As filed with the Securities and Exchange Commission on November 14, 2003
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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 Quarterly Period Ended September 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
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: 57,069,517 shares of
common stock ($.00006 par value) as of October 31, 2003.
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2
BOK Financial Corporation
Form 10-Q
Quarter Ended September 30, 2003
Index
Part I. Financial Information
Management's Discussion and Analysis (Item 2) 2
Quantitative and Qualitative Disclosures about Market Risk (Item 3) 18
Controls and Procedures (Item 4) 21
Report of Management on Consolidated Financial Statements 22
Consolidated Financial Statements (Unaudited) (Item 1) 23
Financial Summaries (Unaudited) (Item 2) 33
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 37
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 $38.8 million
or $0.60 per diluted common share for the third quarter of 2003 compared to
$43.5 million or $0.70 per diluted common share for the same period of 2002. Net
income and diluted earnings per share for the prior year have been restated for
a change in accounting principles. BOK Financial adopted the fair value
accounting provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" during the third quarter of 2003. This
change in accounting requires expense recognition for employee stock options.
The annualized returns on average assets and equity were 1.20% and 13.26% for
the quarter ended September 30, 2003 compared to returns of 1.52% and 18.12% for
the third quarter of 2002. The decrease in return on average equity between the
two quarters resulted from lower net income and a 22% increase in average
shareholders' equity, which is consistent with the company's strategy of
retaining earnings to support asset growth.
Net income for the third quarter of 2003 decreased $4.7 million or 11% compared
to the same period of 2002. The Company incurred a net after-tax loss of $249
thousand attributable to investment portfolio strategies, mortgage servicing
rights (MSRs) hedging activities, and mark-to-market of derivative contracts,
substantially offset by a reversal of provision for impairment of MSRs in the
third quarter of 2003. These same items produced net after-tax income of $8.1
million in the third quarter of 2002. Fees and commission revenue grew $15.5
million or 24%, the largest components of which were increased brokerage fees
and trading revenue. Operating expenses decreased $33.0 million due to a $45.2
million net change in provision for MSRs. Excluding this provision, operating
expenses increased $12.2 million or 13% due primarily to personnel costs.
BOK Financial completed its acquisition of Colorado Funding Company and its
wholly-owned subsidiary, Colorado State Bank and Trust ("CSBT"), during the
third quarter of 2003. This acquisition increased total assets by $390 million,
including $59 million of intangible assets, and total deposits by $301 million,
and added four banking locations in Denver, Colorado.
Year-to-date net income totaled $123.1 million, a 12% increase over 2002.
Diluted earnings per common share were $1.91 in 2003 compared to $1.77 in the
prior year. The annualized returns on average assets and equity were 1.30% and
14.34% for 2003 compared to returns of 1.32% and 16.29% for 2002. The decrease
in return on average equity reflected a 27% increase in average shareholders'
equity. Fee and commissions revenue grew 23% due primarily to increases in
brokerage fees and trading revenue, mortgage banking revenue, and service
charges on deposit accounts. Operating expenses decreased $19.0 million. A
portion of the provision for impairment of MSRs recognized in 2002 was reversed
in 2003 due to a slowing of prepayment speeds. This reversal led to $68.2
million less in operating expenses for the first three quarters of 2003. All
other operating expenses increased $49.2 million or 18% due
3
primarily to a $28.0 million increase in personnel costs. Net gains on sales of
securities were $8.1 million year-to-date in 2003 compared to $48.4 million in
2002. Net gains on the sale of securities held as an economic hedge of the
mortgage servicing rights decreased $14.4 million while gains on sales of other
securities decreased $25.9 million. Mark-to-market losses on derivative
instruments were $12.0 million greater in 2003 due primarily to rising long-term
interest rates.
NET INTEREST REVENUE
Tax-equivalent net interest revenue totaled $97.4 million for the third quarter
of 2003 compared to $94.0 million for the same period of 2002. The increase in
net interest revenue was due to a $1.3 billion increase in average earning
assets, partially offset by a 34 basis point decrease in net interest margin.
The growth in average earning assets included a $571 million increase in
securities and a $662 million increase in net loans. The growth in average
earning assets was funded by a $1.2 billion increase in average interest-bearing
liabilities. Average interest-bearing transaction accounts increased $920
million and average time deposits increased $334 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 third quarter of 2003 compared to the third quarter of
2002. The net interest margin, the ratio of tax-equivalent net interest revenue
to average earning assets, declined to 3.32% from 3.66% 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 73 basis points compared to the same period of the previous
year. Additionally, the mix of earning assets changed slightly from 38.6%
securities and 61.4% loans during the third quarter of 2002 to 39.4% securities
and 60.6% loans in 2003. This increase in securities, which generally have a
lower yield than loans, also reduced the net interest margin. 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 at the end of
this document.
Year to date tax-equivalent net interest revenue increased $14.6 million or 5%
compared to the previous year. Average earning assets increased $1.3 billion
while the net interest margin decreased 31 basis points to 3.45%. The year to
date comparison was affected by the same factors as those that affected the
quarterly comparison.
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TABLE 1 - VOLUME / RATE ANALYSIS
(In thousands)
Three Months Ended Nine Months Ended
September 30, 2003 / 2002 September 30, 2003 / 2002
------------------------------------------------------------------------
Change Due To (1) Change Due To (1)
-------------------------------------------------------------
Yield Yield
Change Volume /Rate Change Volume /Rate
------------------------------------------------------------------------
Tax-equivalent interest revenue:
Securities $ (4,107) $ 8,367 $ (12,474) $ (8,262) $ 26,115 $ (34,377)
Trading securities 74 197 (123) (116) 28 (144)
Loans (2,718) 9,453 (12,171) (2,235) 31,187 (33,422)
Funds sold and resell agreements (6) 70 (76) 17 154 (137)
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Total (6,757) 18,087 (24,844) (10,596) 57,484 (68,080)
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Interest expense:
Transaction deposits (2,682) 2,516 (5,198) (5,655) 6,855 (12,510)
Savings deposits (302) 12 (314) (797) 46 (843)
Time deposits (2,291) 2,575 (4,866) (4,141) 10,672 (14,813)
Federal funds purchased and repurchase
agreements (3,069) (275) (2,794) (8,078) (701) (7,377)
Other borrowings (1,580) 321 (1,901) (5,618) 135 (5,753)
Subordinated debentures (304) (468) 164 (910) (1,401) 491
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Total (10,228) 4,681 (14,909) (25,199) 15,606 (40,805)
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Tax-equivalent net interest revenue 3,471 13,406 (9,935) 14,603 41,878 (27,275)
Decrease in tax-equivalent adjustment 131 729
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Net interest revenue $ 3,602 $ 15,332
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<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 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 third quarter of 2003, this strategy
enhanced net interest revenue $15.1 million, compared to $13.8 million for the
third quarter of 2002. Excluding this strategy, net interest margin for the
third quarter of 2003 was 3.37% compared to 3.72% for the third quarter of 2002.
Average securities purchased and funds borrowed under this strategy were $1.9
billion in third quarters of 2003 and 2002. As more fully discussed in the
Market Risk section of this report, 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 third quarter of 2003 decreased $43.1 million or
40% compared to the third quarter of 2002. Fees and commissions increased $15.5
million or 24% and continue to represent a significant portion of BOK
Financial's total revenue. Fees and commissions represented 46% 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. Brokerage
fees and trading revenue increased $6.2 million. This increase was predominantly
due to transactions with mortgage bankers as economic hedges of their loan
portfolios. Service charges on deposit accounts increased $2.7 million or 15%
due primarily to growth in overdraft fee revenue. Trust fees increased $2.2
million or 22% due to growth in trust assets and improved pricing. Transaction
card revenue increased $1.6 million or 12% due to strong growth in check card
revenue and merchant discount fees. The percentage growth in these revenue
sources was diluted by lower growth in ATM revenue, which is included in
transaction card revenue.
BOK Financial realized net losses on securities sales of $12.0 million during
the third quarter of 2003 compared to net gains of $34.3 million during the
third quarter of 2002. These amounts included net losses from sales of
securities designated as an economic hedge of the mortgage servicing portfolio
of $2.8 million in 2003 compared to net gains of $27.5 million in 2002. Net
losses on sales of securities from the undesignated portfolio were $9.2 million
in 2003 compared to net gains of $6.8 million in 2002. During the third quarter
of 2003, management continued a strategy begun in the preceding quarter of
selling mortgage-backed securities that were subject to high extension risk if
interest rates increased. As long-term rates rose during the quarter, losses
were incurred on some of these sales. The proceeds of these sales, along with
the proceeds of maturing securities, were reinvested in securities with less
extension risk. A total of $2.5 billion was invested in the securities portfolio
during the quarter, which decreased the total securities portfolio by $990
million compared to June 30, 2003. The estimated life of the securities
portfolio was 3.2 years, up from 2.0 years at December 31, 2002 and was within
established guidelines. Net losses on derivatives primarily represent the mark
to market of the derivative portfolio used for interest rate risk management.
Additional discussion regarding the mortgage servicing rights and related hedge
portfolio and BOK Financial's use of derivative instruments is located in the
Market Risk section of this report.
Other operating revenue for the first nine months of 2003 decreased $8.3 million
compared to the same period of 2002. Fees and commissions increased $44.3
million or 23% primarily due to growth in brokerage fees and trading revenue,
service charges on deposit accounts and mortgage banking revenue. Net gains on
securities sales were $8.1 million in 2003. This included net gains of $4.8
million on securities held as an economic hedge of the mortgage servicing
portfolio and $3.3 million on sales of other securities. Net gains on securities
sales were $48.4 million in 2002. This included net gains of $19.1 million on
securities held as an economic hedge of the mortgage servicing portfolio and
$29.3 million on sales of other securities.
5
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TABLE 2 - OTHER OPERATING REVENUE
(In thousands)
Three Months Ended
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Sept. 30, June 30, March 31, Dec.31, Sept. 30,
2003 2003 2003 2002 2002
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Brokerage and trading revenue $ 11,588 $ 10,032 $ 8,679 $ 6,725 $ 5,359
Transaction card revenue 15,241 15,138 13,599 13,973 13,654
Trust fees and commissions 11,762 10,845 10,180 9,813 9,605
Service charges and fees
on deposit accounts 21,106 19,606 18,984 18,991 18,395
Mortgage banking revenue, net 12,735 16,609 15,535 14,943 12,556
Leasing revenue 949 795 859 826 790
Other revenue 7,587 5,992 5,001 4,431 5,105
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Total fees and commissions 80,968 79,017 72,837 69,702 65,464
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Gain on sale of assets 14 8 730 30 444
Gain (loss) on sales of securities, net (12,007) 10,457 9,689 10,342 34,341
Gain (loss) on derivatives, net (4,566) (1,121) (1,102) 665 7,218
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Total other operating revenue $ 64,409 $ 88,361 $ 82,154 $ 80,739 $ 107,467
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OTHER OPERATING EXPENSE
Other operating expense for the quarter ended September 30, 2003 totaled $91.8
million, a $33.0 million decrease compared to the third quarter of 2002.
Operating expenses in 2003 included a $16.2 million reversal of provision for
impairment of MSRs compared to a $29.0 million provision for impairment of MSRs
in 2002. Additionally, mortgage banking costs, which consist primarily of
amortization of mortgage servicing rights, decreased $3.4 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. Excluding the changes in provision for impairment of mortgage servicing
rights and mortgage banking costs, other operating expenses increased $15.6
million or 19%.
Personnel expense increased $10.9 million or 24% during the third quarter of
2003. Salaries increased $2.9 million or 9%. Average compensation per full-time
equivalent employee ("FTE") increased 4% and the number of FTE increased by 175.
Benefits increased $1.4 million or 20% due to higher medical claims and pension
costs.
Incentive compensation increased $6.6 million or 92%. Approximately $2.4 million
of the increase was related to revenue growth in the company's brokerage and
trading activities. Additionally, $1.7 million of the increase was due to a
recently adopted deferred compensation agreement. The cost of this agreement
will vary with changes in the company's stock price and returns on other
selected investments. Commissions associated with mortgage loan production
increased $1.0 million.
Data processing costs increased $1.9 million or 15% due primarily to $1.4
million of expenses related to the current project to upgrade core processing
systems. Professional fees increased $1.6 million due primarily to consulting
fees associated with the overdraft privilege program.
Year to date, other operating expense totaled $304.8 million, a $19.0 million
decrease compared to 2002. The provision for impairment of mortgage servicing
rights reflected a net change of $68.2 million. Mortgage banking costs, which
consist primarily of amortization of mortgage servicing rights, increased $6.4
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. Excluding the changes in provision for impairment of
mortgage servicing rights and mortgage banking costs, other operating expenses
increased $42.8 million or 17%. Personnel expense increased $28.0 million and
data processing and communication expense increased $6.9 million. Professional
fees increased $4.2 million, or 44%. These expense increases were attributable
to the same factors that caused third-quarter expenses to increase compared to
the previous year.
6
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TABLE 3 - OTHER OPERATING EXPENSE
(In thousands)
Three Months Ended
----------------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2003 2003 2003 2002 2002
----------------------------------------------------------------------------------
Personnel $ 56,915 $ 53,584 $ 53,784 $ 51,154 $ 45,999
Business promotion 2,912 2,781 3,471 2,798 2,483
Professional fees and services 4,454 5,404 3,765 3,531 2,816
Net occupancy and equipment 11,600 11,240 11,061 11,130 10,578
Data processing & communications 13,989 14,019 12,643 13,459 12,138
FDIC and other insurance 589 530 516 513 468
Printing, postage and supplies 3,459 3,523 3,359 3,418 3,172
Net gains and operating expenses
on repossessed assets 283 335 8 203 108
Amortization of intangible assets 1,959 1,777 1,777 2,002 1,867
Mortgage banking costs 8,268 11,481 14,442 14,488 11,635
Provision (recovery) for
impairment
of mortgage servicing rights (16,186) 3,353 (7,830) (1,615) 29,042
Other expense 3,510 4,916 3,082 4,932 4,425
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Total $ 91,752 $ 112,943 $ 100,078 $ 106,013 $ 124,731
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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., Bank of Texas, N.A., and Colorado State Bank and
Trust, 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 the 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. In the second quarter of 2003,
management adopted a third-party developed capital allocation model. This model
assigns capital based upon credit, operating, interest rate, liquidity 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 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, but excludes Colorado State Bank and Trust. 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 $12.9 million or 33% to consolidated net income for
the third quarter of 2003. This compares to $12.7 million or 29% of consolidated
net income for the third 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 $16.3 million for the third
quarter of 2003 from $14.3 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 $498 million or 13% for the third
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 Sept. 30, Nine months ended Sept. 30,
-------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------
NIR (expense) from external sources $ 37,563 $ 39,424 $ 113,050 $ 117,568
NIR (expense) from internal sources (7,087) (11,948) (23,688) (36,077)
---------- ----------- ----------- -----------
Total net interest revenue 30,476 27,476 89,362 81,491
Other operating revenue 9,200 8,030 26,883 24,629
Operating expense 16,320 14,271 47,160 43,154
Provision for loan loss 2,399 507 9,053 4,037
Net income 12,893 12,689 36,881 36,238
Average assets $ 4,455,548 $ 3,957,383 $ 4,459,814 $ 3,981,424
Average equity 303,340 277,890 287,400 284,550
Return on assets 1.15% 1.27% 1.11% 1.22%
Return on equity 16.86% 18.12% 17.16% 17.03%
Efficiency ratio 41.13% 40.19% 40.57% 40.67%
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 $2.7 million or 7% to consolidated net income for the third quarter
of 2003. This compares to $2.2 million or 5% of consolidated net income for the
third quarter of 2002. Revenue from internal sources, primarily funds provided
to other business lines, decreased $702 thousand due to lower transfer-pricing
rates. Other operating revenue increased $1.3 million, or 12%, over the third
quarter of 2002 due primarily to increases in service charges from an overdraft
privilege product initiated during 2002. Performance of the Consumer Banking
Division also improved as a result of fewer indirect automobile and overdraft
loan charge-offs.
8
TABLE 5 - CONSUMER BANKING
(In thousands)
Three months ended Sept. 30, Nine months ended Sept. 30,
-------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------
NIR (expense) from external sources $ (4,148) $ (4,599) $ (12,811) $ (13,335)
NIR (expense) from internal sources 14,424 15,126 43,475 46,543
---------- ---------- ---------- ----------
Total net interest revenue 10,276 10,527 30,664 33,208
Other operating revenue 12,040 10,784 34,816 27,953
Operating expense 16,267 15,315 49,203 46,606
Provision for loan loss 1,587 2,444 5,278 4,830
Net income 2,726 2,171 6,720 5,942
Average assets $ 2,486,497 $ 2,311,550 $ 2,497,085 $ 2,322,765
Average equity 58,630 62,650 57,900 61,360
Return on assets 0.43% 0.37% 0.36% 0.34%
Return on equity 18.45% 13.75% 15.52% 12.95%
Efficiency ratio 72.89% 71.86% 75.14% 76.20%
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 $12.1 million or 31% to consolidated net income in the
third quarter of 2003 compared to $4.9 million or 11% in the third 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. Rising long-term interest rates during the third
quarter of 2003 slowed prepayment speeds. This resulted in BOK Financial
reversing a portion of the allowance for impairment of mortgage servicing rights
and lower amortization expense. However, the increase in rates reduced the
pricing for loans sold during the quarter.
Loan Production Sector
Revenue from loan production was $8.0 million in the third quarter of 2003,
including $8.1 million of capitalized mortgage servicing rights, compared to
revenue from loan production of $8.1 million in the third quarter of 2002,
including $4.3 million of capitalized mortgage servicing rights. While loan
production revenue was substantially unchanged between the two quarters, rising
interest rates during the third quarter of 2003 eliminated gains on loan sales,
excluding capitalized mortgage servicing rights. Mortgage loans funded totaled
$490 million in the third quarter of 2003, including $167 million for home
purchases and $323 million of refinanced loans. Mortgage loans funded in the
third quarter of 2002 totaled $347 million. Approximately 68% of the loans
funded in the third quarter of 2003 were in Oklahoma. The greater volume of
loans funded, partially offset by loan pricing, increased pretax income from
loan production to $8.1 million for the third quarter of 2003 compared to $7.4
million for the previous year's third quarter. The pipeline of mortgage loan
applications totaled $288 million at September 30, 2003, down from $563 million
at the end of the preceding quarter.
Loan Servicing Sector
The loan servicing sector generated pretax income of $11.5 million in the third
quarter of 2003 compared to a pretax loss of $2.8 million in 2002. Rising
long-term interest rates and reductions in prepayment speeds during the third
quarter of 2003 resulted in BOK Financial reversing $16.2 million of its
provision for impairment of mortgage servicing rights. Falling long-term
interest rates during the same period of 2002 required BOK Financial to record a
$29.0 million provision for impairment of mortgage servicing rights.
Amortization expense, which is based on both actual and anticipated loan
prepayments, decreased to $7.8 million in 2003 compared to $10.2 million in 2002
due to rising interest rates. BOK Financial incurred losses of $2.8 million from
sales of securities held as an economic hedge of mortgage servicing rights in
2003, compared to gains on sales of securities of $27.5 million in 2002.
9
Servicing revenue totaled $5.3 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 $4.4 billion for the third quarter of 2003 compared to $5.8 billion
for the third 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 $34
million at September 30, 2003 compared to $59 million at September 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
actual and 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 for additional
discussion of the prepayment risk of the mortgage servicing portfolio and
related economic hedging strategies.
TABLE 6 - MORTGAGE BANKING
(In thousands)
Three months ended Sept. 30, Nine months ended Sept. 30,
-------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------
NIR (expense) from external sources $ 6,837 $ 8,508 $ 22,173 $ 24,291
NIR (expense) from internal sources (1,809) (3,258) (6,783) (11,222)
--------- --------- --------- ----------
Total net interest revenue 5,028 5,250 15,390 13,069
Capitalized mortgage servicing rights 8,109 4,318 20,742 14,235
Other operating revenue 6,268 12,301 31,005 25,512
Operating expense 12,517 15,247 47,553 38,719
Provision (recovery) for impairment of
mortgage servicing rights (16,186) 29,042 (20,663) 47,538
Gains (losses) on sales of financial (2,824) 27,490 4,781 19,587
instruments
Net income (loss) 12,075 4,888 27,026 (6,719)
Average assets $ 659,416 $ 666,978 $ 645,374 $ 672,565
Average equity 30,930 48,850 30,360 37,580
Return on assets 7.26% 2.91% 5.60% (1.34)%
Return on equity 154.89% 39.70% 119.02% (23.90)%
Efficiency ratio 64.50% 69.72% 70.83% 73.31%
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, New Mexico, and Colorado. Additionally, Trust
Services include a nationally competitive, self-directed 401-(k) program. At
September 30, 2003 and 2002, trust assets with an aggregate market value of
$19.2 billion and $15.1 billion, respectively, were subject to various fiduciary
arrangements. The increase in trust assets included $1.6 billion from the
acquisition of Colorado State Bank and Trust, combined with an increase in
market value of trust assets. BOK Financial has sole or joint discretionary
authority over $7.4 billion of trust assets at September 30, 2003 compared to
$6.2 billion of trust assets at September 30, 2002. Trust Services contributed
$2.3 million or 6% to consolidated net income for the third quarter 2003. This
compared to $1.2 million or 3% of consolidated net income for the third quarter
of 2002. Average assets (excluding trust assets) increased $152 million or 29%
for the third quarter of 2003 from the same period of the prior year. The growth
in average 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.
10
TABLE 7 - TRUST SERVICES
(In thousands)
Three months ended Sept. 30, Nine months ended Sept. 30,
-------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------
NIR (expense) from external sources $ 266 $ 279 $ 649 $ 1,078
NIR (expense) from internal sources 2,432 2,148 7,127 6,153
-------- -------- -------- --------
Total net interest revenue 2,698 2,427 7,776 7,231
Other operating revenue 11,309 9,554 32,157 30,162
Operating expense 10,061 9,691 30,895 29,044
Net income 2,316 1,208 5,268 4,879
Average assets $ 674,726 $ 522,299 $ 693,334 $ 527,098
Average equity 37,790 42,660 37,600 39,990
Return on assets 1.36% 0.92% 1.02% 1.24%
Return on equity 24.31% 11.23% 18.73% 16.31%
Efficiency ratio 71.83% 80.89% 77.37% 77.67%
Regional Banking
Regional banks include Bank of Texas, Bank of Albuquerque, Bank of Arkansas, and
Colorado State Bank and Trust. 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 $9.3 million or 24% to consolidated
net income for the third quarter of 2003. This compares to $10.3 million or 24%
of consolidated net income for the third quarter of 2002. Net interest revenue
increased $6.4 million or 21% in the third quarter of 2003 from the same period
of the prior year due to growth in average earning assets. Average assets
increased $808 million or 21% for the third 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 $296 million and $220 million, respectively.
Other operating revenue increased $1.9 million or 27% in the third quarter of
2003 from the same period of the prior year due primarily to service charges on
deposit accounts.
The aggregate return on combined allocated and invested capital for the regional
banks has declined compared to the previous year. This decline is due primarily
to growth in operating expenses combined with slower loan growth. Management is
developing specific initiatives to reduce expenses and increase revenue
attributable to this line of business.
BOK Financial's operations in Texas, New Mexico and Arkansas contributed $7.1
million, $1.7 million, and $606 thousand, respectively, to consolidated net
income for the third quarter of 2003. This compared to $6.8 million, $3.1
million, and $397 thousand, respectively, for the third quarter 2002.
11
TABLE 8 - REGIONAL BANKING
(In thousands)
Three months ended Sept. 30, Nine months ended Sept. 30,
-------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------
NIR (expense) from external sources $ 37,890 $ 28,794 $ 115,134 $ 100,950
NIR (expense) from internal sources (304) 2,359 (6,954) (9,615)
-------- --------- --------- ---------
Total net interest revenue 37,586 31,153 108,180 91,335
Other operating revenue 9,247 7,309 25,461 19,261
Operating expense 28,780 22,688 83,022 67,335
Provision for loan loss 2,071 1,583 4,682 5,119
Gains (losses) on sales of financial instruments - 519 339 3,480
Net income 9,289 10,317 29,332 26,423
Average assets $ 4,571,817 $ 3,763,527 $ 4,623,848 $ 3,787,722
Average equity 429,770 359,820 426,410 351,560
Return on assets 0.81% 1.09% 0.85% 0.93%
Return on equity 8.58% 11.38% 9.20% 10.05%
Efficiency ratio 61.45% 58.99% 62.12% 60.88%
DISCUSSION AND ANALYSIS OF OPERATIONS
LOANS
The aggregate loan portfolio at September 30, 2003 totaled $7.3 billion and
increased $249 million or 4% during the quarter. This included $223 million of
loans acquired with Colorado State Bank and Trust. Excluding this acquisition,
loans increased at an annualized rate of 1.5%. Commercial loans increased $34
million and commercial real estate loans decreased $11 million.
- ---------------------------------------------------------------------------------------------------------------------
TABLE 9 - LOANS
(In thousands)
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2003 2003 2003 2002 2002
---------------------------------------------------------------------------------
Commercial:
Energy $ 1,144,354 $ 1,121,285 $ 1,147,875 $ 1,132,178 $ 1,006,151
Manufacturing 531,242 532,849 523,055 501,506 507,798
Wholesale/retail 670,151 693,175 626,362 627,422 671,127
Agricultural 188,925 164,480 163,823 186,976 154,221
Services 1,303,186 1,247,129 1,254,894 1,249,622 1,166,193
Other commercial and industrial 342,364 331,070 297,226 292,094 286,972
- ---------------------------------------------------------------------------------------------------------------------
Total commercial 4,180,222 4,089,988 4,013,235 3,989,798 3,792,462
- ---------------------------------------------------------------------------------------------------------------------
Commercial real estate:
Construction and land development 414,288 363,956 371,680 356,227 331,073
Multifamily 296,136 287,613 306,409 307,119 309,173
Other real estate loans 861,659 812,282 783,674 772,492 767,083
- ---------------------------------------------------------------------------------------------------------------------
Total commercial real estate 1,572,083 1,463,851 1,461,763 1,435,838 1,407,329
- ---------------------------------------------------------------------------------------------------------------------
Residential mortgage:
Secured by 1-4 family
residential properties 1,002,080 921,320 951,415 929,759 849,254
Residential mortgages held for sale 109,035 144,890 146,092 133,421 136,330
- ---------------------------------------------------------------------------------------------------------------------
Total residential mortgage 1,111,115 1,066,210 1,097,507 1,063,180 985,584
- ---------------------------------------------------------------------------------------------------------------------
Consumer 428,136 422,839 403,984 412,167 409,779
- ---------------------------------------------------------------------------------------------------------------------
Total $ 7,291,556 $ 7,042,888 $ 6,976,489 $ 6,900,983 $ 6,595,154
- ---------------------------------------------------------------------------------------------------------------------
12
Outstanding loans to energy customers totaled $1.1 billion or 16% of total loans
at September 30, 2003. Approximately $902 million of the energy loan portfolio
was to oil and gas producers. The amount of credit available to these customers
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 $1.3 billion at September 30, 2003. Services
included loans that totaled $231 million to nursing homes, $121 million to the
healthcare industry and $55 million to the hotel industry. Agriculture included
$161 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 $1.6 billion at September 30, 2003 or 22%
of the total loan portfolio. Construction and land development loans increased
$50 million, including $72 million from the Colorado acquisition. Construction
and land development loans included $266 million for single-family residential
lots and premises. The major components of other commercial real estate loans
were office buildings - $280 million and retail facilities - $244 million.
Residential mortgage loans, excluding loans held for sale, included $363 million
of home equity loans, $284 million of loans held for business relationship, $237
million of adjustable rate mortgage loans and $101 million of loans held for
community development. Consumer loans included $190 million of indirect
automobile loans. Substantially all of these loans were purchased from dealers
in Oklahoma. Approximately 17% of the indirect automobile loan portfolio was
considered sub-prime.
While BOK Financial continued to increase geographic diversification through
expansion into Texas, New Mexico and Colorado, 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.
13
- ---------------------------------------------------------------------------------------------------------------------
TABLE 10 - LOANS BY PRINCIPAL MARKET AREA
(In thousands)
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2003 2003 2003 2002 2002
---------------------------------------------------------------------------------
Oklahoma:
Commercial $ 2,713,411 $ 2,754,718 $ 2,613,235 $ 2,677,616 $ 2,585,795
Commercial real estate 742,444 770,486 782,842 763,469 790,638
Residential mortgage 691,233 644,942 679,727 656,391 613,963
Residential mortgage held for sale 109,035 144,890 146,092 133,421 136,330
Consumer 313,113 309,632 299,404 294,404 311,877
---------------------------------------------------------------------------------
Total Oklahoma $ 4,569,236 $ 4,624,668 $ 4,521,300 $ 4,525,301 $ 4,438,603
---------------------------------------------------------------------------------
Texas:
Commercial $ 898,075 $ 840,470 $ 889,127 $ 866,905 $ 789,846
Commercial real estate 460,292 444,162 459,605 455,364 391,207
Residential mortgage 197,814 202,423 195,179 192,575 149,983
Consumer 96,668 100,148 91,182 104,353 85,651
---------------------------------------------------------------------------------
Total Texas $ 1,652,849 $ 1,587,203 $ 1,635,093 $ 1,619,197 $ 1,416,687
---------------------------------------------------------------------------------
Albuquerque:
Commercial $ 296,710 $ 297,371 $ 298,051 $ 286,622 $ 276,222
Commercial real estate 167,412 180,000 155,240 150,293 141,298
Residential mortgage 65,853 68,374 71,598 76,020 80,298
Consumer 10,371 10,703 11,040 11,399 10,191
---------------------------------------------------------------------------------
Total Albuquerque $ 540,346 $ 556,448 $ 535,929 $ 524,334 $ 508,009
---------------------------------------------------------------------------------
Northwest Arkansas:
Commercial $ 68,977 $ 58,346 $ 61,805 $ 63,113 $ 62,642
Commercial real estate 77,607 69,203 64,076 66,712 84,186
Residential mortgage 5,209 5,581 4,911 4,773 5,010
Consumer 2,480 2,356 2,358 2,011 2,060
---------------------------------------------------------------------------------
Total Northwest Arkansas $ 154,273 $ 135,486 $ 133,150 $ 136,609 $ 153,898
---------------------------------------------------------------------------------
Colorado (1):
Commercial $ 203,049 $ 139,083 $ 151,017 $ 95,542 $ 77,957
Commercial real estate 124,328 - - - -
Residential mortgage 41,971 - - - -
Consumer 5,504 - - - -
---------------------------------------------------------------------------------
Total Colorado $ 374,852 $ 139,083 $ 151,017 $ 95,542 $ 77,957
---------------------------------------------------------------------------------
Total BOK Financial loans $ 7,291,556 $ 7,042,888 $ 6,976,489 $ 6,900,983 $ 6,595,154
---------------------------------------------------------------------------------
<FN>
(1) Includes Denver loan production office.
</FN>
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 $96
million and the fair value of energy contracts carried as liabilities totaled
$97 million at September 30, 2003. Approximately 59% of the fair value of asset
contracts was with customers of BOK Financial. The remaining 41% was with energy
dealers, primarily Coral Energy and Bank of Montreal. Conversely, approximately
43% of the fair value of liability contracts was with energy dealers, primarily
Morgan Stanley, Virginia Power and Coral Energy. The remaining 57% 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
14
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 $127 million at September 30, 2003 compared to $123
million at June 30, 2003 and $111 million at September 30, 2002. These amounts
represent 1.77%, 1.78%, and 1.72%, 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
250% of nonperforming loans at September 30, 2003. Net loans charged-off during
the third quarter totaled $6.3 million, compared to $6.4 million in the second
quarter of 2003 and $4.9 million in the third 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
--------------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2003 2003 2003 2002 2002
--------------------------------------------------------------------------------
Beginning balance $ 122,772 $ 119,699 $ 116,070 $ 111,226 $ 108,084
Loans charged-off:
Commercial 4,362 4,709 4,144 3,550 2,873
Commercial real estate 46 - 5 163 -
Residential mortgage 590 137 400 219 88
Consumer 3,158 2,873 3,502 3,945 3,164
- -------------------------------------------------------------------------------------------------------------------
Total 8,156 7,719 8,051 7,877 6,125
- -------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged-off:
Commercial 553 128 95 441 332
Commercial real estate 40 3 8 15 9
Residential mortgage 25 14 38 2 118
Consumer 1,234 1,144 1,627 898 779
- -------------------------------------------------------------------------------------------------------------------
Total 1,852 1,289 1,768 1,356 1,238
- -------------------------------------------------------------------------------------------------------------------
Net loans charged off 6,304 6,430 6,283 6,521 4,887
Provision for loan losses 8,220 9,503 9,912 10,001 8,029
Additions due to acquisitions 2,283 - - 1,364 -
- -------------------------------------------------------------------------------------------------------------------
Ending balance $ 126,971 $ 122,772 $ 119,699 $ 116,070 $ 111,226
- -------------------------------------------------------------------------------------------------------------------
Reserve to loans outstanding
at period-end (1) 1.77% 1.78% 1.75% 1.72% 1.72%
Net loan losses (annualized)
to average loans (1) 0.36 0.38 0.37 0.39 0.31
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) Excludes residential mortgage loans held for sale.
</FN>
Specific reserves for impairment are determined through evaluation of estimated
future cash flows and collateral value. At September 30, 2003 specific
impairment reserves totaled $5.1 million on total impaired loans of $45 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 September 30, 2003
the range of potential losses for the more significant factors were:
General economic conditions $ 7.8 million - $ 10.5 million
Concentration of large loans $ 1.2 million - $ 2.4 million
Loan portfolio growth $584 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.
15
NONPERFORMING ASSETS
Information regarding nonperforming assets, which totaled $59 million at
September 30, 2003, $61 million at June 30, 2003 and $60 million at September
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 decreased $4.8 million during the third
quarter of 2003, including $5.5 million from charge-offs and foreclosure and
$2.8 million from cash payments received. This decrease was partially offset by
newly identified nonaccruing loans of $4.0 million.
- ---------------------------------------------------------------------------------------------------------------------
TABLE 12 - NONPERFORMING ASSETS
(In thousands)
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2003 2003 2003 2002 2002
----------------------------------------------------------------------
Nonperforming loans:
Nonaccrual loans:
Commercial $ 38,253 $ 41,364 $ 39,576 $ 39,114 $ 41,093
Commercial real estate 2,528 4,719 3,585 3,395 5,788
Residential mortgage 8,568 8,323 6,202 5,950 6,025
Consumer 1,439 1,213 1,350 1,396 556
- ---------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 50,788 55,619 50,713 49,855 53,462
Other nonperforming assets 7,920 5,713 5,350 6,719 6,427
- ---------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 58,708 $ 61,332 $ 56,063 $ 56,574 $ 59,889
- ---------------------------------------------------------------------------------------------------------------------
Ratios:
Reserve for loan losses to
nonperforming loans 250.00% 220.74% 236.03% 232.82% 208.05%
Nonperforming loans to
period-end loans (2) 0.71 0.81 0.74 0.74 0.83
- ---------------------------------------------------------------------------------------------------------------------
Loans past due (90 days) (1) $ 12,372 $ 6,996 $ 7,921 $ 8,117 $ 10,274
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes residential mortgages guaranteed
by agencies of the U.S. Government. $ 4,519 $ 4,669 $ 5,185 $ 4,956 $ 6,640
Excludes residential mortgages guaranteed
by agencies of the U.S. Government in
foreclosure. 3,449 3,178 3,853 3,630 4,931
(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
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 $56 million at September 30, 2003 compared to
$57 million at June 30, 2003 and $71 million at September 30, 2002. At September
30, 2003 the composition of potential problem loans by primary industry
categories included services - $16 million, healthcare - $11 million,
manufacturing - $9 million, and energy - $7 million.
DEPOSITS
Total deposits increased $236 million to $8.9 billion during the third quarter
of 2003, including $301 million from the Colorado State Bank and Trust
acquisition. Demand deposits decreased $180 million to $1.6 billion. This
increase was offset by a $263 million increase in interest-bearing transaction
accounts and a $142 million increase in time deposit accounts. Average core
deposits were 54% of total deposits for the third quarter of 2003 compared to
54% for the second quarter of 2003 and 59% for the third 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 35% of total deposits at September 30, 2003, compared to
33% at June 30, 2003 and 30% at September 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.
16
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)
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2003 2003 2003 2002 2002
---------------------------------------------------------------------------------
Oklahoma:
Demand $ 944,670 $ 1,216,746 $ 1,014,983 $ 1,044,628 $ 951,301
Interest-bearing:
Transaction 2,098,537 2,100,705 2,099,096 1,897,353 1,762,593
Savings 103,292 107,591 109,954 103,749 104,864
Time 2,498,235 2,380,844 2,572,531 2,334,949 2,263,729
---------------------------------------------------------------------------------
Total interest-bearing 4,700,064 4,589,140 4,781,581 4,336,051 4,131,186
---------------------------------------------------------------------------------
Total Oklahoma $ 5,644,734 $ 5,805,886 $ 5,796,564 $ 5,380,679 $ 5,082,487
---------------------------------------------------------------------------------
Texas:
Demand $ 427,473 $ 412,301 $ 344,228 $ 394,164 $ 320,108
Interest-bearing:
Transaction 1,064,835 1,004,029 1,023,917 953,550 776,991
Savings 36,594 36,289 36,965 33,071 31,058
Time 507,702 532,402 542,101 510,512 450,387
---------------------------------------------------------------------------------
Total interest-bearing 1,609,131 1,572,720 1,602,983 1,497,133 1,258,436
---------------------------------------------------------------------------------
Total Texas $ 2,036,604 $ 1,985,021 $ 1,947,211 $ 1,891,297 $ 1,578,544
---------------------------------------------------------------------------------
Albuquerque:
Demand $ 103,262 $ 104,896 $ 89,464 $ 79,953 $ 77,286
Interest-bearing:
Transaction 348,579 308,901 307,411 295,174 264,188
Savings 22,720 24,621 27,036 26,704 27,048
Time 306,920 299,877 296,492 287,607 285,968
---------------------------------------------------------------------------------
Total interest-bearing 678,219 633,399 630,939 609,485 577,204
---------------------------------------------------------------------------------
Total Albuquerque $ 781,481 $ 738,295 $ 720,403 $ 689,438 $ 654,490
---------------------------------------------------------------------------------
Northwest Arkansas:
Demand $ 15,788 $ 12,723 $ 11,761 $ 12,949 $ 11,198
Interest-bearing:
Transaction 22,226 21,652 21,756 18,025 17,807
Savings 1,059 1,039 1,269 1,214 1,218
Time 123,789 126,566 135,756 134,923 128,233
---------------------------------------------------------------------------------
Total interest-bearing 147,074 149,257 158,781 154,162 147,258
---------------------------------------------------------------------------------
Total Northwest Arkansas $ 162,862 $ 161,980 $ 170,542 $ 167,111 $ 158,456
---------------------------------------------------------------------------------
Colorado:
Demand $ 75,183 $ - $ - $ - $ -
Interest-bearing:
Transaction 164,350 - - - -
Savings 17,140 - - - -
Time 44,871 - - - -
---------------------------------------------------------------------------------
Total interest-bearing 226,361 - - - -
---------------------------------------------------------------------------------
Total Colorado 301,544 $ - $ - $ - $ -
---------------------------------------------------------------------------------
Total BOK Financial deposits $ 8,927,225 $ 8,691,182 $ 8,634,720 $ 8,128,525 $ 7,473,977
---------------------------------------------------------------------------------
17
CAPITAL
Shareholders' equity increased $6 million during the third quarter of 2003 and
totaled $1.2 billion at September 30, 2003. The increase was primarily due to
net income for the quarter offset by a $38 million reduction in accumulated
other comprehensive income. The reduction in accumulated other comprehensive
income resulted from a decrease in the fair value of BOK Financial's portfolio
of available for sale securities.
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
Sept. 30, June 30, March 31, Dec 31, Sept. 30,
2003 2003 2003 2002 2002
--------------------------------------------------------------------------
Average shareholders' equity
to average assets 9.03% 9.19% 9.02% 8.81% 8.38%
Risk-based capital:
Tier 1 capital 8.84 9.32 9.20 8.98 9.03
Total capital 11.02 11.85 12.11 11.95 12.43
Leverage 7.03 7.21 7.03 6.88 6.99
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 $37.95, its closing price on September 30,
2003 and if all holders exercised their rights under the price guarantee
agreement. The benchmark price and number of share 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 4,561 173
October 25, 2006 - December 24, 2006 41.30 203,951 18,014 684
October 25, 2007 - December 24, 2007 43.81 203,951 31,466 1,194
18
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 3.2 years while the related
funds borrowed have an average duration of 90 days. Securities purchased and
funds borrowed under this strategy averaged $1.9 billion during the third
quarter of 2003.
Additionally, BOK Financial uses interest rate swaps in managing its interest
rate sensitivity. These products 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 third quarters of 2003
and 2002, net interest revenue increased $4.1 million and $3.2 million,
respectively, from periodic settlements of these contracts. Additionally, a net
loss of $4.7 million was recognized in the third quarter of 2003 compared to a
net gain of $7.2 million in the third quarter of 2002 from adjustments of
interest rate swaps to fair value. Credit risk from these swaps is closely
monitored. Derivative contracts are not used for speculative purposes. A summary
of current interest rate swap contracts is shown at Table 15.
- ---------------------------------------------------------------------------------------------------------------------
TABLE 15 - INTEREST RATE SWAPS
(In Thousands)
Notional Pay Receive Positive Negative
Amount Rate Rate Fair Value Fair Value
-----------------------------------------------------------------------------------------------------
Expiration:
2004 $83,761 1.12%(1) - 5.59% 1.12%(1) - 7.36% $ 1,742 $ (442)
2006 160,481 1.12%(1) - 8.80% 1.12%(1) - 8.80% 1,052 (1,984)
2007 313,874 1.12%(1) - 5.49% 1.12%(1) - 5.49% 7,303 (1,697)
2008 57,763 1.12%(1) - 2.74% 1.12%(1) - 2.74% 427 (427)
2009 5,268 1.12%(1) - 4.75% 1.12%(1) - 4.75% 315 (315)
2011 40,922 5.21% - 5.51% 1.12%(1) - (3,107)
- ---------------------------------------------------------------------------------------------------------------------
$ 10,839 $ (7,972)
-----------------------------------
<FN>
(1) Rates are variable based on LIBOR and reset monthly, quarterly or
semiannually.
</FN>
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
19
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 over 12 months and second assuming a sustained
parallel 100 basis point decrease in interest rates over 12 months. 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 16 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 17.
TABLE 16 - 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 $ 7,711 $ 10,380 $ (5,123) $ (4,928) $ 1,446 $ 3,769
1.8% 2.8% (1.2)% (1.3)% 0.3% 1.0%
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 4,819 $ 6,487 $ (3,202) $ (3,080) $ 904 $ 2,355
2.9% 4.7% (1.9)% (2.3)% 0.5% 1.7%
- ----------------------------------------------------------------------------------------------------------------------
Economic value of equity $ (84,053) $ 12,919 $ 8,726 $ (40,374) $ (11,223) $ 49,822
(5.9)% 1.0% 0.6% (3.0)% (0.8)% 3.7%
- ----------------------------------------------------------------------------------------------------------------------
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 September 30, 2003, securities with a fair value of $136 million and an
unrealized gain of $633 thousand were held for the economic hedge program. This
unrealized gain, 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. At September 30, 2003, the pretax results of this
modeling on reported earnings were:
TABLE 17 - INTEREST RATE SENSITIVITY - MORTGAGE SERVICING
(Dollars in Thousands)
50 bp increase 50 bp decrease
----------------- ----------------
Anticipated change in:
Mortgage servicing rights $ 9,278 $ (14,226)
Hedging securities (4,900) 4,200
----------------- ----------------
Net $ 4,378 $ (10,026)
----------------- ----------------
20
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.
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 September 30, 2003, the VAR was $96 thousand.
The greatest value at risk during the third quarter of 2003 was $916 thousand.
21
CONTROLS AND PROCEDURES
BOK Financial management, including the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), 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. Based upon the controls evaluation, our CEO and CFO
have concluded that as of the date of the controls evaluation, our disclosure
controls were effective to provide reasonable assurance that material
information relating to BOK Financial and its consolidated subsidiaries is made
known to management, including the CEO and CFO, particularly during the period
when our periodic reports are being prepared.
BOK Financial management, including the CEO and CFO, 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. From the date of the
controls evaluation to the date of this Quarterly Report, there have been no
significant changes in internal control over financial reporting or in other
factors that could significantly affect internal control over financial
reporting, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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.
22
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.
23
- --------------------------------------------------- -- --------- --- ------------- -- ------------- --- ------------
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(Dollars In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------------
Interest Revenue
Loans $ 92,883 $ 95,588 $ 279,805 $ 281,978
Taxable securities 42,698 46,473 134,743 141,191
Tax-exempt securities 1,892 2,103 6,032 7,206
- --------------------------------------------------------------------------------------------------------------------
Total securities 44,590 48,576 140,775 148,397
- --------------------------------------------------------------------------------------------------------------------
Trading securities 280 209 494 583
Funds sold and resell agreements 51 57 216 199
- --------------------------------------------------------------------------------------------------------------------
Total interest revenue 137,804 144,430 421,290 431,157
- --------------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits 31,263 36,538 99,203 109,796
Other borrowings 7,949 12,598 25,577 39,273
Subordinated debentures 2,421 2,725 7,261 8,171
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 41,633 51,861 132,041 157,240
- --------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 96,171 92,569 289,249 273,917
Provision for Loan Losses 8,220 8,029 27,635 23,729
- --------------------------------------------------------------------------------------------------------------------
Net Interest Revenue After Provision for Loan
Losses 87,951 84,540 261,614 250,188
- --------------------------------------------------------------------------------------------------------------------
Other Operating Revenue
Brokerage and trading revenue 11,588 5,359 30,299 17,725
Transaction card revenue 15,241 13,654 43,978 39,579
Trust fees and commissions 11,762 9,605 32,787 30,279
Service charges and fees on deposit accounts 21,106 18,395 59,696 48,641
Mortgage banking revenue, net 12,735 12,556 44,879 33,967
Leasing revenue 949 790 2,603 2,504
Other revenue 7,587 5,105 18,580 15,845
- --------------------------------------------------------------------------------------------------------------------
Total fees and commissions revenue 80,968 65,464 232,822 188,540
- --------------------------------------------------------------------------------------------------------------------
Gain on sales of assets 14 444 752 1,127
Gain (loss) on sales of securities, net (12,007) 34,341 8,139 48,362
Gain (loss) on derivatives (4,566) 7,218 (6,789) 5,229
- --------------------------------------------------------------------------------------------------------------------
Total other operating revenue 64,409 107,467 234,924 243,258
- --------------------------------------------------------------------------------------------------------------------
Other Operating Expense
Personnel 56,915 45,999 164,283 136,285
Business promotion 2,912 2,483 9,164 8,569
Professional fees and services 4,454 2,816 13,623 9,456
Net occupancy and equipment 11,600 10,578 33,901 31,217
Data processing and communications 13,989 12,138 40,651 33,792
FDIC and other insurance 589 468 1,635 1,390
Printing, postage and supplies 3,459 3,172 10,341 9,247
Net gains and operating expenses on
repossessed assets 283 108 626 811
Amortization of intangible assets 1,959 1,867 5,513 5,636
Mortgage banking costs 8,268 11,635 34,191 27,783
Provision (recovery) for impairment of
mortgage servicing rights (16,186) 29,042 (20,663) 47,538
Other expense 3,510 4,425 11,508 12,025
- --------------------------------------------------------------------------------------------------------------------
Total other operating expense 91,752 124,731 304,773 323,749
- --------------------------------------------------------------------------------------------------------------------
Income Before Taxes 60,608 67,276 191,765 169,697
Federal and state income tax 21,792 23,784 68,707 59,977
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 38,816 $ 43,492 $ 123,058 $ 109,720
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
24
Earnings Per Share:
Net Income
- ---------------------------------------------------------------------------------------------------------------
Basic $ 0.67 $ 0.79 $ 2.14 $ 1.99
- ---------------------------------------------------------------------------------------------------------------
Diluted $ 0.60 $ 0.70 $ 1.91 $ 1.77
- ---------------------------------------------------------------------------------------------------------------
Average Shares Used in Computation:
Basic 57,059,192 54,633,692 56,940,900 54,560,045
- ----------------------------------------------------------------------------------------------------------------
Diluted 64,692,790 62,082,122 64,564,778 62,039,034
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
25
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Per Share Data)
September 30, December 31, September 30,
2003 2002 2002
--------------------------------------------------
(Unaudited) (Unaudited)
Assets
Cash and due from banks $ 584,905 $ 604,680 $ 531,269
Funds sold and resell agreements 22,200 19,535 8,315
Trading securities 19,238 5,110 6,791
Securities:
Available for sale 3,559,559 3,204,973 3,463,280
Available for sale securities pledged to creditors 449,965 728,370 657,655
Investment (fair value: September 30, 2003 - $195,827;
December 31, 2002 - $202,153;
September 30, 2002 - $199,739) 192,877 197,950 195,643
- --------------------------------------------------------------------------------------------------------------------
Total securities 4,202,401 4,131,293 4,316,578
- --------------------------------------------------------------------------------------------------------------------
Loans 7,291,556 6,900,983 6,595,154
Less reserve for loan losses (126,971) (116,070) (111,226)
- --------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 7,164,585 6,784,913 6,483,928
- --------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 167,813 151,715 144,389
Accrued revenue receivable 59,575 72,018 65,935
Intangible assets, net 251,470 197,868 145,940
Mortgage servicing rights, net 48,392 37,288 42,252
Real estate and other repossessed assets 7,920 6,719 6,427
Bankers' acceptances 45,810 3,728 28,365
Receivable on unsettled security transactions 260,961 65,901 -
Derivative contracts 111,406 90,776 54,671
Other assets 154,120 79,470 77,018
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 13,100,796 $ 12,251,014 $ 11,911,878
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Noninterest-bearing demand deposits $ 1,566,376 $ 1,531,694 $ 1,359,893
Interest-bearing deposits:
Transaction 3,698,527 3,164,102 2,821,579
Savings 180,805 164,738 164,188
Time 3,481,517 3,267,991 3,128,317
- --------------------------------------------------------------------------------------------------------------------
Total deposits 8,927,225 8,128,525 7,473,977
- --------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase agreements 1,437,902 1,567,686 1,730,894
Other borrowings 1,098,647 1,088,022 1,098,242
Subordinated debentures 154,756 155,419 185,640
Accrued interest, taxes and expense 68,583 74,043 78,187
Bankers' acceptances 45,810 3,728 28,365
Due on unsettled security transactions - - 243,038
Derivative contracts 109,592 80,079 44,758
Other liabilities 70,874 53,986 43,187
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 11,913,389 11,151,488 10,926,288
- --------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock 25 25 25
Common stock ($.00006 par value; 2,500,000,000
shares authorized; shares issued and outstanding:
September 30, 2003 - 57,878,009; December 31, 2002
- 55,749,596; September 30, 2002 - 53,690,698) 4 3 3
Capital surplus 540,322 475,054 397,177
Retained earnings 663,125 598,777 561,004
Treasury stock (shares at cost: September 30, 2003 - 801,192;
December 31, 2002 - 682,967; September 30, 2002 - 654,217) (21,856) (17,421) (16,362)
Accumulated other comprehensive income 5,787 43,088 43,743
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,187,407 1,099,526 985,590
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 13,100,796 $ 12,251,014 $ 11,911,878
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
26
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (UNAUDITED)
(In Thousands)
Accumulated
Other
Preferred Stock Common Stock Comprehensive Treasury Stock
------------------------------------ Income Capital Retained --------------------
Shares Amount Shares Amount (Loss) Surplus Earnings Shares Amount Total
----------------------------------------------------------------------------------------------------
Balances at
December 31, 2001 250,000 $ 25 51,737 $ 3 $ 5,792 $335,443 $504,101 541 $ (12,498) $832,866
Comprehensive income:
Net income - - - - - - 109,720 - - 109,720
Other comprehensive
income, net of tax:
Unrealized gain (loss)
on securities available
for sale (1) - - - - 37,951 - - - - 37,951
---------
Comprehensive income 147,671
---------
Exercise of stock options - - 369 - - 5,057 - 96 (3,284) 1,773
Stock-based compensation - - - - - 3,105 - - - 3,105
Director retainer shares - - 6 - - 203 - - - 203
Dividends paid in shares
of common stock:
Common stock - - 1,542 - - 52,244 (51,692) 17 (580) (28)
Preferred stock - - 37 - - 1,125 (1,125) - - -
- ---------------------------------------------------------------------------------------------------------------------------
Balances at
September 30, 2002 250,000 $ 25 53,691 $ 3 $43,743 $397,177 $561,004 654 $ (16,362) $985,590
- ---------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2002 250,000 $ 25 55,750 $ 3 $43,088 $475,054 $598,777 683 $ (17,421) $1,099,526
Comprehensive income:
Net income - - - - - - 123,058 - - 123,058
Other comprehensive
income, net of tax:
Unrealized gain (loss)
on securities
available for sale (1) - - - - (37,301) - - - - (37,301)
----------
Comprehensive income 85,757
----------
Exercise of stock options - - 419 - - 6,116 - 97 (3,691) 2,425
Tax benefit on exercise of
stock options - - - - - 2,750 - - - 2,750
Stock-based compensation - - - - - (2,849) - - - (2,849)
Director retainer shares - - 6 - - 208 - - - 208
Cash dividends paid 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
September 30, 2003 250,000 $ 25 57,878 $ 4 $5,787 $540,322 $663,125 801 $ (21,856) $1,187,407
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
September 30, 2003 September 30, 2002
(1) ------------------ ------------------
Changes in other comprehensive income:
Unrealized gains (losses) on available for
sale securities $ (53,069) $ 107,110
Tax (expense) benefit on unrealized gains
(losses) on available for sale securities 20,741 (39,610)
Reclassification adjustment for (gains)
losses realized included in net income (8,139) (48,362)
Reclassification adjustment for tax
expense (benefit) on realized (gains) losses 3,166 18,813
--------------------------------------
Net change in unrealized gains (losses) on
securities $ (37,301) $ 37,951
--------------------------------------
</FN>
See accompanying notes to consolidated financial statements.
27
- ------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Nine Months Ended
September 30,
-------------------------------------
2003 2002
-------------------------------------
Cash Flow From Operating Activities:
Net income $ 123,058 $ 109,720
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 27,635 23,729
Provision (recovery) for mortgage servicing rights (20,663) 47,538
Unrealized (gains) losses from derivatives 5,991 (4,703)
Stock-based compensation 5,182 3,105
Tax benefit of stock option exercises 2,750 -
Depreciation and amortization 51,574 44,557
Net amortization of financial instrument discounts and premiums 8,734 4,024
Net gain on sale of assets (41,442) (64,044)
Mortgage loans originated for resale (1,155,051) (657,926)
Proceeds from sale of mortgage loans held for resale 1,211,791 711,329
Change in trading securities (14,128) 3,536
Change in accrued revenue receivable 12,443 2,793
Change in other operating assets (54,610) (37,973)
Change in accrued interest, taxes and expense (5,460) 11,173
Change in other liabilities (13,421) 20,553
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 144,383 217,411
- ------------------------------------------------------------------------------------------------------
Cash Flow From Investing Activities:
Proceeds from maturities of investment securities 57,907 74,762
Proceeds from maturities of available for sale securities 2,352,037 932,060
Purchases of investment securities (52,972) (29,445)
Purchases of available for sale securities (6,826,820) (7,267,804)
Proceeds from sales of available for sale securities 4,335,687 5,769,584
Loans originated or acquired net of principal collected (490,840) (407,936)
Payments on derivative asset contracts (33,526) (4,718)
Net change in other investment assets (2,440) 137
Proceeds from disposition of assets 59,954 57,504
Purchases of assets (45,931) (31,856)
- ------------------------------------------------------------------------------------------------------
Net cash used by investing activities (646,944) (907,712)
- ------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net change in demand deposits, transaction
deposits, money market deposits, and savings accounts 585,174 261,022
Net change in certificates of deposit 214,114 307,842
Net change in other borrowings (119,159) 6,199
Proceeds from (payments on) derivative liability contracts 35,696 (4,261)
Net change in derivative margin accounts (37,537) (691)
Change in amount due on unsettled security transactions (195,060) 10,488
Issuance of preferred, common and treasury stock, net 2,633 1,976
Payment of dividends (410) (28)
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 485,451 582,547
- ------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (17,110) (107,754)
Cash and cash equivalents at beginning of period 624,215 647,338
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 607,105 $ 539,584
- ------------------------------------------------------------------------------------------------------
Cash paid for interest $ 137,800 $ 165,958
- ------------------------------------------------------------------------------------------------------
Cash paid for taxes $ 56,189 $ 38,898
- ------------------------------------------------------------------------------------------------------
Net loans transferred to repossessed real estate
and other assets $ 356 $ 2,761
- ------------------------------------------------------------------------------------------------------
Payment of dividends in common stock $ 58,335 $ 52,789
- ------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
28
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., Colorado State Bank and Trust, N.A., and BOSC, Inc. Certain
prior period amounts have been reclassified to conform to current period
classifications.
ACCOUNTING FOR STOCK-BASED COMPENSATION
BOK Financial has various stock option compensation plans for its employees.
Historically, BOK Financial has accounted for those plans under the recognition
and measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25"), and related
interpretations. Under APB 25, because the exercise price of employee stock
options has generally been equal to the market price of the underlying stock
options on the date of grant, no significant stock-based employee compensation
has been recognized. On July 1, 2003, BOK Financial adopted the expense
recognition provisions of Financial Accounting Standards Board Statement 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"). Under FAS 123,
compensation expense is recognized based on the fair value of stock options
granted. BOK Financial has chosen to retroactively restate its results of
operations for the accounting change, as provided within FAS 148. Following the
provisions of FAS 123, the three months ended September 30, 2003 and 2002,
include $1.2 million and $1.0 million, respectively, of pretax stock option
expense, and the nine months ended September 30, 2003 and 2002, include $3.5
million and $3.1 million, respectively, of pretax stock option expense, which
represents approximately $0.01 per share in each three-month period. Adoption of
the fair value method resulted in a reduction of retained earnings as of January
1, 2002 of $7.2 million, representing the cumulative stock option compensation
expense recorded for the seven years ended December 31, 2001, net of the tax
effect. As of December 31, 2001, the net effect upon total shareholders' equity
from stock-based compensation was an increase of $4.4 million due primarily to
recognition of deferred tax assets related to stock option expense.
BOK Financial also permits certain executive officers to defer the recognition
of income from the exercise of stock options for income tax purposes and to
diversify the deferred income into alternative investments. Because the Company
is expected to settle these amounts in cash, they are recognized as a liability.
Changes in the liability are recognized as additional compensation expense.
29
(2) ACQUISITIONS
On September 10, 2003, BOK Financial acquired Colorado Funding Co. and its
Colorado State Bank and Trust subsidiary. Under the terms of the transaction,
BOK Financial paid $78.5 million in cash for all outstanding stock of Colorado
Funding Co. This acquisition was accounted for by the purchase method of
accounting. Management is currently determining a value for the acquired trust
relationships and long-term building lease, which will be identified separately
from goodwill. A preliminary allocation of the purchase price to the net assets
acquired is as follows (in thousands):
Cash and cash equivalents $ 80,051
Securities 14,593
Loans 222,530
Less reserve for loan losses 2,282
------------
Loans, net of reserve 220,248
Premises and equipment, net 6,857
Core deposit premium 10,590
Other assets 8,998
------------
Total assets acquired 341,337
Deposits:
Noninterest-bearing 75,078
Interest-bearing 226,361
------------
Total deposits 301,439
Other borrowings 5,098
Other liabilities 4,634
------------
Net assets acquired 30,166
Less purchase price 78,527
------------
Goodwill $ 48,361
------------
(3) MORTGAGE BANKING ACTIVITIES
At September 30, 2003, BOk owned the rights to service 63,052 mortgage loans
with outstanding principal balances of $4.8 billion, including $425 million
serviced for BOk. The weighted average interest rate and remaining term was
6.57% and 257 months, respectively.
Activity in capitalized mortgage servicing rights and related valuation
allowance during the nine months ending September 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 (4) 20,742 20,738 - - 20,738
Amortization expense (12,936) (16,292) (29,228) - (1,069) (30,297)
Recovery (provision) for
impairment - - - 20,663 - 20,663
- -------------------------------------------------------------------------------------------------------------------------
Balance at Sept. 30, 2003 $ 24,283 $ 54,299 $ 78,582 $ (34,255) $ 4,065 $ 48,392
- -------------------------------------------------------------------------------------------------------------------------
Estimated fair value of
mortgage servicing rights (1) $ 13,535 $ 35,503 $ 49,038 - - $ 49,038
- -------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Excludes approximately $1.5 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 September
30, 2003 follows (in thousands):
30
(3) MORTGAGE BANKING ACTIVITIES (CONTINUED)
< 5.51% 5.51% - 6.49% 6.50% - 7.49% => 7.50% Total
---------------- --------------- ---------------- ----------- -------------
Cost less accumulated amortization $ 12,270 $ 22,509 $ 32,068 $ 11,735 $ 78,582
Deferred hedge losses - - 3,525 540 4,065
- ----------------------------------------------------------------------------------------------------------------------
Adjusted cost $ 12,270 $ 22,509 $ 35,593 $ 12,275 $ 82,647
- ----------------------------------------------------------------------------------------------------------------------
Fair value $ 10,324 $ 15,536 $ 16,825 $ 6,353 $ 49,038
- ----------------------------------------------------------------------------------------------------------------------
Impairment (2) $ 2,172 $ 6,974 $ 18,769 $ 6,340 $ 34,255
- ----------------------------------------------------------------------------------------------------------------------
Outstanding principal of loans serviced (1) $ 750,700 $ 1,265,000 $ 1,656,000 $ 593,300 $4,265,000
- ----------------------------------------------------------------------------------------------------------------------
<FN>
(1) Excludes outstanding principal of $425 million for loans serviced for BOk
and $137 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>
(4) DISPOSAL OF AVAILABLE FOR SALE SECURITIES
Sales of available for sale securities resulted in gains and losses as follows
(in thousands):
Nine Months Ended Sept. 30,
----------------------------------
2003 2002
-------------- ---------------
Proceeds $ 4,335,687 $ 5,769,584
Gross realized gains 27,068 73,253
Gross realized losses 18,929 24,891
Related federal and state income
tax expense 2,916 17,093
(5) 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 Nine Months Ended
-----------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept.30,
2003 2002 (2) 2003 2002 (2)
-----------------------------------------------------
Numerator:
Net income $ 38,816 $ 43,492 $ 123,058 $ 109,720
Preferred stock dividends (375) (375) (1,125) (1,125)
- ---------------------------------------------------------------------------------------------------------------
Numerator for basic earnings per share - income
available to common stockholders 38,441 43,117 121,933 108,595
- ---------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock dividends 375 375 1,125 1,125
- ---------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share - income available
to common shareholders after assumed conversion $ 38,816 $ 43,492 $ 123,058 $ 109,720
- ---------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share - weighted
average shares 57,059,192 54,633,692 56,940,900 54,560,045
Effect of dilutive securities:
Employee stock options (1) 878,447 728,853 774,400 759,412
Convertible preferred stock 6,719,577 6,719,577 6,719,577 6,719,577
Tanglewood market value guarantee 35,574 - 129,901 -
- ---------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 7,633,598 7,448,430 7,623,878 7,478,989
- ---------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 64,692,790 62,082,122 64,564,778 62,039,034
- ---------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.67 $ 0.79 $ 2.14 $ 1.99
- ---------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.60 $ 0.70 $ 1.91 $ 1.77
- ---------------------------------------------------------------------------------------------------------------
<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>
31
(6) REPORTABLE SEGMENTS
Reportable segments reconciliation to the Consolidated Financial Statements for
the nine months ended September 30, 2003 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
----------------------------------------------------------------------------
Total reportable segments $ 251,372 $ 171,064 $ 237,170 $ 105,227 $ 12,919,455
Total nonreportable segments 416 67,640 49,818 27,973 72,917
Unallocated items:
Tax-equivalent adjustment 3,986 - - 3,986 -
Funds management 44,992 (5,219) 5,656 6,956 1,271,993
All others (including eliminations), net (11,517) 89 12,129 (21,084) (1,641,213)
----------------------------------------------------------------------------
BOK Financial consolidated $ 289,249 $ 233,574 $ 304,773 $ 123,058 $ 12,623,152
============================================================================
<FN>
(1) Excluding financial instruments gains/(losses).
</FN>
Reportable segments reconciliation to the Consolidated Financial Statements for
the nine months ended September 30, 2002 is as follows (in thousands):
Net Other Other
Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
----------------------------------------------------------------------------
Total reportable segments $ 226,334 $ 141,752 $ 272,396 $ 66,763 $ 11,291,574
Total nonreportable segments 452 51,538 40,763 18,259 45,097
Unallocated items:
Tax-equivalent adjustment 4,715 - - 4,715 -
Funds management 53,815 (1,450) 8,556 36,256 546,705
All others (including eliminations), net (11,399) (2,173) 2,034 (16,273) (750,308)
----------------------------------------------------------------------------
BOK Financial consolidated $ 273,917 $ 189,667 $ 323,749 $ 109,720 $ 11,133,068
============================================================================
<FN>
(1) Excluding financial instruments gains/(losses).
</FN>
(7) 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.
(8) 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.
32
(8) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
As of September 30, 2003, outstanding commitments and letters of credit were as
follows (in thousands):
September 30,
2003
--------------
Commitments to extend credit $ 4,954,129
Standby letters of credit 426,754
Commercial letters of credit 4,924
Commitments to purchase securities 308,773
(9) RECENTLY ISSUED ACCOUNTING STANDARDS
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
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 was effective immediately for VIEs created after
January 31, 2003 and is effective beginning in the fourth quarter of 2003 for
VIEs created prior to February 1, 2003. On October 31, 2003, the FASB issued an
exposure draft related to proposed modifications of FIN 46. These modifications
included a scope exception for bank trust departments who perform customary
custodial roles for fiduciary trust and mutual funds in trust form and a
clarification that a troubled debt restructuring is generally not an event that
triggers reconsideration of the primary beneficiary. A final pronouncement is
expected to be issued prior to December 31, 2003, the current effective date of
FIN 46 for calendar year-end companies. Pending issuance of this final
pronouncement, management does not expect that the adoption of FIN 46 will have
a material effect on the financial statements.
ACCOUNTING AND REPORTING FOR DERIVATIVE INSTRUMENTS
In April 2003, the FASB issued Financial Accounting Standards Board Statement
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." This statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under FAS 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
was effective for contracts entered into or modified and for hedging
relationships designated after June 30, 2003. Management does not believe the
provisions of this standard will have a material impact on results of future
operations.
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY
In May 2003, the FASB issued Financial Accounting Standards Board Statement No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. This statement was effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective for fiscal periods beginning after June 15, 2003. Management does not
believe the provisions of this standard will have a material impact on results
of future operations.
33
- ------------------------------------------------------------------------------------------------------------------------------------
NINE MONTH FINANCIAL SUMMARY - UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share Data)
Nine Months Ended
------------------------------------------------------------------------------------
September 30, 2003 September 30, 2002
----------------------------------------- --------------------------------------
Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate
------------------------------------------------------------------------------------
Assets
Taxable securities (3) $ 4,312,222 $ 134,743 4.24% $ 3,720,835 $ 141,191 5.40%
Tax-exempt securities (3) 192,968 9,569 6.63 213,192 11,383 7.14
- ------------------------------------------------------------------------------------------------------------------------------
Total securities (3) 4,505,190 144,312 4.34 3,934,027 152,574 5.50
- ------------------------------------------------------------------------------------------------------------------------------
Trading securities 16,857 547 4.35 16,095 663 5.51
Funds sold and resell agreements 26,196 216 1.10 13,047 199 2.04
Loans (2) 7,014,711 280,201 5.34 6,280,195 282,436 6.01
Less reserve for loan losses 123,029 - - 108,393 - -
- ------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 6,891,682 280,201 5.44 6,171,802 282,436 6.12
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 11,439,925 425,276 5.00 10,134,971 435,872 5.88
- ------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 1,183,227 998,097
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 12,623,152 $ 11,133,068
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 3,510,841 23,969 0.91% $ 2,734,492 29,624 1.45%
Savings deposits 170,602 689 0.54 163,528 1,486 1.21
Time deposits 3,438,351 74,545 2.90 2,993,374 78,686 3.51
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 7,119,794 99,203 1.86 5,891,394 109,796 2.49
- ------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 1,489,098 11,669 1.05 1,557,479 19,747 1.70
Other borrowings 1,058,517 13,908 1.76 1,049,990 19,526 2.49
Subordinated debentures 155,080 7,261 6.26 185,967 8,171 5.87
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 9,822,489 132,041 1.80 8,684,830 157,240 2.42
- ------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,289,380 1,143,752
Other liabilities 364,087 403,762
Shareholders' equity 1,147,196 900,724
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 12,623,152 $ 11,133,068
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (3) 293,235 3.20% 278,632 3.46%
Tax-Equivalent Net Interest Revenue
To Earning Assets (3) 3.45 3.76
Less tax-equivalent adjustment (1) 3,986 4,715
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 289,249 273,917
Provision for loan losses 27,635 23,729
Other operating revenue 234,924 243,258
Other operating expense 304,773 323,749
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 191,765 169,697
Federal and state income tax 68,707 59,977
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 123,058 $ 109,720
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share:
Net Income
Basic $ 2.14 $ 1.99
- ------------------------------------------------------------------------------------------------------------------------------
Diluted $ 1.91 $ 1.77
- ------------------------------------------------------------------------------------------------------------------------------
<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>
34
- ------------------------------------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL SUMMARY - UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in Thousands, Except Per Share Data)
Three Months Ended
-------------------------------------------------------------------------------------
September 30, 2003 June 30, 2003
------------------------------------------ -------------------------------------
Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate
-------------------------------------------------------------------------------------
Assets
Taxable securities (3) $ 4,360,340 $ 42,698 3.86% $ 4,388,733 $ 46,911 4.30%
Tax-exempt securities (3) 186,827 3,003 6.38 185,908 3,179 6.86
- ------------------------------------------------------------------------------------------------------------------------------
Total securities (3) 4,547,167 45,701 3.96 4,574,641 50,090 4.41
- ------------------------------------------------------------------------------------------------------------------------------
Trading securities 27,830 295 4.23 12,207 136 4.47
Funds sold and resell agreements 32,491 51 0.62 16,669 59 1.42
Loans (2) 7,122,211 93,013 5.18 6,970,905 92,576 5.33
Less reserve for loan losses 125,966 - - 123,095 - -
- ------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 6,996,245 93,013 5.27 6,847,810 92,576 5.42
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 11,603,733 139,060 4.74 11,451,327 142,861 5.01
- ------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 1,252,896 1,207,690
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 12,856,629 $ 12,659,017
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 3,715,035 $ 7,200 0.77% $ 3,523,932 $ 7,992 0.91%
Savings deposits 170,796 200 0.46 172,258 183 0.43
Time deposits 3,423,920 23,863 2.77 3,491,055 24,688 2.84
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 7,309,751 31,263 1.70 7,187,245 32,863 1.83
- ------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 1,529,721 3,566 0.93 1,515,597 4,080 1.08
Other borrowings 1,062,734 4,383 1.64 1,053,573 4,604 1.75
Subordinated debentures 154,865 2,421 6.20 155,078 2,420 6.26
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 10,057,071 41,633 1.64 9,911,493 43,967 1.78
- ------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,323,641 1,252,076
Other liabilities 314,583 332,430
Shareholders' equity 1,161,334 1,163,018
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 12,856,629 $ 12,659,017
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (3) 97,427 3.10% 98,894 3.23%
Tax-Equivalent Net Interest Revenue
To Earning Assets (3) 3.32 3.47
Less tax-equivalent adjustment (1) 1,256 1,327
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 96,171 97,567
Provision for loan losses 8,220 9,503
Other operating revenue 64,409 88,361
Other operating expense 91,752 112,943
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 60,608 63,482
Federal and state income tax 21,792 22,707
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 38,816 $ 40,775
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share:
Net Income
Basic $ 0.67 $ 0.71
- ------------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.60 $ 0.63
- ------------------------------------------------------------------------------------------------------------------------------
<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>
35
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended
- -------------------------------------------------------------------------------------------------------------------------
March 31, 2003 December 31, 2002 September 30, 2002
- -------------------------------------------------------------------------------------------------------------------------
Average Revenue/ Yield Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate Balance Expense(1) /Rate
- -------------------------------------------------------------------------------------------------------------------------
$ 4,145,472 $ 45,134 4.64% $ 4,024,291 $ 45,710 4.73% $ 3,782,135 $ 46,473 5.06%
197,902 3,387 6.94 194,586 3,407 6.95 193,645 3,335 6.83
- -------------------------------------------------------------------------------------------------------------------------
4,343,374 48,521 4.75 4,218,877 49,117 4.84 3,975,780 49,808 5.15
- -------------------------------------------------------------------------------------------------------------------------
10,342 116 4.55 8,639 87 4.00 13,341 221 6.57
29,392 106 1.46 24,856 92 1.47 11,331 57 2.00
6,949,113 94,612 5.52 6,761,498 95,864 5.62 6,444,933 95,731 5.89
119,959 - - 114,711 - - 110,590 - -
- -------------------------------------------------------------------------------------------------------------------------
6,829,154 94,612 5.62 6,646,787 95,864 5.72 6,334,343 95,731 6.00
- -------------------------------------------------------------------------------------------------------------------------
11,212,262 143,355 5.28 10,899,159 145,160 5.38 10,334,795 145,817 5.67
- -------------------------------------------------------------------------------------------------------------------------
1,154,403 1,032,760 997,835
- -------------------------------------------------------------------------------------------------------------------------
$ 12,366,665 $ 11,931,919 $ 11,332,630
- -------------------------------------------------------------------------------------------------------------------------
$ 3,288,874 8,777 1.08% $ 2,988,986 9,648 1.28% $ 2,795,449 9,882 1.40%
168,730 306 0.74 173,286 491 1.12 164,952 502 1.21
3,399,813 25,994 3.10 3,248,364 25,531 3.12 3,090,272 26,154 3.36
- -------------------------------------------------------------------------------------------------------------------------
6,857,417 35,077 2.07 6,410,636 35,670 2.21 6,050,673 36,538 2.40
- -------------------------------------------------------------------------------------------------------------------------
1,420,781 4,023 1.15 1,523,923 5,471 1.42 1,615,075 6,635 1.63
1,059,201 4,921 1.88 1,084,616 5,751 2.10 999,140 5,963 2.37
155,304 2,420 6.32 169,874 2,580 6.03 185,748 2,725 5.82
- -------------------------------------------------------------------------------------------------------------------------
9,492,703 46,441 1.98 9,189,049 49,472 2.14 8,850,636 51,861 2.32
- -------------------------------------------------------------------------------------------------------------------------
1,292,077 1,310,932 1,188,441
465,820 380,204 341,467
1,116,065 1,051,734 952,086
- -------------------------------------------------------------------------------------------------------------------------
$ 12,366,665 $ 11,931,919 $ 11,332,630
- -------------------------------------------------------------------------------------------------------------------------
96,914 3.30% 95,688 3.24% 93,956 3.35%
3.57 3.55 3.66
1,403 1,404 1,387
- -------------------------------------------------------------------------------------------------------------------------
95,511 94,284 92,569
9,912 10,001 8,029
82,154 80,739 107,467
100,078 106,012 124,731
- -------------------------------------------------------------------------------------------------------------------------
67,675 59,010 67,276
24,208 20,859 23,784
- -------------------------------------------------------------------------------------------------------------------------
$ 43,467 $ 38,151 $ 43,492
- -------------------------------------------------------------------------------------------------------------------------
$ 0.76 $ 0.67 $ 0.79
- -------------------------------------------------------------------------------------------------------------------------
$ 0.67 $ 0.60 $ 0.70
- -------------------------------------------------------------------------------------------------------------------------
36
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
10.4 (c) Amended and Restated Deferred Compensation Agreement (Amended
as of September 1, 2003) between Stanley A. Lybarger and
BOK Financial Corporation
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 July 16, 2003, a report on Form 8-K was filed reporting under Item
5 the announcement that BOK Financial Corporation issued a press
release on July 16, 2003 announcing its financial results for the
second quarter ended June 30, 2003.
37
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: November 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