13
Table 1 Consolidated Selected Financial Data
(Dollars In Thousands Except Per Share Data)
December 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
---------------------------------------------------------------------
Selected Financial Data
For the year:
Interest revenue $ 614,284 $ 565,173 $ 574,913 $ 654,633 $ 638,730
Interest expense 191,041 173,678 205,581 325,159 369,052
Net interest revenue 423,243 391,495 369,332 329,474 269,678
Provision for credit losses 20,439 35,636 33,730 37,610 17,204
Net income 179,023 158,360 147,871 114,439 98,665
Period-end:
Loans, net of reserve 7,820,349 7,369,105 6,797,132 6,206,190 5,445,679
Assets 14,395,414 13,595,598 12,263,233 11,158,701 9,762,022
Deposits 9,674,398 9,219,863 8,128,525 6,905,744 6,046,005
Subordinated debenture 151,594 154,332 155,419 186,302 148,816
Shareholders' equity 1,398,494 1,228,630 1,099,526 832,866 706,793
Nonperforming assets (2) 56,423 59,867 56,574 50,708 43,599
Profitability Statistics
Earnings per share (based on average equivalent shares):
Basic $ 3.00 $ 2.67 $ 2.59 $ 2.02 $ 1.75
Diluted 2.68 2.38 2.30 1.81 1.57
Pro forma diluted earnings per share with
FAS 142 and FAS 147 2.68 2.38 2.30 1.95 1.66
Percentages (based on daily averages):
Return on average assets 1.28% 1.24% 1.31% 1.12% 1.13%
Return on average shareholders' equity 13.80 13.66 15.75 14.65 16.18
Average shareholders' equity to average assets 9.25 9.07 8.30 7.62 7.01
Common Stock Performance
Per Share:
Book value per common share $ 23.28 $ 20.60 $ 18.56 $ 14.62 $ 12.49
Market price: December 31 close 48.76 38.72 32.39 31.51 21.25
Market range - High trade 49.18 41.02 36.52 32.75 21.25
- Low trade 37.29 31.00 26.80 21.31 15.31
Selected Balance Sheet Statistics
Period-end:
Tier 1 capital ratio 10.02% 9.15% 8.98% 8.08% 8.06%
Total capital ratio 11.67 11.31 11.95 11.56 11.23
Leverage ratio 7.94 7.17 6.88 6.38 6.51
Reserve for loan losses to nonperforming loans 206.26 217.89 208.31 204.71 181.60
Reserve for loan losses to loans (1) 1.38 1.55 1.53 1.46 1.32
Combined reserves for credit losses to loans (1), (4) 1.61 1.73 1.72 1.66 1.51
Miscellaneous (at December 31)
Number of employees (full-time equivalent) 3,548 3,449 3,402 3,392 3,003
Number of banking locations 149 142 130 114 105
Number of TransFund locations 1,389 1,442 1,390 1,325 1,111
Mortgage loan servicing portfolio (3) $4,486,513 $4,746,279 $5,754,548 $ 6,645,868 $6,874,995
------------------------------------------------------------------------------------------------------------------------------
<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 affiliates.
(4) Includes reserve for loan losses and reserve for off-balance sheet credit losses.
</FN>
14
MANAGEMENT'S ASSESSMENT OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
BOK Financial Corporation ("BOK Financial" or "the Company") is a financial
holding company that offers full service banking in Oklahoma, Northwest
Arkansas, Dallas and Houston, Texas, Albuquerque, New Mexico and Denver,
Colorado. The Company was incorporated in 1990 in Oklahoma and is headquartered
in Tulsa, Oklahoma. Activities are governed by the Bank Holding Company Act of
1956, as amended by the Financial Services Modernization Act or
Gramm-Leach-Bliley Act. Principal subsidiaries are Bank of Oklahoma, N.A.
("BOk"), Bank of Albuquerque, N.A., Bank of Arkansas, N.A., Bank of Texas, N.A.
("BOTX") 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.
Our overall strategic objective is to emphasize growth in long-term value
by building on our leadership position in Oklahoma and expanding into
high-growth markets in contiguous states. We have a solid position in Oklahoma
and are the state's largest financial institution as measured by deposit market
share. Since 1997, we have expanded into Dallas and Houston, Texas, Albuquerque,
New Mexico, Denver, Colorado, and have recently announced plans to expand into
Phoenix, Arizona.
Our primary focus is to provide a broad range of financial products and
services, including loans and deposits, cash management services, fiduciary
services, mortgage banking, and brokerage and trading services to middle-market
businesses, financial institutions, and consumers. Our revenue sources are
diversified. Approximately 42% of our revenue comes from commissions and fees.
Commercial banking is a significant part of our business. Our credit
culture emphasizes building relationships by making high-quality loans and
providing a full range of financial products and services to our customers.
Our acquisition strategy targets quality organizations that have
demonstrated solid growth in their business lines. We provide additional growth
opportunities by hiring talent to enhance competitiveness, adding locations, and
broadening product offerings. Our operating philosophy embraces local
decision-making through the boards of directors for each of our bank
subsidiaries.
BOK Financial operates five principal lines of business: Oklahoma corporate
banking, Oklahoma consumer banking, mortgage banking, wealth management, and
regional banks. Mortgage banking activities include loan origination and
servicing across all markets served by the Company. Wealth management provides
brokerage and trading, private financial services and investment advisory
services in all markets. It also provides fiduciary services in all markets
except Colorado. Fiduciary services in Colorado are included in regional banks.
Regional banks consist primarily of corporate and consumer banking activities in
the respective local markets.
SUMMARY OF PERFORMANCE
BOK Financial's net income for 2004 totaled $179.0 million or $2.68 per
diluted share, compared with $158.4 million or $2.38 per diluted share in 2003
and $147.9 million or $2.30 per diluted share in 2002. Prior years' earnings per
share have been restated for a 3% stock dividend in 2004. Returns on average
assets and shareholders' equity were 1.28% and 13.80%, respectively for 2004,
compared with returns of 1.24% and 13.66%, respectively, for 2003, and 1.31% and
15.75%, respectively, for 2002. The decrease in return on equity between 2003
and 2002 resulted from a 24% increase in average equity due to retained earnings
and a full year's effect of an acquisition-related stock issuance during the
fourth quarter of 2002.
Growth in net income for 2004 was attributed to two primary factors, net
interest revenue and provision for credit losses. Net interest revenue grew
$31.7 million or 8% during 2004 due to increases in average loans and
securities. The growth in net interest revenue also reflected a one basis point
increase in net interest margin for the year. The provision for credit losses
decreased $15.2 million compared to the previous year as credit quality
continued to improve throughout 2004.
Fees and commissions revenue increased $6.3 million or 2% compared with
last year and represented 42% of total revenue, excluding net securities and
derivatives losses. Trust fees, deposit fees and transaction card revenue grew
by a combined total of $30.9 million. This increased revenue was partially
offset by a $24.1 million decrease in mortgage banking revenue.
Operating expenses increased $27.8 million or 7% compared with 2003 due
primarily to increased personnel and data processing costs.Personnel costs
increased $17.7 million, including $8.2 million from CSBT, which was acquired in
September 2003. Additionally, stock-based compensation expense, which is based
largely on the current market value of our common stock, increased $5.8 million.
Data processing expense increased $6.6 million, including $4.6 million directly
related to higher transaction card processing volumes.
Net income for the fourth quarter of 2004 totaled $46.6 million or 70 cents
per diluted share compared with $35.3 million or
15
53 cents per diluted share for the fourth quarter of 2003. In addition to the
effects of increased net interest revenue and credit quality, earnings for the
fourth quarter of 2004 included an after-tax gain of $2.5 million or 4 cents per
diluted share from the sale of equity securities that had been acquired in prior
years from resolution of a problem loan.
CRITICAL ACCOUNTING POLICIES
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Preparation of our consolidated financial statements is based on the
selection of certain accounting policies, which requires management to make
significant assumptions and estimates. The following discussion addresses the
most critical areas where these assumptions and estimates could affect financial
condition and results of operations. Application of these critical accounting
policies and estimates has been discussed with the appropriate committees of the
Board of Directors. No accounting standards with significant effects on our
financial condition or results of operations were initially adopted in 2004.
RESERVES FOR LOAN LOSSES AND OFF-BALANCE SHEET CREDIT LOSSES
Reserves for loan losses and off-balance sheet credit losses are assessed
by management based on an ongoing evaluation of the probable estimated losses
inherent in the portfolio and probable estimated losses on unused commitments to
provide financing. A consistent, well-documented methodology has been developed
that includes reserves assigned to specific loans and commitments, general
reserves that are based on a statistical migration analysis and nonspecific
reserves that are based on analysis of current economic conditions, loan
concentrations, portfolio growth and other relevant factors.
A Credit Administration department independent of lending management is
responsible for performing this evaluation for all of our subsidiaries to ensure
that the methodology is applied consistently.
All significant loans and commitments that exhibit weaknesses or
deteriorating trends are reviewed at least 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.
General reserves for commercial and commercial real estate loan losses, and
related commitments, are determined primarily through an internally developed
migration analysis model. The purpose of this model is to determine the
probability that each credit relationship 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 loss percentage. 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 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
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
16
daily for changes in market conditions. At least annually, we request estimates
of fair value from outside sources to corroborate the results of the valuation
model.
The assumptions used in this model are primarily based on mortgage interest
rates. A 50 basis point increase in mortgage interest rates is expected to
increase the fair value of our servicing rights by $6.3 million. A 50 basis
point decrease in mortgage interest rates is expected to decrease the fair value
of our servicing rights by $10.4 million. Actual changes in fair values may
differ from these expected changes.
Permanent impairment of mortgage servicing rights is evaluated quarterly. A
strata is considered to be permanently impaired if the fair value does not
exceed amortized cost after assuming a 300 basis point increase in mortgage
interest rates. The amortized cost of the asset is reduced to the calculated
fair value through a charge against the valuation allowance.
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, which consist primarily of goodwill, core deposit
intangible assets and other acquired intangibles, for each business unit are
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 a five-year period 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, 2004, Bank of Texas had $155 million or 70% of total
goodwill and CSBT had $42 million or 19% of total goodwill. Because of the large
concentration of goodwill in these business units, 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.
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, commodity,
and foreign exchange derivative contracts to our customers. All derivative
instruments are carried on the balance sheet at fair value. Fair values for
exchange-traded contracts are based on quoted prices. Fair values for
over-the-counter interest rate contracts used to manage our interest rate risk
are provided either by third-party dealers in the contracts or by quotes
provided by independent pricing services.
Interest rate, commodity and foreign exchange contracts used in our
customer hedging programs are valued internally using a third-party provided
pricing model. This model uses market inputs to estimate fair values. Changes in
assumptions used in this pricing model could significantly affect the reported
fair values of derivative assets and liabilities, though the net effect of these
changes should not significantly affect the Company's earnings. Fair values
determined by the internal model are corroborated by comparison against
third-party dealer provided values monthly.
ASSESSMENT OF OPERATIONS
NET INTEREST REVENUE
Tax-equivalent net interest revenue totaled $428.3 million for 2004
compared to $396.7 million for 2003. The increase was due primarily to a $885
million increase in average earning assets. The growth in average earning assets
included a $355 million increase in securities and a $543 million increase in
loans. This increase in average earning assets was funded primarily by a $428
million increase in interest-bearing liabilities and a $496 million increase in
demand deposit accounts. 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 increased slightly during 2004. The net interest margin, the
ratio of tax-equivalent net interest revenue to average earning assets increased
to 3.45% in 2004 compared with 3.44% in 2003. Growth in non-interest bearing
funding sources, primarily demand deposits, increased the net interest margin
eight basis points for the year. This increase was partially offset by a
decrease in the spread between yields on average earning assets and the cost of
interest bearing liabilities. The narrowed spread decreased the net interest
margin by seven basis points compared with 2003.
17
Table 2 Volume/Rate Analysis
(In Thousands)
2004/2003 2003/2002
------------------------------------- ------------------------------------
Change Due To (1) Change Due To (1)
------------------------ ------------------------
Change Volume Yield/Rate Change Volume Yield/Rate
------------------------------------- ------------------------------------
Tax-equivalent interest revenue:
Securities $ 16,448 $ 16,607 $ (159) $(8,583) $31,722 $(40,305)
Trading securities (65) (38) (27) (56) 129 (185)
Loans 32,525 28,878 3,647 (2,040) 39,229 (41,269)
Funds sold and resell agreements 72 (91) 163 (10) 149 (159)
- ----------------------------------------------------------------------------------------------------------------------------
Total 48,980 45,356 3,624 (10,689) 71,229 (81,918)
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Transaction deposits 4,171 2,305 1,866 (7,927) 9,169 (17,096)
Savings deposits 31 (19) 50 (1,032) 60 (1,092)
Time deposits 8,302 4,288 4,014 (4,578) 12,034 (16,612)
Funds purchased and repurchase agreements 5,550 868 4,682 (9,628) (157) (9,471)
Other borrowings 1,025 (743) 1,768 (7,464) (311) (7,153)
Subordinated debenture (1,716) (110) (1,606) (1,274) (1,622) 348
- ----------------------------------------------------------------------------------------------------------------------------
Total 17,363 6,589 10,774 (31,903) 19,173 (51,076)
- ----------------------------------------------------------------------------------------------------------------------------
Tax-equivalent net interest revenue 31,617 $ 38,767 $ (7,150) 21,214 $52,056 $(30,842)
----------------------- -------------------------
Decrease in tax-equivalent adjustment 131 949
- ---------------------------------------------------------- -------------
Net interest revenue $ 31,748 $22,163
- ---------------------------------------------------------- -------------
4th Qtr 2004/4th Qtr 2003
------------------------------------
Change Due To (1)
------------------------
Change Volume Yield/Rate
------------------------------------
Tax-equivalent interest revenue:
Securities $ 4,355 $ 2,926 $ 1,429
Trading securities (40) (68) 28
Loans 15,233 6,856 8,377
Funds sold and resell agreements 105 20 85
- ---------------------------------------------------------------------------------------------------------------
Total 19,653 9,734 9,919
- ---------------------------------------------------------------------------------------------------------------
Interest expense:
Transaction deposits 3,402 (120) 3,522
Savings deposits (24) (28) 4
Time deposits 4,492 1,653 2,839
Funds purchased and repurchase agreements 4,476 231 4,245
Other borrowings 1,888 (129) 2,017
Subordinated debenture (287) (28) (259)
- --------------------------------------------------------------------------------------------------------------
Total 13,947 1,579 12,368
- --------------------------------------------------------------------------------------------------------------
Tax-equivalent net interest revenue 5,706 $ 8,155 $ (2,449)
-----------------------
Increase in tax-equivalent adjustment (449)
- -------------------------------------------------------------------------------------
Net interest revenue $ 5,257
- -------------------------------------------------------------------------------------
<FN>
(1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.
</FN>
Management regularly models the effects of changes in interest rates on net
interest revenue. This modeling indicates that the Company expects to benefit
modestly from rising interest rates over a one-year forward-looking period.
However, other factors may affect this general expectation. For example,
throughout 2004, the spread between rates charged on loans and related funding
sources narrowed due to competitive pressures. The result was that the loan
portfolio's yield increased less than the increase in market interest rates.
Additionally, we have a large portion of our securities portfolio in
mortgage-backed securities. The yield on these securities is higher than
alternative investments that fit our investment policy. However, the spread on
mortgage-backed securities compared to other investments narrowed during the
year, which resulted in a tax-equivalent yield on the securities portfolio that
was unchanged compared to 2003.
Our overall objective is to manage the Company's balance sheet to be
essentially neutral to changes in interest rates. Approximately 73% of our
commercial loan portfolio is either variable rate or fixed rate that will
reprice within one year. These loans are funded primarily by deposit accounts
that are either non-interest-bearing, or that reprice more slowly than the
loans. The result is a balance sheet that is asset sensitive, which means that
assets generally reprice more quickly than liabilities. Among
18
the strategies that we use to achieve a rate-neutral position, we purchase
fixed-rate, mortgage-backed securities and fund them with short-term borrowings.
The average life of these securities is expected to be approximately 3 years
based on a range of interest rate and prepayment assumptions. The funds borrowed
to purchase these securities generally reprice within 90 days. The
liability-sensitive nature of this strategy provides an offset to the
asset-sensitive characteristics of our loan portfolio.
We also use derivative instruments to manage our interest rate risk. We
have interest rate swaps with a combined notional amount of $539 million that
convert fixed rate liabilities to floating rate based on LIBOR. The purpose of
these derivatives, which generally have been designated as fair value hedges, is
to reduce the asset-sensitive nature of our balance sheet. We also have interest
rate swaps with a notional amount of $100 million that convert prime-based loans
to fixed rate. The purpose of these derivatives, which have been designated as
cash flow hedges, also is to reduce the asset-sensitive nature of our balance
sheet.
The effectiveness of these strategies is reflected in the overall change in
net interest revenue due to changes in interest rates as shown in Table 2 and in
the interest rate sensitivity projections as shown in the Market Risk section of
this report.
FOURTH QUARTER 2004 NET INTEREST REVENUE
Tax-equivalent net interest revenue for the fourth quarter of 2004 totaled
$108.1 million, compared to $102.4 million for the fourth quarter of 2003. The
increase was due to growth in average earning assets, which increased $832
million or 7%. Net interest margin declined two basis points to 3.38% as rising
interest rates affected funding sources more than earning assets. As previously
noted, the Company expects to benefit modestly from rising interest rates over a
forward-looking one-year period. However, the net interest margin may decrease
as rates rise over shorter time periods. Also, competitive and other factors may
affect the amount of benefit derived from rising rates.
2003 NET INTEREST REVENUE
Tax-equivalent net interest revenue for 2003 was $396.7 million, a $21.2
million or 6% increase from 2002. This increase was due to growth in average
earning assets. As shown in Table 2, net interest revenue increased $52.1
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
$30.8 million decrease due to falling yields and rates. Net interest margin for
2003 was 3.44%, down 27 basis points from 3.71% in 2002. This reduction in net
interest margin reflected both a decrease in the spreads between earning assets
and interest bearing liabilities as interest rates fell and a reduction in the
portion of earning assets funded by non-interest bearing sources.
OTHER OPERATING REVENUE
Other operating revenue increased $4.0 million compared with last year due
to a $6.3 million increase in fees and commission revenue, partially offset by
an increase in net losses on securities and derivatives. Diversified sources of
fees and commission revenue are a significant part of our business strategy and
represented 42% of total revenue, excluding gains and losses on securities and
derivatives. A diversified source of fee revenues can provide an offset to
adverse changes in interest rates, values in the equity markets, commodity
prices and consumer spending, all of which can be volatile. We expect continued
growth in other operating revenue through offering new products and services and
by expanding into new markets. However, increased competition and saturation in
our existing markets could affect the rate of future increases.
19
Table 3 Other Operating Revenue
(In Thousands)
Years ended December 31,
-------------------------------------------------------------
2004 2003 2002 2001 2000
-------------------------------------------------------------
Brokerage and trading revenue $ 41,107 $ 41,152 $ 26,290 $ 19,974 $ 15,146
Transaction card revenue 64,816 57,352 52,213 44,231 38,902
Trust fees and commissions 57,532 45,763 40,092 40,567 39,316
Service charges and fees on deposit accounts 93,712 82,042 67,632 51,284 42,932
Mortgage banking revenue 28,189 52,336 48,910 50,155 37,179
Leasing revenue 3,118 3,508 3,330 3,745 4,244
Other revenue 24,091 24,065 19,094 19,507 17,965
- -------------------------------------------------------------------------------------------------------------------------
Total fees and commissions 312,565 306,218 257,561 229,463 195,684
- -------------------------------------------------------------------------------------------------------------------------
Gain on sale of assets 887 822 1,157 557 381
Gain (loss) on securities, net (3,088) 7,188 58,704 30,640 2,059
Gain (loss) on derivatives, net (1,474) (9,375) 5,236 (3,812) -
- -------------------------------------------------------------------------------------------------------------------------
Total other operating revenue $ 308,890 $304,853 $322,658 $256,848 $ 198,124
- -------------------------------------------------------------------------------------------------------------------------
FEES AND COMMISSIONS REVENUE
Brokerage and trading revenue was slightly reduced compared with 2003.
Revenue from securities trading activities declined $5.2 million, or 18%. The
dollar volume and number of transactions processed both increased. However, the
mix of products sold shifted to lower-margin securities compared to the previous
year. The decrease in securities trading revenue was partially offset by a $3.8
million increase in customer hedging revenue. Volatility in the energy markets
during 2004 prompted our energy customers to more actively hedge their gas and
oil production.
Transaction card revenue increased $7.5 million or 13% due to growth in
merchant discount fees, ATM fees and check card revenue. Revenue growth from
each of these activities was due to growth in transaction volume. During 2004,
one of our customers was acquired by another financial institution, which
reduced the number of ATMs serviced by TransFund. This will reduce our
short-term revenue growth from TransFund.
Trust fees increased $11.8 million or 26%, including a $4.9 million
increase from the CSBT acquisition. The fair value of all trust relationships
managed by the Company, which is the basis for a significant portion of trust
fees increased to $24.6 billion at December 31, 2004 compared with $21.3 billion
at December 31, 2003.
Service charges on deposit accounts increased $11.7 million, or 14%
compared with 2003. Approximately $11.3 million of this increase was due to
growth in overdraft fees. Account service charge revenue increased 2% in 2004
after growing by 10% in the previous year. The lower growth rate reflected the
change in earnings credit available to commercial deposit customers as interest
rates rose.
Mortgage banking revenue, which is discussed more fully in the Line of
Business - Mortgage Banking section of this report decreased $24.1 million, or
46% compared with 2003. Much of the mortgage banking revenue in 2003 was
generated by refinancing activity. Loan refinancing was significantly reduced in
2004 due to rising mortgage interest rates.
SECURITIES AND DERIVATIVES
BOK Financial realized net losses on securities of $3.1 million in 2004
compared to net gains of $7.2 million last year. These amounts included net
losses on securities held as economic hedges of the mortgage servicing rights of
$4.9 million in 2004, compared with net gains on hedge securities of $4.0
million in 2003. The Company's use of securities as an economic hedge of
mortgage servicing rights is more-fully discussed in the Line of Business -
Mortgage Banking section of this report.
20
Net gains of $1.8 million were realized during 2004 on sales of securities,
excluding the mortgage servicing hedge. This is compared with net gains of $3.2
million realized in 2003. The Company buys and sells securities as necessary to
maximize the portfolio's total return and to manage prepayment or extension
risk.
During 2004, the Company recognized net losses of $1.3 million on
derivatives used to manage interest rate risk and $208 thousand on derivatives
used as an economic hedge of mortgage servicing rights. These losses are
compared with net losses of $9.4 million in 2003. As more fully discussed in the
Deposits and Borrowings and Capital sections of this report, the Company
designated derivatives as fair value hedges of certain brokered certificates of
deposit and subordinated debt in 2004. Net losses recognized included fair value
adjustments for both the derivatives and the hedged liabilities. No derivatives
were designated as fair value hedges in 2003.
FOURTH QUARTER 2004 OPERATING REVENUE
Other operating revenue for the fourth quarter of 2004 totaled $78.7
million, including net fees and commission revenue of $77.9 million and net
gains on securities and derivatives of $793 thousand. Fees and commission
revenue totaled $74.6 million and net losses on securities and derivatives
totaled $3.2 million for the fourth quarter of 2003. Trust fees rose 14% to
$14.8 million due to growth in the fair value of trust assets. Transaction card
revenue increased 10% to $16.6 million due to growth in processing volumes.
Growth in deposit fees totaled $991 thousand or 4%. Mortgage banking revenue
decreased $1.2 million, or 16% due to reductions in both mortgage loan
production and servicing revenue.
Net gains on securities sold during the fourth quarter of 2004 totaled $967
thousand, including net gains of $871 thousand on securities designated as
economic hedges of the mortgage servicing portfolio. These results compare with
net losses on securities sold during the fourth quarter of 2003 of $951
thousand, including $757 thousand of losses on securities used to hedge mortgage
servicing rights.
Mark-to-market losses on derivative contracts totaled $174 thousand in the
fourth quarter of 2004 compared with net losses of $2.3 million in 2003. Net
losses on derivatives in the fourth quarter of 2004 included the mark-to-market
adjustments of hedged liabilities.
2003 OTHER OPERATING REVENUE
Operating revenue totaled $304.9 million in 2003, down $17.8 million, or 6%
from 2002. Fees and commissions revenue increased $48.7 million, or 19% due to
growth in all revenue components.
Brokerage and trading revenue was $41.2 million for 2003, compared with
$26.3 million for the previous year. 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 growth in overdraft fees. 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.
Net gains on securities sold during 2003 totaled $7.2 million, compared
with net gains of $58.7 million in 2002. These amounts included net gains on
sales of securities held as economic hedges of 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 2003 and 2002. While
securities were sold during 2003 to manage the portfolio's duration,
consistently low interest rates presented fewer opportunities to recognize
gains.
Derivative instruments, which we used primarily to manage interest rate
risk, resulted in mark-to-market losses of $9.4 million in 2003 compared to
gains of $5.2 million in 2002. We had not designated these derivatives as hedges
for accounting purposes.
OTHER OPERATING EXPENSE
Other operating expense for 2004 totaled $441.2 million, a 7% increase from
2003. This increase resulted primarily from personnel and data processing
expenses. Growth in personnel expenses were driven largely by the CSBT
acquisition and stock-based compensation costs. The increase in data processing
expenses included both transaction volume and system maintenance costs.
21
Table 4 Other Operating Expense
(In Thousands)
Years ended December 31,
--------------------------------------------------------------------
2004 2003 2002 2001 2000
--------------------------------------------------------------------
Personnel expense $240,661 $222,922 $ 187,439 $166,864 $148,614
Business promotion 15,618 12,937 11,367 10,658 8,395
Contribution of stock to BOK Charitable Foundation 5,561 - - - -
Professional fees and services 15,487 17,935 12,987 13,391 9,618
Net occupancy and equipment 47,289 45,967 42,347 42,764 35,447
Data processing and communications 60,025 53,398 45,912 39,763 35,111
Printing, postage and supplies 14,034 13,930 12,665 12,329 11,260
Net (gain) loss and operating expenses on
repossessed assets (4,016) 271 1,014 1,401 (1,283)
Amortization of intangible assets 8,138 8,101 7,638 20,113 15,478
Mortgage banking costs 18,167 40,296 42,271 30,261 22,274
Provision (recovery) for impairment of
mortgage servicing rights (1,567) (22,923) 45,923 15,551 2,900
Other expense 21,827 20,604 19,991 18,968 17,412
- ---------------------------------------------------------------------------------------------------------------------------
Total $441,224 $413,438 $ 429,554 $372,063 $305,226
- ---------------------------------------------------------------------------------------------------------------------------
PERSONNEL EXPENSE
Personnel expense increased $17.7 million or 8% to $240.7 million. Regular
compensation expense totaled $146.7 million, an $8.0 million, or 6% increase
over 2003. The increase in regular compensation expense was due to a 5% increase
in average regular compensation per full-time equivalent employee and a 1%
increase in average staffing. The CSBT acquisition increased regular
compensation expense by $5.0 million and the average number of full-time
equivalent employees by 80.
Incentive compensation increased $8.6 million, or 19% to $54.4 million.
Stock-based compensation expense increased $5.9 million or 102%. Much of this
expense is related to stock-based compensation that is recognized as liability
awards. Compensation expense for these awards is based on the excess of the fair
value of BOK Financial common stock over a set exercise price. Incentive
compensation expense for these awards will vary directly with changes in the
fair value of BOKF's common stock. Expense for other incentive compensation
plans increased $2.7 million, or 7% primarily due to revenue growth.
Employee benefit expenses increased $1.9 million, or 5% to $37.8 million.
Retirement benefit costs, including pension and employee thrift plans, increased
$1.4 million, or 15%. Employee insurance costs, which includes medical costs
increased $656 thousand, or 5%.
DATA PROCESSING AND COMMUNICATIONS EXPENSE
Data processing and communication expenses increased $6.6 million, or 12%
compared to 2003. This expense consists of two broad categories, data processing
systems and transaction card processing. Transaction card processing costs
increased $4.6 million or 25% due to growth in processing volumes. Data
processing systems costs increased $2.0 million, or 6% due primarily to
increased maintenance costs.
OTHER OPERATING EXPENSES
BOK Financial contributed appreciated securities to the BOk Charitable
Foundation during 2004. The Foundation supports communities in the markets
served by the Company. The cost-basis in these securities of $5.6 million was
charged to operating expense. The after-tax cost of these contributions reduced
net income by $1.1 million, or 2 cents per diluted share.
Business promotion expense increased $2.7 million or 21% compared with last
year. Promotional activities in support of consumer banking initiatives
accounted for $1.5 million of the increase. Much of the growth in promotional
expenses was targeted at demand deposit growth through our consumer banking
network during 2004.
22
Net gains from the sale of repossessed assets totaled $4.0 million in 2004,
compared to net losses of $271 thousand in 2003. Gains in 2004 included $3.8
million from the sale of stock. This stock had been acquired several years ago
as partial proceeds of the resolution of a troubled loan.
Mortgage banking expenses, including provision for impairment of mortgage
servicing rights decreased $773 thousand, or 4%. These expenses are discussed
more fully in the Line of Business - Mortgage Banking section of this report.
FOURTH QUARTER 2004 OTHER OPERATING EXPENSES
Operating expenses for the fourth quarter of 2004 totaled $111.6 million,
including the previously noted $3.8 million gain on the resolution of
repossessed assets and $1.4 million of the contribution of appreciated
securities to the BOk Charitable Foundation. Excluding these two items,
operating expenses for the fourth quarter of 2004 totaled $114.0 million, a $4.8
million or 4% increase from the fourth quarter of 2003. Personnel costs
increased $3.5 million or 6%. The increase in personnel expense was due
primarily to a $3.2 million increase in stock-based compensation expense.
2003 OTHER OPERATING EXPENSES
Operating expenses for 2003 totaled $413.4 million, a 4% decrease from
2002. This decrease resulted from the provision for impairment of mortgage
servicing rights. The mortgage servicing rights provision shifted from a $45.9
million expense in 2002 to a $22.9 million recovery in 2003 due to slower
prepayment speeds. Excluding the effects of the provision for mortgage servicing
rights, operating expenses increased $52.7 million, or 14%.
Personnel expenses increased $35.5 million, or 19%. Growth in personnel
expenses included a 10% increase in regular compensation due to a 6% increase in
average 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. Employee benefit expenses increased 27%
to $35.9 million due primarily to a 49% increase in medical and insurance costs
and a 21% increase in employee retirement expenses. Several actions were taken
during the fourth quarter of 2003 that were intended to reduce future growth in
personnel expenses, including a 5% reduction in staffing.
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 of $7.5 million, or 16%
included $4.9 million of expenses associated with the conversion of our primary
data processing systems which occurred in the fourth quarter of 2003.
INCOME TAXES
Income tax expense was $91.4 million for 2004, compared with $88.9 million
for 2003 and $80.8 million in 2002. This represented 34%, 36% and 35%
respectively, of book taxable income. Tax expense currently payable totaled
$91.3 million in 2004 compared with $82.6 million in 2003 and $95.9 million in
2002.
Income tax expense for 2004 was reduced by $3.0 million due to the
favorable resolution of state income tax issues and by $2.4 million from the
contribution of appreciated securities to the BOk Charitable Foundation.
Excluding these items, income tax expense would have been $96.9 million, or 36%
of book taxable income.
23
Table 5 Selected Quarterly Financial Data
(In Thousands Except Per Share Data)
Fourth Third Second First
------------------------------------------------
2004
------------------------------------------------
Interest revenue $163,087 $157,027 $147,833 $146,337
Interest expense 56,625 48,642 42,644 43,130
- ---------------------------------------------------------------------------------------------------------------------------
Net interest revenue 106,462 108,385 105,189 103,207
Provision for credit losses 4,439 4,986 3,987 7,027
- ---------------------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 102,023 103,399 101,202 96,180
Other operating revenue 77,921 78,919 80,074 76,538
Gain (loss) on securities, net 967 2,673 (11,005) 4,277
Gain (loss) on derivatives, net (174) (506) 201 (995)
Other operating expense 111,887 108,302 109,857 112,745
Provision (recovery) for impairment of mortgage
servicing rights (305) 5,900 (10,865) 3,703
- ---------------------------------------------------------------------------------------------------------------------------
Income before taxes 69,155 70,283 71,480 59,552
Income tax expense 22,599 22,501 25,947 20,400
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 46,556 $ 47,782 $ 45,533 $ 39,152
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.78 $ 0.79 $ 0.76 $ 0.66
- ---------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.70 $ 0.72 $ 0.68 $ 0.59
- ---------------------------------------------------------------------------------------------------------------------------
Average shares:
Basic 59,251 59,198 59,147 59,051
- ---------------------------------------------------------------------------------------------------------------------------
Diluted 66,895 66,803 66,720 66,672
- ---------------------------------------------------------------------------------------------------------------------------
2003
------------------------------------------------
Interest revenue $143,883 $137,804 $141,534 $141,952
Interest expense 42,678 41,272 43,597 46,131
- ---------------------------------------------------------------------------------------------------------------------------
Net interest revenue 101,205 96,532 97,937 95,821
Provision for credit losses 8,001 8,220 9,503 9,912
- ---------------------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 93,204 88,312 88,434 85,909
Other operating revenue 74,730 80,611 78,403 73,296
Gain (loss) on securities, net (951) (12,007) 10,457 9,689
Loss on derivatives, net (2,259) (4,709) (1,111) (1,296)
Other operating expense 111,475 107,785 109,348 107,753
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 $ 0.59 $ 0.65 $ 0.69 $ 0.74
- ---------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.53 $ 0.58 $ 0.61 $ 0.65
- ---------------------------------------------------------------------------------------------------------------------------
Average shares:
Basic 58,851 58,771 58,648 58,525
- ---------------------------------------------------------------------------------------------------------------------------
Diluted 66,530 66,634 66,506 66,390
- ---------------------------------------------------------------------------------------------------------------------------
24
LINES OF BUSINESS
BOK Financial operates five principal lines of business: Oklahoma corporate
banking, Oklahoma consumer banking, mortgage banking, wealth management, and
regional banking. Mortgage banking activities include loan origination and
servicing across all markets served by the Company. Wealth management provides
brokerage and trading, private financial services and investment advisory
services in all markets. It also provides fiduciary services in all markets
except Colorado. Fiduciary services in Colorado are included in regional
banking. Regional banking consists primarily of corporate and consumer banking
activities in the respective local markets. In addition to its lines of
business, BOK Financial has a funds management unit. The primary purpose of this
unit is to manage the overall liquidity needs and interest rate risk of the
Company. Each line of business borrows funds from and provides funds to the
funds management unit as needed to support their operations.
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.
Economic capital is assigned to the business units by a third-party
developed capital allocation model that reflects management's assessment of
risk. This model assigns capital based upon credit, operating, interest rate and
market risk inherent in our business lines and recognizes the diversification
benefits among the units. The level of assigned economic capital is a
combination of the risk taken by each business line, based on its actual
exposures and calibrated to its own loss history where possible. Additional
capital is assigned to the regional banking line of business based on our
investment in those entities.
As shown in Table 6, the Oklahoma Corporate Banking segment has continued
to be a stable source of earnings. Regional Banking has increased its
contribution to consolidated net income, especially in 2004. The growth of the
regional banking segment is consistent with our corporate strategy of expansion
into high growth markets outside of Oklahoma. The relationship between Mortgage
Banking segment net income and consolidated net income returned to more
historical levels after providing substantial earnings during the 2003 mortgage
refinancing boom.
Table 6 Net Income by Line of Business
(In Thousands)
Years ended December 31,
----------------------------------------
2004 2003 2002
----------------------------------------
Oklahoma corporate banking $ 62,270 $ 58,335 $ 57,137
Regional banking 58,573 42,510 37,754
Mortgage banking 2,681 28,401 1,558
Oklahoma consumer banking 12,064 9,162 6,395
Wealth management 12,394 13,261 7,195
Funds management and other 31,041 6,691 37,832
- -----------------------------------------------------------------------------
Total $179,023 $158,360 $ 147,871
- -----------------------------------------------------------------------------
The variances in contribution to consolidated net income provided by funds
management and other primarily reflect securities and derivatives gains and
losses and the consolidated provision for credit losses over actual losses
charged to the operating segments. Securities and derivatives activities
attributable to funds management and other were net gains of $5.0 million in
2004, net losses of $6.7 million in 2003, and net gains of $33.3 million in
2002. The provision for credit losses attributable to funds management and other
was $14.7 million in 2004, $24.3 million in 2003, and $22.0 million in 2002.
OKLAHOMA CORPORATE BANKING
The Oklahoma Corporate Banking Division provides loan and lease financing
and treasury and cash management services to businesses throughout Oklahoma and
certain relationships in surrounding states. In addition to serving the banking
needs of small businesses, middle market and larger customers, the Oklahoma
Corporate Banking Division has specialized groups that serve customers in the
energy, agriculture, healthcare and banking/finance industries, and includes the
TransFund network. The Oklahoma Corporate Banking Division contributed $62.3
million or 35% to consolidated net income for 2004. This compares to $58.3
million or 37% of consolidated net income for 2003. Growth in net income
provided by the Oklahoma Corporate Banking Division came primarily from net
interest revenue. Net interest revenue from external sources increased due to
loan growth.
25
Operating expenses increased to $97.8 million for 2004 from $85.4 million
for last year. This increase was due primarily to incentive compensation and
transaction processing costs. Net loans charged off for the Oklahoma Corporate
Banking Division totaled $9.0 million, a $1.4 million decrease from 2003.
Average assets increased $503 million or 12% for 2004 due primarily to loan
growth.
Table 7 Oklahoma Corporate Banking
(Dollars in Thousands)
Years ended December 31,
--------------------------------------
2004 2003 2002
--------------------------------------
NIR (expense) from
external sources $ 147,389 $ 139,159 $ 149,385
NIR (expense) from
internal sources (24,016) (24,133) (40,632)
--------------------------------------
Total net interest
revenue 123,373 115,026 108,753
Other operating
revenue 85,256 76,212 69,166
Operating expense 97,759 85,442 77,931
Net loans charged off 8,956 10,318 6,475
Net income 62,270 58,335 57,137
Average assets $4,670,041 $4,166,874 $3,823,116
Average economic capital 312,530 311,140 298,020
Return on assets 1.33% 1.40% 1.49%
Return on economic capital 19.92 18.75 19.17
Efficiency ratio 46.86 44.68 43.80
OKLAHOMA CONSUMER BANKING
The Oklahoma Consumer Banking Division provides a full line of deposit,
loan and fee-based services to customers throughout Oklahoma through four major
distribution channels: traditional branches, supermarket branches, the 24-hour
ExpressBank call center and the Internet. Additionally, the division is a
significant referral source for the Bank of Oklahoma Mortgage Division ("BOk
Mortgage") and BOSC's retail brokerage division. The Oklahoma Consumer Banking
Division contributed $12.1 million or 7% to consolidated net income for 2004.
This compares to $9.2 million or 6% of consolidated net income for 2003. Other
operating revenue growth from 2004 resulted largely from overdraft fees.
During 2004, the Oklahoma Consumer Banking Division added four new
supermarket locations and completed a five-year strategic branch expansion plan.
Growth initiatives focused on building customer relationships through sales
promotions, Perfect Banking sales and service standards and free on-line Billpay
services. Perfect Banking is the name we have given to our ongoing commitment to
constantly improve the way we provide products and services so that we create
lasting client value. These initiatives resulted in a 17% increase in checking
accounts and a 162% increase in the number of on-line Billpay users.
Table 8 Oklahoma Consumer Banking
(Dollars in Thousands)
Years ended December 31,
----------------------------------------
2004 2003 2002
----------------------------------------
NIR (expense) from
external sources $ (19,067) $ (17,146) $ (18,036)
NIR (expense) from
internal sources 64,897 58,290 61,616
----------------------------------------
Total net interest
revenue 45,830 41,144 43,580
Other operating
revenue 56,920 47,544 39,032
Operating expense 76,042 66,803 64,315
Net loans charged off 6,963 6,888 7,831
Net income 12,064 9,162 6,395
Average assets $2,746,047 $ 2,524,743 $2,349,611
Average economic capital 64,390 58,000 60,910
Return on assets 0.44% 0.36% 0.27%
Return on economic capital 18.74 15.80 10.50
Efficiency ratio 74.01 75.32 77.85
MORTGAGE BANKING
BOK Financial engages in mortgage banking activities through the BOk
Mortgage Division of Bank of Oklahoma. These activities include the origination,
marketing and servicing of conventional and government-sponsored mortgage loans.
Consolidated mortgage banking revenue, which is included in other operating
revenue, decreased $24.1 million or 46% compared with 2003. Mortgage banking
activities contributed $2.7 million or 1% to consolidated net income in 2004
compared to $28.4 million or 18% in 2003. Rising mortgage interest rates during
late 2003 and the first half of 2004 significantly decreased refinancing
activity and loan production income.
Mortgage banking activities consisted of two sectors, loan production and
loan servicing. The loan production sector generally performs best when mortgage
rates are relatively low and loan origination volumes are high. Conversely, the
loan servicing sector generally performs best when mortgage rates are relatively
high and prepayments are low.
26
Table 9 Mortgage Banking
(Dollars in Thousands)
Years ended December 31,
-------------------------------------------
2004 2003 2002
-------------------------------------------
NIR (expense) from
external sources $ 21,647 $ 27,770 $ 32,199
NIR (expense) from
internal sources (11,423) (9,415) (13,713)
-------------------------------------------
Total net interest
revenue 10,224 18,355 18,486
Capitalized mortgage
servicing rights 11,365 23,922 20,832
Other operating
revenue 22,055 36,379 38,364
Operating expense 35,415 58,204 54,783
Provision (recovery)
for impairment of
mortgage servicing
rights (1,567) (22,923) 45,923
Gain (loss) on
financial
instruments, net (5,068) 4,025 25,826
Net income 2,681 28,401 1,558
Average assets $559,034 $623,823 $ 671,798
Average economic capital 27,270 34,120 34,160
Return on assets 0.48% 4.55% 0.23%
Return on economic capital 9.83 83.24 4.56
Efficiency ratio 81.53 74.00 70.52
LOAN PRODUCTION SECTOR
Loan production revenue totaled $20.9 million in 2004, including $11.4
million of capitalized mortgage servicing rights, compared to loan production
revenue of $33.8 million in 2003, including $23.9 million of capitalized
mortgage servicing rights. The decrease in loan production revenue was due to
decreased production volume. Mortgage loans funded totaled $633 million in 2004,
including $416 million for home purchases and $217 million of refinanced loans.
Mortgage loans funded in 2003 totaled $1.3 billion, including $457 million for
home purchases and $859 million of refinanced loans. Approximately 71% of the
loans funded during 2004 were in Oklahoma. The decreased volume of loans funded
during 2004 resulted in pre-tax income from loan production of $6.7 million for
2004 compared with $32.0 million for the previous year end. The pipeline of
mortgage loan applications totaled $189 million at December 31, 2004, compared
to $208 million at December 31, 2003.
LOAN SERVICING SECTOR
The loan servicing sector had a pre-tax loss of $4.3 million for 2004
compared to a pre-tax income of $12.9 million for the same period of 2003. The
comparison of operating results between the years was greatly affected by the
effect of interest rates on prepayment speeds and the value of mortgage
servicing rights. Mortgage interest rates were consistently low during 2004. In
this rate environment, the fair value of our mortgage servicing rights was
little-changed. The resulting recovery of provision for mortgage servicing
rights was $1.6 million. In comparison, mortgage interest rates during 2003 were
rising from historic lows. In that rate environment, the fair value of our
mortgage servicing rights increased significantly. The increase in fair value
resulted in a $22.9 million recovery of provision for mortgage servicing rights.
Servicing revenue totaled $17.8 million in 2004 compared to $21.8 million
in 2003. The decrease in servicing revenue was due primarily to a lower
outstanding principal balance of loans serviced. The average outstanding balance
of loans serviced was $4.2 billion during 2004 compared to $4.9 billion during
2003. The decrease in loans serviced reflected both the continued refinancing of
mortgage loans and our decision to curtail purchases of mortgage loan servicing.
This decision also affected the geographic distribution of the loan servicing
portfolio. Approximately 80% of loans serviced were in our primary market areas
at December 31, 2004, compared to 72% at December 31, 2003.
Amortization of mortgage servicing rights, which is included in operating
expense, was $15.8 million in 2004 compared to $35.6 million in 2003.
Amortization expense is determined in proportion to the estimated future cash
flows that will be generated by the mortgage servicing rights. The reduction in
amortization expense in 2004 reflected an expectation of lower loan prepayment
speeds.
The valuation allowance for impairment of mortgage servicing rights totaled
$14 million at December 31, 2004 compared to $32 million at December 31, 2003.
The valuation allowance was reduced by $17 million from the charge-off of
servicing rights determined to be permanently impaired. As discussed in the
Critical Accounting Policies section of this report, servicing rights are
considered to be permanently impaired if the fair value does not exceed
amortized costs after assuming a 300 basis point increase in mortgage interest
rates. Note 8 to the Consolidated Financial Statements presents additional
information about the fair value and amortized cost of servicing rights and
valuation allowance.
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
27
prepayment risks exceed certain levels. Additionally, interest rate derivative
contracts may also be designated as an economic hedge of the risk of loss on
mortgage servicing rights. Because the fair values of these instruments are
expected to vary inversely to the fair value of the servicing rights, they are
expected to partially offset risk. However, no special hedge accounting
treatment is applicable to either the mortgage servicing rights or the financial
instruments designated as an economic hedge. We may sell these securities when
necessary to offset the impairment provision of the mortgage servicing rights.
Derivative contracts used as an economic hedge of mortgage servicing rights are
carried at fair value with changes in fair value recognized in earnings. During
2004, we recognized losses of $5.1 million from hedging activities compared to
gains of $4.0 million in 2003.
This hedging strategy presents certain risks. A well-developed market
determines the fair value for the securities and derivatives. 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, 2004, financial instruments with a fair value of $78
million and an unrealized gain of $523 thousand were held for the economic hedge
program. This unrealized gain, net of income taxes, is included in shareholders'
equity as part of other comprehensive income. The interest rate sensitivity of
the mortgage servicing rights and securities held as an economic hedge is
modeled over a range of +/- 50 basis points. At December 31, 2004, the pre-tax
results of this modeling on reported earnings were:
Table 10 Interest Rate Sensitivity - Mortgage Servicing
(Dollars in Thousands)
50 bp 50 bp
Increase Decrease
------------------------
Anticipated change in:
Fair value of mortgage
servicing rights $6,270 $(10,362)
Fair value of hedging securities (3,489) 4,799
------------------------------------------------------------
Net $2,781 $ (5,563)
------------------------------------------------------------
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 includes 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, Arkansas and New
Mexico. Additionally, trust services include a nationally competitive,
self-directed 401-(k) program and administrative and advisory services to the
American Performance family of mutual funds. Brokerage and trading activities
within the wealth management line of business consists 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 $12.4 million or 7% to consolidated net
income for 2004. This compared to $13.3 million or 8% of consolidated net income
for 2003.
Trust and private financial services provided $10.7 million of net income
in 2004, a 40% increase over 2003. At December 31, 2004 and 2003, the wealth
management line of business was responsible for trust assets with aggregate
market values of $22.6 billion and $19.5 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 $8.2 billion of trust assets
at December 31, 2004 compared to $8.1 billion of trust assets at December 31,
2003. Growth in the fair value of trust assets came primarily in non-managed
assets, which increased by $1.5 billion, or 20%, and custodial assets which
increased by $1.5 billion, or 41%.
28
Brokerage and trading activities provided $1.7 million of net income in
2004 compared to $5.7 million in the previous year. Operating revenue decreased
$6.5 million or 14% due to reduction in trading revenue and financial advisory
fees. The reduction in trading revenue resulted from a shift in the mix of
products sold to lower-margin securities during 2004. This decrease in trading
revenue was partially offset by fees generated by customer hedging activities.
Table 11 Wealth Management
(Dollars in Thousands)
Years ended December 31,
--------------------------------------
2004 2003 2002
--------------------------------------
NIR (expense) from
external sources $ 4,001 $ 1,966 $ 1,959
NIR (expense) from
internal sources 8,888 8,968 8,182
--------------------------------------
Total net interest
revenue 12,889 10,934 10,141
Other operating
revenue 91,533 91,587 70,001
Operating expense 84,062 80,428 67,911
Net income 12,394 13,261 7,195
Average assets $ 754,774 $ 731,070 $556,109
Average economic capital 84,820 69,690 60,880
Return on assets 1.64% 1.81% 1.29%
Return on economic capital 14.61 19.03 11.82
Efficiency ratio 80.50 78.45 84.74
REGIONAL BANKING
Regional banking consists primarily of the corporate and commercial banking
services provided by Bank of Texas, Bank of Albuquerque, Bank of Arkansas, and
Colorado State Bank and Trust in their respective markets. It also includes
fiduciary services provided by Colorado State Bank and Trust. Small businesses
and middle-market corporations are the regional banks' primary customer focus.
Regional banks contributed $58.6 million or 33% to consolidated net income
during 2004. This compares with $42.5 million or 27% of consolidated net income
in 2003. Growth in net income contributed by the regional banks came primarily
from operations in Texas and New Mexico. Net income for 2004 in Texas and New
Mexico increased $12.8 million and $3.2 million, respectively, from the previous
year.
Growth in net income from Texas operations resulted from an increase in net
interest revenue, combined with a reduction in operating expenses. Average
earning assets increased $278 million, including $98 million of loans and $180
million of funds sold to the funds management unit. The growth in average
earning assets was funded by a $165 million increase in interest-bearing
deposits and a $101 million increase in demand deposits. Personnel expenses
decreased $1.2 million due to lower regular and incentive compensation costs.
Bank of Texas shared some of the Consumer Banking Division's initiatives
during 2004. Seven new supermarket branches were added in Texas. The Perfect
Banking sales and service program which had been adopted in Oklahoma in 2003 was
launched in Texas in 2004. This program resulted in a 65% increase in sales
points, one of the measures we use to track branch performance.
The increase in net income from New Mexico operations was also based
largely on an increase in net interest revenue, combined with an increase in
operating revenue. Average earning assets increased $102 million, including $44
million of loans and $61 million of funds sold to the funds management unit.
This growth in average earning assets was partially offset by a reduction in
securities. Average deposits in the New Mexico market increased $102 million,
including $74 million of interest-bearing deposits and $28 million of demand
deposits. The increase in operating revenue was due primarily to growth in
deposit fees.
29
Table 12 Bank of Texas
(Dollars in Thousands)
Years ended December 31,
----------------------------------------
2004 2003 2002
----------------------------------------
NIR (expense) from external sources $ 122,552 $ 108,408 $ 94,731
NIR (expense) from internal sources (7,322) (6,949) (9,133)
----------------------------------------
Total net interest revenue 115,230 101,459 85,598
Other operating revenue 25,408 21,591 17,732
Operating expense 74,837 76,330 62,206
Gains on sales of
financial instruments, net - 56 1,461
Net loans charged off 3,928 4,301 2,614
Net income 40,256 27,493 25,822
Average assets $3,224,721 $2,946,553 $2,452,877
Average economic capital 168,430 166,870 126,160
Average invested capital 335,520 333,960 293,250
Return on assets 1.25% 0.93% 1.05%
Return on economic capital 23.90 16.48 20.47
Return on average invested capital 12.00 8.23 8.81
Efficiency ratio 53.21 63.00 61.14
Table 13 Bank of Albuquerque
(Dollars in Thousands)
Years ended December 31,
----------------------------------------
2004 2003 2002
----------------------------------------
NIR (expense) from external sources $ 46,845 $ 42,046 $ 37,505
NIR (expense) from internal sources (5,033) (4,315) (4,663)
----------------------------------------
Total net interest revenue 41,812 37,731 32,842
Other operating revenue 14,561 10,789 8,330
Operating expense 31,869 29,730 25,835
Gains on sales of
financial instruments, net - 283 2,726
Net loans charged off 1,471 1,326 1,101
Net income 14,074 10,844 10,364
Average assets $ 1,652,006 $1,550,241 $1,335,814
Average economic capital 73,270 66,070 56,740
Average invested capital 92,360 85,160 75,830
Return on assets 0.85% 0.70% 0.78%
Return on economic capital 19.21 16.41 18.27
Return on average invested capital 15.24 12.73 13.67
Efficiency ratio 56.53 61.84 63.32
Table 14 Bank of Arkansas
(Dollars in Thousands)
Years ended December 31,
---------------------------------------
2004 2003 2002
---------------------------------------
NIR (expense) from external sources $ 9,046 $ 8,700 $ 9,422
NIR (expense) from internal sources (2,170) (2,148) (2,713)
------------- ------------- -----------
Total net interest revenue 6,876 6,552 6,709
Other operating revenue 1,394 1,205 1,207
Operating expense 4,115 3,894 3,451
Gains on sales of
financial instruments, net - - 18
Net loans charged off (26) 661 2,300
Net income 2,555 1,957 1,334
Average assets $273,700 $288,030 $278,094
Average economic capital 11,450 10,720 10,740
Average invested capital 11,450 10,720 10,740
Return on assets 0.93% 0.68% 0.48%
Return on economic capital 22.31 18.26 12.42
Return on average invested capital 22.31 18.26 12.42
Efficiency ratio 49.76 50.20 43.60
Table 15 Colorado State Bank and Trust
(Dollars in Thousands)
Years ended December 31,
-------------------------------------
2004 2003 2002
-------------------------------------
NIR (expense) from external sources $ 23,875 *** ***
NIR (expense) from internal sources (7,245) *** ***
-------------------------------------
Total net interest revenue 16,630 *** ***
Other operating revenue 8,160 *** ***
Operating expense 21,890 *** ***
Net loans charged off 136 *** ***
Net income 1,688 *** ***
Average assets $680,840 *** ***
Average economic capital 27,560 *** ***
Average invested capital 69,550 *** ***
Return on assets 0.25% *** ***
Return on economic capital 6.12 *** ***
Return on average invested capital 2.43 *** ***
Efficiency ratio 88.30 *** ***
*** Data not meaningful due to acquisition of Colorado State Bank
and Trust in September 2003.
30
ASSESSMENT OF FINANCIAL CONDITION
SECURITIES
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.
The amortized cost of available for sale securities at December 31, 2004
increased $104 million compared with the previous year-end. Mortgage-backed
securities increased $132 million and represented 97% of total available for
sale securities. The increase in securities reflected an increase in available
funds due to strong deposit growth during 2004. As previously discussed in the
Net Interest Revenue section of this report, we hold mortgage-backed securities
as part of our overall interest rate risk management strategy.
The primary risk of holding mortgage-backed securities comes from extension
during periods of rising interest rates or prepayment during periods of falling
interest rates. We evaluate this risk through extensive modeling both before
making an investment and throughout the life of the security. The expected
duration of the mortgage-backed securities portfolio was 3.3 years at December
31, 2004 compared to 3.0 years at December 31, 2003. This increase in duration
reflected the slower anticipated prepayments of the loans represented by these
securities as interest rates rose.
Table 16 Securities
(Dollars in Thousands)
December 31,
-----------------------------------------------------------------------------
2004 2003 2002
-----------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-----------------------------------------------------------------------------
Investment:
Municipal and other tax-exempt $ 216,986 $218,465 $ 184,192 $ 187,354 $ 191,305 $195,266
Mortgage-backed U.S. agency securities 1,287 1,336 2,296 2,418 4,380 4,618
Other debt securities 2,821 2,835 1,463 1,484 2,265 2,269
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 221,094 $222,636 $ 187,951 $ 191,256 $ 197,950 $202,153
- -------------------------------------------------------------------------------------------------------------------------------
Available for sale:
U.S. Treasury $ 27,119 $27,062 $ 44,679 $ 45,424 $ 31,013 $ 32,233
Municipal and other tax-exempt 414 404 3,271 3,257 11,465 11,511
Mortgage-backed securities:
U.S. agencies 3,067,611 3,052,375 3,514,158 3,518,926 3,005,698 3,067,148
Other 1,423,613 1,418,770 845,430 848,911 727,088 732,542
- -------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 4,491,224 4,471,145 4,359,588 4,367,837 3,732,786 3,799,690
- -------------------------------------------------------------------------------------------------------------------------------
Other debt securities 515 528 1,140 1,177 138 139
Equity securities and mutual funds 90,343 94,051 96,460 101,173 87,434 89,770
- -------------------------------------------------------------------------------------------------------------------------------
Total $4,609,615 $4,593,190 $4,505,138 $4,518,868 $3,862,836 $3,933,343
- -------------------------------------------------------------------------------------------------------------------------------
31
Net unrealized losses on available for sale securities totaled $16 million
at December 31, 2004 compared with net unrealized gains of $14 million at
December 31, 2003 due primarily to rising interest rates. The aggregate gross
amount of unrealized losses at December 31, 2004 totaled $32 million. Management
evaluated the securities with unrealized losses to determine if we believed 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 intent and ability to hold
the securities until the fair values exceed amortized cost. It is our belief,
based on currently available information and our evaluation, that the unrealized
losses in these securities were temporary.
LOANS
The aggregate loan portfolio at December 31, 2004 totaled $7.9 billion, a
$445 million or 6% increase since last year.
The commercial loan portfolio increased $239 million during 2004. Much of
this increase was focused in the services portion of the portfolio, which
increased $231 million. Services comprised 20% of the total loan portfolio and
included $281 million of loans to nursing homes, $143 million of loans to
medical facilities, and $30 million to the hotel industry. Energy loans totaled
$1.2 billion or 15% of total loans. Outstanding energy loans decreased $8
million during 2004. High energy prices provided cash flow to the industry which
reduced outstanding loan balances during the first half of the year. Outstanding
energy loan balances increased $143 million during the second half of the year.
Approximately $985 million 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 $217 million of loans to the cattle industry. Other
notable loan concentrations by primary industry of the borrowers are presented
in Table 17.
Table 17 Loans
(In Thousands)
December 31,
----------------------------------------------------------------
2004 2003 2002 2001 2000
----------------------------------------------------------------
Commercial:
Energy $1,223,195 $1,231,599 $1,132,178 $ 987,556 $ 837,223
Manufacturing 484,423 482,657 501,506 467,260 421,046
Wholesale/retail 699,318 668,202 627,422 600,470 499,017
Agriculture 262,436 228,222 186,976 170,861 185,407
Services 1,615,071 1,383,835 1,249,622 1,084,480 963,171
Other commercial and industrial 291,393 342,187 292,094 364,123 342,169
----------------------------------------------------------------
Total commercial 4,575,836 4,336,702 3,989,798 3,674,750 3,248,033
Commercial real estate:
Construction and land development 457,399 436,087 356,227 327,455 311,700
Multifamily 231,985 271,119 307,119 291,687 271,459
Other real estate loans 931,726 922,886 772,492 722,633 687,335
----------------------------------------------------------------
Total commercial real estate 1,621,110 1,630,092 1,435,838 1,341,775 1,270,494
Residential mortgage:
Secured by 1-4 family residential properties 1,198,918 1,015,643 929,759 703,080 638,044
Residential mortgages held for sale 40,262 56,543 133,421 166,093 48,901
----------------------------------------------------------------
Total residential mortgage 1,239,180 1,072,186 1,063,180 869,173 686,945
Consumer 492,841 444,909 412,167 409,680 312,390
- ----------------------------------------------------------------------------------------------------------------------------
Total $7,928,967 $7,483,889 $6,900,983 $6,295,378 $5,517,862
- ----------------------------------------------------------------------------------------------------------------------------
32
Table 18 Loan Maturity and Interest Rate Sensitivity at December 31, 2004
(In Thousands)
Remaining Maturities of Selected Loans
---------------------------------------
Total Within 1 Year 1-5 Years After 5 Years
------------------------------------------------------
Loan maturity:
Commercial $4,575,836 $1,594,786 $2,441,860 $ 539,190
Commercial real estate 1,621,110 590,991 833,203 196,916
- ------------------------------------------------------------------------------------------------------
Total $6,196,946 $2,185,777 $3,275,063 $ 736,106
- ------------------------------------------------------------------------------------------------------
Interest rate sensitivity for selected loans with:
Predetermined interest rates $1,962,583 $ 288,659 $1,376,026 $ 297,898
Floating or adjustable interest rates 4,234,363 1,897,118 1,899,037 438,208
- ------------------------------------------------------------------------------------------------------
Total $6,196,946 $2,185,777 $3,275,063 $ 736,106
- ------------------------------------------------------------------------------------------------------
BOK Financial participates in shared national credits when appropriate to
obtain or maintain business relationships with local customers. Shared national
credits are defined by banking regulators as credits of more than $20 million
and with three or more non-affiliated banks as participants. At December 31,
2004, the outstanding principal balance of these loans totaled $729 million,
including $726 million to borrowers with local market relationships. BOK
Financial is the agent lender in approximately 37% of these loans. The Company's
lending policies generally avoid loans in which we do not have the opportunity
to maintain or achieve other business relationships with the customer.
Commercial real estate loans totaled $1.6 billion or 20% of the loan
portfolio at December 31, 2004. The outstanding balance of commercial real
estate loans decreased $9 million from the previous year end. Construction and
land development included $349 million for single family residential lots and
premises, up $69 million, or 25% since December 31, 2003. This growth resulted
from expanded builder loans, primarily in New Mexico and Arizona. The major
components of other commercial real estate loans were retail facilities - $312
million and office buildings $343 million. Commercial real estate loans secured
by office buildings increased $53 million during the past year.
Residential mortgage loans, excluding loans held for sale, included $352
million of home equity loans, $304 million of loans held for business
relationship purposes, $237 million of adjustable rate mortgages and $279
million of loans held for community development. Community development loans
increased $177 million during 2004 as part of the Company's ongoing efforts to
more directly serve its local communities. Consumer loans included $234 million
of indirect automobile loans. Substantially all of these loans were purchased
from dealers in Oklahoma.
While the Company continued to increase geographic diversification through
expansion into Texas, New Mexico and Colorado, geographic concentration subjects
the loan portfolio to the general economic conditions in Oklahoma. Table 19
presents the distribution of the major loan categories among our primary market
areas.
33
Table 19 Loans by Principal Market Area
(In Thousands)
December 31,
----------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Oklahoma:
Commercial $2,847,470 $2,802,852 $2,677,616 $2,576,808 $2,476,389
Commercial real estate 744,724 789,868 763,469 739,419 768,232
Residential mortgage 901,648 699,274 656,391 476,023 409,494
Residential mortgage held for sale 40,262 56,543 133,421 166,093 48,901
Consumer 367,947 324,305 294,404 314,060 250,298
------------ ------------ ------------ ------------ -----------
Total Oklahoma $4,902,051 $4,672,842 $4,525,301 $4,272,403 $3,953,314
------------ ------------ ------------ ------------ ------------
Texas:
Commercial $1,120,069 $ 963,340 $ 866,905 $ 775,788 $ 549,505
Commercial real estate 459,067 477,561 455,364 380,602 299,357
Residential mortgage 191,296 204,481 192,575 136,181 122,082
Consumer 86,732 101,269 104,353 85,347 53,397
------------ ------------ ------------ ------------ -----------
Total Texas $1,857,164 $1,746,651 $1,619,197 $1,377,918 $1,024,341
------------ ------------ ------------ ------------ ------------
Albuquerque:
Commercial $ 354,904 $ 297,896 $ 286,622 $ 219,257 $ 167,023
Commercial real estate 224,707 175,745 150,293 136,425 118,492
Residential mortgage 63,043 66,179 76,020 85,309 101,920
Consumer 13,260 11,070 11,399 8,200 6,107
------------ ------------ ------------ ------------ ------------
Total Albuquerque $ 655,914 $ 550,890 $ 524,334 $ 449,191 $ 393,542
------------ ------------ ------------ ------------ ------------
Northwest Arkansas:
Commercial $ 61,934 $ 63,480 $ 63,113 $ 72,728 $ 50,680
Commercial real estate 74,478 75,452 66,712 85,329 84,413
Residential mortgage 11,238 6,245 4,773 5,567 4,548
Consumer 3,858 2,671 2,011 2,073 2,588
------------ ------------ ------------ ------------ -----------
Total Northwest Arkansas $ 151,508 $ 147,848 $ 136,609 $ 165,697 $ 142,229
------------ ------------ ------------ ------------ ------------
Colorado (1):
Commercial $ 191,459 $ 209,134 $ 95,542 $ 30,169 $ 4,436
Commercial real estate 118,134 111,466 - - -
Residential mortgage 31,693 39,464 - - -
Consumer 21,044 5,594 - - -
------------ ------------ ------------ ------------ -----------
Total Colorado $ 362,330 $ 365,658 $ 95,542 $ 30,169 $ 4,436
------------ ------------ ------------ ------------ ------------
Total BOK Financial loans $7,928,967 $7,483,889 $6,900,983 $6,295,378 $5,517,862
------------ ------------ ------------ ------------ ------------
<FN>
(1) Includes Denver loan production office
</FN>
LOAN COMMITMENTS
BOK Financial enters into certain off-balance sheet arrangements in the
normal course of business. These arrangements included loan commitments which
totaled $3.5 billion and standby letters of credit which totaled $414 million at
December 31, 2004. Loan commitments may be unconditional obligations to provide
financing or conditional obligations that depend on the borrower's financial
condition, collateral value or other factors. Standby letters of credit are
unconditional commitments to guarantee the performance of our customer to a
third party. Since some of these commitments are expected to expire before being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
Table 20 Off-Balance Sheet Credit Commitments as of December 31, 2004
(In Thousands)
2004 2003 2002 2001 2000
-------------- ------------- ------------ ------------ -------------
Loan commitments $3,459,425 $2,964,694 $2,884,011 $2,461,141 $2,239,533
Standby letters of credit 414,228 374,550 290,069 248,960 173,455
- ------------------------------------ -------------- ------------- ------------ ------------ -------------
Total $3,873,653 $3,339,244 $3,174,080 $2,710,101 $2,412,988
- ------------------------------------ -------------- ------------- ------------ ------------ -------------
34
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. Programs to assist customers in managing
their interest rate, foreign exchange and other commodity risks were added
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 BOk of
changes in commodity prices, interest rates, or foreign exchange rates. The
counterparty contracts are identical to the customer contracts, except for a
fixed pricing spread or a fee paid to BOk as compensation for administrative
costs, credit risk and profit.
These programs create credit risk for potential amounts due to BOk from its
customers and from the counterparties. Customer credit risk is monitored through
existing credit policies and procedures. The effects of changes in commodity
prices, interest rates or foreign exchange rates are evaluated across a range of
possible options to determine the maximum exposure we are willing to have
individually to any customer. Customers may also be required to provide margin
collateral to further limit our credit risk.
Counterparty credit risk is evaluated through existing policies and
procedures. This evaluation considers the total relationship between BOK
Financial and each counterparty. Individual limits are established by management
and approved by the Asset / Liability Committee. Margin collateral is required
if the exposure to any counterparty exceeds established limits. Based on
declines in the counterparties' credit rating, these limits are reduced and
additional margin collateral is required.
A deterioration of the credit standing of one or more of the parties 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 party deteriorated
such that either the fair value of underlying collateral no longer supported the
contract or the party's ability to provide margin collateral was impaired. No
credit losses have been incurred since inception of this program.
Derivative contracts are carried at fair value. At December 31, 2004, the
fair values of derivative contracts reported as assets under these programs
totaled $379 million. This included energy contracts with fair values of $363
million, interest rate contracts with fair values of $4 million and foreign
exchange contracts with fair values of $11 million. The aggregate fair values of
derivative contracts reported as liabilities totaled $380 million. Approximately
58% of the fair value of asset contracts was with customers. The credit risk of
these contracts is generally backed by energy production. The remaining 42% was
with counterparties. The maximum net exposure to any single customer or
counterparty totaled $41 million.
SUMMARY OF LOAN LOSS EXPERIENCE
The reserve for loan losses, which is available to absorb losses inherent
in the loan portfolio, totaled $109 million at December 31, 2004 compared to
$115 million at December 31, 2003. These amounts represented 1.38% and 1.55% of
outstanding loans, excluding loans held for sale, at December 31, 2004 and 2003,
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
206% of outstanding balance of nonperforming loans at year-end 2004 compared to
218% at year-end 2003. Net loans charged off during 2004 decreased to $22
million in 2004 compared to $25 million in the previous year. Net commercial
loans charged-off during 2004 totaled $12 million, a $3.8 million decrease from
2003. Table 21 provides statistical information regarding the reserve for loan
losses for the past five years.
35
Table 21 Summary of Loan Loss Experience
(Dollars in Thousands)
Years ended December 31,
-------------------------------------------------------------------
Reserve for loan losses: 2004 2003 2002 2001 2000
-------------------------------------------------------------------
Beginning balance $114,784 $103,851 $ 89,188 $72,183 $65,473
Loans charged off:
Commercial 13,921 16,331 13,326 18,042 7,747
Commercial real estate 971 88 286 71 1,176
Residential mortgage 1,465 1,721 412 308 285
Consumer 13,328 13,335 11,881 6,827 5,593
-----------------------------------------------------------------------------------------------------------------------
Total 29,685 31,475 25,905 25,248 14,801
-----------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 2,283 887 1,276 1,151 1,126
Commercial real estate 30 53 118 653 428
Residential mortgage 243 83 146 57 157
Consumer 5,171 5,102 3,436 2,727 2,307
-----------------------------------------------------------------------------------------------------------------------
Total 7,727 6,125 4,976 4,588 4,018
-----------------------------------------------------------------------------------------------------------------------
Net loans charged off 21,958 25,350 20,929 20,660 10,783
Provision for loan losses 15,792 34,000 34,228 35,365 17,493
Additions due to acquisitions - 2,283 1,364 2,300 -
-----------------------------------------------------------------------------------------------------------------------
Ending balance $108,618 $114,784 $103,851 $89,188 $72,183
-----------------------------------------------------------------------------------------------------------------------
Reserve for off-balance sheet credit losses:
Beginning balance $ 13,855 $12,219 $ 12,717 $10,472 $10,761
Provision for off-balance sheet credit losses 4,647 1,636 (498) 2,245 (289)
-----------------------------------------------------------------------------------------------------------------------
Ending balance $ 18,502 $13,855 $ 12,219 $12,717 $10,472
-----------------------------------------------------------------------------------------------------------------------
Total provision for credit losses $ 20,439 $35,636 $ 33,730 $37,610 $17,204
-----------------------------------------------------------------------------------------------------------------------
Reserve for loan losses to loans outstanding at
year-end (1) 1.38% 1.55% 1.53% 1.46% 1.32%
Net charge-offs to average loans (1) 0.29 0.36 0.33 0.35 0.22
Total provision for credit losses to average 0.27 0.50 0.54 0.63 0.35
loans (1)
Recoveries to gross charge-offs 26.03 19.46 19.21 18.17 27.15
Reserve for loan losses as a multiple of net 4.95x 4.53x 4.96x 4.32x 6.69x
charge-offs
Reserve for off-balance sheet credit losses to
off-balance sheet credit commitments 0.48% 0.41% 0.38% 0.47% 0.43%
Combined reserves for credit losses to loans
outstanding at year-end (1) 1.61% 1.73% 1.72% 1.66% 1.51%
-----------------------------------------------------------------------------------------------------------------------
Problem Loans:
Loans past due (90 days) $ 7,649 $14,944 $ 8,117 $ 8,108 $15,467
Nonaccrual (2) 52,660 52,681 49,855 43,540 39,661
Renegotiated - - - 27 87
-----------------------------------------------------------------------------------------------------------------------
Total $ 60,309 $67,625 $ 57,972 $51,675 $55,215
-----------------------------------------------------------------------------------------------------------------------
Foregone interest on nonaccrual loans (2) $ 4,617 $ 4,821 $ 4,770 $ 5,163 $ 3,803
-----------------------------------------------------------------------------------------------------------------------
<FN>
(1) Excludes residential mortgage loans held for sale.
(2) Interest collected and recognized on nonaccrual loans was not significant in 2004 and previous years disclosed.
</FN>
36
The Company has historically considered the credit risk from loan
commitments and letters of credit in its evaluation of the adequacy of the
reserve for loan losses. During 2004, we adopted the preferred presentation
method and separated the reserve for off-balance sheet credit risk from the
reserve for loan losses. Table 21 presents the trend of reserves for off-balance
sheet credit losses and the relationship between the reserve and credit
commitments. It also presents the relationship between the combined reserve for
credit losses and outstanding loans for comparison with peer banks and others
who have not adopted the preferred presentation. The provision for credit losses
included the combined charge to expense for both the reserve for loan losses and
the reserve for off-balance sheet credit losses. All losses incurred from
lending activities will ultimately be reflected in charge-offs against the
reserve for loan losses following funds advanced against outstanding commitments
and after the exhaustion of collection efforts.
Specific impairment reserves are determined through evaluation of estimated
future cash flows and collateral value. At December 31, 2004, specific
impairment reserves totaled $7 million on total impaired loans of $45 million.
Nonspecific reserves are maintained for risks beyond factors specific to an
individual loan or those identified through migration analysis. A range of
potential losses is determined for each risk factor identified. At December 31,
2004, the ranges of potential losses for the more significant factors were:
General economic conditions - $7 million to $11 million
Concentration in large loans - $2 million to $3 million
Allocation of the loan loss reserve to the major loan categories is
presented in Table 22.
The provision for credit losses totaled $20.4 million, a $15.2 million
decrease from 2003. Factors which contributed to the lower provision included an
improvement in credit quality as indicated by our commercial loan migration
analysis model and a reduction in the outstanding balances of criticized loans.
Additionally, the number of past due consumer loans and net losses incurred were
reduced during the year. These factors were partially offset by concerns about
the effect of changes in interest rates and energy prices on the commercial real
estate and commercial loan portfolios.
Table 22 Loan Loss Reserve Allocation
(Dollars in Thousands)
December 31,
-------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------ ------------------- ------------------- ------------------- ------------------
% of % of % of % of % of
Reserve(2) Loans(1)Reserve(2) Loans(1) Reserve(2) Loans(1) Reserve(2) Loans(1) Reserve(2) Loans(1)
--------- -------- --------- --------- --------- --------- --------- --------- --------- --------
Loan category:
Commercial $ 52,325 58.00% $ 58,993 58.39% $ 56,474 58.95% $ 51,803 59.95% $47,504 59.39%
Commercial real
estate 21,317 20.55 16,395 21.95 16,037 21.22 14,000 21.89 10,865 23.23
Residential mortgage 5,904 15.20 6,797 13.67 3,956 13.74 3,612 11.47 1,736 11.67
Consumer 12,034 6.25 16,132 5.99 13,922 6.09 6,318 6.69 6,146 5.71
Nonspecific allowance 17,038 - 16,467 - 13,462 - 13,455 - 5,932 -
- -------------------------- --------- -------- --------- --------- --------- --------- --------- --------- --------- --------
Total $108,618 100.00% $114,784 100.00% $103,851 100.00% $ 89,188 100.00% $72,183 100.00%
- -------------------------- --------- -------- --------- --------- --------- --------- --------- --------- --------- --------
<FN>
(1) Excludes residential mortgage loans held for sale.
(2) Specific allocation for the loan concentration risks are included in the appropriate category.
</FN>
NONPERFORMING ASSETS
Information regarding nonperforming assets, which totaled $56 million at
December 31, 2004 and $60 million at December 31, 2003 is presented in Table 23.
Nonperforming assets included nonaccrual and renegotiated loans and excluded
loans 90 days or more past due but still accruing interest. Nonaccrual loans
totaled $53 million at December 31, 2004 and 2003. Newly identified nonaccruing
loans totaled $47 million during the year. Nonaccruing loans decreased $13
million for loans charged off and foreclosed, and $28 million for cash payments
received. Additionally, nonaccruing loans decreased $6 million due to loans
returned to accruing status after a period of satisfactory performance.
37
Table 23 Nonperforming Assets
(Dollars in Thousands)
December 31,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ -------------
Nonperforming loans
Nonaccrual loans:
Commercial $33,195 $41,360 $39,114 $35,075 $37,146
Commercial real estate 10,144 2,311 3,395 3,856 161
Residential mortgage 8,612 7,821 5,950 4,140 1,855
Consumer 709 1,189 1,396 469 499
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
Total nonaccrual loans 52,660 52,681 49,855 43,540 39,661
Renegotiated loans - - - 27 87
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
Total nonperforming loans 52,660 52,681 49,855 43,567 39,748
Other nonperforming assets 3,763 7,186 6,719 7,141 3,851
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
Total nonperforming assets $56,423 $59,867 $56,574 $50,708 $43,599
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
Ratios:
Reserve for loan losses to nonperforming loans 206.26% 217.89% 208.31% 204.71% 181.60%
Nonperforming loans to period-end loans (2) 0.67 0.71 0.74 0.71 0.73
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
Loans past due (90 days) (1) $ 7,649 $14,944 $ 8,117 $ 8,108 $15,467
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
<FN>
(1) Includes residential mortgages guaranteed by
agencies of the U.S. Government. $ 2,308 $ 4,132 $ 4,956 $ 6,222 $ 7,616
(2) Excludes residential mortgage loans held for sale.
</FN>
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
borrower or the value of the collateral. Because the borrowers are still
performing in accordance with the original terms of the loan agreements, and no
loss of principal or interest is anticipated, these loans were not included in
Nonperforming Assets. Known information does, however, cause management concerns
as to the borrowers' ability to comply with current repayment terms. These
potential problem loans totaled $49 million at December 31, 2004 and $56 million
at December 31, 2003. The current composition of potential problem loans by
primary industry included healthcare - $10 million, energy - $10 million and
manufacturing - $10 million.
DEPOSITS
Deposit accounts represent our primary funding source. We compete for
retail and commercial deposits by offering a broad range of products and
services and focusing on customer convenience. Retail deposit growth is
supported through our Perfect Banking program, free checking and on-line Billpay
services, an extensive network of branch locations and ATMs and a 24-hour
Express Bank call center. Commercial deposit growth is supported by offering
treasury management and lockbox services.
Average deposits increased $895 million or 10% during 2004. Core deposits,
which we define as deposits of less than $100,000, excluding public funds and
brokered deposits, increased 7% to $4.6 billion. Growth in average core deposits
resulted from initiatives such as free on-line Billpay, free checking and
Perfect Banking. Public funds and brokered deposits averaged $998 million for
2004, an increase of 74% compared with 2003 averages. The remaining average
deposits, which were comprised of accounts with balances in excess of $100,000,
increased 5% to $3.5 billion.
Table 24 Maturity of Domestic CDs and Public
Funds in Amounts of $100,000 or More
(In Thousands)
December 31,
---------------------------
2004 2003
---------------------------
Months to maturity:
3 or less $ 412,455 $ 545,555
Over 3 through 6 183,723 300,094
Over 6 through 12 264,101 171,258
Over 12 1,388,014 1,093,750
--------------------------------------------------------
Total $2,248,293 $2,110,657
--------------------------------------------------------
38
During the first half of 2004, the Company raised $342 million in fixed
rate, brokered certificates of deposits. These deposits generally replaced other
time deposits as they matured. The weighted-average interest rate paid on these
certificates is 2.89%. Interest rate swaps with a total notional amount of $342
million have been designated as fair value hedges of these certificates. The
purpose of these swaps is to hedge against changes in fair value due to changes
in interest rates by modifying the certificates from fixed rate to floating
rates based on changes in LIBOR. We receive a weighted average fixed rate of
3.01% on these swaps and currently pay a floating rate of 2.40%.
The distribution of deposit accounts among our principal markets is shown
in Table 25.
Table 25 Deposits by Principal Market Area
(In Thousands)
December 31,
--------------------------------------------------------------------
2004 2003 2002 2001 2000
--------------------------------------------------------------------
Oklahoma:
Demand $ 1,095,228 $ 1,025,483 $ 1,044,628 $ 992,663 $ 937,163
Interest-bearing:
Transaction 2,291,089 2,246,675 1,897,353 1,650,269 1,407,083
Savings 87,597 98,611 103,749 101,433 93,598
Time 2,505,849 2,403,293 2,334,949 2,041,025 2,036,274
--------------------------------------------------------------------
Total interest-bearing 4,884,535 4,748,579 4,336,051 3,792,727 3,536,955
--------------------------------------------------------------------
Total Oklahoma $ 5,979,763 $5,774,062 $ 5,380,679 $ 4,785,390 $ 4,474,118
--------------------------------------------------------------------
Texas:
Demand $ 617,808 $ 421,292 $ 394,164 $ 305,745 $ 250,347
Interest-bearing:
Transaction 1,119,893 1,213,777 953,550 670,728 406,446
Savings 30,331 35,702 33,071 28,918 22,910
Time 571,993 505,463 510,512 451,031 303,203
--------------------------------------------------------------------
Total interest-bearing 1,722,217 1,754,942 1,497,133 1,150,677 732,559
--------------------------------------------------------------------
Total Texas $ 2,340,025 $2,176,234 $1,891,297 $ 1,456,422 $ 982,906
--------------------------------------------------------------------
Albuquerque:
Demand $ 136,599 $ 106,050 $ 79,953 $ 57,648 $ 45,803
Interest-bearing:
Transaction 320,118 370,294 295,174 224,265 161,027
Savings 17,885 20,728 26,704 26,848 25,843
Time 411,939 317,924 287,607 241,549 250,876
--------------------------------------------------------------------
Total interest-bearing 749,942 708,946 609,485 492,662 437,746
--------------------------------------------------------------------
Total Albuquerque $ 886,541 $ 814,996 $ 689,438 $ 550,310 $ 483,549
--------------------------------------------------------------------
Northwest Arkansas:
Demand $ 14,489 $ 16,351 $ 12,949 $ 10,634 $ 10,453
Interest-bearing:
Transaction 26,882 28,411 18,025 14,452 11,114
Savings 1,434 1,341 1,214 1,035 1,030
Time 99,677 105,598 134,923 87,501 82,835
--------------------------------------------------------------------
Total interest-bearing 127,993 135,350 154,162 102,988 94,979
--------------------------------------------------------------------
Total Northwest Arkansas $ 142,482 $ 151,701 $ 167,111 $ 113,622 $ 105,432
--------------------------------------------------------------------
Colorado:
Demand $ 62,995 $ 79,424 $ - $ - $ -
Interest-bearing:
Transaction 189,106 162,651 - - -
Savings 19,092 18,347 - - -
Time 54,394 42,448 - - -
--------------------------------------------------------------------
Total interest-bearing 262,592 223,446 - - -
--------------------------------------------------------------------
Total Colorado $ 325,587 $ 302,870 $ - $ - $ -
--------------------------------------------------------------------
39
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, 2004.
Interest is based on either LIBOR plus a defined margin that is determined by
the principal balance outstanding and our credit rating or a base rate. 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, 2004.
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 $161 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 $98 million under this policy.
Equity capital for BOK Financial increased $170 million to $1.4 billion
during 2004. Retained earnings provided $179 million to this increase, partially
offset by a $20 million increase in net unrealized losses on available for sale
securities. The remaining increase in capital during 2004 resulted primarily
from employee stock options.
Capital is managed to maximize long-term value to the shareholders. Factors
considered in managing capital include projections of future earnings, asset
growth and acquisition strategies, and regulatory and debt covenant
requirements. Capital management may include subordinated debt issuance, share
repurchase and stock and cash dividends. The Board of Directors has authorized a
share repurchase program. The maximum of 191,058 common shares may be
repurchased.
During 2004 and 2003, 3% dividends payable in shares of BOK Financial's
common stock were declared and paid. The shares issued were valued at $66
million and $58 million, respectively, based on current stock prices when
declared. No cash dividends were paid on common stock.
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 16 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
included 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 a $150 million, 10-year, 7.125% fixed rate subordinated
debenture. Interest rate swaps were used as a fair value hedge to convert the
fixed interest on the debenture 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 swaps were 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. Amortization of this gain reduces the cost of the
debt by 102 basis points.
During 2004, a $150 million notional amount interest rate swap was
designated as a hedge of changes in fair value of the subordinated debt due to
changes in interest rates. The Company receives a fixed rate of 3.165% and pays
a variable rate based on 1-month LIBOR, 2.40% at December 31, 2004. Semi-annual
swap settlements coincide with interest payments on the subordinated debenture.
The interest rate swap terminates on August 15, 2007, the maturity date of the
subordinated debenture.
OFF-BALANCE SHEET ARRANGEMENTS
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
40
of the guaranteed price over 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 210,069.
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, the Company's ability to pay cash to satisfy any price guarantee
obligations is limited by applicable banking capital and dividend regulations.
We will have no obligation to issue additional common shares or pay cash to
satisfy any benchmark price protection obligation if the market value per share
of BOK Financial common stock remains above the highest benchmark price of
$42.53. The closing price of the Company's common stock on December 31, 2004 was
$48.76. At a market price of $40.00 per common share, the maximum obligation
under this agreement would be to issue 13,802 additional shares or to pay $552
thousand.
AGGREGATE CONTRACTUAL OBLIGATIONS
BOK Financial has numerous contractual obligations in the normal course of
business. These obligations included time deposits and other borrowed funds,
premises used under various operating leases, commitments to extend credit to
borrowers, to purchase securities and to make other investments, 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, 2004.
Table 26 Contractual Obligations as of December 31, 2004
(In Thousands)
Less Than 1 to 3 4 to 5 More Than
1 Year Years Years 5 Years Total
-------------- ------------- ------------ ------------ -------------
Time deposits $ 753,551 $1,926,008 $ 286,952 $146,390 $3,112,901
Other borrowings 715,788 306,607 10,708 1,469 1,034,572
Subordinated debenture 10,688 167,367 - - 178,055
Operating lease obligations 13,565 24,652 20,267 36,573 95,057
Derivative contracts 258,100 111,280 9,510 1,106 379,996
Data processing contracts 13,554 24,237 18,388 4,973 61,152
- --------------------------------------------- ------------- ------------ ------------ -------------
Total $1,765,246 $2,560,151 $ 345,825 $190,511 $4,861,733
- --------------------------------------------- ------------- ------------ ------------ -------------
Loan commitments $ 3,459,425
Standby letters of credit 575,872
Obligations to purchase when-issued securities 14,785
Unfunded third-party private equity investments 13,869
Purchase obligation for Valley Commerce Bancorp, Ltd. 32,000
Payments on time deposits and other borrowed funds include interest which
has been calculated from rates at December 31, 2004. 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 original terms exceeding one year are presented in
Table 26. Payments on time deposits are based on contractual maturity dates.
These funds may be withdrawn prior to maturity. We may charge the customer a
penalty for early withdrawal.
Operating lease commitments generally represent real property we rent for
branch offices, corporate offices and operations facilities. Payments presented
represent the minimum lease payments and exclude related costs such as utilities
and property taxes.
Data processing and communications contracts represent the minimum
obligations under these contracts. Additional payments that are based on the
volume of transactions processed are excluded.
Derivative contracts represent obligations under our customer hedging
programs. As previously discussed, we have entered into derivative contracts
which are expected to substantially offset the cash payments due on these
obligations.
The Company has commitments to make investments through its BOK Financial
Private Equity Fund. These commitments generally reflect customer investment
obligations.
The Company also has obligations with respect to its employee and executive
benefit plans. See Notes 12 and 13 to the Consolidated Financial Statements.
41
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 rates,
commodity prices or equity prices. Financial instruments that are subject to
market risk can be classified either as held for trading or held for purposes
other than trading.
BOK Financial is subject to market risk primarily through the effect of
changes in interest rates on both its assets held for purposes other than
trading and trading assets. The effects of other changes, such as foreign
exchange rates, commodity prices or equity prices do not pose significant market
risk to BOK Financial. BOK Financial has no material investments in assets that
are affected by changes in foreign exchange rates or equity prices. Energy
derivative contracts, which are affected by changes in commodity prices, are
matched against offsetting contracts as previously discussed.
Responsibility for managing market risk rests with the Asset / Liability
Committee that operates under policy guidelines established by the Board of
Directors. The acceptable negative variation in net interest revenue due to a
specified basis point increase or decrease in interest rates is generally
limited by these guidelines to +/- 10%. These guidelines also set maximum levels
for short-term borrowings, short-term assets, public funds, and brokered
deposits, and establish minimum levels for unpledged assets, among other things.
Compliance with these guidelines is reviewed monthly.
INTEREST RATE RISK - OTHER THAN TRADING
BOK Financial has a large portion of its earning assets in variable rate
loans and a large portion of its liabilities in demand deposit accounts and
interest bearing transaction accounts. Changes in interest rates affect earning
assets more rapidly than interest bearing liabilities in the short term.
Management has adopted several strategies to reduce this interest rate
sensitivity. As previously noted in the Net Interest Revenue section of this
report, management acquires securities that are funded by borrowings in the
capital markets. These securities have an expected average duration of
approximately 3.3 years while the related funds borrowed have an average life of
approximately 90 days.
BOK Financial also uses interest rate swaps in managing its interest rate
sensitivity. During 2004 and 2003, net interest revenue increased $9.9 million
and $14.0 million, respectively, from periodic settlements of these contracts.
These 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
$1.3 million was recognized in 2004 compared to a net loss of $9.4 million in
2003 from adjustments of these swaps and hedged liabilities 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. 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 included the Federal Funds rate, which
affects short-term borrowings, and the prime lending rate and LIBOR, which are
the basis for much of the variable-rate loan pricing. Additionally, mortgage
rates directly affect the prepayment speeds for mortgage-backed securities and
mortgage servicing rights. Derivative financial instruments and other financial
instruments used for purposes other than trading are included in this
simulation. The model incorporates assumptions regarding the effects of changes
in interest rates and account balances on indeterminable maturity deposits based
on a combination of historical analysis and expected behavior. The impact of
planned growth and new business activities is factored into the simulation
model. The effects of changes in interest rates on the value of mortgage
servicing rights are excluded from Table 27 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.
42
Table 27 Interest Rate Sensitivity
(Dollars in Thousands)
200 bp Increase 100 bp Decrease Most Likely
----------------------------------------------------------------------------------
2004 2003 2004 2003 2004 2003
----------------------------------------------------------------------------------
Anticipated impact over the next twelve
months on net interest revenue $ 7,969 $ 7,213 $ (4,683) $ (3,921) $ 5,893 $ 1,688
1.8% 1.6% (1.0)% (0.9)% 1.3% 0.4%
- ------------------------------------------------------------------------------------------------------------------------------
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 or precisely predict the impact of
higher or lower interest rates on net interest revenue. 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, 2004, the VAR was $227 thousand.
The greatest value at risk during 2004 was $1.5 million.
RECENTLY ISSUED ACCOUNTING STANDARDS
FINANCIAL ACCOUNTING STANDARDS BOARD
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS 123R, "SHARE-BASED PAYMENTS"
In December 2004, the FASB revised Statement No. 123, "Accounting for
Stock-Based Compensation," by issuing FAS 123R. FAS 123R requires companies to
recognize in their income statements the grant-date fair value of stock options
and other equity-based compensation issued to their employees. Previously, FAS
123 recommended, but did not require income statement recognition of the fair
value of equity-based compensation. FAS 123R requires that share-based payments
that may be settled in cash be carried at current fair value. Fair value is
determined at each balance sheet date until the award is settled. Changes in
fair value are recognized in the current period. Share-based payments that will
be settled in equity instruments are measured at grant-date fair value and not
remeasured for subsequent changes in fair value. Compensation expense is
generally recognized over the vesting period for awards that will be settled in
equity instruments. FAS 123R is effective for interim periods beginning on or
after June 15, 2005.
The Company previously adopted the preferred income statement recognition
methods of the original FAS 123. Management does not expect FAS 123R to have a
significant effect on its financial statements.
43
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
STATEMENT OF POSITION 03-3, "ACCOUNTING FOR CERTAIN LOANS OR DEBT SECURITIES
ACQUIRED IN A TRANSFER"
SOP 03-3 addresses accounting for differences between contractual and
expected cash flows of certain acquired loans and debt securities when the
differences are due, at least in part, to credit quality. SOP 03-3 is applicable
to loans and debt securities acquired individually, in pools or as part of a
business combination. It is not applicable to loans originated by the lender.
The yield that may be accreted to income is limited to the excess of estimated
undiscounted cash flows over the investor's investment in the asset. Subsequent
increases in expected cash flows should be recognized prospectively through a
yield adjustment. Subsequent decreases in expected cash flows should be
recognized as impairment. SOP 03-3 prohibits the carry-over or creation of
valuation allowances related to acquired assets, including assets acquired in a
business combination that have evidence of deterioration since origination. SOP
03-3 is effective for loans and debt securities acquired in fiscal years
beginning after December 15, 2004. The guidance provided by SOP 03-3 is not
expected to have a significant effect on future financial statements.
EMERGING ISSUES TASK FORCE
ISSUE 03-1, "THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION
TO CERTAIN INVESTMENTS"
EITF 03-1 provides guidance for determining when an investment is impaired,
for evaluating whether the impairment is other-than-temporary and for measuring
impairment. An asset is considered impaired when its fair value is less than
cost. The criteria for evaluating whether the impairment is other-than-temporary
includes the nature of the asset, whether the asset can be prepaid by the issuer
in a manner that the investor will not recover its investment, the severity and
duration of the impairment and the investor's ability and intent to hold the
asset until the fair value recovers. Impairment is measured as the difference
between fair value and cost. If the impairment is considered
other-than-temporary, a new cost basis is established through a direct
write-down of the asset.
In September 2004, the FASB agreed to reconsider EITF 03-1 and all other
guidance on disclosing, measuring and recognizing other-than-temporary
impairment of debt and equity securities. Until the reconsideration of EITF 03-1
is complete, we are unable to evaluate the effect on future financial
statements. The disclosure requirements of EITF 03-1 remain in effect. Guidance
for determining other-than-temporary impairment continues to be provided by the
Securities and Exchange Commission's Staff Accounting Bulletin No. 59.
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.
LEGAL NOTICE
As used in this report, the term "BOK Financial" and such terms as "the
Company," "the Corporation," "our," "we" and "us" may refer to one or more of
its consolidated subsidiaries or to all of them taken as a whole. All of these
terms are used for convenience only and are not intended as a precise
description of any of the separate companies, each of which manages its own
affairs.
44
REPORT OF MANAGEMENT ON FINANCIAL STATEMENTS
Management of BOK Financial is responsible for the preparation, integrity
and fair presentation of the consolidated financial statements included in this
annual report. The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
and necessarily include some amounts that are based on our best estimates and
judgments.
Management, under the supervision of the Chief Executive Officer and the
Chief Financial Officer, conducted an assessment of internal control over
financial reporting as of December 31, 2004. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Company's
consolidated financial statements for external purposes in accordance with
accounting principles generally accepted in the United States. In establishing
internal control over financial reporting, management assesses risk and designs
controls to prevent or detect financial reporting misstatements that may be
consequential to a reader. Management also assesses the impact of any internal
control deficiencies and oversees the effort to continuously improve internal
control over financial reporting. Because of inherent limitations, it is
possible that internal controls may not prevent or detect misstatements and it
is possible that internal controls may vary over time based on changing
conditions. There have been no material changes in internal controls subsequent
to December 31, 2004.
The Risk Oversight and Audit Committee, consisting entirely of independent
directors, meets regularly with management, internal auditors, and the
independent registered public accounting firm, Ernst & Young, LLP, regarding
management's assessment of internal control over financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining internal control
over financial reporting and for assessing the effectiveness of internal control
over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Management has assessed the effectiveness of the
Company's internal control over financial reporting based on the criteria
established in "Internal Control - Integrated Framework," issued by the
Committee of Sponsoring Organizations ("COSO") of the Treadway Commission. Based
on that assessment and criteria, management has determined that the Company has
maintained effective internal control over financial reporting as of December
31, 2004.
Ernst & Young LLP, the independent registered public accounting firm that
audited the consolidated financial statements of the Company included in this
annual report, has issued an audit report on management's assessment of the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2004. Their report, which expresses unqualified opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004, is included in this
annual report.
45
REPORTS OF ERNST & Young LLP, Independent Registered Public Accounting Firm
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Shareholders of BOK Financial Corporation
We have audited the accompanying consolidated balance sheets of BOK
Financial Corporation as of December 31, 2004 and 2003, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BOK Financial
Corporation at December 31, 2004 and 2003, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of BOK
Financial Corporation's internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 11, 2005 expressed an unqualified opinion thereon.
Ernst & Young LLP
Tulsa, Oklahoma
March 11, 2005
46
REPORTS OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT ON EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Shareholders of BOK Financial Corporation
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that BOK
Financial Corporation maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). BOK Financial Corporation's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that BOK Financial Corporation
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, BOK Financial Corporation maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the 2004 consolidated
financial statements of BOK Financial Corporation and our report dated March 11,
2005 expressed an unqualified opinion thereon.
Ernst & Young LLP
Tulsa, Oklahoma
March 11, 2005
47
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands Except Share And Per Share Data)
2004 2003 2002
----------------- ----------------- -----------------
Interest Revenue
Loans $ 408,115 $ 375,788 $ 377,708
Taxable securities 197,884 180,581 186,902
Tax-exempt securities 7,359 7,898 9,359
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total securities 205,243 188,479 196,261
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Trading securities 573 625 653
Funds sold and resell agreements 353 281 291
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total interest revenue 614,284 565,173 574,913
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Interest Expense
Deposits 144,433 131,929 145,466
Borrowed funds 38,847 32,272 49,364
Subordinated debenture 7,761 9,477 10,751
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total interest expense 191,041 173,678 205,581
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net Interest Revenue 423,243 391,495 369,332
Provision for Credit Losses 20,439 35,636 33,730
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net Interest Revenue After Provision for Credit Losses 402,804 355,859 335,602
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Other Operating Revenue
Brokerage and trading revenue 41,107 41,152 26,290
Transaction card revenue 64,816 57,352 52,213
Trust fees and commissions 57,532 45,763 40,092
Service charges and fees on deposit accounts 93,712 82,042 67,632
Mortgage banking revenue 28,189 52,336 48,910
Leasing revenue 3,118 3,508 3,330
Other revenue 24,091 24,065 19,094
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total fees and commissions 312,565 306,218 257,561
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Gain on sale of assets 887 822 1,157
Gain (loss) on securities, net (3,088) 7,188 58,704
Gain (loss) on derivatives, net (1,474) (9,375) 5,236
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total other operating revenue 308,890 304,853 322,658
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Other Operating Expense
Personnel 240,661 222,922 187,439
Business promotion 15,618 12,937 11,367
Contribution of stock to BOK Charitable Foundation 5,561 - -
Professional fees and services 15,487 17,935 12,987
Net occupancy and equipment 47,289 45,967 42,347
Data processing and communications 60,025 53,398 45,912
Printing, postage and supplies 14,034 13,930 12,665
Net (gains) losses and operating expenses on repossessed assets (4,016) 271 1,014
Amortization of intangible assets 8,138 8,101 7,638
Mortgage banking costs 18,167 40,296 42,271
Provision (recovery) for impairment of mortgage servicing rights (1,567) (22,923) 45,923
Other expense 21,827 20,604 19,991
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total other operating expense 441,224 413,438 429,554
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Income Before Taxes 270,470 247,274 228,706
Federal and state income tax 91,447 88,914 80,835
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net Income $ 179,023 $ 158,360 $ 147,871
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Earnings Per Share:
Basic $ 3.00 $ 2.67 $ 2.59
Diluted $ 2.68 $ 2.38 $ 2.30
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Average Shares Used in Computation:
Basic 59,128,395 58,699,951 56,613,689
Diluted 66,732,496 66,509,121 64,353,558
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
See accompanying notes to consolidated financial statements.
48
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
December 31,
-----------------------------------
2004 2003
----------------- -----------------
Assets
Cash and due from banks $ 503,715 $ 629,480
Funds sold and resell agreements 27,376 14,432
Trading securities 9,692 7,823
Securities:
Available for sale 4,080,696 3,833,449
Available for sale securities pledged to creditors 512,494 685,419
Investment (fair value: 2004 - $222,636; 2003 - $191,256) 221,094 187,951
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total securities 4,814,284 4,706,819
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Loans 7,928,967 7,483,889
Less reserve for loan losses (108,618) (114,784)
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Loans, net of reserve 7,820,349 7,369,105
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Premises and equipment, net 172,643 175,901
Accrued revenue receivable 79,644 74,980
Intangible assets, net 242,594 250,686
Mortgage servicing rights, net 45,678 48,550
Real estate and other repossessed assets 3,763 7,186
Bankers' acceptances 31,799 30,884
Receivable on unsettled security transactions 56,873 -
Derivative contracts 380,051 149,100
Other assets 206,953 130,652
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total assets $ 14,395,414 $ 13,595,598
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Liabilities and Shareholders' Equity
Noninterest-bearing demand deposits $ 1,927,119 $ 1,648,600
Interest-bearing deposits:
Transaction 3,947,088 4,021,808
Savings 156,339 174,729
Time 3,643,852 3,374,726
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total deposits 9,674,398 9,219,863
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Funds purchased and repurchase agreements 1,555,507 1,609,668
Other borrowings 1,015,000 1,016,650
Subordinated debenture 151,594 154,332
Accrued interest, taxes and expense 71,062 85,409
Bankers' acceptances 31,799 30,884
Due on unsettled security transactions - 8,259
Derivative contracts 387,292 149,326
Other liabilities 110,268 92,577
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total liabilities 12,996,920 12,366,968
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Shareholders' equity:
Preferred stock 12 12
Common stock ($.00006 par value; 2,500,000,000 shares authorized;
shares issued and outstanding: 2004 - 60,420,811; 2003 - 58,055,697) 4 4
Capital surplus 631,747 546,594
Retained earnings 809,261 698,052
Treasury stock (shares at cost: 2004 - 998,393; 2003 - 848,892) (30,905) (24,491)
Accumulated other comprehensive income (loss) (11,625) 8,459
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total shareholders' equity 1,398,494 1,228,630
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total liabilities and shareholders' equity $ 14,395,414 $ 13,595,598
- ------------------------------------------------------------------------------------------- ----------------- -----------------
See accompanying notes to consolidated financial statements.
49
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
2004 2003 2002
-------------- -------------- -------------
Cash Flows From Operating Activities:
Net income $ 179,023 $ 158,360 $ 147,871
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 20,439 35,636 33,730
Provision (recovery) for mortgage servicing rights impairment (1,567) (22,923) 45,923
Unrealized (gains) losses from derivatives 6,124 5,888 (5,112)
Depreciation and amortization 47,298 64,425 65,790
Tax benefit on exercise of stock options 4,609 1,325 5,482
Stock-based compensation 11,306 5,746 4,124
Net (accretion) amortization of securities discounts and premiums (3,116) 8,965 5,818
Net gain on sale of assets (11,678) (44,426) (83,501)
Contribution of stock to BOK Charitable Foundation 5,561 - -
Mortgage loans originated for resale (635,624) (1,314,453) (1,014,009)
Proceeds from sale of mortgage loans held for resale 666,549 1,420,475 1,073,044
Change in trading securities (1,869) (2,713) 5,217
Change in accrued revenue receivable (4,664) (2,962) (2,776)
Change in other assets (48,766) (28,442) (12,452)
Change in accrued interest, taxes and expense (14,722) 11,366 7,029
Change in other liabilities 39,218 (13,906) 8,010
- ------------------------------------------------------------------------------- -------------- -------------- -------------
Net cash provided by operating activities 258,121 282,361 284,188
- ------------------------------------------------------------------------------- -------------- -------------- -------------
Cash Flows From Investing Activities:
Proceeds from sales of available for sale securities 2,652,554 5,089,734 6,873,320
Proceeds from maturities of investment securities 61,583 65,504 139,591
Proceeds from maturities of available for sale securities 1,036,014 2,410,213 1,802,845
Purchases of investment securities (94,947) (55,678) (96,627)
Purchases of available for sale securities (3,800,015) (8,145,655) (8,985,019)
Loans originated or acquired net of principal collected (554,128) (741,405) (586,281)
Payments on derivative asset contracts (9,368) (41,226) (12,912)
Net change in other investment assets 3,208 (3,849) 43
Proceeds from disposition of assets 69,320 65,989 58,390
Purchases of assets (34,404) (62,926) (46,729)
Cash and cash equivalents of subsidiaries and
branches acquired and sold, net - 2,123 46,295
- ------------------------------------------------------------------------------- -------------- -------------- -------------
Net cash used by investing activities (670,183) (1,417,176) (807,084)
- ------------------------------------------------------------------------------- -------------- -------------- -------------
Cash Flows From Financing Activities:
Net change in demand deposits, transaction
deposits and savings accounts 185,409 984,603 604,771
Net change in certificates of deposit 269,126 107,522 395,740
Net change in other borrowings (55,811) 65,610 (165,744)
Change in amount receivable (due) on unsettled security transactions (65,132) 74,160 (297,055)
Pay down of other borrowings - (95,000) (10,095)
Issuance of preferred, common and treasury stock, net 7,132 4,627 4,172
Pay down of subordinated debenture - - (30,000)
Net change in derivative margin accounts (50,202) (31,763) (5,148)
Proceeds from derivative liability contracts 10,259 45,538 3,162
Dividends paid (1,540) (785) (30)
- ------------------------------------------------------------------------------- -------------- -------------- -------------
Net cash provided by financing activities 299,241 1,154,512 499,773
- ------------------------------------------------------------------------------- -------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents (112,821) 19,697 (23,123)
Cash and cash equivalents at beginning of period 643,912 624,215 647,338
- ------------------------------------------------------------------------------- -------------- -------------- -------------
Cash and cash equivalents at end of period $ 531,091 $ 643,912 $ 624,215
- ------------------------------------------------------------------------------- -------------- -------------- -------------
Cash paid for interest $ 192,187 $ 176,225 $ 208,612
- ------------------------------------------------------------------------------- -------------- -------------- -------------
Cash paid for taxes 95,282 81,596 81,154
- ------------------------------------------------------------------------------- -------------- -------------- -------------
Net loans transferred to repossessed real estate 6,013 6,378 4,550
- ------------------------------------------------------------------------------- -------------- -------------- -------------
Payment of dividends in common stock 65,899 58,300 53,165
- ------------------------------------------------------------------------------- -------------- -------------- -------------
Common stock and price guarantee issued for acquisition - - 67,745
- ------------------------------------------------------------------------------- -------------- -------------- -------------
See accompanying notes to consolidated financial statements.
50
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands)
Preferred Stock Common Stock
------------------------------ ------------------------------
Shares Amount Shares Amount
------------------------------ ------------------------------
December 31, 2001 250,000 $25 51,737 $3
Comprehensive income:
Net income - - - -
Other comprehensive loss, net of tax:
Unrealized gain on securities - - - -
Total comprehensive income
Exercise of stock options - - 695 -
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 - - - -
Total comprehensive income
Exercise of stock options - - 603 -
Tax benefit on exercise of stock options - - - -
Stock-based compensation - - - -
Cash dividends 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
Comprehensive income:
Net income - - - -
Other comprehensive loss, net of tax:
Unrealized loss on securities - - - -
Total comprehensive income
Exercise of stock options - - 616 -
Conversion of preferred stock to common (25) - - -
Tax benefit on exercise of stock options - - - -
Stock-based compensation - - - -
Cash dividends on preferred stock - - - -
Dividends paid in shares of common stock - - 1,749 -
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 2004 249,975 $12 60,421 $4
- ------------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------------------
2004 2003 2002
-------------------------------------------
(1) Changes in other comprehensive income:
Unrealized gains (losses) on securities $ (31,806) $ (46,884) $119,609
Unrealized losses on cash flow hedges (1,625) - -
Tax benefit (expense) on unrealized gains (losses) 11,303 16,858 (44,390)
Reclassification adjustment for (gains) losses
realized and included in net income 3,088 (7,188) (58,704)
Reclassification adjustment for tax expense (benefit)
on realized (gains) losses (1,044) 2,585 20,781
-------------------------------------------
Net change in unrealized gains (losses) $ (20,084) $ (34,629) $ 37,296
-------------------------------------------
See accompanying notes to consolidated financial statements.
51
Accumulated
Other Treasury Stock
Comprehensive Capital Retained ------------------------------------
Income (Loss) (1) Surplus Earnings Shares Amount Total
- -------------------- ----------------- ----------------- ----------------- ------------------ ---------------
$ 5,792 $335,443 $504,101 541 $(12,498) $ 832,866
- - 147,871 - - 147,871
37,296 - - - - 37,296
---------------
185,167
---------------
- 8,515 - 125 (4,343) 4,172
- 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
---------------
- 10,953 - 145 (6,326) 4,627
- 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
- - 179,023 - - 179,023
(20,084) - - - - (20,084)
---------------
158,939
---------------
- 12,507 - 122 (5,375) 7,132
- - - - - -
- 4,609 - - - 4,609
- 1,099 - - - 1,099
- - (1,875) - - (1,875)
- 66,938 (65,939) 27 (1,039) (40)
- -------------------- ----------------- ----------------- ----------------- ------------------ ---------------
$(11,625) $631,747 $809,261 998 $(30,905) $1,398,494
- -------------------- ----------------- ----------------- ----------------- ------------------ ---------------
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidated Financial Statements of BOK Financial Corporation ("BOK
Financial" or "the Company") have been prepared in conformity with accounting
principles generally accepted in the United States, including general practices
of the banking industry. The consolidated financial statements include the
accounts of BOK Financial and its subsidiaries, principally Bank of Oklahoma,
N.A. and its subsidiaries ("BOk"), Bank of Texas, N.A., Bank of Arkansas, N.A.,
Bank of Albuquerque, N.A., Colorado State Bank and Trust, N.A. and BOSC, Inc.
Certain prior year amounts have been reclassified to conform to current year
classifications.
The consolidated financial statements would also include the assets,
liabilities, non-controlling interests and results of operations of variable
interest entities ("VIEs") when BOK Financial is determined to be the primary
beneficiary. Variable interest entities are generally defined in FASB
Interpretation No. 46R, "Consolidation of Variable Interest Entities," as
entities that either do not have sufficient equity to finance their activities
without support from other parties or whose equity investors lack a controlling
financial interest. BOK Financial has limited interests in VIEs in its
operations.
NATURE OF OPERATIONS
BOK Financial, through its subsidiaries, provides a wide range of financial
services to commercial and industrial customers, other financial institutions
and consumers throughout Oklahoma, Northwest Arkansas, Dallas and Houston,
Texas, 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 loan
collectibility, prepayments and cash flows from customer accounts. These
estimates are based upon current conditions and information available to
management. Actual results may differ significantly from these estimates.
ACQUISITIONS
Assets and liabilities acquired 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
Intangible assets, which result from business combinations, are accounted
for under the provisions of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," and No. 147, "Acquisitions of Certain
Financial Institutions."
Intangible assets with indefinite lives, such as goodwill, are evaluated
for each of BOK Financial's business units for impairment annually or more
frequently if conditions indicate impairment. The evaluation of possible
impairment of intangible assets involves significant judgment based upon
short-term and long-term projections of future performance.
The fair value of BOK Financial's 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 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.
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.
53
Amortization is computed by methods that approximate level yield and is adjusted
for changes in prepayment estimates. Investment securities may be sold or
transferred to trading or available for sale classification in certain limited
circumstances specified in generally accepted accounting principles. Securities
identified as available for sale are carried at fair value. Unrealized gains and
losses are recorded, net of deferred income taxes, as accumulated other
comprehensive income (loss) in shareholders' equity. Unrealized losses on
securities are evaluated to determine if the losses are temporary based on
various factors, including the cause of the loss, prospects for recovery and
management's intent and ability to hold the security until the fair value
exceeds amortized cost. 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 may be used by the Company as part of its interest
rate risk management programs or may be offered to customers to assist with
their hedging strategies. All derivative instruments are carried at fair value.
Changes in fair value are generally reported in income as they occur.
Derivative instruments used to manage interest rate risk consist primarily
of interest rate swaps. These contracts modify the interest income or expense of
certain assets or liabilities. Amounts receivable from or payable to
counterparties are reported in interest income or expense using the accrual
method. Changes in fair value of interest rate swaps are reported in other
operating revenue - gains or losses on derivatives.
In certain circumstances, interest rate swaps may be designated as fair
value hedges and may qualify for hedge accounting. In these circumstances,
changes in the fair value of the hedged asset or liability that are attributable
to the hedged risk are also reported in other operating revenue - gains or
losses on derivatives, and may partially or completely offset the change in fair
value of the interest rate swap. Fair value hedges are considered to be
effective if the cumulative fair value adjustment of the interest rate swap is
within a range of 80% to 120% of the change in fair value of the hedged asset or
liability.
Interest rate swaps may be designated as cash flow hedges of variable rate
assets or liabilities, or of anticipated transactions. Changes in the fair value
of interest rate swaps designated as cash flow hedges are recorded in
accumulated other comprehensive income to the extent they are effective. The
amount recorded in other comprehensive income is reclassified to earnings in the
same periods as the hedged cash flows impact earnings. The ineffective portion
of changes in fair value is reported in current earnings.
If a derivative instrument that had been designated as a fair value hedge
is terminated or if the hedge designation is removed or deemed to no longer be
effective, the difference between the hedged item's carrying value and its face
amount is recognized into income over the remaining original hedge period.
Similarly, if a derivative instrument that had been designated as a cash flow
hedge is terminated or if the hedge designation is removed or deemed to no
longer be effective, the amount remaining in accumulated other comprehensive
income is reclassified to earnings in the same period as the hedged item.
BOK Financial also enters into mortgage loan commitments that are
considered derivative instruments. Forward sales contracts are used to hedge
these mortgage loan commitments as well as mortgage loans held for sale.
Mortgage loan commitments are carried at fair value based upon quoted prices,
excluding the value of loan servicing rights or other ancillary values. Changes
in fair value of the mortgage loan commitments and forward sales contracts are
reported in other operating revenue - mortgage banking revenue.
Derivative contracts are also offered to customers to assist in hedging
their risks of adverse changes in commodity 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 customers is offset
by a contract between BOK Financial and various counterparties. These contracts
are carried at fair value. Compensation for credit risk and reimbursement of
administrative costs are recognized over the life of the contracts and included
in other operating revenue - brokerage and trading revenue.
54
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 AND OFF-BALANCE SHEET CREDIT LOSSES
Reserves for loan losses and off-balance sheet credit losses are assessed
by management, based upon an ongoing quarterly evaluation of the probable
estimated losses inherent in the portfolio, and 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 credit losses is charged against earnings in amounts
necessary to maintain adequate reserves for loan and off-balance sheet credit
losses. Loans are charged off when the loan balance or a portion of the loan
balance is no longer covered by the paying capacity of the borrower based on an
evaluation of available cash resources and collateral value. Loans are evaluated
quarterly and charge-offs are taken in the quarter in which the loss is
identified. Additionally, all unsecured or under-secured loans that are past due
by 180 days or more are charged off within 30 days. Recoveries of loans
previously charged off are added to the reserve.
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
55
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 loans. 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 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.
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. At least
annually, we request estimates of fair value from outside sources to corroborate
the results of the valuation model.
Permanent impairment of mortgage servicing rights is evaluated quarterly. A
strata is considered to be permanently impaired if the fair value does not
exceed amortized cost after assuming a 300 basis point increase in mortgage
interest rates. The amortized cost of the asset is reduced to the calculated
fair value through a charge against the valuation allowance.
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. The fair value of the originated
servicing rights is determined at closing based upon relative fair value.
Purchased mortgage servicing rights are recorded at cost.
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.
Current income tax expense is based on an effective tax rate that considers
statutory federal and state income tax rates and permanent differences between
income and expense recognition for financial reporting and income tax purposes.
The amount of current income tax expense recognized in any period may differ
from amounts reported to taxing authorities. These differences are recorded as
current income tax liabilities. Income tax expense may be reduced when amounts
accrued are determined to no longer represent liabilities of the Company. Income
tax expense was reduced $3.0 million in 2004 from the resolution of state income
tax issues.
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.
56
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.
STOCK COMPENSATION PLANS
BOK Financial has various stock compensation plans for its employees.
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.
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.
OTHER OPERATING REVENUE
Fees and commissions revenue is recognized at the time the related services
are provided or products are sold and may be accrued when necessary. Accrued
fees and commissions are reversed against revenue if amounts are subsequently
deemed to be uncollectible.
EFFECT OF PENDING STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
FINANCIAL ACCOUNTING STANDARDS BOARD
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS 123R, "SHARE-BASED PAYMENTS"
In December 2004, the FASB revised Statement No. 123, "Accounting for
Stock-Based Compensation," by issuing FAS 123R. FAS 123R requires companies to
recognize in income statements the grant-date fair value of stock options and
other equity-based compensation issued to employees. Previously, FAS 123
recommended, but did not require income statement recognition of the fair value
of equity-based compensation. FAS 123R requires that share-based payments that
may be settled in cash be carried at current fair value. Fair value is
determined at each balance sheet date until the award is settled. Changes in
fair value are recognized in the current period. Share-based payments that will
be settled in equity instruments are measured at grant-date fair value and not
remeasured for subsequent changes in fair value. Compensation expense is
generally recognized over the vesting period for awards that will be settled in
equity instruments. FAS 123R is effective for interim periods beginning on or
after June 15, 2005.
The Company previously adopted the preferred income statement recognition
methods of the original FAS 123. Management does not expect FAS 123R to have a
significant effect on its financial statements.
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
STATEMENT OF POSITION 03-3, "ACCOUNTING FOR CERTAIN LOANS OR DEBT SECURITIES
ACQUIRED IN A TRANSFER"
SOP 03-3 addresses accounting for differences between contractual and
expected cash flows of certain acquired loans and debt securities when the
differences are due, at least in part, to credit quality. SOP 03-3 is applicable
to loans and debt securities acquired individually, in pools or as part of a
business combination. It is not applicable to loans originated by the lender.
The yield that may be accreted to income is limited to the excess of estimated
undiscounted cash flows over the investor's investment in the asset. Subsequent
increases in expected cash flows should be recognized prospectively through a
yield adjustment. Subsequent decreases in expected cash flows should be
recognized as impairment. SOP 03-3 prohibits the carry-over or creation of
valuation allowances related to acquired assets, including assets acquired in a
business combination that have evidence of deterioration since origination. SOP
03-3 is effective for loans and debt securities acquired in fiscal years
beginning after December 15,
57
2004. The guidance provided by SOP 03-3 is not expected to have a significant
effect on future financial statements.
EMERGING ISSUES TASK FORCE
ISSUE 03-1, "THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS
APPLICATION TO CERTAIN INVESTMENTS"
EITF 03-1 provides guidance for determining when an investment is impaired,
for evaluating whether the impairment is other-than-temporary and for measuring
impairment. An asset is considered impaired when its fair value is less than
cost. The criteria for evaluating whether the impairment is other-than-temporary
includes the nature of the asset, whether the asset can be prepaid by the issuer
in a manner that the investor will not recover its investment, the severity and
duration of the impairment and the investor's ability and intent to hold the
asset until the fair value recovers. Impairment is measured as the difference
between fair value and cost. If the impairment is considered
other-than-temporary, a new cost basis is established through direct write-down
of the asset.
In September 2004, the FASB agreed to reconsider EITF 03-1 and all other
guidance on disclosing, measuring and recognizing other-than-temporary
impairment of debt and equity securities. Until the reconsideration of EITF 03-1
is complete, we are unable to evaluate the effects on future financial
statements. The disclosure requirements of EITF 03-1 remain in effect. Guidance
for determining other-than-temporary impairment continues to be provided by the
Securities and Exchange Commission's Staff Accounting Bulletin No. 59.
(2) ACQUISITIONS
On September 10, 2003, BOK Financial paid $77.9 million in cash for all the
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 16.
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 20,809 8,568
------------ -------------
Total assets acquired 354,385 251,979
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 35,897 17,533
Less purchase price 77,928 67,745
------------ -------------
Goodwill $ 42,031 $ 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 2002:
Condensed Consolidated Pro Forma Statements of Earnings
(In Thousands Except Per Share Data)
(Unaudited)
Year ended December 31,
------------------------------
2003 2002
-------------- ---------------
Net interest revenue $ 400,159 $389,648
Provision for credit losses 35,941 35,162
- ----------------------------- -------------- ---------------
Net interest revenue
after provision for
credit losses 364,218 354,486
Other operating revenue 311,373 332,052
Other operating expense 428,490 452,654
- ----------------------------- -------------- ---------------
Income before taxes 247,101 233,884
Federal and state
income tax 88,914 80,825
- ----------------------------- -------------- ---------------
Net income $ 158,187 $153,059
- ----------------------------- -------------- ---------------
Earnings per share:
Basic net income $ 2.67 $ 2.61
Diluted net income 2.38 2.31
- ----------------------------- -------------- ---------------
Average shares:
Basic 58,700 58,102
Diluted 66,509 66,301
- ----------------------------- -------------- ---------------
On December 21, 2004, BOK Financial announced it entered into an agreement
to acquire Phoenix-based Valley Commerce Bancorp Ltd. and its Valley Commerce
Bank subsidiary for $32 million cash. Total consolidated assets and net assets
of Valley Commerce Bancorp Ltd. were $141 million and $13 million, respectively,
at December 31, 2004. This transaction is expected to be completed in April
2005, subject to regulatory approval.
58
(3) SECURITIES
INVESTMENT SECURITIES
The amortized cost and fair values of investment securities are as follows
(in thousands):
December 31,
----------------------------------------------------------------------------------------------
2004 2003
----------------------------------------------- ----------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Fair ------------------------ Amortized Fair -----------------------
Cost Value Gain Loss Cost Value Gain Loss
----------------------------------------------------------------------------------------------
Municipal and other tax-exempt $216,986 $218,465 $2,501 $(1,022) $184,192 $187,354 $4,049 $ (887)
Mortgage-backed U.S. agency
securities 1,287 1,336 49 - 2,296 2,418 122 -
Other debt securities 2,821 2,835 14 - 1,463 1,484 21 -
----------------------------------------------------------------------------------------------------------------------------
Total $221,094 $222,636 $2,564 $(1,022) $187,951 $191,256 $4,192 $ (887)
----------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of investment securities at December 31,
2004, 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 $ 46,214 $ 138,870 $24,996 $ 6,906 $ 216,986 2.99
Fair value 46,254 140,027 25,365 6,819 218,465
Nominal yield (1) 5.54 5.02 6.03 6.07 5.28
Other debt securities:
Amortized cost $ 2,021 $ 100 $ 700 $ - $ 2,821 2.45
Fair value 2,021 106 708 - 2,835
Nominal yield 2.28 7.00 5.37 - 3.21
------------ -------------- ------------- ------------- ------------- -------------
Total fixed maturity securities:
Amortized cost $ 48,235 $ 138,970 $ 25,696 $ 6,906 $ 219,807 2.98
Fair value 48,275 140,133 26,073 6,819 221,300
Nominal yield 5.41 5.02 6.02 6.07 5.26
------------ -------------- ------------- -------------
Mortgage-backed securities:
Amortized cost $ 1,287 (2)
Fair value 1,336
Nominal yield (3) 6.45
-------------
Total investment securities:
Amortized cost $ 221,094
Fair value 222,636
Nominal yield 5.26
-------------
<FN>
(1) Calculated on a taxable equivalent basis using a 39% effective tax rate.
(2) The average expected lives of mortgage-backed securities were 6.28 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.
</FN>
59
AVAILABLE FOR SALE SECURITIES
The amortized cost and fair value of available for sale securities are as
follows (in thousands):
December 31,
----------------------------------------------------------------------------------------------
2004 2003
---------------------------------------------- -----------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Fair ---------------------- Amortized Fair ----------------------
Cost Value Gain Loss Cost Value Gain Loss
----------------------------------------------------------------------------------------------
U.S. Treasury $ 27,119 $ 27,062 $ 31 $ (88) $ 44,679 $ 45,424 $ 746 $ (1)
Municipal and other tax-exempt 414 404 1 (11) 3,271 3,257 6 (20)
Mortgage-backed securities:
U. S. agencies 3,067,611 3,052,375 8,079 (23,315) 3,514,158 3,518,926 28,962 (24,194)
Other 1,423,613 1,418,770 2,378 (7,221) 845,430 848,911 5,996 (2,515)
- ------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 4,491,224 4,471,145 10,457 (30,536) 4,359,588 4,367,837 34,958 (26,709)
- ------------------------------------------------------------------------------ -----------------------------------------------
Other debt securities 515 528 13 - 1,140 1,177 37 -
Equity securities and mutual funds 90,343 94,051 3,708 - 96,460 101,173 5,450 (737)
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 4,609,615 $4,593,190 $ 14,210 $(30,635) $ 4,505,138 $4,518,868 $ 41,197 $(27,467)
- ------------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of available for sale securities at
December 31, 2004, 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 $ 16,054 $ 11,065 $ - $ - $ 27,119 0.99
Fair value 16,057 11,005 - - 27,062
Nominal yield 2.21 2.75 - - 2.43
Municipal and other tax-exempt:
Amortized cost $ - $ 99 $ 315 $ - $ 414 5.43
Fair value - 100 304 - 404
Nominal yield (1) - 4.67 2.65 - 3.13
Other debt securities:
Amortized cost $ 374 $ 75 $ 66 $ - $ 515 1.57
Fair value 383 79 66 - 528
Nominal yield (1) 6.05 6.23 5.85 - 6.05
------------- ------------- ------------- ------------- --------------- -----------
Total fixed maturity securities:
Amortized cost $ 16,428 $ 11,239 $ 381 $ - $ 28,048 1.07
Fair value 16,440 11,184 370 - 27,994
Nominal yield 2.35 2.80 3.20 - 2.51
------------- ------------- ------------- -------------
Mortgage-backed securities:
Amortized cost $ 4,491,224 (2)
Fair value 4,471,145
Nominal yield (4) 4.35
---------------
Equity securities and mutual funds:
Amortized cost $ 90,343 (3)
Fair value 94,051
Nominal yield 2.64
---------------
Total available-for-sale securities:
Amortized cost $ 4,609,615
Fair value 4,593,190
Nominal yield 4.30
---------------
<FN>
(1) Calculated on a taxable equivalent basis using a 39% effective tax rate.
(2) The average expected lives of mortgage-backed securities were 3.26 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.
</FN>
60
At December 31, 2004, there were outstanding commitments to buy $15 million
of securities that have not yet been issued. As of December 31, 2004, these
commitments are not reflected in BOK Financial's balance sheet because they have
not settled and meet specific criteria exempting them from the definition of
derivative contracts.
Sales of available for sale securities resulted in gains and losses as
follows (in thousands):
2004 2003 2002
----------- ----------- -----------
Proceeds $2,652,554 $5,089,734 $6,873,320
Gross realized gains 10,452 30,373 85,346
Gross realized losses 13,540 23,185 26,642
Related federal and state
income tax expense
(benefit) (1,044) 2,585 20,781
In addition to securities that have been reclassified as pledged to
creditors, securities with an amortized cost of $2.6 billion and $2.1 billion at
December 31, 2004 and 2003, respectively, have been pledged as collateral for
repurchase agreements, public and trust funds on deposit and for other purposes
as required by law. The secured parties do not have the right to sell or
repledge these securities.
Net unrealized losses on securities totaled $15 million at December 31,
2004 compared with net unrealized gains of $17 million at December 31, 2003 due
primarily to rising interest rates. The aggregate gross amount of unrealized
losses at December 31, 2004 totaled $32 million. 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 ability and intent to hold
the securities until the fair values exceed amortized cost. It is our belief,
based on currently available information and our evaluation, that the unrealized
losses in these securities were temporary.
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 $ 49,805 $ 331 $ 42,470 $ 691 $ 92,275 $ 1,022
Available for sale:
U. S. Treasury 21,978 88 - - 21,978 88
Municipal and other tax-exempt - - 304 11 304 11
Mortgage-backed securities:
U. S. agencies 1,139,652 8,236 742,421 15,079 1,882,073 23,315
Other 610,811 6,534 137,188 687 747,999 7,221
- ------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Total $1,822,246 $ 15,189 $ 922,383 $ 16,468 $2,744,629 $ 31,657
- ------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
61
(4) DERIVATIVES
The fair values of derivative contracts at December 31, 2004 were (in
thousands):
Assets Liabilities
----------- -------------
Customer Risk Management Programs:
Interest rate contracts $ 4,116 $ 5,526
Energy contracts 363,388 362,761
Cattle contracts 708 1,138
Foreign exchange contracts 10,569 10,571
- ----------------------------------------- ----------- -------------
Total Customer Derivatives 378,781 379,996
Interest Rate Risk Management Programs:
Interest rate risk management 953 7,296
Mortgage servicing rights 317 -
- ----------------------------------------- ----------- -------------
Total Derivative Contracts $ 380,051 $387,292
- ----------------------------------------- ----------- -------------
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. We
also have programs to assist customers in managing their interest rate and
foreign exchange risks and a specialized program for customers with loans
secured by cattle. 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 commodity prices, interest rates or foreign
exchange rates. The counterparty contracts are identical to the customer
contracts, except for a fixed pricing spread or a fee paid to BOK Financial as
compensation for administrative costs, credit risks and profit.
INTEREST RATE RISK MANAGEMENT PROGRAMS
BOK Financial uses interest rate swaps to assist in managing its interest
rate sensitivity. Interest rate swaps are generally used to reduce overall asset
sensitivity by converting specific fixed rate liabilities to floating rate based
on LIBOR, or specific prime-based loans to fixed rate. Interest rate swaps are
designated as fair value or cash flow hedges when the specific criteria required
by generally accepted accounting principles are met. These criteria include
requirements that derivatives are highly effective in offsetting changes in fair
value or cash flow of the hedged assets or liabilities.
The following table details interest rate swaps and, when applicable, the
associated hedged assets or liabilities at December 31, 2004 (dollars in
thousands):
Hedged Asset / Liability Interest Rate Swap
------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average
--------------------------- ---------------------------
Fixed Rate Floating Rate Notional Fixed Rate Floating Rate Positive Negative
Maturity Description Amount (Paid) Received (2) Amount Received(Paid) Received (Paid)(1) Fair Value Fair Value
--------------------------------------------------------------------------------------------------------------------------------
Fair value hedges:
2005 Certificates of $84,606 (1.933)% - % $85,000 2.113% (2.400)% $ - $ 157
deposit
2006 Certificates of 74,980 (2.313) - 75,000 2.400 (2.400) - 781
deposit
2007 Certificates of 50,000 (2.960) - 50,000 3.085 (2.400) - 480
deposit
2007 Subordinated 150,000 (7.125) - 150,000 3.165 (2.400) - 1,540
debt
2008 Certificates of 21,980 (3.000) - 22,000 3.093 (2.400) - 404
deposit
2009 Certificates of 69,932 (4.009) - 70,000 4.133 (2.400) 953 251
deposit
2010 Certificates of 9,878 (3.624) - 10,000 3.657 (2.400) - 184
deposit
2011 Certificates of 29,779 (3.983) - 30,000 4.013 (2.400) - 231
deposit
------------------------------------------------------------------------------------------------------------------------
Total fair
value hedges 491,155 492,000 953 4,028
------------------------------------------------------------------------------------------------------------------------
Cash flow hedges:
2008 Prime rate loans 100,000 - 5.250 100,000 5.926 (5.250)(2) - 1,625
------------------------------------------------------------------------------------------------------------------------
Total cash flow
hedges 100,000 100,000 - 1,625
------------------------------------------------------------------------------------------------------------------------
Not designated as hedges:
2006 - - - 13,246 (5.425) 2.400 - 418
2011 - - - 33,332 (5.359) 2.400 - 1,225
----------- ------------ -------------------------
Total $591,155 $638,578 $ 953 $ 7,296
----------- ------------ -------------------------
(1) Floating rates are based on 30-day LIBOR, unless otherwise noted.
(2) Floating rate based on prime.
During 2004 and 2003, net interest revenue was increased by $9.9 million
and $14.7 million, respectively, from the settlement of amounts receivable or
payable on interest rate swaps.
In addition, BOK Financial has an option to enter into an interest rate
swap that is part of the mortgage servicing rights hedging program. The notional
amount of this derivative contract is $50 million. On October 15, 2005, we have
the right to enter into an interest rate swap where we receive a fixed rate of
4.05% and pay a variable rate based on LIBOR. If we choose to exercise the
option, the resulting swap will expire in 2015. This contract is carried at fair
value and is not designated as a hedge for accounting purposes.
62
(5) LOANS
Significant components of the loan portfolio are as follows (in thousands):
December 31,
-----------------------------------------------------------------------------------------------
2004 2003
------------------------------------------------ ----------------------------------------------
Fixed Variable Non- Fixed Variable Non-
Rate Rate accrual Total Rate Rate accrual Total
------------------------------------------------ ----------------------------------------------
Commercial $1,580,239 $2,962,402 $33,195 $4,575,836 $1,603,095 $2,692,247 $41,360 $4,336,702
Commercial real estate 376,290 1,234,676 10,144 1,621,110 446,751 1,181,030 2,311 1,630,092
Residential mortgage 687,574 502,732 8,612 1,198,918 522,240 485,582 7,821 1,015,643
Residential mortgage held for
sale 40,262 - - 40,262 56,543 - - 56,543
Consumer 309,461 182,671 709 492,841 298,465 145,255 1,189 444,909
-----------------------------------------------------------------------------------------------------------------------------
Total $2,993,826 $4,882,481 $52,660 $7,928,967 $2,927,094 $4,504,114 $52,681 $7,483,889
-----------------------------------------------------------------------------------------------------------------------------
Loans past due (90 days) $ 7,649 $ 14,944
-----------------------------------------------------------------------------------------------------------------------------
Foregone interest on nonaccrual loans $ 4,617 $ 4,821
-----------------------------------------------------------------------------------------------------------------------------
Approximately 59% of the commercial and consumer loan portfolios and
approximately 75% 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 15% of total loans as of December 31, 2004.
Other notable segments include wholesale/retail, $699 million; manufacturing,
$484 million; agriculture, $262 million, which includes $217 million of loans to
the cattle industry; and services, $1.6 billion, which includes nursing homes of
$281 million, healthcare of $143 million and hotels of $30 million.
Approximately 39% of commercial real estate loans are secured by properties
located in Oklahoma, primarily in the Tulsa and Oklahoma City metropolitan
areas. An additional 31% of commercial real estate loans are secured by property
located in Texas. The major components of these properties are multifamily
residences, $232 million; construction and land development, $457 million;
retail facilities, $312 million; and office buildings, $343 million.
During 2004, interest rate swaps with $100 million notional amounts were
designated cash flow hedges of prime-based loans. The objective of the hedge is
to protect against the variability of interest cash flows on the first $100
million of then existing prime-based loans. The Company receives settlements
based on a fixed rate of 5.93% and pays settlements based on the U.S. prime
rate. Amounts due are settled monthly. The amounts related to these swaps
included in accumulated other comprehensive income that are expected to be
reclassified into earnings during 2005 based on the current interest rate
environment is not material to the Company's operating results.
CREDIT COMMITMENTS
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of conditions established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. At December 31, 2004, outstanding commitments totaled
$3.5 billion. Because some commitments are expected to expire before being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. BOK Financial uses the same credit policies in making commitments
as it does loans.
The amount of collateral obtained, if deemed necessary, is based upon
management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. Because the credit risk involved
in issuing standby letters of credit is essentially the same as that involved in
extending loan commitments, BOK Financial uses the same credit policies in
evaluating the creditworthiness of the customer. Additionally, BOK Financial
uses the same evaluation process in obtaining collateral on standby letters of
credit as it does for loan commitments. The term of these standby letters of
credit is defined in each commitment and typically corresponds with the
underlying loan commitment. At December 31, 2004, outstanding standby letters of
credit totaled $414 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, 2004, outstanding commercial letters of credit
totaled $7 million.
63
RESERVES FOR CREDIT LOSSES
The activity in the reserve for loan losses is summarized as follows (in
thousands):
2004 2003 2002
--------------------------------
Beginning balance $ 114,784 $ 103,851 $ 89,188
Provision for loan losses 15,792 34,000 34,228
Loans charged off (29,685) (31,475) (25,905)
Recoveries 7,727 6,125 4,976
Addition due to acquisitions - 2,283 1,364
-----------------------------------------------------------
Ending balance $ 108,618 $ 114,784 $103,851
-----------------------------------------------------------
The activity in the reserve for off-balance sheet credit losses is
summarized as follows (in thousands):
2004 2003 2002
--------------------------------
Beginning balance $ 13,855 $ 12,219 $ 12,717
Provision for off-balance
sheet credit losses 4,647 1,636 (498)
-----------------------------------------------------------
Ending balance $ 18,502 $ 13,855 $ 12,219
-----------------------------------------------------------
Provision for credit losses $ 20,439 $ 35,636 $ 33,730
-----------------------------------------------------------
IMPAIRED LOANS
Investments in loans considered to be impaired under FAS 114 were as
follows (in thousands):
December 31,
--------------------------------
2004 2003 2002
--------------------------------
Investment in loans
impaired under
FAS 114 (all of
which were on a
nonaccrual basis) $45,424 $46,990 $44,912
Loans with specific
reserves for loss 14,881 18,947 4,685
Specific reserve balance 6,994 6,377 2,269
No specific related reserve
for loss 30,543 28,043 40,227
Average recorded investment
in impaired loans 46,386 47,415 41,828
Interest income recognized on impaired loans during 2004, 2003 and 2002 was
not significant.
(6) PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows (in
thousands):
December 31,
------------------------
2004 2003
----------- ------------
Land $ 40,479 $ 40,098
Buildings and improvements 135,932 126,665
Software 27,515 26,338
Furniture and equipment 100,447 95,833
- ------------------------------------ ----------- ------------
Subtotal 304,373 288,934
Less accumulated depreciation 131,730 113,033
- ------------------------------------ ----------- ------------
Total $172,643 $175,901
- ------------------------------------ ----------- ------------
Depreciation expense of premises and equipment was $23.4 million, $22.4
million and $20.5 million for the years ended December 31, 2004, 2003 and 2002,
respectively.
(7) INTANGIBLE ASSETS
The following table presents the original cost and accumulated amortization
of intangible assets (in thousands):
December 31,
-----------------------
2004 2003
----------- -----------
Core deposit premiums $ 86,257 $ 86,257
Less accumulated amortization 71,158 64,012
- ------------------------------------- ----------- -----------
Net core deposit premiums 15,099 22,245
Other identifiable intangible assets 11,526 11,526
Less accumulated amortization 4,249 3,257
- ------------------------------------- ----------- -----------
Net other identifiable intangible
assets 7,277 8,269
Goodwill 273,353 273,307
Less accumulated amortization 53,135 53,135
- ------------------------------------- ----------- -----------
Net goodwill 220,218 220,172
- ------------------------------------- ----------- -----------
Total intangible assets, net $242,594 $250,686
- ------------------------------------- ----------- -----------
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
-------------- ----------------- -------------
2005 $ 5,175 $ 962 $ 6,137
2006 3,628 796 4,424
2007 2,935 763 3,698
2008 1,552 780 2,332
2009 1,216 804 2,020
Thereafter 593 3,172 3,765
- ---------------- -------------- ----------------- -------------
$15,099 $7,277 $22,376
- ---------------- -------------- ----------------- -------------
64
The net amortized cost of intangible assets at December 31, 2004 is
assigned to reporting units as follows (in thousands):
Core deposit premiums:
Bank of Albuquerque $ 503
Bank of Texas 7,007
Colorado State Bank and Trust 7,589
----------------------------------- -----------
$ 15,099
----------------------------------- -----------
Other identifiable intangible assets:
Bank of Oklahoma $ 197
Colorado State Bank and Trust 7,080
----------------------------------- -----------
$ 7,277
----------------------------------- -----------
Goodwill:
Bank of Oklahoma $ 8,173
Bank of Texas 154,741
Bank of Albuquerque 15,273
Colorado State Bank and Trust 42,031
----------------------------------- -----------
$220,218
----------------------------------- -----------
(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 $40
million and $57 million, and outstanding mortgage loan commitments totaled $189
million and $208 million at December 31, 2004 and 2003, 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, 2004, the unrealized loss on forward
sales contracts used to hedge the mortgage pipeline was approximately $119
thousand.
At December 31, 2004, BOK Financial owned the rights to service 56,062
mortgage loans with outstanding principal balances of $4.5 billion, including
$655 million serviced for affiliates, and held related funds of $67 million for
investors and borrowers. The weighted average interest rate and remaining term
was 6.27% and 270 months, respectively. Mortgage loans sold with recourse
totaled $32 million at December 31, 2004. 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.
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.
65
Activity in capitalized mortgage servicing rights and related valuation
allowance during 2002, 2003 and 2004 are as follows (in thousands):
Capitalized Mortgage Servicing Rights
------------------------------------- Valuation Hedging
Purchased Originated Total Allowance Loss (2) Net
-----------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 55,056 $ 53,611 $ 108,667 $(18,451) $ 8,580 $ 98,796
Additions, net (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
Additions, net - 11,365 11,365 - - 11,365
Amortization expense (4,695) (10,753) (15,448) - (356) (15,804)
Write-off (6,291) (7,012) (13,303) 16,656 (3,353) -
Recovery of impairment - - - 1,567 - 1,567
-----------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 $ 11,394 $ 48,056 $ 59,450 $ (13,772) $ - $ 45,678
-----------------------------------------------------------------------------------------------------------
Estimated fair value of
mortgage servicing rights at:
December 31, 2002 (1) $17,311 $ 20,477 $ 37,788 $ 37,788
December 31, 2003 (1) $12,625 $ 36,564 $ 49,189 $ 49,189
December 31, 2004 (1),(3) $ 9,338 $ 36,985 $ 46,323 $ 46,323
-----------------------------------------------------------------------------------------------------------
<FN>
(1) Excludes approximately $1.1 million, $1.4 million and $2 million at December 31, 2004, 2003 and 2002, respectively, of
loan servicing rights on mortgage loans originated prior to the adoption of FAS 122.
(2) Hedging loss represents the deferred loss on a derivatives-based hedging program prior to the adoption of FAS 133.
(3) Fair value of mortgage servicing rights is based on numerous assumptions primarily related to mortgage interest rates.
At December 31, 2004, management estimates that a 50 basis point increase in mortgage interest rates will increase the
fair value of mortgage servicing rights by $6.3 million and a 50 basis point decrease in mortgage interest rates will
reduce the fair value of mortgage servicing rights by $10.4 million.
</FN>
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, 2004 was 9.71%.
Prepayment rate - Annual prepayment estimates ranging from 10.55% to 34.54%
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, 2004 was
4.52%.
Stratification of the mortgage loan-servicing portfolio, outstanding
principal of loans serviced, and related hedging information by interest rate at
December 31, 2004 follows (in thousands):
< 5.51% 5.51% - 6.50% 6.51% - 7.50% => 7.51% Total
-------------------------------------------------------------------------------
Cost less accumulated amortization $ 13,807 $ 23,266 $ 17,096 $ 5,281 $ 59,450
-----------------------------------------------------------------------------------------------------------------------------
Fair value $ 12,378 $ 17,679 $ 11,856 $ 4,410 $ 46,323
-----------------------------------------------------------------------------------------------------------------------------
Impairment (2) $ 1,628 $ 5,588 $ 5,242 $ 1,314 $ 13,772
-----------------------------------------------------------------------------------------------------------------------------
Outstanding principal of loans serviced (1) $ 938,400 $1,421,900 $ 1,027,300 $ 358,000 $3,745,600
-----------------------------------------------------------------------------------------------------------------------------
<FN>
1 Excludes outstanding principal of $655 million for loans serviced for affiliates and $86 million of mortgage loans for which
there are no capitalized mortgage servicing rights.
2 Impairment is determined by both an interest rate and loan type stratification.
</FN>
66
(9) DEPOSITS
Interest expense on deposits is summarized as follows (in thousands):
2004 2003 2002
-----------------------------------
Transaction deposits $ 35,517 $ 31,346 $ 39,273
Savings 975 944 1,976
Time:
Certificates of
deposits under $100,000 41,978 39,098 50,036
Certificates of deposits
$100,000 and over 53,918 48,181 42,291
Other time deposits 12,045 12,360 11,890
------------------------------------------------------------
Total time 107,941 99,639 104,217
------------------------------------------------------------
Total $144,433 $131,929 $145,466
------------------------------------------------------------
The aggregate amounts of time deposits in denominations of $100,000 or more
at December 31, 2004 and 2003 were $2.2 billion and $2.1 billion, respectively.
Time deposit maturities are as follows: 2005 - $1.3 billion, 2006 - $422
million, 2007 - $808 million, 2008 - $232 million, 2009 - $330 million, and $577
million thereafter.
During the first half of 2004, the Company raised $342 million in fixed
rate, brokered certificates of deposits. These deposits generally replaced other
time deposits as they matured. The weighted average interest rate paid on these
certificates is 2.89%. Interest rate swaps have been designated as hedges of
each of these certificates. The purpose of these swaps is to hedge against
changes in fair value due to changes in interest rates by modifying the
certificates from fixed rate to floating rates based on changes in LIBOR. We
receive a weighted average fixed rate of 3.01% on these swaps and currently pay
a floating rate of 2.40%.
Interest expense on time deposits during 2004 and 2003 was reduced by the
net accrued settlement from interest rate swaps of $7.9 million and $14.0
million, respectively.
(10) OTHER BORROWINGS
Information relating to other borrowings is summarized as follows (dollars
in thousands):
December 31
--------------------------------------------------------------------------------------------------------
2004 2003 2002
--------------------------------------------------------------------------------------------------------
Maximum Maximum Maximum
Outstanding Outstanding Outstanding
At Any At Any At Any
Balance Rate Month End Balance Rate Month End Balance Rate Month End
--------------------------------------------------------------------------------------------------------
Parent Company:
Revolving, unsecured line $ 95,000 2.91% $ 95,000 $ 95,000 1.75% $ 95,000 $ 85,000 2.17% $ 95,000
Subordinated debenture - - - - - - - - 30,000
Other - - - - - - - - 95
------------- ------------- -------------
Total parent company 95,000 2.91 95,000 1.75 85,000 2.17
------------- ------------- -------------
Subsidiary Banks:
Funds purchased and
repurchase agreements 1,555,507 2.18 1,900,810 1,609,668 1.37 1,904,269 1,567,686 1.67 1,895,315
Federal Home Loan Bank
advances 894,354 2.31 899,350 899,426 1.21 974,729 973,454 1.48 1,036,387
Subordinated debenture 151,594 5.18 154,230 154,332 6.02 155,345 155,419 6.19 156,229
Other 25,646 0.98 28,748 22,224 1.58 29,116 29,568 1.49 29,853
------------- ------------- -------------
Total subsidiary banks 2,627,101 2.39 2,685,650 1.58 2,726,127 1.86
------------- ------------- -------------
Total other borrowings $2,722,101 2.41 $2,780,650 1.74 $2,811,127 1.93
------------- ------------- -------------
Aggregate annual principal repayments of long-term debt at December 31,
2004 are as follows (in thousands):
Parent Subsidiary
Company Banks
---------------------------
2005 $ - $2,257,446
2006 95,000 205,124
2007 - 153,537
2008 - 1,934
2009 - 8,049
Thereafter - 1,011
---------------------------
Total $95,000 $2,627,101
---------------------------
67
Funds purchased generally mature within one to ninety days from the
transaction date. At December 31, 2004, securities sold under agreements to
repurchase totaled $822 million with related accrued interest payable of
$556 thousand.
Additional information relating to repurchase agreements at December 31,
2004 is as follows (dollars in thousands):
Amortized Market Repurchase Average
Security Sold/Maturity Cost Value Liability (1) Rate
-------------------------------------------------------------------------------------------------------------
U.S. Agency Securities:
Overnight $ 424,984 $ 422,652 $ 437,457 2.19%
Term of 30 to 90 days 517,925 512,494 384,628 2.33
-------------------------------------------------------------------------------------------------------------
Total Agency Securities $ 942,909 $ 935,146 $ 822,085 2.25%
-------------------------------------------------------------------------------------------------------------
<FN>
(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.
</FN>
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, 2004 pursuant to the Federal Home Loan Bank's collateral
policies is $434 million.
BOK Financial has a revolving, unsecured credit agreement from certain
banks at December 31, 2004 of $125 million. Interest is based upon either a base
rate or LIBOR 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 monthly. 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, 2004.
In 1997, BOk issued a $150 million 7.125% fixed rate subordinated debenture
that matures in 2007. Interest rate swaps were used as a fair value hedge to
convert the fixed interest on the debenture to a LIBOR-based floating rate. This
required BOk to adjust the carrying value of the subordinated debenture to fair
value. In 2001, those 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. Amortization of this adjustment reduces the
cost of the debt by 102 basis points.
During 2004, a $150 million notional amount interest rate swap was
designated as a hedge of changes in fair value of the subordinated debt due to
changes in interest rates. The Company receives a fixed rate of 3.165% and pays
a variable rate based on 1-month LIBOR, or 2.40% at December 31, 2004.
Semi-annual swap settlements coincide with interest payments on the subordinated
debenture. The interest rate swap terminates on August 15, 2007, the maturity
date of the subordinated debenture.
68
(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,
----------------------
2004 2003
----------------------
Deferred tax liabilities:
Available for sale securities
mark-to-market $ - $ 5,300
Pension contributions in excess
of book expense 9,400 10,800
Valuation adjustments 29,300 26,300
Mortgage servicing rights 20,200 24,200
Lease financing 15,800 16,900
Other 4,500 3,600
------------------------------------------------------------
Total deferred tax liabilities 79,200 87,100
------------------------------------------------------------
Deferred tax assets:
Available for sale securities
mark-to-market 6,400 -
Stock-based compensation 3,900 3,500
Credit loss reserves 48,500 48,900
Valuation adjustments 13,200 20,400
Deferred book income 22,400 19,700
Deferred compensation 8,300 4,300
Other 12,100 14,400
------------------------------------------------------------
Total deferred tax assets 114,800 111,200
------------------------------------------------------------
Deferred tax assets in
excess of deferred tax liabilities $ 35,600 $ 24,100
------------------------------------------------------------
The significant components of the provision for income taxes attributable
to continuing operations for BOK Financial are shown below (in thousands):
Years ended December 31,
-----------------------------------
2004 2003 2002
-----------------------------------
Current:
Federal $84,514 $77,015 $89,879
State 6,743 5,551 6,011
-----------------------------------------------------------
Total current 91,257 82,566 95,890
-----------------------------------------------------------
Deferred:
Federal 161 5,369 (12,978)
State 29 979 (2,077)
-----------------------------------------------------------
Total deferred 190 6,348 (15,055)
-----------------------------------------------------------
Total income tax $91,447 $88,914 $80,835
-----------------------------------------------------------
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,
-------------------------------
2004 2003 2002
-------------------------------
Amount:
Federal statutory tax $94,671 $86,538 $79,903
Tax exempt revenue (2,705) (2,815) (3,233)
Effect of state income taxes,
net of federal benefit 4,220 4,110 2,482
Intangible amortization 397 763 914
Charitable contribution (2,446) - -
Utilization of tax credits (784) (794) (937)
Reduction of tax accrual (3,000) - -
Other, net 1,094 1,112 1,706
------------------------------------------------------------
Total $91,447 $88,914 $80,835
------------------------------------------------------------
Due to the favorable resolution of certain state tax issues for the tax
period ended December 31, 2000, BOK Financial reduced its tax accrual by $3
million, which was credited against current federal income tax expense in 2004.
Years ended December 31,
-------------------------------
2004 2003 2002
-------------------------------
Percent of pretax income:
Federal statutory rate 35% 35% 35%
Tax-exempt revenue (1) (1) (1)
Effect of state income taxes,
net of federal benefit 2 2 1
Intangible amortization - - -
Charitable contribution (1) - -
Utilization of tax credits - - -
Reduction of tax accrual (1) - -
Other, net - - -
-------------------------------------------------------------
Total 34% 36% 35%
-------------------------------------------------------------
69
(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,
-----------------------
2004 2003
-----------------------
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $ 37,773 $ 30,606
Service cost 6,096 5,178
Interest cost 2,314 2,015
Actuarial loss 2,262 2,161
Benefits paid (3,757) (2,187)
-----------------------------------------------------------------------------
Projected benefit obligation at end of year (1),(2) $ 44,688 $ 37,773
-----------------------------------------------------------------------------
Change in plan assets:
Plan assets at fair value at beginning of year $ 43,275 $ 30,945
Actual return on plan assets 4,002 7,286
Company contributions 8,726 7,231
Benefits paid (3,757) (2,187)
-----------------------------------------------------------------------------
Plan assets at fair value at end of year $ 52,246 $ 43,275
-----------------------------------------------------------------------------
Reconciliation of prepaid (accrued) and total
amount recognized:
Benefit obligation $(44,688) $(37,773)
Fair value of assets 52,246 43,275
-----------------------------------------------------------------------------
Funded status of the plan 7,558 5,502
Unrecognized net loss 14,226 13,387
Unrecognized prior service cost 443 503
-----------------------------------------------------------------------------
Prepaid pension costs $ 22,227 $ 19,392
-----------------------------------------------------------------------------
Components of net periodic benefit costs:
Service cost $ 6,096 $ 5,178
Interest cost 2,314 2,015
Expected return on plan assets (3,639) (2,957)
Amortization of unrecognized amounts:
Net loss 1,060 818
Prior service cost 60 60
-----------------------------------------------------------------------------
Net periodic pension cost $ 5,891 $ 5,114
-----------------------------------------------------------------------------
(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 5.75% 6.25%
Expected return on plan assets 8.00% 7.50%
Rate of compensation increase 5.25% 5.25%
As of December 31, 2004, expected future benefit payments related to the
Pension Plan were as follows (in thousands):
2005 $ 1,311
2006 1,208
2007 1,989
2008 2,250
2009 3,090
2010 through 2014 16,501
-------------
$ 26,349
-------------
70
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 8.62%. The maximum and minimum required
Pension Plan contributions for 2004 were $2.2 million and $0, respectively.
Amounts contributed to the Pension Plan during 2004 included $1.0 million
attributable to the current year and $7.7 million attributable to 2003.
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 $3.9 million, $3.6
million and $3.1 million for 2004, 2003 and 2002, 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 $2.2 million at December 31, 2004.
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 $58.1 million in 2004, $52.0 million in 2003 and $32.1 million in 2002
for such awards.
(13) STOCK COMPENSATION 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 for the Chief Executive Officer and other
senior executives by an independent compensation committee of the Board of
Directors. Other stock-based compensation awards are approved by the independent
compensation committee upon recommendation of the Chairman of the Board and the
Chief Executive Officer.
These awards consist primarily of stock options that are subject to vesting
requirements. Generally, one-seventh of the options awarded vest annually and
expire three years after vesting. Additionally, stock options that vest in two
years and expire 45 days after vesting have been awarded.
The following table presents options outstanding during 2002, 2003 and 2004
under these plans:
Weighted-
Average
Exercise
Number Price
--------------------------
Options outstanding at
December 31, 2001 3,591,373 $18.17
Options awarded 174,258 31.28
Options exercised (491,952) 13.31
Options forfeited (40,104) 19.89
Options expired (5) 5.96
------------------------------------------------------------
Options outstanding at
December 31, 2002 3,233,570 19.66
Options awarded 889,343 32.60
Options exercised (672,457) 16.74
Options forfeited (61,941) 23.07
Options expired (53) 18.73
------------------------------------------------------------
Options outstanding at
December 31, 2003 3,388,462 23.58
Options awarded 857,951 40.37
Options exercised (693,199) 19.65
Options forfeited (212,844) 27.15
Options expired (2,322) 14.94
------------------------------------------------------------
Options outstanding at
December 31, 2004 3,338,048 $28.53
------------------------------------------------------------
Options vested at
December 31, 2004 980,493 $20.40
------------------------------------------------------------
The following table summarizes information concerning currently outstanding
and vested stock options:
Options Outstanding Options Vested
----------------------------------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (years) Price Vested Price
$8.18 - $9.69 77,458 1.25 $ 9.30 77,458 $ 9.30
16.17 145,632 1.92 16.17 142,560 16.17
17.37 - 19.02 950,979 3.07 18.05 476,849 18.19
28.27 - 31.00 1,101,827 4.42 29.70 283,626 29.28
37.21 - 37.65 226,656 1.00 37.43 - -
37.74 611,338 6.00 37.74 - -
45.43 - 49.09 224,158 2.00 47.81 - -
------------------------------------------------ -------------------
Stock-based compensation expense included in reported pretax net income for
the years ended December 31, 2004, 2003 and 2002 was $11.3 million, $5.7 million
and $4.1 million, respectively.
71
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:
2004 2003 2002
---------- --------- ---------
Average risk-free interest rate 3.27% 2.57% 1.59%
Dividend yield None None None
Volatility factors .168 .178 .190
Weighted-average
expected life 4.9 years 7 years 2 years
Weighted-average fair value $8.53 $6.66 $4.18
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, 2004, a total of
44,738 nonvested common shares have been awarded, including 24,800 awarded in
2004.
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.
This stock-based compensation 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. The total deferred compensation liability attributed to these
arrangements was $16.5 million for 2004 and $6.8 million for 2003.
During January 2005, BOK Financial awarded the following stock-based
compensation:
---------------------------------
Exercise Fair Value /
Number Price Award
---------------------------------
Equity awards:
Stock options 493,235 $47.34 $10.94
Nonvested stock 5,036 - 47.34
----------
Total Equity awards 498,271
Liability awards:
Stock options 187,207 47.34 10.94
Nonvested stock 7,892 - 47.34
----------
Total Liability awards 195,099
----------
Total stock-based awards 693,370
------------------------------------------------------------
72
(14) RELATED PARTIES
In compliance with applicable regulations, the Company may extend credit to
certain executive officers, directors, principal shareholders and their
affiliates (collectively referred to as "related parties") in the ordinary
course of business under substantially the same terms as comparable third-party
lending arrangements. The Company's loans to related parties do not involve more
than the normal credit risk and there are no non-accrual or impaired related
party loans outstanding at December 31, 2004 or 2003.
Activity in loans to related parties is summarized as follows (in
thousands):
2004 2003
------------ ------------
Beginning balance $119,873 $83,189
Advances 434,242 122,685
Payments (442,834) (86,001)
Adjustments (1) (6,436) -
------------------------------- ------------ ------------
Ending balance $104,845 $119,873
------------------------------- ------------ ------------
(1) Adjustments generally consist of changes in status as a related party.
BOK Investment Advisors, Inc. ("BOKIA"), a wholly-owned subsidiary of BOk,
serves as investment advisor to American Performance Funds ("AP Funds"). AP
Funds is a diversified, open-ended, investment company established in 1987 as a
business trust under the Investment Act of 1940. BOk serves as custodian for AP
Funds. Effective July 1, 2004, BOKIA began serving as the AP Funds
administrator. BOK Financial offers the AP Funds products to customers and
employees, in the ordinary course of business, through its brokerage and
trading, employee benefit plan and trust services as well as to the general
public.
Certain related parties are customers of the Company for services other
than loans, including consumer banking, corporate banking, risk management,
wealth management, brokerage and trading, or fiduciary/trust services. The
Company engages in transactions with related parties in the ordinary course of
business in compliance with applicable regulation. There are no other material
related party transactions that require disclosure.
(15) 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 2014 and 2024. Annual base rent is
$3.3 million. BOk subleases portions of its space for annual rents of $370
thousand in 2005 and $213 thousand in years 2006 through 2009. Net rent expense
on this lease was $2.9 million in years 2004, 2003 and 2002. Total rent expense
for BOK Financial was $14.3 million in 2004, $13.0 million in 2003 and $12.4
million in 2002.
At December 31, 2004, future minimum lease payments for equipment and
premises under operating leases were as follows: $13.6 million in 2005, $13.0
million in 2006, $11.6 million in 2007, $10.7 million in 2008, $9.6 million in
2009, and a total of $36.3 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. There were no expenditures related to this guarantee in 2004.
Expenditures totaled $3.2 million in 2003 and $373 thousand in 2002.
The Federal Reserve Bank requires member banks to maintain certain minimum
average cash balances. These balances were approximately $334 million and $303
million at December 31, 2004 and 2003, respectively.
BOSC, Inc., a wholly-owned subsidiary of BOK Financial, is an introducing
broker to Pershing, LLC for retail equity investment transactions. As such, it
has indemnified Pershing, LLC against losses due to a customer's failure to
settle a transaction or to repay a margin loan. All unsettled transactions and
margin loans are secured as required by applicable regulation. The amount of
customer balances subject to indemnification totaled $2.9 million at December
31, 2004.
BOK Private Equity, LLC, indirectly a wholly-owned subsidiary of BOK
Financial, is the general partner in BOK Private Equity Fund, LP ("the Fund").
The Fund provides alternative investment opportunities to certain customers,
some of which are related parties, through limited partnerships. The Fund
generally invests in distressed assets, asset buy-out or venture capital limited
partnerships or limited liability companies. The general partner has contingent
obligations through the Fund to make additional investments totaling $13.9
million as of December 31, 2004.
73
(16) 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 249,974,544 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 36 shares of Series A Preferred Stock at the option of
the holder. Dividends are cumulative at an annual rate of ten percent of the
$0.06 per share liquidation preference value when declared and are payable in
cash. Aggregate liquidation preference is $15 million. In 2004 and 2003, cash
dividends declared on preferred stock totaled $1.9 million and $750 thousand,
respectively. During 2003 and 2002, 23,214 shares and 47,961 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, based on average market
price, as defined, for a 65 business day period preceding declaration. 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. 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 2004, 2003 and 2002, 3% dividends payable in shares of BOK Financial
common stock were declared and paid. The shares issued were valued at $66
million, $58 million and $52 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.
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 210,069. The guaranteed price for each
anniversary period is $37.67 for 2005, $40.10 for 2006 and $42.53 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.
SUBSIDIARY BANKS
The amounts of dividends that BOK Financial's subsidiary banks can declare
and the amounts of loans the subsidiary banks can extend to affiliates are
limited by various federal banking regulations and state corporate law.
Generally, dividends declared during a calendar year are limited to net profits,
as defined, for the year plus retained profits for the preceding two years. The
amounts of dividends are further restricted by minimum capital requirements.
Pursuant to the most restrictive of the regulations at December 31, 2004, BOK
Financial's subsidiary banks could declare dividends up to $161 million without
prior regulatory approval. Management has developed and the Board of Directors
has approved an internal capital policy that is more restrictive than the
regulatory capital standards. As of December 31, 2004, the subsidiary banks
could declare dividends of up to $98 million under this policy. During 2004, the
subsidiary banks did not declare any dividends. The subsidiary banks declared
and paid dividends of $66 million in 2003 and $40 million in 2002.
74
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, 2004, these loans
had no outstanding balance. As of December 31, 2003, these loans totaled $10
million. Total loan commitments to affiliates at December 31, 2004 were
$108 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 $23 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 credit losses,
subject to certain limitations. All of BOK Financial's banking subsidiaries
exceeded the regulatory definition of well capitalized.
December 31,
------------------------------------------------------------
2004 2003
------------------------------ -----------------------------
Amount Ratio Amount Ratio
------------------------------ -----------------------------
(Dollars in thousands)
Total Capital (to Risk Weighted Assets):
Consolidated $ 1,329,431 11.67% $ 1,157,782 11.31%
BOk 1,016,351 11.13 900,888 11.06
Bank of Texas 235,921 11.41 201,984 11.13
Bank of Albuquerque 103,573 15.34 91,412 17.35
Bank of Arkansas 16,162 20.37 15,218 21.56
Colorado State Bank and Trust 36,015 14.50 26,222 10.19
Tier I Capital (to Risk Weighted Assets):
Consolidated $ 1,140,654 10.02% $ 935,932 9.15%
BOk 867,335 9.50 718,538 8.82
Bank of Texas 211,641 10.24 179,256 9.88
Bank of Albuquerque 95,443 14.14 84,811 16.10
Bank of Arkansas 15,164 19.11 14,328 20.30
Colorado State Bank and Trust 32,891 13.24 22,997 8.94
Tier I Capital (to Average Assets):
Consolidated $ 1,140,654 7.94% $ 935,932 7.17%
BOk 867,335 7.29 718,538 6.69
Bank of Texas 211,641 7.62 179,256 7.22
Bank of Albuquerque 95,443 6.69 84,811 6.37
Bank of Arkansas 15,164 8.97 14,328 7.82
Colorado State Bank and Trust 32,891 8.73 22,997 6.86
75
(17) 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,
--------------------------------------------
2004 2003 2002
--------------------------------------------
Numerator:
Net income $ 179,023 $ 158,360 $ 147,871
Preferred stock dividends (1,875) (1,500) (1,500)
---------------------------------------------------------------------------------------------------------------------
Numerator for basic earnings per share - income
available to common stockholders 177,148 156,860 146,371
---------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock dividends 1,875 1,500 1,500
---------------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share - income available
to common stockholders after assumed conversion $ 179,023 $ 158,360 $ 147,871
---------------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share - weighted average shares 59,128,395 58,699,951 56,613,689
Effect of dilutive securities:
Employee stock compensation plans (1) 669,857 776,891 773,628
Convertible preferred stock 6,921,083 6,921,164 6,921,164
Tanglewood market value guarantee (see Note 16) 13,161 111,115 45,077
---------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 7,604,101 7,809,170 7,739,869
---------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 66,732,496 66,509,121 64,353,558
---------------------------------------------------------------------------------------------------------------------
Basic earnings per share $3.00 $2.67 $2.59
---------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $2.68 $2.38 $2.30
---------------------------------------------------------------------------------------------------------------------
<FN>
(1) Excludes employee stock options with exercise prices 31,970 26,943 86,215
greater than the current market price.
</FN>
(18) REPORTABLE SEGMENTS
BOK Financial operates five principal lines of business: Oklahoma corporate
banking, Oklahoma consumer banking, mortgage banking, wealth management, and
regional banking. Mortgage banking activities include loan origination and
servicing across all markets served by the Company. Wealth management provides
brokerage and trading, private financial services and investment advisory
services in all markets. It also provides fiduciary services in all markets
except Colorado. Fiduciary services in Colorado are included in regional banks.
Regional banking consists primarily of corporate and consumer banking activities
in the respective local markets. 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 Oklahoma Corporate Banking segment provides loan and lease financing
and treasury and cash management services to businesses throughout Oklahoma and
certain relationships in surrounding states. Oklahoma Corporate Banking also
includes our TransFund unit, which provides ATM and merchant deposit services.
The Oklahoma 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 Online Banking. The Mortgage Banking segment
consists of two operating sectors that originate a
76
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
financial services, including trust and private financial services and brokerage
and trading services. This segment 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 primarily provided to clients in Oklahoma, Texas,
Arkansas and New Mexico. Regional banking includes 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 Banking 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 Oklahoma Corporate Banking and Oklahoma Consumer Banking
segments. Regional Banking is 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 rates are 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 accounting policies, except that 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. Management uses a
third-party developed capital allocation model. This model assigns capital based
upon credit, operating, interest rate and market risk inherent in the 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. Additional capital is assigned to the regional banking line of
business based on BOK Financial's investment in those entities.
Substantially all revenue is from domestic customers. No single external
customer accounts for more than 10% of total revenue.
77
Oklahoma Oklahoma All
Corporate Consumer Mortgage Wealth Regional Other/
(In Thousands) Banking Banking Banking Management Banking Eliminations Total
------------------------------------------------------------------------------------------------
Year ended December 31, 2004
Net interest revenue/(expense)
from external sources $ 147,389 $ (19,067) $ 21,647 $ 4,001 $ 202,318 $ 66,955 $ 423,243
Net interest revenue/(expense)
from internal sources (24,016) 64,897 (11,423) 8,888 (21,770) (16,576) -
----------------------------------------------------------------------------------------------------------------------------
Total net interest revenue 123,373 45,830 10,224 12,889 180,548 50,379 423,243
Provision for credit losses 8,956 6,963 340 23 5,509 (1,352) 20,439
Other operating revenue 85,256 56,920 22,055 91,533 49,523 (3,200) 302,087
Capitalized mortgage
servicing rights - - 11,365 - - - 11,365
Financial instruments
gains/(losses) - - (5,068) - - 506 (4,562)
Operating expense 97,759 76,042 35,415 84,062 132,711 16,802 442,791
Recovery for impairment of
mortgage servicing rights - - (1,567) - - - (1,567)
Income taxes 39,644 7,681 1,707 7,943 33,278 1,194 91,447
----------------------------------------------------------------------------------------------------------------------------
Net income $ 62,270 $ 12,064 $ 2,681 $ 12,394 $ 58,573 $ 31,041 $ 179,023
----------------------------------------------------------------------------------------------------------------------------
Average assets $4,670,041 $2,746,047 $ 559,034 $754,774 $ 5,831,267 $(534,276) $14,026,887
Average economic capital 312,530 64,390 27,270 84,820 280,710 527,837 1,297,557
Average invested capital - - - - 508,880 - -
Performance measurements:
Return on assets 1.33% 0.44% 0.48% 1.64% 1.00% - 1.28%
Return on economic capital 19.92 18.74 9.83 14.61 20.87 - 13.80
Return on invested capital - - - - 11.51 - -
Efficiency ratio 46.86 74.01 81.53 80.50 57.68 - 60.11
Reconciliation to Consolidated Financial Statements
Other Other
Net Interest Operating Operating Net Average
Revenue Revenue (1) Expense Income Assets
---------------------------------------------------------------------
Total reportable segments $372,864 $ 316,652 $424,422 $147,982 $14,561,163
Unallocated items:
Tax-equivalent adjustment 5,039 - - 5,039 -
Funds management 56,563 (3,465) 12,161 19,092 1,588,393
All others (including
eliminations), net (11,223) 265 4,641 6,910 (2,122,669)
--------------------------------------------------------------------------------------------------
BOK Financial consolidated $423,243 $ 313,452 $441,224 $179,023 $14,026,887
--------------------------------------------------------------------------------------------------
(1) Excluding financial instrument gains/(losses)
78
Oklahoma Oklahoma All
Corporate Consumer Mortgage Wealth Regional Other/
(In Thousands) Banking Banking Banking Management Banking Eliminations Total
------------------------------------------------------------------------------------------------
Year ended December 31, 2003
Net interest revenue/(expense)
from external sources $ 139,159 $ (17,146) $ 27,770 $ 1,966 $ 170,611 $ 69,135 $ 391,495
Net interest revenue/(expense)
from internal sources (24,133) 58,290 (9,415) 8,968 (16,593) (17,117) -
----------------------------------------------------------------------------------------------------------------------------
Total net interest revenue 115,026 41,144 18,355 10,934 154,018 52,018 391,495
Provision for credit losses 10,318 6,888 917 390 6,429 10,694 35,636
Other operating revenue 76,212 47,544 36,379 91,587 35,996 (4,600) 283,118
Capitalized mortgage
servicing rights - - 23,922 - - - 23,922
Financial instruments
gains/(losses) - - 4,025 - 339 (6,551) (2,187)
Operating expense 85,442 66,803 58,204 80,428 117,001 28,483 436,361
Recovery for impairment of
mortgage servicing rights - - (22,923) - - - (22,923)
Income taxes 37,143 5,835 18,082 8,442 24,413 (5,001) 88,914
----------------------------------------------------------------------------------------------------------------------------
Net income $ 58,335 $ 9,162 $ 28,401 $ 13,261 $ 42,510 $ 6,691 $ 158,360
----------------------------------------------------------------------------------------------------------------------------
Average assets $4,166,874 $2,524,743 $ 623,823 $731,070 $ 5,084,224 $(351,318) $12,779,416
Average economic capital 311,140 58,000 34,120 69,690 273,600 413,006 1,159,556
Average invested capital - - - - 459,780 - -
Performance measurements:
Return on assets 1.40% 0.36% 4.55% 1.81% 0.84% - 1.24%
Return on economic capital 18.75 15.80 83.24 19.03 15.54 - 13.66
Return on invested capital - - - - 9.25 - -
Efficiency ratio 44.68 75.32 74.00 78.45 62.35 - 62.47
Reconciliation to Consolidated Financial Statements
Other Other
Net Interest Operating Operating Net Average
Revenue Revenue (1) Expense Income Assets
---------------------------------------------------------------------
Total reportable segments $339,477 $ 311,640 $384,955 $151,669 $13,130,734
Unallocated items:
Tax-equivalent adjustment 5,170 - - 5,170 -
Funds management 59,571 (6,520) 13,848 5,048 1,378,433
All others (including
eliminations), net (12,723) 1,920 14,635 (3,527) (1,729,751)
--------------------------------------------------------------------------------------------------
BOK Financial consolidated $391,495 $ 307,040 $413,438 $158,360 $12,779,416
--------------------------------------------------------------------------------------------------
(1) Excluding financial instrument gains/(losses)
79
Oklahoma Oklahoma All
Corporate Consumer Mortgage Wealth Regional Other/
(In Thousands) Banking Banking Banking Management Banking Eliminations Total
------------------------------------------------------------------------------------------------
Year ended December 31, 2002
Net interest revenue/(expense)
from external sources $ 149,385 $ (18,036) $ 32,199 $ 1,959 $ 144,008 $ 59,817 $ 369,332
Net interest revenue/(expense)
from internal sources (40,632) 61,616 (13,713) 8,182 (17,493) 2,040 -
----------------------------------------------------------------------------------------------------------------------------
Total net interest revenue 108,753 43,580 18,486 10,141 126,515 61,857 369,332
Provision for credit losses 6,475 7,831 252 363 6,015 12,794 33,730
Other operating revenue 69,166 39,032 38,364 70,001 27,274 (6,609) 237,228
Capitalized mortgage
servicing rights - - 20,832 - - - 20,832
Financial instruments
gains - - 25,826 - 4,205 34,567 64,598
Operating expense 77,931 64,315 54,783 67,911 92,503 26,188 383,631
Provision for impairment of
mortgage servicing rights - - 45,923 - - - 45,923
Income taxes 36,376 4,071 992 4,673 21,722 13,001 80,835
----------------------------------------------------------------------------------------------------------------------------
Net income $ 57,137 $ 6,395 $ 1,558 $ 7,195 $ 37,754 $ 37,832 $ 147,871
----------------------------------------------------------------------------------------------------------------------------
Average assets $3,823,116 $2,349,611 $ 671,798 $556,109 $ 4,121,026 $(216,871) $11,304,789
Average economic capital 298,020 60,910 34,160 60,880 193,640 291,228 938,838
Average invested capital - - - - 379,820 - -
Performance measurements:
Return on assets 1.49% 0.27% 0.23% 1.29% 0.92% - 1.31%
Return on economic capital 19.17 10.50 4.56 11.82 19.50 - 15.75
Return on invested capital - - - - 9.94 - -
Efficiency ratio 43.80 77.85 70.52 84.74 60.95 - 61.15
Reconciliation to Consolidated Financial Statements
Other Other
Net Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
---------------------------------------------------------------------
Total reportable segments $307,475 $ 264,669 $403,366 $110,039 $11,521,660
Unallocated items:
Tax-equivalent adjustment 6,119 - - 6,119 -
Funds management 72,804 (7,245) 12,317 39,546 662,837
All others (including
eliminations), net (17,066) 636 13,871 (7,833) (879,708)
--------------------------------------------------------------------------------------------------
BOK Financial consolidated $369,332 $ 258,060 $429,554 $147,871 $11,304,789
--------------------------------------------------------------------------------------------------
(1) Excluding financial instrument gains/(losses)
80
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying values and estimated fair values
of financial instruments as of December 31, 2004 and 2003 (dollars in
thousands):
Range of Average Estimated
Carrying Contractual Repricing Discount Fair
Value Yields (in years) Rate Value
---------------------------------------------------------------------
2004:
Cash and cash equivalents $ 531,091 $ 531,091
Securities 4,823,976 4,825,518
Loans:
Commercial 4,575,836 2.71 - 15.00% 0.41 2.45 - 6.68% 4,778,495
Commercial real estate 1,621,110 3.50 - 15.00 1.08 5.65 - 7.60 1,606,153
Residential mortgage 1,198,918 2.82 - 7.96 4.17 5.36 - 6.44 1,154,226
Residential mortgage - held for sale 40,262 - - - 40,262
Consumer 492,841 2.65 - 21.00 2.29 4.83 - 8.75 471,863
---------------------------------------------------------------------------------------------------------------------
Total loans 7,928,967 8,050,999
Reserve for loan losses (108,618) -
---------------------------------------------------------------------------------------------------------------------
Net loans 7,820,349 8,050,999
Derivative instruments with positive
fair value 380,051 380,051
Deposits with no stated maturity 6,030,546 6,030,546
Time deposits 3,643,852 0.55 - 7.33 2.34 2.40 - 3.75 3,639,345
Other borrowings 2,570,507 2.26 - 5.51 0.05 1.43 - 4.38 2,571,259
Subordinated debt 151,594 5.25 2.60 5.14 153,565
Derivative instruments with negative
fair value 387,292 387,292
---------------------------------------------------------------------------------------------------------------------
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 (114,784) -
---------------------------------------------------------------------------------------------------------------------
Net loans 7,369,105 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 0.05 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
---------------------------------------------------------------------------------------------------------------------
81
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.
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, commodity and foreign exchange
contracts are based on valuations provided either by third-party dealers in the
contracts, quotes provided by independent pricing services, or a third-party
provided pricing model.
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 $28 million and $30 million at December 31, 2004 and
2003, 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 Standards 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, 2004 and 2003.
82
(20) PARENT COMPANY ONLY FINANCIAL STATEMENTS
Summarized financial information for BOK Financial - Parent Company Only
follows:
BALANCE SHEETS
(In Thousands) December 31,
----------------------------
2004 2003
----------------------------
Assets
Cash and cash equivalents $ 13,230 $ 10,881
Securities - available for sale 11,170 16,657
Investment in subsidiaries 1,470,405 1,296,749
Other assets 2,184 1,750
----------------------------------------------------------------------------
Total assets $1,496,989 $1,326,037
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Other borrowings $ 95,000 $ 95,000
Other liabilities 3,495 2,407
----------------------------------------------------------------------------
Total liabilities 98,495 97,407
----------------------------------------------------------------------------
Preferred stock 12 12
Common stock 4 4
Capital surplus 631,747 546,594
Retained earnings 809,261 698,052
Treasury stock (30,905) (24,491)
Accumulated other comprehensive income (loss) (11,625) 8,459
----------------------------------------------------------------------------
Total shareholders' equity 1,398,494 1,228,630
----------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,496,989 $1,326,037
----------------------------------------------------------------------------
STATEMENTS OF EARNINGS
(In Thousands)
2004 2003 2002
-------------------------------------------
Dividends, interest and fees received from subsidiaries $ 127 $ 66,165 $ 42,821
Other operating revenue 35 431 441
------------------------------------------------------------------------------------------------
Total revenue 162 66,596 43,262
------------------------------------------------------------------------------------------------
Interest expense 2,185 1,771 3,453
Professional fees and services 486 545 433
Contribution of stock to BOK Charitable Foundation 4,125 - -
Other operating expense 2 (4) 205
------------------------------------------------------------------------------------------------
Total expense 6,798 2,312 4,091
------------------------------------------------------------------------------------------------
Income (loss) before taxes and equity in
undistributed income of subsidiaries (6,636) 64,284 39,171
Federal and state income tax credit (3,953) (678) (1,879)
------------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed income
of subsidiaries (2,683) 64,962 41,050
Equity in undistributed income of subsidiaries 181,706 93,398 106,821
------------------------------------------------------------------------------------------------
Net income $179,023 $158,360 $147,871
------------------------------------------------------------------------------------------------
83
STATEMENTS OF CASH FLOWS
(In Thousands)
2004 2003 2002
----------------------------------------
Cash flows from operating activities:
Net income $179,023 $158,360 $147,871
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries (181,706) (93,398) (106,821)
Tax benefit on exercise of stock options 4,609 1,325 5,482
Contribution of stock to BOK Charitable Foundation 4,125 - -
Write down of equity securities 410 - -
Change in other assets (5,138) (944) (104)
Change in other liabilities 713 272 (930)
------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,036 65,615 45,498
------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of available for sale securities (53) (27) (568)
Investment in subsidiaries (5,250) (85,015) (5,482)
------------------------------------------------------------------------------------------------
Net cash used by investing activities (5,303) (85,042) (6,050)
------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in other borrowings - 105,000 -
Pay down of other borrowings - (95,000) (40,095)
Issuance of preferred, common and treasury stock, net 7,132 4,627 4,172
Cash dividends (1,540) (785) (30)
Other 24 - -
------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 5,616 13,842 (35,953)
------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 2,349 (5,585) 3,495
Cash and cash equivalents at beginning of period 10,881 16,466 12,971
------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 13,230 $ 10,881 $ 16,466
------------------------------------------------------------------------------------------------
Payment of dividends in common stock $ 65,899 $ 58,300 $ 53,165
------------------------------------------------------------------------------------------------
Cash paid for interest 1,882 1,947 3,482
------------------------------------------------------------------------------------------------
Common stock and price guarantee issued for acquisition - - 67,745
------------------------------------------------------------------------------------------------
84
ANNUAL FINANCIAL SUMMARY - UNAUDITED
CONSOLIDATED DAILY AVERAGE BALANCES,
AVERAGE YIELDS AND RATES
(Dollars in Thousands) 2004
-----------------------------------------------
Average Revenue/ Yield/
Balance Expense(1) Rate
-----------------------------------------------
Assets
Taxable securities (3) $ 4,656,108 $197,884 4.26%
Tax-exempt securities (3) 207,376 11,672 5.64
------------------------------------------------------------------------------------------------------------------------------
Total securities (3) 4,863,484 209,556 4.32
------------------------------------------------------------------------------------------------------------------------------
Trading securities 16,025 629 3.93
Funds sold and resell agreements 19,944 353 1.77
Loans (2) 7,644,049 408,785 5.35
Less reserve for loan losses 116,076 - -
------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 7,527,973 408,785 5.43
------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 12,427,426 619,323 4.99
------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 1,599,461
------------------------------------------------------------------------------------------------------------------------------
Total assets $14,026,887
------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Transaction deposits $ 3,863,276 $ 35,517 0.92%
Savings deposits 169,556 975 0.58
Time deposits 3,584,496 107,941 3.01
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 7,617,328 144,433 1.90
------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase agreements 1,611,771 21,140 1.31
Other borrowings 1,007,237 17,707 1.76
Subordinated debenture 152,983 7,761 5.07
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 10,389,319 191,041 1.84
------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,805,558
Other liabilities 534,453
Shareholders' equity 1,297,557
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $14,026,887
------------------------------------------------------------------------------------------------------------------------------
Tax-equivalent Net Interest Revenue (3) $428,282 3.15%
Tax-equivalent Net Interest Revenue to Earning Assets (3) 3.45
Less tax-equivalent adjustment (1) 5,039
------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 423,243
Provision for credit losses 20,439
Other operating revenue 308,890
Other operating expense 441,224
------------------------------------------------------------------------------------------------------------------------------
Income before taxes 270,470
Federal and state income tax 91,447
------------------------------------------------------------------------------------------------------------------------------
Net Income $179,023
------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments
shown are for comparative purposes.
(2) The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned
income. 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.
</FN>
85
2003 2002
------------------------------------------------------------------------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
----------------------------------------------- ------------------------------------------------
$ 4,316,303 $180,581 4.22% $ 3,756,666 $186,902 5.22%
191,982 12,527 6.59 208,503 14,789 7.09
------------------------------------------------------------------------------------------------------
4,508,285 193,108 4.32 3,965,169 201,691 5.32
------------------------------------------------------------------------------------------------------
16,975 694 4.09 14,215 750 5.28
26,330 281 1.07 16,024 291 1.82
7,101,543 376,260 5.30 6,401,510 378,300 5.91
110,791 - - 97,766 - -
------------------------------------------------------------------------------------------------------
6,990,752 376,260 5.38 6,303,744 378,300 6.00
------------------------------------------------------------------------------------------------------
11,542,342 570,343 4.96 10,299,152 581,032 5.74
------------------------------------------------------------------------------------------------------
1,237,074 1,005,637
------------------------------------------------------------------------------------------------------
$12,779,416 $11,304,789
------------------------------------------------------------------------------------------------------
$ 3,605,539 $ 31,346 0.87% $ 2,798,639 $ 39,273 1.40%
172,938 944 0.55 165,988 1,976 1.19
3,439,361 99,639 2.90 3,057,645 104,217 3.41
------------------------------------------------------------------------------------------------------
7,217,838 131,929 1.83 6,022,272 145,466 2.42
------------------------------------------------------------------------------------------------------
1,537,100 15,590 1.01 1,549,021 25,218 1.63
1,051,685 16,682 1.59 1,058,717 24,146 2.28
154,940 9,477 6.12 181,911 10,751 5.91
------------------------------------------------------------------------------------------------------
9,961,563 173,678 1.74 8,811,921 205,581 2.33
------------------------------------------------------------------------------------------------------
1,309,744 1,185,891
348,553 368,139
1,159,556 938,838
------------------------------------------------------------------------------------------------------
$12,779,416 $11,304,789
------------------------------------------------------------------------------------------------------
$ 396,665 3.22% $375,451 3.41%
3.44 3.71
5,170 6,119
------------------------------------------------------------------------------------------------------
391,495 369,332
35,636 33,730
304,853 322,658
413,438 429,554
------------------------------------------------------------------------------------------------------
247,274 228,706
88,914 80,835
------------------------------------------------------------------------------------------------------
$158,360 $147,871
------------------------------------------------------------------------------------------------------
86
QUARTERLY FINANCIAL SUMMARY - UNAUDITED
CONSOLIDATED DAILY AVERAGE BALANCES,
AVERAGE YIELDS AND RATES
(Dollars in Thousands Except Per Share Data)
Three Months Ended
-------------------------------------------------------------------------
December 31, 2004 September 30, 2004
---------------------------------- ----------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
---------------------------------- ----------------------------------
Assets
Taxable securities (3) $ 4,709,193 $50,200 4.25% $ 4,652,435 $50,847 4.34%
Tax-exempt securities (3) 219,873 2,951 5.37 215,190 2,951 5.46
-------------------------------------------------------------------------------------- ----------------------------------
Total securities (3) 4,929,066 53,151 4.30 4,867,625 53,798 4.39
-------------------------------------------------------------------------------------- ----------------------------------
Trading securities 10,208 107 4.17 14,956 77 2.05
Funds sold and resell agreements 31,994 170 2.11 23,334 91 1.55
Loans (2) 7,873,974 111,292 5.62 7,656,588 104,181 5.41
Less reserve for loan losses 114,106 - - 115,504 - -
-------------------------------------------------------------------------------------- ----------------------------------
Loans, net of reserve 7,759,868 111,292 5.71 7,541,084 104,181 5.50
-------------------------------------------------------------------------------------- ----------------------------------
Total earning assets (3) 12,731,136 164,720 5.15 12,446,999 158,147 5.05
-------------------------------------------------------------------------------------- ----------------------------------
Cash and other assets 1,858,345 1,630,890
-------------------------------------------------------------------------------------- ----------------------------------
Total assets $14,589,481 $14,077,889
-------------------------------------------------------------------------------------- ----------------------------------
Liabilities and Shareholders' Equity
Transaction deposits $ 3,841,742 $10,779 1.12% $ 3,931,166 $ 9,280 0.94%
Savings deposits 160,404 231 0.57 169,398 266 0.62
Time deposits 3,662,455 29,586 3.21 3,712,161 27,667 2.97
-------------------------------------------------------------------------------------- ----------------------------------
Total interest-bearing deposits 7,664,601 40,596 2.11 7,812,725 37,213 1.89
-------------------------------------------------------------------------------------- ----------------------------------
Funds purchased and repurchase agreements 1,747,391 8,397 1.91 1,458,245 5,048 1.38
Other borrowings 1,005,679 5,703 2.26 1,003,050 4,615 1.83
Subordinated debenture 152,634 1,929 5.03 152,333 1,766 4.61
-------------------------------------------------------------------------------------- ----------------------------------
Total interest-bearing liabilities 10,570,305 56,625 2.13 10,426,353 48,642 1.86
-------------------------------------------------------------------------------------- ----------------------------------
Demand deposits 1,938,205 1,839,311
Other liabilities 712,981 516,715
Shareholders' equity 1,367,990 1,295,510
-------------------------------------------------------------------------------------- ----------------------------------
Total liabilities and shareholders' equity $14,589,481 $14,077,889
-------------------------------------------------------------------------------------- ----------------------------------
Tax-equivalent Net Interest Revenue (3) $108,095 3.02% $109,505 3.19%
Tax-equivalent Net Interest Revenue to Earning Assets (3) 3.38 3.50
Less tax-equivalent adjustment (1) 1,633 1,120
-------------------------------------------------------------------------------------- ----------------------------------
Net Interest Revenue 106,462 108,385
Provision for credit losses 4,439 4,986
Other operating revenue 78,714 81,086
Other operating expense 111,582 114,202
-------------------------------------------------------------------------------------- ----------------------------------
Income before taxes 69,155 70,283
Federal and state income tax 22,599 22,501
-------------------------------------------------------------------------------------- ----------------------------------
Net Income $46,556 $47,782
-------------------------------------------------------------------------------------- ----------------------------------
Earnings Per Average Common Share Equivalent:
Net income:
Basic $0.78 $0.79
-------------------------------------------------------------------------------------- ----------------------------------
Diluted $0.70 $0.72
-------------------------------------------------------------------------------------- ----------------------------------
<FN>
(1) Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments shown
are for comparative purposes.
(2) The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned
income. 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.
</FN>
87
Three Months Ended
--------------------------------------------------------------------------------------------------------------
June 30, 2004 March 31, 2004 December 31, 2003
---------------------------------- ----------------------------------- -----------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate Balance Expense(1) Rate
---------------------------------- ----------------------------------- -----------------------------------
$ 4,667,360 $49,321 4.24% $4,594,690 $47,516 4.22% $ 4,421,278 $45,838 4.08%
200,380 2,884 5.79 193,808 2,886 5.99 189,829 2,958 6.19
---------------------------------- ----------------------------------- -----------------------------------
4,867,740 52,205 4.30 4,788,498 50,402 4.29 4,611,107 48,796 4.17
---------------------------------- ----------------------------------- -----------------------------------
23,513 219 3.75 15,499 226 5.86 17,325 147 3.37
16,284 53 1.31 7,995 39 1.96 26,730 65 0.96
7,548,257 96,445 5.14 7,494,713 96,867 5.20 7,359,126 96,059 5.18
117,109 - - 117,644 - - 115,590 - -
---------------------------------- ----------------------------------- -----------------------------------
7,431,148 96,445 5.22 7,377,069 96,867 5.28 7,243,536 96,059 5.26
---------------------------------- ----------------------------------- -----------------------------------
12,338,685 148,922 4.85 12,189,061 147,534 4.89 11,898,698 145,067 4.82
---------------------------------- ----------------------------------- -----------------------------------
1,529,841 1,357,791 1,342,042
---------------------------------- ----------------------------------- -----------------------------------
$13,868,526 $13,546,852 $13,240,740
---------------------------------- ----------------------------------- -----------------------------------
$ 3,859,706 $ 7,875 0.82% $3,819,981 $ 7,583 0.80% $ 3,886,546 $ 7,377 0.75%
173,566 235 0.54 174,958 243 0.56 179,867 255 0.56
3,565,324 25,697 2.90 3,395,785 24,991 2.96 3,442,358 25,094 2.89
---------------------------------- ----------------------------------- -----------------------------------
7,598,596 33,807 1.79 7,390,724 32,817 1.79 7,508,771 32,726 1.73
---------------------------------- ----------------------------------- -----------------------------------
1,565,922 3,731 0.96 1,675,722 3,964 0.95 1,679,540 3,921 0.93
1,009,871 3,376 1.34 1,010,414 4,013 1.60 1,031,414 3,815 1.47
152,799 1,730 4.55 154,175 2,336 6.09 154,524 2,216 5.69
---------------------------------- ----------------------------------- -----------------------------------
10,327,188 42,644 1.66 10,231,035 43,130 1.70 10,374,249 42,678 1.63
---------------------------------- ----------------------------------- -----------------------------------
1,799,249 1,643,638 1,370,088
466,981 421,311 298,287
1,275,108 1,250,868 1,198,116
---------------------------------- ----------------------------------- -----------------------------------
$13,868,526 $13,546,852 $13,240,740
---------------------------------- ----------------------------------- -----------------------------------
$106,278 3.19% $104,404 3.19% $102,389 3.19%
3.46 3.46 3.40
1,089 1,197 1,184
---------------------------------- ----------------------------------- -----------------------------------
105,189 103,207 101,205
3,987 7,027 8,001
69,270 79,820 71,520
98,992 116,448 109,215
---------------------------------- ----------------------------------- -----------------------------------
71,480 59,552 55,509
25,947 20,400 20,207
---------------------------------- ----------------------------------- -----------------------------------
$45,533 $39,152 $35,302
---------------------------------- ----------------------------------- -----------------------------------
$0.76 $0.66 $0.59
---------------------------------- ----------------------------------- -----------------------------------
$0.68 ` $0.59 $0.53
---------------------------------- ----------------------------------- -----------------------------------