10
Table 1 Consolidated Selected Financial Data
(Dollars In Thousands Except Per Share Data)
December 31,
---------------------------------------------------------------------
2003 2002 (4) 2001 (4) 2000 (4) 1999 (4)
---------------------------------------------------------------------
Selected Financial Data
For the year:
Interest revenue $ 565,173 $ 574,913 $ 654,633 $ 638,730 $ 500,274
Interest expense 175,144 206,712 325,681 368,915 263,935
Net interest revenue 390,029 368,201 328,952 269,815 236,339
Provision for loan losses 35,636 33,730 37,610 17,204 10,365
Net income 158,360 147,871 114,439 98,665 87,536
Period-end:
Loans, net of reserve 7,355,250 6,784,913 6,193,473 5,435,207 4,567,255
Assets 13,581,743 12,251,014 11,145,984 9,751,550 8,376,290
Deposits 9,219,863 8,128,525 6,905,744 6,046,005 5,263,184
Subordinated debentures 154,332 155,419 186,302 148,816 148,642
Shareholders' equity 1,228,630 1,099,526 832,866 706,793 559,457
Nonperforming assets (2) 59,867 56,574 50,708 43,599 22,943
Profitability Statistics
Earnings per share (based on average equivalent shares):
Basic $ 2.75 $ 2.66 $ 2.09 $ 1.81 $ 1.60
Diluted 2.45 2.37 1.86 1.62 1.43
Pro forma diluted earnings per share with FAS 142 and 2.45 2.37 2.01 1.70 1.52
FAS 147
Percentages (based on daily averages):
Return on average assets 1.24% 1.31% 1.12% 1.13% 1.15%
Return on average shareholders' equity 13.66 15.75 14.65 16.18 16.10
Average shareholders' equity to average assets 9.08 8.31 7.63 7.02 7.14
Common Stock Performance
Per Share:
Book value per common share $ 21.21 $ 19.12 $ 15.06 $ 12.86 $ 10.15
Market price: December 31 close 38.72 32.39 31.51 21.25 20.19
Market range - High trade 41.02 36.52 32.75 21.25 25.94
- Low trade 31.00 26.80 21.31 15.31 18.94
Selected Balance Sheet Statistics
Period-end:
Tier 1 capital ratio 9.15% 8.98% 8.08% 8.06% 7.27%
Total capital ratio 11.31 11.95 11.56 11.23 10.72
Leverage ratio 7.17 6.88 6.38 6.51 5.92
Reserve for loan losses to nonperforming loans 244.18 232.82 233.90 207.95 391.65
Reserve for loan losses to loans (1) 1.73 1.72 1.66 1.51 1.66
Miscellaneous (at December 31)
Number of employees (full-time equivalent) 3,449 3,402 3,392 3,003 3,101
Number of banking locations 142 130 114 105 100
Number of TransFund locations 1,442 1,390 1,325 1,111 1,020
Mortgage loan servicing portfolio (3) $4,746,279 $5,754,548 $6,645,868 $6,874,995 $7,028,247
------------------------------------------------------------------------------------------------------------------------------
<FN>
1 Excludes residential mortgage loans held for sale.
2 Includes nonaccrual loans, renegotiated loans and assets acquired in
satisfaction of loans. Excludes loans past due 90 days or more and still
accruing.
3 Includes outstanding principal for loans serviced for Bank of Oklahoma.
4 Restated for adoption of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," and stock dividends.
</FN>
11
MANAGEMENT'S ASSESSMENT OF OPERATIONS AND FINANCIAL CONDITION
BOK Financial Corporation ("BOK Financial" or "the Company") is a financial
holding company that offers full service banking in Oklahoma, Northwest
Arkansas, Dallas and Houston, Texas, Albuquerque, New Mexico and Denver,
Colorado. Our principal subsidiaries are Bank of Oklahoma, N.A. ("BOk"), Bank of
Albuquerque, N.A., Bank of Arkansas, N.A., Bank of Texas, N.A. and Colorado
State Bank and Trust, N.A. ("CSBT"). Other subsidiaries include BOSC, Inc., a
broker/dealer that engages in retail and institutional securities sales and
municipal bond underwriting.
CSBT was acquired during the third quarter of 2003. This acquisition added
four branches in Denver, Colorado, and total assets of $396 million, including
intangible assets of $61 million. CSBT also added $1.6 billion to total trust
assets.
BOK Financial adopted the fair value accounting provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," during 2003. This change in accounting required expense
recognition for employee stock options. Net income and earnings per share for
prior years have been restated. No other accounting standards with significant
effects on our financial condition or results of operations were initially
adopted in 2003.
CRITICAL ACCOUNTING POLICIES
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Preparation of our consolidated financial statements is based on the
selection of certain accounting policies, which requires management to make
significant assumptions and estimates. The following discussion addresses the
more critical areas where these assumptions and estimates could materially
affect financial condition and results of operations. Application of these
critical accounting policies and estimates has been discussed with the
appropriate committees of the Board of Directors.
RESERVE FOR LOAN LOSSES
The reserve for loan losses is assessed by management based on an ongoing
evaluation of the probable estimated losses inherent in the portfolio, including
probable losses on both outstanding loans and unused commitments to provide
financing. A consistent, well-documented methodology has been developed that
includes reserves assigned to specific loans, general reserves that are based on
a statistical migration analysis and nonspecific reserves that are based on
analysis of current economic conditions, loan concentrations, portfolio growth
and other relevant factors.
An independent Credit Administration department is responsible for
performing this evaluation for all of our subsidiaries to ensure that the
methodology is applied consistently.
All significant loans that exhibit weaknesses or deteriorating trends are
reviewed quarterly. Specific reserves for impairment are determined through
evaluation of estimated future cash flows and collateral values in accordance
with Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for the Impairment of a Loan," and regulatory accounting standards.
A general reserve for commercial and commercial real estate loan losses is
determined primarily through an internally developed migration analysis model.
The purpose of this model is to determine the probability that each loan in the
portfolio has an inherent loss based on historical trends. We use an
eight-quarter aggregate accumulation of net losses as a basis for this model.
Greater emphasis is placed on loan losses in more recent periods. This model
assigns a general reserve to all commercial loans and leases and commercial real
estate loans, excluding loans that have a specific impairment reserve.
Separate models are used to determine the general reserve for residential
mortgage loans, excluding residential mortgage loans held for sale, and consumer
loans. The general reserve for residential mortgage loans is based on an
eight-quarter average percent of loss. General reserves for consumer loans are
based on a migration of loans from current status to loss. Separate migration
factors are determined by major product line, such as indirect automobile loans
and direct consumer loans.
Nonspecific reserves are maintained for risks beyond those factors specific
to a particular loan
12
or those identified by the migration models. These factors include trends in the
general economy in our primary lending areas, conditions in specific industries
where we have a concentration, such as energy, real estate and agriculture, and
overall growth in the loan portfolio. Evaluation of the nonspecific reserves
also considers duration of the business cycle, regulatory examination results,
potential errors in the migration analysis models and the underlying data, and
other relevant factors. A range of potential losses is determined for each
factor identified.
VALUATION AND AMORTIZATION OF MORTGAGE SERVICING RIGHTS
We have a significant investment in mortgage servicing rights. These rights
are either purchased from other lenders or retained from sales of loans we have
originated. Mortgage servicing rights are carried at the lower of amortized
cost, adjusted for the effects of past hedging activities, or fair value.
Amortized cost and fair value are stratified by interest rate and loan type. A
valuation allowance is provided when the net amortized cost of any strata
exceeds the calculated fair value.
There is no active market for trading in mortgage servicing rights. We use
a cash flow model to determine fair value. Key assumptions and estimates,
including projected prepayment speeds and assumed servicing costs, earnings on
escrow deposits, ancillary income and discount rates, used by this model are
based on current market sources. A separate third party model is used to
estimate prepayment speeds based on interest rates, housing turnover rates,
estimated loan curtailment, anticipated defaults and other relevant factors. The
prepayment model is updated daily for changes in market conditions. We
periodically request estimates of fair value from outside sources to corroborate
the results of the valuation model. The sensitivity of our valuation of mortgage
servicing rights to changes in interest rates is presented in Table 9 in the
Lines of Business - Mortgage Banking section of this report.
Prepayment assumptions also affect the amortization of mortgage servicing
rights. Amortization is determined in proportion to the projected cash flows
over the estimated life of each loan serviced. The same third party model that
estimates prepayment speeds for determining the fair value of mortgage servicing
rights determines the estimated life of each loan serviced.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, core deposit intangible
assets and other acquired intangibles. During 2002, we adopted Statements of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("FAS 142") and No. 147, "Acquisitions of Certain Financial Institutions" ("FAS
147"). These standards eliminated amortization of intangible assets with
indefinite lives, such as goodwill. Instead, goodwill for each business unit
must be evaluated for impairment annually or more frequently if conditions
indicate that impairment may have occurred. The evaluation of possible
impairment of intangible assets involves significant judgment based upon
short-term and long-term projections of future performance.
The fair value of each of our business units is estimated by the discounted
future earnings method. Income growth is projected over five years for each
unit, and a terminal value is computed. The projected income stream is converted
to current fair value by using a discount rate that reflects a rate of return
required by a willing buyer.
At December 31, 2003, Bank of Texas had $155 million or 70% of consolidated
goodwill. Because of the large concentration of goodwill in this business unit,
the fair value determined by the discounted future earnings method was
corroborated by comparison to the fair value of publicly traded banks of similar
size and characteristics. No goodwill impairment was indicated by either
valuation method.
Intangible assets with finite lives, such as core deposit intangible
assets, are amortized over their estimated useful lives. Such assets are
reviewed for impairment whenever events indicate that the remaining carrying
amount may not be recoverable.
13
VALUATION OF DERIVATIVE INSTRUMENTS
We use various types of interest rate derivative instruments as part of an
interest rate risk management program. We also offer interest rate, energy and
foreign exchange derivative contracts to our customers. All derivative
instruments are carried on the balance sheet at fair value. Fair values for
exchange-traded contracts are based on quoted prices. Fair values for
over-the-counter interest rate, energy and foreign exchange contracts are based
on valuations provided by either third-party dealers in the contracts or quotes
from independent pricing services.
SUMMARY OF PERFORMANCE
BOK Financial recorded net income for 2003 of $158.4 million or $2.45 per
diluted share, compared with $147.9 million or $2.37 per diluted share in 2002
and $114.4 million or $1.86 per diluted share in 2001. Prior years' earnings per
share have been restated for the adoption of FAS 123 and a 3% stock dividend in
2003.
As previously noted, we adopted FAS 142 and 147 in 2002. These new
accounting standards did not permit restatement of prior years' financial
statements. If FAS 142 and 147 had been applied retroactively to 2001, pro forma
net income and earnings per diluted share would have been $123.6 million and
$2.01, respectively. The trend of returns on average equity on a comparable
basis for 2003, 2002 and 2001 was 13.66%, 15.75% and 15.83%, respectively. This
trend of return on equity was due primarily to growth in average equity. During
2003, average equity increased 24% due to retained earnings and a full-year's
effect of an acquisition-related stock issuance during the fourth quarter of
2002. Net income increased 7% for this same period.
Net interest revenue grew $21.8 million or 6% during 2003 due to increases
in average earning assets, partially offset by the net effect of lower interest
rates. Fees and commission revenue increased $48.7 million or 19%. All
categories of fee income increased, most notably brokerage and trading revenue,
which grew 58%, and deposit fees, which rose 21%.
Operating expenses decreased $16.5 million or 4% compared to 2002. The
provision for impairment of mortgage servicing rights shifted from a $45.9
million expense in 2002 to a $22.9 million recovery in 2003. Excluding the
provision for mortgage servicing rights, operating expenses increased $52.4
million or 14% due primarily to increased personnel costs, including incentive
compensation that varies directly with operating revenue changes. Gains and
losses on securities and derivatives decreased from a $64.6 million net gain in
2002 to a $1.6 million net loss in 2003. These results included gains and losses
on securities held as an economic hedge of our mortgage servicing rights, on
securities held in our general portfolio and derivatives held for interest rate
risk management purposes. Accounting for securities held as an economic hedge of
mortgage servicing rights is more fully discussed in the Lines of Business -
Mortgage Banking section of this report.
Net income for the fourth quarter of 2003 decreased $2.8 million or 7%
compared to the previous year. Net revenue from mortgage banking activities,
including gains and losses on securities held as an economic hedge of our
mortgage servicing rights, decreased $15.0 million. The decrease in mortgage
banking revenue was partially offset by an $8.4 million decrease in mortgage
banking costs.
14
ASSESSMENT OF OPERATIONS
NET INTEREST REVENUE
Tax-equivalent net interest revenue totaled $395.2 million for 2003
compared to $374.3 million for 2002. The increase was due primarily to a $1.2
billion increase in average earning assets. The growth in average earning assets
included a $543 million increase in securities and a $700 million increase in
loans. This increase in average earning assets was funded primarily by a $1.1
billion increase in interest-bearing liabilities. Table 2 shows the effects on
net interest revenue of changes in average balances and interest rates for the
various types of earning assets and interest-bearing liabilities.
Yields on average earning assets and rates paid on average interest-bearing
liabilities both continued to decline in 2003. The net interest margin, the
ratio of tax-equivalent net interest revenue to average earning assets,
decreased to 3.43% in 2003 compared to 3.70% for the previous year. This
decrease reflected the effects of low interest rates on the spread between
yields on earning assets and rates paid on interest-bearing liabilities. Our net
interest margin decreased for the first three quarters of 2003 as interest rates
declined, but increased during the fourth quarter as rates stabilized. The
effects of interest rates on yields and rates paid during 2003 are reflected in
the Annual and Quarterly Financial Summaries.
Table 2 Volume/Rate Analysis
(In Thousands)
2003/2002 2002/2001
------------------------------------- ------------------------------------
Change Due To(1) Change Due To(1)
------------------------ ------------------------
Change Volume Yield/Rate Change Volume Yield/Rate
------------ ----------- ------------ ----------- ------------ -----------
Tax-equivalent interest revenue:
Securities $(8,583) $31,722 $(40,305) $(2,708) $28,736 $(31,444)
Trading securities (56) 129 (185) (450) (252) (198)
Loans (2,040) 39,229 (41,269) (77,950) 27,886 (105,836)
Funds sold and resell agreements (10) 149 (159) (538) (76) (462)
- ---------------------------------------------- ------------ ----------- ------------ ------------- ------------ -----------
Total (10,689) 71,229 (81,918) (81,646) 56,294 (137,940)
- ---------------------------------------------- ------------ ----------- ------------ ------------- ------------ -----------
Interest expense:
Transaction deposits (7,927) 9,169 (17,096) (10,620) 9,580 (20,200)
Savings deposits (1,032) 60 (1,092) (305) 147 (452)
Time deposits (4,578) 12,034 (16,612) (49,818) 4,197 (54,015)
Funds purchased and repurchase agreements (9,628) (157) (9,471) (39,140) (2,857) (36,283)
Other borrowings (7,129) (144) (6,985) (18,914) 2,900 (21,814)
Subordinated debentures (1,274) (1,622) 348 (172) 102 (274)
- ---------------------------------------------- ------------ ----------- ------------ ------------- ------------ -----------
Total (31,568) 19,340 (50,908) (118,969) 14,069 (133,038)
- ---------------------------------------------- ------------ -------------
----------- ------------ ------------ -----------
Tax-equivalent net interest revenue 20,879 $51,889 $(31,010) 37,323 $42,225 $ (4,902)
----------- ------------ ------------ -----------
Decrease in tax-equivalent
adjustment 949 1,926
- ---------------------------------------------- ------------ -------------
Net interest revenue $21,828 $39,249
- ---------------------------------------------- ------------ -------------
4th Qtr 2003/4th Qtr 2002
-----------------------------------
Change Due To(1)
-----------------------
Change Volume Yield/Rate
----------- ------------ ----------
Tax-equivalent interest revenue:
Securities $ (321) $7,127 $(7,448)
Trading securities 60 81 (21)
Loans 195 8,137 (7,942)
Funds sold and resell agreements (27) 6 (33)
- ------------------------------------------- ----------- ------------ ----------
Total (93) 15,351 (15,444)
- ------------------------------------------- ----------- ------------ ----------
Interest expense:
Transaction deposits (2,271) 2,300 (4,571)
Savings deposits (236) 14 (250)
Time deposits (437) 1,469 (1,906)
Funds purchased and repurchase agreements (1,550) 461 (2,011)
Other borrowings (1,511) (250) (1,261)
Subordinated debentures (364) (227) (137)
- ------------------------------------------- ----------- ------------ ----------
Total (6,369) 3,767 (10,136)
- ------------------------------------------- -----------
------------ ----------
Tax-equivalent net interest revenue 6,276 $11,584 $(5,308)
------------ ----------
Decrease in tax-equivalent adjustment 220
- ------------------------------------------- -----------
Net interest revenue $6,496
- ------------------------------------------- -----------
(1) Changes attributable to both volume and yield/rate are allocated to both
volume and yield/rate on an equal basis.
15
BOK Financial follows a strategy of fully utilizing capital resources by
borrowing funds in the capital markets to supplement deposit growth. The
proceeds of these borrowed funds are invested in securities. The primary
objective of this strategy is to enhance revenue opportunities. In the current
market conditions, this strategy also helps manage our overall interest rate
risk. The interest rate on these borrowed funds, which generally reacts quickly
to changes in market interest rates, tends to match the effects of changes in
interest rates on the loan portfolio. Interest rates earned on the securities
purchased with the proceeds of the borrowings are affected less quickly by
changes in market interest rates. The timing of these changes in interest rates
earned on the securities more closely matches the timing of changes in interest
paid on deposits. Although this strategy may reduce net interest margin, it
provides positive net interest revenue. We estimated that this strategy enhanced
net interest revenue $61 million during 2003 compared to $67 million in 2002.
Excluding this strategy, net interest margin for 2003 and 2002 would have been
3.49% and 3.76%, respectively. Average securities purchased and funds borrowed
under this strategy were $2.0 billion in 2003 and $1.9 billion in 2002. As more
fully discussed in the subsequent Market Risk section, we employ various
techniques to manage, within established parameters, the interest rate and
liquidity risk 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 23.
Tax-equivalent net interest revenue for the fourth quarter of 2003 totaled
$102.0 million, compared to $95.7 million for the fourth quarter of 2002. The
increase was due to growth in average earning assets, which increased $1.0
billion or 9%. Net interest margin declined 16 basis points to 3.39% as yields
on earning assets decreased more rapidly than the cost of interest-bearing
liabilities due to the effects of falling interest rates as discussed above.
Tax-equivalent net interest revenue for 2002 was $374.3 million, a $37.3
million or 11% increase from 2001. This increase was due to growth in average
earning assets. As shown in Table 2, net interest revenue increased $42.2
million due to changes in earning assets and interest-bearing liabilities. The
increase in net interest revenue due to asset growth was partially offset by a
$4.9 million decrease due to falling yields and rates.
OTHER OPERATING REVENUE
Other operating revenue decreased $17.8 million due to a $66.2 million
decrease in net gains on securities sales and derivatives. Fees and commission
revenue increased $48.7 million or 19% compared to 2002. These sources of
non-interest revenue are a significant part of our business strategy and
represented 44% of total revenue, excluding gains and losses on securities and
derivatives.
Brokerage and trading revenue increased $14.2 million or 58% compared to
2002. During the past several years, we have increased the number of sales staff
to take advantage of current market opportunities. These opportunities included
transactions with mortgage lenders that want to hedge the economic risks of
their loan production. Deposit fees increased $14.4 million or 21% due to an
overdraft privilege product that was initiated in 2002. Transaction card revenue
grew $5.1 million or 10%. Check card fees and merchant fees increased 19% and
15%, respectively, while ATM network revenue increased 3%. Trust revenue and
mortgage banking revenue, which are discussed more fully in the Lines of
Business section of this report, increased $5.7 million or 14% and $3.4 million
or 7%, respectively.
BOK Financial realized net gains on securities sold of $7.2 million in 2003
compared to $58.7 million last year. These amounts included net gains on sales
of securities held as economic hedges of the mortgage servicing rights of $4.0
million in 2003 and $26.3 million in 2002. The decrease in net gains on
securities reflected current market interest rates over the past two years.
Falling interest rates during 2002 presented us with the opportunity to actively
manage the portfolio and recognize gains from selling securities that had
limited potential for further appreciation. While we continued to sell
securities during 2003 to manage the portfolio's duration, consistently low
interest rates during 2003 presented fewer opportunities to recognize gains.
Derivative instruments, which we used primarily to manage interest rate
risk, resulted in mark-to-market losses of $8.8 million in 2003 compared to
gains of $5.9 million in 2002. We have not designated these derivatives as
hedges for accounting purposes. Additional discussion regarding use of
derivative instruments as part of our interest rate risk management program is
located in the Market Risk section of this report.
16
Table 3 Other Operating Revenue
(In Thousands)
Years ended December 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
------------- ----------- ----------- ----------- -----------
Brokerage and trading revenue $ 38,681 $ 24,450 $ 19,644 $ 15,146 $ 16,018
Transaction card revenue 55,491 50,385 42,471 37,287 31,399
Trust fees and commissions 45,763 40,092 40,567 39,316 35,127
Service charges and fees on deposit accounts 82,042 67,632 51,284 42,932 41,067
Mortgage banking revenue 52,336 48,910 50,155 37,179 36,986
Leasing revenue 3,508 3,330 3,745 4,244 3,725
Other revenue 25,969 20,276 20,087 17,965 17,589
- ----------------------------------------------------------- ------------- ----------- ----------- ----------- -----------
Total fees and commissions 303,790 255,075 227,953 194,069 181,911
- ----------------------------------------------------------- ------------- ----------- ----------- ----------- -----------
Gain on sale of assets 822 1,157 557 381 5,496
Gain (loss) on sales of securities, net 7,188 58,704 30,640 2,059 (419)
Gain (loss) on derivatives, net (8,808) 5,894 (4,062) - -
- ----------------------------------------------------------- ------------- ----------- ----------- ----------- -----------
Total other operating revenue $302,992 $320,830 $255,088 $ 196,509 $186,988
- ----------------------------------------------------------- ------------- ----------- ----------- ----------- -----------
Other operating revenue for the fourth quarter of 2003, excluding net
losses on securities and derivatives, totaled $74.0 million compared to $68.8
million for the fourth quarter of 2002. Trust fees rose 32% to $13.0 million due
to growth in the fair value of trust assets and the addition of Colorado State
Bank and Trust. Brokerage and trading revenue grew 25%. Revenue from our public
finance unit, which is included in other revenue, totaled $2.8 million for the
fourth quarter of 2003 compared with $439 thousand for the fourth quarter of
2002. Mortgage banking revenue decreased 50% to $7.5 million due to a decrease
in mortgage loan production during the fourth quarter. Mortgage servicing
revenue also decreased compared to last year due to a reduction in loans
serviced.
Losses on securities sales totaled $951 thousand, including $757 thousand
of losses on securities used to hedge mortgage servicing rights for the fourth
quarter of 2003. These results are compared to gains on securities sales of
$10.3 million, including $6.8 million on securities used to hedge mortgage
servicing rights, last year. Mark-to-market losses on derivative contracts
totaled $2.0 million in 2003 compared to gains of $665 thousand in 2002.
Other operating revenue for 2002 totaled $320.8 million, a 26% increase
compared to 2001. Fees and commissions revenue increased 12% to $255.1 million
due primarily to a 32% increase in service charges on deposit accounts.
Brokerage and trading revenue and transaction card revenue increased 24% and
19%, respectively, due to increased transaction volumes in both areas. Growth in
these fee income sources was offset by a decrease in trust revenue. The fair
value of trust assets decreased due to market conditions in 2002. Mortgage
banking revenue also decreased due to a reduction in servicing revenue.
Net gains on securities totaled $58.7 million in 2002, compared to $30.6
million in 2001. These amounts included net gains from securities designated as
economic hedges of mortgage servicing rights of $26.3 million in 2002 and $12.8
million in 2001. The increase in net realized gains reflected active management
of the securities portfolio as interest rates declined during 2002. Management
strategy in 2002 was to sell securities that had limited potential for further
appreciation and to replace them with securities with less prepayment risk. Net
gains on derivatives, which totaled $5.9 million in 2002 compared to losses of
$4.1 million in 2001, primarily represented the mark-to-market of derivatives
used for interest rate risk management.
We expect continued growth in other operating revenue through offering new
products and services and by expanding into new markets. However, increased
competition and saturation in our existing markets could affect the rate of
future increases. We also believe that our diverse sources of fee revenue
mitigate the effects of changes in interest rates, values in the equity markets
and consumer spending, all of which can be volatile.
17
OTHER OPERATING EXPENSE
Other operating expense for 2003 totaled $410.1 million, a 4% decrease from
2002. This decrease resulted from the provision for impairment of mortgage
servicing rights. This provision shifted from a $45.9 million expense in 2002 to
a $22.9 million recovery in 2003 due to slowing prepayment speeds. Excluding the
effects of the provision for impairment of mortgage servicing rights, other
operating expense increased $52.4 million or 14%.
Personnel expense increased $35.5 million or 19% to $222.9 million. Regular
compensation expense totaled $140.2 million, a 10% increase over 2002. This
increase was due to a 6% increase in average regular compensation per full-time
equivalent employee combined with a 4% increase in staffing. Incentive
compensation, which varies directly with revenue, increased 45% to $45.8
million. Incentive compensation expense included brokerage commissions, which
increased 26% to $11.2 million, and stock-based compensation expense, which
increased $1.7 million or 40%. Expense for other incentive compensation plans
increased $10.2 million, primarily due to revenue growth. Employee benefit
expenses increased 27% to $35.9 million due to a 49% increase in medical and
employee insurance costs and a 21% increase in retirement expenses. We have
taken several actions intended to reduce the future growth in personnel expense,
including a five percent reduction in staffing. This reduction is expected to
reduce personnel expense by more than $9 million annually beginning in 2004.
Professional fees increased $4.9 million or 38% compared to 2002. This
increase was due primarily to a $2.5 million increase in consulting fees
associated with deposit fee programs. This consulting engagement ended in 2003.
The increased data processing and communications expense included $4.9 million
of expenses associated with the conversion of our primary data processing
systems, which occurred in the fourth quarter. We expect that the new system
will allow us to be more responsive to future technology changes and to better
control ongoing costs.
Operating expenses for the fourth quarter of 2003 totaled $108.3 million, a
3% increase from the fourth quarter of 2002. Personnel costs increased $7.5
million or 15%, while mortgage banking costs decreased $8.4 million. The
increase in personnel costs for the quarter included $1.1 million of severance
expense related to the staffing reduction noted previously. The decrease in
mortgage banking costs was due primarily to a reduction in amortization of
mortgage servicing rights. This amortization is directly related to actual and
anticipated loan prepayments, which decreased significantly during the fourth
quarter as interest rates began to rise. Additionally, the fourth quarter of
2003 included operating expenses of $4.5 million from CSBT.
Operating expenses for 2002 increased $56.8 million or 15% over 2001.
Mortgage banking costs increased $12.0 million due to increased amortization of
mortgage servicing rights. A provision for impairment of mortgage servicing
rights of $45.9 million was also recognized due to increased actual and
anticipated loan prepayments during the year. Excluding the increase in
amortization expense and provision for impairment of mortgage servicing rights,
operating expenses increased $14.4 million or 4%.
Personnel costs increased $20.6 million or 12% due primarily to an 8%
increase in average salaries per employee combined with a 2% increase in
staffing. Incentive compensation, which is directly related to revenue growth,
increased $4.7 million. Data processing expenses increased $6.1 million or 16%
due primarily to an increase in transaction volumes. Amortization expense
decreased $12.5 million due primarily to the adoption of FAS 142 and FAS 147, as
previously discussed.
18
Table 4 Other Operating Expense
(In Thousands)
Years ended December 31,
-----------------------------------------------------------
2003 2002 2001 2000 1999
----------- ------------ ----------- ---------- -----------
Personnel expense $222,922 $ 187,439 $166,864 $148,614 $138,633
Business promotion 12,937 11,367 10,658 8,395 9,077
Professional fees and services 17,935 12,987 13,391 9,618 9,584
Net occupancy and equipment 45,967 42,347 42,764 35,447 30,789
Data processing and communications 51,537 44,084 38,003 33,496 30,789
FDIC and other insurance 2,267 1,903 1,717 1,569 1,356
Printing, postage and supplies 13,930 12,665 12,329 11,260 11,599
Net gains and operating expenses on
repossessed assets 271 1,014 1,401 (1,283 (3,473)
Amortization of intangible assets 8,101 7,638 20,113 15,478 15,823
Mortgage banking costs 40,296 42,271 30,261 22,274 23,932
Provision (recovery) for impairment of
mortgage servicing rights (22,923) 45,923 15,551 2,900 -
Other expense 16,871 16,957 16,729 15,980 13,781
- ---------------------------------------- ----------- ------------ ----------- ---------- -----------
Total $410,111 $ 426,595 $369,781 $303,748 $281,890
- ---------------------------------------- ----------- ------------ ----------- ---------- -----------
INCOME TAXES
Income tax expense was $88.9 million in 2003, compared to $80.8 million in
2002 and $62.4 million in 2001. This represented 36%, 35% and 35%, respectively,
of book taxable income. Tax expense currently payable totaled $82.6 million in
2003 compared to $95.9 million in 2002 and $74.2 million in 2001.
The Internal Revenue Service closed its examination of 2000 during 2003. No
significant adjustments resulted from this examination, and no other
examinations are currently in process.
19
Table 5 Selected Quarterly Financial Data
(In Thousands Except Per Share Data)
Fourth Third Second First
------------ ------------ ------------ ------------
2003
---------------------------------------------------
Interest revenue $143,883 $137,804 $141,534 $141,952
Interest expense 43,103 41,633 43,967 46,441
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Net interest revenue 100,780 96,171 97,567 95,511
Provision for loan losses 8,001 8,220 9,503 9,912
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Net interest revenue after provision for loan losses 92,779 87,951 88,064 85,599
Other operating revenue 74,021 80,001 77,946 72,644
Gain (loss) on sales of securities, net (951) (12,007) 10,457 9,689
Gain (loss) on derivatives, net (2,019) (4,566) (1,121) (1,102)
Other operating expense 110,581 106,957 108,511 106,985
Provision (recovery) for impairment of mortgage
servicing rights (2,260) (16,186) 3,353 (7,830)
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Income before taxes 55,509 60,608 63,482 67,675
Income tax expense 20,207 21,792 22,707 24,208
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Net income $ 35,302 $ 38,816 $ 40,775 $ 43,467
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Earnings per share:
Basic $ 0.61 $ 0.67 $ 0.71 $ 0.76
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Diluted $ 0.55 $ 0.60 $ 0.63 $ 0.67
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Average shares:
Basic 57,137 57,059 56,940 56,821
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Diluted 64,592 64,693 64,569 64,456
- --------------------------------------------------------- ------------ ------------ ------------ ------------
2002
---------------------------------------------------
Interest revenue $143,756 $144,430 $142,997 $143,730
Interest expense 49,472 51,861 52,716 52,663
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Net interest revenue 94,284 92,569 90,281 91,067
Provision for loan losses 10,001 8,029 6,834 8,866
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Net interest revenue after provision for loan losses 84,283 84,540 83,447 82,201
Other operating revenue 68,800 65,090 62,976 59,366
Gain (loss) on sales of securities, net 10,342 34,341 21,602 (7,581)
Gain (loss) on derivatives, net 665 7,218 (1,453) (536)
Other operating expense 106,696 94,871 90,317 88,788
Provision (recovery) for impairment of mortgage
servicing rights (1,615) 29,042 23,774 (5,278)
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Income before taxes 59,009 67,276 52,481 49,940
Income tax expense 20,858 23,784 18,547 17,646
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Net income $ 38,151 $ 43,492 $ 33,934 $ 32,294
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Earnings per share:
Basic $ 0.67 $ 0.79 $ 0.61 $ 0.59
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Diluted $ 0.60 $ 0.70 $ 0.55 $ 0.52
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Average shares:
Basic 56,166 54,634 54,573 54,466
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Diluted 63,785 62,082 62,112 61,938
- --------------------------------------------------------- ------------ ------------ ------------ ------------
LINES OF BUSINESS
BOK Financial operates four principal lines of business under its Bank of
Oklahoma franchise: corporate banking, consumer banking, mortgage banking and
wealth management. 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.
In addition to its lines of business, BOK Financial has a funds management unit.
The primary purpose of this unit is to manage the overall liquidity needs and
interest rate risk of the company. Each line of business borrows funds from and
provides funds to the funds management unit as needed to support their
operations.
BOK Financial allocates resources and evaluates performance of its lines of
business
20
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. During 2002, the
average transfer-pricing rate for these deposit accounts decreased by
approximately 200 basis points. Since many of these deposit accounts are either
noninterest-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 wealth management, to the funds management unit.
The effects of this shift are seen in the comparison of earnings between 2002
and 2001.
Economic capital is assigned to the business units based on an allocation
method that reflects management's assessment of risk. During 2003, we adopted a
third-party developed capital allocation model. This model assigns capital based
upon credit, operating, interest rate and market risk inherent in our business
lines and recognizes the diversification benefits among the units. The level of
assigned economic capital is a combination of the risk taken by each business
line based on its actual exposures and calibrated to its own loss history where
possible. 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 our 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
our investment in those entities. Capital assignments for prior periods have
been restated to reflect this new allocation model.
CORPORATE BANKING
The Corporate Banking Division provides loan and lease financing and
treasury and cash management services to businesses throughout Oklahoma and
surrounding states. 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 and includes the TransFund ATM
network. The Corporate Banking Division contributed $59.7 million or 38% to
consolidated net income for 2003. This compares to $58.1 million or 39% of
consolidated net income for 2002. Net interest revenue from external sources
decreased due to lower yields on average assets, primarily loans. The lower
yield on loans was offset by a decline in net interest expense from internal
sources. Other operating revenue increased $7.1 million or 10% due primarily to
an increase in merchant discount and deposit fees. Operating expenses increased
to $88.5 million for 2003 from $81.4 million for last year due primarily to an
increase in personnel and transaction processing costs. Average assets increased
$324 million or 8% for 2003 due primarily to loan growth.
Table 6 Corporate Banking
(Dollars in Thousands)
Years ended December 31,
--------------------------------------
2003 2002 2001
--------------------------------------
NIR (expense)from
external sources $ 144,791 $ 155,648 $ 199,727
NIR (expense)from
internal sources (28,218) (45,573) (86,150)
--------------------------------------
Total net
interest revenue 116,573 110,075 113,577
Other operating
revenue 79,316 72,234 62,648
Operating expense 88,478 81,434 78,190
Net loans
charged off 10,325 6,475 10,481
Net income 59,693 58,081 53,344
Average assets $4,362,396 $4,038,353 $3,867,850
Average equity 311,140 298,020 275,090
Return on assets 1.37% 1.44% 1.38%
Return on equity 19.19 19.49 19.39
Efficiency ratio 45.17 44.67 44.37
21
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 Online Banking. 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 $9.2 million or 6% to consolidated net income for 2003. This
compares to $6.8 million or 5% of consolidated net income for 2002. Revenue from
internal sources, primarily funds provided to other business lines, decreased
$3.4 million due to lower transfer-pricing rates. Other operating revenue
increased $8.5 million, or 22%, over 2002 due primarily to increases in deposit
service charges. Operating expenses increased 5% to $66.6 million. Personnel
costs contributed $2.4 million to this increase.
Table 7 Consumer Banking
(Dollars in Thousands)
Years ended December 31,
-----------------------------------------
2003 2002 2001
-----------------------------------------
NIR (expense) from
external sources $ (16,725) $ (17,875) $ (34,049)
NIR (expense) from
internal sources 57,925 61,301 94,393
-----------------------------------------
Total net interest
revenue 41,200 43,426 60,344
Other operating
revenue 47,361 38,862 29,995
Operating expense 66,639 63,401 59,099
Net loans charged
off 6,887 7,829 4,180
Net income 9,186 6,756 16,533
Average assets $2,514,262 $2,341,239 $2,192,698
Average equity 58,000 60,910 53,250
Return on assets .37% .29% .75%
Return on equity 15.84 11.09 31.05
Efficiency ratio 75.25 77.05 65.42
MORTGAGE BANKING
BOK Financial engages in mortgage banking activities through BOk Mortgage.
These activities include the origination, marketing and servicing of
conventional and government-sponsored mortgage loans. Consolidated mortgage
banking revenue, which is included in other operating revenue, increased $3.4
million or 7% compared to 2002. However, mortgage banking activities contributed
$28.4 million or 18% to consolidated net income in 2003 compared to $1.6 million
or 1% in 2002, due primarily to a reduction in provision for mortgage servicing
rights, net of gains on financial instruments held as an economic hedge of the
servicing rights.
Mortgage banking activities consist of two sectors, loan production and
loan servicing. The increased contribution to net income in 2003 reflected both
strong performance of the loan production sector and the partial reversal of
reserves established for impairment of mortgage servicing rights in the loan
servicing sector.
Table 8 Mortgage Banking
(Dollars in Thousands)
Years ended December 31,
-------------------------------------------
2003 2002 2001
-------------------------------------------
NIR (expense) from
external sources $ 27,770 $ 32,199 $ 32,545
NIR (expense) from
internal sources (9,415) (13,713) (20,867)
-------------------------------------------
Total net interest
revenue 18,355 18,486 11,678
Capitalized mortgage
servicing rights 23,922 20,832 22,695
Other operating
revenue 36,379 37,845 30,119
Operating expense 58,204 54,795 47,750
Provision (recovery)
for impairment of
mortgage servicing
rights (22,923) 45,923 15,551
Gain on sales of
financial
instruments, net 4,025 26,345 12,757
Net income 28,401 1,551 8,493
Average assets $623,823 $ 671,798 $651,103
Average equity 69,100 34,160 18,700
Return on assets 4.55% .23% 1.30%
Return on equity 41.10 4.54 45.42
Efficiency ratio 74.00 71.01 74.04
22
LOAN PRODUCTION SECTOR
Loan production revenue totaled $33.8 million in 2003, including $23.9
million of capitalized mortgage servicing rights, compared to loan production
revenue of $27.4 million in 2002, including $20.8 million of capitalized
mortgage servicing rights. The increase in loan production revenue, excluding
the value of capitalized mortgage servicing rights, was due to improved market
conditions for loan sales. The value of mortgage loans sold remained high during
the year as interest rates stayed low. Mortgage loans funded totaled $1.3
billion in 2003, including $457 million for home purchases and $859 million of
refinanced loans. Mortgage loans funded in 2002 totaled $1.0 billion, including
$451 million for home purchases and $563 million of refinanced loans.
Approximately 70% of the loans funded during 2003 were in Oklahoma. The increase
in volume of loans funded, combined with steady loan pricing, resulted in
pre-tax income from loan production of $32.0 million for 2003 compared to $23.7
million for the previous year. The pipeline of mortgage loan applications
totaled $208 million at December 31, 2003, compared to $323 million at December
31, 2002.
LOAN SERVICING SECTOR
The loan servicing sector had pre-tax income of $12.9 million for 2003
compared to a pre-tax loss of $22.5 million for 2002. The improved operating
results were due primarily to the partial reversal of the reserve for impairment
of mortgage servicing rights. Interest rates affected servicing revenue, the
value of mortgage servicing rights and amortization expense during 2002 and
2003. As interest rates fell during 2002, both actual and anticipated loan
prepayments increased. Actual loan prepayments reduce the outstanding balance of
loans serviced, which is a primary factor for determining servicing revenue and
the fair value of servicing rights. The fair value of servicing rights decrease
whenever prepayment speeds are high. Conversely, the fair value of servicing
rights increase whenever prepayment speeds are low. Prepayment speeds were high
during 2002 as a result of the historically low mortgage interest rates.
Prepayment speeds slowed during 2003 as interest rates increased slightly.
Servicing fees totaled $21.8 million in 2003 compared to $28.2 million in
2002. The decrease in servicing fees was due primarily to a lower outstanding
principal balance of loans serviced. The average outstanding balance of loans
serviced was $4.9 billion during 2003 compared to $6.2 billion during 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. This decision also affected the geographic distribution of the loan
servicing portfolio. Approximately 72% of loans serviced are in our primary
market areas at December 31, 2003, compared to 69% at December 31, 2002.
Amortization of mortgage servicing rights, which is included in operating
expense, was $35.6 million in 2003 compared to $36.0 million in 2002.
Amortization expense is determined in proportion to the estimated future cash
flows that will be generated by the mortgage servicing rights.
The valuation allowance for impairment of mortgage servicing rights totaled
$32 million at December 31, 2003 compared to $55 million at December 31, 2002.
The valuation allowance was reduced by $22.9 million during 2003. An impairment
provision of $45.9 million increased the valuation allowance in 2002. As
discussed in the Critical Accounting Policies section of this report, a
valuation allowance is provided to reduce the carrying value of 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. Note 8 to the Consolidated Financial
Statements presents additional information about the fair value and amortized
cost of servicing rights and the valuation allowance.
23
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.
Because the fair value of these securities is expected to vary inversely to the
fair value of the servicing rights, they are expected to partially offset risk.
No special hedge accounting treatment is applicable to either the mortgage
servicing rights or the securities designated as an economic hedge. The
securities designated as an economic hedge are classified as available for sale
and carried at fair market value. We may sell these securities and realize gains
when necessary to offset the impairment provision of the mortgage servicing
rights. During 2003, we realized gains of $4.0 million from economic hedging
activities compared to gains of $26.3 million in 2002.
This hedging strategy presents certain risks. A well-developed market
determines the fair value for the 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 December 31, 2003, securities with a fair value of $124 million and an
unrealized loss of $1.6 million were held for the economic hedge program. This
unrealized loss, net of income taxes, is included in shareholders' equity as
part of other comprehensive income. The interest rate sensitivity of the
mortgage servicing rights and securities held as a hedge is modeled over a range
of +/- 50 basis points. At December 31, 2003, the pre-tax results of this
modeling on reported earnings were:
Table 9 Interest Rate Sensitivity - Mortgage Servicing
(Dollars in Thousands)
50 bp 50 bp
Increase Decrease
------------- -----------
Anticipated change in:
Fair value of mortgage
servicing rights $8,016 $(11,002)
Fair value of hedging securities (6,538) 6,307
----------------------------------- ------------- -----------
Net $1,478 $ (4,695)
----------------------------------- ------------- -----------
WEALTH MANAGEMENT
BOK Financial provides a wide range of financial services through its
wealth management line of business, including trust and private financial
services and brokerage and trading activities. This line of business includes
the activities of BOSC, Inc., a registered broker/dealer. Trust and private
financial services include sales of institutional, investment and retirement
products, loans and other services to affluent individuals, businesses,
not-for-profit organizations, and governmental agencies. Trust services are
provided primarily to clients throughout Oklahoma, Texas and New Mexico.
Additionally, trust services include a nationally competitive, self-directed
401-(k) program. Brokerage and trading activities within the wealth management
line of business consist of retail sales of mutual funds, securities, and
annuities, institutional sales of securities and derivatives, bond underwriting
and other financial advisory services.
Wealth management contributed $13.2 million or 8% to consolidated net
income for 2003. This compared to $6.1 million or 4% of consolidated net income
for 2002. Trust and private financial services provided $7.6 million of net
income in 2003, a 22% increase over 2002. At December 31, 2003 and 2002, the
wealth management line of business was responsible for trust assets with
aggregate market values of $20 billion and $16 billion, respectively, under
various fiduciary arrangements. The growth in trust assets reflected increased
market value of assets managed in addition to new business generated during the
year. We have sole or joint discretionary authority over $8 billion of trust
assets at December 31, 2003 compared to $9 billion of trust assets at December
31, 2002.
24
Brokerage and trading activities provided $5.7 million of net income in
2003 compared to a $115 thousand loss in the previous year. Operating revenue
increased $17.7 million or 59% due to increased institutional sales volumes and
financial advisory fees. During 2003, we expanded a program that assists
mortgage bankers in hedging their interest rate risk through transactions in
mortgage-backed securities. This program contributed significantly to the
increased revenue and sales volume. Operating expenses increased $8.2 million
primarily due to incentive compensation.
Table 10 Wealth Management
(Dollars in Thousands)
Years ended December 31,
--------------------------------------
2003 2002 2001
------------- ------------ ------------
NIR (expense) from
external sources $ 1,967 $ 1,958 $ 839
NIR (expense) from
internal sources 8,954 8,162 13,136
---------------------- ------------- ------------ ------------
Total net interest
revenue 10,921 10,120 13,975
Other operating
revenue 91,534 69,932 67,564
Operating expense 80,440 69,709 63,186
Net income 13,246 6,082 11,129
Average assets $ 731,303 $556,390 $ 492,811
Average equity 69,690 60,880 52,290
Return on assets 1.81% 1.09% 2.26%
Return on equity 19.01 9.99 21.28
Efficiency ratio 78.51 87.08 77.49
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 $41.1 million or 26% to consolidated
net income during 2003. This compares to $35.4 million or 24% of consolidated
net income in 2002. Net interest revenue from external customers increased $26.6
million or 19% due to growth in average earning assets. Other operating revenue
increased $9.7 million or 36% in 2003 from last year due primarily to service
charges on deposit accounts. Operating expenses increased $24.0 million or 25%
compared to last year. Personnel costs accounted for approximately $13.7 million
of this increase.
Operations in Texas, New Mexico, and Arkansas contributed $26.3 million,
$10.9 million, and $2.0 million, respectively, to consolidated net income for
2003. This compared to $23.9 million, $10.4 million, and $1.3 million,
respectively, for 2002. Operations in Colorado contributed $1.9 million in 2003.
Table 11 Regional Banks
(Dollars in Thousands)
Years ended December 31,
------------------------------------------
2003 2002 2001
------------------------------------------
NIR (expense) from
external sources $ 164,755 $ 138,145 $ 138,846
NIR (expense) from
internal sources (12,151) (12,835) (11,689)
------------------------------------------
Total net interest
revenue 152,604 125,310 127,157
Other operating
revenue 36,531 26,876 19,642
Operating expense 118,386 94,383 91,088
Gains on sales of
financial
instruments, net 339 4,205 484
Net loans charged
off 6,425 6,161 5,873
Net income 41,057 35,432 31,804
Average assets $4,899,360 $3,915,411 $3,352,149
Average equity 360,220 286,730 234,420
Return on assets 0.84% 0.90% 0.95%
Return on equity 11.40 12.36 13.57
Efficiency ratio 62.59 62.02 62.05
25
ASSESSMENT OF FINANCIAL CONDITION
SECURITIES PORTFOLIO
Securities are classified as either held for investment or available for
sale based upon asset/liability management strategies, liquidity and
profitability objectives and regulatory requirements. Investment securities,
which consist primarily of Oklahoma municipal bonds, are carried at cost and
adjusted for amortization of premiums or accretion of discounts. Management has
the ability and intent to hold these securities until they mature. Available for
sale securities, which may be sold prior to maturity, are carried at fair value.
Unrealized gains or losses, less deferred taxes, are recorded as accumulated
other comprehensive income in shareholders' equity.
During 2003, the amortized cost of available for sale securities increased
$642 million. Mortgage-backed securities increased $627 million and now
represent 97% of total available for sale securities. The increase in securities
reflected an increase in available funds due to a combination of strong deposit
growth and weaker loan demand during 2003.
Approximately $2.0 billion of mortgage-backed securities are held for our
strategy of fully utilizing available capital resources by borrowing funds and
investing in securities, as previously discussed in the Net Interest Revenue
section of this report. Mortgage-backed securities designated as an economic
hedge of mortgage servicing rights totaled $124 million at December 31, 2003
compared to $127 million a year earlier. At December 31, 2003, available for
sale securities with an amortized cost basis and a fair value of $2.7 billion
were pledged as collateral for repurchase agreement borrowings, deposits of
public funds, and other purposes. The expected duration of the mortgage-backed
securities portfolio was 3 years at December 31, 2003 compared to 2 years at
December 31, 2002. This increase in duration reflected the slower anticipated
prepayments of the loans represented by these securities as interest rates rose.
Table 12 Securities
(Dollars in Thousands)
December 31,
-----------------------------------------------------------------------------
2003 2002 2001
------------------------- ------------------------- -------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------------ ------------ ------------ ------------ ------------ ------------
Investment:
U.S. Treasury $ - $ - $ - $ - $ 7,982 $ 7,981
Municipal and other tax-exempt 184,192 187,354 191,305 195,266 222,195 223,487
Mortgage-backed U.S. agency securities 2,296 2,418 4,380 4,618 7,381 7,620
Other debt securities 1,463 1,484 2,265 2,269 3,555 3,540
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Total $ 187,951 $ 191,256 $ 197,950 $ 202,153 $ 241,113 $ 242,628
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Available for sale:
U.S. Treasury $ 44,679 $45,424 $ 31,013 $ 32,233 $ 34,538 $ 35,197
Municipal and other tax-exempt 3,271 3,257 11,465 11,511 4,262 4,299
Mortgage-backed securities:
U.S. agencies 3,514,158 3,518,926 3,005,698 3,067,148 2,637,636 2,638,425
Other 845,430 848,911 727,088 732,542 669,057 673,737
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Total mortgage-backed securities 4,359,588 4,367,837 3,732,786 3,799,690 3,306,693 3,312,162
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Other debt securities 1,140 1,177 138 139 536 538
Equity securities and mutual funds 96,460 101,173 87,434 89,770 93,918 97,353
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Total $4,505,138 $4,518,868 $3,862,836 $3,933,343 $3,439,947 $3,449,549
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Net unrealized gains on available for sale securities decreased to $14
million at December 31, 2003 from $71 million at December 31, 2002 due primarily
to rising interest rates during 2003. Although the aggregate fair value of the
available for sale securities portfolio exceeded amortized cost, individual
securities within the portfolio had unrealized losses at year-end. Management
evaluated the securities with unrealized losses to determine if we believe that
the losses were temporary. This evaluation considered factors such as causes of
the unrealized losses and prospects for recovery over various interest rate
scenarios and time periods. We also considered our plans for either holding or
selling the securities. It is our belief, based on currently available
information and our evaluation, that the unrealized losses in these securities
were temporary. Information regarding these securities is summarized in Table
13.
26
Table 13 Temporarily Impaired Securities
(In Thousands)
Less Than 12 Months 12 Months or Longer Total
------------------------- ------------------------- -------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----------------------------------------------------------------------------------
Investment:
Municipal and other tax exempt $ 24,193 $ 317 $ 37,671 $ 570 $ 61,864 $ 887
Available for sale:
U. S. Treasury 1,006 1 - - 1,006 1
Municipal and other tax-exempt 803 17 320 3 1,123 20
Mortgage-backed securities:
U. S. agencies 1,371,317 24,194 - - 1,371,317 24,194
Other 252,604 2,502 20,047 13 272,651 2,515
Equity securities and mutual funds - - 2,878 737 2,878 737
- ------------------------------------------------------------------------------------------------------------------------
Total $1,649,923 $27,031 $ 60,916 $1,323 $1,710,839 $ 28,354
- ------------------------------------------------------------------------------------------------------------------------
LOANS
The aggregate loan portfolio at December 31, 2003 totaled $7.5 billion, a
$583 million or 8% increase since last year. The acquisition of CSBT increased
loans by $223 million. Additionally, mortgage loans held for sale decreased $77
million. Excluding the acquisition and change in loans held for sale, the loan
portfolio grew by 6%.
The commercial loan portfolio increased $347 million during 2003. Much of
this increase was focused in the services and energy segments of the portfolio,
which increased $134 million and $99 million, respectively. Services comprised
18% of the total loan portfolio and included $256 million of loans to nursing
homes, $138 million of loans to medical facilities, and $35 million to the hotel
industry. Energy loans totaled $1.2 billion or 16% of total loans. Approximately
$1.0 billion 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 category also included loans to borrowers
involved in the transportation and sale of oil and gas and to borrowers that
manufacture equipment or provide other services to the energy industry.
Agriculture included $197 million of loans to the cattle industry. Other
notable loan concentrations by primary industry of the borrowers are presented
in Table 14.
Table 14 Loans
(Dollars in Thousands)
December 31,
----------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Commercial:
Energy $1,231,599 $1,132,178 $ 987,556 $ 837,223 $ 606,561
Manufacturing 482,657 501,506 467,260 421,046 344,175
Wholesale/retail 668,202 627,422 600,470 499,017 407,785
Agriculture 228,222 186,976 170,861 185,407 173,653
Services 1,383,835 1,249,622 1,084,480 963,171 807,184
Other commercial and industrial 342,187 292,094 364,123 342,169 325,343
------------ ------------ ------------ ------------ ------------
Total commercial 4,336,702 3,989,798 3,674,750 3,248,033 2,664,701
Commercial real estate:
Construction and land development 436,087 356,227 327,455 311,700 249,160
Multifamily 271,119 307,119 291,687 271,459 257,187
Other real estate loans 922,886 772,492 722,633 687,335 588,195
------------ ------------ ------------ ------------ ------------
Total commercial real estate 1,630,092 1,435,838 1,341,775 1,270,494 1,094,542
Residential mortgage:
Secured by 1-4 family residential properties 1,015,643 929,759 703,080 638,044 531,058
Residential mortgages held for sale 56,543 133,421 166,093 48,901 57,057
------------ ------------ ------------ ------------ ------------
Total residential mortgage 1,072,186 1,063,180 869,173 686,945 588,115
Consumer 444,909 412,167 409,680 312,390 296,131
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------
Total $7,483,889 $6,900,983 $6,295,378 $5,517,862 $4,643,489
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------
27
BOK Financial participates in shared national credits when appropriate to
obtain or maintain business relationships with local customers. At December 31,
2003, the outstanding principal balance of these loans totaled $719 million,
including $704 million to borrowers with local market relationships. BOK
Financial is the agent lender in approximately 39% of these loans.
Commercial real estate loans totaled $1.6 billion or 22% of the loan
portfolio at December 31, 2003. This represented a 14% increase from the
previous year. Construction and land development included $280 million for
single family residential lots and premises. The major components of other
commercial real estate loans were retail facilities at $313 million and office
buildings at $290 million.
Commercial real estate loans secured by retail facilities increased $118
million during the past year. This growth focused on retail shopping
developments with strong anchor tenants, primarily in our Texas markets.
Residential mortgage loans, excluding loans held for sale, included $342
million of home equity loans, $305 million of loans for business relationship
purposes, $234 million of adjustable rate mortgages and $101 million of
community development loans. Consumer loans included $203 million of indirect
automobile loans. Substantially all of these loans were purchased from dealers
in Oklahoma. Approximately 15% of the indirect automobile loan portfolio was
considered sub-prime.
Table 15 Loan Maturity and Interest Rate Sensitivity at December 31, 2003
(Dollars in Thousands)
Remaining Maturities of Selected Loans
---------------------------------------
Total Within 1 Year 1-5 Years After 5 Years
------------------------------------------------------
Loan maturity:
Commercial $4,336,702 $1,682,922 $2,183,950 $469,830
Commercial real estate 1,630,092 663,166 750,936 215,990
- --------------------------------------------- -------------- ------------ ------------ -------------
Total $5,966,794 $2,346,088 $2,934,886 $685,820
- --------------------------------------------- -------------- ------------ ------------ -------------
Interest rate sensitivity for selected loans with:
Predetermined interest rates $2,061,181 $ 514,235 $1,227,437 $319,509
Floating or adjustable interest rates 3,905,613 1,831,853 1,707,449 366,311
- --------------------------------------------- -------------- ------------ ------------ -------------
Total $5,966,794 $2,346,088 $2,934,886 $685,820
- --------------------------------------------- -------------- ------------ ------------ -------------
BOK Financial continued to increase the geographic distribution of the loan
portfolio by expansion into Colorado in addition to growth in Texas. Total loans
in the Oklahoma market area comprised 62% of the total loan portfolio at
December 31, 2003 compared to 66% a year ago. Table 16 reflects the distribution
of major loan categories among our principal market areas.
28
Table 16 Loans by Principal Market Area
(Dollars in Thousands)
December 31,
----------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Oklahoma:
Commercial $2,802,852 $2,677,616 $2,576,808 $2,476,389 $2,165,873
Commercial real estate 789,868 763,469 739,419 768,232 704,999
Residential mortgage 699,274 656,391 476,023 409,494 319,749
Residential mortgage held for sale 56,543 133,421 166,093 48,901 57,057
Consumer 324,305 294,404 314,060 250,298 236,565
------------ ------------ ------------ ------------ ------------
Total Oklahoma $4,672,842 $4,525,301 $4,272,403 $3,953,314 $3,484,243
------------ ------------ ------------ ------------ ------------
Texas:
Commercial $ 963,340 $ 866,905 $ 775,788 $ 549,505 $ 383,460
Commercial real estate 477,561 455,364 380,602 299,357 227,748
Residential mortgage 204,481 192,575 136,181 122,082 102,888
Consumer 101,269 104,353 85,347 53,397 50,923
------------ ------------ ------------ ------------ ------------
Total Texas $1,746,651 $1,619,197 $1,377,918 $1,024,341 $ 765,019
------------ ------------ ------------ ------------ ------------
Albuquerque:
Commercial $ 297,896 $ 286,622 $ 219,257 $ 167,023 $ 63,370
Commercial real estate 175,745 150,293 136,425 118,492 87,759
Residential mortgage 66,179 76,020 85,309 101,920 103,684
Consumer 11,070 11,399 8,200 6,107 5,410
------------ ------------ ------------ ------------ ------------
Total Albuquerque $ 550,890 $ 524,334 $ 449,191 $ 393,542 $ 260,223
------------ ------------ ------------ ------------ ------------
Northwest Arkansas:
Commercial $ 63,480 $ 63,113 $ 72,728 $ 50,680 $ 45,603
Commercial real estate 75,452 66,712 85,329 84,413 74,036
Residential mortgage 6,245 4,773 5,567 4,548 4,737
Consumer 2,671 2,011 2,073 2,588 3,233
------------ ------------ ------------ ------------ ------------
Total Northwest Arkansas $ 147,848 $ 136,609 $ 165,697 $ 142,229 $ 127,609
------------ ------------ ------------ ------------ ------------
Colorado (1):
Commercial $ 209,134 $ 95,542 $ 30,169 $ 4,436 $ 6,395
Commercial real estate 111,466 - - - -
Residential mortgage 39,464 - - - -
Consumer 5,594 - - - -
------------ ------------ ------------ ------------ ------------
Total Colorado $ 365,658 $ 95,542 $ 30,169 $ 4,436 $ 6,395
------------ ------------ ------------ ------------ ------------
Total BOK Financial loans $7,483,889 $6,900,983 $6,295,378 $5,517,862 $4,643,489
------------ ------------ ------------ ------------ ------------
1 Includes Denver loan production office.
DERIVATIVES WITH CREDIT RISK
BOK Financial offers programs that permit its customers to hedge various
risks. Much of the focus of these programs had been on assisting energy
producing customers to hedge against price fluctuations and to take positions
through energy derivative contracts. We have added or expanded programs to
assist customers in managing their interest rate and foreign exchange risks
during 2003. Each of these programs work essentially the same way. Derivative
contracts are executed between the customers and BOk. Offsetting contracts are
executed between BOk and selected counterparties to minimize the risk to us of
changes in energy prices, interest rates or foreign exchange rates. The
counterparty contracts are identical to the customer contracts, except for a
fixed pricing spread or a fee paid to BOk as compensation for administrative
costs, credit risk and profit.
These programs create credit risk for amounts due to BOk from its customers
and counterparties. Customer credit risk is monitored through existing credit
policies. Changes in energy prices, interest rates or foreign exchange rates are
evaluated across a range of possible scenarios to determine the maximum likely
exposure we are willing to have individually to any customer. Customers may also
be required to provide margin collateral to further limit our credit risk.
Counterparty credit risk is evaluated through existing policies. This
evaluation considers the total relationship between BOK Financial and each
counterparty. Individual limits are established by management and approved by
the Asset/Liability Committee. Margin collateral is required if the exposure
between BOk and any counterparty exceeds established limits. These limits are
reduced and additional margin collateral is based on changes in the
counterparties' credit ratings.
29
A deterioration of the credit standing of one or more of the counterparties
to these contracts may result in BOK Financial recognizing a loss as the fair
value of the affected contracts may no longer move in tandem with the offsetting
contracts. This could occur if the credit standing of the counterparty
deteriorated such that either the fair value of energy production no longer
supported the contract or the counterparty's ability to provide margin
collateral was impaired.
Derivative contracts are carried at fair value. At December 31, 2003, the
fair values of derivative contracts reported as assets totaled $145 million.
This included energy contracts with fair values of $137 million, interest rate
contracts with fair values of $3 million and foreign exchange contracts with
fair values of $5 million. The fair values of derivative contracts reported as
liabilities totaled $146 million. Approximately 66% of the fair value of asset
contracts was with customers. The remaining 34% was with counterparties.
Conversely, 64% of the liability contracts was with counterparties. The
remaining 36% was with customers. The maximum net exposure to any single
customer or counterparty totaled $24 million.
SUMMARY OF LOAN LOSS EXPERIENCE
The reserve for loan losses, which is available to absorb losses inherent
in the loan portfolio, totaled $129 million at December 31, 2003 compared to
$116 million at December 31, 2002. These amounts represented 1.73% and 1.72% of
loans, excluding loans held for sale, at December 31, 2003 and 2002,
respectively. Losses on loans held for sale, principally mortgage loans
accumulated for placement into security pools, are charged to earnings through
adjustment in the carrying value. The reserve for loan losses also represented
244% of nonperforming loans at year-end 2003 compared to 233% at year-end 2002.
Net loans charged off during 2003 increased to $25 million in 2003 compared to
$21 million in the previous year. Net commercial loans charged-off during 2003
totaled $15.4 million, a $3.4 million increase from 2002. Table 17 provides
statistical information regarding the reserve for loan losses for the past five
years.
Table 17 Summary of Loan Loss Experience
(Dollars in Thousands)
Years ended December 31,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------------------------------------------------------------
Beginning balance $116,070 $101,905 $ 82,655 $76,234 $65,922
Loans charged off:
Commercial 16,331 13,326 18,042 7,747 2,136
Commercial real estate 88 286 71 1,176 35
Residential mortgage 1,721 412 308 285 617
Consumer 13,335 11,881 6,827 5,593 4,560
-----------------------------------------------------------------------------------------------------------------------
Total 31,475 25,905 25,248 14,801 7,348
-----------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 887 1,276 1,151 1,126 3,110
Commercial real estate 53 118 653 428 487
Residential mortgage 83 146 57 157 17
Consumer 5,102 3,436 2,727 2,307 2,156
-----------------------------------------------------------------------------------------------------------------------
Total 6,125 4,976 4,588 4,018 5,770
-----------------------------------------------------------------------------------------------------------------------
Net loans charged off 25,350 20,929 20,660 10,783 1,578
Provision for loan losses 35,636 33,730 37,610 17,204 10,365
Additions due to acquisitions 2,283 1,364 2,300 - 1,525
-----------------------------------------------------------------------------------------------------------------------
Ending balance $128,639 $116,070 $101,905 $82,655 $76,234
-----------------------------------------------------------------------------------------------------------------------
Reserve for loan losses to loans outstanding at 1.73% 1.72% 1.66% 1.51% 1.66%
year-end (1)
Net charge-offs to average loans (1) .36 .33 .35 .22 .04
Provision for loan losses to average loans (1) .50 .54 .63 .35 .26
Recoveries to gross charge-offs 19.46 19.21 18.17 27.15 78.52
Reserve as a multiple of net charge-offs 5.07x 5.55x 4.93x 7.67x 48.31x
-----------------------------------------------------------------------------------------------------------------------
Problem Loans:
Loans past due (90 days) $ 14,944 $ 8,117 $ 8,108 $15,467 $11,336
Nonaccrual (2) 52,681 49,855 43,540 39,661 19,465
Renegotiated - - 27 87 -
-----------------------------------------------------------------------------------------------------------------------
Total $ 67,625 $ 57,972 $ 51,675 $55,215 $30,801
-----------------------------------------------------------------------------------------------------------------------
Foregone interest on nonaccrual loans (2) $ 5,268 $ 4,770 $ 5,163 $ 3,803 $ 2,321
-----------------------------------------------------------------------------------------------------------------------
1 Excludes residential mortgage loans held for sale.
2 Interest collected and recognized on nonaccrual loans was not significant in
2003 and previous years disclosed.
30
Specific impairment reserves are determined through evaluation of estimated
future cash flows and collateral value. At December 31, 2003, specific
impairment reserves totaled $6.4 million on total impaired loans of $47 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 risk factor identified. At December 31,
2003, the ranges of potential losses for the more significant factors were:
General economic conditions - $8.0 million to $10.8 million.
Concentration in large loans - $1.3 million to $2.5 million.
Allocation of the loan loss reserve to the major loan categories is
presented in Table 18.
Table 18 Loan Loss Reserve Allocation
(Dollars in Thousands)
December 31,
-------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------ ------------------- ------------------- ------------------- ------------------
% of % of % of % of % of
Reserve(3)Loans(1) Reserve(3)Loans(1) Reserve(3)Loans(1) Reserve(3) Loans(1) Reserve(3)Loans(1)
--------- -------- --------- --------- --------- --------- --------- --------- --------- --------
Loan category:
Commercial (2) $ 69,594 58.39% $ 65,280 58.95% $ 61,164 59.95% $55,187 59.39% $47,261 58.10%
Commercial real
estate 17,791 21.95 17,753 21.22 15,923 21.89 12,393 23.23 11,216 23.86
Residential mortgage 6,949 13.67 4,099 13.74 3,774 11.47 2,019 11.67 2,137 11.58
Consumer 16,697 5.99 14,384 6.09 6,890 6.69 6,407 5.71 6,721 6.46
Nonspecific allowance 17,608 - 14,554 - 14,154 - 6,649 - 8,899 -
- -------------------------- --------- -------- --------- --------- --------- --------- --------- --------- --------- --------
Total $128,639 100.00% $116,070 100.00% $101,905 100.00% $82,655 100.00% $76,234 100.00%
- -------------------------- --------- -------- --------- --------- --------- --------- --------- --------- --------- --------
<FN>
1 Excludes residential mortgage loans held for sale.
2 Specific allocation for Year 2000 risks was $2.0 million in 1999.
3 Specific allocation for the loan concentration risks are included in the appropriate category.
</FN>
NONPERFORMING ASSETS
Information regarding nonperforming assets, which totaled $60 million at
December 31, 2003 and $57 million at December 31, 2002, is presented in Table
19. Nonperforming assets included nonaccrual and renegotiated loans and excluded
loans 90 days or more past due but still accruing interest. Nonaccrual loans
increased $2.8 million during 2003. Newly identified nonaccruing loans totaled
$33 million during the year. Nonaccruing loans decreased $18 million for loans
charged off and foreclosed and $11 million for cash payments received.
Table 19 Nonperforming Assets
(Dollars in Thousands)
December 31,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ -------------
Nonperforming loans
Nonaccrual loans:
Commercial $41,360 $39,114 $35,075 $37,146 $12,686
Commercial real estate 2,311 3,395 3,856 161 2,046
Residential mortgage 7,821 5,950 4,140 1,855 3,383
Consumer 1,189 1,396 469 499 1,350
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
Total nonaccrual loans 52,681 49,855 43,540 39,661 19,465
Renegotiated loans - - 27 87 -
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
Total nonperforming loans 52,681 49,855 43,567 39,748 19,465
Other nonperforming assets 7,186 6,719 7,141 3,851 3,478
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
Total nonperforming assets $59,867 $56,574 $50,708 $43,599 $22,943
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
Ratios:
Reserve for loan losses to nonperforming loans 244.18% 232.82% 233.90% 207.95% 391.65%
Nonperforming loans to period-end loans (2) .71 .74 .71 .73 .42
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
Loans past due (90 days) (1) $14,944 $ 8,117 $ 8,108 $15,467 $11,336
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
1 Includes residential mortgages guaranteed by agencies of
the U.S. Government. $ 4,132 $ 4,956 $ 6,222 $ 7,616 $ 8,538
2 Excludes residential mortgage loans held for sale.
31
The loan review process also identified loans that possess more than the
normal amount of risk due to deterioration in the financial condition of the
borrowers or the value of the collateral. Because the borrowers are still
performing in accordance with the original terms of the loan agreements, and no
loss of principal or interest is anticipated, these loans were not included in
Nonperforming Assets.
Known information does, however, cause management concerns as to the
borrowers' ability to comply with current repayment terms. These potential
problem loans totaled $56 million at December 31, 2003 and $75 million at
December 31, 2002. The current composition of potential problem loans by primary
industry included general services at $16 million, healthcare at $14 million and
energy at $11 million.
DEPOSITS
Deposit accounts, which are the primary funding source for our asset
growth, increased 13% to $9.2 billion during 2003. Excluding deposits of $301
million acquired with CSBT, deposits grew by 10%. Interest-bearing transaction
accounts, which are the largest category of our deposit accounts, increased 27%
to $4.0 billion. Additionally, noninterest-bearing demand deposits increased 8%,
while time deposits increased 3%. The strong growth in interest-bearing
transaction accounts compared to time deposits reflected customer expectations
regarding the current low interest rates.
Average deposits increased $1.3 billion or 18% during 2003. Core deposits,
which we define as deposits of less than $100,000, excluding public funds and
brokered deposits, increased 15% to $4.6 billion. Average public funds and
brokered deposits were $573 million and $394 million, respectively, for 2003.
Public funds and brokered deposits averaged $488 million and $379 million,
respectively, during 2002. The remaining average deposits, which were comprised
of account balances in excess of $100,000, increased 27% to $2.9 billion.
Table 20 Maturity of Domestic CDs and Public
Funds in Amounts of $100,000 or More
(In Thousands)
December 31,
---------------------------
2003 2002
---------------------------
Months to maturity:
3 or less $ 545,555 $ 448,548
Over 3 through 6 300,094 442,651
Over 6 through 12 171,258 194,241
Over 12 1,093,750 961,413
--------------------------------------------------------
Total $2,110,657 $2,046,853
--------------------------------------------------------
BOK Financial competed for retail and commercial deposits by offering a
broad range of products and services. Retail deposit growth was supported by
customer convenience through Online Banking and free Billpay services. We also
offered an extensive branch and ATM network, including 32 supermarket branches
with extended service hours and a 24-hour Express Bank call center. Commercial
deposit growth was supported by offering treasury management and lockbox
products.
The distribution of deposit accounts among our principal markets is shown
in Table 21. We continued to see strong deposit growth in the Texas and
Albuquerque markets. Deposit growth in Texas was evenly spread between Dallas
and Houston, which demonstrated our ability to compete in these markets.
32
Table 21 Deposits by Principal Market Area
(In Thousands)
December 31,
----------------------------
2003 2002
----------------------------
Oklahoma:
Demand $1,025,483 $1,044,628
Interest-bearing:
Transaction 2,246,675 1,897,353
Savings 98,611 103,749
Time 2,403,293 2,334,949
----------------------------
Total interest-bearing 4,748,579 4,336,051
----------------------------
Total Oklahoma $5,774,062 $5,380,679
----------------------------
Texas:
Demand $ 421,292 $ 394,164
Interest-bearing:
Transaction 1,213,777 953,550
Savings 35,702 33,071
Time 505,463 510,512
----------------------------
Total interest-bearing 1,754,942 1,497,133
----------------------------
Total Texas $2,176,234 $1,891,297
----------------------------
Colorado:
Demand $ 79,424 $ -
Interest-bearing:
Transaction 162,651 -
Savings 18,347 -
Time 42,448 -
----------------------------
Total interest-bearing 223,446 -
----------------------------
Total Colorado $ 302,870 $ -
----------------------------
December 31,
----------------------------
2003 2002
----------------------------
Albuquerque:
Demand $ 106,050 $ 79,953
Interest-bearing:
Transaction 370,294 295,174
Savings 20,728 26,704
Time 317,924 287,607
----------------------------
Total interest-bearing 708,946 609,485
----------------------------
Total Albuquerque $ 814,996 $ 689,438
----------------------------
Northwest Arkansas:
Demand $ 16,351 $ 12,949
Interest-bearing:
Transaction 28,411 18,025
Savings 1,341 1,214
Time 105,598 134,923
----------------------------
Total interest-bearing 135,350 154,162
----------------------------
Total Northwest Arkansas $ 151,701 $ 167,111
----------------------------
BORROWINGS AND CAPITAL
PARENT COMPANY
BOK Financial (parent company) has a $125 million unsecured revolving line
of credit with certain banks that matures in December 2006. The outstanding
principal balance of this credit agreement was $95 million at December 31, 2003.
Interest is based upon either a base rate or the British Bankers' Association
Eurodollar rate plus a defined margin that is determined by our credit rating.
This margin ranges from 0.625% to 1.25%. The base rate is defined as the greater
of the daily federal funds rate plus 0.5% or the prime rate. This credit
agreement includes certain restrictive covenants that limit our ability to
borrow additional funds and to pay cash dividends on common stock. These
covenants also require BOK Financial and subsidiary banks to maintain minimum
capital levels and to exceed minimum net worth ratios. BOK Financial met all of
the restrictive covenants at December 31, 2003.
The primary source of liquidity for BOK Financial is dividends from
subsidiary banks, which are limited by various banking regulations to net
profits, as defined, for the preceding two years. Dividends are further
restricted by minimum capital requirements.
Based on the most restrictive limitations, the subsidiary banks could
declare up to $121 million of dividends without regulatory approval. Management
has developed and the Board of Directors has approved an internal capital policy
that is more restrictive than the regulatory capital standards. The subsidiary
banks could declare dividends of up to $71 million under this policy.
Equity capital for BOK Financial increased $129 million to $1.2 billion
during 2003. Net income provided $158 million to this increase, partially offset
by a $35 million reduction in net unrealized gains on available for sale
securities. The remaining increase in capital during 2003 resulted primarily
from the exercise of employee stock options.
During 2003 and 2002, 3% dividends payable in shares of BOK Financial's
common stock were declared and paid. The shares issued were valued at $58
million and $52 million, respectively, based on current stock prices when
declared. No cash dividends were paid on common stock. Management plans to
recommend continued payment of an annual dividend in shares of common stock.
33
BOK Financial and subsidiary banks are subject to various capital
requirements administered by federal agencies. Failure to meet minimum capital
requirements can result in certain mandatory and possibly additional
discretionary actions by regulators that could have material impact on
operations. These capital requirements include quantitative measures of assets,
liabilities, and off-balance sheet items. The capital standards are also subject
to qualitative judgments by the regulators. The capital ratios for BOK Financial
and each subsidiary bank are presented in Note 15 to the Consolidated Financial
Statements.
SUBSIDIARY BANKS
BOK Financial's subsidiary banks use borrowings to supplement deposits as a
source of funds for loans and securities growth. Sources of these borrowings
include federal funds purchased, securities repurchase agreements, and advances
from the Federal Home Loan Banks. Interest rates and maturity dates for the
various borrowings are matched with specific asset types in the asset/liability
management process.
In 1997, BOk issued $150 million of 7.125% fixed rate subordinated
debentures that mature in 2007. Interest rate swaps were used as a fair value
hedge to convert the fixed interest on these debentures to a LIBOR-based
floating rate, which required an adjustment of the carrying value of this debt
to fair value. In 2001, the interest rate swap was terminated. The related fair
value adjustment of the debt of $8 million was fixed at that time and is being
amortized over the remaining life of the debt.
OFF-BALANCE SHEET ARRANGEMENTS
BOK Financial enters into certain off-balance sheet arrangements in the
normal course of business. These arrangements include standby letters of credit
which totaled $497 million at December 31, 2003. Standby letters of credit are
conditional commitments to guarantee the performance of our customer to a third
party. Since credit risk is involved in issuing standby letters of credit, we
use the same credit policies in evaluating the credit worthiness of the customer
as are used for lending decisions. We also use the same evaluation process in
obtaining collateral on standby letters of credit as is used for loan
commitments.
During 2002, BOK Financial issued shares of common stock and options to
purchase additional shares with a fair value of $65 million 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. The fair value of
this guarantee, estimated to be $3 million based upon the Black-Scholes Option
Pricing Model, was included in the purchase price. 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. The price guarantee is
non-transferable and non-cumulative. 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 maximum remaining number of shares
that may be issued to satisfy any price guarantee obligations is 10 million. If,
as of any benchmark date, we have already issued 10 million shares, we are not
obligated to make any further benchmark payments. Additionally, our ability to
pay cash to satisfy any price guarantee obligation is limited by applicable
banking capital and dividend regulations.
The following table presents the estimated number of common shares that
would be required to be issued and the cash equivalent value if the market value
of our stock remained at $38.72, its closing price on December 31, 2003 and if
all holders exercised their rights under the price guarantee agreement. The
benchmark price and number of shares subject to protection have been restated 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, 2004 -
December 24, 2004 $36.30 203,951 - -
October 25, 2005 -
December 24, 2005 $38.80 203,951 415 $ 16
October 25, 2006 -
December 24, 2006 $41.30 203,951 13,600 $ 527
October 25, 2007 -
December 24, 2007 $43.81 203,951 26,785 $1,037
34
AGGREGATE CONTRACTUAL OBLIGATIONS
BOK Financial has numerous contractual obligations in the normal course of
business. These obligations include time deposits and other borrowed funds,
premises used under various operating leases, commitments to extend credit to
borrowers and to purchase securities, derivative contracts and contracts for
services such as data processing that are integral to our operations. The
following table summarizes payments due per these contractual obligations at
December 31, 2003.
Table 22 Contractual Obligations as of December 31, 2003
(In Thousands)
Less Than 1 to 3 4 to 5 More Than
1 Year Years Years 5 Years Total
-------------- ------------- ------------ ------------ -------------
Time deposits $ 987,230 $ 790,867 $ 717,306 $ 41,251 $2,536,654
Other borrowings 488,931 532,360 3,325 8,487 1,033,103
Subordinated debenture 10,688 21,375 156,234 - 188,297
Operating lease obligations 12,389 22,931 18,018 36,803 90,141
Derivative contracts 104,258 39,994 2,267 2,807 149,326
Loan commitments 1,414,931 815,603 281,349 366,556 2,878,439
Securities commitments 243,492 - - - 243,492
Data processing contracts 12,486 23,091 19,509 11,949 67,035
- ------------------------------------ -------------- ------------- ------------ ------------ -------------
Total $3,274,405 $2,246,221 $1,198,008 $467,853 $7,186,487
- ------------------------------------ -------------- ------------- ------------ ------------ -------------
Payments on time deposits and other borrowed funds include interest that
has been calculated from rates at December 31, 2003. Many of these obligations
have variable interest rates, and actual payments will differ from the amounts
shown on this table. Obligations under derivative contracts used for interest
rate risk management purposes are included with projected payments from time
deposits and other borrowed funds as appropriate.
Only time deposits with an original term exceeding one year are presented
in Table 22. Payments on time deposits are based on contractual maturity dates.
These funds may be withdrawn prior to maturity. We may charge the customer a
penalty for early withdrawal.
Operating lease commitments generally represent real property we rent for
branch offices, corporate offices and operations facilities. Payments presented
represent the minimum lease payments and exclude related costs such as utilities
and property taxes.
Obligations under derivative contracts are used in customer hedging
programs. As previously discussed, we have entered into derivative contracts
that are expected to substantially offset the cash payments due on these
obligations.
Loan commitments represent legally binding obligations to provide financing
to our customers. Because some of these commitments are expected to expire
before being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Data processing and communications contracts represent the minimum
obligations under these contracts. Additional payments that are based on the
volume of transactions processed are excluded.
The Company also has obligations with respect to its employee and executive
benefit plans. See Notes 12 and 13 to the Consolidated Financial Statements.
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.
35
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 MANAGEMENT (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 years
while the related funds borrowed have an average duration of 90 days. Securities
purchased and funds borrowed under this strategy averaged $2.0 billion during
2003.
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 2003 and 2002, net interest revenue
increased $14.0 million and $12.7 million, respectively, from periodic
settlements of these contracts. Although the purpose of these derivative
contracts is to manage interest rate risk, we have not designated them as hedges
for accounting purposes. The contracts are carried on the balance sheet at fair
value, and changes in fair value are reported in income as derivatives gains or
losses. A net loss of $9.5 million was recognized in 2003 compared to a net gain
of $4.7 million in 2002 from adjustments of these swaps to fair value. Credit
risk from these swaps is closely monitored as part of our overall process of
managing credit exposure to other financial institutions. Additional information
regarding interest rate swap contracts is presented in Note 4 to the
Consolidated Financial Statements.
The effectiveness of these strategies in managing the overall interest rate
risk is evaluated through the use of an asset/liability model. BOK Financial
performs a sensitivity analysis to identify more dynamic interest rate risk
exposures, including embedded option positions, on net interest revenue, net
income and the economic value of equity. A simulation model is used to estimate
the effect of changes in interest rates over the next twelve months based on
eight interest rate scenarios. Three specified interest rate scenarios are used
to evaluate interest rate risk against policy guidelines. These are a "most
likely" rate scenario and two "shock test" scenarios, first assuming a sustained
parallel 200 basis point increase and second assuming a sustained parallel 100
basis point decrease in interest rates. Management historically evaluated
interest rate sensitivity for a sustained 200 basis point decrease in rates.
However, these results are not meaningful in the current low-rate environment.
An independent source is used to determine the most likely interest rate
scenario.
Our primary interest rate exposures include the Federal Funds rate, which
affects short-term borrowings, and the prime lending rate and LIBOR, which are
the basis for much of the variable-rate loan pricing. Additionally, mortgage
rates directly affect the prepayment speeds for mortgage-backed securities and
mortgage servicing rights. Derivative financial instruments and other financial
instruments used for purposes other than trading are included in this
simulation. The model incorporates assumptions regarding the effects of changes
in interest rates and account balances on indeterminable maturity deposits based
on a combination of historical analysis and expected behavior. The impact of
planned growth and new business activities is factored into the simulation
model. The effects of changes in interest rates on the value of mortgage
servicing rights are excluded from Table 23 due to the extreme volatility over
such a large rate range. The effects of interest rate changes on the value of
mortgage servicing rights and securities identified as economic hedges are
presented in the Lines of Business - Mortgage Banking section of this report.
36
Table 23 Interest Rate Sensitivity
(Dollars in Thousands)
200 bp Increase 100 bp Decrease Most Likely
--------------------------------------------------------- -------------------------
2003 2002 2003 2002 2003 2002
--------------------------------------------------------- -------------------------
Anticipated impact over the next twelve months:
Net interest revenue $ 7,213 $12,354 $ (3,921) $ (7,456) $ 1,688 $ 7,983
1.6% 3.1% (.9)% (1.8)% .4% 2.0%
---------------------------------------------------------------------------------------------------- -------------------------
Net income $ 4,508 $ 7,722 $(2,450) $ (4,660) $ 1,055 $ 4,990
2.4% 5.0% (1.3)% (3.0)% .6% 3.2%
---------------------------------------------------------------------------------------------------- -------------------------
Economic value of equity $(71,325) $12,398 $ 10,893 $(36,768) $(41,388) $43,799
(4.6)% 0.9% .7% (2.6)% (2.7)% 3.1%
---------------------------------------------------------------------------------------------------- -------------------------
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 the economic value of
equity or precisely predict the impact of higher or lower interest rates on net
interest revenue, net income or the 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.
Management uses a Value at Risk ("VAR") methodology to measure the market
risk inherent in its trading activities. VAR is calculated based upon historical
simulations over the past five years using a variance / covariance matrix of
interest rate changes. It represents an amount of market loss that is likely to
be exceeded only one out of every 100 two-week periods. Trading positions are
managed within guidelines approved by the Board of Directors. These guidelines
limit the VAR to $1.6 million. At December 31, 2003, the VAR was $135 thousand.
The greatest VAR during 2003 was $1.4 million.
NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation 46 "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 clarified the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements" and provided a new framework for identifying
variable interest entities ("VIEs") and determining when a company should
include the assets, liabilities, noncontrolling 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 at the beginning of the
37
fourth quarter of 2003 for VIEs created prior to February 1, 2003. FIN 46 was
revised in December 2003. This revision addressed certain issues in the original
interpretation, including the application of FIN 46 to trust relationships,
mutual funds organized as trusts and troubled debt restructurings. BOK Financial
has limited use of partnerships, joint ventures or securitization vehicles in
its operations and the implementation of FIN 46, as revised, had no impact on
the consolidated financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." This statement amended and clarified financial accounting and
reporting for derivative instruments, including certain derivatives embedded in
other contracts, and hedging activities. This statement was effective for
contracts entered into or modified and for hedging relationships designated
after June 30, 2003. This statement did not have a significant impact on the
consolidated financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity." This statement, which established new standards
for how an issuer classifies and measures certain financial instruments, was
effective for financial instruments issued or modified after May 31, 2003. Other
provisions of this statement were effective for fiscal periods beginning after
June 15, 2003. This statement did not have a significant impact on the
consolidated financial statements.
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.
38
REPORT OF MANAGEMENT ON 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, and all related information appearing in this annual
report. In management's opinion, the accompanying consolidated financial
statements contain all adjustments 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.
As of December 31, 2003, an evaluation was performed under the supervision
and with the participation of BOK Financial's management, including the Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the design and operations of our disclosure controls and
procedures. Based on that evaluation, BOK Financial's management, including the
CEO and CFO, concluded that BOK Financial's disclosure controls and procedures
were effective as of December 31, 2003. There have been no significant changes
in our internal controls or in other factors that could significantly affect
internal controls subsequent to December 31, 2003.
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.
Ernst & Young, LLP, certified public accountants, have been engaged to
audit the consolidated financial statements of BOK Financial and its
subsidiaries. Their audit is conducted in accordance with auditing standards
generally accepted in the United States and their report on BOK Financial's
consolidated financial statements follows this page.
39
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of BOK
Financial Corporation as of December 31, 2003 and 2002, and the related
consolidated statements of earnings, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BOK Financial
Corporation at December 31, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 1 to the consolidated financial statements, in 2003,
the Company retroactively changed its method of accounting for stock-based
employee compensation, and effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets.
Ernst & Young LLP
Tulsa, Oklahoma
January 28, 2004
40
BOK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands Except Share And Per Share Data)
2003 2002 2001
----------------- ----------------- -----------------
Interest Revenue
Loans $ 375,788 $ 377,708 $ 455,332
Taxable securities 180,581 186,902 184,464
Tax-exempt securities 7,898 9,359 12,979
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total securities 188,479 196,261 197,443
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Trading securities 625 653 1,029
Funds sold and resell agreements 281 291 829
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total interest revenue 565,173 574,913 654,633
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Interest Expense
Deposits 131,929 145,466 206,209
Borrowed funds 33,738 50,495 108,549
Subordinated debentures 9,477 10,751 10,923
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total interest expense 175,144 206,712 325,681
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net Interest Revenue 390,029 368,201 328,952
Provision for Loan Losses 35,636 33,730 37,610
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net Interest Revenue After Provision for Loan Losses 354,393 334,471 291,342
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Other Operating Revenue
Brokerage and trading revenue 38,681 24,450 19,644
Transaction card revenue 55,491 50,385 42,471
Trust fees and commissions 45,763 40,092 40,567
Service charges and fees on deposit accounts 82,042 67,632 51,284
Mortgage banking revenue 52,336 48,910 50,155
Leasing revenue 3,508 3,330 3,745
Other revenue 25,969 20,276 20,087
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total fees and commissions 303,790 255,075 227,953
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Gain on sale of assets 822 1,157 557
Gain on sales of securities, net 7,188 58,704 30,640
Gain (loss) on derivatives, net (8,808) 5,894 (4,062)
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total other operating revenue 302,992 320,830 255,088
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Other Operating Expense
Personnel expense 222,922 187,439 166,864
Business promotion 12,937 11,367 10,658
Professional fees and services 17,935 12,987 13,391
Net occupancy and equipment 45,967 42,347 42,764
Data processing and communications 51,537 44,084 38,003
FDIC and other insurance 2,267 1,903 1,717
Printing, postage and supplies 13,930 12,665 12,329
Net gains and operating expenses on repossessed assets 271 1,014 1,401
Amortization of intangible assets 8,101 7,638 20,113
Mortgage banking costs 40,296 42,271 30,261
Provision (recovery) for impairment of mortgage servicing rights (22,923) 45,923 15,551
Other expense 16,871 16,957 16,729
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total other operating expense 410,111 426,595 369,781
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Income Before Taxes 247,274 228,706 176,649
Federal and state income tax 88,914 80,835 62,446
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Income Before Cumulative Effect of a Change in Accounting
Principle, Net of Tax 158,360 147,871 114,203
Transition adjustment of adoption of FAS 133 - - 236
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net Income $ 158,360 $ 147,871 $ 114,439
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Earnings Per Share:
Basic:
Before cumulative effect of change in accounting principle $ 2.75 $ 2.66 $ 2.09
Transition adjustment of adoption of FAS 133 - - -
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net Income $ 2.75 $ 2.66 $ 2.09
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Diluted:
Before cumulative effect of change in accounting principle $ 2.45 $ 2.37 $ 1.86
Transition adjustment of adoption of FAS 133 - - -
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net Income $ 2.45 $ 2.37 $ 1.86
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Average Shares Used in Computation:
Basic 56,990,244 54,964,747 54,150,255
Diluted 64,571,962 62,479,183 61,539,309
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
See accompanying notes to consolidated financial statements.
41
BOK FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
December 31,
-----------------------------------
2003 2002
----------------- -----------------
Assets
Cash and due from banks $ 629,480 $ 604,680
Funds sold and resell agreements 14,432 19,535
Trading securities 7,823 5,110
Securities:
Available for sale 3,833,449 3,204,973
Available for sale securities pledged to creditors 685,419 728,370
Investment (fair value: 2003 - $191,256; 2002 - $202,153) 187,951 197,950
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total securities 4,706,819 4,131,293
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Loans 7,483,889 6,900,983
Less reserve for loan losses (128,639) (116,070)
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Net loans 7,355,250 6,784,913
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Premises and equipment, net 175,901 151,715
Accrued revenue receivable 74,980 72,018
Intangible assets, net 250,686 197,868
Mortgage servicing rights, net 48,550 37,288
Real estate and other repossessed assets 7,186 6,719
Bankers' acceptances 30,884 3,728
Receivable on unsettled security transactions - 65,901
Derivative contracts 149,100 90,776
Other assets 130,652 79,470
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total assets $ 13,581,743 $ 12,251,014
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Liabilities and Shareholders' Equity
Noninterest-bearing demand deposits $ 1,648,600 $ 1,531,694
Interest-bearing deposits:
Transaction 4,021,808 3,164,102
Savings 174,729 164,738
Time 3,374,726 3,267,991
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total deposits 9,219,863 8,128,525
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Funds purchased and repurchase agreements 1,609,668 1,567,686
Other borrowings 1,016,650 1,088,022
Subordinated debenture 154,332 155,419
Accrued interest, taxes and expense 85,409 74,043
Bankers' acceptances 30,884 3,728
Due on unsettled security transactions 8,259 -
Derivative contracts 149,326 80,079
Other liabilities 78,722 53,986
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total liabilities 12,353,113 11,151,488
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Shareholders' equity:
Preferred stock 12 25
Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued:
2003 - 58,055,697; 2002 - 55,749,596) 4 3
Capital surplus 546,594 475,054
Retained earnings 698,052 598,777
Treasury stock (shares at cost: 2003 - 848,892; 2002 - 682,967) (24,491) (17,421)
Accumulated other comprehensive income 8,459 43,088
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total shareholders' equity 1,228,630 1,099,526
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total liabilities and shareholders' equity $ 13,581,743 $ 12,251,014
- ------------------------------------------------------------------------------------------- ----------------- -----------------
See accompanying notes to consolidated financial statements.
42
BOK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
2003 2002 2001
-------------- -------------- ---------------
Cash Flows From Operating Activities:
Net income $ 158,360 $ 147,871 $ 114,439
Adjustments to reconcile net income to net cash provided by operating
activities:
Provisions for loan losses 35,636 33,730 37,610
Provision (recovery) for mortgage servicing rights impairment (22,923) 45,923 15,551
Transition adjustment of adoption of FAS 133 - - (236)
Unrealized (gains) losses from derivatives 5,888 (5,112) 12,082
Depreciation and amortization 64,425 65,790 69,165
Tax benefit on exercise of stock options 1,325 5,482 3,408
Stock-based compensation 5,746 4,124 3,029
Net amortization of securities discounts and premiums 8,965 5,818 (5,615)
Net gain on sale of assets (44,426) (83,501) (47,954)
Mortgage loans originated for resale (1,314,453) (1,014,009) (972,066)
Proceeds from sale of mortgage loans held for resale 1,420,475 1,073,044 1,008,073
Change in trading securities (2,713) 5,217 29,538
Change in accrued revenue receivable (2,962) (2,776) 6,253
Change in other assets (28,442) (12,452) 1,715
Change in accrued interest, taxes and expense 11,366 7,029 (3,125)
Change in other liabilities (13,906) 8,010 9,599
- ------------------------------------------------------------------------------- -------------- -------------- ---------------
Net cash provided by operating activities 282,361 284,188 281,466
- ------------------------------------------------------------------------------- -------------- -------------- ---------------
Cash Flows From Investing Activities:
Proceeds from sales of available for sale securities 5,089,734 6,873,320 9,142,248
Proceeds from maturities of investment securities 65,504 139,591 80,273
Proceeds from maturities of available for sale securities 2,410,213 1,802,845 930,494
Purchases of investment securities (55,678) (96,627) (88,282)
Purchases of available for sale securities (8,145,655) (8,985,019) (10,496,575)
Loans originated or acquired net of principal collected (741,405) (586,281) (675,612)
Payments on derivative asset contracts (41,226) (12,912) -
Net change in other investment assets (3,849) 43 -
Proceeds from disposition of assets 65,989 58,390 68,088
Purchases of assets (62,926) (46,729) (75,655)
Cash and cash equivalents of subsidiaries and
branches acquired and sold, net 2,123 46,295 (72,990)
- ------------------------------------------------------------------------------- -------------- -------------- ---------------
Net cash used by investing activities (1,417,176) (807,084) (1,188,011)
- ------------------------------------------------------------------------------- -------------- -------------- ---------------
Cash Flows From Financing Activities:
Net change in demand deposits, transaction
deposits and savings accounts 984,603 604,771 346,034
Net change in certificates of deposit 107,522 395,740 146,075
Net change in other borrowings 65,610 (165,744) 141,660
Change in amount receivable (due) on unsettled security transactions 74,160 (297,055) 231,660
Pay down of other borrowings (95,000) (10,095) (95,000)
Issuance of subordinated debenture - - 30,000
Issuance of preferred, common and treasury stock, net 4,627 4,172 2,745
Pay down of subordinated debenture - (30,000) -
Net change in collateral on derivative accounts (31,763) (5,148) -
Proceeds from derivative liability contracts 45,538 3,162 -
Dividends paid (785) (30) (20)
- ------------------------------------------------------------------------------- -------------- -------------- ---------------
Net cash provided by financing activities 1,154,512 499,773 803,154
- ------------------------------------------------------------------------------- -------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents 19,697 (23,123) (103,391)
Cash and cash equivalents at beginning of period 624,215 647,338 750,729
- ------------------------------------------------------------------------------- -------------- -------------- ---------------
Cash and cash equivalents at end of period $ 643,912 $ 624,215 $ 647,338
- ------------------------------------------------------------------------------- -------------- -------------- ---------------
Cash paid for interest $ 176,225 $ 208,612 $ 334,103
- ------------------------------------------------------------------------------- -------------- -------------- ---------------
Cash paid for taxes 81,596 81,154 70,699
- ------------------------------------------------------------------------------- -------------- -------------- ---------------
Net loans transferred to repossessed real estate 6,378 4,550 7,228
- ------------------------------------------------------------------------------- -------------- -------------- ---------------
Payment of dividends in common stock 58,300 53,165 36,371
- ------------------------------------------------------------------------------- -------------- -------------- ---------------
Common stock and price guarantee issued for acquisition - 67,745 -
- ------------------------------------------------------------------------------- -------------- -------------- ---------------
See accompanying notes to consolidated financial statements.
43
BOK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands)
Preferred Stock Common Stock
------------------------------ ------------------------------
Shares Amount Shares Amount
------------------------------ ------------------------------
December 31, 2000 250,000 $25 49,706 $3
Comprehensive income:
Net income - - - -
Other comprehensive loss, net of tax:
Unrealized gain on securities available for sale - - - -
Total comprehensive income
Director retainer shares - - 5 -
Exercise of stock options - - 598 -
Tax benefit on exercise of stock options - - - -
Stock-based compensation
Preferred stock dividend - - - -
Dividends paid in shares of common stock:
Preferred stock - - 51 -
Common stock - - 1,377 -
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 250,000 25 51,737 3
Comprehensive income:
Net income - - - -
Other comprehensive loss, net of tax:
Unrealized gain on securities available for sale - - - -
Total comprehensive income
Director retainer shares - - 8 -
Exercise of stock options - - 687 -
Tax benefit on exercise of stock options - - - -
Stock-based compensation
Preferred stock dividend - - - -
Issue shares for acquisition - - 1,711 -
Fair value of stock price guarantee - - - -
Dividends paid in shares of common stock:
Preferred stock - - 48 -
Common stock - - 1,559 -
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 2002 250,000 25 55,750 3
Comprehensive income:
Net income - - - -
Other comprehensive loss, net of tax:
Unrealized loss on securities available for sale - - - -
Total comprehensive income - - - -
Director retainer shares - - 8 -
Exercise of stock options - - 595 -
Tax benefit on exercise of stock options - - - -
Stock-based compensation - - - -
Cash dividends paid on preferred stock - - - -
Redeem nonvoting preferred units - (13) - -
Dividends paid in shares of common stock:
Preferred stock - - 23 -
Common stock - - 1,680 1
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 2003 250,000 $12 58,056 $4
- ------------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------------------
2003 2002 2001
-------------------------------------------
1 Changes in other comprehensive income:
Unrealized gains (losses) on available for sale securities $ (46,884) $119,609 $34,800
Tax benefit (expense) on unrealized gains (losses)
on available for sale securities 16,858 (44,390) (12,412)
Reclassification adjustment for (gains) losses
realized and included in net income (7,188) (58,704) (30,640)
Reclassification adjustment for tax expense (benefit)
on realized (gains) losses 2,585 20,781 10,724
-------------------------------------------
Net change in unrealized gains (losses) on securities $ (34,629) $ 37,296 $ 2,472
-------------------------------------------
See accompanying notes to consolidated financial statements.
44
Accumulated
Other
Comprehensive Capital Retained Treasury Stock
------------------------------------
Income (Loss) (1) Surplus Earnings Shares Amount Total
- -------------------- ----------------- ----------------- ----------------- ------------------ ---------------
$ 3,320 $287,436 $426,053 488 $(10,044) $ 706,793
- - 114,439 - - 114,439
2,472 - - - - 2,472
---------------
116,911
---------------
- 165 - (7) 126 291
- 7,551 - 185 (5,097) 2,454
- 3,408 - - - 3,408
- 3,029 - - - 3,029
- - (1) - - (1)
- 1,114 (1,500) (21) 386 -
- 32,740 (34,890) (104) 2,131 (19)
- -------------------- ----------------- ----------------- ----------------- ------------------ ---------------
5,792 335,443 504,101 541 (12,498) 832,866
- - 147,871 - - 147,871
37,296 - - - - 37,296
---------------
185,167
---------------
- 272 - - - 272
- 8,243 - 125 (4,343) 3,900
- 5,482 - - - 5,482
- 4,124 - - - 4,124
- - (2) - - (2)
- 64,550 - - - 64,550
- 3,195 - - - 3,195
- 1,500 (1,500) - - -
- 52,245 (51,693) 17 (580) (28)
- -------------------- ----------------- ----------------- ----------------- ------------------ ---------------
43,088 475,054 598,777 683 (17,421) 1,099,526
- - 158,360 - - 158,360
(34,629) - - - - (34,629)
---------------
123,731
---------------
- 276 - - - 276
- 10,677 - 145 (6,326) 4,351
- 1,325 - - - 1,325
- 219 - - - 219
- - (750) - - (750)
- - - - - (13)
- 750 (750) - - -
- 58,293 (57,585) 21 (744) (35)
- -------------------- ----------------- ----------------- ----------------- ------------------ ---------------
$ 8,459 $ 546,594 $ 698,052 849 $ (24,491) $ 1,228,630
- -------------------- ----------------- ----------------- ----------------- ------------------ ---------------
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT 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 year amounts have been reclassified to conform to current year
classifications.
NATURE OF OPERATIONS
BOK Financial, through its subsidiaries, provides a wide range of financial
services to commercial and industrial customers, other financial institutions
and consumers throughout Oklahoma, Northwest Arkansas, Dallas and Houston, Texas
metropolitan areas, Albuquerque, New Mexico, and Denver, Colorado. These
services include depository and cash management; lending and lease financing;
mortgage banking; securities brokerage, trading and underwriting; and personal
and corporate trust.
USE OF ESTIMATES
Preparation of BOK Financial's consolidated financial statements requires
management to make estimates of future economic activities, including interest
rates, loan collectibility and prepayments and cash flows from customer
accounts. These estimates are based upon current conditions and information
available to management. Actual results may differ significantly from these
estimates.
ACQUISITIONS
Assets and liabilities acquired by purchase, including identifiable
intangible assets, are recorded at fair values on the acquisition dates. The
Consolidated Statements of Earnings include the results of purchases from the
dates of acquisition.
INTANGIBLE ASSETS
BOK Financial adopted Statements of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("FAS 142"), and No. 147, "Acquisitions
of Certain Financial Institutions" ("FAS 147"), on January 1, 2002. The
following table presents the impact on previously reported net income and
earnings per share after application of FAS 142 and FAS 147:
2001
--------------
Net income as reported $ 114,439
Pro forma net income 123,601
Diluted earnings per share
previously reported $ 1.86
Pro forma diluted earnings
per share 2.01
Intangible assets with indefinite lives, such as goodwill, are evaluated
for each of BOK Financial's business units for impairment at least annually or
more frequently if conditions indicate impairment. The evaluation of possible
impairment of intangible assets involves significant judgment based upon
short-term and long-term projections of future performance.
The fair value of BOK Financial's business units is estimated by the
discounted future earnings method. Income growth is projected over a five-year
period for each unit and a terminal value is computed. This projected income
stream is converted to current fair value by using a discount rate that reflects
a rate of return required by a willing buyer.
Other identifiable intangible assets and core deposit intangibles are
amortized using straight-line and accelerated methods over the estimated benefit
periods. These periods generally range from 5 to 10 years for other intangible
assets and core deposit intangibles. The net book value of these other
intangibles and core deposit intangibles are evaluated for impairment when
economic conditions indicate an impairment may exist.
46
CASH EQUIVALENTS
Due from banks, funds sold (generally federal funds sold for one-day
periods) and resell agreements (which generally mature within one to 30 days)
are considered cash equivalents.
SECURITIES
Securities are identified as trading, investment (held to maturity) or
available for sale at the time of purchase based upon the intent of management,
liquidity and capital requirements, regulatory limitations and other relevant
factors. Trading securities, which are acquired for profit through resale, are
carried at market value with unrealized gains and losses included in current
period earnings. Investment securities are carried at amortized cost.
Amortization is computed by methods that approximate level yield and is adjusted
for changes in prepayment estimates. Investment securities may be sold or
transferred to trading or available for sale classification in certain limited
circumstances specified in generally accepted accounting principles. Securities
identified as available for sale are carried at fair value. Unrealized gains and
losses are recorded, net of deferred income taxes, as accumulated other
comprehensive income (loss) in shareholders' equity. Unrealized losses on
securities are evaluated to determine if the losses are temporary based on
various factors, including the cause of the loss and prospects for recovery. An
impairment charge is recorded against earnings if the loss is determined to be
other than temporary. Realized gains and losses on sales of securities are based
upon the amortized cost of the specific security sold. Available for sale
securities are separately identified as pledged to creditors if the creditor has
the right to sell or repledge the collateral.
The purchase or sale of securities is recognized on a trade date basis. A
net receivable or payable is recognized for subsequent transaction settlement.
BOK Financial will periodically commit to purchase to-be-announced ("TBA")
mortgage-backed securities. These commitments are carried at fair value if they
are considered derivative contracts. These commitments are not reflected in BOK
Financial's balance sheet until settlement date if they meet specific criteria
exempting them from the definition of derivative contracts.
DERIVATIVE INSTRUMENTS
Derivative instruments, primarily interest rate swaps and forward sales
contracts, are used as part of an interest rate risk management strategy.
Interest rate swaps modify the interest income and expense on certain long-term,
fixed rate assets and liabilities. Amounts payable to or receivable from the
counterparties are reported in interest income and expense using the accrual
method. Interest rate swaps are carried at fair value. Changes in the fair value
of interest rate swaps are included in other operating revenue.
In certain circumstances, interest rate swaps may be designated as fair
value hedges and may qualify for hedge accounting. Changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk are
reported in other operating revenue. These changes may partially or completely
offset the mark-to-market adjustments of the interest rate swaps. Fair value
hedges are considered to be effective if the cumulative fair value adjustments
of the interest rate swaps are within a range of 80% to 125% of the cumulative
fair value adjustment of the hedged assets or liabilities.
Interest rate swaps may be designated as cash flow hedges of variable rate
assets or liabilities or anticipated transactions. Changes in fair value of
interest rate swaps are recorded in other comprehensive income to the extent
they are effective. Amounts recorded as other comprehensive income are
recognized in net income in the same periods as the cash flows from the hedged
transactions.
In conjunction with its mortgage banking activities, BOK Financial enters
into mortgage loan commitments that are considered derivative instruments under
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Forward sales contracts are used
to hedge these mortgage loan commitments and mortgage loans held for sale.
Changes in the fair value of the mortgage loan commitments and forward sales
contracts are recognized in other operating revenue. The Securities and Exchange
Commission staff recently expressed an opinion that the fair value of certain
mortgage loan commitments may result in an unrealized loss, but cannot result in
an unrealized gain. This opinion, which is effective for commitments originated
after March 15, 2004, may increase short-term earnings volatility.
Derivative contracts are used to assist certain customers in hedging their
risk of adverse changes in natural gas and oil prices, interest rates and
foreign exchange rates. BOK Financial serves as an intermediary between its
customers and the markets. Each contract between BOK Financial and its customer
is offset by a contract between BOK Financial and various counterparties. These
47
contracts are carried at fair value. Compensation for credit risk and
reimbursement of administrative costs are recognized over the life of the
contracts.
LOANS
Loans are either secured or unsecured based on the type of loan and the
financial condition of the borrower. Repayment is generally expected from cash
flow or proceeds from the sale of selected assets of the borrower. BOK Financial
is exposed to risk of loss on loans due to the borrower's difficulties, which
may arise from any number of factors, including problems within the respective
industry or local economic conditions. Access to collateral, in the event of
borrower default, is reasonably assured through adherence to applicable lending
laws and through sound lending standards and credit review procedures.
Interest is accrued at the applicable interest rate on the principal amount
outstanding. Loans are placed on nonaccrual status when, in the opinion of
management, full collection of principal or interest is uncertain, generally
when the collection of principal or interest is 90 days or more past due.
Interest previously accrued but not collected is charged against interest income
when the loan is placed on nonaccrual status. Payments on nonaccrual loans are
applied to principal or reported as interest income, according to management's
judgment as to the collectibility of principal.
Loan origination and commitment fees and direct loan acquisition and
origination costs, when significant, are deferred and amortized as an adjustment
to yield over the life of the loan or over the commitment period, as applicable.
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value. Mortgage loans held for sale that are designated as hedged assets
are carried at fair value based on sales commitments or market quotes. Changes
in fair value after the date of designation of an effective hedge are recorded
in other operating revenue.
RESERVE FOR LOAN LOSSES
The adequacy of the reserve for loan losses is assessed by management,
based upon an ongoing quarterly evaluation of the probable estimated losses
inherent in the portfolio, and includes probable losses on both outstanding
loans and unused commitments to provide financing. A consistent methodology has
been developed that includes reserves assigned to specific criticized loans,
general reserves that are based upon statistical migration analyses for each
category of loans, and a nonspecific allowance that is based upon an analysis of
current economic conditions, loan concentrations, portfolio growth and other
relevant factors. The reserve for loan losses related to loans that are
identified for evaluation in accordance with Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS
114"), is based on discounted cash flows using the loan's initial effective
interest rate or the fair value of the collateral for certain collateral
dependent loans. Loans are considered to be impaired when it becomes probable
that BOK Financial will be unable to collect all amounts due according to the
contractual terms of the loan agreement. This is substantially the same criteria
used to determine when a loan should be placed on nonaccrual status. This
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change.
In accordance with the provisions of FAS 114, management has excluded small
balance, homogeneous loans from the impairment evaluation specified in FAS 114.
Such loans include 1-4 family mortgage loans, consumer loans, and commercial
loans with committed amounts less than $1 million. The adequacy of the reserve
for loan losses applicable to these loans is evaluated in accordance with
generally accepted accounting principles and standards established by the
banking regulatory authorities and adopted as policy by BOK Financial.
A provision for loan losses is charged against earnings in amounts
necessary to maintain an adequate reserve for loan losses. Loans are charged off
when the loan balance or a portion of the loan balance is no longer covered by
the paying capacity of the borrower based on an evaluation of available cash
resources and collateral value. Loans are evaluated quarterly and charge-offs
are taken in the quarter in which the loss is identified. Additionally, all
unsecured or under-secured loans that are past due by 180 days or more are
charged off within 30 days. Recoveries of loans previously charged off are added
to the reserve.
48
ASSET SECURITIZATION
BOK Financial periodically securitizes and sells pools of assets. These
transactions are recorded as sales for financial reporting purposes when the
criteria for surrender of control specified in Statement of Financial Accounting
Standards, No. 140 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities" are met. BOK Financial may retain the right
to service the assets and a residual interest in excess cash flows generated by
the assets. The carrying value of the assets sold is allocated between the
portion sold and the portion retained based on relative fair values. The fair
value of these retained assets is determined by a discounting of expected future
net cash to be received using assumed market interest rates for these
instruments. Residual interests are carried at fair value. Changes in fair
values are recorded in income. Servicing rights are carried at the lower of
amortized cost or fair value. A valuation allowance is provided when amortized
cost of servicing rights exceeds fair value.
REAL ESTATE AND OTHER REPOSSESSED ASSETS
Real estate and other repossessed assets are assets acquired in partial or
total forgiveness of debt. These assets are carried at the lower of cost, which
is determined by fair value at date of foreclosure, or current fair value.
Income generated by these assets is recognized as received, and operating
expenses are recognized as incurred.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost including capitalized interest,
when appropriate, less accumulated depreciation and amortization. Depreciation
and amortization are computed on a straight-line basis over the estimated useful
lives of the assets or, for leasehold improvements, over the shorter of the
estimated useful lives or remaining lease terms. Repair and maintenance costs
are charged to expense as incurred.
MORTGAGE SERVICING RIGHTS
Capitalized mortgage servicing rights are carried at the lower of amortized
cost, adjusted for the effect of hedging activities, or fair value. Amortization
is determined in proportion to the projected cash flows over the estimated lives
of the servicing portfolios. The actual cash flows are dependent upon the
prepayment of the mortgage loans and may differ significantly from the
estimates.
Fair value is determined by discounting the estimated cash flows of
servicing revenue, less projected servicing costs, using risk-adjusted rates,
which is the assumed market rate for these instruments. Prepayment assumptions
were based on industry consensus provided by independent reporting sources in
2001. During 2002, BOK Financial changed the source of prepayment assumptions
used to value its mortgage servicing rights. Industry consensus prepayment
speeds were not updated frequently enough to reflect rapidly changing market
conditions that existed in 2002. A separate, third-party model that is generally
accepted by the financial markets is now used to estimate prepayment speeds.
This model is updated daily for changes in market conditions. Changes in current
interest rates may significantly affect these assumptions by changing loan
refinancing activity. Amortized cost and fair value are stratified by interest
rate and loan type. A valuation allowance is provided when the net amortized
cost of any strata exceeds the calculated fair value.
Originated mortgage servicing rights are recognized when either mortgage
loans are originated pursuant to an existing plan for sale or, if no such plan
exists, when the mortgage loans are sold. Substantially all fixed rate mortgage
loans originated by BOK Financial are sold under existing commitments. The right
to service mortgage loans sold is generally retained. The fair value of the
originated servicing rights is determined at closing based upon current market
rates.
FEDERAL AND STATE INCOME TAXES
BOK Financial utilizes the liability method in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based upon
the difference between the values of the assets and liabilities as reflected in
the financial statement and their related tax basis using enacted tax rates in
effect for the year in which the differences are expected to be recovered or
settled. As changes in tax law or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
BOK Financial and its subsidiaries file consolidated tax returns. The
subsidiaries provide for income taxes on a separate return basis and remit to
BOK Financial amounts determined to be currently payable.
49
EMPLOYEE BENEFIT PLANS
BOK Financial sponsors various plans, including a defined benefit pension
plan ("Pension Plan"), qualified profit sharing plans ("Thrift Plans"), and
employee healthcare plans. Employer contributions to the Thrift Plans, which
match employee contributions subject to percentage and years of service limits,
are expensed when incurred. Pension Plan costs, which are based upon actuarial
computations of current costs, are expensed annually. Unrecognized prior service
cost and net gains or losses are amortized on a straight-line basis over the
estimated remaining lives of the participants. BOK Financial recognizes the
expense of health care benefits on the accrual method. Employer contributions to
the Pension Plan and various health care plans are in accordance with Federal
income tax regulations.
EXECUTIVE BENEFIT PLANS
BOK Financial has various stock compensation plans for its employees.
Historically, BOK Financial had 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 equaled the market price of the underlying stock on the date of grant,
no significant stock-based employee compensation had been recognized.
During 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 chose
to retroactively restate its results of operations for the accounting change, as
provided by FAS 148. The years ended December 31, 2003, 2002 and 2001 include
$5.7 million, $4.1 million and $3.0 million, respectively, of pretax stock
option expense, which represents approximately $0.06, $0.04, and $0.03 per
diluted share in each year, respectively. Adoption of the fair value method
resulted in a reduction of retained earnings as of January 1, 2001 of $5.3
million, representing the cumulative stock option compensation expense recorded
for the six years ended December 31, 2000, net of the tax effect. As of December
31, 2000, the net effect upon total shareholders' equity from stock-based
compensation was an increase of $3.2 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.
FIDUCIARY SERVICES
Fees and commissions on approximately $21 billion of assets managed by BOK
Financial under various fiduciary arrangements are recognized on the accrual
method.
EFFECT OF PENDING STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
During 2003, the Financial Accounting Standards Board ("FASB") issued
several statements and interpretations that may have an effect on BOK
Financial's accounting policies and financial reporting in future periods. These
included FASB Interpretation 46, "Consolidation of Variable Interest Entities"
("FIN 46"), FASB Statement No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("FAS 149"), and FASB Statement No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("FAS 150").
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, noncontrolling 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. FIN 46 was effective
immediately for VIEs created after January 31, 2003 and was effective beginning
in the fourth quarter of 2003 for VIEs created prior to February 1, 2003. FIN 46
was revised in December 2003. This revision addressed the application of FIN 46
to trust relationships, mutual funds organized as trusts and troubled debt
restructurings. BOK Financial has limited use of VIEs in its operations and the
implementation of FIN 46, as revised, had no impact on the consolidated
financial statements.
50
FAS 149 amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and hedging activities. This statement was effective for
contracts entered into or modified and for hedging relationships designated
after June 30, 2003. This statement did not have a significant impact on the
consolidated financial statements.
FAS 150 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. This statement did not have a significant impact
on the consolidated financial statements.
(2) ACQUISITIONS
On September 10, 2003, BOK Financial paid $77.9 million in cash for all
outstanding stock of Colorado Funding Company and its Colorado State Bank and
Trust subsidiary.
On October 25, 2002, BOK Financial acquired Bank of Tanglewood, N.A. for
1,711,127 shares of common stock and 292,225 options to purchase shares, valued
at approximately $65 million. The options to purchase shares expired February
25, 2003. BOK Financial agreed to a price guarantee on 50 percent of the stock
issued, which resulted in a contingent obligation to issue additional shares or
cash over the next five years based on certain predetermined market valuations.
The value of the contingent price guarantee was $3 million, which was included
in the total purchase price. More discussion of this contingency is at Note 15.
These transactions were accounted for by the purchase method of accounting.
Aggregate allocation of the purchase price to the net assets acquired was as
follows (in thousands):
2003 2002
------------ -------------
Cash and cash equivalents $ 80,051 $ 46,295
Securities 14,507 62,484
Loans 222,530 132,278
Less reserve for loan losses 2,282 1,364
------------ -------------
Loans, net 220,248 130,914
Identifiable intangible assets 18,770 3,718
Other assets 20,855 8,568
------------ -------------
Total assets acquired 354,431 251,979
Deposits:
Noninterest-bearing 75,078 49,213
Interest-bearing 226,361 173,887
------------ -------------
Total deposits 301,439 223,100
Other borrowings 5,098 8,610
Other liabilities 11,951 2,736
------------ -------------
Net assets acquired 35,943 17,533
Less purchase price 77,928 67,745
------------ -------------
Goodwill $ 41,985 $ 50,212
------------ -------------
The following unaudited condensed consolidated pro forma statements of
earnings for BOK Financial present the effects on income had the purchase
acquisitions described above occurred at the beginning of 2001:
Condensed Consolidated Pro Forma Statements of Earnings
(In Thousands Except Per Share Data)
(Unaudited)
Year ended December 31,
-----------------------------------
2003 2002 2001
------------ ----------- ----------
Net interest revenue $ 398,693 $ 388,517 $ 348,537
Provision for loan losses 35,941 35,162 38,594
- --------------------------- ------------ ----------- ----------
Net interest revenue
after provision for
loan losses 362,752 353,355 309,943
Other operating revenue 309,512 330,224 264,134
Other operating expense 425,163 449,695 388,889
- --------------------------- ------------ ----------- ----------
Income before taxes 247,101 233,884 185,188
Federal and state
income tax 88,914 80,825 63,367
Net effect of change in
accounting principle - - 236
- --------------------------- ------------ ----------- ----------
Net income $ 158,187 $ 153,059 $ 122,057
- --------------------------- ------------ ----------- ----------
Earnings per share:
Basic net income $ 2.75 $ 2.69 $ 2.16
Diluted net income 2.45 2.38 1.91
- --------------------------- ------------ ----------- ----------
Average shares:
Basic 56,990 56,410 55,890
Diluted 64,572 64,370 63,818
- --------------------------- ------------ ----------- ----------
51
(3) SECURITIES
INVESTMENT SECURITIES
The amortized cost and fair values of investment securities are as follows
(in thousands):
December 31,
----------------------------------------------------------------------------------------------
2003 2002
----------------------------------------------- ----------------------------------------------
Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized
------------------------ -----------------------
Cost Value Gain Loss Cost Value Gain Loss
----------------------------------------------------------------------------------------------
Municipal and other tax-exempt $184,192 $187,354 $4,049 $ (887) $191,305 $195,266 $4,837 $(876)
Mortgage-backed U.S. agency
Securities 2,296 2,418 122 - 4,380 4,618 238 -
Other debt securities 1,463 1,484 21 - 2,265 2,269 5 (1)
----------------------------------------------------------------------------------------------------------------------------
Total $187,951 $191,256 $4,192 $ (887) $197,950 $202,153 $5,080 $(877)
----------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of investment securities at December 31,
2003, by contractual maturity, are as shown in the following table (dollars in
thousands):
Weighted
Less than One to Five to Over Average
One Year Five Years Ten Years Ten Years Total Maturity (4)
------------ -------------- ------------- ------------- ------------- -------------
Municipal and other tax-exempt:
Amortized cost $50,561 $ 102,386 $26,251 $ 4,994 $ 184,192 2.94
Fair value 50,742 104,803 26,952 4,857 187,354
Nominal yield(1) 5.45 6.20 6.64 5.83 6.05
Other debt securities:
Amortized cost $ 442 $ 296 $ 725 $ - $ 1,463 5.00
Fair value 443 304 737 - 1,484
Nominal yield 1.25 6.83 5.43 - 4.45
------------ -------------- ------------- ------------- ------------- -------------
Total fixed maturity securities:
Amortized cost $51,003 $ 102,682 $26,976 $ 4,994 $ 185,655 2.95
Fair value 51,185 105,107 27,689 4,857 188,838
Nominal yield 5.41 6.20 6.61 5.83 6.03
------------ -------------- ------------- -------------
Mortgage-backed securities:
Amortized cost $ 2,296 (2)
Fair value 2,418
Nominal yield(3) 6.53
-------------
Total investment securities:
Amortized cost $ 187,951
Fair value 191,256
Nominal yield 6.04
-------------
(1) Calculated on a taxable equivalent basis using a 39% effective tax rate.
(2) The average expected lives of mortgage-backed securities were 4.96 years
based upon current prepayment assumptions.
(3) The nominal yield on mortgage-backed securities is based upon prepayment
assumptions at the purchase date. Actual yields earned may differ
significantly based upon actual prepayments.
(4) Expected maturities may differ from contractual maturities, because
borrowers may have the right to call or prepay obligations with or without
penalty.
52
AVAILABLE FOR SALE SECURITIES
The amortized cost and fair value of available for sale securities are as
follows (in thousands):
December 31,
----------------------------------------------------------------------------------------------
2003 2002
---------------------------------------------- -----------------------------------------------
Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized
---------------------- ----------------------
Cost Value Gain Loss Cost Value Gain Loss
----------------------------------------------------------------------------------------------
U.S. Treasury $ 44,679 $ 45,424 $ 746 $ (1) $ 31,013 $ 32,233 $ 1,220 $ -
Municipal and other tax-exempt 3,271 3,257 6 (20) 11,465 11,511 56 (10)
Mortgage-backed securities:
U. S. agencies 3,514,158 3,518,926 28,962 (24,194) 3,005,698 3,067,148 61,589 (139)
Other 845,430 848,911 5,996 (2,515) 727,088 732,542 5,469 (15)
- ------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 4,359,588 4,367,837 34,958 (26,709) 3,732,786 3,799,690 67,058 (154)
- ------------------------------------------------------------------------------------------------------------------------------
Other debt securities 1,140 1,177 37 - 138 139 1 -
Equity securities and mutual funds 96,460 101,173 5,450 (737) 87,434 89,770 2,648 (312)
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 4,505,138 $4,518,868 $ 41,197 $(27,467) $3,862,836 $ 3,933,343 $70,983 $(476)
- ------------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of available for sale securities at
December 31, 2003, by contractual maturity, are as shown in the following table
(dollars in thousands):
Weighted
Less than One to Five to Over Average
One Year Five Years Ten Years Ten Years Total Maturity (5)
------------- ------------- ------------- ------------- --------------- -----------
U.S. Treasuries:
Amortized cost $ 29,338 $ 15,341 $ - $ - $ 44,679 .99
Fair value 29,894 15,530 - - 45,424
Nominal yield 3.50 2.34 - - 3.10
Municipal and other tax-exempt:
Amortized cost $ 358 $ 273 $ 1,125 $1,515 $ 3,271 10.37
Fair value 354 277 1,112 1,514 3,257
Nominal yield (1) 7.75 10.79 8.89 12.69 10.68
Other debt securities:
Amortized cost $ 600 $ 456 $ 84 $ - $ 1,140 1.45
Fair value 607 485 85 - 1,177
Nominal yield (1) 6.30 6.04 5.59 - 6.15
------------- ------------- ------------- ------------- --------------- -----------
Total fixed maturity securities:
Amortized cost $ 30,296 $ 16,070 $ 1,209 $1,515 $ 49,090 1.63
Fair value 30,855 16,292 1,197 1,514 49,858
Nominal yield 3.60 2.59 8.66 12.69 3.68
------------- ------------- ------------- -------------
Mortgage-backed securities:
Amortized cost $4,359,588 (2)
Fair value 4,367,837
Nominal yield (4) 4.28
---------------
Equity securities and mutual funds:
Amortized cost $ 96,460 (3)
Fair value 101,173
Nominal yield 2.21
---------------
Total available-for-sale securities:
Amortized cost $4,505,138
Fair value 4,518,868
Nominal yield 4.23
---------------
(1) Calculated on a taxable equivalent basis using a 39% effective tax rate.
(2) The average expected lives of mortgage-backed securities were 3.04 years
based upon current prepayment assumptions.
(3) Primarily common stock and preferred stock of U.S. Government agencies
with no stated maturity.
(4) The nominal yield on mortgage-backed securities is based upon prepayment
assumptions at the purchase date. Actual yields earned may differ
significantly based upon actual prepayments.
(5) Expected maturities may differ from contractual maturities, because
borrowers may have the right to call or prepay obligations with or without
penalty.
At December 31, 2003, there were outstanding commitments to buy $235
million of securities that have not yet been issued. These commitments are not
reflected in BOK Financial's balance sheet as of December 31, 2003, because they
have not settled and meet specific criteria exempting them from the definition
of derivative contracts.
53
Sales of available for sale securities resulted in gains and losses as
follows (in thousands):
2003 2002 2001
-----------------------------------
Proceeds $5,089,734 $6,873,320 $9,142,248
Gross realized gains 30,373 85,346 55,418
Gross realized losses 23,185 26,642 24,778
Related federal and state
income tax expense
(benefit) 2,585 20,781 10,724
- --------------------------------------------------------------
In addition to securities that have been reclassified as pledged to
creditors, securities with an amortized cost of $2.1 billion and $2.0 billion at
December 31, 2003 and 2002 have been pledged as collateral for repurchase
agreements, public and trust funds on deposit and for other purposes as required
by law. The secured parties do not have the right to sell or repledge these
securities.
See information regarding temporarily impaired securities at Table 13.
(4) DERIVATIVES
INTEREST RATE RISK MANAGEMENT PROGRAM
INTEREST RATE SWAPS
BOK Financial uses interest rate swaps to manage its interest rate
sensitivity. During 2003 and 2002, net interest revenue was increased by $14.7
million and $12.7 million, respectively, from the settlements of amounts
receivable or payable on interest rate swaps. A net loss of $9.5 million was
recognized in 2003 compared to a net gain of $4.7 million in 2002 from
adjustments of these swaps to fair value.
Interest Rate Swaps (dollars in thousands):
Notional Pay Receive Positive Negative
Amount Rate Rate Fair Value Fair Value
--------------------------------------------------------------------------------
Expiration:
2004 $71,554 1.12(1)- 4.22 1.12(1)- 7.36 $ 564 $ (118)
2006 13,940 5.43 1.12(1) - (984)
2007 275,000 1.15(1) 4.09 - 4.51 3,628 -
2011 38,480 5.21 - 5.51 1.12(1) - (2,532)
--------------------------------
$ 4,192 $(3,634)
--------------------------------
(1) Rates are variable based on LIBOR and reset monthly or quarterly.
Scheduled repricing periods for the swaps are as follows (notional value in
thousands):
31-90 91-365 Over
Days Days 1 Year Total
---------------------------------------------------------
Pay floating $(335,000) $ - $ - $(335,000)
Receive fixed - - 335,000 335,000
Pay fixed - - (63,974) (63,974)
Receive floating 63,974 - - 63,974
- -----------------------------------------------------------------------------------------
Total $(271,026) $ - $271,026 $ -
- -----------------------------------------------------------------------------------------
FORWARD SALES CONTRACTS
BOK Financial uses mortgage-backed securities forward sales contracts to
manage exposure to interest rate fluctuations on mortgage loans held for sale
and mortgage loan commitments. At December 31, 2003, the notional amount of
forward sales contracts totaled $76 million, with a negative fair value of $340
thousand. Additional discussion of these contracts can be found in Note 8.
CUSTOMER RISK MANAGEMENT PROGRAMS
BOK Financial offers programs that permit its customers to manage various
risks. We have programs to assist energy producing customers to hedge against
price fluctuations and to take positions through energy derivative contracts. In
2003, we have added or expanded programs to assist customers in managing their
interest rate and foreign exchange risks. These programs work essentially the
same way. Derivative contracts are executed between the customers and BOK
Financial. Offsetting contracts are executed between BOK Financial and selected
counterparties to minimize the risk of changes in energy prices, interest rates
or foreign exchange
54
rates. The counterparty contracts are identical to the customer contracts,
except for a fixed pricing spread or a fee paid to BOK Financial as compensation
for administrative costs, credit risks and profit.
Derivative contracts are carried at fair value. At December 31, 2003, the
fair value of energy derivative contracts, interest rate swaps and foreign
exchange contracts totaled $137 million, $3 million and $5 million,
respectively.
(5) LOANS
Significant components of the loan portfolio are as follows (in thousands):
December 31,
-----------------------------------------------------------------------------------------------
2003 2002
------------------------------------------------ ----------------------------------------------
Fixed Variable Non- Fixed Variable Non-
Rate Rate accrual Total Rate Rate accrual Total
------------------------------------------------ ----------------------------------------------
Commercial $1,603,095 $2,692,247 $41,360 $4,336,702 $ 531,456 $3,419,228 $39,114 $3,989,798
Commercial real estate 446,751 1,181,030 2,311 1,630,092 306,796 1,126,347 3,395 1,435,838
Residential mortgage 522,240 485,582 7,821 1,015,643 749,573 174,236 5,950 929,759
Residential mortgage - held
for sale 56,543 - - 56,543 133,421 - - 133,421
Consumer 298,465 145,255 1,189 444,909 276,278 134,493 1,396 412,167
-----------------------------------------------------------------------------------------------------------------------------
Total $2,927,094 $4,504,114 $52,681 $7,483,889 $1,996,824 $4,854,304 $49,855 $6,900,983
-----------------------------------------------------------------------------------------------------------------------------
Loans past due (90 days) $ 14,944 $ 8,117
-----------------------------------------------------------------------------------------------------------------------------
Foregone interest on nonaccrual loans $ 5,268 $ 4,770
-----------------------------------------------------------------------------------------------------------------------------
Approximately 61% of the commercial and consumer loan portfolios and
approximately 69% of the residential mortgage loan portfolio (excluding loans
held for sale) are loans to businesses and individuals in Oklahoma. This
geographic concentration subjects the loan portfolio to the general economic
conditions within this area.
Within the commercial loan classification, loans to energy-related
businesses total $1.2 billion or 16% of total loans. Other notable segments
include wholesale/retail, $668 million; manufacturing, $483 million;
agriculture, $228 million, which includes $197 million of loans to the cattle
industry; and services, $1.4 billion, which includes nursing homes of $256
million, hotels of $35 million and healthcare of $138 million.
Approximately 39% of commercial real estate loans are secured by properties
located in Oklahoma, primarily in the Tulsa or Oklahoma City metropolitan areas.
An additional 28% of commercial real estate loans are secured by property
located in Texas. The major components of these properties are multifamily
residences, $271 million; construction and land development, $436 million;
retail facilities, $313 million; and office buildings, $290 million.
RELATED PARTY
Included in loans at December 31 are loans to executive officers, directors
or principal shareholders of BOK Financial, as defined in Regulation S-X of the
Securities and Exchange Commission. Such loans have been made on substantially
the same terms as those prevailing at the time for loans to other customers in
comparable transactions.
Information relating to loans to executive officers, directors or principal
shareholders is summarized as follows (in thousands):
2003 2002
------------ ------------
Beginning balance $ 124,568 $ 90,712
Advances 57,487 35,992
Payments (13,903) (2,106)
Adjustments (1) (30)
------------------------------- ------------ ------------
Ending balance $ 168,151 $124,568
------------------------------- ------------ ------------
55
RESERVE FOR LOAN LOSS
The activity in the reserve for loan losses is summarized as follows (in
thousands):
2003 2002 2001
--------------------------------
Beginning balance $ 116,070 $101,905 $ 82,655
Provision for loan losses 35,636 33,730 37,610
Loans charged off (31,475) (25,905) (25,248)
Recoveries 6,125 4,976 4,588
Addition due to acquisitions 2,283 1,364 2,300
-----------------------------------------------------------
Ending balance $ 128,639 $116,070 $101,905
-----------------------------------------------------------
IMPAIRED LOANS
Investments in loans considered to be impaired under FAS 114 were as
follows (in thousands):
December 31,
--------------------------------
2003 2002 2001
--------------------------------
Investment in loans impaired
under FAS 114 (all of
which were on a
nonaccrual basis) $46,990 $44,912 $ 39,848
Loans with specific reserves
for loss 18,947 4,685 10,723
Specific reserve balance 6,377 2,269 2,509
No specific related reserve
for loss 28,043 40,227 29,125
Average recorded investment
in impaired loans 47,415 41,828 44,474
Interest income recognized on impaired loans during 2003, 2002 and 2001 was
not significant.
(6) PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows (in
thousands):
December 31,
----------------------
2003 2002
----------- ----------
Land $ 40,098 $ 32,381
Buildings and improvements 126,665 115,399
Software 26,338 13,702
Furniture and equipment 95,833 84,578
- ------------------------------------ ----------- ----------
Subtotal 288,934 246,060
Less accumulated depreciation 113,033 94,345
- ------------------------------------ ----------- ----------
Total $175,901 $151,715
- ------------------------------------ ----------- ----------
Depreciation expense of premises and equipment was $22.4 million, $20.5
million and $21.0 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
56
(7) INTANGIBLE ASSETS
The following table presents the original cost and accumulated amortization
of intangible assets (in thousands):
December 31,
-----------------------
2003 2002
----------- -----------
Core deposit premiums $ 86,257 $ 75,668
Less accumulated amortization 64,012 56,555
- ------------------------------------- ----------- -----------
Net core deposit premiums 22,245 19,113
Other identifiable intangible assets 11,526 3,346
Less accumulated amortization 3,257 2,613
- ------------------------------------- ----------- -----------
Net other identifiable intangible
assets 8,269 733
Goodwill 273,307 231,157
Less accumulated amortization 53,135 53,135
- ------------------------------------- ----------- -----------
Net goodwill 220,172 178,022
- ------------------------------------- ----------- -----------
Total intangible assets, net $250,686 $197,868
- ------------------------------------- ----------- -----------
The net amortized cost of intangible assets at December 31, 2003 is
assigned to reporting units as follows (in thousands):
Core deposit premiums:
Bank of Albuquerque $ 1,718
Bank of Texas 10,752
Colorado State Bank and Trust 9,775
----------------------------------- ----------
$22,245
----------------------------------- ----------
Other identifiable intangible assets:
Bank of Oklahoma $ 367
Colorado State Bank and Trust 7,902
----------------------------------- ----------
$8,269
----------------------------------- ----------
Goodwill:
Bank of Oklahoma $ 8,173
Bank of Texas 154,741
Bank of Albuquerque 15,273
Colorado State Bank and Trust 41,985
----------------------------------- -----------
$220,172
----------------------------------- -----------
Expected amortization expense for intangible assets that will continue to
be amortized under FAS 142, as amended by FAS 147, (in thousands):
Core Other
Deposit Identifiable
Premiums Intangible Assets Total
-------------- ----------------- -------------
2004 $ 7,146 $ 992 $ 8,138
2005 5,175 962 6,137
2006 3,628 796 4,424
2007 2,935 763 3,698
2008 1,577 780 2,357
Thereafter 1,784 3,976 5,760
- ---------------- -------------- ----------------- -------------
$22,245 $8,269 $30,514
- ---------------- -------------- ----------------- -------------
57
(8) MORTGAGE BANKING ACTIVITIES
BOK Financial engages in mortgage banking activities through the BOk
Mortgage Division of BOk. Residential mortgage loans held for sale totaled $57
million and $133 million, and outstanding mortgage loan commitments totaled $208
million and $323 million at December 31, 2003 and 2002, respectively. Mortgage
loan commitments are generally outstanding for 60 to 90 days and are subject to
both credit and interest rate risk. Credit risk is managed through underwriting
policies and procedures, including collateral requirements, which are generally
accepted by the secondary loan markets. Exposure to interest rate fluctuations
is partially hedged through the use of mortgage-backed securities forward sales
contracts. These contracts set the price for loans that will be delivered in the
next 60 to 90 days. As of December 31, 2003, the unrealized loss on forward
contracts used to hedge the mortgage pipeline was approximately $340,000.
At December 31, 2003, BOK Financial owned the rights to service 61,254
mortgage loans with outstanding principal balances of $4.7 billion, including
$357 million serviced for affiliates, and held related funds of $83 million for
investors and borrowers. The weighted average interest rate and remaining term
was 6.50% and 266 months, respectively. Mortgage loans sold with recourse
totaled $103 million at December 31, 2003. At December 31, 2002, BOK Financial
owned the rights to service 76,298 mortgage loans with outstanding principal
balances of $5.8 billion and held related funds of $174 million for investors
and borrowers. The weighted average interest rate and remaining term was 7.05%
and 265 months, respectively.
The portfolio of mortgage servicing rights exposes BOK Financial to
interest rate risk. During periods of falling interest rates, mortgage loan
prepayments increase, reducing the value of the mortgage servicing rights. See
Note 1 for specific accounting policies for mortgage servicing rights and the
related hedges.
Activity in capitalized mortgage servicing rights and related valuation
allowance during 2003, 2002 and 2001 are as follows (in thousands):
Capitalized Mortgage Servicing Rights Valuation Hedging
-------------------------------------
Purchased Originated Total Allowance (Gain)/Loss(2) Net
-------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $63,361 $ 40,325 $103,686 $ (2,900) $10,005 $110,791
Additions 4,400 22,695 27,095 - - 27,095
Amortization expense (12,705) (9,409) (22,114) - (1,425) (23,539)
Provision for impairment - - - (15,551) - (15,551)
-------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 55,056 53,611 108,667 (18,451) 8,580 98,796
Additions (412) 20,832 20,420 - - 20,420
Amortization expense (17,421) (17,159) (34,580) - (1,425) (36,005)
Write-off - (7,435) (7,435) 9,456 (2,021) -
Provision for impairment - - - (45,923) - (45,923)
-------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 37,223 49,849 87,072 (54,918) 5,134 37,288
Additions, net (3) 23,922 23,919 - - 23,919
Amortization expense (14,840) (19,315) (34,155) - (1,425) (35,580)
Recovery of impairment - - - 22,923 - 22,923
-------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $22,380 $ 54,456 $ 76,836 $(31,995) $ 3,709 $ 48,550
-------------------------------------------------------------------------------------------------------------------------
Estimated fair value of mortgage servicing rights at:
December 31, 20011 $53,174 $ 46,789 $ 99,963 $ 99,963
December 31, 20021 $17,311 $ 20,477 $ 37,788 $ 37,788
December 31, 20031 $12,625 $ 36,564 $ 49,189 $ 49,189
-------------------------------------------------------------------------------------------------------------------------
1 Excludes approximately $1.4 million, $2 million and $5 million at December
31, 2003, 2002 and 2001, respectively, of loan servicing rights on mortgage
loans originated prior to the adoption of FAS 122.
2 Hedging (gain)/loss represents the deferred (gains)/losses on a
derivatives-based hedging program prior to the adoption of FAS 133.
58
Fair value is determined by discounting the projected net cash flows.
Significant assumptions are:
Discount rate - Indexed to a risk-free rate commensurate with the average
life of the servicing portfolio plus a market premium. The discount rate at
December 31, 2003 was 8.9%.
Prepayment rate - Annual prepayment estimates ranging from 9.45% to 36.34%
based upon loan interest rate, original term and loan type.
Loan servicing costs - $35 to $46 annually per loan based upon loan type.
Escrow earnings rate - Indexed to rates paid on deposit accounts with a
comparable average life. The escrow earnings rate at December 31, 2003 was
4.33%.
Stratification of the mortgage loan-servicing portfolio, outstanding principal
of loans serviced, and related hedging information by interest rate at December
31, 2003 follows (in thousands):
< 5.51% 5.51% - 6.49% 6.50% - 7.49% => 7.50% Total
---------------------------------------------------------------------------
Cost less accumulated amortization $ 12,491 $ 23,786 $ 29,758 $ 10,801 $ 76,836
Deferred hedge losses - - 3,246 463 3,709
-------------------------------------------------------------------------------------------------------------------------
Adjusted cost $ 12,491 $ 23,786 $ 33,004 $ 11,264 $ 80,545
-------------------------------------------------------------------------------------------------------------------------
Fair value $ 10,489 $ 16,780 $ 16,064 $ 5,856 $ 49,189
-------------------------------------------------------------------------------------------------------------------------
Impairment (2) $ 2,233 $ 7,008 $ 16,941 $ 5,813 $ 31,995
-------------------------------------------------------------------------------------------------------------------------
Outstanding principal of loans serviced (1) $ 909,206 $1,333,210 $ 1,498,370 $ 523,371 $4,264,157
-------------------------------------------------------------------------------------------------------------------------
<FN>
1 Excludes outstanding principal of $357 million for loans serviced for BOk and
$125 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>
(9) DEPOSITS
Interest expense on deposits is summarized as follows (in thousands):
2003 2002 2001
-----------------------------------
Transaction deposits $ 31,346 $ 39,273 $ 49,893
Savings 944 1,976 2,281
Time:
Certificates of deposits
under $100,000 39,098 50,036 61,626
Certificates of deposits
$100,000 and over 48,181 42,291 81,524
Other time deposits 12,360 11,890 10,885
------------------------------------------------------------
Total time 99,639 104,217 154,035
------------------------------------------------------------
Total $131,929 $145,466 $206,209
------------------------------------------------------------
The aggregate amounts of time deposits in denominations of $100,000 or more
at December 31, 2003 and 2002 were $2.1 billion and $2.0 billion, respectively.
Time deposit maturities are as follows: 2004 - $1.4 billion, 2005 - $190
million, 2006 - $119 million, 2007 - $1.1 billion, 2008 - $211 million, and $359
million thereafter.
Interest expense on time deposits during 2003 and 2002 was reduced by the
net accrued settlement from interest rate swaps of $14.0 million and $11.9
million, respectively.
59
(10) OTHER BORROWINGS
Information relating to other borrowings is summarized as follows (dollars
in thousands):
December 31
------------------------------------------------------------------------------------
2003 2002
------------------------------------------------------------------------------------
Maximum Maximum
Outstanding Outstanding
At Any At Any
Balance Rate Month End Balance Rate Month End
------------------------------------------------------------------------------------
Parent Company:
Revolving, unsecured line $ 95,000 1.75% $ 95,000 $ 85,000 2.17% $ 95,000
Subordinated debenture - - - - - 30,000
Other - - - - - 95
-------------- ---------------
Total parent company 95,000 1.75 85,000 2.17
-------------- ---------------
Subsidiary Banks:
Funds purchased and
repurchase agreements 1,609,668 1.37 1,904,269 1,567,686 1.67 1,895,315
Federal Home Loan Bank
advances 899,426 1.21 974,729 973,454 1.48 1,036,387
Subordinated debenture 154,332 6.02 155,345 155,419 6.19 156,229
Other 22,224 1.58 29,116 29,568 1.49 29,853
-------------- ---------------
Total subsidiary bank 2,685,650 1.58 2,726,127 1.86
-------------- ---------------
Total other borrowings $2,780,650 1.74 $2,811,127 1.93
-------------- ---------------
Aggregate annual principal repayments of long-term debt at December 31, 2003
are as follows (in thousands):
Parent Subsidiary
Company Banks
---------------------------
2004 $ - $2,089,707
2005 - 425,994
2006 95,000 3,805
2007 - 2,128
2008 - 1,197
Thereafter - 162,819
---------------------------
Total $95,000 $2,685,650
---------------------------
Borrowings from the Federal Home Loan Bank are used for funding purposes.
In accordance with policies of the Federal Home Loan Bank, BOK Financial has
granted a blanket pledge of eligible assets (generally unencumbered U.S.
Treasury and mortgage-backed securities, 1-4 family loans and multifamily loans)
as collateral for these advances. The unused credit available to BOK Financial
at December 31, 2003 pursuant to the Federal Home Loan Bank's collateral
policies is $498 million.
BOK Financial has a revolving, unsecured credit agreement from certain
banks at December 31, 2003 of $125 million. Interest is based upon either a base
rate or the British Bankers' Association Eurodollar rate plus a defined margin
that is determined by BOK Financial's credit rating. This margin ranges from
0.625% to 1.25%. The base rate is defined as the greater of the daily federal
funds rate plus 0.5% or the prime rate. Interest is generally paid quarterly.
Facility fees are paid quarterly on the unused portion of the commitment at a
rate of 0.20% to 0.25% as determined by BOK Financial's current debt rating.
This credit agreement includes certain restrictive covenants that limit BOK
Financial's ability to borrow additional funds and to pay cash dividends on
common stock. These covenants also require BOK Financial and its subsidiaries to
maintain minimum capital levels and to exceed minimum net worth ratios. BOK
Financial met all of the restrictive covenants at December 31, 2003.
In 1997, BOk issued $150 million of 7.125% fixed rate subordinated
debentures that mature in 2007. Interest rate swaps were used as a fair value
hedge to convert the fixed interest on these debentures to a LIBOR-based
floating rate. This required BOk to adjust the carrying value of the
subordinated debentures to fair value. In 2001, the interest rate swaps were
terminated. The related market value adjustment of the subordinated debenture of
$8 million is being recognized over the remaining life of the debt.
BOK Financial issued a $30 million, seven year subordinated debenture,
bearing interest at LIBOR plus 1.75%, on March 23, 2001 to its principal
shareholder, George B. Kaiser. This debt was paid off in its entirety in
November 2002.
Funds purchased generally mature within one to ninety days from the
transaction date. At December 31, 2003, securities sold under agreements to
repurchase totaled $1.0 billion with related accrued interest payable of $374
thousand.
60
Additional information relating to repurchase agreements at December 31,
2003 is as follows (dollars in thousands):
Amortized Market Repurchase Average
Security Sold/Maturity Cost Value Liability1 Rate
-------------------------------------------------------------------------------------------------------------
U.S. Agency Securities:
Overnight $ 450,807 $ 449,642 $ 403,473 0.93%
Term of up to 30 days 84,554 85,272 81,485 1.10
Term of 30 to 90 days 599,170 600,147 554,060 1.12
-------------------------------------------------------------------------------------------------------------
Total Agency Securities $1,134,531 $ 1,135,061 $1,039,018 1.04%
-------------------------------------------------------------------------------------------------------------
1 BOK Financial maintains control over the securities underlying overnight
repurchase agreements and generally transfers control over securities
underlying longer-term dealer repurchase agreements to the respective
counterparty.
(11) FEDERAL AND STATE INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred tax assets and liabilities are as follows (in thousands):
December 31,
----------------------
2003 2002
----------------------
Deferred tax liabilities:
Available for sale securities
mark-to-market $ 5,300 $ 27,400
Pension contributions in excess
of book expense 10,800 6,900
Valuation adjustments 24,900 13,800
Mortgage servicing 25,900 21,100
Lease financing 14,600 12,800
Other 6,400 9,800
------------------------------------------------------------
Total deferred tax liabilities 87,900 91,800
------------------------------------------------------------
Deferred tax assets:
Stock-based compensation 3,500 2,100
Loan loss reserve 48,900 44,100
Valuation adjustments 20,800 29,900
Deferred book income 19,700 15,400
Other 14,800 14,300
Deferred compensation 4,300 1,800
------------------------------------------------------------
Total deferred tax assets 112,000 107,600
------------------------------------------------------------
Deferred tax assets in excess of
deferred tax liabilities $ 24,100 $ 15,800
------------------------------------------------------------
The significant components of the provision for income taxes attributable
to continuing operations for BOK Financial are shown below (in thousands):
Years ended December 31,
-----------------------------------
2003 2002 2001
-----------------------------------
Current:
Federal $77,015 $89,879 $69,971
State 5,551 6,011 4,240
-----------------------------------------------------------
Total current 82,566 95,890 74,211
-----------------------------------------------------------
Deferred:
Federal 5,369 (12,978) (10,130)
State 979 (2,077) (1,635)
-----------------------------------------------------------
Total deferred 6,348 (15,055) (11,765)
-----------------------------------------------------------
Total income tax $88,914 $80,835 $62,446
-----------------------------------------------------------
The reconciliations of income attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense are as
follows (in thousands):
Years ended December 31,
-------------------------------
2003 2002 2001
-------------------------------
Amount:
Federal statutory tax $86,538 $79,903 $61,721
Tax exempt revenue (2,815) (3,233) (3,600)
Effect of state income taxes,
net of federal benefit 4,110 2,482 2,605
Intangible amortization 763 914 3,965
Utilization of tax credits (794) (937) (800)
Other, net 1,112 1,706 (1,445)
------------------------------------------------------------
Total $88,914 $80,835 $62,446
------------------------------------------------------------
Years ended December 31,
-------------------------------
2003 2002 2001
-------------------------------
Percent of pretax income:
Federal statutory rate 35% 35% 35%
Tax-exempt revenue (1) (1) (2)
Effect of state income taxes,
net of federal benefit 2 1 2
Intangible amortization - - 2
Utilization of tax credits - - (1)
Other, net - - (1)
-------------------------------------------------------------
Total 36% 35% 35%
-------------------------------------------------------------
61
(12) EMPLOYEE BENEFITS
BOK Financial sponsors a defined benefit Pension Plan for all employees who
satisfy certain age and service requirements. The following table presents
information regarding this plan (dollars in thousands):
December 31,
-----------------------
2003 2002
-----------------------
Change in projected benefit obligation:
Projected benefit obligation, at beginning of year $ 30,606 $ 24,141
Service cost 5,178 4,016
Interest cost 2,015 1,768
Actuarial loss 2,161 1,995
Benefits paid (2,187) (1,314)
-------------------------------------------------------------------------------------------
Projected benefit obligation at end of year1,2 $ 37,773 $ 30,606
-------------------------------------------------------------------------------------------
Change in plan assets:
Plan assets at fair value, at beginning of year $ 30,945 $ 27,307
Actual return on plan assets 7,286 (3,098)
Company contributions 7,231 8,050
Benefits paid (2,187) (1,314)
-------------------------------------------------------------------------------------------
Plan assets at fair value at end of year $ 43,275 $ 30,945
-------------------------------------------------------------------------------------------
Reconciliation of prepaid (accrued) and total amount recognized:
Benefit obligation $(37,773) $(30,606)
Fair value of assets 43,275 30,945
-------------------------------------------------------------------------------------------
Funded status of the plan 5,502 339
Unrecognized net loss 13,387 16,373
Unrecognized prior service cost 503 563
-------------------------------------------------------------------------------------------
Prepaid pension costs $ 19,392 $ 17,275
-------------------------------------------------------------------------------------------
Components of net periodic benefit costs:
Service cost $ 5,178 $ 4,016
Interest cost 2,015 1,768
Expected return on plan assets (2,957) (2,384)
Amortization of unrecognized amounts:
Net loss 818 251
Prior service cost 60 60
-------------------------------------------------------------------------------------------
Net periodic pension cost $ 5,114 $ 3,711
-------------------------------------------------------------------------------------------
1 Projected benefit obligation equals accumulated benefit obligation.
2 Projected benefit obligation is based on a January 1 measurement date.
Weighted-average assumptions as of December 31:
Discount rate 6.25% 6.75%
Expected return on plan assets 7.50% 7.50%
Rate of compensation increase 5.25% 5.25%
Assets of the Pension Plan consist primarily of shares in the American
Performance Balanced Fund. The stated objective of this fund is to provide an
attractive total return through a broadly diversified mix of equities and bonds.
The typical portfolio mix is approximately 60% equities and 40% bonds. The
life-to-date return on the fund, which is used as an indicator when setting the
expected return on plan assets, was 7.95%. The maximum and minimum required
Pension Plan contributions for 2003 were $12.7 million and $0, respectively.
Amounts contributed to the Pension Plan during 2003 included $5.0 million
attributable to the current year and $2.2 million attributable to 2002.
Employee contributions to the Thrift Plans are matched by BOK Financial up
to 5% of base compensation, based upon years of service. Participants may direct
the investments of their accounts in a variety of options, including BOK
Financial Common Stock. Employer contributions vest over five years. Expenses
incurred by BOK Financial for the Thrift Plans totaled $3.6 million, $3.1
million and $2.8 million for 2003, 2002 and 2001, respectively.
BOK Financial also sponsors a defined benefit post-retirement employee
medical plan, which pays 50 percent of annual medical insurance premiums for
retirees who meet certain age and service requirements. Assets of the retiree
medical plan consist primarily of shares in a cash management fund. Eligibility
for the post-retirement plan is limited to current retirees and certain
employees who were age 60 or older at the time the plan was frozen in 1993. The
net obligation recognized under the plan was $2.4 million at December 31,
62
2003. A 1% change in medical expense trends would not significantly affect the
net obligation or cost of this plan.
Under various performance incentive plans, participating employees may be
granted awards based on defined formulas or other criteria. Earnings were
charged $52.0 million in 2003, $32.1 million in 2002 and $27.2 million in 2001
for such awards.
(13) EXECUTIVE BENEFIT PLANS
The shareholders and Board of Directors of BOK Financial have approved
various stock-based compensation plans. The number of awards and the employees
to receive awards are determined by an independent compensation committee of the
Board of Directors for the Chief Executive Officer and other senior executives.
Other stock-based compensation awards are determined by the Chairman of the
Board and the Chief Executive Officer.
These awards consist primarily of stock options that are subject to vesting
requirements. Generally, one-seventh of the options awarded vest annually and
expire three years after vesting. Additionally, stock options that vest in two
years and expire 45 days after vesting have been awarded.
The following table presents options outstanding during 2001, 2002 and 2003
under these plans:
Weighted-
Average
Exercise
Number Price
--------------------------
Options outstanding at
December 31, 2000 3,448,924 $15.38
Options awarded 722,119 28.68
Options exercised (640,234) 11.79
Options forfeited (48,469) 16.06
Options expired (1,057) 16.70
------------------------------------------------------------
Options outstanding at
December 31, 2001 3,481,283 18.74
Options awarded 169,183 32.22
Options exercised (477,623) 13.71
Options forfeited (38,936) 20.49
Options expired (4) 7.91
------------------------------------------------------------
Options outstanding at
December 31, 2002 3,133,903 20.29
Options awarded 861,898 33.64
Options exercised (652,871) 17.24
Options forfeited (60,137) 23.76
Options expired (51) 19.29
------------------------------------------------------------
Options outstanding at
December 31, 2003 3,282,742 $24.34
------------------------------------------------------------
Options vested at
December 31, 2003 1,010,099 $18.13
------------------------------------------------------------
The following table summarizes information concerning currently outstanding
and vested stock options:
Options Outstanding Options Vested
------------------------------------------------------------------------
Weighted Weighted
Average Average Weighted
Range of Remaining Exercise Average
Exercise Number Contractual Price Number Exercise
Prices Outstanding Life (years) Vested Price
$ 8.29 - $9.98 196,788 1.61 $ 9.25 196,788 $ 9.25
16.65 236,587 2.42 16.65 152,191 16.65
17.89 - 19.59 1,258,771 3.56 18.62 509,809 18.74
28.52 - 32.51 1,353,763 4.97 30.70 151,311 29.12
38.33 - 38.78 236,833 2.00 38.55 - -
-----------------------------------------------------------------------
Compensation expense for stock options is generally recognized based on the
fair value of options granted over the options' vesting period. No compensation
expense is recognized for options that are forfeited before vesting. The fair
value of options was determined as of the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions:
2003 2002 2001
--------- --------- ---------
Average risk-free interest rate 2.57% 1.59% 6.04%
Dividend yield None None None
Volatility factors .178 .190 .195
Weighted-average
expected life 7 years 2 years 7 years
Weighted-average fair value $6.66 $4.18 $8.65
BOK Financial also may issue nonvested common shares under the various
stock-based compensation plans. These shares, which generally are issued only to
the Chief Executive Officer and selected senior executives, vest five years
after the grant date. The holders of these shares may be required to retain the
shares for a three-year period after vesting. At December 31, 2003, a total of
18,635 nonvested common shares have been awarded.
63
BOK Financial permits certain executive officers to defer recognition of
taxable income from their stock-based compensation. These officers are also able
to diversify their deferred compensation into investments other than BOK
Financial common stock.
Accordingly, stock-based compensation for these officers is recognized as
liability awards rather than equity awards. Compensation expense is based on the
intrinsic value of the award over the vesting period. Additional compensation
expense is recognized based on changes in the fair value of the deferred
compensation liability after the vesting period. At December 31, 2003, the total
deferred compensation liability attributed to these arrangements was $6.8
million.
During January 2004, BOK Financial awarded the following stock-based
compensation:
Exercise Fair Value/
Number Price Award
---------- --------- ------------
Equity awards:
Stock options 487,559 $38.87 $ 8.99
Liability awards:
Stock options 125,756 38.87 8.99
Nonvested stock 24,800 - 38.87
----------
Total Liability awards 150,556
----------
Total stock-based awards 638,115
-------------------------- ---------- --------- ------------
(14) COMMITMENTS AND 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.
BOk is obligated under a long-term lease for its bank premises located in
downtown Tulsa. The lease term, which began November 1, 1976, is for fifty-seven
years with options to terminate in 2013 and 2023. Annual base rent is $3.3
million. BOk subleases portions of its space for annual rents of $386 thousand
in 2004, $370 thousand in 2005 and $213 thousand in years 2006 through 2008. Net
rent expense on this lease was $2.9 million in years 2003, 2002 and 2001. Total
rent expense for BOK Financial was $13.0 million in 2003, $12.4 million in 2002
and $11.8 million in 2001.
At December 31, 2003, the future minimum lease payments for equipment and
premises under operating leases were as follows: $12.4 million in 2004, $11.7
million in 2005, $11.2 million in 2006, $9.7 million in 2007, $8.3 million in
2008 and a total of $36.8 million thereafter.
BOk and Williams Companies, Inc. severally guaranteed 30 percent and 70
percent, respectively, of the $13 million debt and operating deficit of two
parking facilities operated by the Tulsa Parking Authority. The debt had a
maturity date of May 15, 2007. In 2003, BOk funded the remaining amount of this
commitment and paid $2.9 million to retire the Company's obligation with respect
to this debt. Total expenditures related to this guarantee were $3.2 million in
2003, $373 thousand in 2002 and $441 thousand in 2001.
The Federal Reserve Bank requires member banks to maintain certain minimum
average cash balances. These balances were approximately $303 million for 2003
and $283 million for 2002.
64
(15) SHAREHOLDERS' EQUITY
PREFERRED STOCK
One billion shares of preferred stock with a par value of $0.00005 per
share are authorized. A single series of 250,000,000 shares designated as Series
A Preferred Stock ("Series A Preferred Stock") is currently issued and
outstanding. The Series A Preferred Stock has no voting rights except as
otherwise provided by Oklahoma corporate law and may be converted into one share
of Common Stock for each 37 shares of Series A Preferred Stock at the option of
the holder. Dividends are cumulative at an annual rate of ten percent of the
$0.06 per share liquidation preference value when declared and are payable in
cash. Aggregate liquidation preference is $15 million. During 2003, 2002 and
2001, 23,214 shares, 47,961 shares, and 72,141 shares, respectively, of BOK
Financial common stock were issued in payment of dividends on the Series A
Preferred Stock in lieu of cash by mutual agreement of BOK Financial and the
holders of the Series A Preferred Stock. These shares were valued at $750,000 in
2003, and $1.5 million in 2002 and 2001, based on average market price, as
defined, for a 65 business day period preceding declaration. In 2003, cash
dividends paid on preferred stock totaled $750,000. George B. Kaiser owns
substantially all Series A Preferred Stock.
COMMON STOCK
Common stock consists of 2.5 billion authorized shares with a $0.00006 par
value. Holders of common shares are entitled to one vote per share at the
election of the Board of Directors and on any question arising at any
shareholders' meeting and to receive dividends when and as declared. No common
stock dividends can be paid unless all accrued dividends on the Series A
Preferred Stock have been paid. The present policy of BOK Financial is to retain
earnings for capital and future growth, and management has no current plans to
recommend payment of cash dividends on common stock. Additionally, regulations
restrict the ability of national banks and bank holding companies to pay
dividends, and BOK Financial's credit agreement restricts the payment of
dividends by the holding company.
During 2003, 2002 and 2001, 3% dividends payable in shares of BOK Financial
common stock were declared and paid. The shares issued were valued at $58
million, $52 million and $35 million, respectively, based on the average closing
bid/ask prices on the day preceding declaration. Per share data has been
restated to reflect these stock dividends. Presently, management plans to
recommend continued payment of an annual dividend in shares of common stock.
On October 25, 2002, BOK Financial issued 1,711,127 shares of common stock
and 292,225 options to purchase shares, with a fair value at the issuance date
of $65 million 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. The fair value of this price guarantee, estimated to be $3
million based upon the Black-Scholes Option pricing model, was included in the
purchase price of Bank of Tanglewood (see Note 2). 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. The guaranteed price for each
anniversary period is $36.30 for 2004, $38.80 for 2005, $41.30 for 2006 and
$43.81 for 2007. The price guarantee is nontransferable and noncumulative. 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 maximum aggregate number of common shares that may be issued to satisfy any
price guarantee obligations is 10 million. If, as of any benchmark date, BOK
Financial has already issued 10 million shares, BOK Financial is not obligated
to make any further benchmark payments. BOK Financial's ability to pay cash to
satisfy any price guarantee obligations is limited by applicable bank holding
company and bank capital and dividend regulations.
65
SUBSIDIARY BANKS
The amounts of dividends that BOK Financial's subsidiary banks can declare
and the amounts of loans the subsidiary banks can extend to affiliates are
limited by various federal and state banking regulations. Generally, dividends
declared during a calendar year are limited to net profits, as defined, for the
year plus retained profits for the preceding two years. The amounts of dividends
are further restricted by minimum capital requirements. Pursuant to the most
restrictive of the regulations at December 31, 2003, BOK Financial's subsidiary
banks could declare dividends up to $121 million without prior regulatory
approval. The subsidiary banks declared and paid dividends of $60 million in
2003, $40 million in 2002 and $92 million in 2001.
Loans to a single affiliate may not exceed 10% and loans to all affiliates
may not exceed 20% of unimpaired capital and surplus, as defined. Additionally,
loans to affiliates must be fully secured. As of December 31, 2003 and 2002,
these loans totaled $10 million. None of the affiliate loans in 2002 were to
consolidated entities. Total loan commitments to affiliates at December 31, 2003
were $95 million.
REGULATORY CAPITAL
BOK Financial and its banking subsidiaries are subject to various capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and additional
discretionary actions by regulators that could have a material effect on BOK
Financial's operations. These capital requirements include quantitative measures
of assets, liabilities and certain off-balance sheet items. The capital
standards are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
For a banking institution to qualify as well capitalized, its Tier I, Total
and Leverage capital ratios must be at least 6%, 10% and 5%, respectively. Tier
I capital consists primarily of common stockholders' equity, excluding
unrealized gains or losses on available for sale securities, less goodwill, core
deposit premiums and certain other intangible assets. As directed by the Federal
Reserve Bank, Tier I capital excludes $29 million, the combined value of common
shares issued subject to the market value protection program and the value of
the market value guarantee. These values will be restored to Tier I capital as
the market price guarantee expires. Total capital consists primarily of Tier I
capital plus preferred stock, subordinated debt and reserves for loan losses,
subject to certain limitations. All of BOK Financial's banking subsidiaries
exceeded the regulatory definition of well capitalized.
66
December 31,
------------------------------------------------------------
2003 2002
------------------------------ -----------------------------
Amount Ratio Amount Ratio
------------------------------ -----------------------------
(Dollars in thousands)
Total Capital (to Risk Weighted Assets):
Consolidated $ 1,157,782 11.31% $ 1,083,244 11.95%
BOk 900,888 11.06 864,519 11.91
Bank of Texas 201,984 11.13 199,659 12.00
Bank of Albuquerque 91,412 17.35 81,458 16.59
Bank of Arkansas 15,218 21.56 14,079 18.08
Colorado State Bank and Trust 26,222 10.19 - -
Tier I Capital (to Risk Weighted Assets):
Consolidated $ 935,932 9.15% $ 813,845 8.98%
BOk 718,538 8.82 624,968 8.61
Bank of Texas 179,256 9.88 178,832 10.75
Bank of Albuquerque 84,811 16.10 75,310 15.34
Bank of Arkansas 14,328 20.30 13,099 16.82
Colorado State Bank and Trust 22,997 8.94 - -
Tier I Capital (to Average Assets):
Consolidated $ 935,932 7.17% $ 813,845 6.88%
BOk 718,538 6.69 624,968 6.39
Bank of Texas 179,256 7.22 178,832 8.43
Bank of Albuquerque 84,811 6.37 75,310 6.48
Bank of Arkansas 14,328 7.82 13,099 6.95
Colorado State Bank and Trust 22,997 6.86 - -
(16) EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings
per share (dollars in thousands except per share data):
Years ended December 31,
--------------------------------------------
2003 2002 2001
--------------------------------------------
Numerator:
Net income $ 158,360 $ 147,871 $ 114,439
Preferred stock dividends (1,500) (1,500) (1,500)
---------------------------------------------------------------------------------------------------------------------
Numerator for basic earnings per share - income
available to common stockholders 156,860 146,371 112,939
---------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock dividends 1,500 1,500 1,500
---------------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share - income available
to common stockholders after assumed conversion $ 158,360 $ 147,871 $ 114,439
---------------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share -weighted average shares 56,990,244 54,964,747 54,150,255
Effect of dilutive securities:
Employee stock compensation plans (1) 754,262 751,095 669,477
Convertible preferred stock 6,719,577 6,719,577 6,719,577
Tanglewood market value guarantee (see Note 15) 107,879 43,764 -
---------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 7,581,718 7,514,436 7,389,054
---------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 64,571,962 62,479,183 61,539,309
---------------------------------------------------------------------------------------------------------------------
Basic earnings per share $2.75 $2.66 $2.09
---------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $2.45 $2.37 $1.86
---------------------------------------------------------------------------------------------------------------------
1 Excludes employee stock options with exercise prices 26,158 83,704 615,662
greater than the current market price.
67
(17) REPORTABLE SEGMENTS
BOK Financial operates four principal lines of business under its Bank of
Oklahoma franchise: corporate banking, consumer banking, mortgage banking and
wealth management. 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.
These five principal lines of business combined account for approximately 94% of
total revenue. 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.
The Corporate Banking segment provides loan and lease financing and
treasury and cash management services to businesses throughout Oklahoma and
surrounding states. Corporate Banking also includes our TransFund unit, which
provides ATM and merchant deposit services. The Consumer Banking segment
provides a full line of deposit, loan and fee-based services to customers
throughout Oklahoma through four major distribution channels: traditional
branches, supermarket branches, the 24-hour ExpressBank call center and the
Internet. The Mortgage Banking segment consists of two operating sectors that
originate a full range of mortgage products from federally sponsored programs to
"jumbo loans" on higher priced homes in BOK Financial's primary market areas.
The Mortgage Banking segment also services mortgage loans acquired from
throughout the United States. The Wealth Management segment provides a wide
range of trust and private financial services, including institutional,
investment and retirement products, loans and other services to affluent
individuals, businesses, not-for-profit organizations, and governmental
agencies. Trust services are primarily provided to clients in Oklahoma, Texas,
Arkansas and New Mexico. Wealth Management includes a nationally competitive,
self-directed 401-(k) program. Additionally, Wealth Management engages in
securities brokerage and trading activities and investment banking. Wealth
Management includes BOSC, Inc., a registered broker/dealer. 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. Trust Services provided
through Colorado State Bank and Trust are included in the Regional Banks
segment.
BOK Financial identifies reportable segments by type of service provided
for the Mortgage Banking and the Wealth Management segments and by type of
customer for the Corporate Banking and Consumer Banking segments. Regional Banks
are identified by legal entity. Operating results are adjusted for intercompany
loan participations and allocated service costs and management fees.
BOK Financial allocates resources and evaluates performance of its lines of
business after allocation of funds, certain indirect expenses, taxes and capital
costs. The cost of funds borrowed from the funds management unit by the
operating lines of business is transfer priced at rates that approximate market
for funds with similar duration. Market is generally based on the applicable
LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of
transfer-pricing funds that support assets of the operating lines of business
tends to insulate them from interest rate risk.
The value of funds provided by the operating lines of business to the funds
management unit is based on applicable Federal Home Loan Bank advance rates.
Deposit accounts with indeterminate maturities, such as demand deposit accounts
and interest-bearing transaction accounts, are transfer-priced at a rolling
average based on expected duration of the accounts. The expected duration ranges
from 90 days for certain rate-sensitive deposits to five years. The accounting
policies of the reportable segments generally follow those described in the
summary of significant account policies except interest income is reported on a
fully tax-equivalent basis, loan losses are based on actual net amounts charged
off and the amortization of intangible assets is generally excluded.
Economic capital is assigned to the business units 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
68
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.
Substantially all revenue is from domestic customers. No single external
customer accounts for more than 10% of total revenue.
69
All
Corporate Consumer Mortgage Wealth Regional Other/
(In Thousands) Banking Banking Banking Management Banks Eliminations Total
------------------------------------------------------------------------------------------------
Year ended December 31, 2003
Net interest revenue/(expense)
from external sources $ 144,791 $ (16,725) $ 27,770 $ 1,967 $ 164,755 $ 67,471 $ 390,029
Net interest revenue/(expense)
from internal sources (28,218) 57,925 (9,415) 8,954 (12,151) (17,095) -
----------------------------------------------------------------------------------------------------------------------------
Total net interest revenue 116,573 41,200 18,355 10,921 152,604 50,376 390,029
Provision for loan losses 10,325 6,887 917 390 6,425 10,692 35,636
Other operating revenue 79,316 47,361 36,379 91,534 36,531 (10,431) 280,690
Capitalized mortgage
servicing rights - - 23,922 - - - 23,922
Financial instruments
gains/(losses) 614 - 4,025 53 339 (6,651) (1,620)
Operating expense 88,478 66,639 58,204 80,440 118,386 20,887 433,034
Recovery for impairment of
mortgage servicing rights - - (22,923) - - - (22,923)
Income taxes 38,007 5,849 18,082 8,432 23,606 (5,062) 88,914
----------------------------------------------------------------------------------------------------------------------------
Net income $ 59,693 $ 9,186 $ 28,401 $ 13,246 $ 41,057 $ 6,777 $ 158,360
----------------------------------------------------------------------------------------------------------------------------
Average assets $4,362,396 $2,514,262 $ 623,823 $731,303 $ 4,899,360 $(365,583) $12,765,561
Average equity 311,140 58,000 69,100 69,690 360,220 291,406 1,159,556
Performance measurements:
Return on assets 1.37% .37% 4.55% 1.81% 0.84% - 1.24%
Return on equity 19.19 15.84 41.10 19.01 11.40 - 13.66
Efficiency ratio 45.17 75.25 74.00 78.51 62.59 - 62.34
Reconciliation to Consolidated Financial Statements
Other Other
Net Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
---------------------------------------------------------------------
Total reportable segments $339,653 $ 315,043 $389,224 $151,583 $13,131,144
Unallocated items:
Tax-equivalent adjustment 5,170 - - 5,170 -
Funds management 59,520 (6,520) 13,926 4,972 1,379,319
All others (including
eliminations), net (14,314) (3,911) 6,961 (3,365) (1,744,902)
--------------------------------------------------------------------------------------------------
BOK Financial consolidated $390,029 $ 304,612 $410,111 $158,360 $12,765,561
--------------------------------------------------------------------------------------------------
(1)Excluding financial instrument gains/(losses)
70
All
Corporate Consumer Mortgage Wealth Regional Other/
(In Thousands) Banking Banking Banking Management Banks Eliminations Total
------------------------------------------------------------------------------------------------
Year ended December 31, 2002
Net interest revenue/(expense)
from external sources $ 155,648 $ (17,875) $ 32,199 $ 1,958 $ 138,145 $ 58,126 $ 368,201
Net interest revenue/(expense)
from internal sources (45,573) 61,301 (13,713) 8,162 (12,835) 2,658 -
----------------------------------------------------------------------------------------------------------------------------
Total net interest revenue 110,075 43,426 18,486 10,120 125,310 60,784 368,201
Provision for loan losses 6,475 7,829 252 363 6,161 12,650 33,730
Other operating revenue 72,234 38,862 37,845 69,932 26,876 (10,349) 235,400
Capitalized mortgage
servicing rights - - 20,832 - - - 20,832
Financial instruments
gains/(losses) 658 - 26,345 68 4,205 33,322 64,598
Operating expense 81,434 63,401 54,795 69,709 94,383 16,950 380,672
Provision for impairment of
mortgage servicing rights - - 45,923 - - - 45,923
Income taxes 36,977 4,302 987 3,966 20,415 14,188 80,835
----------------------------------------------------------------------------------------------------------------------------
Net income $ 58,081 $ 6,756 $ 1,551 $ 6,082 $ 35,432 $ 39,969 $ 147,871
----------------------------------------------------------------------------------------------------------------------------
Average assets $4,038,353 $2,341,239 $ 671,798 $556,390 $ 3,915,411 $(230,621) $11,292,570
Average equity 298,020 60,910 34,160 60,880 286,730 198,138 938,838
Performance measurements:
Return on assets 1.44% .29% .23% 1.09% .90% - 1.31%
Return on equity 19.49 11.09 4.54 9.99 12.36 - 15.75
Efficiency ratio 44.67 77.05 71.01 87.08 62.02 - 60.96
Reconciliation to Consolidated Financial Statements
Other Other
Net Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
---------------------------------------------------------------------
Total reportable segments $307,417 $ 266,581 $409,645 $107,902 $11,523,191
Unallocated items:
Tax-equivalent adjustment 6,119 - - 6,119 -
Funds management 72,802 (7,245) 10,503 40,652 661,182
All others (including
eliminations), net (18,137) (3,104) 6,447 (6,802) (891,803)
--------------------------------------------------------------------------------------------------
BOK Financial consolidated $368,201 $ 256,232 $426,595 $147,871 $11,292,570
--------------------------------------------------------------------------------------------------
(1)Excluding financial instrument gains/(losses)
71
All
Corporate Consumer Mortgage Wealth Regional Other/
(In Thousands) Banking Banking Banking Management Banks Eliminations Total
------------------------------------------------------------------------------------------------
Year ended December 31, 2001
Net interest revenue/(expense)
from external sources $ 199,727 $ (34,049) $ 32,545 $ 839 $ 138,846 $ (8,956) $ 328,952
Net interest revenue/(expense)
from internal sources (86,150) 94,393 (20,867) 13,136 (11,689) 11,177 -
----------------------------------------------------------------------------------------------------------------------------
Total net interest revenue 113,577 60,344 11,678 13,975 127,157 2,221 328,952
Provision for loan losses 10,481 4,180 47 128 5,873 16,901 37,610
Other operating revenue 62,648 29,995 30,119 67,564 19,642 (4,153) 205,815
Capitalized mortgage
servicing rights - - 22,695 - - - 22,695
Financial instruments
gains/(losses) (250) - 12,757 - 484 13,587 26,578
Operating expense 78,190 59,099 47,750 63,186 91,088 14,917 354,230
Provision for impairment of
mortgage servicing rights - - 15,551 - - - 15,551
Income taxes 33,960 10,527 5,408 7,096 18,518 (13,063) 62,446
Transition adjustment of
adoption of FAS 133 - - - - - 236 236
----------------------------------------------------------------------------------------------------------------------------
Net income $ 53,344 $ 16,533 $ 8,493 $ 11,129 $ 31,804 $ (6,864) $ 114,439
----------------------------------------------------------------------------------------------------------------------------
Average assets $3,867,850 $2,192,698 $651,103 $492,811 $3,352,149 $(315,009) $10,241,602
Average equity 275,090 53,250 18,700 52,290 234,420 147,285 781,035
Performance measurements:
Return on assets 1.38% 0.75% 1.30% 2.26% 0.95% - 1.12%
Return on equity 19.39 31.05 45.42 21.28 13.57 - 14.65
Efficiency ratio 44.37 65.42 74.04 77.49 62.05 - 63.54
Reconciliation to Consolidated Financial Statements
Other Other
Net Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
---------------------------------------------------------------------
Total reportable segments $326,731 $232,663 $354,864 $ 121,303 $10,556,611
Unallocated items:
Tax-equivalent adjustment 8,045 - - 8,045 -
Funds management 15,177 (408) 7,946 (719) 323,113
All others (including
eliminations), net (21,001) (3,745) 6,971 (14,190) (638,122)
--------------------------------------------------------------------------------------------------
BOK Financial consolidated $328,952 $228,510 $369,781 $ 114,439 $10,241,602
--------------------------------------------------------------------------------------------------
(1)Excluding financial instrument gains/(losses)
72
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying values and estimated fair values
of financial instruments as of December 31, 2003 and 2002 (dollars in
thousands):
Range of Average Estimated
Carrying Contractual Repricing Discount Fair
Value Yields (in years) Rate Value
---------------------------------------------------------------------
2003:
Cash and cash equivalents $ 643,912 $ 643,912
Securities 4,714,642 4,717,947
Loans:
Commercial 4,336,702 2.75 - 18.94% 0.38 1.20 - 5.43% 4,528,247
Commercial real estate 1,630,092 2.45 - 11.50 1.26 4.45 - 6.35 1,637,499
Residential mortgage 1,015,643 2.75 - 7.96 2.55 3.83 - 6.28 1,020,330
Residential mortgage - held for sale 56,543 - - - 56,543
Consumer 444,909 1.11 - 18.69 2.63 3.43 - 7.50 442,485
---------------------------------------------------------------------------------------------------------------------
Total loans 7,483,889 7,685,104
Reserve for loan losses (128,639) -
---------------------------------------------------------------------------------------------------------------------
Net loans 7,355,250 7,685,104
Derivative instruments with positive
fair value 149,100 149,100
Deposits with no stated maturity 5,845,137 5,845,137
Time deposits 3,374,726 0.60 - 7.65 2.03 1.05 - 2.27 3,413,556
Other borrowings 2,626,318 1.05 - 7.74 .05 1.00 - 3.29 2,626,136
Subordinated debt 154,332 6.22 3.60 5.01 170,612
Derivative instruments with negative
fair value 149,326 149,326
---------------------------------------------------------------------------------------------------------------------
2002:
Cash and cash equivalents $ 624,215 $ 624,215
Securities 4,136,403 4,140,606
Loans:
Commercial 3,989,798 1.78 - 12.25% 0.32 1.45 - 5.68% 4,058,743
Commercial real estate 1,435,838 2.70 - 12.50 1.09 4.70 - 6.60 1,450,552
Residential mortgage 929,759 3.50 - 8.50 2.74 3.92 - 6.67 933,161
Residential mortgage - held for sale 133,421 - - - 133,421
Consumer 412,167 1.33 - 21.00 2.49 3.64 - 7.75 416,643
---------------------------------------------------------------------------------------------------------------------
Total loans 6,900,983 6,992,520
Reserve for loan losses (116,070) -
---------------------------------------------------------------------------------------------------------------------
Net loans 6,784,913 6,992,520
Derivative instruments with positive
fair value 90,776 90,776
Deposits with no stated maturity 4,860,534 4,860,534
Time deposits 3,267,991 0.90 - 7.65 1.54 1.26 - 2.34 3,353,243
Other borrowings 2,655,708 3.29 - 5.84 0.05 1.13 - 3.29 2,658,930
Subordinated debt 155,419 6.45 4.60 4.50 175,307
Derivative instruments with negative
fair value 80,079 80,079
---------------------------------------------------------------------------------------------------------------------
The preceding table presents the estimated fair values of financial
instruments. The fair values of certain of these instruments were calculated by
discounting expected cash flows, which involved significant judgments by
management. Fair value is the estimated amount at which financial assets or
liabilities could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Because no market exists for certain
of these financial instruments and management does not intend to sell these
financial instruments, BOK Financial does not know whether the fair values shown
above represent values at which the respective financial instruments could be
sold individually or in the aggregate.
73
The following methods and assumptions were used in estimating the fair
value of these financial instruments:
CASH AND CASH EQUIVALENTS
The book value reported in the consolidated balance sheet for cash and
short-term instruments approximates those assets' fair values.
SECURITIES
The fair values of securities are based on quoted market prices or dealer
quotes, when available. If quotes are not available, fair values are based on
quoted prices of comparable instruments.
DERIVATIVES
All derivative instruments are carried on the balance sheet at fair value.
Fair values for exchange-traded contracts are based on quoted prices. Fair
values for over-the-counter interest rate, energy and foreign exchange contracts
are based on valuations provided either by third-party dealers in the contracts
or by quotes provided by independent pricing services.
LOANS
The fair value of loans, excluding loans held for sale, are based on
discounted cash flow analyses using interest rates currently being offered for
loans with similar remaining terms to maturity and credit risk, adjusted for the
impact of interest rate floors and ceilings. The fair values of classified loans
were estimated to approximate their carrying values less loan loss reserves
allocated to these loans of $30 million and $29 million at December 31, 2003 and
2002, respectively.
The fair values of residential mortgage loans held for sale are based upon
quoted market prices of such loans sold in securitization transactions,
including related unfunded loan commitments and hedging transactions.
DEPOSITS
The fair values of time deposits are based on discounted cash flow analyses
using interest rates currently being offered on similar transactions. Statement
of Financial Accounting Standard No. 107, "Disclosures about Fair Value of
Financial Instruments," ("FAS 107") defines the estimated fair value of deposits
with no stated maturity, which includes demand deposits, transaction deposits,
money market deposits and savings accounts, to equal the amount payable on
demand. Although market premiums paid reflect an additional value for these low
cost deposits, FAS 107 prohibits adjusting fair value for the expected benefit
of these deposits. Accordingly, the positive effect of such deposits is not
included in this table.
OTHER BORROWINGS AND SUBORDINATED DEBENTURE
The fair values of these instruments are based upon discounted cash flow
analyses using interest rates currently being offered on similar instruments.
OFF-BALANCE SHEET INSTRUMENTS
The fair values of commercial loan commitments are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements. The fair values of these off-balance sheet instruments
were not significant at December 31, 2003 and 2002.
74
(19) 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.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. At December 31, 2003, outstanding commitments
totaled $3 billion. Because some of the commitments are expected to expire
before being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. BOK Financial uses the same credit policies
in making commitments as it does loans.
The amount of collateral obtained, if deemed necessary, is based on
management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. Because the credit risk involved
in issuing standby letters of credit is essentially the same as that involved in
extending loan commitments, BOK Financial uses the same credit policies in
evaluating the creditworthiness of the customer. Additionally, BOK Financial
uses the same evaluation process in obtaining collateral on standby letters of
credit as it does for loan commitments. The term of these standby letters of
credit is defined in each commitment and typically corresponds with the
underlying loan commitment. At December 31, 2003, outstanding standby letters of
credit totaled $497 million.
Commercial letters of credit are used to facilitate customer trade
transactions with the drafts being drawn when the underlying transaction is
consummated. At December 31, 2003, outstanding commercial letters of credit
totaled $7 million.
75
(20) PARENT COMPANY ONLY FINANCIAL STATEMENTS
Summarized financial information for BOK Financial - Parent Company Only
follows:
BALANCE SHEETS
(In Thousands) December 31,
----------------------------
2003 2002
----------------------------
Assets
Cash and cash equivalents $ 10,881 $ 16,466
Securities - available for sale 16,657 14,253
Investment in subsidiaries 1,296,749 1,146,915
Other assets 1,750 8,102
------------------------------------------------------------------------------------------------
Total assets $1,326,037 $ 1,185,736
------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Other borrowings $ 95,000 $ 85,000
Other liabilities 2,407 1,210
------------------------------------------------------------------------------------------------
Total liabilities 97,407 86,210
------------------------------------------------------------------------------------------------
Preferred stock 12 25
Common stock 4 3
Capital surplus 546,594 475,054
Retained earnings 698,052 598,777
Treasury stock (24,491) (17,421)
Accumulated other comprehensive income 8,459 43,088
------------------------------------------------------------------------------------------------
Total shareholders' equity 1,228,630 1,099,526
------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,326,037 $ 1,185,736
------------------------------------------------------------------------------------------------
STATEMENTS OF EARNINGS
(In Thousands)
2003 2002 2001
-------------------------------------------
Dividends, interest and fees received from subsidiaries $ 66,165 $ 42,821 $ 91,960
Other operating revenue 431 441 425
------------------------------------------------------------------------------------------------
Total revenue 66,596 43,262 92,385
------------------------------------------------------------------------------------------------
Interest expense 1,771 3,453 6,458
Personnel expense - - 2
Professional fees and services 545 433 471
Other operating expense (4) 205 265
------------------------------------------------------------------------------------------------
Total expense 2,312 4,091 7,196
------------------------------------------------------------------------------------------------
Income before taxes and equity in undistributed
income of subsidiaries 64,284 39,171 85,189
Federal and state income tax credit (678) (1,879) (3,092)
------------------------------------------------------------------------------------------------
Income before equity in undistributed income of
subsidiaries 64,962 41,050 88,281
Equity in undistributed income of subsidiaries 93,398 106,821 26,158
------------------------------------------------------------------------------------------------
Net income $158,360 $147,871 $ 114,439
------------------------------------------------------------------------------------------------
76
STATEMENTS OF CASH FLOWS
(In Thousands)
2003 2002 2001
----------------------------------------
Cash flows from operating activities:
Net income $158,360 $147,871 $114,439
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries (93,398) (106,821) (26,158)
Tax benefit on exercise of stock options 1,325 5,482 3,408
Change in other assets (944) (104) (57)
Change in other liabilities 272 (930) 166
------------------------------------------------------------------------------------------------
Net cash provided by operating activities 65,615 45,498 91,798
------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of available for sale securities (27) (568) (1,961)
Investment in subsidiaries (85,015) (5,482) (119,309)
------------------------------------------------------------------------------------------------
Net cash used by investing activities (85,042) (6,050) (121,270)
------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in other borrowings 105,000 - 124,963
Pay down of other borrowings (95,000) (40,095) (95,000)
Issuance of preferred, common and treasury stock, net 4,627 4,172 2,745
Cash dividends (785) (30) (20)
------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 13,842 (35,953) 32,688
------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (5,585) 3,495 3,216
Cash and cash equivalents at beginning of period 16,466 12,971 9,755
------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 10,881 $ 16,466 $ 12,971
------------------------------------------------------------------------------------------------
Payment of dividends in common stock $ 58,300 $ 53,165 $ 36,371
------------------------------------------------------------------------------------------------
Cash paid for interest 1,947 3,482 6,726
------------------------------------------------------------------------------------------------
Common stock and price guarantee issued for acquisition - 67,745 -
------------------------------------------------------------------------------------------------
77
BOK FINANCIAL CORPORATION
ANNUAL FINANCIAL SUMMARY - UNAUDITED
Consolidated Daily Average Balances,
Average Yields and Rates
(Dollars in Thousands)
2003
----------------------------------------------
Average Revenue/ Yield/
Balance Expense (1) Rate
----------------------------------------------
Assets
Taxable securities (3) $ 4,316,303 $180,581 4.22%
Tax-exempt securities (3) 191,982 12,527 6.59
------------------------------------------------------------------------------------------------------
Total securities (3) 4,508,285 193,108 4.32
------------------------------------------------------------------------------------------------------
Trading securities 16,975 694 4.09
Funds sold and resell agreements 26,330 281 1.07
Loans (2) 7,101,543 376,260 5.30
Less reserve for loan losses 124,646 - -
------------------------------------------------------------------------------------------------------
Loans, net of reserve 6,976,897 376,260 5.39
------------------------------------------------------------------------------------------------------
Total earning assets (3) 11,528,487 570,343 4.96
------------------------------------------------------------------------------------------------------
Cash and other assets 1,237,074
------------------------------------------------------------------------------------------------------
Total assets $12,765,561
------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Transaction deposits $ 3,605,539 $ 31,346 0.87%
Savings deposits 172,938 944 0.55
Time deposits 3,439,361 99,639 2.90
------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 7,217,838 131,929 1.83
------------------------------------------------------------------------------------------------------
Funds purchased and repurchase agreements 1,537,100 15,590 1.01
Other borrowings 1,051,685 18,148 1.73
Subordinated debentures 154,940 9,477 6.12
------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 9,961,563 175,144 1.76
------------------------------------------------------------------------------------------------------
Demand deposits 1,309,744
Other liabilities 334,698
Shareholders' equity 1,159,556
------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $12,765,561
------------------------------------------------------------------------------------------------------
Tax-equivalent Net Interest Revenue (3) $ 395,199 3.20%
Tax-equivalent Net Interest Revenue to Earning Assets (3) 3.43
Less tax-equivalent adjustment (1) 5,170
------------------------------------------------------------------------------------------------------
Net Interest Revenue 390,029
Provision for loan losses 35,636
Other operating revenue 302,992
Other operating expense 410,111
------------------------------------------------------------------------------------------------------
Income before taxes 247,274
Federal and state income tax 88,914
------------------------------------------------------------------------------------------------------
Net Income $158,360
------------------------------------------------------------------------------------------------------
1 Tax equivalent at the statutory federal and state rates for the periods
presented. The taxable equivalent adjustments shown are for comparative
purposes.
2 The loan averages included loans on which the accrual of interest has been
discontinued and are stated net of unearned income. See Note 1 of Notes to
the Consolidated Financial Statements for a description of income recognition
policy.
3 Yield calculations exclude security trades that have been recorded on trade
date with no corresponding interest income.
78
2002 2001
------------------------------------------------------------------------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
----------------------------------------------- ------------------------------------------------
$ 3,756,666 $186,902 5.22% $2,989,967 $184,464 6.17%
208,503 14,789 7.09 277,309 19,935 7.19
------------------------------------------------------------------------------------------------------
3,965,169 201,691 5.32 3,267,276 204,399 6.26
------------------------------------------------------------------------------------------------------
14,215 750 5.28 18,504 1,200 6.49
16,024 291 1.82 18,419 829 4.50
6,401,510 378,300 5.91 5,989,224 456,250 7.62
109,985 - - 92,392 - -
------------------------------------------------------------------------------------------------------
6,291,525 378,300 6.01 5,896,832 456,250 7.74
------------------------------------------------------------------------------------------------------
10,286,933 581,032 5.75 9,201,031 662,678 7.20
------------------------------------------------------------------------------------------------------
1,005,637 1,040,571
------------------------------------------------------------------------------------------------------
$11,292,570 $10,241,602
------------------------------------------------------------------------------------------------------
$ 2,798,639 $ 39,273 1.40% $ 2,267,032 $ 49,893 2.20%
165,988 1,976 1.19 154,934 2,281 1.47
3,057,645 104,217 3.41 2,960,170 154,035 5.20
------------------------------------------------------------------------------------------------------
6,022,272 145,466 2.42 5,382,136 206,209 3.83
------------------------------------------------------------------------------------------------------
1,549,021 25,218 1.63 1,652,467 64,358 3.89
1,058,717 25,277 2.39 974,907 44,191 4.53
181,911 10,751 5.91 180,211 10,923 6.06
------------------------------------------------------------------------------------------------------
8,811,921 206,712 2.35 8,189,721 325,681 3.98
------------------------------------------------------------------------------------------------------
1,185,891 1,102,958
355,920 167,888
938,838 781,035
------------------------------------------------------------------------------------------------------
$11,292,570 $10,241,602
------------------------------------------------------------------------------------------------------
$374,320 3.40% $336,997 3.22%
3.70 3.66
6,119 8,045
------------------------------------------------------------------------------------------------------
368,201 328,952
33,730 37,610
320,830 255,452
426,595 369,781
------------------------------------------------------------------------------------------------------
228,706 177,013
80,835 62,574
------------------------------------------------------------------------------------------------------
$147,871 $114,439
------------------------------------------------------------------------------------------------------
79
BOK FINANCIAL CORPORATION
QUARTERLY FINANCIAL SUMMARY - UNAUDITED
Consolidated Daily Average Balances,
Average Yields and Rates
(Dollars in Thousands Except Per Share Data)
Three Months Ended
-------------------------------------------------------------------------
December 31, 2003 September 30, 2003
---------------------------------- ----------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
---------------------------------- ----------------------------------
Assets
Taxable securities (3) $ 4,421,278 $45,838 4.08% $ 4,360,340 $42,698 3.86%
Tax-exempt securities (3) 189,829 2,958 6.19 186,827 3,003 6.38
-------------------------------------------------------------------------------------- ----------------------------------
Total securities (3) 4,611,107 48,796 4.17 4,547,167 45,701 3.96
-------------------------------------------------------------------------------------- ----------------------------------
Trading securities 17,325 147 3.37 27,830 295 4.21
Funds sold and resell agreements 26,730 65 0.96 32,491 51 0.62
Loans (2) 7,359,126 96,059 5.18 7,122,211 93,013 5.18
Less reserve for loan losses 129,445 - - 125,966 - -
-------------------------------------------------------------------------------------- ----------------------------------
Loans, net of reserve 7,229,681 96,059 5.27 6,996,245 93,013 5.27
-------------------------------------------------------------------------------------- ----------------------------------
Total earning assets (3) 11,884,843 145,067 4.83 11,603,733 139,060 4.74
-------------------------------------------------------------------------------------- ----------------------------------
Cash and other assets 1,342,042 1,252,896
-------------------------------------------------------------------------------------- ----------------------------------
Total assets $13,226,885 $12,856,629
-------------------------------------------------------------------------------------- ----------------------------------
Liabilities and Shareholders' Equity
Transaction deposits $ 3,886,546 $ 7,377 0.75% $ 3,715,035 $ 7,200 0.77%
Savings deposits 179,867 255 0.56 170,796 200 0.46
Time deposits 3,442,358 25,094 2.89 3,423,920 23,863 2.77
-------------------------------------------------------------------------------------- ----------------------------------
Total interest-bearing deposits 7,508,771 32,726 1.73 7,309,751 31,263 1.70
-------------------------------------------------------------------------------------- ----------------------------------
Funds purchased and repurchase agreements 1,679,540 3,921 0.93 1,529,721 3,566 0.92
Other borrowings 1,031,414 4,240 1.63 1,062,734 4,383 1.64
Subordinated debentures 154,524 2,216 5.69 154,865 2,421 6.20
-------------------------------------------------------------------------------------- ----------------------------------
Total interest-bearing liabilities 10,374,249 43,103 1.65 10,057,071 41,633 1.64
-------------------------------------------------------------------------------------- ----------------------------------
Demand deposits 1,370,088 1,323,641
Other liabilities 284,432 314,583
Shareholders' equity 1,198,116 1,161,334
-------------------------------------------------------------------------------------- ----------------------------------
Total liabilities and shareholders' equity $13,226,885 $12,856,629
-------------------------------------------------------------------------------------- ----------------------------------
Tax-equivalent Net Interest Revenue (3) $101,964 3.18% $97,427 3.10%
Tax-equivalent Net Interest Revenue to Earning Assets (3) 3.39 3.32
Less tax-equivalent adjustment (1) 1,184 1,256
-------------------------------------------------------------------------------------- ----------------------------------
Net Interest Revenue 100,780 96,171
Provision for loan losses 8,001 8,220
Other operating revenue 71,051 63,428
Other operating expense 108,321 90,771
-------------------------------------------------------------------------------------- ----------------------------------
Income before taxes 55,509 60,608
Federal and state income tax 20,207 21,792
-------------------------------------------------------------------------------------- ----------------------------------
Net Income $ 35,302 $38,816
-------------------------------------------------------------------------------------- ----------------------------------
Earnings Per Average Common Share Equivalent:
Net income:
Basic $0.61 $0.67
-------------------------------------------------------------------------------------- ----------------------------------
Diluted $0.55 $0.60
-------------------------------------------------------------------------------------- ----------------------------------
1 Tax equivalent at the statutory federal and state rates for the periods
presented. The taxable equivalent adjustments shown are for comparative
purposes.
2 The loan averages included loans on which the accrual of interest has been
discontinued and are stated net of unearned income. See Note 1 of Notes to
the Consolidated Financial Statements for a description of income recognition
policy.
3 Yield calculations exclude security trades that have been recorded on trade
date with no corresponding interest income.
80
Three Months Ended
--------------------------------------------------------------------------------------------------------------
June 30, 2003 March 31, 2003 December 31, 2002
---------------------------------- ----------------------------------- -----------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate Balance Expense(1) Rate
---------------------------------- ----------------------------------- -----------------------------------
$ 4,388,733 $46,911 4.30% $4,145,472 $45,134 4.64% $ 4,000,780 $45,710 4.76%
185,908 3,179 6.86 197,902 3,387 6.94 194,586 3,407 6.95
---------------------------------- ----------------------------------- -----------------------------------
4,574,641 50,090 4.41 4,343,374 48,521 4.75 4,195,366 49,117 4.87
---------------------------------- ----------------------------------- -----------------------------------
12,207 136 4.47 10,342 116 4.55 8,639 87 4.00
16,669 59 1.42 29,392 106 1.46 24,856 92 1.47
6,970,905 92,576 5.33 6,949,113 94,612 5.52 6,761,498 95,864 5.62
123,095 - - 119,959 - - 114,711 - -
---------------------------------- ----------------------------------- -----------------------------------
6,847,810 92,576 5.42 6,829,154 94,612 5.62 6,646,787 95,864 5.72
---------------------------------- ----------------------------------- -----------------------------------
11,451,327 142,861 5.01 11,212,262 143,355 5.28 10,875,648 145,160 5.39
---------------------------------- ----------------------------------- -----------------------------------
1,207,690 1,154,403 1,057,625
---------------------------------- ----------------------------------- -----------------------------------
$12,659,017 $12,366,665 $11,933,273
---------------------------------- ----------------------------------- -----------------------------------
$ 3,523,932 $ 7,992 0.91% $3,288,874 $ 8,777 1.08% $ 2,988,986 $ 9,648 1.28%
172,258 183 0.43 168,730 306 0.74 173,286 491 1.12
3,491,055 24,688 2.84 3,399,813 25,994 3.10 3,248,364 25,531 3.12
---------------------------------- ----------------------------------- -----------------------------------
7,187,245 32,863 1.83 6,857,417 35,077 2.07 6,410,636 35,670 2.21
---------------------------------- ----------------------------------- -----------------------------------
1,515,597 4,080 1.08 1,420,781 4,023 1.15 1,523,923 5,471 1.42
1,053,573 4,604 1.75 1,059,201 4,921 1.88 1,084,616 5,751 2.10
155,078 2,420 6.26 155,304 2,420 6.32 169,874 2,580 6.03
---------------------------------- ----------------------------------- -----------------------------------
9,911,493 43,967 1.78 9,492,703 46,441 1.98 9,189,049 49,472 2.14
---------------------------------- ----------------------------------- -----------------------------------
1,252,076 1,292,077 1,310,932
332,430 465,820 378,573
1,163,018 1,116,065 1,054,719
---------------------------------- ----------------------------------- -----------------------------------
$12,659,017 $12,366,665 $11,933,273
---------------------------------- ----------------------------------- -----------------------------------
$98,894 3.23% $96,914 3.30% $95,688 3.25%
3.47 3.57 3.55
1,327 1,403 1,404
---------------------------------- ----------------------------------- -----------------------------------
97,567 95,511 94,284
9,503 9,912 10,001
87,282 81,231 79,807
111,864 99,155 105,081
---------------------------------- ----------------------------------- -----------------------------------
63,482 67,675 59,009
22,707 24,208 20,858
---------------------------------- ----------------------------------- -----------------------------------
$40,775 $43,467 $38,151
---------------------------------- ----------------------------------- -----------------------------------
$0.71 $0.76 $0.67
---------------------------------- ----------------------------------- -----------------------------------
$0.63 ` $0.67 $0.60
---------------------------------- ----------------------------------- -----------------------------------