserve2 % of Loans1 Reserve2 % of Loans1 Loan category: Commercial Commercial real estate Residential mortgage Consumer Nonspecific allowance Total $ 121,320 55.04% $ 100,743 57.56% $ 49,961 56.07% $ 44,151 58.29% $ 43,915 58.32% 104,208 27,863 20,452 22.09 15.90 6.97 75,555 14,017 19,819 20.98 13.61 7.85 40,807 6,156 9,962 22.89 13.38 7.66 30,838 4,663 11,784 22.97 11.80 6.94 25,529 5,302 10,929 21.89 12.87 6.92 18,252 – 23,102 – 19,791 – 18,061 – 18,201 – $ 292,095 100.00% $ 233,236 100.00% $ 126,677 100.00% $ 109,497 100.00% $ 103,876 100.00% 1 Excludes residential mortgage loans held for sale. 2 Specific allocation for the loan concentration risks is included in the appropriate category. The provision for loan 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 loan losses totaled $197 million for 2009 compared to $208 million for 2008. Factors considered in determining the provision for credit losses for 2009 included trends of net charge-offs, nonperforming loans and risk grading. 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 collateral 50 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 2009 totaled $138 million compared to $102 million in the previous year. The ratio of net loans charged off to average outstanding loans was 1.14% for 2009 compared with 0.81% for 2008. Net loans charged off in 2008 included a $26 million charge-off from the SemGroup credit and recoveries of $7.1 million from a loan charged off in 2005 and $4.0 million from a loan charged off in 2001. Net charge-offs for 2009 were up $51 million over 2008 excluding these significant items. Net loans charged off by category and principal market area during 2009 follow in Table 30. Table 30 Net Loans Charged Off by Category and Principal Market Area (Dollars in Thousands) Oklahoma Texas Colorado Arkansas Mexico Arizona New Kansas/ Missouri Total 2009: Commercial Commercial real estate Residential mortgage Consumer $ 18,861 2,435 7,857 8,231 $ 8,851 5,155 4,005 5,363 $ 12,214 11,884 610 287 $ 79 369 190 2,998 $ 2,882 2,805 1,112 981 $ 3,416 34,191 1,969 182 $ 876 13 - 3 $ 47,179 56,852 15,743 18,045 Net loans charged off $ 37,384 $ 23,374 $ 24,995 $ 3,636 $ 7,780 $ 39,758 $ 892 $137,819 2008: Commercial Commercial real estate Residential mortgage Consumer $ 33,748 3,693 2,843 7,536 $ 10,462 1,014 1,701 2,992 $ 7,468 404 (3) 109 $ 150 17 35 2,993 $ 941 1,826 87 799 $ 1,725 11,855 2,194 26 $ 7,103 - - 3 $ 61,597 18,809 6,857 14,458 Net loans charged off $ 47,820 $ 16,169 $ 7,978 $ 3,195 $ 3,653 $ 15,800 $ 7,106 $101,721 Excluding the impact of these significant items from 2008, net commercial loans charged off during 2009 were largely unchanged. Net commercial loans charged off in 2009 included $18 million from the service sector of the loan portfolio, $13 million from the energy sector of the loan portfolio and $7.6 million from the wholesale / retail sector of the loan portfolio. Net commercial real estate loans charged off during 2009 increased $38 million over the prior year. Net charge-offs increased $22 million in the Arizona market and $11 million in the Colorado market. Net commercial real estate loan charge-offs in 2009 included $45 million from the land and residential construction sector of the loan portfolio, primarily composed of $26 million in the Arizona market and $11 million in the Colorado market. Residential mortgage net charge-offs increased $8.9 million over the prior year including $7.9 million in the Oklahoma market, $4.0 million in the Texas market and $2.0 million in the Arizona market. Consumer loan net charge-offs, which include indirect auto loan and deposit account overdraft losses, increased $3.6 million over the previous year. Net charge- offs of indirect auto loans totaled $9.7 million for 2009 and $8.6 million for 2008. The Company considers the credit risk from loan commitments and letters of credit in its evaluation of the adequacy of the reserve for loan losses. A separate reserve for off-balance sheet credit risk is maintained. Table 28 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. 51 Nonperforming Assets Table 31 Nonperforming Assets (Dollars in Thousands) Nonperforming loans Nonaccrual loans: Commercial Commercial real estate Residential mortgage Consumer Total nonaccrual loans Renegotiated loans2 Total nonperforming loans Other nonperforming assets Total nonperforming assets Nonaccrual loans by principal market: Oklahoma Texas New Mexico Arkansas Colorado3 Arizona Kansas/Missouri Total nonaccrual loans Nonaccrual loans by loan portfolio sector: Commercial: Energy Manufacturing Wholesale / retail Agriculture Services Healthcare Other Total commercial Commercial real estate: Land development and construction Retail Office Multifamily Industrial Other commercial real estate Total commercial real estate Residential mortgage: Permanent mortgage Home equity Total residential mortgage Consumer Total nonaccrual loans Ratios: 2009 2008 December 31, 2007 2006 2005 $101,384 204,924 29,989 3,058 339,355 15,906 355,261 129,034 $484,295 $ 134,846 137,279 27,387 561 300,073 13,039 313,112 29,179 $342,291 $ 83,176 66,892 26,693 13,820 60,082 84,559 4,133 $339,355 $ 108,367 42,934 16,016 3,263 32,415 80,994 16,084 $ 300,073 $ 22,692 15,765 12,057 65 30,926 13,103 6,776 101,384 $ 49,364 7,343 18,773 680 36,873 12,118 9,695 134,846 109,779 26,236 25,861 26,540 279 16,229 204,924 76,082 15,625 7,637 24,950 6,287 6,698 137,279 $ 42,981 25,319 15,272 718 84,290 10,394 94,684 9,475 $104,159 $ 47,977 4,983 11,118 1,635 9,222 9,355 – $ 84,290 $ 529 9,915 3,792 380 25,468 2,301 596 42,981 13,466 5,259 1,013 3,998 – 1,583 25,319 $ 10,737 4,771 10,325 222 26,055 9,802 35,857 8,486 $44,343 $ 11,673 5,370 7,347 772 25,162 6,379 31,541 8,476 $ 40,017 $ 17,683 6,096 871 267 1,138 – – $ 26,055 $ 16,857 5,475 928 – 1,902 – – $ 25,162 $ 535 101 2,457 93 5,759 1,600 192 10,737 2,031 – 732 320 – 1,688 4,771 $ 75 1,113 3,036 268 5,213 1,942 26 11,673 2,081 – – 668 – 2,621 5,370 28,314 1,675 29,989 3,058 $ 339,355 26,233 1,154 27,387 561 $ 300,073 14,541 731 15,272 718 $ 84,290 9,923 402 10,325 222 $ 26,055 6,844 503 7,347 772 $25,162 Reserve for loan losses to nonperforming loans Nonperforming loans to period-end loans Loans past due (90 days)1 82.22% 3.15 $10,308 74.49% 2.43 $19,123 133.79% 0.79 $ 5,575 305.37% 0.34 $ 5,945 329.34% 0.35 $ 8,708 1 2 3 Includes residential mortgages guaranteed by agencies of the U.S. Government. Includes residential mortgage loans guaranteed by agencies of the U.S. government. These loans have been modified to extend payment terms and/or reduce interest rates. Includes loans subject to First United Bank sellers escrow. $ 1,400 $12,799 $ 872 $10,396 $ 1,017 $ 7,550 $ 2,233 $ 5,747 $ 2,021 $ 3,577 $ 4,311 $13,181 $ 8,412 $ – $ – 52 Nonperforming assets totaled $484 million or 4.24% of outstanding loans and repossessed assets at December 31, 2009, up $142 million since December 31, 2008. In addition to $339 million of nonaccruing loans, nonperforming assets included $16 million of restructured residential mortgage loans and $129 million of real estate and other repossessed assets. Approximately $13 million of the restructured residential mortgage loans are guaranteed by agencies of the U.S. government. Nonperforming assets included $4.3 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 $4.1 million for any losses incurred during a three-year period after the acquisition date. The Company generally retains nonperforming assets to maximize potential recovery which may cause future nonperforming assets to increase. A rollforward of nonperforming assets for the year ended December 31, 2009 follows in Table 32. Table 32 Rollforward of Nonperforming Assets (Dollars in Thousands) Beginning balance Additions Payments Charge-offs / Write-offs Foreclosures Sales Return to accrual Other, net Ending balance Nonaccruing Loans $ 300,073 350,578 (72,625) (101,146) (119,596) - (8,832) (9,097) $ 339,355 Renegotiated Loans $ 13,039 - - - - - - 2,867 $ 15,906 Real Estate and Other Repossessed Assets $ 29,179 - - (9,935) 119,596 (17,854) - 8,048 $ 129,034 Total Nonperforming Assets $ 342,291 350,578 (72,625) (111,081) - (17,854) (8,832) 1,818 $ 484,295 This distribution of nonaccruing loans among our various markets follows in Table 33. Table 33 Nonaccruing Loans by Principal Market (Dollars in Thousands) December 31, 2009 December 31, 2008 Change % of outstanding loans Amount % of outstanding loans Amount $ 83,176 1.61% $ 108,367 1.81% % of outstanding loans (20) b.p. Amount $ (25,191) 66,892 26,693 13,820 60,082 84,559 4,133 2.07 3.56 3.67 6.91 17.09 1.03 42,934 16,016 3,263 32,415 80,994 16,084 1.16 1.95 0.76 3.27 13.52 4.62 23,958 10,677 10,557 27,667 3,565 (11,951) 91 161 291 364 357 (359) 339,355 3.01% $ 300,073 2.33% $ 39,282 68 b.p. Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas / Missouri Total The decrease in nonaccruing loans attributed to the Oklahoma market during 2009 included $13 million of proceeds from the partial sale of SemGroup bankruptcy claims and $21 million in cash and an equity interest received to partially satisfy bankruptcy claims against SemGroup. Cash received totaled $7 million and the equity interest was valued at $14 million. We continue to hold a $12 million nonaccruing loan to the entity created when SemGroup exited bankruptcy. With the exception of Oklahoma and Kansas/Missouri, nonaccruing loans grew in all geographies during 2009. The 68 basis point increase in the ratio of nonaccruing loans to period end loans was also impacted by a $1.6 billion decrease in period end loans at December 31, 2009 compared to December 31, 2008. Commercial Nonaccruing commercial loans totaled $101 million or 1.63% of total commercial loans at December 31, 2009 and $135 million or 1.82% of total commercial loans at December 31, 2008. Newly identified nonaccruing commercial loans in 2009 totaled approximately $88 million primarily in the energy and service sector of the portfolio. This was primarily offset by a $34 million decrease in energy loans related to SemGroup item previously discussed and approximately $39 million of charge-offs and $32 million of payments in addition to approximately $8 million transferred to real estate owned and other repossessed assets. The distribution of nonaccruing commercial loans among our various markets was as follows in Table 34. 53 Table 34 Nonaccruing Commercial Loans by Principal Market (Dollars in Thousands) December 31, 2009 December 31, 2008 Change Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas / Missouri Amount $ 36,990 32,591 14,365 434 8,132 8,804 68 Total commercial $ 101,384 % of outstanding loans 1.40% 1.62 4.20 0.42 1.49 4.42 0.02 1.63% Amount $ 74,717 20,472 4,564 148 21,922 2,117 10,906 % of outstanding loans 2.23% 0.87 1.09 0.14 3.32 1.00 3.55 134,846 1.82% % of outstanding loans (83) b.p. 75 311 28 (183) 342 (353) (19) b.p. Amount $ (37,727) 12,119 9,801 286 (13,790) 6,687 (10,838) $ (33,462) Approximately $31 million or 1.71% of all loans in the services sector of the loan portfolio and $23 million or 1.19% of the energy sector of the loan portfolio were nonaccruing at December 31, 2009. Nonaccruing services sector loans were down $5.9 million and nonaccruing energy sector loans were down $27 million from December 31, 2008. In addition, nonaccruing loans in the manufacturing sector of the portfolio increased $8.4 million to $16 million or 3.90% of all loans to the manufacturing sector and nonaccruing loans to the wholesale / retail sector of the loan portfolio decreased $6.7 million from December 31, 2008 to $12 million or 1.31% of all loans in the wholesale /retail sector of the loan portfolio at December 31, 2009. Commercial Real Estate Nonaccruing commercial real estate loans totaled $205 million or 8.23% of outstanding commercial real estate loans at December 31, 2009 compared to $137 million or 5.08% of outstanding commercial real estate loans at December 31, 2008. Nonaccruing commercial real estate loans increased approximately $226 million during 2009 related to newly identified commercial real estate loans, primarily in the construction and land development sector. This was partially offset by transfers to other real estate owned and charge-offs. Table 35 Nonaccruing Commercial Real Estate Loans by Principal Market (Dollars in Thousands) December 31, 2009 December 31, 2008 Change Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas / Missouri % of outstanding loans 3.72% 3.29 3.31 8.85 21.53 32.17 11.82 Amount $ 30,524 24,163 10,101 11,727 51,661 73,106 3,641 Amount $ 22,837 14,014 % of outstanding loans Amount $ 7,687 10,149 2.71% 1.70 % of outstanding loans 101 b.p. 159 8,404 1,919 10,008 76,208 3,889 2.93 1.43 3.82 23.85 12.98 1,697 9,808 41,653 (3,102) (248) 38 742 1,771 832 (116) Total commercial real estate $ 204,923 8.23% $ 137,279 5.08% $ 67,644 315 b.p. Nonaccruing commercial real estate loans are primarily concentrated in the Arizona and Colorado markets. Approximately $73 million or 36% of nonaccruing commercial real estate loans are in Arizona and consist primarily of $34 million of nonaccruing residential construction and land development loans, $19 million of nonaccruing loans secured by retail facilities and $10 million of nonaccruing loans secured by office buildings. Nonaccruing commercial real estate decreased $3 million compared to the prior year primarily due to charge-offs and transfers to other real estate owned. Nonaccruing commercial real estate loans in the Colorado market were $52 million or 25% of total nonaccruing commercial real estate loans, composed primarily of $42 million of nonaccruing residential construction and land development loans and $9 million of nonaccruing loans secured by office buildings. The majority of the increase in nonaccruing commercial real estate loans in Colorado was composed of $14 million related to a single loan secured by residential construction and land development properties and $9 million related to a single loan secured by an office building. 54 The increase in nonaccruing commercial real estate loans included $34 million from nonaccruing residential construction and land development loans, $18 million from nonaccruing loans secured by office buildings and $11 million from nonaccruing loans secured by retail facilities. The increase in nonaccruing residential construction and land development loans included $37 million in the Colorado market and $10 million in the Texas market, offset by a $17 million decrease in the Arizona market. The increase in nonaccruing loans secured by retail facilities included $7 million in the Arizona market and $5 million in the New Mexico market. The increase in loans secured by office building included $7 million in the Arizona market, $7 million in the Colorado market and $5 million in the Arkansas market. Residential Mortgage and Consumer Nonaccruing residential mortgage loans primarily consist of permanent residential mortgage loans which totaled $30 million or 1.67% of outstanding residential mortgage loans at December 31, 2009, a $2.6 million increase over December 31, 2008. Home equity loans continued to perform well with only $1.7 million or 0.34% of total home equity loans in nonaccrual status. The distribution of nonaccruing residential mortgage loans among our various markets is included in Table 36. Table 36 Nonaccruing Residential Mortgage Loans by Principal Market (Dollars in Thousands) December 31, 2009 December 31, 2008 Change Oklahoma Texas New Mexico Arkansas Colorado Arizona Kansas / Missouri Amount $ 14,650 9,320 2,168 620 291 2,517 423 Total residential mortgage loans $ 29,989 % of outstanding loans 1.19% 2.98 2.51 3.68 0.44 3.87 2.51 1.67% Amount $ 10,704 8,066 3,016 1,196 447 2,668 1,290 $ 27,387 % of outstanding loans 0.89% 2.56 3.08 7.09 0.83 4.29 13.84 1.56% Amount $ 3,946 1,254 (848) (576) (156) (151) (867) % of outstanding loans 30 b.p. 42 57 (341) (39) (42) (1,133) $ 2,602 11 b.p. In addition to nonaccruing 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 37. Residential mortgage loans less than 90 days past due increased $3.4 million and residential mortgage loans past due 90 days or more increased $72 thousand during 2009. Consumer loans past due 30 to 89 days decreased $408 thousand primarily due to a decrease in other consumer loans offset by an increase in indirect automobile loans. Consumer loans past due 90 days or more increased $2.2 million, primarily due to a $2.9 million increase in other consumer loans offset by a $654 thousand decrease indirect automobile loans. Table 37 Residential Mortgage and Consumers Loans Past Due (Dollars in Thousands) December 31, 2009 30 to 89 90 Days Days or More December 31, 2008 30 to 89 90 Days Days or More Permanent mortgage Home equity Total residential mortgage $ 1,532 24 $ 1,556 $ 23,489 2,049 $ 25,538 $ 1,370 114 $ 1,484 $ 20,422 1,723 $ 22,145 Consumer: Indirect automobile Other consumer Total consumer $ 537 3,297 $ 3,834 $ 23,191 1,612 $ 24,803 $ 1,191 395 $ 1,586 $22,082 3,129 $ 25,211 Real estate and other repossessed assets totaled $129 million at December 31, 2009, up from $29 million at December 31, 2008. The distribution of real estate and other repossessed assets attributed by geographical market is included in the following Table 38. 55 Table 38 Real Estate and Other Repossessed Assets by Principal Market (Dollars in Thousands) Oklahoma Texas Colorado Arkansas Mexico Arizona New Kansas/ Missouri Other Total 1-4 family residential properties and residential land development properties Developed commercial real estate properties Equity interest in partial satisfaction of debts Undeveloped land Construction equipment Vehicles Other Total real estate and other repossessed assets $ 5,034 $ 17,610 $ 3,153 $ 4,474 $ 1,612 $ 30,242 $ 675 $ 370 $ 63,170 2,486 4,855 4,594 1,391 7,580 15,382 14,477 - - 904 - - - - 457 - - 2,219 - - 229 - - - 569 - - - - - - - 5,883 - - - - - - 4,838 - - - - - - - - 36,288 14,477 8,102 4,838 1,930 229 $ 22,901 $ 22,922 $ 10,195 $ 6,434 $ 9,192 $ 51,507 $ 5,513 $ 370 $ 129,034 Approximately $2 million of residential and residential land development properties in the Colorado market are supported by the First United Bank sellers’ guaranty. Undeveloped land is primarily zoned for commercial development. Developed commercial real estate properties are primarily completed with no additional construction necessary for sale. Our loan review process also identified loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrower or the value of the collateral. Because the borrowers are still performing in accordance with the original terms of the loan agreements, and no loss of principal or interest is anticipated, these loans were not included in Nonperforming Assets. Known information does, however, cause management concern as to the borrowers’ ability to comply with current repayment terms. These potential problem loans totaled $236 million at December 31, 2009. The current composition of potential problem loans by primary industry included: real estate - $120 million, energy - $38 million, services - $24 million, manufacturing - $16 million and healthcare - $15 million. Potential problem real estate loans included $54 million of residential development loans on properties primarily located in Texas, Colorado and Oklahoma and $24 million of loans secured by multi-family residential properties located primarily in Texas. 56 Liquidity and Capital Subsidiary Banks Deposits and borrowed funds are the primary sources of liquidity for the subsidiary banks. For 2009, approximately 66% of our funding is provided by average deposit accounts, 19% from average borrowed funds, 2% from average long-term subordinated debt and 9% from average shareholders’ equity. Our funding sources, which primarily include deposits, borrowings from the Federal Home Loan Banks and other banks, 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 Perfect Banking sales and customer service program, free checking and on-line 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 $15.2 billion at December 31, 2009 and represent 66% of total average liabilities and capital for 2009 compared with $13.7 billion or 63% of total average liabilities and capital for 2008. Average deposits increased $1.5 billion compared to 2008. Average interest-bearing transaction deposit accounts continued to grow in 2009, up $751 million or 12% over 2008. Average demand deposits also increased, up $647 million or 25% over last year, primarily related to the growth in balances held by our commercial banking customers. Growth in our average interest-bearing transaction deposit accounts included $406 million of wealth management deposits, $199 million of consumer banking deposits and $182 million of commercial deposits. Average time deposits increased $130 million or 3% over 2008. Table 39 Maturity of Domestic CDs and Public Funds in Amounts of $100,000 or More (In Thousands) Months to maturity: 3 or less Over 3 through 6 Over 6 through 12 Over 12 Total December 31, 2009 2008 $ 537,757 399,580 648,416 525,127 $ 2,110,880 $ 879,792 844,957 651,632 710,395 $ 3,086,776 Brokered deposits, which are included in time deposits, averaged $533 million for 2009, down $278 million or 34% compared to the previous year. Brokered deposits totaled $36 million at December 31, 2009 compared to $1.0 billion at December 31, 2008. These deposits which were largely added in 2008 to remix wholesale funding sources to provide more available liquidity are being replaced by other deposit products as they mature. Average wealth management time deposits increased $439 million or 113% compared with 2008 and average retail time deposits increased $106 million or 4% compared with 2008. For 2009, core deposits were defined as deposits of less than $250,000 excluding public funds and brokered deposits, to reflect the increased FDIC insurance level under the FDIC’s Transaction Account Guarantee Program. Core deposits for 2009 averaged $9.6 billion. Accounts with balances in excess of $250,000 excluding brokered deposit accounts averaged $4.3 billion. For 2008, core deposits were defined as deposits of less than $100,000 excluding public funds and brokered deposits, averaged $6.6 billion. Accounts with balances in excess of $100,000 excluding brokered deposit accounts averaged $5.6 billion for 2008. The distribution of deposit accounts among our principal markets is shown in Table 40. 57 Table 40 Deposits by Principal Market Area (In Thousands) Oklahoma: Demand Interest-bearing: Transaction Savings Time Total interest-bearing Total Oklahoma Texas: Demand Interest-bearing: Transaction Savings Time Total interest-bearing Total Texas New Mexico: Demand Interest-bearing: Transaction Savings Time Total interest-bearing Total New Mexico Arkansas: Demand Interest-bearing: Transaction Savings Time Total interest-bearing Total Arkansas Colorado: Demand Interest-bearing: Transaction Savings Time Total interest-bearing Total Colorado Arizona: Demand Interest-bearing: Transaction Savings Time Total interest-bearing Total Arizona Kansas/Missouri: Demand Interest-bearing: Transaction Savings Time Total interest-bearing Total Kansas/Missouri Total BOK Financial deposits 2009 2008 December 31, 2007 2006 2005 $ 2,068,908 $ 1,683,374 $ 1,394,861 $ 1,298,593 $ 1,333,331 5,134,902 93,006 1,397,240 6,625,148 $ 8,694,056 4,117,729 86,476 3,104,933 7,309,138 $ 8,992,512 3,477,208 80,467 2,426,822 5,984,497 $ 7,379,358 3,072,830 83,017 2,595,890 5,751,737 $7,050,330 2,672,563 85,837 2,564,337 5,322,737 $6,656,068 $ 1,108,401 $ 1,067,456 $ 1,035,134 $ 848,152 $ 841,197 1,748,319 35,129 1,100,602 2,884,050 $ 3,992,451 1,460,576 32,071 857,416 2,350,063 $ 3,417,519 1,753,843 34,618 800,460 2,588,921 $ 3,624,055 1,480,138 24,074 829,255 2,333,467 $ 3,181,619 1,310,105 27,398 735,731 2,073,234 $ 2,914,431 $ 209,090 $ 155,345 $ 151,231 $ 175,980 $ 172,363 444,247 17,563 510,202 972,012 $ 1,181,102 397,382 16,289 522,894 936,565 $ 1,091,910 432,919 15,146 486,868 934,933 $ 1,086,164 380,450 16,417 490,460 887,327 $ 1,063,307 338,025 17,839 453,314 809,178 $ 981,541 $ 21,526 $ 16,293 $ 13,247 $ 15,604 $ 14,414 50,879 1,346 101,839 154,064 $ 175,590 38,566 1,083 75,579 115,228 $ 131,521 $ 19,027 883 40,692 60,602 73,849 $ 14,890 1,010 57,446 73,346 88,950 18,369 1,058 75,034 94,461 $ 108,875 $ 146,929 $ 116,637 $ 117,939 $ 80,559 $ 91,483 448,846 17,802 525,844 992,492 $ 1,139,421 480,113 17,660 532,475 1,030,248 $ 1,146,885 446,427 23,806 539,523 1,009,756 $ 1,127,695 296,451 12,632 485,200 794,283 $ 874,842 228,832 17,772 264,020 510,624 $ 602,107 $ 68,651 $ 39,424 $ 46,701 $ 51,542 $ 59,689 81,909 958 60,768 143,635 $ 212,286 56,985 1,014 34,290 92,289 $ 131,713 65,788 1,435 11,603 78,826 $ 125,527 61,539 1,978 6,574 70,091 $ 121,633 42,872 4,111 5,624 52,607 $ 112,296 $ 30,339 $ 3,850 $ 9,656 $ 57 $ – 21,337 148 71,498 92,983 $ 123,322 $15,518,228 10,999 42 55,656 66,697 $ 70,547 $14,982,607 8,304 13 24,670 32,987 $ 42,643 $13,459,291 244 2 5,721 5,967 6,024 – – – – $ – $ 12,386,705 $ 11,375,318 $ 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 $188 million at 58 December 31, 2009. Securities repurchase agreements generally mature within 90 days and are secured by certain available for sale securities. Federal Home Loan Bank borrowings generally mature within one year and are secured by a blanket pledge of eligible collateral (generally unencumbered U.S. Treasury and mortgage-backed securities, 1-4 family mortgage loans and multifamily mortgage loans). During 2009, the outstanding balance of federal funds purchased averaged $1.5 billion and securities repurchase agreements averaged $817 million. Amounts borrowed from the Federal Home Loan Banks of Topeka and Dallas averaged $1.2 million. The subsidiary banks began borrowing funds under the Federal Reserve Bank Term Auction Facility program. This is a temporary program which allows banks that are in generally sound financial condition to bid for funds. Funds are borrowed for either 28 or 84 days and are secured by a pledge of eligible collateral. Funds borrowed under this program averaged $943 million for 2009. Although designated as a temporary program, no plans have been announced for its termination. At December 31, 2009, the estimated unused credit available to the subsidiary banks from collateralized sources and within our internal policy limits was approximately $4.7 billion. Parent Company The primary source of liquidity for BOK Financial is dividends from subsidiary banks, which are limited by various banking regulations to net profits, as defined, for the year plus retained profits for the preceding two years. Dividends are further restricted by minimum capital requirements. Based on the most restrictive limitations, at December 31, 2009, the subsidiary banks could declare up to $225 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 $190 million under this policy. Future losses or increases in required regulatory capital at the subsidiary banks could affect their ability to pay dividends to the parent company. Effective December 2, 2009, the Company amended an unsecured revolving credit agreement with George B. Kaiser, its Chairman and principal shareholder. The terms of the amended credit agreement reduced the committed amount from $188 million to $100 million, changed the interest rate and facility fee to reflect current market terms and extended the maturity date from December 2, 2010 to December 2, 2012. Interest on outstanding balances due to Mr. Kaiser is based on one- month LIBOR plus 250 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 50 basis points. Previously, interest was due quarterly based on one- month LIBOR plus 125 basis points and the facility fee was paid quarterly on the unused portion of the commitment at 25 basis points. As with the original agreement, the amended agreement has no restrictive covenants. No amounts were outstanding under this credit agreement as of December 31, 2009. The outstanding balance at December 31, 2008 was $50 million. Our equity capital at December 31, 2009 was $2.2 billion up from $1.8 billion at December 31, 2008. Net income less cash dividend paid increased equity $137 million. Accumulated other comprehensive losses decreased $212 million during 2009 due primarily to a $344 million change from a net unrealized loss on available for sale securities at December 31, 2008 to a net unrealized gain at December 31, 2009. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings, asset growth and acquisition strategies, and regulatory and debt covenant requirements. Capital management may include subordinated debt issuance, share repurchase and stock and cash dividends. 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 at the time 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 $39 million. No shares were repurchased by the Company during 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. 59 For a banking institution to qualify as well capitalized, its Tier 1, Total and Leverage capital ratios must be at least 6%, 10% and 5%, respectively. All of the Company’s banking subsidiaries exceeded the regulatory definitions of well capitalized. The capital ratios for BOK Financial on a consolidated basis and for each of the subsidiary banks are presented in Note 15 to the Consolidated Financial Statements. Capital resources of financial institutions are also regularly measured by the tangible common shareholders’ equity ratio. Tangible common shareholders’ 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 it eliminates intangible assets from shareholders’ equity and retains the effect of unrealized losses on securities and other components of accumulated other comprehensive income (loss) in shareholders’ equity. At December 31, 2009, BOK Financial’s tangible common shareholders’ equity ratio was 7.99% and tier 1 common equity ratio was 10.75%. At December 31, 2008 BOK Financial’s tangible common shareholders’ equity ratio was 6.64% and tier 1 common equity ratio was 9.32% The following table provides a reconciliation of the non-GAAP measures with financial measures defined by GAAP. Table 41 Non-GAAP Measures (In Thousands) Tangible common equity ratio: Total shareholders' equity Less: Intangible assets, net Tangible common equity Total assets Less: Intangible assets, net Tangible assets Tangible common equity ratio Tier 1 common equity ratio: Tier 1 capital Less: Non-controlling interest Tier 1 common equity Risk weighted assets Tier 1 common equity ratio December 31, 2009 2008 $ 2,205,813 354,239 1,851,574 23,516,831 354,239 $23,162,592 $ 1,846,257 361,209 1,485,048 22,734,648 361,209 $22,373,439 7.99% 6.64% $ 1,876,778 19,561 $ 1,728,926 13,855 1,857,217 1,715,071 17,275,808 18,401,051 10.75% 9.32% Off-Balance Sheet Arrangements Bank of Oklahoma guarantees rents totaling $28.7 million through September, 2017 to the City of Tulsa (“City”) as owner of a building immediately adjacent to the Bank’s main office for space currently rented by third-party tenants in the building. All rent payments are current. Remaining guaranteed rents totaled $22.8 million at December 31, 2009. In return for this guarantee, Bank of Oklahoma will receive 80% of net cash flow as defined in an agreement with the City over the next 10 years from currently vacant space in the same building. None of this additional space has been rented to outside parties since the date of the agreement. The maximum amount that Bank of Oklahoma may receive under this agreement is $4.5 million. Aggregate Contractual Obligations BOK Financial has numerous contractual obligations in the normal course of business. These obligations included time deposits and other borrowed funds, premises used under various operating leases, commitments to extend credit to borrowers and to purchase securities, derivative contracts and contracts for services such as data processing that are integral to our operations. The following table summarizes payments due per these contractual obligations at December 31, 2009. 60 Table 42 Contractual Obligations as of December 31, 2009 (In Thousands) Time deposits Other borrowings Subordinated debentures Operating lease obligations Derivative contracts Data processing contracts Total Less Than 1 Year 1 to 3 Years 4 to 5 Years More Than 5 Years $ 617,810 1,254,283 21,875 14,955 205,977 17,876 $2,132,776 $329,726 160,966 43,750 25,652 137,366 32,373 $729,833 $214,947 1,190 43,750 18,227 15,142 20,864 $314,120 $428,190 8,442 458,542 88,585 4,461 6,317 $994,537 Total $1,590,673 1,424,881 567,917 147,419 362,946 77,430 $4,171,266 Loan commitments Standby letters of credit Mortgage loans sold with recourse Alternative investment commitments Unfunded third-party private equity commitments Deferred compensation and stock-based compensation obligations $ 5,001,338 588,091 330,963 9,923 18,904 27,452 Payments on time deposits and other borrowed funds include interest which has been calculated from rates at December 31, 2009. Many of these obligations have variable interest rates and actual payments will differ from the amounts shown on this table. Obligations under derivative contracts used for interest rate risk management purposes are included with projected payments from time deposits and other borrowed funds as appropriate. Payments on time deposits are based on contractual maturity dates. These funds may be withdrawn prior to maturity. We may charge the customer a penalty for early withdrawal. Operating lease commitments generally represent real property we rent for branch offices, corporate offices and operations facilities. Payments presented represent the minimum lease payments and exclude related costs such as utilities and property taxes. Data processing and communications contracts represent the minimum obligations under the contracts. Additional payments that are based on the volume of transactions processed are excluded. Loan commitments represent legally binding obligations to provide financing to our customers. Some of these commitments are expected to expire before being drawn upon and the total commitment amounts do not necessarily represent future cash requirements. Approximately $1.3 billion of the loan commitments expire within one year. Obligations under derivative contracts are used in customer hedging programs. As previously discussed, we have entered into derivative contracts which are expected to substantially offset the cash payments due on these obligations. Amounts shown in the table exclude $55 million of cash margin which secures our obligations under these contracts. The Company has funded $52 million and has commitments to fund an additional $9.9 million for various alternative investments. Alternative investments generally consist of limited partnership interests in or loans to entities that invest in distressed assets, energy development, venture capital and other activities. The Company is prohibited by banking regulations from controlling or actively managing the activities of these investments. The Company has $19 million of commitments to make investments through its BOK Financial Private Equity Funds. These commitments, which are included in unfunded third-party private equity commitments, generally reflect customer investment obligations. The Company has compensation and employment agreements with our President and Chief Executive Officer. Collectively, these agreements provide, among other things, that all unvested stock-based compensation shall fully vest upon his termination, subject to certain conditions. These agreements provide for settlement in cash or other assets. We currently have recognized a $20 million liability for these plans. This liability would increase to $21 million if all awards were fully vested. We also have obligations with respect to employee and executive benefit plans. See Notes 11 and 12 to the Consolidated Financial Statements for additional information about our employee benefit plans. Recently Issued Accounting Standards See Note 1 of the consolidated financial statements for disclosure of newly adopted and pending accounting standards. 61 Forward-Looking Statements This report contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates, and projections about BOK Financial, the financial services industry and the economy in general. Words such as “anticipates,” “believes,” ”estimates,” “expects,” “forecasts,” “plans,” “projects,” variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the provision and reserves for loan losses and off-balance sheet credit losses, reserves for uncertain tax positions and accruals for loss contingencies involve judgments as to expected events and are inherently forward-looking statements. Assessments that BOK Financial’s acquisitions and other growth endeavors will be profitable are necessary statements of belief as to the outcome of future events, based in part on information provided by others that BOK Financial has not independently verified. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied, or forecasted in such forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to: (1) the ability to fully realize expected cost savings from mergers within the expected time frames, (2) the ability of other companies on which BOK Financial relies to provide goods and services in a timely and accurate manner, (3) changes in interest rates and interest rate relationships, (4) demand for products and services, (5) the degree of competition by traditional and nontraditional competitors, (6) changes in banking regulations, tax laws, prices, levies, and assessments, (7) the impact of technological advances and (8) trends in customer behavior as well as their ability to repay loans. BOK Financial and its affiliates undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events or otherwise. Legal Notice As used in this report, the term “BOK Financial” and such terms as “the Company,” “the Corporation,” “our,” “we” and “us” may refer to one or more of the consolidated subsidiaries or all of them taken as a whole. All these terms are used for convenience only and are not intended as a precise description of any of the separate companies, each of which manages its own affairs. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange prices, commodity prices or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading. Market risk excludes changes in fair value due to credit of the individual issuers of financial instruments. BOK Financial is subject to market risk primarily through the effect of changes in interest rates on both its assets held for purposes other than trading and trading assets. The effects of other changes, such as foreign exchange rates, commodity prices or equity prices do not pose significant market risk to BOK Financial. BOK Financial has no material investments in assets that are affected by changes in foreign exchange rates or equity prices. Energy and agricultural product derivative contracts, which are affected by changes in commodity prices, are matched against offsetting contracts as previously discussed. Responsibility for managing market risk rests with the Asset / Liability Committee that operates under policy guidelines established by the Board of Directors. The acceptable negative variation in net interest revenue, net income or economic value of equity due to a specified basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 10%. These guidelines also set maximum levels for short-term borrowings, short-term assets, public funds, and brokered deposits, and establish minimum levels for un-pledged assets, among other things. Compliance with these guidelines is reviewed monthly. Interest Rate Risk – Other than Trading As previously noted in the Net Interest Revenue section of this report, management has implemented strategies to manage the Company’s balance sheet to be relatively neutral to changes in interest rates over a twelve month period. The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model. BOK Financial performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions, on net interest revenue, net income and economic value of equity. A simulation model is used to estimate the effect of changes in interest rates over the next 12 and 24 months based on eight interest rate scenarios. Two specified interest rate scenarios are used to evaluate interest rate risk against policy guidelines. The first assumes a sustained parallel 200 basis point increase and the second assumes a sustained parallel 50 basis point decrease in interest 62 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 include 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 43 due to the extreme volatility over such a large rate range. The effects of interest rate changes on the value of mortgage servicing rights and securities identified as economic hedges are presented in the Lines of Business – Consumer Banking section of this report. The simulations used to manage market risk are based on numerous assumptions regarding the effects of changes in interest rates on the timing and extent of re-pricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest revenue, net income or economic value of equity or precisely predict the impact of higher or lower interest rates on net interest revenue, net income or economic value of equity. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, market conditions and management strategies, among other factors. Table 43 Interest Rate Sensitivity (Dollars in Thousands) 200 bp Increase 50 bp Decrease Most Likely 2009 2008 2009 2008 2009 2008 Anticipated impact over the next 12 months on net interest revenue $ (4,933) (0.3)% $ (5,609) (0.8)% $ (8,032) (1.2)% $ (13,125) (1.8)% $ (262) – $ 1,892 0.3% 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 December 31, 2009, the VAR was $692 thousand. The greatest value at risk during 2009 was $3.6 million. The value at risk guideline was exceeded with appropriate approvals by management to take advantage of wide yields available on certain securities during the year. 63 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Management on Financial Statements Management of BOK Financial is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and necessarily include some amounts that are based on our best estimates and judgments. Management, under the supervision of the Chief Executive Officer and the Chief Financial Officer, conducted an assessment of internal control over financial reporting as of December 31, 2009. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States. In establishing internal control over financial reporting, management assesses risk and designs controls to prevent or detect financial reporting misstatements that may be consequential to a reader. Management also assesses the impact of any internal control deficiencies and oversees efforts to improve internal control over financial reporting. Because of inherent limitations, it is possible that internal controls may not prevent or detect misstatements, and it is possible that internal controls may vary over time based on changing conditions. There have been no material changes in internal controls subsequent to December 31, 2009. The Risk Oversight and Audit Committee, consisting entirely of independent directors, meets regularly with management, internal auditors and the independent registered public accounting firm, Ernst & Young LLP, regarding management’s assessment of internal control over financial reporting. Report of Management on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting and for assessing the effectiveness of internal control over financial reporting, as such term is defined in Exchange Act Rules 13a- 15(f) and 15d-15(f), as amended. Management has assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria established in “Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. Based on that assessment and criteria, management has determined that the Company maintained effective internal control over financial reporting as of December 31, 2009. Ernst & Young LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this annual report has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. Their report, which expresses unqualified opinions on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009, is included in this annual report. 64 Report of Independent Registered Public Accounting Firm Report on Consolidated Financial Statements The Board of Directors and Shareholders of BOK Financial Corporation We have audited the accompanying consolidated balance sheets of BOK Financial Corporation as of December 31, 2009 and 2008, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BOK Financial Corporation at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, BOK Financial Corporation changed its method of accounting for non-controlling interests and changed its method of recognition and presentation of other-than-temporary impairments as of January 1, 2009. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), BOK Financial Corporation's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2010 expressed an unqualified opinion thereon. Ernst & Young LLP Tulsa, Oklahoma February 26, 2010 65 Report of Independent Registered Public Accounting Firm Report on Effectiveness of Internal Control over Financial Reporting The Board of Directors and Shareholders of BOK Financial Corporation We have audited BOK Financial Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). BOK Financial Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, BOK Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of BOK Financial Corporation as of December 31, 2009 and 2008, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009 of BOK Financial Corporation and our report dated February 26, 2010 expressed an unqualified opinion thereon. Ernst & Young LLP Tulsa, Oklahoma February 26, 2010 66 Consolidated Statements of Earnings (In Thousands, Except Share and Per Share Data) Interest revenue Loans Residential mortgage loans held for sale Taxable securities Tax-exempt securities Total securities Trading securities Funds sold and resell agreements Total interest revenue Interest expense Deposits Borrowed funds Subordinated debentures Total interest expense Net interest revenue Provision for credit losses Net interest revenue after provision for credit losses Other operating revenue Brokerage and trading revenue Transaction card revenue Trust fees and commissions Deposit service charges and fees Mortgage banking revenue Bank-owned life insurance Margin asset fees Other revenue Total fees and commissions Gain (loss) on other assets, net Gain (loss) on derivatives, net Gain on securities, net Total other-than-temporary impairment losses Portion of loss recognized in other comprehensive income Net impairment losses recognized in earnings Total other operating revenue Other operating expense Personnel Business promotion Professional fees and services Net occupancy and equipment Insurance FDIC special assessment Data processing and communications Printing, postage and supplies Net losses and operating expenses of repossessed assets Amortization of intangible assets Mortgage banking costs Change in fair value of mortgage servicing rights Visa retrospective responsibility obligation Other expense Total other operating expense Income before taxes Federal and state income tax Net income before non-controlling interest Net income (loss) attributable to non-controlling interest Net income attributable to BOK Financial Corp. Earnings per share: Basic Diluted Average shares used in computation: Basic Diluted Dividends declared per share See accompanying notes to consolidated financial statements. 67 2009 2008 2007 $ 562,367 10,102 328,997 10,143 339,140 2,883 77 914,569 $ 726,405 5,805 313,360 10,651 324,011 3,847 1,577 1,061,645 $ 887,248 4,776 248,972 13,604 262,576 1,657 4,480 1,160,737 164,362 17,545 22,298 204,205 710,364 195,900 514,464 91,677 105,517 66,177 115,791 64,980 10,239 236 25,895 480,512 4,134 (3,365) 46,122 (129,154) (94,741) (34,413) 492,990 380,517 19,582 30,243 65,715 24,040 11,773 81,292 15,960 11,400 6,970 36,304 (12,124) – 25,061 696,733 310,721 106,705 204,016 3,438 200,578 2.96 2.96 $ $ $ 288,924 103,597 22,262 414,783 646,862 202,593 444,269 42,804 100,153 78,979 117,528 30,599 10,681 8,548 25,902 415,194 (9,406) 1,299 26,943 (5,306) – (5,306) 428,724 352,947 23,536 27,045 60,632 11,988 – 78,047 16,433 1,019 7,661 22,513 34,515 (2,767) 28,835 662,404 210,589 64,909 145,680 (7,552) $ 153,232 412,746 178,605 24,901 616,252 544,485 34,721 509,764 62,542 90,425 78,231 109,218 22,275 10,058 4,800 28,073 405,622 2,404 2,282 313 (8,641) – (8,641) 401,980 328,705 21,888 22,795 57,284 3,017 – 72,733 16,570 691 7,358 13,111 2,893 2,767 25,175 574,987 336,757 115,761 220,996 3,332 $ 217,664 $ $ 2.27 2.27 $ $ 3.24 3.22 67,375,387 67,487,944 $ 0.945 67,302,990 67,461,361 0.875 $ 67,083,200 67,519,742 $ 0.75 December 31, 2009 2008 $ $ 875,250 45,966 65,354 581,133 113,809 99,601 8,726,135 145,888 240,405 285,950 9,398,378 217,826 11,279,698 (292,095) 10,987,603 280,260 108,822 354,239 73,824 129,034 3,869 343,782 247,357 – 385,267 23,516,831 5,800,691 590,760 242,344 399,211 7,033,006 129,246 12,876,006 (233,236) 12,642,770 277,458 96,673 361,209 42,752 29,179 12,913 452,604 237,006 239,474 385,815 22,734,648 $ $ $ 3,653,844 $ 3,082,379 7,930,439 165,952 3,767,993 15,518,228 2,471,743 2,133,357 398,539 111,880 3,869 212,335 308,360 133,146 21,291,457 4 758,723 1,563,683 (105,857) (10,740) 2,205,813 19,561 2,225,374 23,516,831 $ 6,562,350 154,635 5,183,243 14,982,607 3,025,399 1,522,054 398,407 133,220 12,913 – 667,034 132,902 20,874,536 4 743,411 1,427,057 (101,329) (222,886) 1,846,257 13,855 1,860,112 22,734,648 $ Consolidated Balance Sheets (In Thousands, Except Share Data) Assets Cash and due from banks Funds sold and resell agreements Trading securities Securities: Available for sale Available for sale securities pledged to creditors Investment (fair value: 2009 – $246,704; 2008 – $245,769) Mortgage trading securities Total securities Residential mortgage loans held for sale Loans Less reserve for loan losses Loans, net of reserve Premises and equipment, net Accrued revenue receivable Intangible assets, net Mortgage servicing rights, net Real estate and other repossessed assets Bankers’ acceptances Derivative contracts Cash surrender value of bank-owned life insurance Receivable on unsettled securities trades Other assets Total assets Liabilities and shareholders’ equity Noninterest-bearing demand deposits Interest-bearing deposits: Transaction Savings Time (includes deposits carried at fair value: 2009 – $98,031; 2008 – $632,754) Total deposits Funds purchased and repurchase agreements Other borrowings Subordinated debentures Accrued interest, taxes and expense Bankers’ acceptances Due on unsettled securities trades Derivative contracts Other liabilities Total liabilities Shareholders’ equity: Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: 2009 – 70,312,086; 2008 – 69,884,749) Capital surplus Retained earnings Treasury stock (shares at cost: 2009 – 2,509,279; 2008 – 2,411,663) Accumulated other comprehensive loss Total shareholders’ equity Non-controlling interest Total equity Total liabilities and equity See accompanying notes to consolidated financial statements. 68 Consolidated Statements of Cash Flows (In Thousands) Cash Flows From Operating Activities: Net income before non-controlling interest Adjustments to reconcile net income to cash provided by operating activities: Provision for credit losses Change in fair value of mortgage servicing rights Unrealized (gains) losses from derivatives Depreciation and amortization Change in bank-owned life insurance Tax expense (benefit) on exercise of stock options Stock-based compensation Net (accretion) amortization of securities discounts and premiums Realized (gains) losses on financial instruments and other assets Mortgage loans originated for resale Proceeds from sale of mortgage loans held for resale Capitalized mortgage servicing rights Change in trading securities, including mortgage trading securities Change in accrued revenue receivable Change in other assets Change in accrued interest, taxes and expense Change in other liabilities Net cash provided by operating activities Cash Flows From Investing Activities: Proceeds from sales of available for sale securities Proceeds from maturities of investment securities Proceeds from maturities of available for sale securities Purchases of investment securities Purchases of available for sale securities Loans originated or acquired net of principal collected Net payments or proceeds on derivative asset contracts Net change in other investment assets Proceeds from disposition of assets Purchases of other assets Cash and equivalents of subsidiaries and branches acquired and sold, net Net cash used in investing activities Cash Flows From Financing Activities: Net change in demand deposits, transaction deposits and savings accounts Net change in time deposits Net change in other borrowings, banks Change in amount receivable (due) on unsettled security transactions Issuance of common and treasury stock, net Issuance of other borrowings, holding companies Pay down of other borrowings, holding companies Issuance of subordinated debenture, net Pay down of subordinated debentures Net change in derivative margin accounts Net payments or proceeds on derivative liability contracts Tax benefit on exercise of stock options Repurchase of common stock Dividends paid Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Cash paid for interest Cash paid for taxes Net loans and bank premises transferred to repossessed real estate Securities transferred from trading securities to available for sale securities See accompanying notes to consolidated financial statements. 2009 2008 2007 $ 204,016 $ 145,680 $ 220,996 195,900 (12,124) 23,000 87,771 (10,351) 276 5,862 35,636 (46,318) (2,676,868) 2,619,399 (39,869) 102,121 (12,149) (166,375) (21,340) (7,571) 281,016 3,242,282 91,562 1,600,165 (89,816) (6,966,218) 1,328,731 497,034 – 26,640 (81,142) – (350,762) 202,593 34,515 35,408 51,282 (7,466) (895) 4,798 (18,106) (30,981) (1,201,613) 1,170,722 (19,220) (297,292) 41,570 (82,948) 28,411 25,607 82,065 3,499,128 69,931 1,091,054 (65,506) (5,576,035) (1,043,001) 63,109 33 39,522 (85,943) – (2,007,708) 34,721 2,893 (11,162) 43,524 (17,310) (3,460) 8,483 (2,404) 7,663 (1,022,829) 1,008,828 (17,708) 896 (30,719) 14,598 36,985 (36,218) 237,777 806,979 93,245 1,186,319 (92,648) (2,909,791) (936,018) (143,649) 67 48,341 (44,929) (47,476) (2,039,560) 1,950,871 670,712 860,612 (1,407,380) 112,797 451,809 5,198 – (55,150) – – (162,138) (535,759) (276) – (63,952) 296,020 226,274 694,942 921,216 $ 842,408 294,758 (219,510) 7,743 50,000 (50,000) – – 244,413 (44,064) 895 (7,992) (59,191) 1,730,172 (195,471) 890,413 694,942 $ (291,822) 1,301,093 (117,491) 13,747 – – 248,618 (150,000) (58,451) 152,873 3,460 (17,353) (50,416) 1,894,870 93,087 797,326 890,413 230,841 $ 124,547 132,758 45,890 411,860 $ 114,120 30,972 – 608,963 115,627 9,825 – $ $ 69 Consolidated Statements of Changes in Shareholders’ Equity (In Thousands) December 31, 2006 Effect of implementing FAS 157, net of tax Effect of implementing FIN 48 Comprehensive income: Net income attributed to BOK Financial Corp. Net income (loss) attributable to non-controlling interest Other comprehensive loss, net of tax Comprehensive income Treasury stock purchase Exercise of stock options Tax benefit on exercise of stock options Stock-based compensation Cash dividends on common stock Capital calls, net December 31, 2007 Effect of implementing FAS 159, net of tax Comprehensive income (loss): Net income attributed to BOK Financial Corp. Net income (loss) attributable to non-controlling interest Other comprehensive loss, net of tax Comprehensive loss Treasury stock purchase Exercise of stock options Tax benefit on exercise of stock options Stock-based compensation Cash dividends on common stock Capital calls, net December 31, 2008 Comprehensive income: Net income attributed to BOK Financial Corp. Net income (loss) attributable to non-controlling interest Other comprehensive income, net of tax Comprehensive income Exercise of stock options Tax benefit on exercise of stock options Stock-based compensation Cash dividends on common stock Capital calls, net December 31, 2009 See accompanying notes to consolidated financial statements. Common Stock Shares 68,705 – – – – – – 760 – – – – 69,465 – – – – – 420 – – – – 69,885 – – – 427 – – – – 70,312 Amount $4 – – – – – – – – – – – 4 – – – – – – – – – – 4 – – – – – – – – $4 Accumulated Other Comprehensive Income (Loss) $ (73,444) – – – – – 42,210 – – – – – (31,234) – – – (191,652) – – – – – – (222,886) – – 212,146 – – – – – $ (10,740) 70 Capital Surplus $688,861 – – – – – – 23,429 3,460 6,338 – – 722,088 – – – – – 12,652 895 7,776 – – 743,411 – – – Retained Earnings $1,166,994 (679) (609) 217,664 – – – – – – (50,416) – 1,332,954 62 153,232 – – – – – – (59,191) – 1,427,057 200,578 – – 9,726 (276) 5,862 – – $ 758,723 – – – (63,952) – $ 1,563,683 Treasury Stock Shares 1,637 – – – – – 340 182 – – – – 2,159 – – – – 166 87 – – – – 2,412 – – – 97 – – – – 2,509 Amount $(61,393) – – – – – (17,353) (9,682) – – – – (88,428) – – – – (7,992) (4,909) – – – – (101,329) – – – (4,528) – – – – $ (105,857) Total Shareholders’ Equity $1,721,022 (679) (609) 217,664 – 42,210 259,874 (17,353) 13,747 3,460 6,338 (50,416) – 1,935,384 62 153,232 – (191,652) (38,420) (7,992) 7,743 895 7,776 (59,191) – 1,846,257 Non- Controlling Interest $ 13,852 – – – (3,332) – (3,332) – – – – – 8,329 18,849 – – 7,552 – 7,552 – – – – – (12,546) 13,855 Total Equity $ 1,734,874 (679) (609) 217,664 (3,332) 42,210 256,542 (17,353) 13,747 3,460 6,338 (50,416) 8,329 1,954,233 62 153,232 7,552 (191,652) (30,868) (7,992) 7,743 895 7,776 (59,191) (12,546) 1,860,112 200,578 – 212,146 412,724 5,198 (276) 5,862 (63,952) – $ 2,205,813 – (3,438) – (3,438) – – – – 9,144 $ 19,561 200,578 (3,438) 212,146 409,286 5,198 (276) 5,862 (63,952) 9,144 $ 2,225,374 71 Notes to Consolidated Financial Statements (1) Significant Accounting Policies Basis of Presentation The Consolidated Financial Statements of BOK Financial Corporation (“BOK Financial” or “the Company”) have been prepared in conformity with accounting principles generally accepted in the United States, including general practices of the banking industry. The consolidated financial statements include the accounts of BOK Financial and its subsidiaries, principally Bank of Oklahoma, N.A. and its subsidiaries (“BOk”), Bank of Texas, N.A., Bank of Arkansas, N.A., Bank of Albuquerque, N.A., Colorado State Bank and Trust, N.A., Bank of Arizona, N.A., Bank of Kansas City, N.A., and BOSC, Inc. All significant intercompany transactions are eliminated in consolidation. The consolidated financial statements would also include the assets, liabilities, non-controlling interests and results of operations of variable interest entities (“VIEs”) when BOK Financial is determined to be the primary beneficiary. Variable interest entities are generally defined as entities that either do not have sufficient equity to finance their activities without support from other parties or whose equity investors lack a controlling financial interest. BOK Financial is not the primary beneficiary in any VIE that would be significant to its operations. Nature of Operations BOK Financial, through its subsidiaries, provides a wide range of financial services to commercial and industrial customers, other financial institutions and consumers throughout Oklahoma; Northwest Arkansas; Dallas, Fort Worth and Houston, Texas; Albuquerque, New Mexico; Denver, Colorado; Phoenix, Arizona; and Kansas City, Kansas/Missouri. These services include depository and cash management; lending and lease financing; mortgage banking; securities brokerage, trading and underwriting; and personal and corporate trust. Use of Estimates Preparation of BOK Financial’s consolidated financial statements requires management to make estimates of future economic activities, including loan collectibility, prepayments and cash flows from customer accounts. These estimates are based upon current conditions and information available to management. Actual results may differ significantly from these estimates. Acquisitions Assets and liabilities acquired, including identifiable intangible assets, are recorded at fair value on the acquisition dates. Goodwill is recognized as the excess of the purchase price over the net fair value of assets acquired and liabilities assumed. The Consolidated Statements of Earnings include the results of operations from the dates of acquisition. Intangible Assets Intangible assets, which generally result from business combinations, are accounted for under the provisions of Accounting Standards Codification Topic 350, “Intangibles - Goodwill and Other.” Intangible assets with indefinite lives, such as goodwill, are evaluated for each of BOK Financial’s business units for impairment annually or more frequently if conditions indicate impairment. The evaluation of possible impairment of intangible assets involves significant judgment based upon short-term and long-term projections of future performance. The fair value of BOK Financial’s reporting units is estimated by the discounted future earnings method. Income growth is projected for each unit and a terminal value is computed. This projected income stream is converted to current fair value by using a discount rate that reflects a rate of return required by a willing buyer. Assumptions used to determine the fair value of the reporting units are compared to observable inputs, such as the market value of BOK Financial common stock. However, determination of the fair value of individual reporting units requires the use of significant unobservable inputs. There have been no changes in the techniques used to value goodwill. Core deposit intangible assets are amortized using accelerated methods over the estimated lives of the acquired deposits. These assets generally have a weighted average life of 5 years. Other intangible assets are amortized using accelerated or straight-line methods, as appropriate, over the estimated benefit periods. These periods range from 5 years to 20 years. The net book values of core deposit intangible assets are evaluated for impairment when economic conditions indicate impairment may exist. 72 Cash Equivalents Due from banks, funds sold (generally federal funds sold for one-day periods) and resell agreements (which generally mature within one to 30 days) are considered cash equivalents. Securities Securities are identified as trading, investment (held to maturity) or available for sale at the time of purchase based upon the intent of management, liquidity and capital requirements, regulatory limitations and other relevant factors. Trading securities, which are acquired for profit through resale, are carried at market value with unrealized gains and losses included in current period earnings. Investment securities are carried at amortized cost. Amortization is computed by methods that approximate level yield and is adjusted for changes in prepayment estimates. Investment securities may be sold or transferred to trading or available for sale classification in certain limited circumstances specified in generally accepted accounting principles. Securities identified as available for sale are carried at fair value. Unrealized gains and losses are recorded, net of deferred income taxes, as accumulated other comprehensive income (loss) in shareholders’ equity. Unrealized losses on securities are evaluated to determine if the losses are temporary based on various factors, including the cause of the loss, prospects for recovery, projected cash flows, collateral values, credit enhancements and other relevant factors, and management’s intent and ability not to sell the security until the fair value exceeds amortized cost. A charge is recognized against earnings for all or a portion of the impairment if the loss is determined to be other than temporary. Realized gains and losses on sales of securities are based upon the amortized cost of the specific security sold. Available for sale securities are separately identified as pledged to creditors if the creditor has the right to sell or re-pledge the collateral. Certain mortgage-backed securities, identified as mortgage trading securities, have been designated as economic hedges of mortgage servicing rights. We have elected to carry these securities at fair value with changes in fair value recognized in current period income. These securities are held with the intent that gains or losses will offset changes in the fair value of mortgage servicing rights. The purchase or sale of securities is recognized on a trade date basis. A net receivable or payable is recognized for subsequent transaction settlement. BOK Financial will periodically commit to purchase to-be-announced mortgage-backed securities. These commitments are carried at fair value if they are considered derivative contracts. These commitments are not reflected in BOK Financial’s balance sheet until settlement date if they meet specific criteria exempting them from the definition of derivative contracts. Derivative Instruments Derivative instruments may be used by the Company as part of its interest rate risk management programs or may be offered to customers. All derivative instruments are carried at fair value. The determination of fair value of derivative instruments considers changes in interest rates, commodity prices and foreign exchange rates. Credit risk is also considered in determining fair value. Deterioration in the credit rating of customers or other counterparties reduces the fair value of asset contracts. Deterioration of our credit rating to below investment grade or the credit ratings of other counterparties could decrease the fair value of our derivative liabilities. Changes in fair value are generally reported in income as they occur. Derivative instruments used to manage interest rate risk consist primarily of interest rate swaps. These contracts modify the interest income or expense of certain assets or liabilities. Amounts receivable from or payable to counterparties are reported in interest income or expense using the accrual method. Changes in fair value of interest rate swaps are reported in other operating revenue – gain (loss) on derivatives, net. In certain circumstances, an interest rate swap may be designated as a fair value hedge and may qualify for hedge accounting. In these circumstances, changes in the full fair value of the hedged asset or liability, not only changes in fair value due to changes in the benchmark interest rate, is also recognized in earnings and may partially or completely offset changes in fair value of the interest rate swap. A fair value hedge is considered effective if the cumulative fair value adjustment of the interest rate swap is within a range of 80% to 120% of the cumulative change in the fair value of the hedged asset or liability. Any ineffectiveness, including ineffectiveness due to credit risk or ineffectiveness created when the fixed rate of the hedged asset or liability does not match the fixed rate of the interest rate swap, is recognized in earnings in the income statement line item “Gain (loss) on derivatives, net.” Interest rate swaps may be designated as cash flow hedges of variable rate assets or liabilities, or of anticipated transactions. Changes in the fair value of interest rate swaps designated as cash flow hedges are recorded in accumulated other comprehensive income to the extent they are effective. The amount recorded in other comprehensive income is reclassified to earnings in the same periods as the hedged cash flows impact earnings. The ineffective portion of changes in fair value is reported in current earnings. 73 If a derivative instrument that had been designated as a fair value hedge is terminated or if the hedge designation is removed or deemed to no longer be effective, the difference between the hedged items carrying value and its face amount is recognized into income over the remaining original hedge period. Similarly, if a derivative instrument that had been designated as a cash flow hedge is terminated or if the hedge designation is removed or deemed to no longer be effective, the amount remaining in accumulated other comprehensive income is reclassified to earnings in the same period as the hedged item. BOK Financial also enters into mortgage loan commitments that are considered derivative instruments. Forward sales contracts are used to hedge these mortgage loan commitments as well as mortgage loans held for sale. Mortgage loan commitments are carried at fair value based upon quoted prices, excluding the value of loan servicing rights or other ancillary values. Changes in fair value of the mortgage loan commitments and forward sales contracts are reported in other operating revenue – mortgage banking revenue. BOK Financial offers programs to permit its customer to manage various risks, including fluctuations in energy, cattle and other agricultural products, interest rates and foreign exchanges rates, or to take positions in derivative contracts. Derivative contracts are executed between the customers and BOK Financial. Offsetting contracts are executed between BOK Financial and other selected counterparties to minimize its risk of changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to BOK Financial as profit and compensation for administrative costs and credit risk which is recognized over the life of the contracts and included in other operating revenue – brokerage and trading revenue. When bilateral netting agreements exist between the Company and its counterparties that create a single legal claim or obligation to pay or receive the net amount in settlement of the individual derivative contracts, the Company reports derivative assets and liabilities on a net by counterparty basis. Derivative contracts may also require the Company to provide or receive cash margin as collateral for derivative assets and liabilities. Derivative assets and liabilities are reported net of cash margin when certain conditions are met. Loans Loans are either secured or unsecured based on the type of loan and the financial condition of the borrower. Repayment is generally expected from cash flow or proceeds from the sale of selected assets of the borrower. BOK Financial is exposed to risk of loss on loans due to the borrower’s difficulties, which may arise from any number of factors, including problems within the respective industry or local economic conditions. Access to collateral, in the event of borrower default, is reasonably assured through adherence to applicable lending laws and through sound lending standards and credit review procedures. Interest is accrued at the applicable interest rate on the principal amount outstanding. Loans are placed on nonaccrual status when, in the opinion of management, full collection of principal or interest is uncertain, generally when the collection of principal or interest is 90 days or more past due. Interest previously accrued but not collected is charged against interest income when the loan is placed on nonaccrual status. Payments on nonaccrual loans are applied to principal or reported as interest income, according to management’s judgment as to the collectability of principal. Loans may be returned to accruing status when, in the opinion of management, full collection of principal and interest is probable based on improvements in the borrower’s financial condition or a sustained period of performance. Loan origination and commitment fees and direct loan acquisition and origination costs are deferred and amortized as an adjustment to yield over the life of the loan or over the commitment period, as applicable. Mortgage loans originated by our mortgage banking unit are held for sale and are carried at fair value based on sales commitments or market quotes. Changes in fair value are recorded in other operating revenue – mortgage banking revenue. Reserve for Loan Losses and Off-Balance Sheet Credit Losses Reserves for loan losses and off-balance sheet credit losses are assessed by management, based upon an ongoing quarterly evaluation of the probable estimated losses inherent in the portfolio, and include probable losses on both outstanding loans and unused commitments to provide financing. A consistent methodology has been developed that includes reserves assigned to specific criticized loans, general reserves that are based upon statistical migration analyses for each category of loans, and a nonspecific allowance that is based upon an analysis of current economic conditions, loan concentrations, portfolio growth and other relevant factors. The reserve for loan losses is based on discounted cash flows using the loan’s initial effective interest rate, the fair value of the collateral for certain collateral dependent loans, or historical statistics. Loans are considered to be impaired when it becomes probable that BOK Financial will be unable to collect all amounts due according to the contractual terms of the loan agreement. This is substantially the same criteria used to determine when a loan should be placed on nonaccrual status. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. 74 Management has excluded small balance, homogeneous loans from the impairment evaluation. Such loans include 1-4 family mortgage loans, consumer loans and commercial loans with committed amounts less than $1 million. The adequacy of the reserve for loan losses applicable to these loans is evaluated in accordance with generally accepted accounting principles and standards established by the banking regulatory authorities and adopted as policy by BOK Financial. A provision for credit losses is charged against earnings in amounts necessary to maintain adequate reserves for loan and off-balance sheet credit losses. Loans are charged off when the loan balance or a portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value. Loans are evaluated quarterly and charge-offs are taken in the quarter in which the loss is identified. Additionally, all unsecured or under-secured loans that are past due by 180 days or more are charged off within 30 days. Recoveries of loans previously charged off are added to the reserve. Transfers of Financial Assets BOK Financial transfers financial assets as part of its mortgage banking activities and periodically may transfer other financial assets. Transfers are recorded as sales for financial reporting purposes when the criteria for surrender of control are met. BOK Financial may retain the right to service the assets and may incur a recourse obligation. The Company may also retain a residual interest in excess cash flows generated by the assets. All assets obtained, including cash, servicing rights and residual interests, and all liabilities incurred, including recourse obligations, are initially recognized at fair value, all assets transferred are derecognized and any gain or loss on the sale is recognized in earnings. Subsequently, servicing rights and residual interests are carried at fair value with changes in fair value recognized in earnings as they occur. A separate reserve is maintained as part of other liabilities for the Company’s credit risk on loans transferred subject to a recourse obligation. Real Estate and Other Repossessed Assets Real estate and other repossessed assets are assets acquired in partial or total forgiveness of loans. These assets are carried at the lower of cost, which is determined by fair value at date of foreclosure, or current fair value. Fair values are generally evaluated annually, or more frequently for certain asset types or assets located in certain distressed markets. Additional costs incurred to complete real estate and other repossessed assets may increase the carrying value, up to current fair value. Income generated by these assets is recognized as received, and operating expenses are recognized as incurred. Premises and Equipment Premises and equipment are carried at cost including capitalized interest, when appropriate, less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets or, for leasehold improvements, over the shorter of the estimated useful lives or remaining lease terms. Useful lives range from 5 years to 40 years for buildings and improvements, 3 years to 7 years for software and 3 years to 10 years for furniture and equipment. Repair and maintenance costs are charged to expense as incurred. Rent expense for leased premises is recognized as incurred over the lease term. The effects of rent holidays, significant rent escalations and other adjustments to rent payments are recognized on a straight-line basis over the lease term. Mortgage Servicing Rights Mortgage servicing rights may be purchased or may be recognized when mortgage loans are originated pursuant to an existing plan for sale or, if no such plan exists, when the mortgage loans are sold. Originated mortgage servicing rights are initially recognized at fair value. Purchased servicing rights are initially recognized at purchase price. All mortgage servicing rights are subsequently carried at fair value. Changes in the fair value are recognized in earnings as they occur. There is no active market for trading in mortgage servicing rights after origination. A cash flow model is used to determine fair value. Key assumptions and estimates, including projected prepayment speeds and assumed servicing costs, earnings on escrow deposits, ancillary income and discount rates, used by this model are based on current market sources. Assumptions used to value mortgage servicing rights are considered significant unobservable inputs. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors. The prepayment model is updated daily for changes in market conditions and adjusted to better correlate with actual performance of BOK Financial’s servicing portfolio. At least annually, we request estimates of fair value from outside sources to corroborate the results of the valuation model. There have been no changes in the techniques used to value mortgage servicing rights. 75 Federal and State Income Taxes BOK Financial and its subsidiaries file consolidated tax returns. The subsidiaries provide for income taxes on a separate return basis and remit to BOK Financial amounts determined to be currently payable. Income tax expense is based on an effective tax rate that considers statutory federal and state income tax rates and permanent differences between income and expense recognition for financial reporting and income tax purposes. The amount of income tax expense recognized in any period may differ from amounts reported to taxing authorities. BOK Financial has a reserve for uncertain tax positions, which is included in accrued current income taxes payable, for the uncertain portion of recorded tax benefits and related interest. These uncertainties result from the application of complex tax laws, rules, regulations and interpretations, primarily in state taxing jurisdictions. The adequacy of this reserve is assessed quarterly and may be adjusted through current income tax expense in future periods based on changing facts and circumstances, completion of examinations by taxing authorities or expiration of a statute of limitations. Estimated penalties and interest on uncertain tax positions are recognized in income tax expense. Deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statements and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax law or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is provided when it is more likely than not that some portion or the entire deferred tax asset will not be realized. Employee Benefit Plans BOK Financial sponsors a defined benefit cash balance pension plan (“Pension Plan”), qualified profit sharing plan (“Thrift Plan”) and employee healthcare plans. Pension Plan costs, which are based upon actuarial computations of current costs, are expensed annually. Unrecognized prior service cost and net gains or losses are amortized on a straight-line basis over the lesser of the average remaining service periods of the participants or 10 years. Employer contributions to the Pension Plan are in accordance with Federal income tax regulations. Pension Plan benefits were curtailed as of April 1, 2006. No participants may be added to the Pension Plan and no additional service benefits will be accrued. BOK Financial recognizes the funded status of its employee benefit plans. For a pension plan, the funded status is the difference between the fair value of plan assets and the projected benefit obligation measured as of the fiscal year-end date. Adjustments required to recognize the Pension Plan’s net funded status are made through accumulated other comprehensive income, net of deferred income taxes. Employer contributions to the Thrift Plan, which matches employee contributions subject to percentage and years of service limits, are expensed when incurred. BOK Financial recognizes the expense of health care benefits on the accrual method. Stock Compensation Plans BOK Financial awards stock options and non-vested common shares as compensation to certain officers. Grant date fair value of stock options is based on the Black-Scholes option pricing model. Stock options generally have graded vesting over 7 years. Each tranche is considered a separate award for valuation and compensation cost recognition. Grant date fair value of non-vested shares is based on the current market value of BOK Financial common stock. Non-vested shares generally cliff vest in 5 years. Compensation cost is recognized as expense over the service period, which is generally the vesting period. Expense is reduced for estimated forfeitures over the vesting period and adjusted for actual forfeitures as they occur. Stock-based compensation awarded to certain officers has performance conditions that affect the number of awards granted. Compensation cost is adjusted based on the probable outcome of the performance conditions. Excess tax benefits from share-based payments recognized in capital surplus are determined by the excess of tax benefits recognized over the tax effect of compensation cost recognized. Certain executive officers may defer the recognition of income from stock-based compensation for income tax purposes and to diversify the deferred income into alternative investments. Stock-based compensation granted to these officers is considered liability awards. Changes in the fair value of liability awards are recognized as compensation expense in the period of the change. Other Operating Revenue Fees and commission revenue is recognized at the time the related services are provided or products are sold and may be accrued when necessary. Accrued fees and commissions are reversed against revenue if amounts are subsequently deemed to be uncollectible. Revenue is recognized on a gross basis whenever we have primary responsibility and risk in providing the services or products to our customers and on a net basis whenever we act as a broker for products or services of others. 76 Brokerage and trading revenue includes changes in the fair value of securities held for trading purposes and derivatives held for customer risk management programs, including credit losses on trading securities and derivatives, commissions earned from the retail sale of securities, mutual funds and other financial instruments, and underwriting and financial advisory fees. Trust fees and commissions include revenue from asset management, custody, recordkeeping, investment advisory and administration services. Revenue is recognized on an accrual basis at the time the services are performed and may be based on either the fair value of the account or the service provided. Deposit service charges and fees are recognized at least quarterly in accordance with our published deposit account agreement and disclosure statement for retail accounts or contractual agreement for commercial accounts. Item charges for overdraft or non-sufficient funds items are recognized as items are presented for payment. Account balance charges and activity fees are accrued monthly and collected in arrears. Commercial account activity fees may be offset by an earnings credit based on account balances. Effect of Recently Issued Statements of Financial Accounting Standards Financial Accounting Standards Board 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. Banks may no longer carry over the pre-acquisition allowance for loan losses. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date. Acquirers are required to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed. 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. Certain pre-acquisition contingencies are to be recognized at fair value. Other contingencies 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 was applicable to the Company’s accounting for business combinations closing on or after January 1, 2009. No such transactions were completed during 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 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. All prior periods have been reclassified for a consistent presentation. 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. 77 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). The guidance was effective for interim and annual periods ending after June 15, 2009 and required 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 January 1, 2009 and 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”) 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 16 – 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. 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 78 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’s adoption of ASU 2009-12 as of December 31, 2009 did not have a significant impact on the Company’s financial statements. FASB Accounting Standards Update No. 2009-16, “Accounting for Transfers of Financial Assets” (“ASU 2009-16”) ASU 2009-16 codifies Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets – an amendment to Statement No. 140,” which amended Financial Accounting Standards No. 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. The standard eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. It also requires additional disclosures about all continuing involvement with transferred financial assets including information about gains and losses resulting from transfers during the period. ASU 2009-16 was effective January 1, 2010 and did not have a significant impact on the Company’s financial statements. FASB Accounting Standards Update No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved With Variable Interest Entities” (“ASU 2009-17”) ASU 2009-17 codifies Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R),” (“FAS 167”) which amended Financial Accounting Standards Interpretation No. 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. The standard 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. ASU 2009-17 was effective January 1, 2010 and did not have a significant impact on the Company’s financial statements. FASB Accounting Standards Update No. 2010-06, “Improving Disclosures About Fair Value Measurements” (“ASU 2010- 06”) ASU 2010-06 amends ASC 820 to add new disclosure requirements about transfers into and out of Levels 1 and 2, as defined in ASC 820 and separate disclosures about purchases, sales, issuance and settlements relating to Level 3 measurements, as defined in ASC 820. It also clarified existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASU 2010-06 was effective for the Company on January 1, 2010 with exception of the requirement to provide Level 3 activity of purchases, sales, issuances, and settlement on a gross basis, which will be effective for the Company on January 1, 2011. Early adoption is permitted. 79 (2) Securities Investment Securities The amortized cost and fair values of investment securities are as follows (in thousands): 2009 December 31, Amortized Cost Fair Value Not Recognized in OCI (1) Gross Unrealized Loss Gain Amortized Cost 2008 Fair Value Not Recognized in OCI (1) Gross Unrealized Loss Gain Municipal and other tax-exempt Other debt securities Total $ 232,568 $ 238,847 7,857 $ 6,336 20 $ 240,405 $ 246,704 $ 6,356 7,837 $ (57) – (57) $ $ 235,791 $ 239,178 6,591 $ 3,736 38 $ 242,344 $ 245,769 $ 3,774 6,553 $ (349) – (349) $ (1) Other comprehensive income The amortized cost and fair values of investment securities at December 31, 2009, by contractual maturity, are as shown in the following table (dollars in thousands): Less than One Year One to Five Years Six to Ten Years Over Ten Years Total Municipal and other tax-exempt: Amortized cost Fair value Nominal yield¹ Other debt securities: Amortized cost Fair value Nominal yield Total fixed maturity securities: Amortized cost Fair value Nominal yield Total investment securities: Amortized cost Fair value Nominal yield $ 58,491 59,104 5.28 $ 6,399 6,415 0.85 $ 64,890 65,519 4.84 $ 139,581 144,253 4.61 $ 1,425 1,429 5.09 $ 141,006 145,682 4.61 $ 26,499 27,394 5.71 $ 7,997 8,096 6.39 $ 232,568 238,847 4.96 $ – – – $ 13 13 – $ 26,499 27,394 5.71 $ 8,010 8,109 6.38 $ 7,837 7,857 1.62 $ 240,405 246,704 4.85 $ 240,405 246,704 4.85 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. Weighted Average Maturity² 2.83 0.92 2.77 80 Available for Sale Securities The amortized cost and fair value of available for sale securities are as follows (in thousands): 2009 2008 December 31, Recognized in OCI (1) Other Than Amortized Cost Fair Value Gross Unrealized Temporary Amortized Gain Loss Impairment Cost Fair Value Recognized in OCI (1) Gross Unrealized Gain Loss $ 6,998 $ 7,020 $ 22 $ – $ – $ 6,987 $ 7,126 $ 139 $ – U.S. Treasury Municipal and other tax-exempt 61,268 62,201 1,244 (311) Residential mortgage-backed securities: U. S. agencies: FNMA FHLMC GNMA Other Total U.S. agencies Private issue: Alt-A loans Jumbo-A loans Total private issue Total residential mortgage- backed securities Other debt securities Federal Reserve Bank stock Federal Home Loan Bank stock Perpetual preferred stock Equity securities and mutual funds 3,690,280 3,782,180 2,479,522 2,547,978 1,221,577 1,225,042 254,438 254,128 98,764 70,024 10,371 5,080 (6,864) (1,568) (6,906) (5,390) 7,645,817 7,809,328 184,239 (20,728) 262,106 699,272 961,378 195,808 596,554 792,362 – – – (13,305) (71,023) (84,328) 8,607,195 17,174 8,601,690 17,147 184,239 – (105,056) (27) 32,526 32,526 78,999 19,224 78,999 22,275 – – 3,051 – – – 35,414 50,165 15,275 (524) – – – – – – (52,993) (31,695) (84,688) (84,688) – – – – – 19,537 20,163 664 (38) 2,194,834 2,222,253 195,767 288,041 2,225,589 2,254,989 200,086 292,264 37,855 37,577 4,319 4,322 (7,100) (4,841) – (99) 4,900,895 4,972,928 84,073 (12,040) 393,118 1,243,816 1,636,934 268,545 972,693 1,241,238 – 28 28 (124,573) (271,151) (395,724) 6,537,829 37 6,214,166 36 84,101 – (407,764) (1) 32,380 32,380 61,760 32,472 61,760 21,701 – – – – – (10,771) 31,421 34,119 2,698 – Total $ 8,858,798 $8,872,023 $ 203,831 $ (105,918) $ (84,688) $ 6,722,423 $6,391,451 $87,602 $ (418,574) (1) Other comprehensive income 81 The amortized cost and fair values of available for sale securities at December 31, 2009, by contractual maturity, are as shown in the following table (dollars in thousands): Less than One Year One to Five Years Six to Ten Years Over Ten Years6 Total Weighted Average Maturity5 $ $ 6,998 7,020 2.16 – – – $ $ 25 25 6.18 7,023 7,045 2.18 $ $ $ $ – – – 4,046 4,302 3.99 6 6 7.61 4,052 4,308 3.99 U.S. Treasuries: Amortized cost Fair value Nominal yield Municipal and other tax-exempt: Amortized cost Fair value Nominal yield¹ Other debt securities: Amortized cost Fair value Nominal yield¹ Total fixed maturity securities: Amortized cost Fair value Nominal yield Mortgage-backed securities: Amortized cost Fair value Nominal yield4 Equity securities and mutual funds: Amortized cost Fair value Nominal yield Total available-for-sale securities: Amortized cost Fair value Nominal yield $ $ 15,892 16,768 4.11 $ – – – $ 15,892 16,768 4.11 $ – – – – – – $ 41,330 41,131 1.43 $ 17,143 17,116 1.60 $ 58,473 58,247 1.48 0.16 19.41 29.94 19.95 ² ³ $ $ $ $ 6,998 7,020 2.16 61,268 62,201 2.29 17,174 17,147 1.61 85,440 86,368 2.15 $ 8,607,195 8,601,690 4.31 $ 166,163 183,965 2.34 $ 8,858,798 8,872,023 4.25 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. 6 Nominal yield on municipal and other tax-exempt securities and other debt securities with contractual maturity dates over ten years are based on variable rates which generally are reset within 35 days. Sales of available for sale securities resulted in gains and losses as follows (in thousands): Proceeds Gross realized gains Gross realized losses Related federal and state income tax expense (benefit) 2009 2008 2007 $ 3,242,282 63,859 1,390 $ 3,499,128 21,128 11,932 $ 806,979 2,862 3,138 24,300 2,736 (96) Gains and losses on sales of available for sale securities are realized on settlement date. Gross realized gains for the year ended December 31, 2008 exclude $6.8 million gain from the redemption of Visa, Inc. Class B common stock. In addition to securities that have been reclassified as pledged to creditors, securities with an amortized cost of $5.1 billion and $5.0 billion at December 31, 2009 and 2008, respectively, have been pledged as collateral for repurchase agreements, public and trust funds on deposit and for other purposes, as required by law. The secured parties do not have the right to sell or re-pledge these securities. 82 Temporarily Impaired Securities as of December 31, 2009 (In Thousands) Number of Securities Less Than 12 Months Fair Value Unrealized Loss 12 Months or Longer Fair Value Unrealized Loss Total Fair Value Unrealized Loss Investment: Municipal and other tax exempt Available for sale: Municipal and other tax-exempt Residential mortgage- backed securities: U. S. agencies: FNMA FHLMC GNMA Other Total U.S. agencies Private issue: Alt-A loans Jumbo-A loans Total private issue Total residential mortgage-backed securities Other debt securities Equity securities and mutual funds Total available for sale Total 15 $ 1,490 $ 14 $ 2,991 $ 43 $ 4,481 $ 57 27 21 8 16 4 49 21 65 86 34,373 265 657 46 35,030 311 497,659 212,618 460,144 87,434 1,257,855 6,864 1,568 6,906 5,390 20,728 – – – – – – – – – – – – – – – – 195,808 596,554 792,362 66,298 102,718 169,016 497,659 212,618 460,144 87,434 1,257,855 195,808 596,554 792,362 6,864 1,568 6,906 5,390 20,728 66,298 102,718 169,016 135 1,257,855 20,728 792,362 169,016 2,050,217 189,744 5 8,116 26 31 1 8,147 27 4 171 186 524 2,790 1,303,134 21,543 $ 1,304,624 $ 21,557 – 793,050 $ 796,041 – 169,063 $169,106 524 2,790 2,096,184 190,606 $ 2,100,665 $ 190,663 Temporarily Impaired Securities as of December 31, 2008 (In Thousands) Number of Securities Less Than 12 Months Fair Value Unrealized Loss 12 Months or Longer Fair Value Unrealized Loss Total Fair Value Unrealized 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 Residential mortgage- backed securities: U. S. agencies: FNMA FHLMC Other Total U.S. agencies Private issue: Alt-A loans Jumbo-A loans Total private issue Total residential mortgage-backed securities Other debt securities Perpetual preferred stock Total available for sale Total 4 645 30 1,269 8 1,914 38 31 28 1 60 27 87 114 484,689 273,829 36,444 794,962 24,655 273,081 297,736 6,266 3,413 99 9,778 16,251 67,470 83,721 65,219 152,222 – 217,441 243,890 692,187 936,077 834 1,428 – 2,262 108,322 203,681 312,003 549,908 426,051 36,444 1,012,403 268,545 965,268 1,233,813 7,100 4,841 99 12,040 124,573 271,151 395,724 174 1,092,698 93,499 1,153,518 314,265 2,246,216 407,764 2 10 190 253 – 4,739 1,098,082 – 1,155 94,684 $ 1,108,413 $ 94,831 36 16,962 1,171,785 1 9,616 323,890 $ 1,179,699 $ 324,092 36 21,701 2,269,867 $ 2,288,112 1 10,771 418,574 $418,923 83 On a quarterly basis, the Company performs separate evaluations of impaired debt and equity securities to determine if the unrealized losses are temporary. 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. During 2009, the Company recognized a $1.3 million other- than-temporary charge on $91 million of impaired debt securities that it intended to sell. These securities were sold during the year. At December 31, 2009, the Company does 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 the Company 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. As of December 31, 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): Held-to-Maturity: Municipal and other tax-exempt Other debt securities Total Available for Sale: U.S. Treasury Municipal and other tax-exempt Residential mortgage- backed securities: U. S. agencies: FNMA FHLMC GNMA Other Total U.S. agencies Private issue: Alt-A loans Jumbo-A loans Total private issue Total residential mortgage-backed securities Other debt securities Federal Reserve Bank U.S. Govt / GSE (1) AAA - AA A - BBB Below Investment Grade Not Rated Total Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Cost Value Cost Value Cost Value Cost Value Cost Fair Value Amortized Cost Fair Value $ – $ – $ 52,157 $ 53,771 $ 59,053 $ 60,366 $ – $ – $ 121,358 $ 124,710 $ 232,568 $ 238,847 – – – – 1,350 1,350 – – 6,487 6,507 7,837 7,857 $ – $ – $ 52,157 $ 53,771 $ 60,403 $ 61,716 $ – $ – $ 127,845 $ 131,217 $ 240,405 $ 246,704 $ 6,998 $ 7,020 $ – $ – $ – $ – $ – $ – $ – $ – $ 6,998 $ 7,020 – – 41,445 42,293 7,761 7,850 9,818 9,724 2,244 2,334 61,268 62,201 3,690,280 3,782,180 2,479,522 2,547,978 1,221,577 1,225,042 254,438 254,128 7,645,817 7,809,328 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 22,444 19,601 13,254 12,585 226,408 163,622 222,875 199,912 113,841 100,288 362,556 296,354 245,319 219,513 127,095 112,873 588,964 459,976 7,645,817 7,809,328 245,319 219,513 127,095 112,873 588,964 459,976 – – 14,592 14,566 – 2,550 2,550 – – – – – – – – – 19,224 22,275 – – – – – – – – – – – – – – – – – – – – 32 – – – – – – – – – – – – 31 – – – 3,690,280 3,782,180 2,479,522 2,547,978 1,221,577 1,225,042 254,438 254,128 7,645,817 7,809,328 262,106 699,272 195,808 596,554 961,378 792,362 8,607,195 8,601,690 17,174 17,147 32,526 32,526 78,999 19,224 78,999 22,275 35,414 50,165 35,414 50,165 – – $301,356 $276,372 $ 154,080 – $142,998 $ 601,332 $ 472,250 $ 37,690 $ 52,530 $ 8,858,798 $ 8,872,023 stock 32,526 32,526 Federal Home Loan Bank stock 78,999 78,999 Perpetual preferred stock – – Equity securities and mutual funds Total – $7,764,340 $ 7,927,873 – (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. Impairment of debt securities rated investment grade by all nationally-recognized rating agencies are 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 December 31, 2009. 84 At December 31, 2009, approximately $589 million of the portfolio of privately issued mortgage-backed securities (based on amortized cost after 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 $129 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 management expects 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 estimated liquidation costs at foreclosure. The primary assumptions used in this evaluation were: • Unemployment rates – increasing to 10.5% over the next 12 months, dropping to 8% for the following 12 months, and holding at 8% thereafter. • 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 twelve months and holding at that level thereafter. Estimated Liquidation Costs – held constant at 27% of the then-current depreciated housing price at estimated foreclosure date. • • Discount rates – estimated cash flows were discounted at rates that range from 5.50% to 6.14% based on our current expected yields. The Company also considers the adjusted loan-to-value ratio and credit enhancement coverage ratio as part of the assessment of the cash flows available to recover the amortized cost of the debt securities. Each factor is given equal weight in the evaluation. Adjusted loan-to-value ratio is an estimate of the current 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. 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 current 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 Ratio < 70 % 70 < 75 75 < 80 80 < 85 >= 85 Total Number of Securities 4 – 7 9 5 25 Amortized Cost 46,229 $ – 169,886 274,813 98,036 $ 588,964 $ Fair Value 41,236 – 130,815 219,410 68,515 $ 459,976 Number of Securities – – 2 6 5 13 Amount $ $ – – 2,330 14,177 8,635 25,142 Credit Loss Recognized 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 these 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 adjusted 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. 85 Based on projected declines in expected cash flows from certain private-label residential mortgage-backed securities, the Company recognized $25 million of credit loss impairment in earnings during 2009. Additional impairment based on the difference between the total unrealized losses and the estimated credit losses on these securities was charged against other comprehensive income, net of deferred taxes. Impaired equity securities, including perpetual preferred stocks, are evaluated based on management’s ability and intent to hold the securities until fair value recovers over periods not to exceed three years. The assessment of the ability and intent to hold these securities focuses on liquidity needs, asset / liability management objectives and securities portfolio objectives. Factors considered when assessing recovery include forecasts of general economic conditions and specific performance of the issuer, analyst ratings and credit spreads for preferred stocks which have debt-like characteristics. All impairment of equity securities was considered temporary at December 31, 2009. During 2009, the Company recognized $8.0 million in other-than-temporary impairment charges against the portfolio of preferred stocks. The following represents the composition of net impairment losses recognized in earnings (in thousands): OTTI related to perpetual preferred stocks OTTI on debt securities due to change in intent to sell OTTI on debt securities not intended for sale Less: Portion of OTTI recognized in other comprehensive income OTTI recognized in earnings related to credit losses on debt securities not intended for sale Total OTTI recognized in earnings Year Ended December 31, 2008 2007 2009 $ (8,008) $ (5,306) $ (8,641) (1,263) (119,883) (94,741) – – – – – – (25,142) (34,413) $ – (5,306) $ – (8,641) $ The following is a tabular roll forward of the amount of credit-related OTTI recognized on available-for-sale debt securities in earnings for the year ended December 31, 2009 (in thousands): Balance of credit-related OTTI recognized on available for sale debt securities at January 1, 2009 Additions for credit-related OTTI not previously recognized 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 Balance of credit-related OTTI recognized on available for sale debt securities at December 31, 2009 $ – 21,468 3,674 $ 25,142 Mortgage Trading Securities Mortgage trading securities are mortgage-backed securities that have been designated as an economic hedge of the mortgage servicing rights and are separately identified on the balance sheet. The Company elected to carry these securities at fair value. Changes in fair value are recognized in earnings as they occur. As of December 31, 2009, mortgage trading securities were carried at their $286 million fair value and had a net unrealized loss of $2.1 million. As of December 31, 2008, mortgage trading securities were carried at their $399 million fair value and had a net unrealized gain of $13 million. The Company recognized a net loss of $13 million on mortgage trading securities in 2009 and a net gain of $11 million during 2008. 86 (3) Derivatives The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at December 31, 2009 (in thousands): Gross Basis Net Basis2 Assets Liabilities Assets Liabilities Notional¹ Fair Value Notional¹ Fair Value Notional¹ Fair Value Notional¹ Fair Value $ 4,377,115 3,588,767 23,196 $ 110,449 454,978 1,004 $ 4,367,002 3,719,796 31,715 $ 115,413 450,614 875 $ 4,377,115 591,294 23,196 $ 110,449 174,319 1,004 $ 4,367,002 711,885 31,715 $ 115,413 176,983 875 63,942 66,248 8,119,268 – 8,119,268 64,182 5,493 636,106 – 636,106 64,182 66,248 8,248,943 – 8,248,943 64,182 5,493 636,577 – 636,577 63,942 66,248 5,121,795 – 5,121,795 64,182 5,493 355,447 64,182 66,248 5,241,032 (13,229) 342,218 – 5,241,032 Customer Risk Management Programs: Interest rate contracts Energy contracts Agriculture contracts Foreign exchange contracts CD options Total Customer Derivatives before cash collateral Less: cash collateral Total customer derivatives 64,182 5,493 362,946 (54,586) 308,360 – $ 308,360 Interest Rate Risk Management Programs Total Derivative Contracts – $ 8,248,943 ¹ Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception – $ 5,241,032 43,357 $ 5,165,152 43,357 $ 8,162,625 1,564 $ 343,782 1,564 $ 637,670 – $ 636,577 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): Year ended December 31, 2009 Brokerage and Trading Revenue Gain (Loss) on Derivatives, Net Customer Risk Management Programs: Interest rate contracts Energy contracts Agriculture contracts Foreign exchange contracts CD options Total Customer Derivatives $ Interest Rate Risk Management Programs Total Derivative Contracts $ 2,780 3,480 728 593 – 7,581 – 7,581 $ – – – – – – (11,235) $ (11,235) For the years ended December 31, 2009 and 2008, net interest revenue decreased $13.1 million and $7.0 million, respectively, from the settlements of amounts receivable or payable on interest rate swaps. For the year ended December 31, 2007, net interest revenue was increased by $6.8 million from the settlement of amounts receivable or payable on interest rate swaps. The notional amount and the fair value of derivative contracts 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 as of and for the year ended December 31, 2009 were (in thousands): Mortgage loan commitments Forward sales contracts Mortgage Loans Held for Sale Notional Fair Value Mortgage Banking Revenue $ 117,716 333,218 $ 496 3,626 $ 4,122 $ (1,673) 5,786 $ 4,113 None of these derivative contracts have been designated as hedging instruments. 87 (4) Loans Significant components of the loan portfolio are as follows (in thousands): 2009 2008 December 31, Fixed Rate Variable Rate Non- accrual Total Fixed Rate Variable Rate Non- accrual Total Commercial Commercial real estate Residential mortgage Consumer Total Loans past due (90 days) Foregone interest on nonaccrual loans $ 2,917,814 $3,188,642 $ 101,384 204,924 29,989 3,058 $ 6,207,840 2,491,434 1,793,622 786,802 $ 5,021,282 $5,919,061 $ 339,355 $ 11,279,698 1,513,269 993,972 223,178 773,241 769,661 560,566 $3,012,649 $4,264,108 $ 134,846 $7,411,603 137,279 2,701,248 27,387 1,752,574 561 1,010,581 $5,437,835 $7,138,098 $ 300,073 $12,876,006 1,716,153 952,953 204,884 847,816 772,234 805,136 $ $ 10,308 17,015 $ 19,123 $ 8,391 At December 31, 2009, approximately $5.1 billion or 46% of the total loan portfolio is to businesses and individuals in Oklahoma and $3.2 billion or 29% of our total loan portfolio is to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. Approximately $2.6 billion or 43% of the commercial portfolio are to business in Oklahoma and $2.0 billion or 32% of our commercial loan portfolio are to business in Texas. At December 31, 2009, loans to energy-related businesses within the commercial loan classification, totaled $1.9 billion or 17% of total loans and loans to service-related businesses totaled $1.8 billion or 16% of total loans. Approximately $1.0 billion of loans in the services category consists of loans with individual balances of less than $10 million. Other notable segments include wholesale/retail, $922 million; healthcare, $793 million; and manufacturing, $404 million. Approximately 33% of commercial real estate loans are secured by properties located in Oklahoma, primarily in the Tulsa and Oklahoma City metropolitan areas. An additional 30% of commercial real estate loans are secured by property located in Texas, primarily in the Dallas and Houston areas. The major components of these properties are construction and land development, $645 million; office buildings, $463 million; retail facilities, $423 million; and multifamily residences, $360 million. At December 31, 2009 and 2008, residential mortgage loans included $15.8 million and $12.8 million, respectively, and consumer loans included $94 thousand and $254 thousand, respectively, of loans with repayment terms that have been modified from the original contracts. Credit Commitments Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At December 31, 2009, outstanding commitments totaled $5.0 billion. Because some commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. BOK Financial uses the same credit policies in making commitments as it does loans. The amount of collateral obtained, if deemed necessary, is based upon management’s credit evaluation of the borrower. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Because the credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan commitments, BOK Financial uses the same credit policies in evaluating the creditworthiness of the customer. Additionally, BOK Financial uses the same evaluation process in obtaining collateral on standby letters of credit as it does for loan commitments. The term of these standby letters of credit is defined in each commitment and typically corresponds with the underlying loan commitment. At December 31, 2009, outstanding standby letters of credit totaled $588 million. Commercial letters of credit are used to facilitate customer trade transactions with the drafts being drawn when the underlying transaction is consummated. At December 31, 2009, outstanding commercial letters of credit totaled $13 million. The Company also has off-balance sheet credit risk for residential loans sold with full or partial recourse. These loans consist of first lien, fixed rate residential mortgage loans originated under various community development programs and sold to U.S. government agencies. These loans were underwritten to standards approved by the agencies, including full documentation. However, these loans have a higher risk of delinquency and losses given default than traditional residential mortgage loans. A separate recourse reserve is maintained for this off-balance sheet credit risk. At December 31, 2009, the principal balance of loans sold subject to recourse obligations totaled $331 million and the reserve for credit risk from these 88 loans totaled $14 million. Provision for loan losses incurred during 2009 and 2008 totaled $12.2 million and $8.6 million, respectively. Reserve for Credit Losses The activity in the reserve for loan losses is summarized as follows (in thousands): 2009 2008 2007 Beginning balance Provision for loan losses Loans charged off Recoveries Addition due to acquisitions Ending balance $ 233,236 196,678 (148,499) 10,680 – $ 292,095 $ 126,677 208,280 (122,211) 20,490 – $ 233,236 $ 109,497 34,758 (31,617) 10,511 3,528 $ 126,677 The activity in the reserve for off-balance sheet credit losses is summarized as follows (in thousands): Beginning balance Provision for off-balance sheet credit losses 2009 2008 2007 $ 15,166 $ 20,853 $ 20,890 (778) (5,687) (37) Ending balance $ 14,388 $ 15,166 $ 20,853 Provision for credit losses $ 195,900 $202,593 $ 34,721 Reserve for Recourse Loan Losses The activity in the reserve for losses on loans sold with recourse is summarized as follows (in thousands): 2009 2008 2007 Beginning balance Provision for recourse losses Loans charged off, net Ending balance $ 8,767 12,210 (7,196) $ 13,781 $ $ 3,560 8,577 (3,370) 8,767 $ $ 2,473 1,092 (5) 3,560 Impaired Loans Investments in loans considered to be impaired under FAS 114 were as follows (in thousands): Investment in loans impaired under FAS 114 (all of which were on a nonaccrual basis) Loans with specific reserves for loss Specific reserve balance No specific related reserve for loss Average recorded investment in impaired loans December 31, 2008 2007 2009 $ 316,666 $269,908 $ 74,085 204,076 36,168 194,292 28,532 22,749 4,425 112,590 75,616 51,336 327,935 179,808 44,535 Approximately $85 million of losses on impaired loans with no related specific reserves at December 31, 2009 were charged off against the allowance for loan losses during 2009. Interest income recognized on impaired loans during 2009, 2008 and 2007 was not significant. 89 (5) Premises and Equipment Premises and equipment at December 31 are summarized as follows (in thousands): Land Buildings and improvements Software Furniture and equipment Subtotal Less accumulated depreciation Total December 31, 2009 2008 $ 76,900 226,724 61,347 122,842 487,813 207,553 $ 280,260 $ 71,306 221,035 55,488 136,785 484,614 207,156 $ 277,458 Depreciation expense of premises and equipment was $32.5 million, $28.4 million and $25.6 million for the years ended December 31, 2009, 2008 and 2007, respectively. (6) Intangible Assets The following table presents the original cost and accumulated amortization of intangible assets (in thousands): Core deposit premiums Less accumulated amortization Net core deposit premiums December 31, 2009 2008 $ 109,417 100,664 8,753 $ 109,417 95,059 14,358 Other identifiable intangible assets Less accumulated amortization Net other identifiable intangible assets 16,791 6,906 9,885 16,791 5,769 11,022 Goodwill Less accumulated amortization Net goodwill Total intangible assets, net 388,736 53,135 335,601 $ 354,239 388,964 53,135 335,829 $ 361,209 Expected amortization expense for intangible assets that will continue to be amortized (in thousands): Core Deposit Premiums Other Identifiable Intangible Assets 2010 2011 2012 2013 2014 Thereafter 4,131 2,227 815 485 433 662 $ 8,753 1,163 1,190 1,218 936 334 5,044 $ 9,885 Total 5,294 3,417 2,033 1,421 767 5,706 $ 18,638 90 The net amortized cost of identifiable intangible assets at December 31, 2009 is assigned to the Company’s geographic markets as follows (in thousands): Core deposit premiums: Texas Colorado Arizona Other identifiable intangible assets: Oklahoma Colorado Kansas / Missouri Goodwill: Oklahoma Texas New Mexico Colorado Arizona $ 5,735 2,609 409 8,753 $ $ $ 5,923 3,172 790 9,885 $ 8,173 240,122 15,273 55,611 16,422 $ 335,601 Changes in the carrying value goodwill by operating segment are as follows (in thousands): Commercial Consumer Wealth Management Total Balance January 1, 2009 $ 266,728 $ 39,251 $ 29,850 $ 335,829 Impairment - (228) - (228) Balance December 31, 2009 $ 266,728 $ 39,023 $ 29,850 $ 335,601 As a result of the annual goodwill evaluation, the Company recorded an impairment charge of $228 thousand related to the consumer banking operating segment in the Arizona market. The annual goodwill evaluation did not indicate impairment for any reporting unit in 2008 or 2007. Economic conditions did not indicate that impairment existed for any identifiable intangible assets and therefore no impairment evaluation was performed. 91 (7) Mortgage Banking Activities BOK Financial engages in mortgage banking activities through the BOk Mortgage Division of BOk. Residential mortgage loans held for sale totaled $218 million and $129 million, and outstanding mortgage loan commitments totaled $145 million and $241 million at December 31, 2009 and 2008, respectively. Mortgage loan commitments are generally outstanding for 60 to 90 days and are subject to both credit and interest rate risk. Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Exposure to interest rate fluctuations is partially managed through forward sales of mortgage-backed securities and forward sales contracts. These latter contracts set the price for loans that will be delivered in the next 60 to 90 days. As of December 31, 2009, the unrealized gain on forward sales contracts used to manage the mortgage pipeline interest rate risk was approximately $3.6 million. Gains on mortgage loans sold, including capitalized mortgage servicing rights, totaled $31.1 million in 2009, $9.5 million in 2008 and $5.2 million in 2007. At December 31, 2009, BOK Financial owned the rights to service 64,104 mortgage loans with outstanding principal balances of $7.4 billion, including $828 million serviced for affiliates, and held related funds of $86 million for investors and borrowers. The weighted average interest rate and remaining term was 5.66% and 292 months, respectively. Mortgage loans sold with recourse totaled $331 million at December 31, 2009, and $17 million of loans sold with recourse were either 90 days or more delinquent or were in bankruptcy or foreclosure. At December 31, 2008, BOK Financial owned the rights to service 58,023 mortgage loans with outstanding principal balances of $6.0 billion, including $793 million serviced for affiliates, and held related funds of $65 million for investors and borrowers. The weighted average interest rate and remaining term was 6.15% and 284 months, respectively. Mortgage loans sold with recourse totaled $391 million at December 31, 2008, and $13.2 million of loans sold with recourse were 90 days or more delinquent. Servicing revenue and late charges on loans serviced for others, which are included in mortgage banking revenue in the Consolidated Statements of Earnings totaled $20.0 million for 2009, $17.6 million for 2008 and $17.1 million for 2007. The portfolio of mortgage servicing rights exposes BOK Financial to interest rate risk. During periods of falling interest rates, mortgage loan prepayments increase, reducing the value of the mortgage servicing rights. See Note 1 for specific accounting policies for mortgage servicing rights. Activity in capitalized mortgage servicing rights and related valuation allowance during 2007, 2008 and 2009 are as follows (in thousands): Balance at December 31, 2006 Additions, net Change in fair value due to loan runoff Change in fair value due to market changes Balance at December 31, 2007 Additions, net Change in fair value due to loan runoff Change in fair value due to market changes Balance at December 31, 2008 Additions, net Change in fair value due to loan runoff Change in fair value due to market changes Balance at December 31, 2009 Capitalized Mortgage Servicing Rights Purchased Originated Total $ 12,813 $ 53,133 $ 65,946 3,628 14,080 (2,478) (57) (8,274) (2,836) 17,708 (10,752) (2,893) $ 13,906 $ 56,103 $ 70,009 – 19,220 (2,286) (9,676) (5,267) (29,248) 19,220 (11,962) (34,515) $ 6,353 $ 36,399 $ 42,752 – 39,869 39,869 (2,526) (18,395) (20,921) 4,001 8,123 12,124 $ 7,828 $ 65,996 $ 73,824 Fair value is determined by discounting the projected net cash flows. Significant assumptions are: Discount rate – Indexed to a risk-free rate commensurate with the average life of the servicing portfolio plus a market premium. The discount rate at December 31, 2009 was 11.2%. Prepayment rate – Annual prepayment estimates ranging from 8.1% to 26.9% based upon loan interest rate, original term and loan type. Loan servicing costs – $43 to $66 annually per loan based upon loan type. Escrow earnings rate – Indexed to rates paid on deposit accounts with a comparable average life. The escrow earnings rate at December 31, 2009 was 2.98%. 92 The effect of a 50 basis point decrease in mortgage interest rates on all significant assumptions is expected to decrease the fair value of mortgage servicing rights by $9.7 million. Stratification of the mortgage loan-servicing portfolio, outstanding principal of loans serviced, and related hedging information by interest rate at December 31, 2009 follows (in thousands): < 5.51% 5.51% - 6.50% 6.51% - 7.50% => 7.51% Total Fair value $ 42,150 $ 23,480 Outstanding principal of loans serviced1 $ 3,433,000 $ 2,216,000 $ $ 6,630 $ 1,564 $ 73,824 721,994 $ 141,006 $ 6,512,000 1 Excludes outstanding principal of $828 million for loans serviced for affiliates and $27 million of mortgage loans for which there are no capitalized mortgage servicing rights. On February 9, 2010, the Company finalized an agreement to purchase the rights to service approximately $4.1 billion of residential mortgage loans largely concentrated in New Mexico from Charter Bank of Albuquerque, New Mexico, for $34 million in cash. The loans to be serviced are predominantly held by Fannie Mae, Freddie Mac and Ginnie Mae. (8) Deposits Interest expense on deposits is summarized as follows (in thousands): 2009 2008 2007 Transaction deposits Savings Time: Certificates of deposits under $100,000 Certificates of deposits $100,000 and over Other time deposits Total time Total $ 51,607 614 $ 121,403 676 $ 194,617 1,499 57,486 70,806 88,465 37,193 17,462 112,141 $ 164,362 78,965 17,074 166,845 $ 288,924 110,791 17,374 216,630 $ 412,746 The aggregate amounts of time deposits in denominations of $100,000 or more at December 31, 2009 and 2008 were $2.1 billion and $3.1 billion, respectively. Time deposit maturities are as follows: 2010 – $2.9 billion, 2011 – $187 million, 2012 – $120 million, 2013 – $131 million, 2014 – $60 million and $350 million thereafter. At December 31, 2009, the Company had $36 million in fixed rate, brokered certificates of deposits. The weighted-average interest rate paid on these certificates is 3.88%. Interest expense on time deposits was reduced by $11.5 million and $6.9 million in 2009 and 2008, respectively, from the net accrued settlement of interest rate swaps. Interest expense on time deposits was increased by $2.6 million in 2007 from the net accrued settlement of interest rate swaps. The aggregate amount of overdrawn transaction deposits that have been reclassified as loan balances was $13 million at December 31, 2009 and $35 million at December 31, 2008. 93 (9) Other Borrowings Information relating to other borrowings is summarized as follows (dollars in thousands): 2009 Maximum Outstanding At Any Balance Rate Month End December 31 2008 Maximum Outstanding At Any 2007 Maximum Outstanding At Any Balance Rate Month End Balance Rate Month End Parent Company: Revolving, unsecured line $ Subsidiary Banks: – –% $ 50,000 $ 50,000 3.78% $ 50,000 $ 50,000 5.42% $ 50,000 Funds purchased and repurchase agreements Federal Home Loan Bank advances Federal Reserve advances Subordinated debentures Other Total subsidiary banks Total other borrowings 2,471,743 0.29 2,798,274 3,025,399 0.72 3,686,019 3,225,131 4.30 3,225,131 1,253,051 0.23 850,000 0.25 398,539 5.53 30,306 1.69 5,003,639 0.71 $ 5,003,639 0.72 2,053,130 1,100,000 398,539 43,949 991,401 1.76 450,000 0.24 398,407 5.51 30,653 2.62 4,895,860 1.30 $ 4,945,860 1.32 2,391,618 450,000 398,407 44,227 938,168 4.65 – – 398,273 5.91 39,396 4.10 4,600,968 4.52 $ 4,650,968 4.53 938,168 – 548,187 43,985 Aggregate annual principal repayments of long-term debt at December 31, 2009 are as follows (in thousands): 2010 2011 2012 2013 2014 Thereafter Total Parent Company Subsidiary Banks $ $ – – – – – – – $ 4,589,362 2,055 1,399 525 525 409,773 $ 5,003,639 Funds purchased generally mature within one to ninety days from the transaction date. At December 31, 2009, securities sold under agreements to repurchase totaled $1.3 billion with related accrued interest payable of $194 thousand. Additional information relating to repurchase agreements at December 31, 2009 is as follows (dollars in thousands): Security Sold/Maturity Amortized Cost Market Value Repurchase Liability1 Average Rate U.S. Agency Securities: Overnight1 Long-term $ 1,188,400 139,674 $ 1,328,074 1 BOK Financial maintains control over the securities underlying overnight repurchase agreements and generally transfers control over securities underlying longer-term dealer repurchase agreements to the respective counterparty. $ 1,170,682 145,888 $ 1,316,570 $ 1,006,619 163,088 $ 1,169,707 Total Agency Securities 0.31% 4.71 0.93% Borrowings from the Federal Home Loan Banks are used for funding purposes. In accordance with policies of the Federal Home Loan Banks, BOK Financial has granted a blanket pledge of eligible assets (generally unencumbered U.S. Treasury and mortgage-backed securities, 1-4 family loans and multifamily loans) as collateral for these advances. The Federal Home Loan Banks have issued letters of credit totaling $468 million to secure BOK Financial’s obligations to depositors of public funds. The unused credit available to BOK Financial at December 31, 2009 pursuant to the Federal Home Loan Bank’s collateral policies is $2.3 billion. 94 In 2008, the subsidiary banks began borrowing funds under the Federal Reserve Bank Term Auction Facility program. This is a temporary program which allows banks that are in generally sound financial condition to bid for funds. Funds are borrowed for either 28 or 84 days and are secured by a pledge of eligible collateral. Funds borrowed under this program totaled $850 million at December 31, 2009. Effective December 2, 2009, the Company amended the $188 million unsecured revolving credit agreement with George B. Kaiser, its Chairman and principal shareholder. The amended terms of the credit agreement reduce the size of the credit agreement from $188 million to $100 million. Interest on the outstanding balance due to Mr. Kaiser is based on one-month LIBOR plus 250 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 50 basis points. Previously, interest was due quarterly based on one-month LIBOR plus 125 basis points and the facility fee was paid quarterly on the unused portion of the commitment at 25 basis points. The maturity date was extended to December 2, 2012 from December 2, 2010 and as with the original agreement, it has no restrictive covenants. This credit agreement matures in December, 2010. At December 31, 2008, the outstanding balance under this credit agreement was $50 million. No amounts were outstanding under this credit agreement as of December 31, 2009 In 2007, Bank of Oklahoma issued $250 million of subordinated debt due May 15, 2017. Interest on this debt is based upon a fixed rate of 5.75% through May 14, 2012 and on a floating rate of three-month LIBOR plus 0.69% thereafter. The proceeds of this debt were used to fund the Worth National Bank and First United Bank acquisitions and to fund continued asset growth. In 2005, Bank of Oklahoma issued $150 million of 10-year, fixed rate subordinated debt. The cost of this subordinated debt, including issuance discounts and hedge loss is 5.56%. The proceeds of this debt were used to repay $95 million of BOK Financial’s unsecured revolving line of credit and to provide additional capital to support asset growth. During 2006, a $150 million notional amount interest rate swap was designated as a hedge of changes in fair value of the subordinated debt due to changes in interest rates. The Company received a fixed rate of 5.257% and paid a variable rate based on 1- month LIBOR. This fair value hedging relationship was discontinued and the interest rate swap was terminated in April 2007. 95 (10) Federal and State Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities are as follows (in thousands): Deferred tax liabilities: Available for sale securities mark-to-market Valuation adjustments Mortgage servicing rights Lease financing Other Total deferred tax liabilities Deferred tax assets: Available for sale securities mark-to-market Stock-based compensation Credit loss reserves Valuation adjustments Deferred book income Deferred compensation Book expense in excess of pension contribution Other Total deferred tax assets Deferred tax assets in excess of deferred tax liabilities December 31, 2009 2008 $ 6,500 30,000 37,900 18,200 5,200 97,800 $ – 33,800 29,500 19,800 2,300 85,400 – 7,100 115,900 26,000 17,800 17,000 2,300 18,500 204,600 126,300 6,500 94,200 23,900 22,300 11,300 1,200 18,800 304,500 $106,800 $219,100 The significant components of the provision for income taxes attributable to continuing operations for BOK Financial are shown below (in thousands): Years ended December 31, 2008 2009 2007 Current: Federal State Total current Deferred: Federal State Total deferred Total income tax $ 112,163 16,759 128,922 $ 108,879 7,377 116,256 $ 119,025 10,179 129,204 (19,835) (2,382) (22,217) $ 106,705 (47,685) (3,662) (51,347) $ 64,909 (12,935) (508) (13,443) $ 115,761 The reconciliations of income attributable to continuing operations computed at the U.S. federal statutory tax rates to income tax expense are as follows (in thousands): Amount: Federal statutory tax Tax exempt revenue Effect of state income taxes, net of federal benefit Non-controlling interest Utilization of tax credits Bank-owned life insurance Charitable contribution Reduction of tax accrual Other, net Total Years ended December 31, 2007 2008 2009 $108,752 (4,616) $73,710 $117,865 (4,204) (4,173) 9,165 (1,204) (1,327) (3,424) – – (641) 5,783 (1,167) (1,218) (3,411) – – 2,113 $106,705 $ 64,909 $115,761 1,278 2,643 (1,234) (3,555) (2,852) (2,437) 1,529 96 Due to the favorable resolution of certain tax issues for the tax periods ended December 31, 2004, BOK Financial reduced its tax accrual by $2.4 million in 2008, which was credited against current income tax expense. Percent of pretax income: Federal statutory rate Tax-exempt revenue Effect of state income taxes, net of federal benefit Non-controlling interest Bank-owned life insurance Charitable contribution Reduction of tax accrual Other, net Total Years ended December 31, 2007 2008 2009 35% (2) 3 (1) (1) – – – 34% 35% (2) 1 1 (2) (1) (1) – 31% 35% (1) 1 (1) (1) – – 1 34% A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Balance as of January 1 Additions for tax for current year positions Settlements during the period Decreases in tax for prior year positions Lapses of applicable statute of limitations Balance as of December 31 2009 $ 13,200 4,050 – (700) (4,250) $ 12,300 2008 $ 13,200 3,800 (100) – (3,700) $ 13,200 Any of the above unrecognized tax benefits, if recognized, would affect the effective tax rate. BOK Financial recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2009 and 2008, the Company recognized $1.4 million and $1.5 million, respectively, in interest and penalties. The Company had approximately $2.7 million and $3.0 million for the payment of interest and penalties accrued as of December 31, 2009 and 2008, respectively. Federal statutes remain open for federal tax returns filed in the previous three reporting periods. Various state income tax statutes remain open for the previous three to six reporting periods. One of our acquired entities is currently under examination by the Internal Revenue Service (“IRS”) for the year ending May 31, 2007 and the related carry-back period. Refunds claimed in the carry-back period total $3.5 million. The ultimate resolution is unlikely to have a material impact on the financial statements. Also during 2008, the IRS exam for the year ended December 31, 2005 for the same acquired entity was closed with no adjustments. 97 (11) Employee Benefits BOK Financial sponsors a defined benefit cash balance Pension Plan for all employees who satisfy certain age and service requirements. Pension Plan benefits were curtailed as of April 1, 2006. No participants may be added to the plan and no additional service benefits will be accrued. Interest will continue to accrue on employees’ account balances at 5.25%. The following table presents information regarding this plan (dollars in thousands): Change in projected benefit obligation: Projected benefit obligation at beginning of year Service cost Interest cost Actuarial (gain) loss Benefits paid Projected benefit obligation at end of year1,2 Change in plan assets: Plan assets at fair value at beginning of year Actual return on plan assets Company contributions Benefits paid Plan assets at fair value at end of year Funded status of the plan Components of net periodic benefit costs: Service cost Interest cost Expected return on plan assets Amortization of unrecognized net loss Net periodic pension cost (benefit) December 31, 2009 2008 $ 39,099 – 2,403 7,517 (2,438) $ 46,581 $ 46,183 – 2,685 (1,205) (8,564) $ 39,099 $ 35,301 8,826 – (2,438) $ 41,689 $ 58,089 (14,224) – (8,564) $ 35,301 $(4,892) $ (3,798) $ – 2,403 (2,190) 2,180 $ 2,393 $ $ – 2,685 (3,910) 496 (729) 1 Projected benefit obligation equals accumulated benefit obligation. 2 Projected benefit obligation is based on a January 1 measurement date. Weighted-average assumptions as of December 31: Discount rate Expected return on plan assets Rate of compensation increase 5.15% 5.25% N/A 6.50% 7.00% N/A As of December 31, 2009, expected future benefit payments related to the Pension Plan were as follows (in thousands): 2010 2011 2012 2013 2014 2015 through 2019 $ 3,128 3,251 3,584 3,491 3,704 16,889 $34,047 Assets of the Pension Plan consist primarily of shares in the Cavanal Hill Balanced Fund. The stated objective of this fund is to provide an attractive total return through a broadly diversified mix of equities and bonds. The typical portfolio mix is approximately 60% equities and 40% bonds. The net asset value of shares in the Cavanal Hill Funds is reported daily based on market quotations for the Fund’s securities. If market quotations are not readily available, the securities’ fair values are determined by the Fund’s pricing committee. The inception-to-date return on the fund, which is used as an indicator when setting the expected return on plan assets, was 6.58%. As of December 31, 2009, the expected return on plan assets for 2010 is 5.25%. The maximum allowed and minimum required Pension Plan contributions for 2009 were $22.6 million and $364 thousand, respectively. The minimum contribution will be made for 2009. No contribution was made for 2008. We expect approximately $2.5 million of net pension costs currently in accumulated other comprehensive income to be recognized as net periodic pension cost in 2010. Employee contributions to the Thrift Plan are eligible for Company matching equal 6% of base compensation, as defined in the plan. The Company-provided matching contribution rates range from 50% for employees with less than four years of service to 200% for employees with 15 or more years of service. Additionally, a maximum Company-provided, non- elective annual contribution of up to $750 is made for employees whose annual base compensation is less than $40,000. Total non-elective contributions were $998 thousand in 2009, $955 thousand in 2008 and $999 thousand in 2007. 98 Participants may direct investments in their accounts to a variety of options, including a BOK Financial common stock fund. Employer contributions, which are invested in accordance with the participant’s investment options, vest over five years. Thrift Plan expenses were $13.0 million, $12.1 million and $11.6 million for 2009, 2008 and 2007, respectively. BOK Financial also sponsors a defined benefit post-retirement employee medical plan, which pays 50 percent of annual medical insurance premiums for retirees who meet certain age and service requirements. Assets of the retiree medical plan consist primarily of shares in a cash management fund. The post-retirement medical plan is limited to current retirees and certain employees who were age 60 or older at the time the plan was frozen in 1993. The net obligation recognized under the plan was $2.2 million at December 31, 2009. A 1% change in medical expense trends would not significantly affect the net obligation or cost of this plan. BOK Financial offers numerous incentive compensation plans that are aligned with the Company’s growth strategy. Compensation awarded under these plans may be based on defined formulas, other performance criteria or discretionary. Incentive compensation is designed to motivate and reinforce sales and customer service behavior in all markets. Earnings were charged $91.2 million in 2009, $83.2 million in 2008 and $71.4 million in 2007 for incentive compensation plans. (12) Stock Compensation Plans The shareholders and Board of Directors of BOK Financial have approved various stock-based compensation plans. An independent compensation committee of the Board of Directors determines the number of awards granted to the Chief Executive Officer and other senior executives. Stock-based compensation is granted to other officers and employees and is approved by the independent compensation committee upon recommendation of the Chairman of the Board and the Chief Executive Officer. These awards consist primarily of stock options that are subject to vesting requirements. Generally, one-seventh of the options awarded vest annually and expire three years after vesting. Additionally, stock options that vest in two years and expire 45 days after vesting have been awarded. Non-vested shares may be granted to the Chief Executive Officer and other senior executives of the Company. These shares vest five years after the grant date. The holders of these shares may be required to retain the shares for a three-year period after vesting. The Chief Executive Officer and other senior executives participate in an Executive Incentive Plan. The number of options and non-vested shares may increase or decrease based upon the Company’s growth in earnings per share over a three-year period compared to the median growth in earnings per share for a designated peer group of financial institutions and other individual performance factors. 99 The following table presents options outstanding during 2007, 2008 and 2009 under these plans: Options outstanding at December 31, 2006 Options awarded Options exercised Options forfeited Options expired Options outstanding at December 31, 2007 Options awarded Options exercised Options forfeited Options expired Options outstanding at December 31, 2008 Options awarded Options exercised Options forfeited Options expired Options outstanding at December 31, 2009 Options vested at December 31, 2009 Weighted- Average Exercise Price $38.63 54.18 32.41 43.74 45.80 $43.50 47.71 33.05 47.96 49.91 $45.77 37.24 33.49 44.83 51.76 Number 3,496,625 956,475 (703,833) (429,848) (1,249) 3,318,170 1,098,172 (498,700) (271,250) (70,924) 3,575,468 913,880 (280,572) (487,793) (199,220) 3,521,763 $44.58 903,380 $43.37 The following table summarizes information concerning currently outstanding and vested stock options: Options Outstanding Options Vested Range of Exercise Prices $17.37 28.27 – 30.87 36.65 37.74 38.91 – 44.30 45.15 – 47.34 47.05 – 48.53 47.67 48.46 53.88 – 54.28 54.33 Weighted Weighted Average Weighted Remaining Average Average Contractual Exercise Number Exercise Price Vested Price Number Outstanding Life (years) 33,482 214,242 676,219 216,517 93,533 437,242 509,079 44,319 694,057 93,724 509,349 1.00 1.80 6.00 2.50 1.00 3.00 3.50 2.00 5.00 0.12 4.00 $17.37 29.96 36.65 37.74 41.75 47.31 47.06 47.67 48.46 54.09 54.33 $17.37 33,482 29.67 161,268 – – 37.74 100,306 – – 191,724 47.31 184,034 47.07 – – 53,566 48.46 93,724 54.09 85,276 54.33 Compensation expense for stock options is generally recognized based on the fair value of options granted over the options’ vesting period. The fair value of options was determined as of the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: 2009 2008 2007 Average risk-free interest rate Dividend yield Volatility factors Weighted average expected life Weighted average fair value 1.32% 2.50% .218 4.9 years $5.36 3.50% 1.70% .147 4.9 years $7.09 4.68% 1.10% .143 4.9 years $9.91 Compensation cost of stock options granted that may be recognized as compensation expense in future years totaled $8.5 million at December 31, 2009. Subject to adjustments for forfeitures, we expect to recognize compensation expense for current outstanding options of $3.7 million in 2010, $2.4 million in 2011, $1.3 million in 2012, $720 thousand in 2013, $330 thousand in 2014 and $100 thousand thereafter. Stock option expense for the years ended December 31, 2009, 2008 100 and 2007 was $5.9 million, $7.8 million and $6.3 million, respectively. The intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 was $3.8 million, $11.8 million and $14.9 million, respectively. The aggregate intrinsic value of options outstanding as of December 31, 2009 and 2008 was $10.4 million and $19.2 million, respectively. The aggregate intrinsic value of options exercisable as of December 31, 2009 and 2008 was $3.7 million and $656 thousand, respectively. BOK Financial also issues non-vested common shares under the various stock-based compensation plans. At December 31, 2009, a total of 282,772 non-vested common shares have been awarded, including 156,339 awarded in 2009. The weighted average grant date fair value of non-vested shares awarded in 2009 was $35.31 per share. During 2009, 13,625 shares which had an average grant date fair value of $47.34 per share vested and 12,481 shares which had an average grant date fair value of $46.61 per share were forfeited. Unrecognized compensation cost of non-vested shares totaled $6.6 million at December 31, 2009. Subject to adjustment for forfeitures, we expect to recognize compensation expense of $2.0 million in 2010, $1.8 million in 2011, $1.6 million in 2012, $1.1 million in 2013 and $40 thousand in 2014. BOK Financial permits certain executive officers to defer recognition of taxable income from their stock-based compensation. Deferred compensation may also be diversified into investments other than BOK Financial common stock. Stock-based compensation subject to these deferral plans is recognized as a liability award rather than as an equity award. Compensation expense is based on the fair value of the award recognized over the vesting period. At December 31, 2009, the recorded obligation for liability awards was $2.4 million. Compensation cost of liability awards was an expense of $1.3 million in 2009, a benefit of $471 thousand in 2008 and an expense of $506 thousand in 2007. During January 2010, BOK Financial awarded the following stock-based compensation: Number Exercise Price Fair Value / Award Equity awards: Stock options Non-vested stock Total equity awards Total stock-based awards 241,720 173,857 415,577 415,577 $48.30 – $10.17 48.30 The aggregate compensation cost of these awards totaled approximately $10.9 million. This cost will be recognized over the vesting periods, subject to adjustments for forfeitures. None of the stock-based compensation awards in January 2010 are subject to deferred compensation plans. (13) Related Parties In compliance with applicable regulations, the Company may extend credit to certain executive officers, directors, principal shareholders and their affiliates (collectively referred to as “related parties”) in the ordinary course of business under substantially the same terms as comparable third-party lending arrangements. The Company’s loans to related parties do not involve more than the normal credit risk and there are no nonaccrual or impaired related party loans outstanding at December 31, 2009 or 2008. Activity in loans to related parties is summarized as follows (in thousands): Beginning balance Advances Payments Charge-offs2 Adjustments1 Ending balance 2009 2008 $ 207,140 676,743 (666,159) – (26) $ 217,698 $ 252,051 734,553 (704,433) (26,000) (49,031) $ 207,140 1 Adjustments generally consist of changes in status as a related party. In 2008, adjustments include $48 million of loans to SemGroup, L.P., which ceased to be a related party upon resignation of Thomas L. Kivisto, its principal owner, from the Company’s Board of Directors. Approximately $12 million of these loans remain outstanding at December 31, 2009 and are nonperforming. 2 In 2008, the Company charged off $26 million of the balance due from SemGroup, L.P. Certain related parties are customers of the Company for services other than loans, including consumer banking, corporate banking, risk management, wealth management, brokerage and trading, or fiduciary/trust services. The Company engages in transactions with related parties in the ordinary course of business in compliance with applicable regulations. 101 The Company has an unsecured revolving credit agreement with George B. Kaiser, its Chairman and principal shareholder as more fully described in Note 9. The Company also rents office space in facilities owned by affiliates of Mr. Kaiser. Lease payments for 2009 totaled $1.0 million. In 2008, the Company entered into a $25 million loan commitment with the Tulsa Community Foundation (“TCF”) to be secured by tax-exempt bonds purchased from the Tulsa Stadium Trust (the “Stadium Trust”) by TCF. The Stadium Trust is an Oklahoma public trust, of which the City of Tulsa is the sole beneficiary. Stanley A. Lybarger, President and CEO of the Company, is Chairman of the Stadium Trust. Cavanal Hill Investment Management, Inc., a wholly-owned subsidiary of BOk, is the administrator to and investment advisor for the Cavanal Hill Funds (the "Funds"), a diversified, open-ended investment company established as a business trust under the Investment Company Act of 1940 (the "1940 Act"). BOk is custodian and BOSC, Inc. is distributor for the Funds. The Funds’ products are offered to customers, employee benefit plans, trusts and the general public in the ordinary course of business. Approximately 99% of the Funds’ assets of $2.6 billion are held for the Company's clients. A Company executive officer serves on the Funds' board of trustees and BOk officers serve as president and secretary of the Funds. A majority of the members of the Funds’ board of trustees are, however, independent of the Company and the Funds are managed by its board of trustees. (14) Commitments and Contingent Liabilities On April 7, 2008, AXIA and its parent, BOK, received a Wells notice from the regional office of the SEC in Los Angeles indicating that the staff is considering recommending that the SEC bring a civil injunctive action against AXIA and BOK for violations of Section 17(a) of the Securities Act of 1955, Section 10(b) of the Securities Exchange Act of 1934, Sections 206(1) and (2) of the Investment Advisors Act of 1940, and Sections 12(b) and 34(b) of the Investment Company Act of 1940. During 2009, the staff of the SEC advised the Company that it does not intend to recommend the Commission take any action as originally contemplated by the Wells Notice received by the Company in connection with the Staff’s investigation of BISYS Fund Services Ohio, Inc. 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 $2.2 million at December 31, 2009. During 2008, Visa funded an escrow account to cover litigation claims, including covered litigation losses under the retrospective responsibility plan, with proceeds from its initial public offering and from available cash. BOK Financial recognized a $2.2 million receivable for its proportionate share of this escrow account. BOK Financial received 410,562 Visa Class B shares as part of Visa’s initial public offering in the first quarter of 2008. A partial redemption of Class B shares was completed and the Company received $6.8 million in cash in exchange for 158,725 Class B shares. The remaining 251,837 Class B shares are convertible into Visa Class A shares at the later of three years after the date of Visa’s initial public offering or the final settlement of all covered litigation. The current exchange rate is approximately 0.5824 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 December 31, 2009, Cavanal Hill Funds’ assets included $794 million of U.S. Treasury, $1.1 billion of cash management and $550 million of tax-free money market funds. Assets of these funds consist of highly-rated, short-term obligations of the U.S. Treasury, corporate issuers and U.S. states and municipalities. The net asset value of units in these funds was $1.00 at December 31, 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. No assets were purchased from the funds in 2009, 2008 or 2007. 102 BOk is obligated under a long-term lease for its bank premises owned by Williams Companies, Inc. and located in downtown Tulsa. The Chairman and CEO of the Williams Companies, Inc. is a director of BOK Financial Corporation. The lease term, which began November 1, 1976, is for fifty-seven years with options to terminate in 2014 and 2024. Annual base rent is $3.2 million. BOk subleases portions of its space for annual rents of $206 thousand in 2010. Net rent expense on this lease was $3.0 million in 2009, 2008 and 2007. Total rent expense for BOK Financial was $21.4 million in 2009, $20.3 million in 2008 and $18.8 million in 2007. At December 31, 2009, future minimum lease payments for equipment and premises under operating leases were as follows: $17.0 million in 2010, $15.5 million in 2011, $12.3 million in 2012, $10.1 million in 2013, $9.3 million in 2014 and a total of $89.4 million thereafter. Premises leases may include options to renew at then current market rates and may include escalation provisions based upon changes in the consumer price index or similar benchmarks. The Federal Reserve Bank requires member banks to maintain certain minimum average cash balances. These balances were approximately $723 million and $373 million at December 31, 2009 and 2008, respectively. BOSC, Inc., a wholly-owned subsidiary of BOK Financial, is an introducing broker to Pershing, LLC for retail equity investment transactions. As such, it has indemnified Pershing, LLC against losses due to a customer’s failure to settle a transaction or to repay a margin loan. All unsettled transactions and margin loans are secured as required by applicable regulation. The amount of customer balances subject to indemnification totaled $2.3 million at December 31, 2009. At December 31, 2009, the Company has funded $51.7 million and has commitments to fund an additional $9.9 million in various unrelated alternative investments. Alternative investments generally consist of limited partnership interests in or loans to entities that invest in distressed real estate loans and properties, energy development, venture capital and other activities. The Company is prohibited by banking regulations from controlling or actively managing the activities of these investments. BOKF Equity, LLC, indirectly a wholly-owned subsidiary of BOK Financial, is the general partner in two private equity funds (“the Funds”). The Funds provide alternative investment opportunities to certain customers, some of which are related parties, through limited partnerships. The Funds generally invest in distressed assets, asset buy-out or venture capital limited partnerships or limited liability companies. The Funds’ assets totaled $22.9 million and the limited partners’ ownership interests in the Funds totaled $19.4 million at December 31, 2009. The Funds have no debt. The general partner has contingent obligations through the Funds to make additional investments totaling $18.9 million as of December 31, 2009. Substantially all of those contingent obligations are offset by commitments of the limited partners. Bank of Oklahoma guarantees rents totaling $28.7 million through September, 2017 to the City of Tulsa (“City”) as owner of a building immediately adjacent to the Bank’s main office for space currently rented by third-party tenants in the building. All rent payments are current. Remaining guaranteed rents totaled $22.8 million at December 31, 2009. In return for this guarantee, Bank of Oklahoma will receive 80% of net cash flow as defined in an agreement with the City over the next 10 years from currently vacant space in the same building. None of this additional space has been rented to outside parties since the date of the agreement. The maximum amount that Bank of Oklahoma may receive under this agreement is $4.5 million. 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. (15) Shareholders’ Equity Preferred Stock One billion shares of preferred stock with a par value of $0.00005 per share are authorized. The Series A Preferred Stock has no voting rights except as otherwise provided by Oklahoma corporate law and may be converted into one share of Common Stock for each 36 shares of Series A Preferred Stock at the option of the holder. Dividends are cumulative at an annual rate of ten percent of the $0.06 per share liquidation preference value when declared and are payable in cash. Aggregate liquidation preference is $15 million. No Series A Preferred Stock was outstanding in 2009, 2008 or 2007. Common Stock Common stock consists of 2.5 billion authorized shares with a $0.00006 par value. Holders of common shares are entitled to one vote per share at the election of the Board of Directors and on any question arising at any shareholders’ meeting and to receive dividends when and as declared. Additionally, regulations restrict the ability of national banks and bank holding companies to pay dividends. Cash dividends paid on common stock totaled $64 million, $59 million and $50 million in 2009, 2008 and 2007, respectively. 103 Subsidiary Banks The amounts of dividends that BOK Financial’s subsidiary banks can declare and the amounts of loans the subsidiary banks can extend to affiliates are limited by various federal banking regulations and state corporate law. Generally, dividends declared during a calendar year are limited to net profits, as defined, for the year plus retained profits for the preceding two years. The amounts of dividends are further restricted by minimum capital requirements. Pursuant to the most restrictive of the regulations at December 31, 2009, BOK Financial’s subsidiary banks could declare dividends up to $225 million without prior regulatory approval. Management has developed and the Board of Directors has approved an internal capital policy that is more restrictive than the regulatory capital standards. As of December 31, 2009, the subsidiary banks could declare dividends of up to $190 million under this policy. The subsidiary banks declared and paid dividends of $172 million, $76 million and $254 million in 2009, 2008 and 2007, respectively. As defined by banking regulations, loan commitments and equity investments to a single affiliate may not exceed 10% of unimpaired capital and surplus and loan commitments and equity investments to all affiliates may not exceed 20% of unimpaired capital and surplus. All loans to affiliates must be fully secured by eligible collateral. At December 31, 2009, loan commitments and equity investments were limited to $246 million to a single affiliate and $492 million to all affiliates. The largest loan commitment and equity investment to a single affiliate was $200 million and the aggregate loan commitments and equity investments to all affiliates were $323 million. The largest outstanding amount to a single affiliate was $44 million and the total outstanding amounts to all affiliates were $83 million. At December 31, 2008, total loan commitments and equity investments to all affiliates were $203 million. Total outstanding amounts to all affiliates were $64 million. Regulatory Capital BOK Financial and its banking subsidiaries are subject to various capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and additional discretionary actions by regulators that could have a material effect on BOK Financial’s operations. These capital requirements include quantitative measures of assets, liabilities and certain off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. For a banking institution to qualify as well capitalized, Tier I, Total and Leverage capital ratios must be at least 6%, 10% and 5%, respectively. Tier I capital consists primarily of common stockholders’ equity, excluding unrealized gains or losses on available for sale securities, less goodwill, core deposit premiums and certain other intangible assets. Total capital consists primarily of Tier I capital plus preferred stock, subordinated debt and reserves for credit losses, subject to certain limitations. All of BOK Financial’s banking subsidiaries exceeded the regulatory definition of well capitalized. 104 (Dollars in thousands) Total Capital (to Risk Weighted Assets): Consolidated BOk Bank of Texas Bank of Albuquerque Bank of Arkansas Colorado State Bank and Trust Bank of Arizona Bank of Kansas City Tier I Capital (to Risk Weighted Assets): Consolidated BOk Bank of Texas Bank of Albuquerque Bank of Arkansas Colorado State Bank and Trust Bank of Arizona Bank of Kansas City Tier I Capital (to Average Assets): Consolidated BOk Bank of Texas Bank of Albuquerque Bank of Arkansas Colorado State Bank and Trust Bank of Arizona Bank of Kansas City December 31, 2009 2008 Amount Ratio Amount Ratio $ $ $ 2,492,771 1,623,887 452,420 131,523 37,202 93,201 28,023 14,679 1,876,778 1,079,037 398,937 121,816 34,286 85,328 24,676 13,771 1,876,778 1,079,037 398,937 121,816 34,286 85,328 24,676 13,771 $ $ $ 14.43% 13.82 10.62 16.99 16.13 12.16 10.63 17.86 10.86% 9.18 9.36 15.73 14.87 11.13 9.36 16.75 8.05% 6.45 7.24 6.54 12.85 6.96 9.60 10.17 2,356,948 1,584,353 440,303 127,910 34,395 87,370 25,136 16,057 1,728,926 1,032,120 390,444 118,588 30,842 80,232 22,133 15,424 1,728,926 1,032,120 390,444 118,588 30,842 80,232 22,133 15,424 12.81% 12.22 11.07 17.20 12.18 12.41 10.65 28.42 9.40% 7.96 9.82 15.94 10.92 11.39 9.37 27.30 7.89% 6.46 9.30 7.22 10.80 6.90 9.55 23.88 105 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. Balance at December 31, 2006 Unrealized gains on securities Unrealized gains on cash flow hedges Unrealized gains on employee benefit plans Tax benefit (expense) on unrealized gains (losses) Reclassification adjustment for losses realized and included in net income Reclassification adjustment for tax benefit on realized losses Balance at December 31, 2007 Unrealized losses on securities Unrealized gains on cash flow hedges Unrealized losses on employee benefit plans Tax benefit (expense) on unrealized gains (losses) Reclassification adjustment for (gains) losses Unrealized Gain (Loss) On Available Temporary Other Than Accumulated Unrealized (Loss) on Effective Impairment Cash Flow Losses Hedges (Loss) On Employee Benefit Plans For Sale Securities $ (59,152) $ – $ (2,935) $ (11,357) – – – – 7,518 – (2,925) – – 2,201 – (856) 48,308 – – (17,239) Total $ (73,444) 48,308 2,201 7,518 (21,020) 8,117 – 211 (384) 7,944 (2,809) $ (22,775) (236,990) – – 70,492 – $ – $ (82) (1,461) $ 150 (6,998) – – (16,434) 6,393 (2,741) $ (31,234) (236,990) 139 (16,434) 76,831 – 139 – (54) – – – – – realized and included in net income (21,926) Reclassification adjustment for tax expense (benefit) on realized gains (losses) Balance at December 31, 2008 Unrealized gains on securities Other-than-temporary impairments losses on securities Unrealized gains on employee benefit plans Tax benefit (expense) on unrealized gains (losses) Reclassification adjustment for (gains) losses 6,551 $ (204,648) 418,477 – – – $ – $ 10,053 (94,741) – (146,743) 31,688 289 – (21,637) (112) – (1,199) $ (17,039) – – 926 (360) – – – – 6,439 $ (222,886) 428,530 (94,741) 926 (115,415) realized and included in net income (11,970) – 262 – (11,708) Reclassification adjustment for tax expense (benefit) on realized gains (losses) Balance at December 31, 2009 4,656 $ 59,772 – $ (53,000) $ (102) – (1,039) $ (16,473) 4,554 $ (10,740) 106 (16) 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 Company has determined that its outstanding non-vested stock awards are participating securities. Accordingly, earnings per common share are 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): Years ended December 31, 2008 2007 2009 Numerator: Net income Earnings allocated to participating securities Numerator for basic earnings per share – income available to common shareholders Effect of reallocating undistributed earnings of participating securities Numerator for diluted earnings per share – income available to common shareholders Denominator: Weighted average shares outstanding Less: Participating securities included in weighted average shares outstanding Denominator for basic earnings per common share Dilutive effect of employee stock compensation plans (1) Denominator for diluted earnings per common share Basic earnings per share Diluted earnings per share $ 200,578 (818) $ 153,232 (384) $ 217,664 (462) 199,760 1 152,848 (40) 217,202 2 $ 199,761 $ 152,808 $ 217,204 67,653,035 67,428,086 67,220,529 (277,648) 67,375,387 112,557 67,487,944 $ 2.96 $ 2.96 (125,096) 67,302,990 158,371 67,461,361 $ 2.27 $ 2.27 (137,329) 67,083,200 436,542 67,519,742 $ 3.24 $ 3.22 (1) Excludes employee stock options with exercise prices greater than current market price. 2,735,375 1,571,239 799,087 (17) Reportable Segments BOK Financial operates three principal lines of business: commercial banking, consumer banking and wealth management. Commercial banking includes lending, treasury and cash management services and customer risk management products to small businesses, middle market and larger commercial customers. Commercial banking also includes the TransFund network. Consumer banking includes retail lending and deposit services, all mortgage banking activities and our indirect automobile lending products. Wealth management provides fiduciary services, brokerage and trading, private bank services and investment advisory services in all markets. In addition to its lines of business, BOK Financial has a funds management unit. The primary purpose of this unit is to manage the overall liquidity needs and interest rate risk of the Company. Each line of business borrows funds from and provides funds to the funds management unit as needed to support their operations. Operating results for funds management and other include the effect of interest rate risk positions and risk management activities, securities gains and losses including impairment charges, the provision for credit losses in excess of net loans charged off, tax planning strategies and certain executive compensation costs that are not attributed to the lines of business. BOK Financial allocates resources and evaluates performance of its lines of business after allocation of funds, certain indirect expenses, taxes based on statutory rates, actual net credit losses and capital costs. The cost of funds borrowed from the funds management unit by the operating lines of business is transfer priced at rates that approximate market for funds with similar duration. Market is generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of transfer-pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk. The value of funds provided by the operating lines of business to the funds management unit is based on applicable Federal Home Loan Bank advance rates. Deposit accounts with indeterminate maturities, such as demand deposit accounts and interest-bearing transaction accounts, are transfer-priced at a rolling average based on expected duration of the accounts. The expected duration ranges from 30 days for certain rate-sensitive deposits to five years. Economic capital is assigned to the business units by a third-party developed capital allocation model that reflects management’s assessment of risk. This model assigns capital based upon credit, operating, interest rate and market risk inherent in our business lines and recognizes the diversification benefits among the units. The level of assigned economic capital is a combination of the risk taken by each business line, based on its actual exposures and calibrated to its own loss 107 history where possible. Average invested capital includes economic capital and amounts we have invested in the lines of business. Substantially all revenue is from domestic customers. No single external customer accounts for more than 10% of total revenue. (In Thousands) Year ended December 31, 2009 Net interest revenue/(expense) from external sources Net interest revenue/(expense) from internal sources Total net interest revenue Other operating revenue Operating expense Net loans charged off Change in fair value of mortgage servicing rights Gains (losses) on financial instruments, net Gains (losses) on repossessed assets, net Income before taxes Federal and state income tax Net income before non-controlling interest Net income (loss) attributable to non-controlling interest Net income $ Commercial Banking Consumer Banking Wealth Management Funds Management and Other Total $ 345,375 $ 57,893 $ 25,899 $ 281,197 $ 710,364 (52,598) 292,777 133,703 224,065 100,749 – – (7,500) 94,166 36,630 57,536 – 57,536 73,565 131,458 182,895 256,337 24,366 12,124 (13,198) 1,773 34,349 13,362 18,746 44,645 156,360 171,543 11,399 – – (39,713) 241,484 11,688 50,947 59,386 – 710,364 484,646 702,892 195,900 – 12,124 21,542 8,344 – 18,063 7,026 (238) 164,143 49,687 (5,965) 310,721 106,705 20,987 11,037 114,456 204,016 – 20,987 – $ 11,037 3,438 $ 111,018 $ 3,438 200,578 $ Average assets Average invested capital $ 10,116,014 1,042,101 $ 6,149,598 225,540 $ 3,032,007 194,731 $ 3,839,768 614,669 $ 23,137,387 2,077,041 Performance measurements: Return on assets Return on invested capital Efficiency ratio 0.57% 5.52 52.54 0.34% 9.31 81.54 0.36% 5.67 85.34 – – – 0.87% 9.66 58.82 Reconciliation to Consolidated Financial Statements Net Interest Revenue Other Operating Revenue Other Operating Expense Net Income Average Assets Total reportable segments Unallocated items: Tax-equivalent adjustment Funds management and other (including eliminations), net BOK Financial consolidated $ 468,880 $ 472,958 $ 645,548 $ 89,560 $ 19,297,619 8,074 – – 8,074 – 233,410 $ 710,364 11,688 $ 484,646 51,185 $ 696,733 102,944 $ 200,578 3,839,768 $ 23,137,387 108 Commercial Banking Consumer Banking Wealth Management Funds Management and Other Total (In Thousands) Year ended December 31, 2008 Net interest revenue/(expense) from external sources $ 451,624 $ 32,076 $ 12,617 $ 150,545 $ 646,862 Net interest revenue/(expense) from internal sources Total net interest revenue Other operating revenue Operating expense Net loans charged off Change in fair value of mortgage servicing rights Gains (losses) on financial instruments, net Gains (losses) on repossessed assets, net Income (loss) before taxes Federal and state income tax Net income before non-controlling interest Net income (loss) attributable to non-controlling interest Net income (134,191) 317,433 107,185 216,655 81,966 118,728 150,804 148,885 219,024 16,726 32,853 45,470 156,133 149,966 2,961 (17,390) 133,155 (6,415) 42,733 100,940 – 646,862 405,788 628,378 202,593 – (34,515) 4,689 12,525 – (7) – (34,515) 5,729 22,936 (82) 130,604 50,805 193 42,142 16,393 – 48,669 18,932 378 (10,826) (21,221) 489 210,589 64,909 79,799 25,749 29,737 10,395 145,680 – 79,799 $ – 25,749 – $ 29,737 (7,552) $ $ 17,947 (7,552) 153,232 $ Average assets Average invested capital $ 11,049,565 1,103,656 $ 5,764,667 207,586 $ 2,193,386 183,845 $ 2,602,201 512,810 $ 21,609,819 1,946,342 Performance measurements: Return on assets Return on invested capital Efficiency ratio 0.72% 7.23 51.02 0.45% 12.40 73.08 1.36% 16.18 74.39 – – – 0.71% 7.87 59.69 Reconciliation to Consolidated Financial Statements Net Interest Revenue Other Operating Revenue Other Operating Expense Net Income Average Assets Total reportable segments Unallocated items: Tax-equivalent adjustment Funds management and other (including eliminations), net BOK Financial consolidated $ 513,707 $ 412,203 $ 620,049 $ 135,285 $ 19,007,618 8,228 – – 8,228 – 124,927 $ 646,862 (6,415) $ 405,788 42,355 $ 662,404 9,719 $ 153,232 2,602,201 $ 21,609,819 109 Commercial Banking Consumer Banking Wealth Management Funds Management and Other Total (In Thousands) Year ended December 31, 2007 Net interest revenue/(expense) from external sources $ 526,225 $ (7,807) $ 8,562 $ 17,505 $ 544,485 Net interest revenue/(expense) from internal sources Total net interest revenue Other operating revenue Operating expense Net loans charged off Change in fair value of mortgage servicing rights Gains (losses) on financial instruments, net Gains (losses) on repossessed assets, net Income (loss) before taxes Federal and state income tax Net income (loss) before non- controlling interest Net income (loss) attributable to non-controlling interest Net income (loss) (200,390) 325,835 131,081 201,876 9,747 163,028 155,221 144,585 193,600 9,233 – (2,893) 1,075 (486) 10 246,378 95,841 107 93,701 36,450 37,627 46,189 130,681 133,436 1,513 – 13 – 41,934 16,312 (265) 17,240 1,679 43,265 14,228 – 544,485 408,026 572,177 34,721 – (2,893) (6,648) (6,046) (34) (45,256) (32,842) 83 336,757 115,761 150,537 57,251 25,622 (12,414) 220,996 – $ 150,537 $ – 57,251 – $ 25,622 3,332 $ (15,746) $ 3,332 217,664 Average assets Average invested capital $ 9,646,637 1,095,314 $ 5,509,485 180,393 $ 1,743,943 171,159 $ 2,125,703 365,597 $ 19,025,768 1,812,463 Performance measurements: Return on assets Return on invested capital Efficiency ratio 1.56% 13.77 44.08 1.04% 31.74 64.58 1.47% 14.97 75.44 – – – 1.14% 12.01 60.07 Reconciliation to Consolidated Financial Statements Net Interest Revenue Other Operating Revenue Other Operating Expense Net Income Average Assets Total reportable segments Unallocated items: Tax-equivalent adjustment Funds management and other (including eliminations), net BOK Financial consolidated $ 527,245 $ 406,347 $ 531,688 $ 233,410 $ 16,900,065 9,120 – – 9,120 – 8,120 $544,485 1,679 $ 408,026 43,299 $ 574,987 (24,866) $ 217,664 2,125,703 $ 19,025,768 110 (18) Fair Value of Financial Instruments Fair value is defined by applicable accounting guidance as the price to sell an asset or transfer a liability in an orderly transaction between market participants in the principal market for the given asset or liability. Certain assets and liabilities are recorded in the Company’s financial statements at fair value. Some are recorded on a recurring basis and some on a non-recurring basis The following table presents the carrying values and estimated fair values of all financial instruments, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis as of December 31, 2009 and 2008 (dollars in thousands): Range of Contractual Yields Average Re-pricing (in years) Discount Rate Estimated Fair Value $ 921,216 9,470,031 217,826 – – 1.04 – 18.00% 2.00 – 18.00 0.08 – 12.75 1.75 – 21.00 – 0.47 1.24 6.93 1.26 0.23 – 3.81% 0.24 – 3.81 0.74 – 4.85 3.81 0.02 – 10.00 0.25 – 6.58 5.58 2.09 0.05 3.55 0.06 – 2.34 0.06 – 0.25 1.79 $ 694,942 7,132,607 129,246 – $ 694,942 7,136,032 129,246 – 0.25 – 18.00% 1.75 – 18.00 5.00 – 10.45 1.50 – 21.00 – 0.35 1.49 7.10 1.22 0.44 – 3.81% 1.00 – 3.81 1.76 – 3.53 3.81 2009: Cash and cash equivalents Securities Residential mortgage loans held for sale Loans: Commercial Commercial real estate Residential mortgage Consumer Total loans Reserve for loan losses Net loans Mortgage servicing rights Derivative instruments with positive fair value, net of cash margin Other assets – private equity funds Deposits with no stated maturity Time deposits Other borrowings Subordinated debentures Derivative instruments with negative fair value, net of cash margin 2008: Cash and cash equivalents Securities Residential mortgage loans held for sale Loans: Commercial Commercial real estate Residential mortgage Consumer Total loans Reserve for loan losses Net loans Mortgage servicing rights Derivative instruments with positive fair value, net of cash margin Other assets – private equity funds Deposits with no stated maturity Time deposits Other borrowings Subordinated debentures Derivative instruments with negative fair value, net of cash margin Carrying Value $ 921,216 9,463,732 217,826 6,207,840 2,491,434 1,793,622 786,802 11,279,698 (292,095) 10,987,603 73,824 343,782 22,917 11,750,235 3,767,993 4,605,100 398,539 308,360 7,411,603 2,701,248 1,752,574 1,010,581 12,876,006 (233,236) 12,642,770 42,752 452,604 15,891 9,799,364 5,183,243 4,547,453 398,407 667,034 0.15 – 9.74 1.85 – 4.52 5.59 1.89 0.54 4.57 0.13 – 1.66 0.09 – 6.56 1.41 Because no market exists for certain of these financial instruments and management does not intend to sell these financial instruments, BOK Financial the fair values shown above may not represent values at which the respective financial instruments could be sold individually or in the aggregate. 111 6,118,613 2,457,730 1,920,449 807,288 11,304,080 – 11,304,080 73,824 343,782 22,917 11,750,235 3,776,149 4,989,509 442,738 308,360 7,344,753 2,703,146 2,086,901 1,063,566 13,198,366 – 13,198,366 42,752 452,604 15,891 9,799,364 5,238,740 4,085,035 466,280 667,034 The following methods and assumptions were used in estimating the fair value of these financial instruments: Cash and Cash Equivalents The book value reported in the consolidated balance sheet for cash and short-term instruments approximates those assets’ fair values. Securities The fair values of securities are based on quoted prices for identical instruments in active markets, when available. If quoted prices for identical instruments are not available, fair values are based on significant other observable inputs such as quoted prices of comparable instruments or interest rates and credit spreads, yield curves, volatilities prepayment speeds and loss severities. Fair values for a a portion of the securities portfolio are based on significant unobservable inputs, including projected cash flows discounted as rates indicated by comparison to securities with similar credit and liquidity risk. Derivatives All derivative instruments are carried on the balance sheet at fair value. Fair values for exchange-traded contracts are based on quoted prices. Fair values for over-the-counter interest rate, commodity and foreign exchange contracts are based on valuations provided either by third-party dealers in the contracts, quotes provided by independent pricing services, or a third-party provided pricing model. Residential Mortgage Loans Held for Sale Residential mortgage loans held for sale are carried on the balance sheet at fair value. The fair values of residential mortgage loans held for sale are based upon quoted market prices of such loans sold in securitization transactions, including related unfunded loan commitments. Loans The fair value of loans, excluding loans held for sale, are based on discounted cash flow analyses using interest rates and credit and liquidity spreads currently being offered for loans with similar remaining terms to maturity and risk, adjusted for the impact of interest rate floors and ceilings. The fair values of loans were estimated to approximate their discounted cash flows less loan loss reserves allocated to these loans of $274 million and $210 million at December 31, 2009 and 2008, respectively. Other Assets – Private Equity Funds The fair value of the portfolio investments of the Company’s two private equity funds are based upon net asset value reported by the underlying funds, as adjusted by the general partner when necessary to represent the price that would be received to sell the assets. Private equity fund assets are long-term, illiquid investments. No secondary market exists for these assets. They may only be realized through cash distributions from the underlying funds. Deposits The fair values of time deposits are based on discounted cash flow analyses using interest rates currently being offered on similar transactions. Estimated fair value of deposits with no stated maturity, which includes demand deposits, transaction deposits, money market deposits and savings accounts, is equal to the amount payable on demand. Although market premiums paid reflect an additional value for these low cost deposits, adjusting fair value for the expected benefit of these deposits is prohibited. Accordingly, the positive effect of such deposits is not included in this table. Other Borrowings and Subordinated Debentures The fair values of these instruments are based upon discounted cash flow analyses using interest rates currently being offered on similar instruments. Off-Balance Sheet Instruments The fair values of commercial loan commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of these off-balance sheet instruments were not significant at December 31, 2009 and 2008. 112 Assets and liabilities recorded at fair value in the financial statement on a recurring and non-recurring basis are grouped into three broad levels as follows: Quoted Prices in active Markets for Identical Instruments – Fair value is based on unadjusted quoted prices in active markets for identical assets or liabilities. Significant Other Observable Inputs – fair value is 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: • Quoted prices for similar, but not identical, assets or liabilities in active markets; • Quoted prices for identical or similar assets or liabilities in inactive markets; • 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; • Other inputs derived from or corroborated by observable market inputs. Significant Unobservable Inputs – Fair value is based upon model-based valuation techniques for which at least one significant assumption is not observable in the market. 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 cash 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. Fair Value of Financial Instruments Measured on a Recurring Basis The fair value of financial assets and liabilities that are measured on a recurring basis are as follows as of December 31, 2009 (in thousands): Assets: Trading securities Investment securities Available for sale securities: U.S. Treasury Municipal and other tax-exempt Mortgage-backed securities Other debt securities Federal Reserve Bank stock Federal Home Loan Bank stock Perpetual preferred stock Equity securities and mutual funds Mortgage trading securities Residential mortgage loans held for sale Mortgage servicing rights Derivative contracts, net of cash margin Other assets – private equity funds Liabilities: Certificates of deposit Derivative contracts, net of cash margin Total $ 65,354 246,704 7,020 62,201 8,601,690 17,147 32,526 78,999 22,275 50,165 8,872,023 285,950 217,826 73,824 343,782 22,917 98,031 308,360 Quoted Prices in Active Markets for Identical Instruments Significant Other Observable Inputs Significant Unobservable Inputs $ 1,282 $ 54,272 246,704 $ 9,800 7,020 24,424 31,444 1,175 875 25,603 8,601,690 31 32,526 78,999 22,275 25,741 8,786,865 285,950 217,826 342,607 98,031 307,485 36,598 17,116 53,714 73,824 (1) 22,917 (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 7, Mortgage Banking Activities. 113 The fair value of certain municipal and other debt securities classified as trading or available for sale are based on significant unobservable inputs. These significant unobservable inputs 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. Discount rates are 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 1.73% to 2.79%. As of December 31, 2009, average yields on comparable short-term taxable securities are generally less than 1%. Tax-exempt securities rated investment grade by all nationally recognized rating agencies are generally valued using a spread of 70 to 80 basis points over average yields of comparable securities as of December 31, 2009. Approximately $9.7 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. The fair value of these securities is determined using a spread of 370 to 380 basis points over average yields for comparable municipal securities as of December 31, 2009. All of these securities are currently performing in accordance with their respective contractual terms. The following represents the changes for the year ended December 31, 2009 related to assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands): Available for Sale Securities Trading Securities Municipal and other tax- exempt Balance at December 31, 2008 Transfer to significant unobservable inputs Transfer from trading to available for sale Purchases, sales, issuances and settlements, net Gain (loss) recognized in earnings (1) Other comprehensive income (loss) Balance December 31, 2009 $ - 44,650 (45,890) 11,850 (810) – 9,800 $ $ – – 32,540 4,268 – (210) $ 36,598 Other debt securities $ – – 13,350 3,792 – (26) $ 17,116 Other assets – private equity funds $ 15,891 – – 2,906 4,120 – $ 22,917 (1) Loss on trading securities included in Brokerage and Trading Revenue. Gain on private equity funds included in Gain on Other Assets. Approximately $45 million of trading securities were transferred to significant unobservable inputs during 2009. Independent pricing of these securities was discontinued due to a lack of observable inputs. The Company purchased an additional $12 million of similar securities into the trading portfolio after independent pricing was discontinued. Losses recognized in earnings during 2009 based on significant unobservable inputs totaled $810 thousand and included $513 thousand on securities transferred and $297 thousand on securities purchased. Substantially all trading securities with fair values based on significant unobservable inputs were transferred available for sale during 2009 based on sales limitations and banking regulations. Fair Value of Financial Instruments Measured on a Non-Recurring Basis 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 to completed sales of similar assets. In addition, goodwill impairment is evaluated based on the fair value of the Company’s reporting units. 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 year ended December 31, 2009: Impaired loans Real estate and other repossessed assets Carrying Value at December 31, 2009 Quoted Prices in Active Markets for Identical Instruments $ - - Significant Other Observable Inputs $73,195 21,042 Significant Unobservable Inputs $ - - Fair Value Adjustments for the year ended December 31, 2009 $73,985 8,611 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. 114 The fair value of pension plan assets was approximately $42 million at December 31, 2009 determined by significant other observable inputs. Fair value adjustments of pension plan assets along with changes in projected benefit obligation are recognized in other comprehensive income (loss). Intangible assets, which consist primarily of goodwill, core deposit intangible assets and other acquired intangibles, for each business unit are evaluated for impairment annually as of October 1st or more frequently if conditions indicate that impairment may have occurred. The evaluation of possible impairment of intangible assets involves significant judgment based upon short-term and long-term projections of future performance. The fair value of each of our reporting units is estimated by the discounted future earnings method. Income growth is projected for each of our reporting units for 2010 through 2015 and a terminal value is computed. The projected income stream is converted to current fair value by using a discount rate that reflects a rate of return required by a willing buyer. Assumptions used to value our business units are based on growth rates, volatility, discount rate and market risk premium inherent in our current stock price. These assumptions are to be significant unobservable inputs and represent our best estimate of assumptions that market participants would use to determine fair value of the respective reporting units. Critical assumptions in our evaluation were a 12.00% average expected long-term growth rate, a 0.74% volatility factor for BOK Financial common stock, a 10.60% discount rate, and a 9.86% market risk premium. In general, the growth rate for all reporting units is expected to remain flat in 2010 as the impact of the present recession lessens, with acceleration in growth rates in future years, based on the expectation of improving overall economic growth in future years. Fair Value Election Certain certificates of deposit were designated as carried at fair value. This determination is made based on the Company’s intent to convert these certificates 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 December 31, 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 $7.9 million in 2009, which is included in Gain (Loss) on Derivatives, net on the Consolidated Statement of Earnings. As more fully disclosed in Note 2 and Note 7 to the Consolidated Financial Statements, the Company has elected to carry certain mortgage-backed securities which have been designated as economic hedges against changes in the fair value of mortgage servicing rights and residential mortgage loans held for sale at fair value. Changes in the fair value of these financial instruments are recognized in earnings. (19) Parent Company Only Financial Statements Summarized financial information for BOK Financial – Parent Company Only follows: Balance Sheets (In Thousands) Assets Cash and cash equivalents Securities – available for sale Investment in subsidiaries Other assets Total assets Liabilities and Shareholders’ Equity Other borrowings Other liabilities Total liabilities Common stock Capital surplus Retained earnings Treasury stock Accumulated other comprehensive loss Total shareholders’ equity Total liabilities and shareholders’ equity December 31, 2009 2008 $ 19,088 49,669 2,138,253 47,240 $ 2,254,250 $ 20,324 9,900 1,865,514 1,623 $ 1,897,361 $ – 48,437 48,437 4 758,723 1,563,683 (105,857) (10,740) 2,205,813 $ 2,254,250 $ 50,000 1,104 51,104 4 743,411 1,427,057 (101,329) (222,886) 1,846,257 $ 1,897,361 115 Statements of Earnings (In Thousands) Dividends, interest and fees received from subsidiaries Other operating revenue Total revenue $ 172,023 674 172,697 $ 76,587 359 76,946 $ 254,256 482 254,738 2009 2008 2007 Interest expense Professional fees and services Other operating expense Total expense Income before taxes and equity in undistributed income of subsidiaries Federal and state income tax expense (credit) Income before equity in undistributed income of subsidiaries Equity in undistributed income of subsidiaries Net income Statements of Cash Flows (In Thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries Tax (expense) benefit on exercise of stock options Change in other assets Change in other liabilities Net cash provided by operating activities Cash flows from investing activities: Purchases of available for sale securities Investment in subsidiaries Net cash used by investing activities Cash flows from financing activities: Increase in other borrowings Pay down of other borrowings Issuance of common and treasury stock, net Cash dividends Repurchase of common stock Net cash used by financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 581 – – 581 2,131 842 290 3,263 715 601 220 1,536 172,116 738 73,683 (1,505) 253,202 497 171,378 29,200 $ 200,578 75,188 78,044 $ 153,232 252,705 (35,041) $ 217,664 2009 2008 2007 $ 200,578 $ 153,232 $ 217,664 (70,959) 276 (45,617) 47,333 131,611 (78,044) (895) (3,930) (402) 69,961 35,041 (3,460) (3,090) (585) 245,570 (2,903) (26,500) (29,403) – (16,244) (16,244) – (240,718) (240,718) – (50,000) 10,508 (63,952) – (103,444) (1,236) 20,324 $ 19,088 50,000 (50,000) 9,533 (59,191) (7,992) (57,650) (3,933) 24,257 $ 20,324 50,000 – 20,667 (50,416) (17,353) 2,898 7,750 16,507 $ 24,257 Cash paid for interest $ 589 $ 2,282 $ 560 (20) Subsequent Events The Company evaluated events from the date of the consolidated financial statements on December 31, 2009 through the issuance of those consolidated financial statements included in this Annual Report on Form 10-K on February 26, 2010 and has disclosed the subsequent purchase of mortgage servicing rights in Note 7 to the Consolidated Financial Statements. No additional events were identified requiring recognition in and/or disclosure in the consolidated financial statements. 116 117 Annual Financial Summary – Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands) Assets Taxable securities3 Tax-exempt securities3 Total securities3 Trading securities Funds sold and resell agreements Residential mortgage loans held for sale Loans2 Less reserve for loan losses Loans, net of reserve Total earning assets3 Cash and other assets Total assets Liabilities and Shareholders’ Equity Transaction deposits Savings deposits Time deposits Total interest-bearing deposits Funds purchased and repurchase agreements Other borrowings Subordinated debentures Total interest-bearing liabilities Demand deposits Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity Tax-equivalent Net Interest Revenue3 Tax-equivalent Net Interest Revenue to Earning Assets3 Less tax-equivalent adjustment1 Net Interest Revenue Provision for credit losses Other operating revenue Other operating expense Income before taxes Federal and state income tax Net income before non-controlling interest Net income (loss) attributable to non-controlling interest Net income attributable to BOK Financial Corp. Average Balance $ 7,896,861 274,508 8,171,369 89,240 44,348 218,305 12,133,912 279,689 11,854,223 20,377,485 2,759,902 $23,137,387 $ 7,093,768 165,677 4,682,462 11,941,907 2,333,179 2,166,804 398,471 16,840,361 3,279,347 940,638 2,077,041 $23,137,387 Yield/ Rate 4.32% 5.60 4.36 4.15 0.17 4.63 4.65 – 4.76 4.59 0.73% 0.37 2.39 1.38 0.36 0.42 5.60 1.21 3.38% 3.57 2009 Revenue/ Expense1 $ 328,997 15,376 344,373 3,700 77 10,102 564,391 – 564,391 922,643 $ 51,607 614 112,141 164,362 8,355 9,190 22,298 204,205 $ 718,438 8,074 710,364 195,900 492,990 696,733 310,721 106,705 204,016 3,438 $ 200,578 1 Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments shown are for comparative purposes. 2 The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned income. See Note 1 of Notes to the Consolidated Financial Statements for a description of income recognition policy. 3 Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income. 118 Average Balance $ 6,087,167 258,552 6,345,719 73,563 70,287 106,179 12,487,504 168,042 12,319,462 18,915,210 2,694,609 $21,609,819 $ 6,342,421 158,096 4,552,931 11,053,448 3,087,012 1,745,938 398,333 16,284,731 2,632,719 746,027 1,946,342 $21,609,819 2008 Revenue/ Expense1 $ 313,361 16,653 330,014 4,935 1,577 5,805 727,542 – 727,542 1,069,873 $ 121,403 676 166,845 288,924 61,371 42,226 22,262 414,783 $ 655,090 8,228 646,862 202,593 428,724 662,404 210,589 64,909 145,680 (7,552) $ 153,232 Yield/ Rate Average Balance $ 5,166,218 341,913 5,508,131 29,043 77,890 84,443 11,355,602 120,086 11,235,516 16,935,023 2,090,745 $19,025,768 $ 5,508,831 165,729 4,568,738 10,243,298 2,758,306 838,708 395,050 14,235,362 2,368,897 609,046 1,812,463 $19,025,768 5.10% 6.48 5.16 6.71 2.24 5.47 5.83 – 5.91 5.64 1.91% 0.43 3.66 2.61 1.99 2.42 5.59 2.55 3.09% 3.45 Yield/ Rate 4.85% 6.39 4.94 6.71 5.75 5.66 7.82 – 7.91 6.92 3.53% 0.90 4.74 4.03 4.87 5.28 6.30 4.33 2.59% 3.28 2007 Revenue/ Expense1 $ 248,972 21,293 270,265 1,948 4,480 4,776 888,388 – 888,388 1,169,857 $ 194,617 1,499 216,630 412,746 134,347 44,258 24,901 616,252 $ 553,605 9,120 544,485 34,721 401,980 574,987 336,757 115,761 220,996 3,332 $ 217,664 119 Quarterly Financial Summary – Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands Except Per Share Data) Assets Taxable securities3 Tax-exempt securities3 Total securities3 Trading securities Funds sold and resell agreements Residential mortgage loans held for sale Loans2 Less reserve for loan losses Loans, net of reserve Total earning assets3 Cash and other assets Total assets Liabilities and Shareholders’ Equity Transaction deposits Savings deposits Time deposits Total interest-bearing deposits Funds purchased and repurchase agreements Other borrowings Subordinated debentures Total interest-bearing liabilities Demand deposits Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity Tax-equivalent Net Interest Revenue3 Tax-equivalent Net Interest Revenue to Earning Assets3 Less tax-equivalent adjustment1 Net Interest Revenue Provision for credit losses Other operating revenue Other operating expense Income before taxes Federal and state income tax Net income before non-controlling interest Net income (loss) attributable to non-controlling interest Net income attributable to BOK Financial Corp. Earnings Per Average Common Share Equivalent: Net income: Basic Diluted December 31, 2009 September 30, 2009 Three Months Ended Average Balance Revenue/ Yield/ Expense1 Rate Average Balance Revenue/ Expense1 Yield/ Rate $ 8,875,417 $ 82,392 3,726 86,118 927 16 2,311 137,235 – 137,235 226,607 286,550 9,161,967 68,027 30,358 194,760 11,492,696 298,157 11,194,539 20,649,651 3,046,083 $23,695,734 $ 7,734,678 $ 11,092 199 19,700 30,991 1,658 1,742 5,542 39,933 167,572 4,002,337 11,904,587 2,173,476 2,380,938 398,522 16,857,523 3,666,663 924,803 2,246,745 $ 23,695,734 3.83% 5.16 3.87 5.41 0.21 4.71 4.74 – 4.86 4.42 0.57% 0.47 1.95 1.03 0.30 0.29 5.52 0.94 $ 8,012,380 $ 81,890 3,468 85,358 771 18 2,198 139,883 – 139,883 228,228 273,432 8,285,812 64,763 67,032 176,403 11,887,418 281,289 11,606,129 20,200,139 2,850,395 $23,050,534 $ 7,162,477 $ 11,736 203 24,401 36,340 1,817 2,070 5,558 45,785 167,677 4,404,854 11,735,008 2,284,985 2,173,103 398,484 16,591,580 3,392,578 931,406 2,134,970 $ 23,050,534 4.18% 5.03 4.21 4.72 0.11 4.94 4.67 – 4.78 4.54 0.65% 0.48 2.20 1.23 0.32 0.38 5.53 1.09 $186,674 3.48% 3.64 $182,443 3.45% 3.63 2,196 184,478 48,620 108,163 176,437 67,584 24,780 42,804 33 $ 42,771 $0.63 $0.63 1,982 180,461 55,120 131,770 178,732 78,379 24,772 53,607 2,947 $ 50,660 $0.75 $0.75 1 Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments shown are for comparative purposes. 2 The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned income. See Note 1 of Notes to the Consolidated Financial Statements for a description of income recognition policy. 3 Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income. 120 June 30, 2009 Three Months Ended March 31, 2009 December 31, 2008 Average Balance Revenue/ Yield/ Expense1 Rate Average Balance Revenue/ Expense1 Yield/ Rate Average Balance Revenue/ Expense1 Yield/ Rate 5.12% 6.43 5.17 6.55 0.76 5.52 5.26 – 5.35 5.28 1.51% 0.37 3.28 2.29 0.94 1.51 5.48 2.02 3.26% 3.57 $ 7,594,355 $ 80,711 4,044 84,755 983 14 3,215 143,510 – 143,510 232,477 285,078 7,879,433 112,960 29,277 286,077 12,403,050 273,335 12,129,715 20,437,462 2,636,569 $23,074,031 $ 6,854,003 $ 13,362 104 31,637 45,103 1,995 2,375 5,632 55,105 167,813 5,123,947 12,145,763 2,316,990 1,951,699 398,456 16,812,908 3,183,338 1,071,121 2,006,664 $ 23,074,031 4.50% 5.69 4.54 3.49 0.19 4.51 4.64 – 4.75 4.65 0.78% 0.25 2.48 1.49 0.35 0.49 5.67 1.31 $ 7,084,340 $ 84,004 4,138 88,142 1,019 30 2,378 143,763 – 143,763 235,332 252,612 7,336,952 111,962 50,701 201,135 12,784,765 252,734 12,532,031 20,232,781 2,710,588 $ 22,943,369 $ 6,610,805 $ 15,417 109 36,401 51,927 2,825 3,064 5,566 63,382 159,537 5,215,091 11,985,433 2,562,066 2,158,963 398,425 17,104,887 2,864,751 1,058,216 1,915,515 $ 22,943,369 4.90% 6.64 4.96 3.69 0.24 4.79 4.56 – 4.65 4.75 0.95% 0.28 2.83 1.76 0.45 0.58 5.67 1.50 $ 6,634,035 $ 87,317 4,133 91,450 1,298 92 1,683 169,700 – 169,700 264,223 255,693 6,889,728 78,840 48,246 121,184 12,826,696 209,319 12,617,377 19,755,375 2,516,276 $ 22,271,651 $ 6,116,465 $ 23,161 143 42,090 65,394 7,289 7,541 5,489 85,713 155,784 5,109,303 11,381,552 3,095,054 1,986,857 398,392 16,861,855 2,712,384 788,530 1,908,882 $ 22,271,651 $178,510 2,063 176,447 73,001 121,447 185,442 39,451 10,363 29,088 (6,355) $ 35,443 $0.53 $0.52 $177,372 3.34% 3.55 $171,950 3.25% 3.47 1,792 175,580 47,120 127,965 175,770 80,655 28,315 52,340 225 $ 52,115 $ 0.77 $ 0.77 2,105 169,845 45,040 125,092 165,794 84,103 28,838 55,265 233 $ 55,032 $0.81 $0.81 121 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”), the Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness and design of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a- 15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting information required to be disclosed by the Company, within the time periods specified in the Securities and Exchange Commission’s rules and forms. In addition and as of the end of the period covered by this report, there have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f), as amended, of the Exchange Act) during the Company’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting. The Report of Management on Financial Statements and Management’s Report on Internal Control over Financial Reporting appear within Item 8, “Financial Statements and Supplementary Data.” The independent registered public accounting firm, Ernst & Young LLP, has audited the financial statements included in Item 8 and has issued an audit report on the Company’s internal control over financial reporting, which appears therein. ITEM 9B. OTHER INFORMATION None. 122 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information set forth under the headings “Election of Directors,” “Executive Officers, “Insider Reporting,” “Director Nominations,” and “Risk Oversight and Audit Committee” in BOK Financial’s 2010 Annual Proxy Statement is incorporated herein by reference. The Company has a Code of Ethics which is applicable to all Directors, officers and employees of the Company, including the Chief Executive Officer and the Chief Financial Officer, the principal executive officer and principal financial and accounting officer, respectively. A copy of the Code of Ethics will be provided without charge to any person who requests it by writing to the Company’s headquarters at Bank of Oklahoma Tower, P.O. Box 2300, Tulsa, Oklahoma 74192 or telephoning the Chief Auditor at (918) 588-6000. The Company will also make available amendments to or waivers from its Code of Ethics applicable to Directors or executive officers, including the Chief Executive Officer and the Chief Financial Officer, in accordance with all applicable laws and regulations. There are no material changes to the procedures by which security holders may recommend nominees to the Company’s board of directors since the Company’s 2009 Annual Proxy Statement to Shareholders. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the heading “Compensation Discussion and Analysis,” “Compensation Committee Interlocks and Insider Participation,” Compensation Committee Report,” “Executive Compensation Tables,” and “Director Compensation” in BOK Financial’s 2010 Annual Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information set forth under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Election of Directors” in BOK Financial’s 2010 Annual Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information regarding related parties is set forth in Note 13 of the Company’s Notes to Consolidated Financial Statements, which appears elsewhere herein. Additionally, the information set forth under the heading “Certain Transactions,” “Director Independence” and “Related Party Transaction Review and Approval Process” in BOK Financial’s 2010 Annual Proxy Statement is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information set forth under the heading “Principal Accountant Fees and Services” in BOK Financial’s 2010 Annual Proxy Statement is incorporated herein by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) (1) Financial Statements The following financial statements of BOK Financial Corporation are filed as part of this Form 10-K in Item 8: Consolidated Statements of Earnings for the years ended December 31, 2009, 2008 and 2007 Consolidated Balance Sheets as of December 31, 2009 and 2008 Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007 Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2009, 2008 and 2007 Notes to Consolidated Financial Statements Annual Financial Summary – Unaudited Quarterly Financial Summary - Unaudited Reports of Independent Registered Public Accounting Firm 123 (a) (2) Financial Statement Schedules The schedules to the consolidated financial statements required by Regulation S-X are not required under the related instructions or are inapplicable and are therefore omitted. (a) (3) Exhibits Exhibit Number Description of Exhibit 3.0 3.1 3.1(a) 4.0 10.0 10.1 10.2 10.3 10.4 10.4(a) 10.4(b) 10.4(c) 10.4 (d) 10.4 (e) 10.4 (f) 10.4 (g) 10.4.1(a) 10.4.1(b) The Articles of Incorporation of BOK Financial, incorporated by reference to (i) Amended and Restated Certificate of Incorporation of BOK Financial filed with the Oklahoma Secretary of State on May 28, 1991, filed as Exhibit 3.0 to S-1 Registration Statement No. 33-90450, and (ii) Amendment attached as Exhibit A to Information Statement and Prospectus Supplement filed November 20, 1991. Bylaws of BOK Financial, incorporated by reference to Exhibit 3.1 of S-1 Registration Statement No. 33-90450. Bylaws of BOK Financial, as amended and restated as of October 30, 2007, incorporated by reference to Exhibit 3.1 of Form 8-K filed on November 5, 2007. The rights of the holders of the Common Stock and Preferred Stock of BOK Financial are set forth in its Certificate of Incorporation. Purchase and Sale Agreement dated October 25, 1990, among BOK Financial, Kaiser, and the FDIC, incorporated by reference to Exhibit 2.0 of S-1 Registration Statement No. 33-90450. Amendment to Purchase and Sale Agreement effective March 29, 1991, among BOK Financial, Kaiser, and the FDIC, incorporated by reference to Exhibit 2.2 of S-1 Registration Statement No. 33-90450 Letter agreement dated April 12, 1991, among BOK Financial, Kaiser, and the FDIC, incorporated by reference to Exhibit 2.3 of S-1 Registration Statement No. 33-90450. Second Amendment to Purchase and Sale Agreement effective April 15, 1991, among BOK Financial, Kaiser, and the FDIC, incorporated by reference to Exhibit 2.4 of S-1 Registration Statement No. 33-90450. Employment and Compensation Agreements. Employment Agreement between BOK Financial and Stanley A. Lybarger, incorporated by reference to Exhibit 10.4(a) of Form 10-K for the fiscal year ended December 31, 1991. Amendment to 1991 Employment Agreement between BOK Financial and Stanley A. Lybarger, incorporated by reference to Exhibit 10.4(b) of Form 10-K for the fiscal year ended December 31, 2001. Amended and Restated Deferred Compensation Agreement (Amended as of September 1, 2003) between Stanley A. Lybarger and BOK Financial Corporation, incorporated by reference to Exhibit 10.4 (c) of Form 10-Q for the quarter ended September 30, 2003. 409A Deferred Compensation Agreement between Stanley A. Lybarger and BOK Financial Corporation dated December 31, 2004, incorporated by reference to Exhibit 10.4 (d) of Form 8-K filed on January 5, 2005. Guaranty by George B. Kaiser in favor of Stanley A. Lybarger dated March 7, 2005, incorporated by reference to Exhibit 10.4 (e) of Form 10-K for the fiscal year ended December 31, 2004. Third Amendment to 1991 Employment Agreement between Stanley A. Lybarger and Bank of Oklahoma, National Association, incorporated by reference to Exhibit 10.4 (f) of Form 10-K for the fiscal year ended December 31, 2007. Amended and Restated Employment Agreement dated December 26, 2008 between BOK Financial Corporation and Stanley A. Lybarger, incorporated by reference to Exhibit 99 (a) of Form 8-K filed on December 26, 2008. Employee Agreement between BOK Financial and V. Burns Hargis, incorporated by reference to Exhibit 10.4.1(a) of Form 10-K for the fiscal year ended December 31, 2002. Amendment to Employee Agreement between BOK Financial and V. Burns Hargis, incorporated by reference to Exhibit 10.4.1(b) of Form 10-K for the fiscal year ended December 31, 2002. 124 10.4.2 10.4.2 (a) 10.4.2 (b) 10.4.4 10.4.5 10.4.5 (a) 10.4.5 (b) 10.4.6 10.4.6 (a) 10.4.7 10.4.7 (a) 10.4.8 Amended and Restated Deferred Compensation Agreement (Amended as of December 1, 2003) between Steven G. Bradshaw and BOK Financial Corporation, incorporated by reference to Exhibit 10.4.2 of Form 10-K for the fiscal year ended December 31, 2003. 409A Deferred Compensation Agreement between Steven G. Bradshaw and BOK Financial Corporation dated December 31, 2004, incorporated by reference to Exhibit 10.4.2 (a) of Form 8-K filed on January 5, 2005. Employment Agreement between BOK Financial and Steven G. Bradshaw dated September 29, 2003, incorporated by reference to Exhibit 10.4.2 (b) of Form 10-K for the fiscal year ended December 31, 2004. Amended and Restated Employment Agreement (Amended as of June 14, 2002) among First National Bank of Park Cities, BOK Financial Corporation and C. Fred Ball, Jr., incorporated by reference to Exhibit 10.4.4 of Form 10-K for the fiscal year ended December 31, 2003. 409A Deferred Compensation Agreement between Daniel H. Ellinor and BOK Financial Corporation dated December 31, 2004, incorporated by reference to Exhibit 10.4.5 of Form 8-K filed on January 5, 2005. Employment Agreement between BOK Financial and Dan H. Ellinor dated August 29, 2003, incorporated by reference to Exhibit 10.4.5 (a) of Form 10-K for the fiscal year ended December 31, 2004. Deferred Compensation Agreement dated November 28, 2003 between Daniel H. Ellinor and BOK Financial Corporation, incorporated by reference to Exhibit 10.4.5 (b) of Form 10-K for the fiscal year ended December 31, 2004. 409A Deferred Compensation Agreement between Mark W. Funke and BOK Financial Corporation dated December 31, 2004, incorporated by reference to Exhibit 10.4.6 of Form 8-K filed on January 5, 2005. Amended and Restated Deferred Compensation Agreement (Amended as of December 1, 2003) between Mark W. Funke and BOK Financial Corporation, incorporated by reference to Exhibit 10.4.6 (a) of Form 10-K for the fiscal year ended December 31, 2004. 409A Deferred Compensation Agreement between Steven E. Nell and BOK Financial Corporation dated December 31, 2004, incorporated by reference to Exhibit 10.4.7 of Form 8-K filed on January 5, 2005. Amended and Restated Deferred Compensation Agreement (Amended as of December 1, 2003) between Steven E. Nell and BOK Financial Corporation, incorporated by reference to Exhibit 10.4.7 (a) of Form 10-K for the fiscal year ended December 31, 2004. Employment Agreement dated August 1, 2005 between BOK Financial Corporation and Donald T. Parker, incorporated by reference to Exhibit 99 (a) of Form 8-K filed on February 1, 2006. 125 10.5 Director indemnification agreement dated June 30, 1987, between BOk and Kaiser, incorporated by reference to Exhibit 10.5 of S-1 Registration Statement No. 33-90450. Substantially similar director indemnification agreements were executed between BOk and the following: Date of Agreement James E. Barnes William H. Bell James S. Boese Dennis L. Brand Chester E. Cadieux William B. Cleary Glenn A. Cox William E. Durrett Leonard J. Eaton, Jr. William B. Fader Gregory J. Flanagan Jerry L. Goodman David A. Hentschel Philip N. Hughes Thomas J. Hughes, III William G. Kerr Philip C. Lauinger, Jr. Stanley A. Lybarger Patricia McGee Maino Robert L. Parker, Sr. James A. Robinson William P. Sweich June 30, 1987 June 30, 1987 June 30, 1987 June 30, 1987 June 30, 1987 June 30, 1987 June 30, 1987 June 30, 1987 June 30, 1987 December 5, 1990 June 30, 1987 June 30, 1987 July 7, 1987 July 8, 1987 June 30, 1987 June 30, 1987 June 30, 1987 December 5, 1990 June 30, 1987 June 30, 1987 June 30, 1987 June 30, 1987 10.6 10.7.3 10.7.4 10.7.5 10.7.6 10.7.7 10.7.8 10.7.9 10.7.10 10.7.11 10.7.12 10.7.13 10.8 Capitalization and Stock Purchase Agreement dated May 20, 1991, between BOK Financial and Kaiser, incorporated by reference to Exhibit 10.6 of S-1 Registration Statement No. 33-90450. BOK Financial Corporation 1994 Stock Option Plan, incorporated by reference to Exhibit 4.0 of S-8 Registration Statement No. 33-79834. BOK Financial Corporation 1994 Stock Option Plan (Typographical Error Corrected January 16, 1995), incorporated by reference to Exhibit 10.7.4 of Form 10-K for the fiscal year ended December 31, 1994. BOK Financial Corporation 1997 Stock Option Plan, incorporated by reference to Exhibit 4.0 of S-8 Registration Statement No. 333-32649. BOK Financial Corporation 2000 Stock Option Plan, incorporated by reference to Exhibit 4.0 of S-8 Registration Statement No. 333-93957. BOK Financial Corporation 2001 Stock Option Plan, incorporated by reference to Exhibit 4.0 of S-8 Registration Statement No. 333-62578. BOK Financial Corporation Directors’ Stock Compensation Plan, incorporated by reference to Exhibit 4.0 of S-8 Registration Statement No. 33-79836. Bank of Oklahoma Thrift Plan (Amended and Restated Effective as of January 1, 1995), incorporated by reference to Exhibit 10.7.6 of Form 10-K for the year ended December 31, 1994. Trust Agreement for the Bank of Oklahoma Thrift Plan (December 30, 1994), incorporated by reference to Exhibit 10.7.7 of Form 10-K for the year ended December 31, 1994. BOK Financial Corporation 2003 Stock Option Plan, incorporated by reference to Exhibit 4.0 of S-8 Registration Statement No. 333-106531. BOK Financial Corporation 2003 Executive Incentive Plan, incorporated by reference to Exhibit 4.0 of S-8 Registration Statement No. 333-106530. 10b5-1 Repurchase Plan between BOK Financial Corporation and BOSC, Inc. dated May 27, 2008, incorporated by reference to Exhibit 10.1 of Form 8-K filed May 27, 2008. Lease Agreement between One Williams Center Co. and National Bank of Tulsa (predecessor to BOk) dated June 18, 1974, incorporated by reference to Exhibit 10.9 of S-1 Registration Statement No. 33-90450. 126 10.9 10.10 10.11 10.12 10.13 10.13.1 10.14 10.14.1 10.15 10.15.1 10.16 10.16.1 10.17 10.18 10.18.1 10.19 10.20 10.21 Lease Agreement between Security Capital Real Estate Fund and BOk dated January 1, 1988, incorporated by reference to Exhibit 10.10 of S-1 Registration Statement No. 33- 90450. Asset Purchase Agreement (OREO and other assets) between BOk and Phi-Lea-Em Corporation dated April 30, 1991, incorporated by reference to Exhibit 10.11 of S-1 Registration Statement No. 33-90450. Asset Purchase Agreement (Tanker Assets) between BOk and Green River Exploration Company dated April 30, 1991, incorporated by reference to Exhibit 10.12 of S-1 Registration Statement No. 33-90450. Asset Purchase Agreement (Recovery Rights) between BOk and Kaiser dated April 30, 1991, incorporated by reference to Exhibit 10.13 of S-1 Registration Statement No. 33- 90450. Purchase and Assumption Agreement dated August 7, 1992 among First Gibraltar Bank, FSB, Fourth Financial Corporation and BOk, as amended, incorporated by reference to Exhibit 10.14 of Form 10-K for the fiscal year ended December 31, 1992. Allocation Agreement dated August 7, 1992 between BOk and Fourth Financial Corporation, incorporated by reference to Exhibit 10.14.1 of Form 10-K for the fiscal year ended December 31, 1992. Merger Agreement among BOK Financial, BOKF Merger Corporation Number Two, Brookside Bancshares, Inc., The Shareholders of Brookside Bancshares, Inc. and Brookside State Bank dated December 22, 1992, as amended, incorporated by reference to Exhibit 10.15 of Form 10-K for the fiscal year ended December 31, 1992. Agreement to Merge between BOk and Brookside State Bank dated January 27, 1993, incorporated by reference to Exhibit 10.15.1 of Form 10-K for the fiscal year ended December 31, 1992. Merger Agreement among BOK Financial, BOKF Merger Corporation Number Three, Sand Springs Bancshares, Inc., The Shareholders of Sand Springs Bancshares, Inc. and Sand Springs State Bank dated December 22, 1992, as amended, incorporated by reference to Exhibit 10.16 of Form 10-K for the fiscal year ended December 31, 1992. Agreement to Merge between BOk and Sand Springs State Bank dated January 27, 1993, incorporated by reference to Exhibit 10.16.1 of Form 10-K for the fiscal year ended December 31, 1992. Partnership Agreement between Kaiser-Francis Oil Company and BOK Financial dated December 1, 1992, incorporated by reference to Exhibit 10.16 of Form 10-K for the fiscal year ended December 31, 1993. Amendment to Partnership Agreement between Kaiser-Francis Oil Company and BOK Financial dated May 17, 1993, incorporated by reference to Exhibit 10.16.1 of Form 10-K for the fiscal year ended December 31, 1993. Purchase and Assumption Agreement between BOk and FDIC, Receiver of Heartland Federal Savings and Loan Association dated October 9, 1993, incorporated by reference to Exhibit 10.17 of Form 10-K for the fiscal year ended December 31, 1993. Merger Agreement among BOk, Plaza National Bank and The Shareholders of Plaza National Bank dated December 20, 1993, incorporated by reference to Exhibit 10.18 of Form 10-K for the fiscal year ended December 31, 1993. Amendment to Merger Agreement among BOk, Plaza National Bank and The Shareholders of Plaza National Bank dated January 14, 1994, incorporated by reference to Exhibit 10.18.1 of Form 10-K for the fiscal year ended December 31, 1993. Stock Purchase Agreement between Texas Commerce Bank, National Association and BOk dated March 11, 1994, incorporated by reference to Exhibit 10.19 of Form 10-K for the fiscal year ended December 31, 1993. Merger Agreement among BOK Financial Corporation, BOKF Merger Corporation Number Four, Citizens Holding Company and others dated May 11, 1994, incorporated by reference to Exhibit 10.20 of Form 10-K for the fiscal year ended December 31, 1994. Stock Purchase and Merger Agreement among Northwest Bank of Enid, BOk and The Shareholders of Northwest Bank of Enid effective as of May 16, 1994, incorporated by reference to Exhibit 10.21 of Form 10-K for the fiscal year ended December 31, 1994. 127 10.22 10.23 10.24 10.25 10.26 10.27 10.28 10.29 10.30 10.31 10.32 10.33 10.34 10.35 21.0 23.0 31.1 31.2 32 Agreement and Plan of Merger among BOK Financial Corporation, BOKF Merger Corporation Number Five and Park Cities Bancshares, Inc. dated October 3, 1996, incorporated by reference to Exhibit C of S-4 Registration Statement No. 333-16337. Agreement and Plan of Merger among BOK Financial Corporation and First TexCorp., Inc. dated December 18, 1996, incorporated by reference to Exhibit 10.24 of S-4 Registration Statement No. 333-16337. Purchase and Assumption Agreement between Bank of America National Trust and Savings Association and BOK Financial Corporation dated July 27, 1998. Merger Agreement among BOK Financial Corporation, BOKF Merger Corporation No. Seven, First Bancshares of Muskogee, Inc., First National Bank and Trust Company of Muskogee, and Certain Shareholders of First Bancshares of Muskogee, Inc. dated December 30, 1998. Merger Agreement among BOK Financial Corporation, BOKF Merger Corporation Number Nine, and Chaparral Bancshares, Inc. dated February 19, 1999. Merger Agreement among BOK Financial Corporation, Park Cities Bancshares, Inc., Mid- Cities Bancshares, Inc. and Mid-Cities National Bank dated February 24, 1999. Merger Agreement among BOK Financial Corporation, Park Cities Bancshares, Inc., PC Interim State Bank, Swiss Avenue State Bank and Certain Shareholders of Swiss Avenue State Bank dated March 4, 1999. Merger Agreement among BOK Financial Corporation, Park Cities Bancshares, Inc. and CNBT Bancshares, Inc. dated August 18, 2000, incorporated by reference to Exhibit 10.29 of Form 10-K for the fiscal year ended December 31, 2000. Merger Agreement among BOK Financial Corporation, Bank of Tanglewood, N.A. and TW Interim Bank dated October 25, 2002, incorporated by reference to Exhibit 2.0 of S-4 Registration Statement No. 333-98685. Remote Outsourcing Services Agreement between Bank of Oklahoma, N.A. and Alltel Information Services, Inc., dated September 1, 2002, incorporated by reference to Exhibit 10.30 of the September 30, 2002 10-Q filed on November 13, 2002. Merger Agreement among BOK Financial Corporation, BOKF Merger Corporation Number Eleven, Colorado Funding Company, Colorado State Bank and Trust and Certain Shareholders of Colorado Funding Company dated July 8, 2003, incorporated by reference to Exhibit 10.32 of Form 10-K for the fiscal year ended December 31, 2003. Merger Agreement between BOK Financial Corporation, BOKF Merger Corporation Number Eight, Valley Commerce Bank, and Valley Commerce Bancorp, Ltd. dated December 20, 2004, incorporated by reference to Exhibit 10.1 of the Form 8-K filed on December 22, 2004. Merger Agreement among BOK Financial Corporation, BOKF Merger Corporation Number Twelve, Worth Bancorporation, Inc., and Worth National Bank dated March 9, 2007, incorporated by reference to Exhibit 99.2 of the Form 8-K filed on March 12, 2007. Stock Purchase Agreement among BOK Financial Corporation, BOKF Stock Corporation Number Thirteen, United Banks of Colorado, Inc., First United Bank, NA and Baltz Family Partners, Ltd. dated May 23, 2007, incorporated by reference to Exhibit 99.2 of the Form 8- K filed on May 24, 2007. Subsidiaries of BOK Financial, filed herewith. Consent of independent registered public accounting firm - Ernst & Young LLP, filed herewith. Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. 128 99.0 99 (a) 99 (b) 99 (c) 99.1 99.5 99.6 99.7 99.8 99.9 Additional Exhibits. Credit Agreement dated December 2, 2005 between BOK Financial Corporation and participating lenders, incorporated by reference to Exhibit 99 (a) of Form 8-K filed December 6, 2005. Credit Agreement between BOK Financial Corporation and George B. Kaiser dated July 21, 2008, incorporated by reference to Exhibit 99 (b) of Form 8-K filed July 21, 2008. First Amended Debenture dated December 2, 2009 between BOK Financial Corporation and George B. Kaiser, incorporated by reference to Exhibit 99 (a) of Form 8-K filed December 4, 2009. Undertakings incorporated by reference into S-8 Registration Statement No. 33-44121 for Bank of Oklahoma Master Thrift Plan and Trust, incorporated by reference to Exhibit 99.1 of Form 10-K for the fiscal year ended December 31, 1993. Undertakings incorporated by reference into S-8 Registration Statement No. 33-79834 for BOK Financial Corporation 1994 Stock Option Plan, incorporated by reference to Exhibit 99.5 of Form 10-K for the fiscal year ended December 31, 1994. Undertakings incorporated by reference into S-8 Registration Statement No. 33-79836 for BOK Financial Corporation Directors’ Stock Compensation Plan, incorporated by reference to Exhibit 99.6 of Form 10-K for the fiscal year ended December 31, 1994. Undertakings incorporated by reference into S-8 Registration Statement No. 333-32649 for BOK Financial Corporation 1997 Stock Option Plan, Incorporated by reference to Exhibit 99.7 of Form 10-K for the fiscal year ended December 31, 1997. Undertakings incorporated by reference into S-8 Registration Statement No. 333-93957 for BOK Financial Corporation 2000 Stock Option Plan, Incorporated by reference to Exhibit 99.8 of Form 10-K for the fiscal year ended December 31, 1999. Undertakings incorporated by reference into S-8 Registration Statement No. 333-40280 for BOK Financial Corporation Thrift Plan for Hourly Employees, Incorporated by reference to Exhibit 99.9 of Form 10-K for the fiscal year ended December 31, 2000. (b) Exhibits See Item 15 (a) (3) above. (c) Financial Statement Schedules See Item 15 (a) (2) above. 129 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BOK FINANCIAL CORPORATION DATE: February 26, 2010 BY: /s/ George B. Kaiser George B. Kaiser Chairman of the Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 26, 2010, by the following persons on behalf of the registrant and in the capacities indicated. /s/ George B. Kaiser George B. Kaiser Chairman of the Board of Directors /s/ Steven E. Nell Steven E. Nell Executive Vice President and Chief Financial Officer OFFICERS /s/ Stanley A. Lybarger Stanley A. Lybarger Director, President and Chief Executive Officer /s/ John C. Morrow John C. Morrow Senior Vice President and Chief Accounting Officer /s/ Gregory S. Allen Gregory S. Allen C. Fred Ball, Jr. /s/ Sharon J. Bell Sharon J. Bell /s/ Peter C. Boylan, III Peter C. Boylan, III /s/ Chester Cadieux, III Chester Cadieux, III Joseph W. Craft, III William E. Durrett /s/ John W. Gibson John W. Gibson DIRECTORS /s/ David F. Griffin David F. Griffin /s/ V. Burns Hargis V. Burns Hargis /s/ E. Carey Joullian, IV E. Carey Joullian, IV /s/ Robert J. LaFortune Robert J. LaFortune Steven J. Malcolm /s/ E.C. Richards E.C. Richards 130 131 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 FOR THE CHIEF EXECUTIVE OFFICER Exhibit 31.1 I, Stanley A. Lybarger, President and Chief Executive Officer of BOK Financial Corporation (“BOK Financial”), certify that: 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K of BOK Financial; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) (b) (c) (d) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) (b) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 26, 2010 /s/ Stanley A. Lybarger Stanley A. Lybarger President Chief Executive Officer BOK Financial Corporation 132 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 FOR THE CHIEF FINANCIAL OFFICER Exhibit 31.2 I, Steven E. Nell, Executive Vice President and Chief Financial Officer of BOK Financial Corporation (“BOK Financial”), certify that: 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K of BOK Financial; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) (b) (c) (d) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) (b) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 26, 2010 /s/ Steven E. Nell Steven E. Nell Executive Vice President Chief Financial Officer BOK Financial Corporation 133 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32 In connection with the Annual Report of BOK Financial Corporation (“BOK Financial”) on Form 10-K for the fiscal year ending December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Stanley A. Lybarger and Steven E. Nell, Chief Executive Officer and Chief Financial Officer, respectively, of BOK Financial, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge: (1) (2) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of BOK Financial. February 26, 2010 /s/ Stanley A. Lybarger Stanley A. Lybarger President Chief Executive Officer BOK Financial Corporation /s/ Steven E. Nell Steven E. Nell Executive Vice President Chief Financial Officer BOK Financial Corporation 134 www.bokf.com

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