As filed with the Securities and Exchange Commission on August 14, 2003
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2003
Commission File No. 0-19341
BOK FINANCIAL CORPORATION
Incorporated in the State of Oklahoma
I.R.S. Employer Identification No.73-1373454
Bank of Oklahoma Tower
P.O. Box 2300
Tulsa, Oklahoma 74192
Registrant's Telephone Number,
Including Area Code (918) 588-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b)
OF THE ACT: (NONE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g)
OF THE ACT:
COMMON STOCK ($.00006 Par Value)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: 57,049,227 shares of
common stock ($.00006 par value) as of July 31, 2003.
- -------------------------------------------------------------------------------
2
BOK Financial Corporation
Form 10-Q
Quarter Ended June 30, 2003
Index
Part I. Financial Information
Management's Discussion and Analysis (Item 2) 2
Market Risk (Item 3) 17
Controls and Procedures (Item 4) 20
Report of Management on Consolidated Financial Statements 21
Consolidated Financial Statements (Unaudited) (Item 1) 22
Financial Summaries (Unaudited) (Item 2) 31
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 6. Exhibits and Reports on Form 8-K 35
Signatures 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
SUMMARY OF PERFORMANCE
BOK Financial Corporation ("BOK Financial") recorded net income of $41.5 million
or $0.64 per diluted common share for the second quarter of 2003 compared to
$34.6 million or $0.56 per diluted common share for the same period of 2002.
Diluted earnings per share for the prior year have been restated for a 3% stock
dividend that was distributed to shareholders during the second quarter of 2003.
The annualized returns on average assets and equity were 1.31% and 14.31% for
the quarter ended June 30, 2003 compared to returns of 1.25% and 15.62% for the
second quarter of 2002. The decrease in return on average equity between the two
quarters resulted from a 31% increase in average shareholders' equity. This is
consistent with the company's strategy of retaining earnings to support asset
growth.
In July 2003, BOK Financial entered into a definitive agreement to acquire
Colorado Funding Company and its wholly owned subsidiary, Colorado State Bank
and Trust, for $81.7 million in cash. Colorado State Bank has $316 million in
assets and is responsible for more than $1.6 billion in trust assets. The
acquisition is expected to close during the third quarter of 2003 and will
expand upon BOK Financial's existing Denver loan production office to become its
first full-service banking and trust presence in Denver. At June 30, 2003, the
outstanding balance of loans held by BOK Financial in the Denver market was $134
million.
The $6.9 million or 20% increase in net income was due primarily to growth in
fee and commissions revenue. Mortgage banking revenue, brokerage and trading
revenue, and service charges on deposit accounts increased 54%, 59%, and 20%,
respectively. Operating expenses decreased $2.0 million due to a $16.7 million
reduction in provision for mortgage servicing rights and related mortgage
banking costs. All other operating expenses increased $14.7 million or 18% due
primarily to increased personnel costs. Net gains on sales of securities were
$10.5 million during the second quarter of 2003 compared to $21.6 million in
2002. Gains on the sale of securities held as an economic hedge of the mortgage
servicing rights decreased $7.1 million and gains on sales of other securities
decreased $4.0 million.
Year-to-date net income totaled $85.7 million, a 27% increase over 2002. Diluted
earnings per common share were $1.33 in 2003 compared to $1.09 in the prior
year. The annualized returns on average assets and equity were 1.39% and 15.16%
for 2003 compared to returns of 1.24% and 15.63% for 2002. Fees and commissions
revenue grew 23% due primarily to increases in mortgage banking revenue,
brokerage and trading revenue, and service charges on deposit
3
accounts. Operating expenses increased $13.8 million or 7%. Mortgage banking
costs and provision for mortgage servicing rights decreased $13.2 million. All
other operating expenses increased $27.0 million or 17% due primarily to
increased personnel costs. Net gains on sales of securities were $20.1 million
during 2003 compared to $14.0 million in 2002. Net gains on the sale of
securities held as an economic hedge of the mortgage servicing rights increased
$16.0 million while gains on sales of other securities decreased $9.9 million.
NET INTEREST REVENUE
Tax-equivalent net interest revenue totaled $98.9 million for the second quarter
of 2003 compared to $91.9 million for the same period of 2002. The increase in
net interest revenue was due to a $1.4 billion increase in average earning
assets, partially offset by a 30 basis point decrease in net interest margin.
The growth in average earning assets included a $638 million increase in
securities and a $732 million increase in net loans. The growth in average
earning assets was funded by a $1.3 billion increase in average interest-bearing
liabilities. Average interest-bearing transaction accounts increased $783
million and average time deposits increased $522 million. Table 1 reflects the
effects on net interest revenue of changes in average balances and interest
rates for the various types of earning assets and interest-bearing liabilities.
Yields on average earning assets and rates paid on interest-bearing liabilities
both declined in the second quarter of 2003 compared to the second quarter of
2002. The net interest margin, the ratio of tax-equivalent net interest revenue
to average earning assets, declined to 3.47% from 3.77% for the same period of
2002. The decrease in net interest margin was due to yields on earning assets
falling more than rates paid on interest-bearing liabilities. The yield on the
securities portfolio decreased 119 basis points and the yield on the loan
portfolio decreased 71 basis points compared to the previous year. The cost of
interest-bearing liabilities decreased 68 basis points for the same periods. The
effects of declining interest rates on asset yields and rates paid for the past
five quarters are presented in the Quarterly Financial Summary on pages 32 and
33.
Year to date tax-equivalent net interest revenue increased $11.1 million or 6%
compared to the previous year. Average earning assets increased $1.3 billion
while the net interest margin decreased 30 basis points to 3.52%. The year to
date comparison was affected by the same factors as those that affected the
quarterly comparison.
- -------------------------------------------------------------------------------------------------------------------
Table 1 - Volume / Rate Analysis
(In thousands)
Three Months Ended Six Months Ended
June 30, 2003 / 2002 June 30, 2003 / 2002
------------------------------------------------------------------------
Change Due To (1) Change Due To (1)
---------------------- ----------------------
Yield Yield
Change Volume /Rate Change Volume /Rate
------------------------------------------------------------------------
Tax-equivalent interest revenue:
Securities $ (422) $ 11,343 $ (11,765) $ (4,156) $ 17,362 $ (21,518)
Trading securities (102) (90) (12) (189) (148) (41)
Loans (1,211) 10,570 (11,781) 483 21,824 (21,341)
Funds sold and resell agreements (33) (2) (31) 23 79 (56)
- -------------------------------------------------------------------------------------------------------------------
Total (1,768) 21,821 (23,589) (3,839) 39,117 (42,956)
- -------------------------------------------------------------------------------------------------------------------
Interest expense:
Transaction deposits (1,849) 2,295 (4,144) (2,974) 4,300 (7,274)
Savings deposits (320) 14 (334) (495) 34 (529)
Time deposits (2,126) 4,199 (6,325) (1,850) 8,163 (10,013)
Federal funds purchased and repurchase
agreements (2,117) 102 (2,219) (5,009) (421) (4,588)
Other borrowings (2,033) 113 (2,146) (4,037) (210) (3,827)
Subordinated debentures (304) (467) 163 (606) (934) 328
- -------------------------------------------------------------------------------------------------------------------
Total (8,749) 6,256 (15,005) (14,971) 10,932 (25,903)
- -------------------------------------------------------------------------------------------------------------------
Tax-equivalent net interest revenue 6,981 15,565 (8,584) 11,132 28,185 (17,053)
Decrease in tax-equivalent adjustment 305 598
- -------------------------------------------------------------------------------------------------------------------
Net interest revenue $ 7,286 $ 11,730
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) Changes attributable to both volume and yield/rate are allocated to both
volume and yield/rate on an equal basis.
</FN>
4
BOK Financial follows a strategy of fully utilizing its capital resources by
borrowing funds in the capital markets to fund increased investment in
securities. The primary objective of this strategy is to enhance revenue
opportunities. In the current market conditions, this strategy also helps manage
the overall interest rate risk of the company. The interest rate on these
borrowed funds, which generally reacts quickly to changes in market interest
rates, tends to match the effect of changes in interest rates on the loan
portfolio. Interest rates earned on the securities purchased with the proceeds
of these borrowed funds are affected less quickly by changes in market interest
rates. The timing of changes in interest rates earned on securities more closely
matches the timing of changes in interest rates paid on time deposits. Although
this strategy may result in a net interest margin that falls below those
normally seen in the commercial banking industry, it provides positive net
interest revenue. Management estimates that for the second quarter of 2003, this
strategy enhanced net interest revenue $15.1 million, compared to $17.3 million
for the second quarter of 2002. Excluding this strategy, net interest margin for
the second quarter of 2003 was 3.56%. For the same period of 2002, there was
nominal impact on net interest margin due to the continued decline of yields on
securities in relation to moderating the cost of short-term borrowed funds.
Average securities purchased and funds borrowed under this strategy were $2.0
billion in the second quarter of 2003 and $1.9 billion in the second quarter of
2002. As more fully discussed in the Market Risk section of this report on page
17, management employs various techniques to manage, within certain parameters,
the interest rate and liquidity risks inherent in this strategy. The
effectiveness of these techniques is reflected in the overall change in net
interest revenue due to changes in interest rates as shown in Table 1.
OTHER OPERATING REVENUE
Other operating revenue for the second quarter of 2003 increased $4.5 million or
5% compared to the second quarter of 2002. Fees and commissions increased $15.3
million or 24% and continue to represent a significant portion of BOK
Financial's total revenue. Fees and commissions represented 45% of total
revenue, excluding gains and losses on securities and derivatives, in the second
quarter of 2003. This is compared to 41% for the same period of 2002. Mortgage
banking revenue which is discussed in the Lines of Business - Mortgage Banking
section of this report on page 8 increased $5.9 million or 54%. Brokerage and
trading revenue increased $3.7 million or 59% due to increased sales of fixed
income securities to institutional customers. Service charges on deposit
accounts increased $3.2 million or 20% due primarily to an overdraft privilege
product initiated during the second quarter of 2002. Transaction card revenue
increased $1.7 million or 13% due to strong growth in check card revenue and
merchant discount fees. The percentage growth in these revenue sources was
partially offset by a 1% growth in ATM revenue, which is included in transaction
card revenue.
BOK Financial realized net gains on securities sales of $10.5 million during the
second quarter of 2003 compared to net gains of $21.6 million during the second
quarter of 2002. These amounts included net gains from sales of securities
designated as an economic hedge of the mortgage servicing portfolio of $4.4
million in 2003 compared to $11.5 million in 2002. Net gains on sales of
securities from the undesignated portfolio were $6.1 million in 2003 compared to
$10.1 million in 2002. During the second quarter of 2003, management initiated a
strategy of selling mortgage-backed securities that were subject to high
extension risk if interest rates increased. The proceeds of these sales were
reinvested in similar securities with less extension risk. Approximately $1.0
billion of sales proceeds were generated during the second quarter. A total of
$2.1 billion was invested in the securities portfolio during the second quarter.
The estimated life of the securities portfolio was 2.5 years, up from 2.0 years
at December 31, 2002 and within established guidelines. Net losses on
derivatives primarily represent the mark to market of the derivative portfolio
used for interest rate risk management.
Other operating revenue for the first half of 2003 increased $34.7 million or
26% compared to the first half of 2002. Fees and commissions increased $28.8
million or 23% primarily due to growth in mortgage banking revenue, brokerage
and trading revenue, and service charges on deposit accounts. Net gains on
securities sales were $20.1 million for the first half of 2003. This included
net gains of $7.6 million on securities held as an economic hedge of the
mortgage servicing portfolio and $12.5 million on sales of other securities. Net
gains on securities sales were $14.0 million for the first half of 2002. This
included a net loss of $8.4 million on securities held as an economic hedge of
the mortgage servicing portfolio and gains of $22.4 million on sales of other
securities.
5
- --------------------------------------------------------------------------------------------------------------------------
Table 2 - Other Operating Revenue
(In thousands)
Three Months Ended
-------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
2003 2003 2002 2002 2002
-------------------------------------------------------------------------------
Brokerage and trading revenue $ 10,032 $ 8,679 $ 6,725 $ 5,359 $ 6,299
Transaction card revenue 15,138 13,599 13,973 13,654 13,439
Trust fees and commissions 10,845 10,180 9,813 9,605 10,300
Service charges and fees
on deposit accounts 19,606 18,984 18,991 18,395 16,391
Mortgage banking revenue, net 16,609 15,535 14,943 12,556 10,759
Leasing revenue 795 859 826 790 822
Other revenue 5,992 5,001 4,431 5,105 5,698
- -----------------------------------------------------------------------------------------------------------------
Total fees and commissions 79,017 72,837 69,702 65,464 63,708
- -----------------------------------------------------------------------------------------------------------------
Gain on sale of assets 8 730 30 444 7
Gain on sales of securities, net 10,457 9,689 10,342 34,341 21,602
Gain (loss) on derivatives, net (1,121) (1,102) 665 7,218 (1,453)
- -----------------------------------------------------------------------------------------------------------------
Total other operating revenue $ 88,361 $ 82,154 $ 80,739 $ 107,467 $ 83,864
- -----------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSE
Other operating expense for the quarter ended June 30, 2003 totaled $111.8
million, a $2.0 million decrease compared to the second quarter of 2002. The
provision for impairment of mortgage servicing rights decreased $20.4 million.
Mortgage banking costs which consist primarily of amortization of mortgage
servicing rights increased $3.7 million. Both of these expenses reflected
changes in market conditions. These market conditions and their effect on actual
and anticipated loan prepayment speeds are more thoroughly discussed in the
Lines of Business - Mortgage Banking section of this report on page 8. Excluding
the changes in provision for impairment of mortgage servicing rights and
mortgage banking costs, other operating expenses increased $14.7 million or 18%.
Personnel expense increased $7.5 million or 17% during the second quarter of
2003. Salaries increased $3.6 million or 11%. Average compensation per full-time
equivalent employee ("FTE") increased 9% and the number of FTE increased by 81.
Benefits increased $2.4 million or 34% due to higher medical claims and pension
costs. Incentive compensation increased $1.6 million or 24%. Approximately $1.2
million of the increase was due to commissions that are related to revenue
growth in the company's brokerage and trading activities.
Data processing and communication expense increased $2.8 million or 25%. Data
processing costs increased $1.2 million due to transaction card processing which
is directly related to the volume of transactions. Additionally, data processing
costs increased $1.2 million due to expenses related to the current project to
upgrade core processing systems.
Year to date, other operating expense totaled $210.7 million, a $13.8 million
increase compared to the first half of 2002. The provision for impairment of
mortgage servicing rights decreased $23.0 million. Mortgage banking costs which
consist primarily of amortization of mortgage servicing rights increased $9.8
million. Both of these expenses reflected changes in market conditions. These
market conditions and their effect on actual and anticipated loan prepayment
speeds are more thoroughly discussed in the Lines of Business - Mortgage Banking
section of this report on page 8. Excluding the changes in provision for
impairment of mortgage servicing rights and mortgage banking costs, other
operating expenses increased $27.0 million or 17%. Personnel expense increased
$16.8 million and data processing and communication expense increased $5.0
million. These expense increases were attributable to the same factors that
caused second quarter expenses to increase compared to the previous year.
6
- ----------------------------------------------------------------------------------------------------------------------
Table 3 - Other Operating Expense
(In thousands)
Three Months Ended
----------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
2003 2003 2002 2002 2002
----------------------------------------------------------------------------------
Personnel $ 52,429 $ 52,632 $ 50,134 $ 44,963 $ 44,885
Business promotion 2,781 3,471 2,798 2,483 3,208
Professional fees and services 5,404 3,765 3,531 2,816 3,732
Net occupancy and equipment 11,240 11,061 11,130 10,578 10,299
Data processing & communications 14,019 12,643 13,459 12,138 11,216
FDIC and other insurance 530 516 513 468 483
Printing, postage and supplies 3,523 3,359 3,418 3,172 3,018
Net gains and operating expenses
on repossessed assets 335 8 203 108 656
Amortization of intangible assets 1,777 1,777 2,002 1,867 1,882
Mortgage banking costs 11,481 14,442 14,488 11,635 7,791
Provision (recovery) for impairment
of mortgage servicing rights 3,353 (7,830) (1,615) 29,042 23,774
Other expense 4,916 3,082 4,932 4,425 2,854
- ---------------------------------------------------------------------------------------------------------------------
Total $ 111,788 $ 98,926 $ 104,993 $ 123,695 $ 113,798
- ---------------------------------------------------------------------------------------------------------------------
LINES OF BUSINESS
BOK Financial operates four principal lines of business under its Bank of
Oklahoma ("BOk") franchise: corporate banking, consumer banking, mortgage
banking and trust services. It also operates a fifth principal line of business,
regional banks, which includes all banking functions for Bank of Albuquerque,
N.A., Bank of Arkansas, N.A., and Bank of Texas, N.A. Other non-reportable lines
of business include the TransFund ATM network and BOSC, Inc., a securities
broker/dealer. 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.
BOK Financial allocates resources and evaluates performance of its lines of
business after allocation of funds, certain indirect expenses, taxes and capital
costs. The cost of funds borrowed from the funds management unit by the
operating lines of business is transfer priced at rates that approximate market
for funds with similar duration. Market is generally based on the applicable
LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of
transfer-pricing funds that support assets of the operating lines of business
tends to insulate them from interest rate risk.
The value of funds provided by the operating lines of business to the funds
management unit is based on applicable Federal Home Loan Bank advance rates.
Deposit accounts with indeterminate maturities, such as demand deposit accounts
and interest-bearing transaction accounts, are transfer-priced at a rolling
average based on expected duration of the accounts. The expected duration ranges
from 90 days for certain rate-sensitive deposits to five years. Over the past
year, the average transfer-pricing rate for these deposit accounts decreased.
Since many of these deposit accounts are either non-interest bearing accounts or
interest bearing accounts whose rates cannot be readily reset lower due to
market constraints, the decline in the transfer-pricing rates shifted net
interest revenue from providers of funds, primarily consumer banking and trust
services, to the funds management unit.
Economic capital is assigned to the business units based on an allocation method
that reflects management's assessment of risk. During the second quarter of
2003, management adopted a third-party developed capital allocation model. This
model assigns capital based upon credit, operating, interest rate and market
risk inherent in BOK Financial's 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. Previously,
capital was assigned to the business units based on an internally-developed
model that focused primarily on credit risk as defined by regulatory standards.
While adoption of this new allocation model has not significantly affected
management's assessment of the overall capital levels required for the company,
it has assigned more capital to business units with operating, interest rate and
market risk, and assigned less capital to business units with credit risk.
Additional capital is assigned to the regional banks line of business based on
BOK Financial's investment in those entities. Capital assignments for prior
periods have been restated to reflect this new allocation model.
7
CORPORATE BANKING
The Corporate Banking Division provides loan and lease financing and treasury
and cash management services to businesses throughout Oklahoma and surrounding
states. BOk's Corporate Banking Division includes the Denver loan production
office. In addition to serving the banking needs of small businesses, middle
market and larger customers, the Corporate Banking Division has specialized
groups that serve customers in the energy, agriculture, healthcare and
banking/finance industries. The Corporate Banking Division contributed $11.9
million or 29% to consolidated net income for the second quarter of 2003. This
compares to $12.0 million or 35% of consolidated net income for the second
quarter of 2002. Net interest revenue from external sources decreased due to
lower yields on average assets, primarily loans. The diminishing yield on loans
was offset by a decline in net interest expense from internal sources. Operating
expenses increased to $15.6 million for the second quarter of 2003 from $14.9
million for the same period of the prior year mostly due to an increase in
personnel and transaction processing costs. The provision for loan loss
represents net loans charged off or recovered for the Corporate Banking
Division. Average assets increased $509 million or 13% for the second quarter of
2003 from the same period of the prior year due primarily to loan growth.
TABLE 4 - CORPORATE BANKING
(In thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------------------
NIR (expense) from external sources $ 37,506 $ 39,508 $ 75,487 $ 78,144
NIR (expense) from internal sources (7,963) (11,923) (16,601) (24,129)
----------- ----------- ------------ -----------
Total net interest revenue 29,543 27,585 58,886 54,015
Other operating revenue 9,117 8,368 17,683 16,599
Operating expense 15,618 14,916 30,840 28,883
Provision for loan loss 3,620 1,316 6,654 3,530
Net income 11,860 11,976 23,988 23,549
Average assets $ 4,440,987 $ 3,932,104 $ 4,451,281 $ 3,933,341
Average equity 294,235 281,300 285,380 258,304
Return on assets 1.07% 1.22% 1.09% 1.21%
Return on equity 16.17% 17.08% 16.95% 18.38%
Efficiency ratio 40.40% 41.49% 40.28% 40.90%
CONSUMER BANKING
The Consumer Banking Division provides a full line of deposit, loan and
fee-based services to customers throughout Oklahoma through four major
distribution channels: traditional branches, supermarket branches, the 24-hour
ExpressBank call center and the Internet. Additionally, the division is a
significant referral source for the Bank of Oklahoma Mortgage Division ("BOk
Mortgage") and BOSC's retail brokerage division. The Consumer Banking Division
contributed $2.1 million or 5% to consolidated net income for the second quarter
of 2003. This compares to $2.2 million or 6% of consolidated net income for the
second quarter of 2002. Revenue from internal sources, primarily funds provided
to other business lines, decreased $1.3 million due to lower transfer-pricing
rates. Other operating revenue increased $2.4 million, or 25%, over the second
quarter of 2002 due primarily to increases in service charges from an overdraft
privilege product initiated during the second quarter of 2002. The provision for
loan losses, which represents actual net loans charged off, increased $700
thousand in the second quarter of 2003 as compared to the same period of 2002
due primarily to the overdraft privilege product.
8
TABLE 5 - CONSUMER BANKING
(In thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------------------
NIR (expense) from external sources $ (4,206) $ (4,652) $ (8,663) $ (8,736)
NIR (expense) from internal sources 14,533 15,808 29,051 31,417
---------- ---------- ---------- ----------
Total net interest revenue 10,327 11,156 20,388 22,681
Other operating revenue 11,661 9,295 22,776 17,169
Operating expense 16,929 15,842 32,936 31,291
Provision for loan loss 1,646 946 3,691 2,386
Net income 2,084 2,237 3,994 3,771
Average assets $ 2,461,539 $ 2,282,477 $ 2,475,909 $ 2,300,335
Average equity 62,545 63,100 62,130 63,432
Return on assets 0.34% 0.39% 0.33% 0.33%
Return on equity 13.36% 14.22% 12.96% 11.99%
Efficiency ratio 76.99% 77.46% 76.30% 78.52%
MORTGAGE BANKING
BOK Financial engages in mortgage banking activities through the BOk Mortgage
Division of Bank of Oklahoma. These activities include the origination,
marketing and servicing of conventional and government-sponsored mortgage loans.
BOK Mortgage contributed $5.6 million or 14% to consolidated net income in the
second quarter of 2003 compared to a loss of $5.3 million in the second quarter
of 2002.
BOK Mortgage is comprised of two sectors, loan production and loan servicing.
The loan production sector generally performs best when mortgage interest rates
are low and loan origination volumes are high. Conversely, the loan servicing
sector generally performs best when mortgage interest rates are relatively high
and prepayments are low. The historically low mortgage interest rate environment
that continued throughout the second quarter of 2003 produced net profits for
the loan production sector. The loan servicing sector incurred a loss during the
second quarter as amortization expense and impairment provision related to loan
servicing rights were only partially offset by hedging gains.
LOAN PRODUCTION SECTOR
Revenue from loan production was $13.5 million in the second quarter of 2003,
including $7.1 million of capitalized mortgage servicing rights, compared to
revenue from loan production of $4.0 million in the second quarter of 2002,
including $4.6 million of capitalized mortgage servicing rights. The increase in
revenue was due to increased volume of loans originated and an improved market
for loan sales. Mortgage loans funded totaled $463 million in the second quarter
of 2003, including $145 million for home purchases and $318 million of
refinanced loans. Mortgage loans funded in the second quarter of 2002 totaled
$254 million. Approximately 71% of the loans funded in the second quarter of
2003 were in Oklahoma. The combination of increased volume and improved market
conditions increased pre-tax income from loan production to $11.6 million in
2003 compared to $2.4 million in 2002. The pipeline of mortgage loan
applications totaled $563 million at June 30, 2003.
LOAN SERVICING SECTOR
The loan servicing sector had a pre-tax loss of $2.8 million for the second
quarter of 2003 compared to a pre-tax loss of $11.4 million for the same period
of 2002. The reduction in pre-tax loss was due primarily to a lower provision
for impairment of mortgage servicing rights which was partially offset by
increased amortization expense and lower hedging gains.
Excluding hedge performance, the loan servicing sector incurred a $13.4 million
pre-tax loss in the second quarter of 2003 compared to a pre-tax loss of $24.5
million in 2002. Amortization expense, which is based on both actual and
anticipated loan prepayments, increased to $11.1 million in 2003 compared to
$6.3 million in 2002. This increase in amortization expense was offset by a
reduction in the provision for impairment of mortgage servicing rights to $3.4
9
million in 2003 from $23.8 million in 2002. BOK Financial realized net gains on
sales of securities held as an economic hedge of its mortgage servicing rights
of $4.4 million in the second quarter of 2003. This is compared to net gains of
$12.0 million realized in the second quarter of 2002.
Servicing revenue totaled $5.8 million in 2003 compared to $6.9 million in 2002.
The decrease in servicing revenue was due primarily to a lower outstanding
principal balance of loans serviced. The average outstanding balance of loans
serviced was $4.7 billion for the second quarter of 2003 compared to $6.1
billion for the second quarter of 2002. The decrease in loans serviced reflected
both the rapid refinancing of mortgage loans and BOK Mortgage's decision to
curtail purchases of mortgage loan servicing.
The valuation allowance for impairment of mortgage servicing rights totaled $50
million at June 30, 2003 compared to $37 million at June 30, 2002. BOK Financial
provides a valuation allowance to reduce the carrying value of its servicing
rights to the lower of fair value or amortized cost segregated by impairment
strata. Impairment strata are determined by interest rate bands and by loan
types, either conventional or government-backed. The fair value of servicing
rights is based on estimated revenues that will be generated over the servicing
period, less estimated costs to service the loans. The valuation allowance may
be reversed, in part or in whole, if the fair value of servicing rights in a
particular impairment strata increase or if the amortized cost of servicing
rights in a particular strata decrease. Fair value may increase if anticipated
loan prepayment speeds decrease. Amortized cost of a particular impairment
stratum will decrease through amortization.
BOK Financial designates a portion of its securities portfolio as an economic
hedge against the risk of loss on its mortgage servicing rights. Mortgage-backed
securities and U.S. government agency debentures are acquired and held as
available for sale when prepayment risks exceed certain levels. The fair value
of these securities is expected to vary inversely to the fair value of the
servicing rights. See the Market Risk section of this report on page 17 for
additional discussion of the prepayment risk of the mortgage servicing portfolio
and related hedging strategies.
TABLE 6 - MORTGAGE BANKING
(In thousands)
Three months ended June 30, Six months ended June 30,
---------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------------------
NIR (expense) from external sources $ 7,647 $ 6,838 $ 15,336 $ 15,783
NIR (expense) from internal sources (2,176) (3,725) (4,974) (7,964)
----------- ----------- ----------- -----------
Total net interest revenue 5,471 3,113 10,362 7,819
Capitalized mortgage servicing rights 7,112 4,556 12,633 8,778
Other operating revenue 11,939 6,865 24,737 14,351
Operating expense 16,203 11,468 35,036 23,472
Provision (recovery) for impairment of
mortgage servicing rights 3,353 23,774 (4,477) 18,496
Gains (losses) on sales of financial instruments 4,412 12,019 7,605 (7,903)
Net income (loss) 5,645 (5,315) 14,951 (11,607)
Average assets $ 665,045 $ 686,222 $ 673,458 $ 661,391
Average equity 37,560 52,270 37,900 51,194
Return on assets 3.40% (3.11)% 4.48% (3.54)%
Return on equity 60.28% (40.79)% 79.55% (45.72)%
Efficiency ratio 66.08% 78.90% 73.40% 75.84%
TRUST SERVICES
BOK Financial provides a wide range of trust and private financial services,
including institutional, investment and retirement products, loans and other
services to affluent individuals, businesses, not-for-profit organizations, and
governmental agencies. Trust services are primarily provided to clients in
Oklahoma, Texas, Arkansas and New Mexico. Additionally, Trust Services include a
nationally competitive, self-directed 401-(k) program. At June 30, 2003 and
2002, trust assets with an aggregate market value of $18.6 billion and $17.9
billion, respectively, were subject to various fiduciary arrangements. BOK
Financial has sole or joint discretionary authority over $8.2 billion of trust
assets at June 30, 2003 compared to $7.8 billion of trust assets at June 30,
2002. Trust Services contributed $1.6 million or 4% to consolidated net income
for the second quarter 2003. This compared to $1.9 million or 6% of consolidated
net income for the second quarter of 2002. Average assets increased $125 million
or 25% for the second
10
quarter of 2003 from the same period of the prior year. The growth in assets is
largely attributable to an increase in funds provided by the personal financial
services units of Trust Services. Interest-bearing transaction deposits have
increased as customers respond to the equities market downturn.
TABLE 7 - TRUST SERVICES
(In thousands)
Three months ended June 30, Six months ended June 30,
--------------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------------------
NIR (expense) from external sources $ 191 $ 326 $ 383 $ 799
NIR (expense) from internal sources 2,381 2,131 4,695 4,005
----------- ----------- ---------- -----------
Total net interest revenue 2,572 2,457 5,078 4,804
Other operating revenue 10,767 10,248 20,848 20,608
Operating expense 10,568 9,540 20,834 19,353
Net income 1,554 1,934 2,952 3,671
Average assets $ 633,141 $ 508,361 $ 656,118 $ 517,499
Average equity 41,355 43,320 41,133 43,267
Return on assets 0.98% 1.53% 0.91% 1.43%
Return on equity 15.07% 17.91% 14.47% 17.11%
Efficiency ratio 79.23% 75.09% 80.36% 76.16%
REGIONAL BANKING
Regional banks include Bank of Texas, Bank of Albuquerque, and Bank of Arkansas.
Each of these banks provides a full range of corporate and consumer banking
services in their respective markets. Small businesses and middle-market
corporations are the regional banks' primary customer focus. Regional banks
contributed $10.9 million or 26% to consolidated net income for the second
quarter of 2003. This compares to $8.3 million or 24% of consolidated net income
for the second quarter of 2002. Net interest revenue from external customers
increased $1.5 million or 4% in the second quarter of 2003 from the same period
of the prior year due to growth in average earning assets, offset by declines in
yields. Net interest expense from internal sources decreased $3.4 million or 61%
due to lower transfer-pricing rates, as described above. Other operating revenue
increased $1.8 million or 28% in the second quarter of 2003 from the same period
of the prior year due primarily to service charges on deposit accounts,
including an overdraft privilege product initiated in the second quarter of
2002. Operating expenses increased $4.6 million or 20% in the second quarter of
2003 from the second quarter of 2002. Personnel costs accounted for
approximately $2.3 million of this increase due to increases in the number of
employees, overall increases in salary and benefits expense per employee, and
incentive bonuses directly related to revenue growth.
BOK Financial's operations in Texas, New Mexico and Arkansas contributed $6.7
million, $3.6 million, and $620 thousand, respectively, to consolidated net
income for the second quarter of 2003. This compared to $5.8 million, $2.6
million, and a $97 thousand loss, respectively, for the second quarter 2002.
Average assets increased $787 million or 21% for the second quarter of 2003 from
the same period of the prior year due to the acquisition of $252 million of Bank
of Tanglewood assets in the fourth quarter of 2002 and due to growth at Bank of
Texas and Bank of Albuquerque of approximately $285 million and $215 million,
respectively.
11
TABLE 8 - REGIONAL BANKING
(In thousands)
Three months ended June 30, Six months ended June 30,
--------------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------------------
NIR (expense) from external sources $ 38,234 $ 36,719 $ 77,244 $ 72,156
NIR (expense) from internal sources (2,212) (5,657) (6,650) (11,974)
---------- ---------- ---------- -----------
Total net interest revenue 36,022 31,062 70,594 60,182
Other operating revenue 8,369 6,545 16,214 11,952
Operating expense 27,353 22,795 54,242 44,647
Provision for loan loss 1,208 2,420 2,611 3,536
Gains (losses) on sales of financial instruments - 2,134 339 2,961
Net income 10,884 8,272 20,043 16,106
Average assets $ 4,503,491 $ 3,716,658 $ 4,519,785 $ 3,739,332
Average equity 427,531 356,759 424,819 359,234
Return on assets 0.97% 0.89% 0.89% 0.87%
Return on equity 10.21% 9.30% 9.51% 9.04%
Efficiency ratio 61.62% 60.61% 62.49% 61.89%
DISCUSSION AND ANALYSIS OF OPERATIONS
LOANS
The aggregate loan portfolio at June 30, 2003 totaled $7.0 billion and increased
$66 million or 1% during the quarter. Commercial loans increased $77 million and
consumer loans increased $19 million. These increases were partially offset by a
$31 million decrease in mortgage loans.
- ---------------------------------------------------------------------------------------------------------------------
TABLE 9 - LOANS
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2003 2003 2002 2002 2002
---------------------------------------------------------------------------------
Commercial:
Energy $ 1,121,285 $ 1,147,875 $ 1,132,178 $ 1,006,151 $ 936,381
Manufacturing 532,849 523,055 501,506 507,798 513,019
Wholesale/retail 693,175 626,362 627,422 671,127 655,081
Agricultural 164,480 163,823 186,976 154,221 134,612
Services 1,247,129 1,254,894 1,249,622 1,166,193 1,118,239
Other commercial and industrial 331,070 297,226 292,094 286,972 300,239
- ---------------------------------------------------------------------------------------------------------------------
Total commercial 4,089,988 4,013,235 3,989,798 3,792,462 3,657,571
- ---------------------------------------------------------------------------------------------------------------------
Commercial real estate:
Construction and land development 363,956 371,680 356,227 331,073 320,730
Multifamily 287,613 306,409 307,119 309,173 297,576
Other real estate loans 812,282 783,674 772,492 767,083 744,391
- ---------------------------------------------------------------------------------------------------------------------
Total commercial real estate 1,463,851 1,461,763 1,435,838 1,407,329 1,362,697
- ---------------------------------------------------------------------------------------------------------------------
Residential mortgage:
Secured by 1-4 family
residential properties 921,320 951,415 929,759 849,254 795,834
Residential mortgages held for sale 144,890 146,092 133,421 136,330 82,714
- ---------------------------------------------------------------------------------------------------------------------
Total residential mortgage 1,066,210 1,097,507 1,063,180 985,584 878,548
- ---------------------------------------------------------------------------------------------------------------------
Consumer 422,839 403,984 412,167 409,779 414,571
- ---------------------------------------------------------------------------------------------------------------------
Total $ 7,042,888 $ 6,976,489 $ 6,900,983 $ 6,595,154 $ 6,313,387
- ---------------------------------------------------------------------------------------------------------------------
Outstanding loans to energy customers totaled $1.1 billion or 16% of total loans
at June 30, 2003. Approximately $910 million of the energy loan portfolio was to
oil and gas producers. The amount of credit available to these customers
12
generally depends on the value of their proven energy reserves based on current
prices. The energy loan category also included loans to borrowers involved in
the transportation of oil and gas and loans to borrowers that manufacture
equipment and provide other services to the energy industry. Outstanding loans
to the services industry totaled $1.2 billion at June 30, 2003. Services
included loans that totaled $243 million to nursing homes, $114 million to the
healthcare industry and $55 million to the hotel industry. Agriculture included
$148 million of loans to the cattle industry. Other notable loan concentrations
by primary industry of the borrowers are presented in Table 9.
Commercial real estate loans totaled $1.5 billion at June 30, 2003 or 21% of the
total loan portfolio. Construction and land development loans included $292
million for single-family residential lots and premises. The major components of
other commercial real estate loans were office buildings at $286 million and
retail facilities at $230 million.
Residential mortgage loans, excluding loans held for sale, included $327 million
of home equity loans, $265 million of loans held for business relationship, $253
million of adjustable rate mortgage loans and $59 million of loans held for
community development. Consumer loans included $188 million of indirect
automobile loans. Substantially all of these loans were purchased from dealers
in Oklahoma. Approximately 18% of the indirect automobile loan portfolio was
considered sub-prime.
While BOK Financial continued to increase geographic diversification through
expansion into Texas and New Mexico, geographic concentration subjects the loan
portfolio to the general economic conditions in Oklahoma. Table 10 presents the
distribution of the major loan categories among BOK Financial's principal market
areas.
- ---------------------------------------------------------------------------------------------------------------------
TABLE 10 - LOANS BY PRINCIPAL MARKET AREA
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2003 2003 2002 2002 2002
---------------------------------------------------------------------------------
Oklahoma (1):
Commercial $ 2,893,801 $ 2,764,252 $ 2,773,158 $ 2,663,752 $ 2,547,218
Commercial real estate 770,486 782,842 763,469 790,638 752,757
Residential mortgage 644,942 679,727 656,391 613,963 559,366
Residential mortgage held for sale 144,890 146,092 133,421 136,330 82,714
Consumer 309,632 299,404 294,404 311,877 314,061
---------------------------------------------------------------------------------
Total Oklahoma $ 4,763,751 $ 4,672,317 $ 4,620,843 $ 4,516,560 $ 4,256,116
---------------------------------------------------------------------------------
Texas:
Commercial $ 840,470 $ 889,127 $ 866,905 $ 789,846 $ 773,649
Commercial real estate 444,162 459,605 455,364 391,207 381,068
Residential mortgage 202,423 195,179 192,575 149,983 148,463
Consumer 100,148 91,182 104,353 85,651 88,783
---------------------------------------------------------------------------------
Total Texas $ 1,587,203 $ 1,635,093 $ 1,619,197 $ 1,416,687 $ 1,391,963
---------------------------------------------------------------------------------
Albuquerque:
Commercial $ 297,371 $ 298,051 $ 286,622 $ 276,222 $ 270,278
Commercial real estate 180,000 155,240 150,293 141,298 142,829
Residential mortgage 68,374 71,598 76,020 80,298 82,926
Consumer 10,703 11,040 11,399 10,191 9,711
---------------------------------------------------------------------------------
Total Albuquerque $ 556,448 $ 535,929 $ 524,334 $ 508,009 $ 505,744
---------------------------------------------------------------------------------
Northwest Arkansas:
Commercial $ 58,346 $ 61,805 $ 63,113 $ 62,642 $ 66,426
Commercial real estate 69,203 64,076 66,712 84,186 86,043
Residential mortgage 5,581 4,911 4,773 5,010 5,079
Consumer 2,356 2,358 2,011 2,060 2,016
---------------------------------------------------------------------------------
Total Northwest Arkansas $ 135,486 $ 133,150 $ 136,609 $ 153,898 $ 159,564
---------------------------------------------------------------------------------
Total BOK Financial loans $ 7,042,888 $ 6,976,489 $ 6,900,983 $ 6,595,154 $ 6,313,387
---------------------------------------------------------------------------------
<FN>
(1) Includes Denver loan production office.
</FN>
13
OTHER DERIVATIVES WITH CREDIT RISK
BOK Financial offers a program that permits its energy-producing customers to
hedge against price fluctuations and to take positions through energy option and
swap contracts. These contracts are executed between BOk and its customers.
Offsetting contracts are executed between BOk and selected energy dealers to
minimize the risk of changes in energy prices. The dealer contracts are
identical to the customer contracts, except for a fixed pricing spread paid to
BOk as compensation for administrative costs, credit risk and profit.
The fair value of energy derivative contracts carried as assets totaled $132
million and the fair value of energy contracts carried as liabilities totaled
$133 million at June 30, 2003. Approximately 67% of the fair value of asset
contracts was with customers of BOK Financial. The remaining 33% was with energy
dealers, primarily Bank of Montreal and JP Morgan Chase. Conversely,
approximately 62% of the fair value of liability contracts was with energy
dealers, primarily Coral Energy and Morgan Stanley. The remaining 38% was due to
various customers. Deterioration in the credit standing of one or more
counterparties may result in BOK Financial recognizing a loss as the fair value
of the affected contracts may no longer move in tandem with the offsetting
contracts. This could occur if the credit standing of the counterparty
deteriorated such that either the fair value of the energy production no longer
supported the contract or the counterparty's ability to provide margin
collateral was impaired.
SUMMARY OF LOAN LOSS EXPERIENCE
The reserve for loan losses, which is available to absorb losses inherent in the
loan portfolio, totaled $123 million at June 30, 2003 compared to $120 million
at March 31, 2003 and $108 million at June 30, 2002. These amounts represent
1.78%, 1.75%, and 1.73%, respectively, of total loans, excluding loans held for
sale. Losses on loans held for sale, principally mortgage loans accumulated for
placement in security pools, are charged to earnings through adjustments in the
carrying value. The reserve for loan losses also represented 221% of
nonperforming loans at June 30, 2003. Net loans charged-off during the second
quarter totaled $6.4 million, compared to $6.3 million in the first quarter of
2003 and $4.6 million in the second quarter of 2002. Table 11 presents
statistical information regarding the reserve for loan losses.
- -------------------------------------------------------------------------------------------------------------------
TABLE 11 - SUMMARY OF LOAN LOSS EXPERIENCE
(In thousands)
Three Months Ended
--------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
2003 2003 2002 2002 2002
--------------------------------------------------------------------------------
Beginning balance $ 119,699 $ 116,070 $ 111,226 $ 108,084 $ 105,900
Loans charged-off:
Commercial 4,709 4,144 3,550 2,873 3,378
Commercial real estate - 5 163 - -
Residential mortgage 137 400 219 88 11
Consumer 2,873 3,502 3,945 3,164 2,258
- -------------------------------------------------------------------------------------------------------------------
Total 7,719 8,051 7,877 6,125 5,647
- -------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged-off:
Commercial 128 95 441 332 169
Commercial real estate 3 8 15 9 45
Residential mortgage 14 38 2 118 6
Consumer 1,144 1,627 898 779 777
- -------------------------------------------------------------------------------------------------------------------
Total 1,289 1,768 1,356 1,238 997
- -------------------------------------------------------------------------------------------------------------------
Net loans charged off 6,430 6,283 6,521 4,887 4,650
Provision for loan losses 9,503 9,912 10,001 8,029 6,834
Additions due to acquisitions - - 1,364 - -
- -------------------------------------------------------------------------------------------------------------------
Ending balance $ 122,772 $ 119,699 $ 116,070 $ 111,226 $ 108,084
- -------------------------------------------------------------------------------------------------------------------
Reserve to loans outstanding
at period-end (1) 1.78% 1.75% 1.72% 1.72% 1.73%
Net loan losses (annualized)
to average loans (1) 0.38 0.37 0.39 0.31 0.30
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) Excludes residential mortgage loans held for sale.
</FN>
14
Specific reserves for impairment are determined through evaluation of estimated
future cash flows and collateral value. At June 30, 2003 specific impairment
reserves totaled $5.1 million on total impaired loans of $48 million.
Nonspecific reserves are maintained for risks beyond factors specific to an
individual loan or those identified through migration analysis. A range of
potential losses is determined for each factor identified. At June 30, 2003 the
range of potential losses for the more significant factors were:
General economic conditions $ 7.6 million - $10.4 million
Concentration of large loans $ 1.2 million - $2.5 million
Loan portfolio growth $601 thousand - $1.2 million
Evaluation of the loan loss reserve requires a significant level of assumptions
by management including estimation of future cash flows, collateral values,
relevance of historical loss trends to the loan portfolio and assessment of
current economic conditions on the borrowers' ability to repay. The required
loan loss reserve could be materially affected by changes in these assumptions.
The loan loss reserve is adequate to absorb losses inherent in the loan
portfolio based upon current conditions and information available to management.
However, actual losses may differ significantly due to changing conditions or
information that is not currently available.
NONPERFORMING ASSETS
Information regarding nonperforming assets, which totaled $61 million at June
30, 2003, $56 million at March 31, 2003 and $45 million at June 30, 2002, is
presented in Table 12. Nonperforming assets included nonaccrual and renegotiated
loans and excluded loans 90 days or more past due but still accruing interest.
Nonaccrual loans increased $4.9 million during the second quarter of 2003,
including newly identified nonaccruing loans of $14.2 million. This increase was
partially offset by nonaccruing loans decreasing $4.0 million from charge-offs
and foreclosure and $4.5 million from cash payments received.
- ---------------------------------------------------------------------------------------------------------------------
Table 12 - Nonperforming Assets
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2003 2003 2002 2002 2002
----------------------------------------------------------------------
Nonperforming loans:
Nonaccrual loans:
Commercial $ 41,364 $ 39,576 $ 39,114 $ 41,093 $ 28,803
Commercial real estate 4,719 3,585 3,395 5,788 4,388
Residential mortgage 8,323 6,202 5,950 6,025 4,486
Consumer 1,213 1,350 1,396 556 605
- ---------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 55,619 50,713 49,855 53,462 38,282
Other nonperforming assets 5,713 5,350 6,719 6,427 6,630
- ---------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 61,332 $ 56,063 $ 56,574 $ 59,889 $ 44,912
- ---------------------------------------------------------------------------------------------------------------------
Ratios:
Reserve for loan losses to
nonperforming loans 220.74% 236.03% 232.82% 208.05% 282.34%
Nonperforming loans to
period-end loans (2) 0.81 0.74 0.74 0.83 0.72
- ---------------------------------------------------------------------------------------------------------------------
Loans past due (90 days) (1) $ 6,996 $ 7,921 $ 8,117 $ 10,274 $ 12,215
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes residential mortgages guaranteed
by agencies of the U.S.Government. $ 4,669 $ 5,185 $ 4,956 $ 6,640 $ 6,764
Excludes residential mortgages guaranteed
by agencies of the U.S. Government in
foreclosure. 3,178 3,853 3,630 4,931 4,853
(2) Excludes residential mortgage loans held for sale.
</FN>
- ---------------------------------------------------------------------------------------------------------------------
The loan review process also identifies loans that possess more than the normal
amount of risk due to deterioration in the financial condition of the borrower
or value of the collateral. Because the borrowers are still performing in
15
accordance with the original terms of the loan agreements and no loss of
principal or interest is anticipated, these loans are not included in
nonperforming assets. Known information does, however, cause management to have
concerns as to the borrowers' ability to comply with current repayment terms.
Potential problem loans totaled $57 million at June 30, 2003 compared to $62
million at March 31, 2003 and $68 million at June 30, 2002. At June 30, 2003 the
composition of potential problem loans by primary industry categories included
services - $19 million, manufacturing - $9 million, healthcare - $11 million and
energy - $7 million.
DEPOSITS
Total deposits increased $56 million to $8.7 billion during the second quarter
of 2003. Demand deposits increased $286 million to $1.7 billion. This increase
was partially offset by a $207 million decrease in time deposit accounts and a
$17 million decrease in interest-bearing transaction accounts. Average core
deposits were 54% of total deposits for the second quarter of 2003 compared to
54% for the first quarter of 2003 and 59% for the second quarter of 2002. Core
deposits represent all deposits, excluding public funds, broker deposits, sweep
accounts and time deposits greater than $100 thousand. Average uninsured
deposits represented 33% of total deposits at June 30, 2003, compared to 38% at
March 31, 2003 and 29% at June 30, 2002. Uninsured deposits as used in this
presentation are based on a simple analysis of account balances and do not
reflect combined ownership and other account styling that would determine
insurance based on FDIC regulations.
The distribution of deposit accounts among BOK Financial's principal markets is
shown in Table 13.
- ---------------------------------------------------------------------------------------------------------------------
TABLE 13 - DEPOSITS BY PRINCIPAL MARKET AREA
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2003 2003 2002 2002 2002
---------------------------------------------------------------------------------
Oklahoma:
Demand $ 1,216,746 $ 1,014,983 $ 1,044,628 $ 951,301 $ 834,240
Interest-bearing:
Transaction 2,100,705 2,099,096 1,897,353 1,762,593 1,689,404
Savings 107,591 109,954 103,749 104,864 105,226
Time 2,380,844 2,572,531 2,334,949 2,263,729 2,212,642
---------------------------------------------------------------------------------
Total interest-bearing 4,589,140 4,781,581 4,336,051 4,131,186 4,007,272
---------------------------------------------------------------------------------
Total Oklahoma $ 5,805,886 $ 5,796,564 $ 5,380,679 $ 5,082,487 $ 4,841,512
---------------------------------------------------------------------------------
Texas:
Demand $ 412,301 $ 344,228 $ 394,164 $ 320,108 $ 318,334
Interest-bearing:
Transaction 1,004,029 1,023,917 953,550 776,991 749,516
Savings 36,289 36,965 33,071 31,058 30,253
Time 532,402 542,101 510,512 450,387 464,948
---------------------------------------------------------------------------------
Total interest-bearing 1,572,720 1,602,983 1,497,133 1,258,436 1,244,717
---------------------------------------------------------------------------------
Total Texas $ 1,985,021 $ 1,947,211 $ 1,891,297 $ 1,578,544 $ 1,563,051
---------------------------------------------------------------------------------
Albuquerque:
Demand $ 104,896 $ 89,464 $ 79,953 $ 77,286 $ 70,892
Interest-bearing:
Transaction 308,901 307,411 295,174 264,188 249,771
Savings 24,621 27,036 26,704 27,048 27,215
Time 299,877 296,492 287,607 285,968 280,073
---------------------------------------------------------------------------------
Total interest-bearing 633,399 630,939 609,485 577,204 557,059
---------------------------------------------------------------------------------
Total Albuquerque $ 738,295 $ 720,403 $ 689,438 $ 654,490 $ 627,951
---------------------------------------------------------------------------------
Northwest Arkansas:
Demand $ 12,723 $ 11,761 $ 12,949 $ 11,198 $ 12,548
Interest-bearing:
Transaction 21,652 21,756 18,025 17,807 15,791
Savings 1,039 1,269 1,214 1,218 1,425
Time 126,566 135,756 134,923 128,233 119,968
---------------------------------------------------------------------------------
Total interest-bearing 149,257 158,781 154,162 147,258 137,184
---------------------------------------------------------------------------------
Total Northwest Arkansas $ 161,980 $ 170,542 $ 167,111 $ 158,456 $ 149,732
---------------------------------------------------------------------------------
Total BOK Financial deposits $ 8,691,182 $ 8,634,720 $ 8,128,525 $ 7,473,977 $ 7,182,246
---------------------------------------------------------------------------------
16
CAPITAL
Shareholders' equity increased $45 million during the second quarter of 2003 and
totaled $1.2 billion at June 30, 2003. The increase was primarily due to net
income for the quarter. BOK Financial and its subsidiary banks are subject to
various capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can result in certain mandatory and
additional discretionary actions by regulators that could have a material effect
on 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 regulatory agencies about
components, risk weightings and other factors. For a banking institution to
qualify as well capitalized, as defined by the banking agencies, its Tier I,
Total and Leverage capital ratios must be at least 6%, 10% and 5%, respectively.
BOK Financial's capital ratios are presented in Table 14. Additionally, each
subsidiary bank exceeds the regulatory definition of well capitalized.
- ----------------------------------------------------------------------------------------------------------
TABLE 14 - CAPITAL RATIOS
June 30, March 31, Dec. 31, Sept. 30, June 30,
2003 2003 2002 2002 2002
--------------------------------------------------------------------------
Average shareholders' equity
to average assets 9.19% 9.02% 8.81% 8.38% 8.01%
Risk-based capital:
Tier 1 capital 9.32 9.20 8.98 9.03 8.69
Total capital 11.85 12.11 11.95 12.43 12.11
Leverage 7.21 7.03 6.88 6.99 6.78
As provided by federal banking regulations, subordinated debt is included in
total capital, subject to certain limitations based upon the remaining term to
maturity. The subordinated debt issued by BOK Financial that may be included in
total capital will be reduced each year as the debt nears maturity.
During 2002, BOK Financial issued shares of common stock for its purchase of
Bank of Tanglewood. In addition, BOK Financial agreed to a limited price
guarantee on a portion of the shares issued in this purchase. Pursuant to this
guarantee, any holder of BOK Financial common shares issued in this acquisition
may annually make a claim for the excess of the guaranteed price and the actual
sales price of any shares sold during a 60-day period after each of the first
five anniversary dates after October 25, 2002. The maximum annual number of
shares subject to this guarantee is 203,951. BOK Financial may elect, in its
sole discretion, to issue additional shares of common stock to satisfy any
obligation under the price guarantee or to pay cash.
The following table presents the estimated number of common shares that would be
required to be issued and the cash value equivalent if the market value of BOK
Financial's common stock remained at $38.59, its closing price on June 30, 2003
and if all holders exercised their rights under the price guarantee agreement.
The benchmark price and number of shares subject to protection have been
adjusted to reflect the 3% stock dividend issued during the second quarter of
2003.
Cash
Equivalent
of
Additional Additional
Number Shares Shares
Benchmark Benchmark Of To (In
Period Price Shares Issue Thousands)
- -----------------------------------------------------------------------------------------------------------
October 25, 2003 - December 24, 2003 $33.79 203,951 - $ -
October 25, 2004 - December 24, 2004 36.30 203,951 - -
October 25, 2005 - December 24, 2005 38.80 203,951 1,103 43
October 25, 2006 - December 24, 2006 41.30 203,951 14,333 553
October 25, 2007 - December 24, 2007 43.81 203,951 27,562 1,064
17
MARKET RISK
Market risk is a broad term for the risk of economic loss due to adverse changes
in the fair value of a financial instrument. These changes may be the result of
various factors, including interest rates, foreign exchange prices, commodity
prices or equity prices. Financial instruments that are subject to market risk
can be classified either as held for trading or held for purposes other than
trading.
BOK Financial is subject to market risk primarily through the effect of changes
in interest rates on both its assets held for purposes other than trading and
trading assets. The effects of other changes, such as foreign exchange rates,
commodity prices or equity prices do not pose significant market risk to BOK
Financial. BOK Financial has no material investments in assets that are affected
by changes in foreign exchange rates or equity prices. Energy derivative
contracts, which are affected by changes in commodity prices, are matched
against offsetting contracts as previously discussed.
Responsibility for managing market risk rests with the Asset / Liability
Committee that operates under policy guidelines established by the Board of
Directors. The acceptable negative variation in net interest revenue, net income
or economic value of equity due to a specified basis point increase or decrease
in interest rates is generally limited by these guidelines to +/- 10%. These
guidelines also set maximum levels for short-term borrowings, short-term assets,
public funds, and brokered deposits, and establish minimum levels for unpledged
assets, among other things. Compliance with these guidelines is reviewed
monthly.
INTEREST RATE RISK - OTHER THAN TRADING
BOK Financial has a large portion of its earning assets in variable rate loans
and a large portion of its liabilities in demand deposit accounts and interest
bearing transaction accounts. Changes in interest rates affect earning assets
more rapidly than interest bearing liabilities in the short term. Management has
adopted several strategies to reduce this interest rate sensitivity. As
previously noted in the Net Interest Revenue section of this report, management
acquires securities that are funded by borrowings in the capital markets. These
securities have an expected average duration of 1.9 years while the related
funds borrowed have an average duration of 90 days. Securities purchased and
funds borrowed under this strategy averaged $2.0 billion during the second
quarter of 2003.
Additionally, BOK Financial uses interest rate derivative contracts in managing
its interest rate sensitivity. These contracts are generally used to more
closely match interest on certain fixed-rate loans with funding sources and
long-term certificates of deposit with earning assets. During the second
quarters of 2003 and 2002, net interest revenue increased $4.0 million and $2.0
million, respectively, from periodic settlements of these contracts.
Additionally, net losses of $1.1 million were recognized in the second quarter
of 2003 compared to net losses of $1.9 million in the second quarter of 2002
from adjustments of interest rate swaps to fair value. Credit risk from these
contracts is closely monitored. Derivative contracts are not used for
speculative purposes.
The effectiveness of these strategies in managing the overall interest rate risk
is evaluated through the use of an asset/liability model. BOK Financial performs
a sensitivity analysis to identify more dynamic interest rate risk exposures,
including embedded option positions, on net interest revenue, net income and
economic value of equity. A simulation model is used to estimate the effect of
changes in interest rates over the next twelve months based on eight interest
rate scenarios. Three specified interest rate scenarios are used to evaluate
interest rate risk against policy guidelines. These are a "most likely" rate
scenario and two "shock test" scenarios, first assuming a sustained parallel 200
basis point increase and second assuming a sustained parallel 100 basis point
decrease in interest rates. Management historically evaluated interest rate
sensitivity for a sustained 200 basis point decrease in rates. However, these
results are not meaningful in the current low-rate environment. An independent
source is used to determine the most likely interest rate scenario.
BOK Financial's primary interest rate exposures included the Federal Funds rate,
which affects short-term borrowings, and the prime lending rate and the London
Interbank Offering Rate, 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 15 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 shown in Table 16.
18
TABLE 15 - INTEREST RATE SENSITIVITY
(Dollars in Thousands)
Increase Decrease
-------------------------- --------------------------- ------------------------
200 bp 100 bp Most Likely
-------------------------- --------------------------- ------------------------
2003 2002 2003 2002 2003 2002
-------------------------- --------------------------- ------------------------
Anticipated impact over the
next twelve months:
Net interest revenue $ 4,840 $ 9,362 $ (4,414) $ (5,463) $ 305 $ 7,452
1.2% 2.5% (1.1)% (1.5)% 0.1% 2.0%
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 3,025 $ 5,851 $ (2,758) $ (3,414) $ 191 $ 4,658
2.0% 4.0% (1.8)% (2.3)% 0.1% 3.2%
- -----------------------------------------------------------------------------------------------------------------------
Economic value of equity $ (51,081) $ 81,747 $ (4,812) $ (93,169) $ 7,824 $ 107,751
(3.7)% 6.4% (0.3)% (7.3)% 0.6% 8.4%
- -----------------------------------------------------------------------------------------------------------------------
The estimated effect of a 200 basis point increase in interest rates on the
economic value of equity shifted from a gain of $82 million at June 30, 2002 to
a loss of $51 million at June 30, 2003. This reflects actions taken by
management over the past year to manage prepayment risk in the securities
portfolio. Securities with limited appreciation potential in a falling rate
environment were sold. The proceeds of these sales, along with principal
payments received on maturing securities, were reinvested in securities with
less prepayment risk. Securities held at June 30, 2003 are exposed to extension
risk and a reduction in economic value during periods of rising interest rates.
This reduction in value is partially offset by an appreciation of certain
deposit accounts.
BOK Financial has market risk associated with its portfolio of mortgage
servicing rights, primarily due to loan prepayments. BOK Financial designates a
portion of its securities portfolio as an economic hedge against the risk of
loss on its mortgage servicing rights. Mortgage-backed and U.S. government
agency debentures are acquired and held as available for sale when prepayment
risk exceeds certain levels. The fair value of these securities is expected to
vary inversely to the fair value of the mortgage servicing rights. This strategy
presents certain risks. A well-developed market determines the fair value for
securities, however there is no comparable market for mortgage servicing rights.
Therefore, the computed change in value of the servicing rights for a specified
change in interest rates may not correlate to the change in value of the
securities.
At June 30, 2003, securities with a fair value of $50 million and an unrealized
loss of $94 thousand were held for the economic hedge program. This unrealized
loss, net of income taxes, is included in shareholders' equity as part of other
comprehensive income. The interest rate sensitivity of the mortgage servicing
rights and securities held as a hedge is modeled over a range of +/- 50 basis
points. Additionally, the estimated effect of a +/- 100 basis point change in
interest rates is presented due to the rise in interest rates that has occurred
through July 31, 2003. At June 30, 2003, the pre-tax results of this modeling on
reported earnings were:
TABLE 16 - INTEREST RATE SENSITIVITY - MORTGAGE SERVICING
(Dollars in Thousands)
50 bp increase 50 bp decrease 100 bp increase 100 bp decrease
-------------- -------------- --------------- ---------------
Anticipated change in:
Mortgage servicing rights $10,134 $(4,156) $ 24,563 $ (6,443)
Hedging securities (1,397) 984 (3,109) 1,357
----------------------------------------------------------------------
Net $ 8,737 $(3,172) $ 21,454 $ (5,086)
----------------------------------------------------------------------
The simulations used to manage market risk are based on numerous assumptions
regarding the effects of changes in interest rates on the timing and extent of
repricing characteristics, future cash flows and customer behavior. These
assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net interest revenue, net income or economic value of equity
or precisely predict the impact of higher or lower interest rates on net
interest revenue, net income or economic value of equity. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes, market conditions and management strategies, among other factors.
19
- ---------------------------------------------------------------------------------------------------------------------
TABLE 17 - INTEREST RATE SWAPS
(In Thousands)
Notional Pay Receive Positive Negative
Amount Rate Rate Fair Value Fair Value
-----------------------------------------------------------------------------------------------------
Expiration:
2003 $ 75,000 1.12%(1) 4.98% - 5.47% $ 653 $ -
2004 71,688 1.12%(1) - 4.22% 1.12%(1) - 7.36% 2,423 (302)
2006 147,215 1.12%(1) - 8.80% 1.12%(1) - 8.80% 2,073 (1,743)
2007 275,000 1.12%(1) 4.09% - 4.51% 8,301 -
2008 58,736 1.12%(1) - 2.74% 1.12%(1) - 2.74% 649 (649)
2009 5,268 1.12%(1) - 4.75% 1.12%(1) - 4.75% 376 (376)
2011 41,864 5.21% - 5.51% 1.12%(1) - (3,790)
- ---------------------------------------------------------------------------------------------------------------------
$ 14,475 $ (6,860)
-----------------------------------
<FN>
(1) Rates are variable based on LIBOR and reset monthly, quarterly or semiannually.
</FN>
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. The Risk Management
Department monitors trading activity daily and reports to senior management and
the Risk Oversight and Audit Committee of the BOK Financial Board of Directors
any exceptions to trading position limits and risk management policy exceptions.
BOK Financial uses a Value at Risk ("VAR") methodology to measure the market
risk inherent in its trading activities. VAR is calculated based upon historical
simulations over the past five years using a variance / covariance matrix of
interest rate changes. It represents an amount of market loss that is likely to
be exceeded only one out of every 100 two-week periods. Trading positions are
managed within guidelines approved by the Board of Directors. These guidelines
limit the VAR to $1.6 million. At June 30, 2003, the VAR was $452 thousand and
the greatest value at risk during the second quarter of 2003 was $844 thousand.
NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation 46 "Consolidation of Variable Interest Entities" ("FIN 46"). FIN
46 clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," and provides a new framework for
identifying variable interest entities ("VIEs") and determining when a company
should include the assets, liabilities, non-controlling interests and results of
operations of a VIE in its consolidated financial statements. VIEs are generally
defined in FIN 46 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. Examples of such entities may
include partnerships, joint ventures, securitization vehicles or similarly
structured entities. FIN 46 is effective immediately for VIEs created after
January 31, 2003 and is effective beginning in the third quarter of 2003 for
VIEs created prior to the issuance of the interpretation. BOK Financial does not
generally use partnerships, joint ventures, or securitization vehicles in its
operations. Therefore, management does not expect that the adoption of FIN 46
will have a material effect on the financial statements.
However, in its current form, FIN 46 may require BOK Financial to consolidate
certain lending and trust relationships in future financial statements. The
consolidation of these relationships appears to be an unintended consequence of
FIN 46. It is currently unknown if, or when, the FASB will address this issue
and the potential effect of these unintended consequences on future financial
statements has not yet been determined.
20
CONTROLS AND PROCEDURES
As required by Rule 13a-15(b), BOK Financial management, including the Chief
Executive Officer and Chief Financial Officer, conducted an evaluation as of the
end of the period covered by this report, of the effectiveness of the company's
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures were effective as
of the end of the period covered by this report. As required by Rule 13a-15(d),
BOK Financial management, including the Chief Executive Officer and Chief
Financial Officer, also conducted an evaluation of the company's internal
controls over financial reporting to determine whether any changes occurred
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, the company's internal controls over
financial reporting. Based on that evaluation, there has been no such change
during the quarter covered by this report.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are based on management's
beliefs, assumptions, current expectations, estimates, and projections about BOK
Financial, the financial services industry and the economy in general. Words
such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans,"
"projects," variations of such words and similar expressions are intended to
identify such forward-looking statements. Management judgments relating to and
discussion of the provision and reserve for loan losses involve judgments as to
expected events and are inherently forward-looking statements. Assessments that
BOK Financial's acquisitions and other growth endeavors will be profitable are
necessary statements of belief as to the outcome of future events, based in part
on information provided by others that BOK Financial has not independently
verified. These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions that are difficult to predict with
regard to timing, extent, likelihood and degree of occurrence. Therefore, actual
results and outcomes may materially differ from what is expressed, implied, or
forecasted in such forward-looking statements. Internal and external factors
that might cause such a difference include, but are not limited to: (1) the
ability to fully realize expected cost savings from mergers within the expected
time frames, (2) the ability of other companies on which BOK Financial relies to
provide goods and services in a timely and accurate manner, (3) changes in
interest rates and interest rate relationships, (4) demand for products and
services, (5) the degree of competition by traditional and nontraditional
competitors, (6) changes in banking regulations, tax laws, prices, levies, and
assessments, (7) the impact of technological advances and (8) trends in customer
behavior as well as their ability to repay loans. BOK Financial and its
affiliates undertake no obligation to update, amend, or clarify forward-looking
statements, whether as a result of new information, future events or otherwise.
21
REPORT OF MANAGEMENT ON CONSOLIDATED FINANCIAL STATEMENTS
Management is responsible for the consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. In management's opinion, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial conditions, results of
operations and cash flows of BOK Financial and its subsidiaries at the dates and
for the periods presented.
BOK Financial and its subsidiaries maintain a system of internal accounting
controls designed to provide reasonable assurance that transactions are executed
in accordance with management's general or specific authorization, and are
recorded as necessary to maintain accountability for assets and to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States. This system includes written policies
and procedures, a corporate code of conduct, an internal audit program and
standards for the hiring and training of qualified personnel.
The Board of Directors of BOK Financial maintains a Risk Oversight and Audit
Committee consisting of outside directors that meet periodically with management
and BOK Financial's internal and independent auditors. The Committee considers
the audit and nonaudit services to be performed by the independent auditors,
makes arrangements for the internal and independent audits and recommends BOK
Financial's selection of independent auditors. The Committee also reviews the
results of the internal and independent audits, critical accounting policies and
practices, and various shareholder reports and other reports and filings.
The financial information included in this interim report has been prepared by
management without audit by independent public accountants and should be read in
conjunction with BOK Financial's 2002 Form 10-K filed with the Securities and
Exchange Commission which contains audited financial statements.
22
- -----------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(Dollars In Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------
2003 2002 2003 2002
------------------------------------------------
Interest Revenue
Loans $ 92,446 $ 93,635 $ 186,922 $ 186,390
Taxable securities 46,911 46,564 92,045 94,717
Tax-exempt securities 2,004 2,503 4,140 5,104
- -----------------------------------------------------------------------------------------------------
Total securities 48,915 49,067 96,185 99,821
- -----------------------------------------------------------------------------------------------------
Trading securities 114 203 214 374
Funds sold and resell agreements 59 92 165 142
- -----------------------------------------------------------------------------------------------------
Total interest revenue 141,534 142,997 283,486 286,727
- -----------------------------------------------------------------------------------------------------
Interest Expense
Deposits 32,863 37,158 67,940 73,259
Other borrowings 8,684 12,834 17,628 26,674
Subordinated debentures 2,420 2,724 4,840 5,446
- -----------------------------------------------------------------------------------------------------
Total interest expense 43,967 52,716 90,408 105,379
- -----------------------------------------------------------------------------------------------------
Net Interest Revenue 97,567 90,281 193,078 181,348
Provision for Loan Losses 9,503 6,834 19,415 15,700
- -----------------------------------------------------------------------------------------------------
Net Interest Revenue After Provision for Loan Losses 88,064 83,447 173,663 165,648
- -----------------------------------------------------------------------------------------------------
Other Operating Revenue
Brokerage and trading revenue 10,032 6,299 18,711 12,366
Transaction card revenue 15,138 13,439 28,737 25,925
Trust fees and commissions 10,845 10,300 21,025 20,674
Service charges and fees on deposit accounts 19,606 16,391 38,590 30,246
Mortgage banking revenue, net 16,609 10,759 32,144 21,411
Leasing revenue 795 822 1,654 1,714
Other revenue 5,992 5,698 10,993 10,740
- -----------------------------------------------------------------------------------------------------
Total fees and commissions revenue 79,017 63,708 151,854 123,076
- -----------------------------------------------------------------------------------------------------
Gain on sales of assets 8 7 738 683
Gain on sales of securities, net 10,457 21,602 20,146 14,021
Loss on derivatives (1,121) (1,453) (2,223) (1,989)
- -----------------------------------------------------------------------------------------------------
Total other operating revenue 88,361 83,864 170,515 135,791
- -----------------------------------------------------------------------------------------------------
Other Operating Expense
Personnel 52,429 44,885 105,061 88,217
Business promotion 2,781 3,208 6,252 6,086
Professional fees and services 5,404 3,732 9,169 6,640
Net occupancy and equipment 11,240 10,299 22,301 20,639
Data processing and communications 14,019 11,216 26,662 21,654
FDIC and other insurance 530 483 1,046 922
Printing, postage and supplies 3,523 3,018 6,882 6,075
Net gains and operating expenses on
repossessed assets 335 656 343 703
Amortization of intangible assets 1,777 1,882 3,554 3,769
Mortgage banking costs 11,481 7,791 25,923 16,148
Provision (recovery) for impairment of
mortgage servicing rights 3,353 23,774 (4,477) 18,496
Other expense 4,916 2,854 7,998 7,600
- -----------------------------------------------------------------------------------------------------
Total other operating expense 111,788 113,798 210,714 196,949
- -----------------------------------------------------------------------------------------------------
Income Before Taxes 64,637 53,513 133,464 104,490
Federal and state income tax 23,140 18,944 47,780 36,989
- -----------------------------------------------------------------------------------------------------
Net Income $ 41,497 $ 34,569 $ 85,684 $ 67,501
- -----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
23
EARNINGS PER SHARE:
Net Income
- -------------------------------------------------------------------------------------------------------
Basic $ 0.72 $ 0.63 $ 1.49 $ 1.22
- -------------------------------------------------------------------------------------------------------
Diluted $ 0.64 $ 0.56 $ 1.33 $ 1.09
- -------------------------------------------------------------------------------------------------------
Average Shares Used in Computation:
Basic 56,939,759 54,573,079 56,880,774 54,522,612
- --------------------------------------------------------------------------------------------------------
Diluted 64,569,404 62,111,878 64,499,792 62,016,881
- --------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
24
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Per Share Data)
June 30, December 31, June 30,
2003 2002 2002
--------------------------------------------------
(Unaudited) (Unaudited)
Assets
Cash and due from banks $ 718,497 $ 604,680 $ 495,186
Funds sold and resell agreements 10,395 19,535 39,750
Trading securities 38,143 5,110 35,648
Securities:
Available for sale 4,355,669 3,204,973 2,929,979
Available for sale securities pledged to creditors 644,767 728,370 716,729
Investment (fair value: June 30, 2003 - $197,541;
December 31, 2002 - $202,153;
June 30, 2002 - $200,180) 192,185 197,950 197,324
- --------------------------------------------------------------------------------------------------------------------
Total securities 5,192,621 4,131,293 3,844,032
- --------------------------------------------------------------------------------------------------------------------
Loans 7,042,888 6,900,983 6,313,387
Less reserve for loan losses (122,772) (116,070) (108,084)
- --------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 6,920,116 6,784,913 6,205,303
- --------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 160,474 151,715 139,187
Accrued revenue receivable 66,689 72,018 60,139
Intangible assets, net 194,478 197,868 147,807
Mortgage servicing rights, net 31,141 37,288 77,202
Real estate and other repossessed assets 5,713 6,719 6,630
Bankers' acceptances 33,857 3,728 23,431
Receivable on unsettled security transactions - 65,395 -
Derivative contracts 142,605 90,776 48,202
Other assets 114,217 74,007 69,800
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 13,628,946 $ 12,245,045 $ 11,192,317
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Noninterest-bearing demand deposits $ 1,746,666 $ 1,531,694 $ 1,236,014
Interest-bearing deposits:
Transaction 3,435,287 3,164,102 2,704,482
Savings 169,540 164,738 164,119
Time 3,339,689 3,267,991 3,077,631
- --------------------------------------------------------------------------------------------------------------------
Total deposits 8,691,182 8,128,525 7,182,246
- --------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase agreements 1,723,711 1,567,686 1,355,477
Other borrowings 1,057,476 1,088,022 890,370
Subordinated debentures 154,977 155,419 185,860
Accrued interest, taxes and expense 65,316 74,043 71,673
Bankers' acceptances 33,857 3,728 23,431
Due on unsettled security transactions 524,587 - 469,423
Derivative contracts 136,485 80,079 44,412
Other liabilities 59,744 53,986 43,980
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 12,447,335 11,151,488 10,266,872
- --------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock 25 25 25
Common stock ($.00006 par value; 2,500,000,000
shares authorized; shares issued and outstanding:
June 30, 2003 - 57,818,775; December 31, 2002
- 55,749,596; June 30, 2002 - 53,622,080) 4 3 3
Capital surplus 523,709 459,347 381,264
Retained earnings 635,489 608,515 526,360
Treasury stock (shares at cost: June 30, 2003 - 786,484;
December 31, 2002 - 682,967; June 30, 2002 - 644,740) (21,129) (17,421) (16,067)
Accumulated other comprehensive income 43,513 43,088 33,860
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,181,611 1,093,557 925,445
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 13,628,946 $ 12,245,045 $ 11,192,317
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
25
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(In Thousands)
Accumulated
Preferred Stock Common Stock Other Treasury Stock
------------------------------------ Comprehensive Capital Retained ------------------
Shares Amount Shares Amount Income(loss) Surplus Earnings Shares Amount Total
------------------------------------------------------------------------------------------------------
Balances at
December 31, 2001 250,000 $ 25 51,737 $ 3 $ 5,792 $323,860 $511,301 541 $(12,498) $ 828,483
Net income - - - - - - 67,501 - - 67,501
Other Comprehensive
income, net of tax:
Unrealized gains(loss)
on securities
available for sale (1) - - - - 28,068 - - - - 28,068
---------
Comprehensive income 95,569
---------
Exercise of stock options - - 315 - - 4,275 - 86 (2,989) 1,286
Director retainer shares - - 4 - - 135 - - - 135
Dividends paid in shares
of common stock:
Common stock - - 1,542 - - 52,244 (51,692) 18 (580) (28)
Preferred stock - - 24 - - 750 (750) - - -
- -----------------------------------------------------------------------------------------------------------------------------
Balances at
June 30, 2002 250,000 $ 25 53,622 $ 3 $33,860 $381,264 $526,360 645 $(16,067) $925,445
- -----------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2002 250,000 $ 25 55,750 $ 3 $ 43,088 $459,347 $608,515 683 $(17,421) $1,093,557
Comprehensive income:
Net income - - - - - - 85,684 - - 85,684
Other Comprehensive
income, net of tax:
Unrealized gains(loss)
on securities
available for sale (1)- - - - 425 - - - - 425
----------
Comprehensive income 86,109
----------
Exercise of stock options - - 362 - - 5,181 - 82 (2,964) 2,217
Director retainer shares - - 4 - - 138 - - - 138
Cash dividends declared on
preferred stock - - - - - - (375) - - (375)
Dividends paid in shares
of common stock:
Common stock - - 1,680 1 - 58,293 (57,585) 21 (744) (35)
Preferred stock - - 23 - - 750 (750) - - -
- -----------------------------------------------------------------------------------------------------------------------------
Balances at
June 30, 2003 250,000 $ 25 57,819 $ 4 $ 43,513 $523,709 $635,489 786 $(21,129) $1,181,611
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
(1) June 30, 2003 June 30, 2002
--------------------------------
Changes in other comprehensive income:
Unrealized gains (losses) on available for
sale securities $ 20,896 $ 57,468
Tax (expense) benefit on unrealized gains
(losses) on available for sale securities (7,537) (20,342)
Reclassification adjustment for (gains)
losses realized included in net income (20,146) (14,021)
Reclassification adjustment for tax
expense (benefit) on realized (gains) 7,212 4,963
losses
--------------------------------
Net change in unrealized gains (losses) on
securities $ 425 $ 28,068
--------------------------------
</FN>
See accompanying notes to consolidated financial statements.
26
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Six Months Ended
June 30,
--------------------------------------
2003 2002
--------------------------------------
Cash Flow From Operating Activities:
Net income $ 85,684 $ 67,501
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 19,415 15,700
Provision (recovery) for mortgage servicing rights (4,477) 18,496
Unrealized (gains) losses from derivatives 2,928 2,550
Depreciation and amortization 15,521 27,357
Net amortization of financial instrument discounts and premiums 5,195 2,306
Net gain on sale of assets (42,982) (23,096)
Mortgage loans originated for resale (730,423) (392,972)
Proceeds from sale of mortgage loans held for resale 738,096 494,052
Change in trading securities (33,033) (25,321)
Change in accrued revenue receivable 5,329 8,589
Change in other operating assets (32,915) (25,095)
Change in accrued interest, taxes and expense (8,727) 4,095
Change in other liabilities 36,148 17,829
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 55,759 191,991
- --------------------------------------------------------------------------------------------------------
Cash Flow From Investing Activities:
Proceeds from maturities of investment securities 30,865 56,029
Proceeds from maturities of available for sale securities 1,157,603 683,229
Purchases of investment securities (25,201) (12,353)
Purchases of available for sale securities (4,358,803) (5,038,167)
Proceeds from sales of available for sale securities 2,149,080 4,214,637
Loans originated or acquired net of principal collected (197,927) (173,727)
Payments on derivative asset contracts (27,285) (4,146)
Net change in other investment assets (9,708) 112
Proceeds from disposition of assets 80,957 54,931
Purchases of assets (31,423) (17,352)
- --------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,231,842) (236,807)
- --------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net change in demand deposits, transaction
deposits, money market deposits, and savings accounts 490,959 19,977
Net change in certificates of deposit 72,087 256,957
Net change in other borrowings 125,479 (577,090)
Proceeds from (payments on) derivative liability contracts 28,705 (6,586)
Net change in derivative margin accounts (28,397) -
Change in amount due on unsettled security transactions 589,982 237,763
Issuance of preferred, common and treasury stock, net 2,355 1,421
Payment of dividends (410) (28)
- --------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 1,280,760 (67,586)
- --------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 104,677 (112,402)
Cash and cash equivalents at beginning of period 624,215 647,338
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 728,892 $ 534,936
- --------------------------------------------------------------------------------------------------------
Cash paid for interest $ 93,078 $ 109,973
- --------------------------------------------------------------------------------------------------------
Cash paid for taxes $ 43,544 $ 27,266
- --------------------------------------------------------------------------------------------------------
Net loans transferred to repossessed real estate
and other assets $ 356 $ 1,181
- --------------------------------------------------------------------------------------------------------
Payment of dividends in common stock $ 58,335 $ 52,442
- --------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidated Financial Statements of BOK Financial Corporation ("BOK
Financial") 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. and BOSC, Inc. Certain prior period amounts have been
reclassified to conform to current period classifications.
EXECUTIVE BENEFIT PLANS
BOK Financial has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals the market price of
the underlying stock options on the date of grant, no compensation expense is
recorded. BOK Financial has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("FAS 123"), as amended by Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("FAS 148").
The following table represents the required pro forma disclosures for options
granted subsequent to December 31, 1994 (in thousands, except per share data):
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------
Net income as reported $41,497 $34,569 $85,684 $67,501
Stock-based employee compensation, net of tax,
as if fair value method were applied (722) (635) (1,440) (1,270)
-------------------------------------------------
Pro forma net income $40,775 $33,934 $84,244 $66,231
-------------------------------------------------
Earnings per share as reported:
Basic $0.72 $0.63 $1.49 $1.22
Diluted $0.64 $0.56 $1.33 $1.09
Pro forma earnings per share:
Basic $0.71 $0.61 $1.47 $1.20
Diluted $0.63 $0.55 $1.31 $1.07
28
(2) MORTGAGE BANKING ACTIVITIES
At June 30, 2003, BOk owned the rights to service 67,357 mortgage loans with
outstanding principal balances of $5.1 billion, including $397 million serviced
for BOk. The weighted average interest rate and remaining term was 6.77% and 265
months, respectively.
Activity in capitalized mortgage servicing rights and related valuation
allowance during the six months ending June 30, 2003 is as follows (in
thousands):
Capitalized Mortgage Servicing Rights
-----------------------------------------------------------------------------------------
Valuation Hedging
Purchased Originated Total Allowance (Gain)/Loss Net
-----------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 37,223 $ 49,849 $ 87,072 $ (54,918) $ 5,134 $ 37,288
Additions, net (2) 12,633 12,631 - - 12,631
Amortization expense (10,184) (12,359) (22,543) - (712) (23,255)
Recovery (provision) for
impairment - - - 4,477 - 4,477
- ----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003 $ 27,037 $ 50,123 $ 77,160 $ (50,441) $ 4,422 $ 31,141
- ----------------------------------------------------------------------------------------------------------------------
Estimated fair value of
mortgage servicing rights(1) $ 10,635 $ 20,869 $ 31,504 - - $ 31,504
- ----------------------------------------------------------------------------------------------------------------------
<FN>
(1) Excludes approximately $1.1 million of loan servicing rights on mortgage
loans originated prior to the adoption of FAS 122.
</FN>
Stratification of the mortgage loan servicing portfolio, outstanding principal
of loans serviced, and related hedging information by interest rate at June 30,
2003 follows (in thousands):
< 5.51% 5.51% - 6.49% 6.50% - 7.49% => 7.50% Total
---------------- --------------- ---------------- ----------- -------------
Cost less accumulated amortization $ 6,280 $ 22,272 $ 35,591 $ 13,017 $ 77,160
Deferred hedge losses - - 3,678 744 4,422
- ------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
Adjusted cost $ 6,280 $ 22,272 $ 39,269 $ 13,761 $ 81,582
- ------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
Fair value $ 4,271 $ 10,101 $ 11,936 $ 5,196 $ 31,504
- ------------------------------------------ ---------------- --------------- ---------------- ----------- -------------
Impairment (2) $ 2,150 $ 12,172 $ 27,333 $ 8,786 $ 50,441
- ----------------------------------------- ---------------- --------------- ---------------- ----------- -------------
Outstanding principal of loans serviced (1) $ 404,600 $ 1,320,100 $2,098,300 $ 722,000 $4,545,000
- ------------------------------------------ ---------------- --------------- ---------------- ----------- ------------
<FN>
(1) Excludes outstanding principal of $397 million for loans serviced for BOk
and $164 million of mortgage loans originated prior to FAS 122, for which there
are no capitalized mortgage servicing rights.
(2) Impairment is determined by both an interest rate and loan type stratification.
</FN>
(3) DISPOSAL OF AVAILABLE FOR SALE SECURITIES
Sales of available for sale securities resulted in gains and losses as follows
(in thousands):
Six Months Ended June 30,
----------------------------------
2003 2002
-------------- ---------------
Proceeds $ 2,149,080 $ 4,214,637
Gross realized gains 21,178 38,982
Gross realized losses 1,032 24,961
Related federal and state income
tax expense (benefit) 7,212 4,963
29
(4) EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per
share (dollars in thousands, except share data):
Three Months Ended Six Months Ended
-----------------------------------------------------
June 30, June 30, June 30, June 30,
2003 2002 (2) 2003 2002 (2)
-----------------------------------------------------
Numerator:
Net income $ 41,497 $ 34,569 $ 85,684 $ 67,501
Preferred stock dividends (375) (375) (750) (750)
- ---------------------------------------------------------------------------------------------------------------
Numerator for basic earnings per share - income
available to common stockholders 41,122 34,194 84,934 66,751
- ---------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock dividends 375 375 750 750
- ---------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share - income available
to common shareholders after assumed conversion $ 41,497 $ 34,569 $ 85,684 $ 67,501
- ---------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share - weighted
average shares 56,939,759 54,573,079 56,880,774 54,522,612
Effect of dilutive securities:
Employee stock options (1) 789,677 819,222 722,376 774,692
Convertible preferred stock 6,719,577 6,719,577 6,719,577 6,719,577
Tanglewood market value guarantee 120,391 - 177,065 -
- ---------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 7,629,645 7,538,799 7,619,018 7,494,269
- ---------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 64,569,404 62,111,878 64,499,792 62,016,881
- ---------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.72 $ 0.63 $ 1.49 $ 1.22
- ---------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.64 $ 0.56 $ 1.33 $ 1.09
- ---------------------------------------------------------------------------------------------------------------
<FN>
(1) Current market price was greater than exercise price on all employee stock options.
(2) Restated for 3% dividend paid in common shares in May 2003.
</FN>
(5) REPORTABLE SEGMENTS
Reportable segments reconciliation to the Consolidated Financial Statements for
the six months ended June 30, 2003 is as follows (in thousands):
Net Other Other
Interest Operating Operating Average
Revenue Revenue(1) Expense Net Income Assets
---------------------------------------------------------------------------
Total reportable segments $ 165,308 $ 114,891 $ 169,411 $ 65,928 $12,776,551
Total nonreportable segments 175 42,594 32,541 15,949 69,956
Unallocated items:
Tax-equivalent adjustment 2,730 - - 2,730 -
Funds management 32,991 (4,949) 3,868 11,941 1,199,856
All others (including eliminations), net (8,126) 56 4,894 (10,864) (1,579,039)
---------------------------------------------------------------------------
BOK Financial consolidated $ 193,078 $ 152,592 $ 210,714 $ 85,684 $12,467,324
===========================================================================
<FN>
(1) Excluding financial instruments gains/(losses).
</FN>
30
(5) REPORTABLE SEGMENTS (CONTINUED)
Reportable segments reconciliation to the Consolidated Financial Statements for
the six months ended June 30, 2002 is as follows (in thousands):
Net Other Other
Interest Operating Operating Average
Revenue Revenue(1) Expense Net Income Assets
----------------------------------------------------------------------------
Total reportable segments $ 149,501 $ 89,457 $ 166,142 $ 35,490 $ 11,151,898
Total nonreportable segments 359 35,093 27,460 12,876 40,632
Unallocated items:
Tax-equivalent adjustment 3,328 - - 3,328 -
Funds management 35,889 801 4,254 24,715 476,268
All others (including eliminations), net (7,729) (1,592) (907) (8,908) (687,137)
----------------------------------------------------------------------------
BOK Financial consolidated $ 181,348 $ 123,759 $ 196,949 $ 67,501 $ 10,981,661
============================================================================
<FN>
(1) Excluding financial instruments gains/(losses).
</FN>
(6) CONTINGENT LIABILITIES
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.
(7) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
BOK Financial is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to manage interest rate risk. Those financial instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in BOK
Financial's Consolidated Balance Sheets. Exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the notional
amount of those instruments.
As of June 30, 2003, outstanding commitments and letters of credit were as
follows (in thousands):
June 30,
2003
------------
Commitments to extend credit $ 4,873,522
Standby letters of credit 381,792
Commercial letters of credit 4,006
Commitments to purchase securities 202,318
31
- -----------------------------------------------------------------------------------------------------------------------------------
SIX MONTH FINANCIAL SUMMARY - UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share Data)
Six Months Ended
------------------------------------------------------------------------------------
June 30, 2003 June 30, 2002
----------------------------------------- --------------------------------------
Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate
------------------------------------------------------------------------------------
Assets
Taxable securities (3) $ 4,221,462 $ 92,045 4.46% $ 3,638,681 $ 94,719 5.59%
Tax-exempt securities (3) 191,872 6,566 6.90 223,128 8,048 7.27
- ------------------------------------------------------------------------------------------------------------------------------
Total securities (3) 4,413,334 98,611 4.57 3,861,809 102,767 5.69
- ------------------------------------------------------------------------------------------------------------------------------
Trading securities 11,280 252 4.51 17,494 441 5.08
Funds sold and resell agreements 22,996 165 1.45 13,920 142 2.06
Loans (2) 6,960,069 187,188 5.42 6,194,769 186,705 6.08
Less reserve for loan losses 121,536 - - 107,277 - -
- ------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 6,838,533 187,188 5.52 6,087,492 186,705 6.18
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 11,286,143 286,216 5.14 9,980,715 290,055 5.99
- ------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 1,181,181 1,000,946
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 12,467,324 $ 10,981,661
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 3,407,053 16,769 0.99% $ 2,703,509 19,743 1.47%
Savings deposits 170,504 489 0.58 162,804 984 1.22
Time deposits 3,445,686 50,682 2.97 2,944,122 52,532 3.60
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 7,023,243 67,940 1.95 5,810,435 73,259 2.54
- ------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 1,468,451 8,103 1.11 1,528,204 13,112 1.73
Other borrowings 1,056,372 9,525 1.82 1,075,836 13,562 2.54
Subordinated debentures 155,190 4,840 6.29 186,078 5,446 5.90
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 9,703,256 90,408 1.88 8,600,553 105,379 2.47
- ------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,271,966 1,121,038
Other liabilities 352,431 389,951
Shareholders' equity 1,139,671 870,119
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 12,467,324 $ 10,981,661
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (3) 195,808 3.26% 184,676 3.52%
Tax-Equivalent Net Interest Revenue
To Earning Assets (3) 3.52 3.82
Less tax-equivalent adjustment (1) 2,730 3,328
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 193,078 181,348
Provision for loan losses 19,415 15,700
Other operating revenue 170,515 135,791
Other operating expense 210,714 196,949
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 133,464 104,490
Federal and state income tax 47,780 36,989
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 85,684 $ 67,501
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share:
Net Income
Basic $ 1.49 $ 1.22
- ------------------------------------------------------------------------------------------------------------------------------
Diluted $ 1.33 $ 1.09
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Tax equivalent at the statutory federal and state rates for the periods
presented. The taxable equivalent adjustments shown are for comparative purposes.
(2) The loan averages included loans on which the accrual of interest has been
discontinued and are stated net of unearned income.
(3) Yield calculations exclude security trades that have been recorded on trade
date with no corresponding interest income.
</FN>
32
- ------------------------------------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL SUMMARY - UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share Data)
Three Months Ended
-------------------------------------------------------------------------------------
June 30, 2003 March 31, 2003
------------------------------------------ -------------------------------------
Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate
-------------------------------------------------------------------------------------
Assets
Taxable securities (3) $ 4,388,733 46,911 4.30% $ 4,145,472 $ 45,134 4.64%
Tax-exempt securities (3) 185,908 3,179 6.86 197,902 3,387 6.94
- ------------------------------------------------------------------------------------------------------------------------------
Total securities (3) 4,574,641 50,090 4.41 4,343,374 48,521 4.75
- ------------------------------------------------------------------------------------------------------------------------------
Trading securities 12,207 136 4.47 10,342 116 4.55
Funds sold and resell agreements 16,669 59 1.42 29,392 106 1.46
Loans (2) 6,970,905 92,576 5.33 6,949,113 94,612 5.52
Less reserve for loan losses 123,095 - - 119,959 - -
- ------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 6,847,810 92,576 5.42 6,829,154 94,612 5.62
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 11,451,327 142,861 5.01 11,212,262 143,355 5.28
- ------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 1,207,690 1,154,403
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 12,659,017 $ 12,366,665
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 3,523,932 7,992 0.91% $ 3,288,874 8,777 1.08%
Savings deposits 172,258 183 0.43 168,730 306 0.74
Time deposits 3,491,055 24,688 2.84 3,399,813 25,994 3.10
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 7,187,245 32,863 1.83 6,857,417 35,077 2.07
- ------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 1,515,597 4,080 1.08 1,420,781 4,023 1.15
Other borrowings 1,053,573 4,604 1.75 1,059,201 4,921 1.88
Subordinated debentures 155,078 2,420 6.26 155,304 2,420 6.32
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 9,911,493 43,967 1.78 9,492,703 46,441 1.98
- ------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,252,076 1,292,077
Other liabilities 332,430 465,820
Shareholders' equity 1,163,018 1,116,065
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 12,659,017 $ 12,366,665
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (3) 98,894 3.23% 96,914 3.30%
Tax-Equivalent Net Interest Revenue
To Earning Assets (3) 3.47 3.57
Less tax-equivalent adjustment (1) 1,327 1,403
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 97,567 95,511
Provision for loan losses 9,503 9,912
Other operating revenue 88,361 82,154
Other operating expense 111,788 98,926
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 64,637 68,827
Federal and state income tax 23,140 24,640
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 41,497 $ 44,187
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share:
Net Income
Basic $ 0.72 $ 0.77
- ------------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.64 $ 0.69
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Tax equivalent at the statutory federal and state rates for the periods
presented. The taxable equivalent adjustments shown are for comparative purposes.
(2) The loan averages included loans on which the accrual of interest has been
discontinued and are stated net of unearned income.
(3) Yield calculations exclude security trades that have been recorded on trade
date with no corresponding interest income.
</FN>
33
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended
- -------------------------------------------------------------------------------------------------------------------------
December 31, 2002 September 30, 2002 June 30, 2002
- -------------------------------------------------------------------------------------------------------------------------
Average Revenue/ Yield Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate Balance Expense(1) /Rate
- -------------------------------------------------------------------------------------------------------------------------
$ 4,024,291 $ 45,710 4.73% $ 3,794,732 $ 46,473 5.06% $ 3,696,603 $ 46,564 5.50%
194,586 3,407 6.95 193,645 3,335 6.83 218,747 3,948 7.24
- -------------------------------------------------------------------------------------------------------------------------
4,218,877 49,117 4.84 3,988,377 49,808 5.15 3,915,350 50,512 5.60
- -------------------------------------------------------------------------------------------------------------------------
8,639 87 4.00 13,341 221 6.57 19,989 238 4.78
24,856 92 1.47 11,331 57 2.00 17,148 92 2.15
6,761,498 95,864 5.62 6,444,933 95,731 5.89 6,225,134 93,787 6.04
114,711 - - 110,590 - - 109,366 - -
- -------------------------------------------------------------------------------------------------------------------------
6,646,787 95,864 5.72 6,334,343 95,731 6.00 6,115,768 93,787 6.15
- -------------------------------------------------------------------------------------------------------------------------
10,899,159 145,160 5.38 10,347,392 145,817 5.67 10,068,255 144,629 5.94
- -------------------------------------------------------------------------------------------------------------------------
1,032,760 981,246 1,005,122
- -------------------------------------------------------------------------------------------------------------------------
$ 11,931,919 $ 11,328,638 $ 11,073,377
- -------------------------------------------------------------------------------------------------------------------------
$ 2,988,986 9,648 1.28% $ 2,795,449 9,882 1.40% $ 2,740,454 9,841 1.44%
173,286 491 1.12 164,952 502 1.21 165,496 503 1.22
3,248,364 25,531 3.12 3,090,272 26,154 3.36 2,969,488 26,814 3.62
- -------------------------------------------------------------------------------------------------------------------------
6,410,636 35,670 2.21 6,050,673 36,538 2.40 5,875,438 37,158 2.54
- -------------------------------------------------------------------------------------------------------------------------
1,523,923 5,471 1.42 1,615,075 6,635 1.63 1,485,816 6,197 1.67
1,084,616 5,751 2.10 999,140 5,963 2.37 1,032,685 6,637 2.58
169,874 2,580 6.03 185,748 2,725 5.82 185,968 2,724 5.88
- -------------------------------------------------------------------------------------------------------------------------
9,189,049 49,472 2.14 8,850,636 51,861 2.32 8,579,907 52,716 2.46
- -------------------------------------------------------------------------------------------------------------------------
1,310,932 1,188,441 1,129,412
380,204 340,264 476,886
1,051,734 949,297 887,172
- -------------------------------------------------------------------------------------------------------------------------
$ 11,931,919 $ 11,328,638 $ 11,073,377
- -------------------------------------------------------------------------------------------------------------------------
95,688 3.24% 93,956 3.35% 91,913 3.48%
3.55 3.65 3.77
1,404 1,387 1,632
- -------------------------------------------------------------------------------------------------------------------------
94,284 92,569 90,281
10,001 8,029 6,834
80,739 107,467 83,864
104,993 123,695 113,798
- -------------------------------------------------------------------------------------------------------------------------
60,029 68,312 53,513
21,250 24,183 18,944
- -------------------------------------------------------------------------------------------------------------------------
$ 38,779 $ 44,129 $ 34,569
- -------------------------------------------------------------------------------------------------------------------------
$ 0.68 $ 0.80 $ 0.63
- -------------------------------------------------------------------------------------------------------------------------
$ 0.61 $ 0.71 $ 0.56
- -------------------------------------------------------------------------------------------------------------------------
34
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on April 29, 2003 (the "Annual
Meeting"). At the Annual Meeting, shareholders voted on three matters: (i) to
fix the number of directors to be elected at twenty-six (26) and to elect
twenty-six (26) persons as directors for a term of one year or until their
successors have been elected and qualified, (ii) to approve the BOK Financial
Corporation 2003 Stock Option Plan and the existing 1993, 1994, 1997, 2000 and
2001 Stock Option Plans (the "Stock Option Plans"), and (iii) to approve the
Executive Performance-Based Compensation Plan. The shareholders elected
management's nominees as directors in an uncontested election and approved the
Stock Option Plans and Executive Performance-Based Compensation Plan by the
following votes, respectively:
(i) Election of twenty-six (26) directors for a term of one year:
Votes
Withheld/
Votes For Against
-------------- ------------
C. Fred Ball, Jr. 50,076,759 1,918,081
Sharon J. Bell 51,810,201 184,639
Peter C. Boylan, III 49,341,789 2,653,051
Joseph E. Cappy 51,810,568 184,272
Luke R. Corbett 49,760,443 2,234,397
William E. Durrett 51,785,574 209,266
James O. Goodwin 51,531,654 463,186
Robert G. Greer 51,811,862 182,978
David F. Griffin 51,810,763 184,077
V. Burns Hargis 50,470,841 1,523,999
E. Carey Joullian IV 51,511,744 483,096
George B. Kaiser 50,202,441 1,792,399
David L. Kyle 51,786,198 208,642
Robert J. LaFortune 51,536,156 458,684
Philip C. Lauinger, Jr. 51,537,804 457,036
John C. Lopez 49,415,482 2,579,358
Stanley A. Lybarger 49,842,908 2,151,932
Steven J. Malcolm 51,786,008 208,832
Paula Marshall-Chapman 51,808,096 186,744
Frank A. McPherson 51,811,385 183,455
Steven E. Moore 51,812,282 182,558
J. Larry Nichols 49,568,993 2,425,847
Robert L. Parker, Sr. 51,811,172 183,668
James A. Robinson 49,471,136 2,523,704
L. Francis Rooney, III 51,812,282 182,558
Scott F. Zarrow 51,811,662 183,178
(ii) Approval of the Stock Option Plans:
Votes
Withheld/
Votes For Against Abstentions
- ---------------------------- -------------------------- -----------------------
51,058,112 650,171 286,557
(iii) Approval of the Executive Performance-Based Compensation Plan:
Votes
Withheld/
Votes For Against Abstentions
- ---------------------------- -------------------------- -----------------------
51,165,249 533,599 295,990
35
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(B) Reports on Form 8-K:
On April 21, 2003, a report on Form 8-K was filed reporting under Item 5
the announcement that BOK Financial Corporation issued a press release on
April 16, 2003 announcing its financial results for the first quarter ended
March 31, 2003.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOK FINANCIAL CORPORATION
(Registrant)
Date: August 14, 2003 /s/ Steven E. Nell
--------------------- --------------------
Steven E. Nell
Executive Vice President and
Chief Financial Officer
/s/ John C. Morrow
--------------------
John C. Morrow
Senior Vice President and Director
of Financial Accounting & Reporting