Exhibit 13.0
RELATIONSHIPS DRIVE RESULTS
BOK FINANCIAL CORPORATION | 2005 ANNUAL REPORT
Map shown and accompanied by the captions:
COLORADO
Since BOKF acquired Colorado State Bank & Trust, N.A. in 2003, average
assets have more than doubled to $874 million. The newly opened Orchard Falls
branch makes five full service locations in the Denver area, including two in
Douglas County - one of the top 20 fastest growing counties in the U.S.
KANSAS/MISSOURI
The Kansas City loan production office has outstanding loan
commitments exceeding $300 million at December 31, 2005. We've been serving
retail clients in the Kansas City market since 1999 through our investment
center and our two morgage origination offices, with one on either side of the
state line.
OKLAHOMA
With 74 full-service banking locations statewide complemented by an
extensive ATM network, Bank of Oklhoma, N.A. is the state's leading bank, with
twice the deposit market share of our closest competitor. We also are the leader
in trust, commercial and cosnumer lending, transaction card services and public
finance.
ARKANSAS
Bank of Arkansas, N.A.'s two full service branches are located in the
northwest region of the state where the economy is flourishing. Our third branch
is scheduled to open in Bentonville in the third quarter of 2006. Our largest
institutional investments sales office is located in the state's capital of
Little Rock.
TEXAS
Since BOKF's entry in the Texas market in 1997, average assets have grown
to $3.4 billion. With 23 banking locations in the Dallas/Fort Worth area and
another 14 locations in the Houston area, Bank of Texas, N.A. is now the eighth
largest bank headquartered in the state and contributes 25% of BOKF earnings.
NEW MEXICO
Beginning as a consumer branch network acquired in 1998, Bank of
Albuquerque, N.A. has grown to the fourth largest bank in Albuquerque as
measured by deposit market share. Our 19 convenient locations in Albuquerque are
complemented by one full service location in Santa Fe.
ARIZONA
After entering the dynamic Phoenix market in 2004 with a successful loan
production office, BOKF acquired a bank in 2005 which it subsequently renamed
Bank of Arizona, N.A. The two full service branches are located in the
Phoenix/Scottsdale area. Already one of the top ten largest cities, Phoenix is
the fastest growing city in the U.S.
FINANCIAL HIGHLIGHTS
(Dollars in Thousands Except Per Share Data)
2005 2004 2003
For the year:
Net income $ 201,505 $179,023 $158,360
Period-end:
Loans 9,139,978 7,928,967 7,483,889
Assets 16,252,907 14,145,660 13,595,598
Deposits 11,375,318 9,674,398 9,219,863
Shareholders' equity 1,539,154 1,398,494 1,228,630
Nonperforming assets(1) 33,638 56,423 59,867
Profitability Statistics
Earnings per share (based on average equivalent shares):
Basic $ 3.14 $ 3.00 $ 2.67
Diluted 3.01 2.68 2.38
Percentages (based on daily averages):
Return on average assets 1.29 % 1.28 % 1.24 %
Return on average shareholders' equity 13.78 13.80 13.66
Common Stock Performance
Per Share:
Book value per common share $ 23.07 $ 23.28 $ 20.60
Market price: December 31 close 45.43 48.76 38.72
Selected Balance Sheet Statistics
Period-end:
Tier 1 capital ratio 9.84 % 10.02 % 9.15 %
Total capital ratio 12.10 11.67 11.31
Leverage ratio 8.30 7.94 7.17
Reserve for loan losses to non performing loans 412.83 206.26 217.89
Combined reserves for credit losses to loans (2), (3) 1.37 1.61 1.73
Miscellaneous (at December 31)
Number of banking locations 150 149 142
Number of TransFund locations 1,421 1,389 1,442
(1) Includes nonaccrual loans, renegotiated loans and assets acquired in
satisfaction of loans. Excludes loans past due 90 days or more
and still accruing.
(2) Excludes residential mortgage loans held for sale.
(3) Includes reserve for loan losses and reserve for off-balance sheet credit
losses.
RELATIONSHIPS DRIVE RESULTS
Our continued investment in building deeper, more complete relationships with
our clients provided the foundation for the strong results for BOK Financial
Corporation (BOKF) in 2005. Our 15th consecutive year of record earnings
included net income of $201.5 million and earnings per share of $3.01 - a 12%
increase over 2004. Loan growth of 15% was very strong and well-balanced,
geographically and by industry. All of the BOKF subsidiary banks experienced
solid growth. The banks outside Oklahoma produced over half of our growth in
earnings and now represent close to 40% of BOKF's total income.
Our core strategy for many years has been to provide nationally competitive
products delivered with local community bank service, but others share a similar
strategy. In an increasingly commoditized business, BOKF has been successful by
being more creative, flexible, and responsive than the competition. BOKF's
greatest strength is the ability to attract and retain top talent and create an
environment which helps talented and entrepreneurial people excel. It is the
interplay of these factors and strong relationships with our customers that has
significantly enhanced shareholder value over the past 15 years.
In addition to the robust financial accomplishments in 2005, we continued to
build the foundation for future growth. In April, we completed our first
acquisition in Phoenix, Arizona which we subsequently renamed Bank of Arizona.
We added significantly to our talent in Houston in the first half of the year,
and benefited from accelerated growth in the second half, increasing loans at a
30% annualized rate. In the fourth quarter, we added a team of talented local
bankers in Kansas City to provide agribusiness and middle market lending
services to continue to increase our presence in a market where, despite no
full-service banking locations, we have enjoyed solid growth. We also laid the
groundwork for successful expansion into the Tucson, Arizona and Boulder,
Colorado markets in 2006.
Another notable achievement in 2005 was the addition of two key members to the
management team. Don Parker joined BOKF to lead our Operations and Technology
Division. Don is committed to ensuring that the quality of our service and
support provides a competitive edge for BOKF as we continue to grow. We also
named Jean-Claude Gruet to lead our equity investment management group.
Jean-Claude is charged with substantially expanding our offering and delivering
top tier performance to our clients.
As we look forward to 2006, we remain focused on building on the strong record
of earnings growth that has been the hallmark of BOKF. Our diverse sources of
non-interest revenue, which in total comprised 44% of total revenue in 2005,
provide stability and growth during periods when the interest rate or credit
environments are less favorable. The outstanding growth potential of our
regional markets should yield continued strong loan and deposit growth as well
as expansion opportunities for our fee-based lines of business.
Our success, past and future, is dependent upon people. The faces you see in
this year's annual report represent the thousands of talented BOKF team members
who continue to work hard for our clients. Their efforts enable us to be a
provider of choice in the markets we serve. We want to express our appreciation
to all the members of the BOKF team and the many thousands of loyal customers
they serve.
/s/ George B. Kaiser /s/ Stanley A. Lybarger
___________________________ ____________________________________
Chairman President and Chief Executive Officer
COMMERCIAL
BOKF remains steadfastly focused on developing long term banking relationships
by partnering with our commercial clients to provide the financing and services
they need to grow and prosper. Our experienced, knowledgeable bankers work
closely with each client to determine their specific needs and offer innovative
solutions. We offer a wide range of financial products and services including
loan and lease financing, treasury and cash management, international trade
services and even financial risk management, including interest rate, energy,
foreign exchange and cattle hedging products. Growth in the commercial loan
portfolio is evidence of our forte in middle market and small business lending.
While our five year compound average growth rate is a strong 10%, the commercial
loan portfolio grew 18% in 2005.
In 2005, we made an investment in technology to enhance our client service
capabilities to allow us to more efficiently offer our full range of financial
products and services. With our new sales force automation initiative, our
bankers are in a better position to evaluate a client's financial needs,
opportunities and profitability. This integrated system facilitates cross
selling and enables predictive selling. Another important benefit of this
initiative is that our bankers are spending less time in their offices at their
computers and more time with existing and potential clients. Though we are just
beginning to reap the benefits, the payoff is clear. In Oklahoma in 2005,
commercial lending relationships with new clients were up 35% compared to the
prior year.
As we have sought out new business, we have continued to uphold our conservative
underwriting standards. Our centralized credit oversight is efficient and our
well defined and consistently applied standards ensure the quality of the
portfolio. While our five year average is more indicative of our long term
commercial credit losses, in 2005, net chargeoffs decreased to 12 basis points
while nonperforming assets decreased from 70 basis points in 2004 to 23 basis
points.
COMMERCIAL LOANS in Billions graph shown here. Data points are:
01 $5.0
02 $5.4
03 $6.0
04 $6.2
05 $7.3
COMMERCIAL NET CHARGE-OFF RATIO graph shown here. Data points are:
01 .34
02 .23
03 .27
04 .21
05 .12
COMMERCIAL LOAN PORTFOLIO graph shown here. Data points are:
Energy 19%
Manufacturing 7%
Wholesale Retail 11%
Agricultural 4%
Healthcare 7%
Services 20%
Other Commercial & Industrial 5%
Commercial Real Estate 27%
REGIONAL
The core strategies for Regional Banking focus on developing and enhancing
client relationships by providing highly qualified, empowered relationship
managers that take a personal interest in their clients. While we centralize
administrative and back office functions, we place a premium on maintaining
local independence in client service areas. To execute our strategy for local
growth, we seek out proven talent with tenure and influence. With the right
people in the right markets, the results are outstanding - our five year
compound annual growth rate is 19% for loans and 25% for deposits.
Our well established local management enables us to be responsive; our growing
scale enables us to be increasingly efficient while offering a complete range of
services. By delivering sophisticated products with a highly responsive personal
touch, Regional Banking fueled over half of BOKF's growth in loans, deposits and
earnings since 2001.
Beginning with our entry in Dallas, Texas in 1997, BOKF has carefully chosen
dynamic new markets for expansion. Our loan and deposit portfolios are
increasingly reflecting our geographic diversity. Markets outside Oklahoma
fueled 60% of the growth in loans and deposits in 2005 and accounted for 41% of
the portfolios at year end. Regional Banking's contribution to net income has
grown from 28% in 2001 to 38% in 2005. During this period, gross revenue has
grown at a compound annual rate of 21%. There are opportunities for significant
growth in fee revenue as we continue to export our services in our newer
markets.
Though organic growth continues to be our primary focus, we will continue to
pursue acquisition opportunities in our footprint that would benefit our clients
and shareholders. Of the $6.4 billion in average assets outside Oklahoma, $2.4
billion were acquired. Our disciplined acquisition approach and effective
integration yield impressive returns. Bank of Albuquerque, N.A., acquired in
1998, generated a 21% return on invested capital in 2005, while Bank of Texas,
N.A., which is far from maturity, generated 14%.
REVENUES BY STATE graph shown here. Data points are:
2001 2005
OK 72% 61%
TX 19% 22%
NM 7% 8%
AR 2% 3%
CO 0% 5%
AZ 0% 1%
REGIONAL DIVESITY - LOANS BY MARKET in Millions graph shown here. Data points
are:
OK All Other Areas
01 68% 32%
02 66% 34%
03 62% 38%
04 62% 38%
05 59% 41%
REGIONAL DIVERSITY - DEPOSITS BY MARKET in Millions graph shown here. Data
points are:
OK All Other Areas
01 69% 31%
02 66% 34%
03 63% 37%
04 62% 38%
05 59% 41%
CONSUMER
We value our clients and strive to deliver the best advice and service for each
client's unique situation. The core of our Perfect Banking strategy, launched in
2001, is to create an exceptional client experience during each and every
contact. The process includes a continuous training program centered on
improvement and features a client profile designed to help identify needs that
can be satisfied through an expanded relationship with our bank. The success of
this program is demonstrated by the 26% compound annual growth rate over the
last five years in sales points, which measure the profit contribution of new
business. Helping our clients make the best possible financial decisions sets us
apart from other transaction-focused retail banks.
Consumer Banking's vision strives to benefit each of our primary constituents;
our clients receive quality assistance, our employees experience career growth
and job satisfaction, and our shareholders gain from the ultimate result of
increased profit. The results are exceptional. Since 2001, consumer deposits and
fee income have grown at annual compound rates of 10% and 23%, respectively. Our
footprint provides ample opportunity for this impressive growth to continue. Ten
of the 28 counties we serve are among the 100 fastest growing counties in the
United States as measured by numerical increase in population.
We understand that time and value are paramount to today's consumers so we offer
more conveniences and benefits. In addition to free checking, our clients enjoy
free online bill pay. Nearly 30% of our clients utilize our free online banking
service while the number of bill pay users has increased five-fold since late
2003. Forty eight of our 137 branches are instore locations which are open
extended hours. A client service representative is available 24 hours a day, 7
days a week at ExpressBank, our contact center. In 2005, ExpressBank celebrated
its 10th year of continuous service, averaging 790,000 phone calls each month,
124,000 of which are handled by a live ExpressBanker located in one of our
domestic offices.
CONSUMER DEPOSITS & FEE INCOME graph shown here. Data points are:
Consumer Deposits Fee Income
01 $2.9 Billion $39.0 Million
02 $3.1 Billion $52.6 Million
03 $3.6 Billion $66.0 Million
04 $4.1 Billion $80.7 Million
05 $4.5 Billion $94.9 Million
SALES POINTS graph shown here. Data points are:
01 380 thousand
02 520 thousand
03 590 thousand
04 640 thousand
05 750 thousand
NUMBER OF PERSONAL CHECKING ACCOUNTS graph shown here. Data points are:
01 175 thousand
02 200 thousand
03 229 thousand
04 257 thousand
05 279 thousand
TRANSACTION CARD
Transaction cards are a fundamental part of our client relationships. For over
25 years, TransFund, our electronic funds transfer network, has been offering
integrated payment solutions to merchants and financial institutions. Merchant
services, which includes revenue from processing card transactions for over
7,000 merchant locations, represents 35% of TransFund's 2005 revenue. Network
revenue, which includes debit card support and processing for more than 360
financial institutions in 12 states, represents 43% of revenue while check card
transaction revenue represents the remaining 22%. As the 10th largest ATM
network, TransFund has over 1,400 ATMs conveniently located in financial
institutions, grocery stores and convenience stores.
While TransFund's 16% five year compound annualized growth rate in transaction
volume is partially attributed to the impressive growth in BOKF's deposit client
base, much of it is due to our sales efforts to other financial institutions.
The number of clients outside Oklahoma has increased 50% in the last five years.
TransFund's 1.5 million cardholders throughout a 12 state area have come to rely
on the red and white TransFund logo.
TransFund's 13% compound annualized revenue growth rate over the last five years
is a direct result of our focus on client relationships. Though we do offer a
cost advantage over the competition with our surcharge- free zones, it is our
unparalleled reputation for quality service that attracts and maintains
business. From the first contact to the on-site personalized training, our
dedicated, knowledgeable EFT professionals, many of whom have more than 20 years
of service with the company, guide financial institutions through the process of
implementation and growth.
TRANSACTION CARD REVENUE in Millions graph shown here. Data points are:
01 $44
02 $52
03 $57
04 $65
05 $72
MERCHANT SALES PROCESSED in Millions graph shown here. Data points are:
01 701
02 836
03 1,008
04 1,107
05 1,188
TRANSACTION VOLUME in Millions graph shown here. Data points are:
Purchases ATM
01 50 45
02 65 48
03 81 50
04 99 50
05 118 49
WEALTH MANAGEMENT
BOKF's wealth management group provides a wide range of trust and private
financial services to affluent individuals, businesses and non-profit agencies.
Trust services include personal trust, estate and retirement planning,
investment management, retirement and institutional benefits, and corporate
trust as well as mineral and real estate management. Total trust assets grew 16%
in 2005, totaling $28 billion at year end, while discretionary assets grew 22%
to $11 billion.
Our talented team of employees value the relationships we have with our clients
and work very hard to find solutions to client needs instead of forcing a
one-size-fitsall product. During 2005, this was best illustrated through the
introduction of our wealth management investment team. The team is comprised of
talented and experienced professionals from our brokerage, trust, investment
management, and private financial services units. Their focus is to provide a
broad and detailed set of unique solutions to ensure that each client has a
financial advisory strategy that will achieve their stated goals and objectives.
Our bankers strive to earn the role of "trusted advisor" to our clients by
gaining their trust, providing useful, personalized advice and building
relationships. Our success is reflected in the 13% increase in fee revenue.
BOKF's proprietary mutual fund family, the American Performance Funds, includes
money market, equity and fixed income investment options. Four of our 13 funds
rank in the top 10% of their Lipper peer groups for the calendar year 2005. The
American Performance Intermediate Bond Fund was ranked #1 for the calendar year
2005 according to Lipper. During 2005, we began an initiative to expand our
equity product offerings. We recently implemented a strategic effort to expand
our distribution capabilities and increase assets under management in our mutual
funds which grew 24% in 2005 to $3.2 billion.
TRUST FEES & COMMISSIONS in Millions graph shown here. Data points are:
01 $41
02 $40
03 $46
04 $58
05 $65
COMPOSITION OF TRUST ASSETS graph shown here. Data points are:
Equity 44%
Fixed Income 27%
Cash 16%
Other 13%
TRUST ASSETS in Millions graph shown here. Data points are:
Discretionary Nondiscretionary
01 $9.5 $8.7
02 $10.2 $6.9
03 $7.8 $11.7
04 $8.9 $15.7
05 $10.9 $17.5
INVESTMENT SERVICES
With 165 registered representatives in offices in 10 states, our tenured
investment professionals provide institutional and retail sales, investment
banking and financial risk management services with an unusually high degree of
personal attention and industry knowledge. Our financial consultants average
over 15 years of professional experience in the industry, which is more than 5
times the industry average. As a result, we are uniquely qualified to assist
individual and corporate clients in reaching their financial goals.
By knowing our clients and their financial needs, we are able to provide a level
of professional advice and counsel not found in other banks. Our investment
professionals take a consultative approach, helping clients to select, preserve
and grow assets according to their investment objectives. In 2005, we handled
more than 240,000 transactions and traded in excess of $145 billion in
securities for more than 25,000 institutional and individual investors.
Our institutional sales professionals work closely with our commercial banking
division to identify our clients' investment needs. We offer a complete line of
investment products and services including bonds, commercial paper, bankers
acceptances, portfolio accounting and pricing, safekeeping, analysis and
educational workshops to our institutional clients which include corporations,
insurance companies, foundations, pension funds, mutual funds, universities and
investment advisors. Over the last five years, brokerage and trading revenue has
grown at a compound annual rate of 24%.
While always seeking to attract new clients, we value our existing
relationships. In 2005, we created a team of three professionals who devote
their efforts entirely to working with clients exiting benefit plans. Though an
individual's employment with our client may end, his relationship with BOKF can
continue.
BROKERAGE AND TRADING REVENUE in Millions graph shown here. Data points are:
01 $20
02 $26
03 $41
04 $41
05 $44
RETAIL/INSTITUTIONAL SALES BY MARKET in Millions graph shown here. Data points
are:
Oklahoma Arkansas Texas Other Markets
01 17.2 5.0 1.1 0.0
02 17.9 8.4 1.3 0.2
03 18.6 20.2 2.3 1.3
04 15.5 15.7 3.2 2.7
05 14.7 14.6 4.2 3.0
COMPONENTS OF REVENUE graph shown here. Data points are:
Trading/Institutional Fees 44%
Brokerage Fees 24%
Financial Risk Management Fees 24%
Investment Banking Revenue 8%
MORTGAGE
Our clients will make hundreds of important decisions during their lives, but
few as significant as the purchase of a new home. With 15 mortgage offices in
seven states, BOKF stands ready to guide buyers through the sometimes stressful
and confusing process of financing a home. From the application through the
servicing of the monthly payments, BOKF's focus is on client satisfaction.
BOKF's relationships continue after funding as we retain servicing rights on
traditional mortgage products. We service traditional mortgage loans exceeding
$4 billion for over 50,000 very satisfied families. In 2005, BOKF's mortgage
unit earned FHLMC's prestigious Tier 1 designation. The ranking is based on
servicing efficiency and assistance provided to homeowners, including those
struggling to avoid foreclosure. For the last five years, BOKF's annual
delinquency rates have averaged over 100 basis points below the national
delinquency rate reported by the Mortgage Bankers' Association.
As with every product and service BOKF offers, the mortgage unit serves not only
our clients, but our shareholders. Though the earnings volatility introduced by
the mortgage unit presents short term challenges, BOKF manages for the long term
return. The mortgage business is a significant contributor to fee income and
because of its counter-cyclical nature, typically enjoys strong returns when
other fee business slows. From a client service perspective, by retaining
servicing rights we are able to ensure our clients will continue to receive the
outstanding service they have come to expect from BOKF.
BOKF mortgage clients will be even better served in 2006 as we implement an
initiative to integrate the mortgage unit into the Consumer Division's "Perfect
Banking" experience. Our goal is to improve client service and increase
bank-referred business.
MORTGAGE SERVICING PORTFOLIO graphs shown here. Data points are:
Oklahoma 63.48%
Texas 5.85%
South 11.72%
West 6.87%
Midwest 8.89%
Northeast 3.19%
Conventional Over 15 Years 57.10%
Conventional 15 Years and Less 18.90%
FHA 13.18%
VA 10.18%
Other 0.64%
LOAN ORIGINATIONS in Millions graph shown here. Data points are:
01 $1,128
02 $1,253
03 $1,538
04 $893
05 $910
COMMUNITY DEVELOPMENT
BOKF's dedication to the communities we serve is defined in our mission
statement and is demonstrated in several ways in each of our markets. BOKF and
its employees supported non-profit organizations with over $2.7 million in
charitable grants and donations. Our employees provide leadership on boards and
committees of 250 non-profit agencies and community organizations and volunteer
their time for over 1,000 events and programs.
In 2005, bank employees contributed more than 24,000 hours of community service.
We read to inner-city school children in Oklahoma City; painted, mowed and
trimmed trees for United Way agencies in Tulsa; and committed time and money to
directly assist Hurricane Katrina victims taking shelter in Houston. Arkansas
employees collected care package supplies for U.S. troops. In Albuquerque, our
staff hosted a Spanish language call-in program for residents in need of
financial services advice. Throughout our markets, employees conducted a
literacy drive that collected more than 18,000 books for agencies that care for
homeless and abused children and families. Through the course of these
outreaches and our support of public and private endeavors, we will continue to
carry on our mission of improving the quality of life in all our markets.
Through our innovative Adopt-An-Agency program, BOKF has partnered with key
community-based organizations in all of our markets to drive product, investment
and service alternatives that provide wealth creation and asset building
opportunities for low-to-moderate income families and individuals. Our work with
agencies such as Mercy Housing, Community Action Project of Tulsa County and
Mosaic Family Services, has a direct and lasting impact on the communities where
we live and work. At BOKF, we aim to do well and do good, all at the same time.
COMMUNITY DEVELOPMENT INVESTMENTS in Thousands
Qualified Investments MBS Qualified Investments
03 $5,914 $31,638
04 $6,106 $81,368
05 $7,145 $129,428
COMMUNITY DEVELOPMENT LOANS in Thousands
Affordable Housing Small Business CD Loans
03 $396,972 $746,376 $33,343
04 $349,144 $805,130 $29,080
05 $273,736 $713,491 $86,000
COMMUNITY SERVICE HOURS
Arts 1%
Board Member 36%
Community Service 28%
Economic Development/
Affordable Housing 1%
Financial Education and Services 4%
Education 7%
Health and Human Services 3%
Youth Programs and Activities 20%
POSITIONED FOR A SUCCESSFUL FUTURE
The depth and breadth of client relationships determine the growth and
profitability of our company. BOKF's goal is to be our clients' lifelong
financial resource fulfilling every need from consumer and commercial loans and
deposit accounts to mortgage loans. As our clients' needs change, we stand ready
to help them select, preserve and grow their assets. Our proven methods for
generating new business and expanding services to existing clients produced
solid results in 2005. For the 15th consecutive year, BOKF produced record
earnings fueled by a combination of superior loan, deposit and fee revenue
growth. As we reflect on the past year, we must once again thank our dedicated
employees whose unwavering support for BOKF's values and implementation of our
strategies is the core of our success story.
Relationships drive results and our investment in people is critical to meeting
our long term objectives. As we look toward the future, our focus will remain on
our relationships with our employees, our clients and the communities we serve,
with the ultimate goal of all of our endeavors to build long term value for our
shareholders. We'll continue to foster a working environment that promotes
career development and rewards initiative, innovation, enthusiasm, team work and
performance. We will continue to provide our clients with the highest quality
products and services, keeping in mind their need for timeliness, convenience
and flexibility. We will provide leadership in all of our communities for local
and regional causes, encourage and support volunteerism among our employees and
financially support key civic activities that are critical to the vitality of
the community. By maintaining excellence in relationship banking, we will
continue to create value for our shareholders.
NET INCOME AND EARNINGS PER SHARE graph shown here. Data points are:
Net Income (in millions) EPS
1991 15,885 0.36
1992 29,786 0.56
1993 39,472 0.68
1994 45,065 0.77
1995 49,205 0.83
1996 54,127 0.91
1997 68,155 1.10
1998 79,611 1.26
1999 89,226 1.42
2000 100,140 1.57
2001 116,302 1.81
2002 147,871 2.30
2003 158,360 2.38
2004 179,023 2.68
2005 201,505 3.01
1
Table 1 Consolidated Selected Financial Data
(Dollars In Thousands Except Per Share Data)
December 31,
---------------------------------------------------------------------
2005 2004 2003 2002 2001
---------------------------------------------------------------------
Selected Financial Data
For the year:
Interest revenue $ 769,934 $ 614,284 $ 565,173 $ 574,913 $ 654,633
Interest expense 320,593 191,041 173,678 205,581 325,159
Net interest revenue 449,341 423,243 391,495 369,332 329,474
Provision for credit losses 12,441 20,439 35,636 33,730 37,610
Net income 201,505 179,023 158,360 147,871 114,439
Period-end:
Loans, net of reserve 9,036,102 7,820,349 7,369,105 6,797,132 6,206,190
Assets 16,252,907 14,145,660 13,595,598 12,263,233 11,158,701
Deposits 11,375,318 9,674,398 9,219,863 8,128,525 6,905,744
Subordinated debentures 295,964 151,594 154,332 155,419 186,302
Shareholders' equity 1,539,154 1,398,494 1,228,630 1,099,526 832,866
Nonperforming assets (2) 33,638 56,423 59,867 56,574 50,708
Profitability Statistics
Earnings per share (based on average equivalent shares):
Basic $ 3.14 $ 3.00 $ 2.67 $ 2.59 $ 2.02
Diluted 3.01 2.68 2.38 2.30 1.81
Pro forma diluted earnings per share with FAS 142 and 3.01 2.68 2.38 2.30 1.95
FAS 147
Percentages (based on daily averages):
Return on average assets 1.29% 1.28% 1.24% 1.31% 1.12%
Return on average shareholders' equity 13.78 13.80 13.66 15.75 14.65
Average shareholders' equity to average assets 9.39 9.25 9.07 8.30 7.62
Common Stock Performance
Per Share:
Book value per common share (5) $ 23.07 $ 23.28 $ 20.60 $ 18.56 $ 14.62
Market price: December 31 close 45.43 48.76 38.72 32.39 31.51
Market range - High close 49.31 49.18 41.02 36.52 32.75
- Low close 39.79 37.29 31.00 26.80 21.31
Selected Balance Sheet Statistics
Period-end:
Tier 1 capital ratio 9.84% 10.02% 9.15% 8.98% 8.08%
Total capital ratio 12.10 11.67 11.31 11.95 11.56
Leverage ratio 8.30 7.94 7.17 6.88 6.38
Reserve for loan losses to nonperforming loans 412.83 206.26 217.89 208.31 204.71
Reserve for loan losses to loans (1) 1.14 1.38 1.55 1.53 1.46
Combined reserves for credit losses to loans (1),(4) 1.37 1.61 1.73 1.72 1.66
Miscellaneous (at December 31)
Number of employees (full-time equivalent) 3,825 3,548 3,449 3,402 3,392
Number of banking locations 150 149 142 130 114
Number of TransFund locations 1,421 1,389 1,442 1,390 1,325
Mortgage loan servicing portfolio (3) $4,492,524 $4,486,513 $4,746,279 $5,754,548 $ 6,645,868
------------------------------------------------------------------------------------------------------------------------------
<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.
(5) Conversion of Series A preferred stock added 6.9 million common shares outstanding in 2005.
</FN>
2
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, Denver, Colorado,
and Phoenix, Arizona. The Company also has commercial loan production, mortgage
banking and institutional sales offices in the Kansas City market. BOK Financial
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., Bank of Albuquerque, N.A., Bank of
Arkansas, N.A., Bank of Texas, N.A, Colorado State Bank and Trust, N.A. and Bank
of Arizona, N.A. Other subsidiaries include BOSC, Inc., a broker/dealer that
engages in retail and institutional securities sales and municipal bond
underwriting.
Our overall strategic objective is to emphasize growth in long-term value by
building on our leadership position in Oklahoma and expanding into high-growth
markets in contiguous states. We have a solid position in Oklahoma and are the
state's largest financial institution as measured by deposit market share. Since
1997, we have expanded into Dallas and Houston, Texas, Albuquerque, New Mexico,
and Denver, Colorado. During 2005, we acquired Valley Commerce Bank
(subsequently renamed Bank of Arizona, N.A.) in Phoenix, Arizona. We are
currently exploring opportunities for further growth in our regional markets and
expansion into the Kansas City market through acquisition or de novo banking
operations.
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 43% 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 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. Wealth management also provides fiduciary services in
all markets except Colorado. Fiduciary services in Colorado are included in
regional banking. Regional banking consist primarily of corporate and consumer
banking activities in the respective local markets.
PERFORMANCE SUMMARY
BOK Financial's net income for 2005 totaled $201.5 million or $3.01 per diluted
share compared with $179.0 million or $2.68 per diluted share in 2004. Returns
on average assets and shareholders' equity were 1.29% and 13.78%, respectively,
for 2005 compared with 1.28% and 13.80%, respectively, for 2004.
Net income growth for 2005 was attributed primarily to increases in both net
interest revenue and fees and commissions revenue, and a decrease in the
provision for credit losses. Net interest revenue grew $26.1 million or 6%
during 2005 while fees and commissions revenue increased $33.0 million or 11%.
The provision for credit losses decreased $8.0 million compared to the previous
year.
Average earning assets increased $1.0 billion for 2005, including an $846
million increase in average outstanding loans. Outstanding loans increased in
all of our primary markets. Much of the loan growth was focused in the
commercial and commercial real estate portfolios. Growth in average earning
assets was funded by a $1.2 billion increase in interest-bearing liabilities.
Average interest-bearing deposits increased $839 million while short-term
borrowings increased $325 million. Growth in average deposits came primarily in
the Texas, Oklahoma and Colorado markets. Consumer banking and personal
financial services provided much of the increases. Growth in average
interest-bearing liabilities also funded a $198 million decrease in average
demand deposits. Net interest margin was 3.39% for 2005, down 6 basis points
from the previous year.
3
Fees and commissions totaled $345.6 million, which represented 43% of total
revenue, excluding net securities and derivatives losses. Revenue grew in all
business lines. Trust fees increased $7.7 million or 13% due primarily to growth
in the fair value of assets and new business generated. Transaction card revenue
grew $7.2 million or 11% due to transaction volumes. Other revenue increased
$7.9 million due largely to fees earned on margin assets carried in support of
the Company's derivatives business.
Operating expenses increased $27.9 million or 6% compared with 2004 due
primarily to increased personnel and data processing costs. Personnel costs
increased $18.3 million as both total employment and average compensation per
employee grew. Data processing expenses increased $7.0 million, including $3.5
million directly related to higher transaction card processing volumes.
Net income for the fourth quarter of 2005 totaled $48.2 million or 72 cents per
diluted share compared with $46.6 million or 70 cents per diluted share for the
fourth quarter of 2004. Net interest revenue grew $9.9 million or 9% due to
earning asset growth, partially offset by a 4 basis point reduction in net
interest margin. Fees and commissions revenue increased $11.1 million or 14% due
primarily to trust fees, transaction card revenue and fees earned on margin
assets. Operating expenses increased $12.3 million or 11% due to higher
personnel and data processing costs. 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 a sale 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 2005.
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.
An independent Credit Administration department is responsible for performing
this evaluation for all of our subsidiaries to ensure that the methodology is
applied consistently.
All significant loans and commitments that exhibit weaknesses or deteriorating
trends are reviewed quarterly. Specific reserves for impairment are determined
through evaluation of estimated future cash flows and collateral values in
accordance with Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for the Impairment of a Loan", regulatory accounting standards and
other authoritative literature.
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. A minimum reserve level is established for each loan
grade based on long-term loss history. 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. General reserves for residential mortgage loans and consumer loans are
based on a percent of loss experience for the preceding eight quarters. Separate
migration factors are determined by major product line, such as indirect
automobile loans and direct consumer loans.
4
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.
A separate reserve for off-balance sheet credit risk is maintained. The
provision for credit losses includes the combined charge to expense for both the
reserve for loan losses and the reserve for off-balance sheet credit losses. All
losses incurred from lending activities will ultimately be reflected in
charge-offs against the reserve for loan losses after funds are advanced against
outstanding commitments and after the exhaustion of collection efforts.
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 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. Evaluation of the effect of a change in one assumption must consider the
effect on related assumptions to be meaningful. For example, an increase in
mortgage interest rates may decrease loan prepayment speeds, but may increase
discount rates and escrow earnings rates. Considering the effects on all related
assumptions, a 50 basis point increase in mortgage interest rates is expected to
increase the fair value of our servicing rights by $3.1 million. A 50 basis
point decrease in mortgage interest rates is expected to decrease the fair value
of our servicing rights by $4.8 million.
Permanent impairment of mortgage servicing rights is evaluated quarterly. A
strata is considered to be permanently impaired if the net amortized cost
exceeds the calculated fair value assuming a 300 basis point increase in the
applicable interest rates. We believe that a 300 basis point increase in
mortgage interest rates reasonably represents changes that may occur under
normal market conditions. The net 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, 2005, Bank of Texas had $155 million or 66% of total goodwill
and Colorado State Bank & Trust had $42 million or 18% 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.
5
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 interest rate derivative instruments to manage our interest rate risk. We
also offer interest rate, commodity and foreign exchange derivative contracts to
our customers. All derivative instruments are carried on the balance sheet at
fair value. Fair values for exchange-traded contracts are based on quoted
prices. 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 based on valuations generated internally by 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 earnings. Fair values determined by the
internal model are corroborated by comparison against third-party dealer
provided values.
Credit risk is considered in determining the fair value of derivative
instruments. Deterioration in the credit rating of customers or dealers reduces
the fair value of asset contracts. The reduction in fair value is recognized in
earnings during the current period.
INCOME TAXES
Determination of income tax expense and related assets and liabilities is
complex and requires estimates and judgments when applying tax laws, rules,
regulations and interpretations. It also requires judgments as to future
earnings and the timing of future events. Accrued income taxes represent an
estimate of net amounts due to or from taxing jurisdictions based upon these
estimates, interpretations and judgments.
We recognize the benefit of uncertain tax positions when, based upon all
relevant evidence, it is more likely than not that our position would prevail
upon audit. A reserve for the uncertain portion of the tax benefit is included
in current accrued income taxes. This tax contingency reserve may reduce income
tax expense in future periods if the uncertainty is favorably resolved,
generally upon completion of an examination by the taxing authorities,
expiration of a statute of limitations or changes in facts and circumstances.
Additional income tax expense would be recognized from the adverse resolution of
an uncertain tax position.
PENSIONS
The Company offers a defined-benefit, cash-balance pension plan to all employees
who satisfy certain age and length of service requirements. Accounting for this
plan requires management to make assumptions regarding the expected long-term
rate of return on plan assets, the discount rate and the rate of future
compensation increases. Changes in these assumptions affect pension liability
and pension expense. Management, in consultation with independent actuaries,
bases its assumptions on currently available information.
All plan assets are invested in the American Performance Balanced Fund. The
expected long-term return on plan assets is based on this fund's life-to-date
performance, adjusted for any known or expected changes in the fund's
composition or objectives. The discount rate is based on current yields of high
quality fixed income securities such as AA rated industrial and utility bonds. A
25 basis point decrease in the discount rate increases the pension liability by
approximately $1.4 million or 3% and pension expense by approximately $300
thousand or 5%.
STOCK-BASED COMPENSATION
Stock-based compensation consists of stock options and non-vested shares awarded
to officers and employees of the Company. Awards may be granted on a
discretionary basis as described in the employee stock option plan or as
required by employment agreements and incentive compensation plans with certain
executive officers. Accounting for stock-based compensation requires management
to make assumptions regarding the valuation of financial instruments for which
there are no readily available market values, achievement of specified
performance conditions and expected forfeiture rates.
The majority of our stock options have graded vesting. One-seventh of the
options awarded vest annually starting one year after the grant date. Options
expire three years after vesting. Each tranche of these options is considered a
separate award when determining fair value.
We use the Black-Scholes option pricing model. This model requires assumptions
of expected volatility of our stock price and expected
6
term between grant date and exercise date, along with other input to determine
fair value. Expected volatility is based on historical changes in our stock
price measured over a period that approximates the expected term of our stock
options. Expected term and forfeitures are also based on historical trends.
Information about assumptions used to value stock options can be found in Note
13 to the Consolidated Financial Statements. Non-vested shares, which cliff-vest
five years after the grant date, are valued at the grant date market price for
BOK Financial common stock.
Executive incentive plans and individual employment agreements include
performance conditions that may increase or decrease the number of awards based
on future events. Unrecognized compensation cost, which generally will be
recognized as expense over the service period, based on the probable outcome of
these conditions is $12.7 million. Future compensation cost ranges from
approximately $7.4 million, if none of the performance conditions are met, to
$16.3 million if all of the performance conditions are met.
ASSESSMENT OF OPERATIONS
NET INTEREST REVENUE
Tax-equivalent net interest revenue totaled $454.5 million for 2005 compared
with $428.3 million for 2004. Net interest revenue growth was driven primarily
by a $1.0 billion increase in average earning assets. Average outstanding loans
increased $846 million while average securities increased $133 million. Growth
in average earning assets was funded primarily by a $1.2 billion increase in
interest-bearing liabilities, partially offset by a $198 million decrease in
average 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 during 2005 due primarily to rising short-term
interest rates. Net interest margin, the ratio of tax-equivalent net interest
revenue to average earning assets, decreased to 3.39% in 2005 compared with
3.45% in 2004. The decrease in net interest margin reflected a flattened yield
curve, the reduction in the difference between short-term and long-term interest
rates, and asset spread compression.
7
Table 2 Volume/Rate Analysis
(In Thousands)
2005/2004 2004/2003
------------------------------------- -------------------------------------
Change Due To(1) Change Due To(1)
------------------------ -------------------------
Change Volume Yield/Rate Change Volume Yield/Rate
------------------------------------------------------------------------------
Tax-equivalent interest revenue:
Securities $ 7,983 $ 5,232 $ 2,751 $ 16,448 $ 16,607 $(159)
Trading securities 141 (6) 147 (65) (38) (27)
Loans 146,735 50,282 96,453 32,525 28,878 3,647
Funds sold and resell agreements 934 475 459 72 (91) 163
- -----------------------------------------------------------------------------------------------------------------------------
Total 155,793 55,983 99,810 48,980 45,356 3,624
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Transaction deposits 37,204 6,936 30,268 4,171 2,305 1,866
Savings deposits 131 (64) 195 31 (19) 50
Time deposits 28,632 10,101 18,531 8,302 4,288 4,014
Funds purchased and repurchase agreements 40,466 7,301 33,165 5,550 868 4,682
Other borrowings 16,513 (285) 16,798 1,025 (743) 1,768
Subordinated debentures 6,606 4,659 1,947 (1,716) (110) (1,606)
- -----------------------------------------------------------------------------------------------------------------------------
Total 129,552 28,648 100,904 17,363 6,589 10,774
- -----------------------------------------------------------------------------------------------------------------------------
Tax-equivalent net interest revenue 26,241 $27,335 $(1,094) 31,617 $38,767 $(7,150)
----------------------- -------------------------
Decrease in tax-equivalent adjustment (143) 131
- ---------------------------------------------------------- -----------
Net interest revenue $ 26,098 $ 31,748
- ---------------------------------------------------------- -----------
4th Qtr 2005/4th Qtr 2004
------------------------------------
Change Due To(1)
------------------------
Change Volume Yield/Rate
------------------------------------
Tax-equivalent interest revenue:
Securities $ 3,270 $ 992 $ 2,278
Trading securities 136 116 20
Loans 47,095 18,137 28,958
Funds sold and resell agreements 411 198 213
- ---------------------------------------------------------------------------------------------------------------
Total 50,912 19,443 31,469
- ---------------------------------------------------------------------------------------------------------------
Interest expense:
Transaction deposits 13,296 3,847 9,449
Savings deposits 61 (10) 71
Time deposits 10,497 4,920 5,577
Funds purchased and repurchase agreements 9,517 504 9,013
Other borrowings 5,104 365 4,739
Subordinated debentures 2,754 2,044 710
- ---------------------------------------------------------------------------------------------------------------
Total 41,229 11,670 29,559
- ---------------------------------------------------------------------------------------------------------------
Tax-equivalent net interest revenue 9,683 $ 7,773 $ 1,910
------------------------
Increase in tax-equivalent adjustment 241
- -------------------------------------------------------------------------------------
Net interest revenue $ 9,924
- -------------------------------------------------------------------------------------
(1) Changes attributable to both volume and yield/rate are allocated to both
volume and yield/rate on an equal basis.
8
Management regularly models the effects of changes in interest rates on net
interest revenue. Based on this modeling, we expect the effect of changes in
interest rates on the Company's earnings to be neutral over a one-year
forward-looking period. However, other factors may affect this general
expectation. For example, throughout 2005 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. These securities reprice as cash flow
received is reinvested at current market rates. The resulting change in yield of
the securities portfolio occurs more slowly than changes in market rates. The
tax-equivalent yield on the securities portfolio increased 6 basis points over
2004.
Our overall objective is to manage the Company's balance sheet to be essentially
neutral to changes in interest rates. Approximately 71% 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 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 3.4 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. Interest
rate swaps with a combined notional amount of $684 million 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 the balance sheet. Interest rate swaps with a notional
amount of $100 million 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 2005 NET INTEREST REVENUE
Tax-equivalent net interest revenue for the fourth quarter of 2005 totaled
$117.8 million compared with $108.1 million for the fourth quarter of 2004.
Average earning assets increased $1.3 billion or 10%, including a $1.1 billion
increase in average loans outstanding. Growth in average earning assets was
funded by a $1.8 billion increase in interest-bearing liabilities, including a
$1.5 billion increase in average interest-bearing deposits. The increase in
interest-bearing liabilities also funded a decrease in average demand deposits.
Net interest margin was 3.34%, down 4 basis points from the fourth quarter of
2004 due to changes in the funding mix and spread compression.
Net interest margin for the fourth quarter of 2005 was reduced 3 basis points by
$299 million of average margin assets carried in support of our derivatives
business. We were required to place margin collateral with counterparties as the
fair value of our derivative liabilities increased due to volatile energy
prices. Fees earned on these margin assets, which totaled $3.4 million, are
included in non-interest revenue while the related cost of funds is included in
interest expense. Margin assets averaged $126 million for the fourth quarter of
2004. Fees earned on these assets totaled $756 thousand.
2004 NET INTEREST REVENUE
Tax-equivalent net interest revenue for 2004 was $428.3 million, a $31.6 million
or 8% increase from 2003. Average earning assets increased $885 million or 8%,
including a $542 million increase in average outstanding loans. As shown in
Table 2, net interest revenue increased $38.8 million due to changes in earning
assets and interest-bearing liabilities. Net interest revenue growth due to
earning assets was partially offset by a $7.2 million decrease due to changes in
interest yields and rates. Changes in interest rates and yields include the
narrowing of spreads due to competitive pressures and other market conditions.
9
OTHER OPERATING REVENUE
Other operating revenue increased $38.1 million compared with last year due
primarily to a $33.0 million increase in fees and commission revenue. Other
operating revenue for 2005 also included $7.1 million of gains on asset sales.
Diversified sources of fees and commission revenue are a significant part of our
business strategy and represented 43% of total revenue, excluding gains and
losses on asset sales, securities and derivatives. We believe that a variety of
fee revenue sources provide an offset to changes in interest rates, values in
the equity markets, commodity prices and consumer spending, all of which can be
volatile. We expect continued growth in other operating revenue through offering
new products and services and by expanding into new markets. However, increased
competition and saturation in our existing markets could affect the rate of
future increases.
Table 3 Other Operating Revenue
(In Thousands)
Years ended December 31,
-------------------------------------------------------------
2005 2004 2003 2002 2001
-------------------------------------------------------------
Brokerage and trading revenue $ 44,222 $ 41,107 $ 41,152 $ 26,290 $ 19,974
Transaction card revenue 72,036 64,816 57,352 52,213 44,231
Trust fees and commissions 65,187 57,532 45,763 40,092 40,567
Service charges and fees on deposit accounts 98,361 93,712 82,042 67,632 51,284
Mortgage banking revenue 30,681 28,189 52,336 48,910 50,155
Other revenue 35,114 27,209 27,573 22,424 23,252
- -------------------------------------------------------------------------------------------------------------------------
Total fees and commissions 345,601 312,565 306,218 257,561 229,463
- -------------------------------------------------------------------------------------------------------------------------
Gain on sales of assets 7,061 887 822 1,157 557
Gain (loss) on securities, net (6,895) (3,088) 7,188 58,704 30,640
Gain (loss) on derivatives, net 1,179 (1,474) (9,375) 5,236 (3,812)
- -------------------------------------------------------------------------------------------------------------------------
Total other operating revenue $ 346,946 $ 308,890 $304,853 $322,658 $256,848
- -------------------------------------------------------------------------------------------------------------------------
FEES AND COMMISSIONS REVENUE
Trust fees increased $7.7 million or 13%. The fair value of all trust
relationships overseen by the Company, which is the basis for a significant
portion of trust fees, increased to $28.5 billion at December 31, 2005 compared
with $24.6 billion at December 31, 2004. Approximately 31% of trust fees are
earned on personal trust relationships. Additionally, 21% of trust fees are
earned by providing employee benefit plan services and 20% are based on mutual
fund activities.
Transaction card revenue increased $7.2 million or 11%. Merchant discount fees
and check card revenue increased 11% and 32%, respectively. Revenue growth from
each of these activities was due to growth in transaction volume. Merchant
locations serviced increased by 485 or 7%, including 179 new merchant locations
in Arizona and Colorado. The number of check card transactions processed during
2005 increased 17% over 2004. ATM fees grew at 3% compared to 2004. As
previously disclosed, the growth rate in ATM fees was expected to slow for 2005.
One of our customers was purchased by another financial institution in 2004.
Service charges on deposit accounts increased $4.6 million or 5% compared with
2004. Overdraft fees increased 16% to $62.7 million while account service charge
revenue decreased 12% to $28.6 million. The volume of overdraft items processed
increased in 2005. Additionally, the per item overdraft charge was increased in
the second quarter of 2005. The decrease in service charge revenue reflected an
increase in the earnings credit available to commercial deposit customers. The
earnings credit, which provides a non-cash method for commercial customers to
avoid incurring charges for deposit services, increases when interest rates
rise.
Brokerage and trading revenue grew $3.1 million or 8% compared with 2004.
Revenue from customer hedging activities increased $2.4 million, including $2.1
million from energy hedging activities. Volatility in the energy markets during
2005 prompted our energy customers to more actively hedge their gas and oil
production. Retail brokerage revenue increased $742 thousand or 6% over 2004.
Securities trading revenue was $23.5 million, unchanged from the previous year.
Volatility in the energy markets increased the fair value of derivative assets
and liabilities and required the Company to pledge margin
10
assets to secure obligations. Fees earned on margin assets, which are recognized
in other revenue, totaled $7.1 million in 2005, compared with $686 thousand in
2004.
GAINS ON SALES OF ASSETS
The Company recognized net gains on asset sales of $7.1 million in 2005,
including $4.8 million from the sale of its interest in an Oklahoma City office
building and $1.2 million from the sale of loans from the community development
mortgage loan portfolio. In addition to a cash premium received on the loan
sale, we retained both the right to service the loans and a recourse obligation
to the purchaser for borrower defaults. A servicing asset of $1.6 million and a
recourse liability of $888 thousand were recognized in conjunction with this
sale.
SECURITIES AND DERIVATIVES
Aggregate net losses on securities and derivatives totaled $5.7 million in 2005
and $4.6 million in 2004. Net losses on securities totaled $6.9 million in 2005,
consisting of losses of $5.2 million on securities held as economic hedges of
mortgage servicing rights and $1.7 million on other securities. Net losses on
securities held as an economic hedge included $420 thousand of
other-than-temporary impairment at December 31, 2005. 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.
Other securities are bought and sold as necessary to maximize the portfolio's
total return and to manage prepayment or extension risk.
Net gains on derivatives totaled $1.2 million in 2005, including net gains of
$1.1 million from fair value adjustments of derivatives used to manage interest
rate risk and related hedge liabilities. Additionally, net gains on derivatives
included $108 thousand of gains realized on derivatives used as an economic
hedge of mortgage servicing rights. The Company's use of derivatives to manage
interest rate risk is more fully discussed in the Deposits and Borrowings and
Capital sections of this report.
FOURTH QUARTER 2005 OTHER OPERATING REVENUE
Other operating revenue for the fourth quarter of 2005 totaled $87.3 million, an
$8.6 million or 11% increase from 2004. Fees and commissions revenue increased
$11.1 million or 14%. All business lines contributed to this increase.
Transaction card revenue, deposit fees and trust fees increased $2.4 million,
$1.9 million and $1.7 million, respectively. Other operating revenue included
$3.4 million of fees earned on margin assets.
2004 OTHER OPERATING REVENUE
Other operating revenue totaled $308.9 million for 2004, up $4.0 million from
2003. Fees and commissions revenue increased $6.3 million or 2%. Strong growth
in trust fees, transaction card revenue and deposit fees was partially offset by
lower mortgage banking revenue. Mortgage banking revenue decreased $24.1 million
due primarily to reduced loan refinancing activity.
Net losses on securities totaled $3.1 million, including losses of $4.9 million
on securities held as economic hedges of mortgage servicing rights and gains of
$1.8 million on sales of other securities.
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
economic hedges of mortgage servicing rights. 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.
OTHER OPERATING EXPENSE
Other operating expense for 2005 totaled $469.1 million, a 6% increase from
2004. This increase resulted primarily from personnel and data processing
expenses. Growth in personnel expenses was driven largely by employment growth
and an increase in average compensation per employee. The increase in data
processing expenses included both transaction volume and system maintenance
costs.
11
Table 4 Other Operating Expense
(In Thousands)
Years ended December 31,
---------------------------------------------------------------------
2005 2004 2003 2002 2001
------------- -------------- ------------- ------------ -------------
Personnel expense $258,971 $240,661 $222,922 $ 187,439 $166,864
Business promotion 17,964 15,618 12,937 11,367 10,658
Contribution of stock to BOK Charitable Foundation - 5,561 - - -
Professional fees and services 16,596 15,487 17,935 12,987 13,391
Net occupancy and equipment 50,195 47,289 45,967 42,347 42,764
Data processing and communications 67,026 60,025 53,398 45,912 39,763
Printing, postage and supplies 15,066 14,034 13,930 12,665 12,329
Net (gain) loss and operating expenses on
repossessed assets 572 (4,016) 271 1,014 1,401
Amortization of intangible assets 6,943 8,138 8,101 7,638 20,113
Mortgage banking costs 14,562 18,167 40,296 42,271 30,261
Provision (recovery) for impairment of
mortgage servicing rights (3,915) (1,567) (22,923) 45,923 15,551
Other expense 25,126 21,827 20,604 19,991 18,968
- ------------------------------------------------------ ------------- -------------- ------------- ------------ -------------
Total $469,106 $441,224 $413,438 $ 429,554 $372,063
- ------------------------------------------------------ ------------- -------------- ------------- ------------ -------------
PERSONNEL EXPENSE
Personnel expense increased $18.3 million or 8% to $259.0 million. Regular
compensation expense totaled $162.7 million, a $16.0 million or 11% increase
over 2004. The increase in regular compensation expense was due to a 6% increase
in average regular compensation per full-time equivalent employee and a 5%
increase in average staffing.
Incentive compensation, which includes both cash-based and stock-based plans,
decreased $4.6 million or 8% to $49.8 million. The Company offers numerous
incentive compensation plans that are aligned with the Company's growth
strategy. Cash settlements paid under these plans may be based on defined
formulas, other performance criteria or discretionary. Incentive compensation is
designed to motivate and reinforce sales and customer service behavior in all of
our markets. Variations of the plans are used in targeted geographic markets and
lines of business where exceptional growth potential is expected. The
effectiveness of all plans and their alignment with the Company's objectives are
reviewed annually with executive management. Incentive compensation expenses
related to these cash-based plans increased $2.0 million or 5%.
Stock-based compensation expense decreased $6.6 million or 56%. The Company's
stock-based compensation plans include both equity awards and liability awards.
Compensation expense associated with liability award plans decreased $8.4
million. This decrease reflected a decrease in the market value of BOK Financial
common stock at December 31, 2005 compared with December 31, 2004, and a
reduction in the number of executive officers of the Company eligible to
participate in liability award plans. Additional information about our
stock-based compensation plans is provided in Note 13 to the Consolidated
Financial Statements.
Employee benefit expenses increased $5.8 million or 15% to $43.6 million.
Employee insurance costs increased $2.6 million or 20% due primarily to growth
in medical claims. The Company self-insures a portion of its employee health
care coverage. Retirement benefit costs, which include both thrift and pension
plan expenses, increased $1.7 million or 16%.
During the fourth quarter of 2005, our Board of Directors approved modifications
to both the thrift and pension plans. These modifications will become effective
April 1, 2006. The purpose of these modifications is to provide retirement
benefits that align with the Company's strategy of rewarding long-term, superior
performance, that are easily understood and that increase employee ownership and
control over their retirement. These modifications consist primarily of enhanced
Company contributions to the thrift plans and curtailed benefit accruals to the
pension plan. A charge of $384 thousand was recognized in 2005 for the
curtailment of the pension plan. The combined effects of these modifications are
not expected to have a significant impact on future earnings or liquidity.
The Company will continue to have a funding obligation to the pension plan and
will continue to recognize pension expense based on plan asset performance,
discount rates and other factors. At December 31, 2005, prepaid pension expense
totaled $21.9 million, consisting of $1.3 million of net plan assets in excess
of liabilities and $20.6 million of unrecognized actuarial losses. These losses
will be recognized in future
12
years based on the lesser of the average remaining service periods or 10 years.
These unrecognized losses may also be increased or reduced by plan asset
performance and discount rate changes.
DATA PROCESSING AND COMMUNICATIONS EXPENSE
Data processing and communication expenses increased $7.0 million or 12%
compared to 2004. This expense consists of two broad categories, data processing
systems and transaction card processing. Data processing systems costs increased
$3.5 million or 10% due primarily to increased maintenance and communications
costs. Transaction card processing costs increased $3.5 million or 15% due to
growth in processing volumes. The number of transactions processed during 2005
increased 17% over 2004.
OTHER OPERATING EXPENSES
Business promotion expense increased $2.3 million or 15% compared with last
year. Promotional activities in support of consumer banking initiatives
accounted for $1.5 million of the increase.
Mortgage banking expenses, including provision for impairment of mortgage
servicing rights, decreased $6.0 million. These expenses are discussed more
fully in the Line of Business - Mortgage Banking section of this report.
FOURTH QUARTER 2005 OPERATING EXPENSES
Operating expenses for the fourth quarter of 2005 totaled $123.9 million, up 11%
over the same period in 2004. Personnel costs increased $6.5 million or 11%.
Regular compensation expense increased $4.7 million or 12% due to a 5% increase
in average compensation per employee and a 7% increase in staffing. Data
processing and communication expense grew $2.9 million or 19% due to increases
of $1.5 million in data processing costs and $1.4 million in transaction card
processing costs. Both increases reflect growth in processing volumes.
2004 OPERATING EXPENSES
Operating expenses for 2004 totaled $441.2 million, a 7% increase from 2003.
This increase resulted primarily from personnel and data processing costs.
Growth in personnel costs were driven largely by the Colorado State Bank & Trust
acquisition and stock-based compensation costs. The increase in data processing
costs included both transaction volume and system maintenance costs.
Personnel costs increased $17.7 million or 8%. Regular compensation increased
$8.0 million or 6% due primarily to a 5% increase in average regular
compensation per employee and a 1% increase in average staffing. Additionally,
incentive compensation increased $8.6 million, including a $5.9 million increase
in stock-based compensation. 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.
Data processing and communication expenses increased $6.6 million or 12%.
Transaction card processing costs increased $4.6 million or 25% due to
processing volumes. Data processing systems costs increased $2.0 million or 6%
due primarily to maintenance costs.
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.
Net gains from the sale of repossessed assets totaled $4.0 million including
$3.8 million from the sale of stock acquired several years ago as partial
proceeds of the sale of a troubled loan.
INCOME TAXES
Income tax expense was $113.2 million for 2005, $91.4 million for 2004 and $88.9
million for 2003. This represented 36%, 34% and 36%, respectively, of book
taxable income. Tax expense currently payable totaled $112.7 million in 2005
compared with $91.3 million in 2004 and $82.6 million in 2003.
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.
13
Table 5 Selected Quarterly Financial Data
(In Thousands Except Per Share Data)
Fourth Third Second First
---------------------------------------------------
2005
---------------------------------------------------
Interest revenue $214,240 $199,056 $186,334 $170,304
Interest expense 97,854 86,228 73,801 62,710
- ------------------------------------------------------------------------------------------------------------------------------
Net interest revenue 116,386 112,828 112,533 107,594
Provision for credit losses 4,450 3,976 2,015 2,000
- ------------------------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 111,936 108,852 110,518 105,594
Other operating revenue 89,018 90,993 92,636 80,015
Gain (loss) on securities, net (1,780) (4,744) 2,266 (2,637)
Gain (loss) on derivatives, net 106 606 (311) 778
Other operating expense 124,611 121,705 118,922 107,783
Provision (recovery) for impairment of mortgage
servicing rights (708) (4,671) 7,088 (5,624)
- ------------------------------------------------------------------------------------------------------------------------------
Income before taxes 75,377 78,673 79,099 81,591
Income tax expense 27,219 27,846 28,634 29,536
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 48,158 $50,827 $ 50,465 $ 52,055
- ------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.72 $ 0.77 $ 0.79 $ 0.87
- ------------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.72 $ 0.76 $ 0.75 $ 0.78
- ------------------------------------------------------------------------------------------------------------------------------
Average shares:
Basic 66,527 66,427 63,779 59,433
- ------------------------------------------------------------------------------------------------------------------------------
Diluted 67,147 67,106 66,986 66,947
- ------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------
14
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 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, regional banking continued to increase its contribution to
consolidated net income. The growth of the regional banking segment is
consistent with our corporate strategy of expansion into high growth markets
outside of Oklahoma. The Oklahoma consumer banking unit's contribution to
consolidated earnings increased significantly in 2005. Rising short-term
interest rates increased the internal transfer pricing credit provided to units
that generate lower-costing funds for the Company.
Table 6 Net Income by Line of Business
(In Thousands)
Years ended December 31,
2005 2004 2003
-----------------------------------------
Oklahoma corporate banking $ 73,625 $ 61,956 $ 57,631
Oklahoma consumer banking 24,183 11,854 8,928
Mortgage banking 2,182 2,681 28,401
Wealth management 17,890 13,587 14,517
Regional banking 77,344 57,706 41,673
- ----------------------------------------------------------------------------
Subtotal 195,224 147,784 151,150
Funds management and all other 6,281 31,239 7,210
- ----------------------------------------------------------------------------
Total $201,505 $179,023 $158,360
- ----------------------------------------------------------------------------
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, this division has
specialized groups that serve customers in the energy, agriculture, healthcare
and banking/finance industries, and includes TransFund, our electronic funds
transfer network. The Oklahoma Corporate Banking Division contributed $73.6
million or 37% to consolidated net income for 2005, including an after-tax gain
of $2.9 million from the sale of the Company's interest in an Oklahoma City
office building. This compares to $62.0 million or 35% of consolidated net
income for 2004. Net interest revenue increased $7.4 million or 6% due primarily
to asset growth. Average assets attributed to this division, which consist
primarily of commercial loans, increased $249 million or 6% over 2004. Operating
revenue grew $6.2 million or 7%. TransFund provided $3.1 million of the increase
in operating revenue. Operating expenses, which consist primarily of personnel
and data processing costs, increased 4%. Growth in net income also reflected a
$4.2 million decrease in net loan charge-offs.
15
Table 7 Oklahoma Corporate Banking
(Dollars in Thousands)
Years ended December 31,
----------------------------------------
2005 2004 2003
----------------------------------------
NIR (expense) from
external sources $ 191,040 $ 148,919 $ 140,818
NIR (expense) from
internal sources (60,735) (26,049) (25,924)
----------------------------------------
Total net interest
revenue 130,305 122,870 114,894
Other operating
revenue 92,707 86,493 77,332
Gain on sale of assets 4,758 - -
Operating expense 102,513 99,007 87,585
Net loans charged off 4,757 8,956 10,318
Net income $ 73,625 $ 61,956 $ 57,631
Average assets $4,629,400 $4,380,491 $4,106,441
Average economic capital 322,440 312,530 311,140
Return on assets 1.59% 1.41% 1.40%
Return on economic capital 22.83 19.82 18.52
Efficiency ratio 45.01 47.29 45.56
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. This division contributed $24.2
million or 12% to consolidated net income for 2005. This compares to $11.9
million or 7% of consolidated net income for 2004. Net interest revenue grew
$16.5 million or 36% compared with 2004 due primarily to an increase in the
internal transfer pricing credit. Additionally, average deposits provided by the
Oklahoma Consumer Banking Division grew $158 million or 6%. Other operating
revenue growth from 2004 resulted largely from check card revenue and overdraft
fees.
During 2005, growth initiatives focused on building customer relationships
through sales promotions, Perfect Banking sales and service standards and free
on-line BillPay services. These initiatives resulted in a 6% increase in average
consumer deposits, a 10% increase in checking accounts and a 54% increase in the
number of on-line BillPay users. Oklahoma Consumer Banking Division also added
one new supermarket location.
Table 8 Oklahoma Consumer Banking
(Dollars in Thousands)
Years ended December 31,
-----------------------------------------
2005 2004 2003
-----------------------------------------
NIR (expense) from
external sources $ (25,140) $ (19,061) $(17,188)
NIR (expense) from
internal sources 87,421 64,873 58,261
-----------------------------------------
Total net interest
revenue 62,281 45,812 41,073
Other operating
revenue 66,266 56,611 47,229
Operating expense 84,336 76,057 66,798
Net loans charged off 4,632 6,964 6,892
Net income $24,183 $11,854 $8,928
Average assets $2,988,218 $2,746,279 $2,525,060
Average economic capital 69,810 64,390 58,000
Return on assets 0.81% 0.43% 0.35%
Return on economic capital 34.64 18.41 15.39
Efficiency ratio 65.61 74.26 75.65
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.
Mortgage banking activities contributed $2.2 million to consolidated net income
in 2005 compared to $2.7 million in 2004. Net income for 2005 included $753
thousand from the sale of mortgage loans from the Company's community
development loan portfolio.
Mortgage banking activities consist 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.
16
Table 9 Mortgage Banking
(Dollars in Thousands)
Years ended December 31,
-------------------------------------------
2005 2004 2003
-------------------------------------------
NIR (expense) from
external sources $ 20,392 $ 21,647 $ 27,770
NIR (expense) from
internal sources (14,979) (11,423) (9,415)
-------------------------------------------
Total net interest
revenue 5,413 10,224 18,355
Capitalized mortgage
servicing rights 17,402 11,365 23,922
Other operating
revenue 16,427 22,055 36,379
Gain on sale of assets 1,232 - -
Operating expense 35,315 35,415 58,204
Recovery for
impairment of mortgage
servicing rights (3,915) (1,567) (22,923)
Gain (loss) on financial
instruments, net (5,087) (5,068) 4,025
Net income $ 2,182 $ 2,681 $ 28,401
Average assets $526,224 $559,034 $623,823
Average economic capital 24,210 27,270 34,120
Return on assets 0.41% 0.48% 4.55%
Return on economic capital 9.01 9.83 83.24
Efficiency ratio 87.25 81.15 74.00
LOAN PRODUCTION SECTOR
Loan production revenue totaled $17.6 million in 2005, including $17.4 million
of capitalized mortgage servicing rights, compared to loan production revenue of
$20.9 million in 2004, including $11.4 million of capitalized mortgage servicing
rights. Mortgage loans funded totaled $910 million in 2005, including $664
million for home purchases and $246 million of refinanced loans. Mortgage loans
funded in 2004 totaled $893 million, including $587 million for home purchases
and $306 million of refinanced loans. Approximately 69% of the loans funded
during 2005 were in Oklahoma. Growth initiatives for the loan production sector
include a program to hire experienced originators in markets outside of Oklahoma
to boost production. Pre-tax income from loan production totaled $5.6 million
for 2005 compared with $6.7 million for the previous year end. The pipeline of
mortgage loan applications totaled $233 million at December 31, 2005, compared
to $189 million at December 31, 2004.
LOAN SERVICING SECTOR
The loan servicing sector had a pre-tax loss of $3.2 million for 2005 compared
to a pre-tax loss of $4.3 million for the same period of 2004. Operating results
of the loan servicing sector are greatly affected by the effect of changes in
interest rates on prepayment speeds and the value of mortgage servicing rights.
Mortgage interest rates changed little during 2005. In this rate environment,
the fair value of our mortgage servicing rights appreciated modestly. The
resulting recovery of provision for mortgage servicing rights was $3.9 million
in 2005, compared with a provision recovery of $1.6 million in 2004.
Servicing revenue totaled $16.3 million in 2005 compared to $17.8 million in
2004. The decrease in servicing revenue was due primarily to a lower outstanding
principal balance of loans serviced. The average outstanding balance of loans
serviced for others was $3.6 billion during 2005 compared to $3.9 billion during
2004. The decrease in loans serviced reflected our decision to curtail purchases
of mortgage loan servicing outside our market area. Servicing revenue per
outstanding loan principal was 42 basis points in 2005 compared with 45 basis
points in 2004. Approximately 80% of loans serviced was in our primary market
areas at December 31, 2005 and December 31, 2004.
Subsequent to December 31, 2005, we agreed to purchase a $480 million mortgage
loan servicing package for approximately $7 million. Substantially all of the
loans are within our primary market area. This purchase is expected to close by
the end of the first quarter of 2006.
Amortization of mortgage servicing rights, which is included in operating
expense, was $12.9 million in 2005 compared to $15.8 million in 2004.
Amortization expense is determined in proportion to the estimated future cash
flows that will be generated by the mortgage servicing rights. The decrease in
amortization expense in 2005 reflected an expectation of slower loan prepayment
speeds.
The valuation allowance for impairment of mortgage servicing rights totaled $7
million at December 31, 2005 compared to $14 million at December 31, 2004.
Increased fair value of our servicing rights was the primary reason for the
reduction in the valuation allowance. The valuation allowance was also reduced
by $2.4 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
costs of servicing rights and valuation allowance.
17
BOK Financial designates a portion of its securities portfolio as an economic
hedge against the risk of loss on its mortgage servicing rights. Mortgage-backed
securities and U.S. government agency debentures are acquired and held as
available for sale when prepayment risks exceed certain levels. Additionally,
mortgage-related 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.
Derivative contracts used to hedge mortgage servicing rights are carried at fair
value with changes in fair value recognized in earnings. We recognized net
losses of $1.2 million in 2005 and $3.5 million in 2004 from changes in the
value of mortgage servicing rights and economic hedging activities.
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, 2005, financial instruments with a fair value of $49 million and
an unrealized gain of $52 thousand were held for the economic hedge program.
This unrealized gain, net of income taxes, is included in shareholders' equity
as part of other comprehensive income. The interest rate sensitivity of the
mortgage servicing rights and securities held as a hedge is modeled over a range
of +/- 50 basis points. At December 31, 2005, the pre-tax results of this
modeling on reported earnings are shown in Table 10:
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 $3,113 $ (4,763)
Fair value of hedging securities (1,915) 2,112
-------------------------------------------------------------
Net $1,198 $ (2,651)
-------------------------------------------------------------
Table 10 shows the non-linear effect of changes in mortgage commitment rates on
the value of mortgage servicing rights. A 50 basis point increase in rates is
expected to increase value by $3.1 million while a 50 basis point decrease is
expected to reduce value by $4.8 million. This considers that there is an upper
limit to appreciation in the value of servicing rights as rates rise due to the
contractual repayment terms of the loans and other factors. There is much less
of a limit on the speed at which mortgage loans may prepay in a declining rate
environment.
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 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 consist of retail sales of mutual funds, securities, and annuities,
institutional sales of securities and derivatives, bond underwriting and other
financial advisory services. Customer hedging programs were combined into the
Wealth Management Division in 2005. Prior years' results have been reclassified
for consistency.
Wealth Management contributed $17.9 million or 9% to consolidated net income for
2005. This compared to $13.6 million or 8% of consolidated net income for 2004.
Trust and private financial services provided $15.6 million of net income in
2005, a $4.9 million or 46% increase over 2004. The increased contribution by
trust and private financial services is attributable primarily to trust fees. At
December 31, 2005 and 2004, the wealth management line of business was
responsible for trust assets with aggregate market values of $26.0 billion and
$22.6 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 $10.0 billion of trust assets at December 31, 2005 compared to
$8.2 billion of trust assets at December 31, 2004. The fair value of assets held
in custody
18
by the Wealth Management Division increased $1.6 billion or 33% while the fair
value of non-managed assets remained unchanged at $9.4 billion.
Brokerage and trading activities provided $2.3 million of net income in 2005
compared to $2.9 million in the previous year. Operating revenue increased $1.5
million or 4% due primarily to customer hedging programs. Operating expenses,
which consisted primarily of compensation expense, increased $2.1 million or 5%.
Table 11 Wealth Management
(Dollars in Thousands)
Years ended December 31,
--------------------------------------
2005 2004 2003
--------------------------------------
NIR (expense) from
external sources $ 5,651 $ 4,001 $ 1,966
NIR (expense) from
internal sources 11,208 8,888 8,939
--------------------------------------
Total net interest
revenue 16,859 12,889 10,905
Other operating
revenue 100,647 93,193 93,757
Operating expense 88,001 83,784 80,512
Net income $ 17,890 $ 13,587 $ 14,517
Average assets $1,503,886 $1,122,147 $ 875,661
Average economic capital 106,040 84,820 69,690
Return on assets 1.19% 1.21% 1.66%
Return on economic capital 16.87 16.02 20.83
Efficiency ratio 74.89 78.98 76.93
REGIONAL BANKING
Regional banking consists primarily of the corporate and commercial banking
services provided by Bank of Texas, Bank of Albuquerque, Bank of Arkansas,
Colorado State Bank and Trust and Bank of Arizona 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 banking contributed $77.3 million or 38% to
consolidated net income during 2005. This compares with $57.7 million or 32% of
consolidated net income in 2004. Growth in net income contributed by regional
banking came primarily from operations in Texas and New Mexico. Net income for
2005 in Texas and New Mexico increased $10.6 million and $6.0 million,
respectively, from the previous year. Net income from our Colorado operations
grew $2.5 million or 152% over 2004.
Texas growth resulted from an increase in net interest revenue. Net interest
revenue increased $21.6 million or 19%. Average earning assets increased $274
million, including $293 million of loans partially offset by a reduction in
securities and funds sold to the funds management unit. The growth in average
earning assets was funded by a $115 million increase in interest-bearing
deposits and a $77 million increase in demand deposits. Company initiatives to
support loan growth included hiring additional middle market lending talent in
Houston and expanding the energy lending staff in both Houston and Dallas.
Operating expenses increased $8.6 million or 12% due primarily to a $6.5 million
increase in personnel costs.
Net income growth from our New Mexico operations was also based largely on an
increase in net interest revenue, combined with an increase in operating
revenue. Average loans increased $62 million compared with 2004 while average
funds sold to the funds management unit decreased $82 million. Average deposits
in the New Mexico market grew $74 million, including $59 million of
interest-bearing deposits and $16 million of demand deposits. Over 15 thousand
new consumer checking accounts were opened during 2005. Funds provided by the
growth in deposits reduced average external borrowings. The increase in
operating revenue was due primarily to growth in deposit fees and check card
revenue.
Expansion efforts in the Colorado region continued during 2005. Commercial
lending staff was added throughout the year. Additionally, a new office which
offers trust products in Salt Lake City, Utah, was opened during the second
quarter. The result of these efforts was net income from our Colorado operations
of $4.1 million, a 152% increase in its second full year of operations as a BOK
Financial unit. Average earning assets attributed to our Colorado operations
increased 36% due primarily to loan growth. Average deposits increased $128
million or 40%. These factors combined to increase net interest revenue $6.5
million or 39%. Other operating revenue increased $1.6 million or 19% due
primarily to growth in trust fees. The fair value of trust assets managed by
Colorado State Bank and Trust was $2.4 billion at December 31, 2005, a 20%
increase from December 31, 2004. Net loans charged-off increased to $2.5 million
in 2005 from the resolution of several commercial lending relationships that
pre-dated our acquisition of Colorado State Bank and Trust.
Bank of Arizona incurred a net loss of $524 thousand since its acquisition in
April, 2005. Operating expense included $778 thousand of core deposit premium
amortization expense. Our policy is to amortize core deposit premiums over the
expected lives of the acquired
19
deposits using an accelerated amortization method. The weighted average life of
the acquired deposits is approximately five years. Operating expense also
included $380 thousand of recruiting expenses as we add professional staff. In
the nine months since acquisition, Bank of Arizona has been converted to our
data processing systems which increased the scope of products and services
offered in the Phoenix market. Outstanding loans increased $70 million or 55%.
We recently opened a loan production office in Tucson to further expand our
Arizona operations.
Table 12 Bank of Texas
(Dollars in Thousands)
Years ended December 31,
----------------------------------------
2005 2004 2003
----------------------------------------
NIR (expense) from external sources $148,021 $120,813 $ 106,617
NIR (expense) from internal sources (10,809) (5,206) (5,068)
------------- ------------- -------------
Total net interest revenue 137,212 115,607 101,549
Other operating revenue 24,053 22,406 21,951
Operating expense 82,189 73,548 78,152
Net loans charged off 2,727 3,928 4,301
Net income $ 49,946 $ 39,388 $ 26,601
Average assets $3,417,995 $3,143,625 $2,859,069
Average economic capital 182,640 168,430 166,870
Average invested capital 349,720 335,520 333,960
Return on assets 1.46% 1.25% 0.93%
Return on economic capital 27.35 23.39 15.94
Return on average invested capital 14.28 11.74 7.97
Efficiency ratio 50.97 53.29 63.28
Table 13 Bank of Albuquerque
(Dollars in Thousands)
Years ended December 31,
---------------------------------------
2005 2004 2003
---------------------------------------
NIR (expense) from external sources $ 58,208 $46,888 $42,128
NIR (expense) from internal sources (10,560) (5,065) (4,362)
------------- ------------- -----------
Total net interest revenue 47,648 41,823 37,766
Other operating revenue 17,367 14,701 11,533
Operating expense 31,195 31,904 30,385
Net loans charged off 930 1,471 1,326
Net income $ 20,096 $ 14,144 $ 10,919
Average assets $1,633,310 $1,652,557 $1,551,192
Average economic capital 76,560 73,270 66,070
Average invested capital 95,650 92,360 85,160
Return on assets 1.23% 0.86% 0.70%
Return on economic capital 26.25 19.30 16.53
Return on average invested capital 21.01 15.31 12.82
Efficiency ratio 47.98 56.44 61.63
Table 14 Bank of Arkansas
(Dollars in Thousands)
Years ended December 31,
---------------------------------------
2005 2004 2003
---------------------------------------
NIR (expense) from external sources $12,055 $ 9,046 $8,700
NIR (expense) from internal sources (3,918) (2,170) (2,148)
------------- ------------- -----------
Total net interest revenue 8,137 6,876 6,552
Other operating revenue 2,063 1,394 1,205
Operating expense 4,018 4,115 3,894
Net loans charged off 52 (26) 661
Net income $ 3,745 $ 2,555 $ 1,957
Average assets $268,307 $273,700 $288,030
Average economic capital 11,900 11,450 10,720
Average invested capital 11,900 11,450 10,720
Return on assets 1.40% 0.93% 0.68%
Return on economic capital 31.47 22.31 18.26
Return on average invested capital 31.47 22.31 18.26
Efficiency ratio 39.39 49.76 50.20
Table 15 Colorado State Bank and Trust
(Dollars in Thousands)
Years ended December 31,
------------------------------------
2005 2004 2003
------------------------------------
NIR (expense) from external sources $ 35,299 $ 24,034 ***
NIR (expense) from internal sources (12,059) (7,312) ***
------------------------------------
Total net interest revenue 23,240 16,722 ***
Other operating revenue 10,136 8,516 ***
Operating expense 24,179 22,455 ***
Net loans charged off 2,517 134 ***
Net income $ 4,081 $ 1,619 ***
Average assets $873,805 $684,329 ***
Average economic capital 47,070 27,560 ***
Average invested capital 89,050 69,550 ***
Return on assets 0.47% 0.24% ***
Return on economic capital 8.67 5.87 ***
Return on average invested capital 4.58 2.33 ***
Efficiency ratio 72.44 88.97 ***
*** Data not meaningful due to acquisition of Colorado State Bank and Trust in
September 2003.
20
Table 16 Bank of Arizona
(Dollars in Thousands)
Years ended December 31,
-------------------------------------
2005 2004 2003
-------------------------------------
NIR (expense) from external sources $10,690 *** ***
NIR (expense) from internal sources (3,992) *** ***
------------------------------------
Total net interest revenue 6,698 *** ***
Other operating revenue 1,100 *** ***
Operating expense 8,828 *** ***
Net loans charged off (31) *** ***
Net loss $ (524) *** ***
Average assets $227,081 *** ***
Average economic capital 6,830 *** ***
Average invested capital 23,480 *** ***
Return on assets (0.23)% *** ***
Return on economic capital (7.67) *** ***
Return on average invested capital (2.23) *** ***
Efficiency ratio 113.21 *** ***
*** Data not applicable due to acquisition of Bank of Arizona in April 2005.
ASSESSMENT OF FINANCIAL CONDITION
SECURITIES
BOK Financial maintains a securities portfolio to support its interest rate risk
management strategies, provide liquidity and profitability and comply with
regulatory requirements. Securities are classified as either held for investment
or available for sale. 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, 2005
increased $317 million compared with the previous year-end. Mortgage-backed
securities increased $293 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 2005. 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 of risk both
before making an investment and throughout the life of the security. The
expected duration of the mortgage-backed securities portfolio was 2.8 years at
December 31, 2005. Management estimates that the expected duration would extend
to 3.3 years assuming a 300 basis point immediate rate shock.
Table 17 Securities
(Dollars in Thousands)
December 31,
-----------------------------------------------------------------------------
2005 2004 2003
-----------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-----------------------------------------------------------------------------
Investment:
U.S. Treasury $ 1,994 $ 1,976 $ - $ - $ - $ -
Municipal and other tax-exempt 240,359 238,649 216,986 218,465 184,192 187,354
Mortgage-backed U.S. agency securities - - 1,287 1,336 2,296 2,418
Other debt securities 2,772 2,781 2,821 2,835 1,463 1,484
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 245,125 $ 243,406 $ 221,094 $ 222,636 $ 187,951 $ 191,256
- -------------------------------------------------------------------------------------------------------------------------------
Available for sale:
U.S. Treasury $ 16,037 $15,827 $ 27,119 $ 27,062 $ 44,679 $ 45,424
Municipal and other tax-exempt 17,153 17,078 414 404 3,271 3,257
Mortgage-backed securities:
U.S. agencies 3,507,047 3,424,356 3,067,611 3,052,375 3,514,158 3,518,926
Other 1,277,161 1,250,701 1,423,613 1,418,770 845,430 848,911
- -------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 4,784,208 4,675,057 4,491,224 4,471,145 4,359,588 4,367,837
- -------------------------------------------------------------------------------------------------------------------------------
Other debt securities 124 124 515 528 1,140 1,177
Equity securities and mutual funds 108,914 113,489 90,343 94,051 96,460 101,173
- -------------------------------------------------------------------------------------------------------------------------------
Total $4,926,436 $4,821,575 $4,609,615 $4,593,190 $4,505,138 $4,518,868
- -------------------------------------------------------------------------------------------------------------------------------
21
Net unrealized losses on available for sale securities totaled $105 million at
December 31, 2005 compared with net unrealized losses of $16 million at December
31, 2004 due primarily to rising interest rates. None of the unrealized losses
resulted from credit quality concerns. The aggregate gross amount of unrealized
losses at December 31, 2005 totaled $114 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 intent and ability to either
hold or sell the securities. 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 before allowance for loan losses totaled $9.1
billion at December 31, 2005, a $1.2 billion or 15% increase since last year.
Loan growth was broadly distributed among the various segments of the portfolio
and across all geographic markets.
The commercial loan portfolio increased $724 million during 2005. Much of this
increase was focused in the services portion of the portfolio, which increased
$235 million or 20%. Services, which consist of loans to a variety of
businesses, comprised 16% of the total loan portfolio. Approximately $1.1
billion of the services category is made up of loans with outstanding balances
of less than $10 million. Energy loans totaled $1.4 billion or 15% of total
loans. Outstanding energy loans increased $176 million or 14% during 2005.
Approximately $1.1 billion of the outstanding balance of energy loans was to oil
and gas producers. The amount of credit available to these customers generally
depends on a percentage of the value of their proven energy reserves based on
anticipated 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.
Notable loan concentrations by primary industry of the borrowers are presented
in Table 18.
Table 18 Loans
(In Thousands)
December 31,
----------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Commercial:
Energy $1,399,417 $1,223,195 $1,231,599 $1,132,178 $ 987,556
Services 1,425,821 1,190,814 989,906 917,263 807,691
Wholesale/retail 793,032 699,318 668,202 627,422 600,470
Manufacturing 514,792 484,423 482,657 501,506 467,260
Healthcare 520,309 424,257 393,929 332,359 276,789
Agriculture 291,858 262,436 228,222 186,976 170,861
Other commercial and industrial 354,706 291,393 342,187 292,094 364,123
------------ ------------ ------------ ------------ ------------
Total commercial 5,299,935 4,575,836 4,336,702 3,989,798 3,674,750
Commercial real estate:
Construction and land development 638,366 457,399 436,087 356,227 327,455
Multifamily 204,620 231,985 271,119 307,119 291,687
Other real estate loans 1,146,916 931,726 922,886 772,492 722,633
------------ ------------ ------------ ------------ ------------
Total commercial real estate 1,989,902 1,621,110 1,630,092 1,435,838 1,341,775
Residential mortgage:
Secured by 1-4 family residential properties 1,169,331 1,198,918 1,015,643 929,759 703,080
Residential mortgages held for sale 51,666 40,262 56,543 133,421 166,093
------------ ------------ ------------ ------------ ------------
Total residential mortgage 1,220,997 1,239,180 1,072,186 1,063,180 869,173
Consumer 629,144 492,841 444,909 412,167 409,680
- ----------------------------------------------------------- ------------ ------------ ------------ ------------ ------------
Total $9,139,978 $7,928,967 $7,483,889 $6,900,983 $6,295,378
- ----------------------------------------------------------- ------------ ------------ ------------ ------------ ------------
22
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, 2005, the
outstanding principal balance of these loans totaled $1.1 billion. Substantially
all of these loans are to borrowers with local market relationships. BOK
Financial serves as the agent lender in approximately 30% of its shared national
credits, based on dollars committed. 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 $2.0 billion or 22% of the loan portfolio
at December 31, 2005. Commercial real estate loans grew $369 million or 23% from
the previous year end. Growth in commercial real estate loans was distributed
across all of our markets. Construction and land development included $494
million for single family residential lots and premises, up $144 million or 41%
since December 31, 2004. The major components of other commercial real estate
loans were retail facilities - $305 million and office buildings - $499 million.
Commercial real estate loans secured by office buildings increased $156 million
or 46% during the past year.
Residential mortgage loans, excluding loans held for sale, included $350 million
of home equity loans, $346 million of loans held for business relationship
purposes, $232 million of adjustable rate mortgages and $182 million of loans
held for community development. Consumer loans included $357 million of indirect
automobile loans. Indirect automobile loans grew $123 million during 2005 due to
increased demand. Substantially all of these loans were purchased from dealers
in Oklahoma, although the Company began indirect automobile lending in Arkansas
during 2005.
The Company continued to increase geographic diversification through expansion
into Texas, New Mexico, Colorado and Arizona. The percent of the loan portfolio
attributed to Oklahoma was 59% at December 31, 2005 and 62% at December 31,
2004. Table 20 presents the distribution of the major loan categories among our
primary market areas.
Table 19 Loan Maturity and Interest Rate Sensitivity at December 31, 2005
(In Thousands)
Remaining Maturities of Selected Loans
--------------------------------------
Total Within 1 Year 1-5 Years After 5 Years
-------------- ------------ ------------ ------------
Loan maturity:
Commercial $5,299,935 $1,915,030 $2,683,475 $ 701,430
Commercial real estate 1,989,902 827,606 920,674 241,622
- --------------------------------------------- -------------- ------------ ------------ ------------
Total $7,289,837 $2,742,636 $3,604,149 $ 943,052
- --------------------------------------------- -------------- ------------ ------------ ------------
Interest rate sensitivity for selected loans with:
Predetermined interest rates $2,630,474 $ 487,157 $1,684,373 $ 458,944
Floating or adjustable interest rates 4,659,363 2,255,479 1,919,776 484,108
- --------------------------------------------- -------------- ------------ ------------ ------------
Total $7,289,837 $2,742,636 $3,604,149 $ 943,052
- --------------------------------------------- -------------- ------------ ------------ ------------
23
Table 20 Loans by Principal Market Area
(In Thousands)
December 31,
----------------------------------------------------------------
2005 2004 2003 2002 2001
----------------------------------------------------------------
Oklahoma:
Commercial $3,159,683 $2,847,470 $2,802,852 $2,677,616 $2,576,808
Commercial real estate 862,700 744,724 789,868 763,469 739,419
Residential mortgage 842,757 901,648 699,274 656,391 476,023
Residential mortgage held for sale 51,666 40,262 56,543 133,421 166,093
Consumer 466,180 367,947 324,305 294,404 314,060
----------------------------------------------------------------
Total Oklahoma $5,382,986 $4,902,051 $4,672,842 $4,525,301 $4,272,403
----------------------------------------------------------------
Texas:
Commercial $1,356,611 $1,120,069 $ 963,340 $ 866,905 $ 775,788
Commercial real estate 569,921 459,067 477,561 455,364 380,602
Residential mortgage 199,726 191,296 204,481 192,575 136,181
Consumer 89,017 86,732 101,269 104,353 85,347
----------------------------------------------------------------
Total Texas $2,215,275 $1,857,164 $1,746,651 $1,619,197 $1,377,918
----------------------------------------------------------------
Albuquerque:
Commercial $ 383,325 $ 354,904 $ 297,896 $ 286,622 $ 219,257
Commercial real estate 232,564 196,832 175,745 150,293 136,425
Residential mortgage 65,784 63,043 66,179 76,020 85,309
Consumer 15,137 13,260 11,070 11,399 8,200
----------------------------------------------------------------
Total Albuquerque $ 696,810 $ 628,039 $ 550,890 $ 524,334 $ 449,191
----------------------------------------------------------------
Northwest Arkansas:
Commercial $ 79,719 $ 61,934 $ 63,480 $ 63,113 $ 72,728
Commercial real estate 75,483 74,478 75,452 66,712 85,329
Residential mortgage 13,044 11,238 6,245 4,773 5,567
Consumer 25,659 3,858 2,671 2,011 2,073
----------------------------------------------------------------
Total Northwest Arkansas $ 193,905 $ 151,508 $ 147,848 $ 136,609 $ 165,697
----------------------------------------------------------------
Colorado (1):
Commercial $ 270,108 $ 191,459 $ 209,134 $ 95,542 $ 30,169
Commercial real estate 133,537 118,134 111,466 - -
Residential mortgage 21,918 31,693 39,464 - -
Consumer 27,871 21,044 5,594 - -
----------------------------------------------------------------
Total Colorado $ 453,434 $ 362,330 $ 365,658 $ 95,542 $ 30,169
----------------------------------------------------------------
Arizona:
Commercial $ 50,489 $ - $ - $ - $ -
Commercial real estate 115,697 27,875 - - -
Residential mortgage 26,102 - - - -
Consumer 5,280 - - - -
----------------------------------------------------------------
Total Arizona $ 197,568 $ 27,875 $ - $ - $ -
----------------------------------------------------------------
Total BOK Financial loans $9,139,978 $7,928,967 $7,483,889 $6,900,983 $6,295,378
----------------------------------------------------------------
(1) Includes Denver loan production office
24
LOAN COMMITMENTS
BOK Financial enters into off-balance sheet arrangements in the normal course of
business. These arrangements included loan commitments which totaled $4.3
billion and standby letters of credit which totaled $559 million at December 31,
2005. 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 21 Off-Balance Sheet Credit Commitments as of December 31, 2005
(In Thousands)
2005 2004 2003 2002 2001
-------------- ------------- ------------ ------------ -------------
Loan commitments $4,349,114 $3,459,425 $2,964,694 $2,884,011 $2,461,141
Standby letters of credit 558,907 414,228 374,550 290,069 248,960
- ------------------------------------ -------------- ------------- ------------ ------------ -------------
Total $4,908,021 $3,873,653 $3,339,244 $3,174,080 $2,710,101
- ------------------------------------ -------------- ------------- ------------ ------------ -------------
DERIVATIVES WITH CREDIT RISK
BOK Financial offers programs that permit its customers to hedge various risks,
including fluctuations in energy and cattle prices, interest rates and foreign
exchange rates, or to take positions in derivative contracts. Each of these
programs work essentially the same way. Derivative contracts are executed
between the customers and BOK Financial. Offsetting contracts are executed
between the Company and selected counterparties to minimize the risk to us of
changes in commodity prices, interest rates or foreign exchange rates. The
counterparty contracts are identical to the customer contracts, except for a
fixed pricing spread or a fee paid to us as compensation for administrative
costs, credit risk and profit.
These programs create credit risk for potential amounts due to the Company 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
of the counterparties. Individual limits are established by management, approved
by Credit Administration and reviewed by the Asset / Liability Committee. Margin
collateral is required if the exposure between the Company and any counterparty
exceeds established limits. Based on declines in the counterparties' credit
ratings, these limits are reduced and additional margin collateral is required.
A deterioration of the credit standing of one or more of the customers or
counterparties to these contracts may result in BOK Financial's 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
customer or counterparty deteriorated such that either the fair value of
underlying collateral no longer supported the contract or the customer or
counterparty's ability to provide margin collateral was impaired.
Derivative contracts are carried at fair value. At December 31, 2005, the fair
values of derivative contracts reported as assets under these programs totaled
$453 million. This included energy contracts with fair values of $418 million,
interest rate contracts with fair values of $19 million and foreign exchange
contracts with fair values of $15 million. The aggregate fair values of
derivative contracts reported as liabilities totaled $452 million. Approximately
94% of the fair value of asset contracts was with customers. The credit risk of
these contracts is generally backed by energy production. The remaining 6% was
with counterparties, consisting primarily of highly-rated financial institutions
and energy companies. The maximum net exposure to any single customer or
counterparty totaled $85 million.
The Company's policy had been to carry all derivative contracts at fair value on
a gross asset / gross liability basis. Changes in energy prices during the third
quarter of 2005 caused significant increases in the fair values of both
derivative assets and liabilities. The potential impact of these increases on
regulatory capital ratios caused the Company to adopt FASB Interpretation No.
39, "Offsetting Amounts Related to Certain Contracts" ("FIN 39"). FIN 39
permits, but does not require, reporting derivative assets and liabilities on a
net by counterparty basis provided certain specified criteria are met. These
criteria require written bilateral netting agreements between the Com-
25
pany and each of its counterparties that create a single legal claim or
obligation to pay or receive the net amount in settlement of the individual
derivative contracts. Amounts reported for derivative assets and liabilities in
prior periods have been reclassified for consistent presentation.
SUMMARY OF LOAN LOSS EXPERIENCE
The reserve for loan losses, which is available to absorb losses inherent in the
loan portfolio, totaled $104 million at December 31, 2005 compared to $109
million at December 31, 2004. These amounts represented 1.14% and 1.38% of
outstanding loans, excluding loans held for sale, at December 31, 2005 and 2004,
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
413% of the outstanding balance of nonperforming loans at year-end 2005 compared
to 206% at year-end 2004. Nonperforming loans at December 31, 2005 decreased to
$25 million compared with $53 million at the previous year-end. Net loans
charged off during 2005 decreased to $16 million in 2005 compared to $22 million
in the previous year. Net commercial loans charged-off during 2005 totaled $5.6
million, a $6.0 million decrease from 2004. Net consumer loan charge-offs, which
include deposit account overdraft losses, were $7.1 million in 2005 and $8.2
million in 2004. Table 22 provides statistical information regarding the reserve
for loan losses for the past five years.
Table 22 Summary of Loan Loss Experience
(Dollars in Thousands)
Years ended December 31,
-------------------------------------------------------------------
Reserve for loan losses: 2005 2004 2003 2002 2001
-------------------------------------------------------------------
Beginning balance $108,618 $114,784 $103,851 $89,188 $72,183
Loans charged off:
Commercial 9,670 13,921 16,331 13,326 18,042
Commercial real estate 2,619 971 88 286 71
Residential mortgage 1,212 1,465 1,721 412 308
Consumer 12,257 13,328 13,335 11,881 6,827
-----------------------------------------------------------------------------------------------------------------------
Total 25,758 29,685 31,475 25,905 25,248
-----------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 4,071 2,283 887 1,276 1,151
Commercial real estate 117 30 53 118 653
Residential mortgage 180 243 83 146 57
Consumer 5,176 5,171 5,102 3,436 2,727
-----------------------------------------------------------------------------------------------------------------------
Total 9,544 7,727 6,125 4,976 4,588
-----------------------------------------------------------------------------------------------------------------------
Net loans charged off 16,214 21,958 25,350 20,929 20,660
Provision for loan losses 10,401 15,792 34,000 34,228 35,365
Additions due to acquisitions 1,071 - 2,283 1,364 2,300
-----------------------------------------------------------------------------------------------------------------------
Ending balance $103,876 $108,618 $114,784 $103,851 $89,188
-----------------------------------------------------------------------------------------------------------------------
Reserve for off-balance sheet credit losses:
Beginning balance $18,502 $13,855 $12,219 $12,717 $10,472
Provision for off-balance sheet credit losses 2,040 4,647 1,636 (498) 2,245
Additions due to acquisitions 32 - - - -
-----------------------------------------------------------------------------------------------------------------------
Ending balance $20,574 $18,502 $13,855 $12,219 $12,717
-----------------------------------------------------------------------------------------------------------------------
Total provision for credit losses $12,441 $20,439 $35,636 $33,730 $37,610
-----------------------------------------------------------------------------------------------------------------------
Reserve for loan losses to loans outstanding at
year-end (1) 1.14% 1.38% 1.55% 1.53% 1.46%
Net charge-offs to average loans (1) 0.19 0.29 0.36 0.33 0.35
Total provision for credit losses to average loans (1) 0.15 0.27 0.50 0.54 0.63
Recoveries to gross charge-offs 37.05 26.03 19.46 19.21 18.17
Reserve for loan losses as a multiple of net charge-offs6.41x 4.95x 4.53x 4.96x 4.32x
Reserve for off-balance sheet credit losses to
off-balance sheet credit commitments 0.42% 0.48% 0.41% 0.38% 0.47%
Combined reserves for credit losses to loans
outstanding at year-end (1) 1.37% 1.61% 1.73% 1.72% 1.66%
-----------------------------------------------------------------------------------------------------------------------
Problem Loans:
Loans past due (90 days) $ 8,708 $ 7,649 $ 14,944 $ 8,117 $ 8,108
Nonaccrual2 25,162 52,660 52,681 49,855 43,540
Renegotiated - - - - 27
-----------------------------------------------------------------------------------------------------------------------
Total $ 33,870 $ 60,309 $ 67,625 $57,972 $51,675
-----------------------------------------------------------------------------------------------------------------------
Foregone interest on nonaccrual loans (2) $ 2,515 $ 4,617 $ 4,821 $ 4,770 $ 5,163
-----------------------------------------------------------------------------------------------------------------------
<FN>
(1) Excludes residential mortgage loans held for sale.
(2) Interest collected and recognized on nonaccrual loans was not significant in 2005 and previous years disclosed.
</FN>
26
The Company considers the credit risk from loan commitments and letters of
credit in its evaluation of the adequacy of the reserve for loan losses. 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 22
presents the trend of reserves for off-balance sheet credit losses and the
relationship between the reserve and loan 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. The reserve for off-balance sheet credit
losses would decrease and the reserve for loan losses would increase as
outstanding commitments are funded.
Specific impairment reserves are determined through evaluation of estimated
future cash flows and collateral value. At December 31, 2005, specific
impairment reserves totaled $2.6 million on total impaired loans of $20 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,
2005, the ranges of potential losses for the more significant factors were:
General economic conditions - $6 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 23.
The provision for credit losses totaled $12.4 million, an $8.0 million decrease
from 2004. Factors considered in determining the provision for credit losses
included reductions in the outstanding balances of criticized and classified
loans, nonperforming loans and potential problem loans. Factors that reduce the
required provision 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 23 Loan Loss Reserve Allocation
(Dollars in Thousands)
December 31,
-------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------------ ------------------- ------------------- ------------------- ------------------
% 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 $43,915 58.32% $52,325 58.00% $58,993 58.39% $56,474 58.95% $ 51,803 59.95%
Commercial real
estate 25,529 21.89 21,317 20.55 16,395 21.95 16,037 21.22 14,000 21.89
Residential mortgage 5,302 12.87 5,904 15.20 6,797 13.67 3,956 13.74 3,612 11.47
Consumer 10,929 6.92 12,034 6.25 16,132 5.99 13,922 6.09 6,318 6.69
Nonspecific allowance 18,201 - 17,038 - 16,467 - 13,462 - 13,455 -
- -------------------------- --------- -------- --------- --------- --------- --------- --------- --------- --------- --------
Total $103,876 100.00% $108,618 100.00% $114,784 100.00% $103,851 100.00% $ 89,188 100.00%
- -------------------------- --------- -------- --------- --------- --------- --------- --------- --------- --------- --------
<FN>
(1) Excludes residential mortgage loans held for sale.
(2) Specific allocation for the loan concentration risks are included in the appropriate category.
</FN>
27
NONPERFORMING ASSETS
Information regarding nonperforming assets, which totaled $34 million at
December 31, 2005 and $56 million at December 31, 2004 is presented in Table 24.
Nonperforming assets included nonaccrual and renegotiated loans and excluded
loans 90 days or more past due but still accruing interest. Nonaccrual loans
decreased to $25 million at December 31, 2005 from $53 million at December 31,
2004. Newly identified nonaccruing loans totaled $17 million during the year.
Nonaccruing loans decreased $17 million for loans charged off and foreclosed and
$16 million for cash payments received. Nonaccruing loans also decreased $10
million from loans returned to accruing status after a period of satisfactory
performance.
Table 24 Nonperforming Assets
(Dollars in Thousands)
December 31,
-----------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ -------------
Nonperforming loans
Nonaccrual loans:
Commercial $11,673 $33,195 $41,360 $39,114 $35,075
Commercial real estate 5,370 10,144 2,311 3,395 3,856
Residential mortgage 7,347 8,612 7,821 5,950 4,140
Consumer 772 709 1,189 1,396 469
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
Total nonaccrual loans 25,162 52,660 52,681 49,855 43,540
Renegotiated loans - - - - 27
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
Total nonperforming loans 25,162 52,660 52,681 49,855 43,567
Other nonperforming assets 8,476 3,763 7,186 6,719 7,141
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
Total nonperforming assets $33,638 $56,423 $59,867 $56,574 $50,708
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
Ratios:
Reserve for loan losses to nonperforming loans 412.83% 206.26% 217.89% 208.31% 204.71%
Nonperforming loans to period-end loans (2) 0.28 0.67 0.71 0.74 0.71
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
Loans past due (90 days)(1) $ 8,708 $ 7,649 $14,944 $ 8,117 $ 8,108
- ------------------------------------------------------------ ------------ ------------ ------------ ------------ -------------
<FN>
(1) Includes residential mortgages guaranteed by
agencies of the U.S. Government. $ 2,021 $ 2,308 $ 4,132 $ 4,956 $ 6,222
(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 $28 million at December 31, 2005 and $49 million
at December 31, 2004. The current composition of potential problem loans by
primary industry included healthcare - $12 million, real estate - $6 million and
services - $5 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 ExpressBank call
center. Commercial deposit growth is supported by offering treasury management
and lockbox services.
Total deposits averaged $10.1 billion for 2005, a $641 million or 7% increase
over 2004. Growth in average deposits came primarily in the Texas, Oklahoma and
Colorado markets. Average deposits increased $192 million or 8% in Texas, $179
million or 3% in Oklahoma and $128 million or 40% in Colorado. Consumer banking
and personal financial services provided much of the deposit growth in each of
these markets. Additionally, average deposits increased $90 million from the
Bank of Arizona acquisition.
Across all markets, average core deposits, which we define as deposits of less
than $100,000, excluding public funds and brokered deposits, increased 4% to
$5.2 billion. Growth in average core
28
deposits resulted from initiatives such as free on-line billpay, free checking
and Perfect Banking. The remaining average deposits included accounts with
balances in excess of $100,000, which totaled $3.9 billion, and brokered
deposits and public funds, which totaled $987 million.
Table 25 Maturity of Domestic CDs and Public
Funds in Amounts of $100,000 or More
(In Thousands)
December 31,
---------------------------
2005 2004
---------------------------
Months to maturity:
3 or less $ 354,724 $ 412,455
Over 3 through 6 256,919 183,723
Over 6 through 12 631,691 264,101
Over 12 1,226,823 1,388,014
--------------------------------------------------------
Total $2,470,157 $2,248,293
--------------------------------------------------------
At December 31, 2005, the Company had $442 million in fixed rate, brokered
certificates of deposits. The weighted-average interest rate paid on these
certificates is 3.64%. 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 3.81% on these swaps and currently pay
a floating rate of 4.39%.
The distribution of deposit accounts among our principal markets is shown in
Table 26.
29
Table 26 Deposits by Principal Market Area
(In Thousands)
December 31,
-------------------------------------------------------------------
2005 2004 2003 2002 2001
--------------------------------------------------------------------
Oklahoma:
Demand $1,003,284 $1,095,228 $1,025,483 $1,044,628 $ 992,663
Interest-bearing:
Transaction 3,002,609 2,291,089 2,246,675 1,897,353 1,650,269
Savings 85,837 87,597 98,611 103,749 101,433
Time 2,564,338 2,505,849 2,403,293 2,334,949 2,041,025
--------------------------------------------------------------------
Total interest-bearing 5,652,784 4,884,535 4,748,579 4,336,051 3,792,727
--------------------------------------------------------------------
Total Oklahoma $6,656,068 $5,979,763 $5,774,062 $5,380,679 $4,785,390
--------------------------------------------------------------------
Texas:
Demand $ 615,732 $ 617,808 $ 421,292 $ 394,164 $ 305,745
Interest-bearing:
Transaction 1,535,570 1,119,893 1,213,777 953,550 670,728
Savings 27,398 30,331 35,702 33,071 28,918
Time 735,731 571,993 505,463 510,512 451,031
--------------------------------------------------------------------
Total interest-bearing 2,298,699 1,722,217 1,754,942 1,497,133 1,150,677
--------------------------------------------------------------------
Total Texas $2,914,431 $2,340,025 $2,176,234 $1,891,297 $1,456,422
--------------------------------------------------------------------
Albuquerque:
Demand $ 129,289 $ 136,599 $ 106,050 $ 79,953 $ 57,648
Interest-bearing:
Transaction 381,099 320,118 370,294 295,174 224,265
Savings 17,839 17,885 20,728 26,704 26,848
Time 453,314 411,939 317,924 287,607 241,549
--------------------------------------------------------------------
Total interest-bearing 852,252 749,942 708,946 609,485 492,662
--------------------------------------------------------------------
Total Albuquerque $ 981,541 $ 886,541 $ 814,996 $ 689,438 $ 550,310
--------------------------------------------------------------------
Northwest Arkansas:
Demand $ 10,429 $ 14,489 $ 16,351 $ 12,949 $ 10,634
Interest-bearing:
Transaction 22,354 26,882 28,411 18,025 14,452
Savings 1,058 1,434 1,341 1,214 1,035
Time 75,034 99,677 105,598 134,923 87,501
--------------------------------------------------------------------
Total interest-bearing 98,446 127,993 135,350 154,162 102,988
--------------------------------------------------------------------
Total Northwest Arkansas $ 108,875 $ 142,482 $ 151,701 $ 167,111 $ 113,622
--------------------------------------------------------------------
Colorado:
Demand $ 61,647 $ 62,995 $ 79,424 $ - $ -
Interest-bearing:
Transaction 258,668 189,106 162,651 - -
Savings 17,772 19,092 18,347 - -
Time 264,020 54,394 42,448 - -
--------------------------------------------------------------------
Total interest-bearing 540,460 262,592 223,446 - -
--------------------------------------------------------------------
Total Colorado $ 602,107 $ 325,587 $ 302,870 $ - $ -
--------------------------------------------------------------------
Arizona:
Demand $ 45,567 $ - $ - $ - $ -
Interest-bearing:
Transaction 56,994 - - - -
Savings 4,111 - - - -
Time 5,624 - - - -
--------------------------------------------------------------------
Total interest-bearing 66,729 - - - -
--------------------------------------------------------------------
Total Arizona $ 112,296 $ - $ - $ - $ -
--------------------------------------------------------------------
Total BOK Financial deposits $11,375,318 $9,674,398 $9,219,863 $8,128,525 $6,905,744
--------------------------------------------------------------------
30
BORROWINGS AND CAPITAL
PARENT COMPANY
BOK Financial (parent company) has a $100 million unsecured revolving line of
credit with certain commercial banks that expires in December 2010. There was no
outstanding principal balance of this credit agreement at December 31, 2005.
Interest is based upon a base rate or LIBOR plus a defined margin that is
determined by the Company's credit rating. This margin ranges from 0.375% to
1.125%. The margin currently applicable to borrowings against this line is
0.500%. The base rate is defined as the greater of the daily federal funds rate
plus 0.5% or the SunTrust Bank prime rate. Interest is generally paid monthly.
Facility fees are paid quarterly on the unused portion of the commitment at
rates that range from 0.100% to 0.250% based on the Company's credit rating.
This credit agreement includes certain restrictive covenants that limit the
Company's ability to borrow additional funds, to make investments and to pay
cash dividends on common stock. These covenants also require BOK Financial and
subsidiary banks to maintain minimum capital levels. BOK Financial met all of
the restrictive covenants at December 31, 2005.
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 $158 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 $86
million under this policy.
Equity capital for BOK Financial increased $141 million to $1.5 billion during
2005. Retained earnings, net income less cash dividends paid, provided $181
million to this increase. Growth in retained earnings was partially offset by a
$56 million increase in accumulated other comprehensive losses due primarily to
net unrealized losses on available for sale securities. The remaining increase
in capital during 2005 resulted primarily from employee stock option
transactions.
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.
On April 26, 2005, the Board of Directors authorized a share repurchase program
which replaced a previously authorized program. A maximum of two million common
shares may be repurchased. The specific timing and amount of shares repurchased
will vary based on market conditions, securities law limitations and other
factors. Repurchases may be made over time in open market or privately
negotiated transactions. The repurchase program may be suspended or discontinued
at any time without prior notice. Since this program began, 30,000 shares have
been repurchased by the Company for $1.3 million.
During the second quarter of 2005, the Board of Directors approved the Company's
first quarterly cash dividend of $0.10 per common share. The quarterly cash
dividend replaced the annual dividend historically paid in shares of common
stock. Concurrent with the first quarterly cash dividend, holders of the
Company's convertible preferred stock exercised their conversion rights. All of
the Series A Preferred Stock was converted into 6,920,666 common shares.
BOK Financial and subsidiary banks are subject to various capital requirements
administered by federal agencies. Failure to meet minimum capital requirements
can result in certain mandatory and possibly additional discretionary actions by
regulators that could have a material impact on operations. These capital
requirements include quantitative measures of assets, liabilities and
off-balance sheet items. The capital standards are also subject to qualitative
judgments by the regulators. 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. Note 10 to the Consolidated Financial Statements provides
additional information about the subsidiary banks' borrowings, including
maturity and repricing periods and collateral requirements.
31
During 2005, Bank of Oklahoma issued $150 million of 10-year, fixed rate
subordinated debt. The cost of this subordinated debt, including issuance
discounts and hedge loss is 5.43%. The proceeds of this debt were used to repay
$95 million of BOK Financial's unsecured revolving line of credit and to provide
additional capital to support asset growth.
In 1997, Bank of Oklahoma issued $150 million of 10-year, 7.125% fixed rate
subordinated debt. 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. 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 debt.
OFF-BALANCE SHEET ARRANGEMENTS
During 2002, BOK Financial agreed to a limited price guarantee on a portion of
the common shares issued to purchase Bank of Tanglewood. 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. 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 price guarantee is non-transferable and non-cumulative. BOK
Financial may elect, in its sole discretion, to issue additional shares of
common stock or to pay cash to satisfy any obligation under the price guarantee.
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.
The Company 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,
2005 was $45.43.
AGGREGATE CONTRACTUAL OBLIGATIONS
BOK Financial has numerous contractual obligations in the normal course of
business. These obligations include time deposits and other borrowed funds,
premises used under various operating leases, commitments to extend credit to
borrowers and to purchase securities, derivative contracts and contracts for
services such as data processing that are integral to our operations. The
following table summarizes payments due per these contractual obligations at
December 31, 2005.
Table 27 Contractual Obligations as of December 31, 2005
(In Thousands)
Less Than 1 to 3 4 to 5 More Than
1 Year Years Years 5 Years Total
-------------- ------------- ------------ ------------ -------------
Time deposits $1,010,487 $1,328,851 $ 690,977 $446,834 $3,477,149
Other borrowings 1,046,357 5,813 14,526 11,910 1,078,606
Subordinated debentures 18,188 182,367 15,000 183,125 398,680
Operating lease obligations 14,963 26,328 22,090 29,883 93,264
Derivative contracts 308,823 128,411 13,975 805 452,014
Data processing contracts 13,967 23,544 13,868 - 51,379
- ------------------------------------ -------------- ------------- ------------ ------------ -------------
Total $2,412,785 $1,695,314 $ 770,436 $672,557 $5,551,092
- ------------------------------------ -------------- ------------- ------------ ------------ -------------
Loan commitments $ 4,349,114
Standby letters of credit 558,907
Unfunded third-party private equity investments 16,438
Deferred compensation and stock-based compensation obligations 18,278
32
Payments on time deposits and other borrowed funds include interest, which has
been calculated from rates at December 31, 2005. 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
27. 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 contracts represent the minimum obligations under the contracts.
Additional payments that are based on the volume of transactions processed are
excluded.
Loan commitments represent legally binding obligations to provide financing to
our customers. Since some of these commitments are expected to expire before
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
Obligations under derivative contracts relate to customer hedging programs. As
previously discussed, we have entered into derivative contracts that are
expected to substantially offset the cash payments due on these obligations.
The Company has commitments to make investments through its BOK Financial
Private Equity Fund. These commitments generally reflect customer investment
obligations.
The Company has compensation and employment agreements with its President and
Chief Executive Officer. Collectively, these agreements provide, among other
things, that all unvested stock-based compensation shall fully vest upon his
termination, subject to certain conditions. These agreements also provide for
settlement in cash or other assets. We currently have recognized an $11.7
million liability for these plans. This liability would increase to $13.0
million if all awards were fully vested. We also have obligations with respect
to employee and executive benefit plans. See Notes 12 and 13 to the Consolidated
Financial Statements.
MARKET RISK
Market risk is a broad term for the risk of economic loss due to adverse changes
in the fair value of a financial instrument. These changes may be the result of
various factors, including interest rates, foreign exchange prices, commodity
prices or equity prices. Financial instruments that are subject to market risk
can be classified either as held for trading or held for purposes other than
trading.
BOK Financial is subject to market risk primarily through the effect of changes
in interest rates on both its assets held for purposes other than trading and
trading assets. The effects of other changes, such as foreign exchange rates,
commodity prices or equity prices, do not pose significant market risk to BOK
Financial. BOK Financial has no material investments in assets that are affected
by changes in foreign exchange rates or equity prices. Energy derivative
contracts, which are affected by changes in commodity prices, are matched
against offsetting contracts as previously discussed.
Responsibility for managing market risk rests with the Asset / Liability
Committee that operates under policy guidelines established by the Board of
Directors. The acceptable negative variation in net interest revenue, net income
or economic value of equity due to a specified basis point increase or decrease
in interest rates is generally limited by these guidelines to +/- 10%. These
guidelines also set maximum levels for short-term borrowings, short-term assets,
public funds and brokered deposits, and establish minimum levels for unpledged
assets, among other things. Compliance with these guidelines is reviewed
monthly.
INTEREST RATE RISK - OTHER THAN TRADING
BOK Financial has a large portion of its earning assets in variable rate loans
and a large portion of its liabilities in demand deposit accounts and
interest-bearing transaction accounts. Changes in interest rates affect earning
assets more rapidly than interest-bearing liabilities in the short-term.
Management has adopted several strategies to reduce this interest rate
sensitivity. As previously noted in the Net Interest Revenue section of this
report, management acquires securities that are funded by borrowings in the
capital markets. These securities have an expected average duration of 2.8 years
while the related funds borrowed have an average duration of 90 days.
33
BOK Financial also uses interest rate swaps to manage its interest rate
sensitivity. These products are generally used to more closely match interest on
certain fixed rate loans with funding sources and long-term certificates of
deposit with earning assets. Net interest revenue decreased $1.4 million in 2005
and increased $9.9 million in 2004 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 gain of
$1.1 million was recognized in 2005 compared with a net loss of $1.3 million in
2004 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, net income and
economic value of equity. A simulation model is used to estimate the effect of
changes in interest rates over the next 12 and 24 months based on eight interest
rate scenarios. Two specified interest rate scenarios are used to evaluate
interest rate risk against policy guidelines. The first assumes a sustained
parallel 200 basis point increase and the second assumes a sustained parallel
200 basis point decrease in interest rates. The Company also performs a
sensitivity analysis based on a "most likely" interest rate scenario, which
includes non-parallel shifts in interest rates. An independent source is used to
determine the most likely interest rate scenario.
The Company's primary interest rate exposures include the Federal Funds rate,
which affects short-term borrowings, and the prime lending rate and LIBOR, which
are the basis for much of the variable rate loan pricing. Additionally, mortgage
rates directly affect the prepayment speeds for mortgage-backed securities and
mortgage servicing rights. Derivative financial instruments and other financial
instruments used for purposes other than trading are included in this
simulation. The model incorporates assumptions regarding the effects of changes
in interest rates and account balances on indeterminable maturity deposits based
on a combination of historical analysis and expected behavior. The impact of
planned growth and new business activities is factored into the simulation
model. The effects of changes in interest rates on the value of mortgage
servicing rights are excluded from Table 28 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.
Table 28 Interest Rate Sensitivity
(Dollars in Thousands)
200 bp Increase 200 bp Decrease Most Likely
----------------------------------------------------------------------------------
2005 2004 2005 2004 2005 2004
----------------------------------------------------------------------------------
Anticipated impact over the next twelve
months on net interest revenue $ 7,334 $ 7,969 $ (7,295) *** $ 5,675 $ 5,893
1.5% 1.8% (1.5)% *** 1.2% 1.3%
-----------------------------------------------------------------------------------------------------------------------------
*** A 200 basis point decrease was not computed in 2004 due to low market
interest rates.
The simulations used to manage market risk are based on numerous assumptions
regarding the effects of changes in interest rates on the timing and extent of
repricing characteristics, future cash flows and customer behavior. These
assumptions are inherently uncertain, and, as a result, the model cannot
precisely estimate net interest revenue, net income or economic value of equity
or precisely predict the impact of higher or lower interest rates on net
interest revenue, net income or economic value of equity. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes, market conditions and management strategies, among other factors.
34
TRADING ACTIVITIES
BOK Financial enters into trading activities both as an intermediary for
customers and for its own account. As an intermediary, BOK Financial will take
positions in securities, generally mortgage-backed securities, government agency
securities and municipal bonds. These securities are purchased for resale to
customers, which include individuals, corporations, foundations and financial
institutions. BOK Financial will also take trading positions in U.S. Treasury
securities, mortgage-backed securities, municipal bonds and financial futures
for its own account. These positions are taken with the objective of generating
trading profits. Both of these activities involve interest rate risk.
A variety of methods are used to manage the interest rate risk of trading
activities. These methods include daily marking of all positions to market
value, independent verification of inventory pricing and position limits for
each trading activity. Hedges in either the futures or cash markets may be used
to reduce the risk associated with some trading programs.
Management uses a Value at Risk ("VAR") methodology to measure the market risk
inherent in its trading activities. VAR is calculated based upon historical
simulations over the past five years using a variance / covariance matrix of
interest rate changes. It represents an amount of market loss that is likely to
be exceeded only one out of every 100 two-week periods. Trading positions are
managed within guidelines approved by the Board of Directors. These guidelines
limit the VAR to $1.8 million. At December 31, 2005, the VAR was $241 thousand.
The greatest value at risk during 2005 was $1.8 million.
RECENTLY ISSUED ACCOUNTING STANDARDS
FINANCIAL ACCOUNTING STANDARDS BOARD
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS 123R,
"SHARE-BASED PAYMENTS" ("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 also
requires that share-based payments that meet specified criteria be classified as
liability awards and carried at current fair value. Fair value is determined at
each balance sheet date until the award is settled. Share-payments that will be
settled in equity instruments are measured at grant-date fair value and not
re-measured for subsequent changes in fair value. FAS 123R was effective for
annual periods beginning on or after June 15, 2005.
We 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.
FSP 115-1 AND FAS 124-1 THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS
APPLICATION TO CERTAIN INVESTMENTS ("FSP 115-1")
FSP 115-1 addressed the determination as to when an investment is considered
impaired, whether that impairment is other-than-temporary and the measurement of
an impairment loss. It also addressed accounting considerations subsequent to
the recognition of an other-than-temporary impairment and disclosures about
unrealized losses that have not been recognized.
An investment is considered impaired when its fair value is less than cost.
Determination of when an unrealized loss must be recognized as an
other-than-temporary impairment is based on an assessment of factors, including
the nature of the asset, the financial condition and near-term prospects of the
issuer, 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.
FSP 115-1 was effective for reporting periods beginning after December 15, 2005.
Guidance provided by FSP 115-1 had previously been issued in other authoritative
literature, including SEC Staff Accounting Bulletin No. 59, and we do not expect
a significant impact on future financial statements.
35
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
the consolidated subsidiaries or all of them taken as a whole. All these terms
are used for convenience only and are not intended as a precise description of
any of the separate companies, each of which manages its own affairs.
36
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, 2005. Internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Company's consolidated financial
statements for external purposes in accordance with accounting principles
generally accepted in the United States. In establishing internal control over
financial reporting, management assesses risk and designs controls to prevent or
detect financial reporting misstatements that may be consequential to a reader.
Management also assesses the impact of any internal control deficiencies and
oversees efforts to 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, 2005.
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 adequate internal
control over financial reporting and for assessing the effectiveness of internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Management has assessed the effectiveness of the
Company's internal control over financial reporting based on the criteria
established in "Internal Control - Integrated Framework," issued by the
Committee of Sponsoring Organizations ("COSO") of the Treadway Commission. Based
on that assessment and criteria, management has determined that the Company
maintained effective internal control over financial reporting as of December
31, 2005.
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, 2005. 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, 2005, is included in this
annual report.
37
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, 2005 and 2004, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2005. 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, 2005 and 2004, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2005, 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, 2005,
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 10, 2006 expressed an unqualified opinion thereon.
Ernst & Young LLP
Tulsa, Oklahoma
March 10, 2006
38
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, 2005, 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, 2005, 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, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the 2005 consolidated financial
statements of BOK Financial Corporation and our report dated March 10,
2006 expressed an unqualified opinion thereon.
Ernst & Young LLP
Tulsa, Oklahoma
March 10, 2006
39
Consolidated Statements of Earnings
(In Thousands Except Share And Per Share Data)
2005 2004 2003
----------------- ----------------- -----------------
INTEREST REVENUE
Loans $ 554,691 $ 408,115 $ 375,788
Taxable securities 205,952 197,884 180,581
Tax-exempt securities 7,329 7,359 7,898
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total securities 213,281 205,243 188,479
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Trading securities 675 573 625
Funds sold and resell agreements 1,287 353 281
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total interest revenue 769,934 614,284 565,173
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
INTEREST EXPENSE
Deposits 210,400 144,433 131,929
Borrowed funds 95,826 38,847 32,272
Subordinated debentures 14,367 7,761 9,477
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total interest expense 320,593 191,041 173,678
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
NET INTEREST REVENUE 449,341 423,243 391,495
PROVISION FOR CREDIT LOSSES 12,441 20,439 35,636
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
NET INTEREST REVENUE AFTER PROVISION FOR CREDIT LOSSES 436,900 402,804 355,859
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
OTHER OPERATING REVENUE
Brokerage and trading revenue 44,222 41,107 41,152
Transaction card revenue 72,036 64,816 57,352
Trust fees and commissions 65,187 57,532 45,763
Service charges and fees on deposit accounts 98,361 93,712 82,042
Mortgage banking revenue 30,681 28,189 52,336
Other revenue 35,114 27,209 27,573
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total fees and commissions 345,601 312,565 306,218
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Gain on sales of assets 7,061 887 822
Gain (loss) on securities, net (6,895) (3,088) 7,188
Gain (loss) on derivatives, net 1,179 (1,474) (9,375)
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total other operating revenue 346,946 308,890 304,853
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
OTHER OPERATING EXPENSE
Personnel 258,971 240,661 222,922
Business promotion 17,964 15,618 12,937
Contribution of stock to BOK Charitable Foundation - 5,561 -
Professional fees and services 16,596 15,487 17,935
Net occupancy and equipment 50,195 47,289 45,967
Data processing and communications 67,026 60,025 53,398
Printing, postage and supplies 15,066 14,034 13,930
Net (gains) losses and operating expenses on repossessed assets 572 (4,016) 271
Amortization of intangible assets 6,943 8,138 8,101
Mortgage banking costs 14,562 18,167 40,296
Recovery for impairment of mortgage servicing rights (3,915) (1,567) (22,923)
Other expense 25,126 21,827 20,604
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total other operating expense 469,106 441,224 413,438
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
INCOME BEFORE TAXES 314,740 270,470 247,274
Federal and state income tax 113,235 91,447 88,914
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
NET INCOME $ 201,505 $ 179,023 $ 158,360
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
EARNINGS PER SHARE:
Basic $ 3.14 $ 3.00 $ 2.67
Diluted $ 3.01 $ 2.68 $ 2.38
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
AVERAGE SHARES USED IN COMPUTATION:
Basic 64,067,873 59,128,395 58,699,951
Diluted 67,047,064 66,732,496 66,509,121
- ------------------------------------------------------------------------- ----------------- ----------------- -----------------
See accompanying notes to consolidated financial statements.
40
Consolidated Balance Sheets
(In Thousands Except Share Data)
December 31,
-----------------------------------
2005 2004
----------------- -----------------
ASSETS
Cash and due from banks $ 684,857 $ 503,715
Funds sold and resell agreements 14,465 27,376
Trading securities 18,633 9,692
Securities:
Available for sale 4,821,575 4,080,696
Available for sale securities pledged to creditors - 512,494
Investment (fair value: 2005 - $243,406; 2004 - $222,636) 245,125 221,094
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total securities 5,066,700 4,814,284
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Loans 9,139,978 7,928,967
Less reserve for loan losses (103,876) (108,618)
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Loans, net of reserve 9,036,102 7,820,349
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Premises and equipment, net 179,627 172,643
Accrued revenue receivable 99,874 79,644
Intangible assets, net 263,022 242,594
Mortgage servicing rights, net 54,097 45,678
Real estate and other repossessed assets 8,476 3,763
Bankers' acceptances 33,001 31,799
Receivable on unsettled security transactions - 56,873
Derivative contracts 452,878 130,297
Other assets 341,175 206,953
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total assets $ 16,252,907 $ 14,145,660
- ------------------------------------------------------------------------------------------- ----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing demand deposits $ 1,865,948 $ 1,927,119
Interest-bearing deposits:
Transaction 5,257,295 3,947,088
Savings 154,015 156,339
Time 4,098,060 3,643,852
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total deposits 11,375,318 9,674,398
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Funds purchased and repurchase agreements 1,337,911 1,555,507
Other borrowings 1,054,298 1,015,000
Subordinated debentures 295,964 151,594
Accrued interest, taxes and expense 18,057 71,062
Bankers' acceptances 33,001 31,799
Due on unsettled security transactions 8,429 -
Derivative contracts 466,669 137,538
Other liabilities 124,106 110,268
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total liabilities 14,713,753 12,747,166
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Shareholders' equity:
Preferred stock - 12
Common stock ($.00006 par value; 2,500,000,000 shares authorized;
shares issued and outstanding: 2005 - 67,904,533; 2004 - 60,420,811) 4 4
Capital surplus 656,579 631,747
Retained earnings 990,422 809,261
Treasury stock (shares at cost: 2005 - 1,202,125; 2004 - 998,393) (40,040) (30,905)
Accumulated other comprehensive loss (67,811) (11,625)
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total shareholders' equity 1,539,154 1,398,494
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total liabilities and shareholders' equity $ 16,252,907 $ 14,145,660
- ------------------------------------------------------------------------------------------- ----------------- -----------------
See accompanying notes to consolidated financial statements.
41
Consolidated Statements of Cash Flows
(In Thousands)
2005 2004 2003
-------------- -------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 201,505 $ 179,023 $ 158,360
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 12,441 20,439 35,636
Recovery for mortgage servicing rights impairment (3,915) (1,567) (22,923)
Unrealized losses from derivatives 8,463 6,124 5,888
Depreciation and amortization 44,860 47,298 64,425
Tax benefit on exercise of stock options 3,583 4,609 1,325
Stock-based compensation 4,848 11,306 5,746
Net (accretion) amortization of securities discounts and premiums (1,159) (3,116) 8,965
Net gain on sale of assets (15,230) (11,678) (44,426)
Contribution of stock to BOK Charitable Foundation - 5,561 -
Mortgage loans originated for resale (783,498) (635,624) (1,314,453)
Proceeds from sale of mortgage loans held for resale 770,115 666,549 1,420,475
Change in trading securities (8,941) (1,869) (2,713)
Change in accrued revenue receivable (20,230) (4,664) (2,962)
Change in other assets 17,592 (48,766) (28,442)
Change in accrued interest, taxes and expense (53,005) (14,722) 11,366
Change in other liabilities 33,102 39,218 (13,906)
- ------------------------------------------------------------------------------- -------------- -------------- -------------
Net cash provided by operating activities 210,531 258,121 282,361
- ------------------------------------------------------------------------------- -------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities 1,537,628 2,652,554 5,089,734
Proceeds from maturities of investment securities 54,336 61,583 65,504
Proceeds from maturities of available for sale securities 868,401 1,036,014 2,410,213
Purchases of investment securities (78,675) (94,947) (55,678)
Purchases of available for sale securities (2,731,763) (3,800,015) (8,145,655)
Loans originated or acquired net of principal collected (1,287,158) (554,128) (741,405)
Net payments or proceeds on derivative asset contracts 4,290 (9,368) (41,226)
Net change in other investment assets 33,718 3,208 (3,849)
Proceeds from disposition of assets 88,527 69,320 65,989
Purchases of assets (49,199) (34,404) (62,926)
Cash and cash equivalents of subsidiaries and
branches acquired and sold, net (29,093) - 2,123
- ------------------------------------------------------------------------------- -------------- -------------- -------------
Net cash used by investing activities (1,588,988) (670,183) (1,417,176)
- ------------------------------------------------------------------------------- -------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in demand deposits, transaction
deposits and savings accounts 1,246,713 185,409 984,603
Net change in certificates of deposit 457,412 269,126 107,522
Net change in other borrowings (83,299) (55,811) 65,610
Change in amount receivable (due) on unsettled security transactions 65,302 (65,132) 74,160
Pay down of revolving line of credit (95,000) - (95,000)
Issuance of preferred, common and treasury stock, net 7,032 7,132 4,627
Issuance of subordinated debenture 147,855 - -
Net change in derivative margin accounts (167,137) (50,202) (31,763)
Net payments or proceeds on derivative liability contracts (9,407) 10,259 45,538
Repurchase of common stock (2,439) - -
Dividends paid (20,344) (1,540) (785)
- ------------------------------------------------------------------------------- -------------- -------------- -------------
Net cash provided by financing activities 1,546,688 299,241 1,154,512
- ------------------------------------------------------------------------------- -------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents 168,231 (112,821) 19,697
Cash and cash equivalents at beginning of period 531,091 643,912 624,215
- ------------------------------------------------------------------------------- -------------- -------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 699,322 $ 531,091 $ 643,912
- ------------------------------------------------------------------------------- -------------- -------------- -------------
CASH PAID FOR INTEREST $ 312,200 $ 192,187 $ 176,225
- ------------------------------------------------------------------------------- -------------- -------------- -------------
CASH PAID FOR TAXES 104,543 95,282 81,596
- ------------------------------------------------------------------------------- -------------- -------------- -------------
NET LOANS TRANSFERRED TO REPOSSESSED REAL ESTATE 11,633 6,013 6,378
- ------------------------------------------------------------------------------- -------------- -------------- -------------
PAYMENT OF DIVIDENDS IN COMMON STOCK - 65,899 58,300
- ------------------------------------------------------------------------------- -------------- -------------- -------------
See accompanying notes to consolidated financial statements.
42
Consolidated Statements of Changes in Shareholders' Equity
(In Thousands)
Preferred Stock Common Stock
------------------------------ ------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 2002 250,000 $25 55,750 $3
Comprehensive income:
Net income - - - -
Other comprehensive loss, net of tax - - - -
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 - - - -
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
Comprehensive income:
Net income - - - -
Other comprehensive loss, net of tax - - - -
Comprehensive income
Treasury stock purchase - - - -
Exercise of stock options - - 563 -
Conversion of preferred stock to common (249,975) (12) 6,921 -
Tax benefit on exercise of stock options - - - -
Stock-based compensation - - - -
Cash dividends on:
Preferred stock - - - -
Common stock - - - -
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 2005 - $ - 67,905 $4
- ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
43
Accumulated
Other
Comprehensive Capital Retained Treasury Stock
------------------------------------
Income (Loss) Surplus Earnings Shares Amount Total
- -------------------- ----------------- ----------------- ----------------- ------------------ ---------------
$ 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
- - 201,505 - - 201,505
(56,186) - - - - (56,186)
---------------
145,319
---------------
- - - 60 (2,439) (2,439)
- 13,728 - 144 (6,696) 7,032
- 12 - - - -
- 3,583 - - - 3,583
- 7,509 - - - 7,509
- - (375) - - (375)
- - (19,969) - - (19,969)
- -------------------- ----------------- ----------------- ----------------- ------------------ ---------------
$(67,811) $656,579 $990,422 1,202 $ (40,040) $ 1,539,154
- -------------------- ----------------- ----------------- ----------------- ------------------ ---------------
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidated Financial Statements of BOK Financial Corporation ("BOK
Financial" or "the Company") have been prepared in conformity with accounting
principles generally accepted in the United States, including general practices
of the banking industry. The consolidated financial statements include the
accounts of BOK Financial and its subsidiaries, principally Bank of Oklahoma,
N.A. and its subsidiaries ("BOk"), Bank of Texas, N.A., Bank of Arkansas, N.A.,
Bank of Albuquerque, N.A., Colorado State Bank and Trust, N.A., Bank of Arizona,
N.A. and BOSC, Inc.
During 2005, the Company adopted FASB Interpretation No. 39, "Offsetting Amounts
Related to Certain Contracts" ("FIN 39"). FIN 39 permits reporting derivative
assets and liabilities on a net by counterparty basis provided certain specified
criteria are met. These criteria require written bilateral netting agreements
between the Company and each of its counterparties that create a single legal
claim or obligation to pay or receive the net amount in settlement of the
individual derivative contracts. Amounts reported for derivative assets and
liabilities in prior periods have been reclassified for consistent presentation.
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 is not the primary beneficiary in any VIE that
would be significant to its operations.
NATURE OF OPERATIONS
BOK Financial, through its subsidiaries, provides a wide range of financial
services to commercial and industrial customers, other financial institutions
and consumers throughout Oklahoma; Northwest Arkansas; Dallas and Houston,
Texas; Albuquerque, New Mexico; Denver, Colorado, and Phoenix, Arizona. These
services include depository and cash management; lending and lease financing;
mortgage banking; securities brokerage, trading and underwriting; and personal
and corporate trust.
USE OF ESTIMATES
Preparation of BOK Financial's consolidated financial statements requires
management to make estimates of future economic activities, including loan
collectibility, prepayments and cash flows from customer accounts. These
estimates are based upon current conditions and information available to
management. Actual results may differ significantly from these estimates.
ACQUISITIONS
Assets and liabilities acquired, including identifiable intangible assets, are
recorded at fair values on the acquisition dates. The Consolidated Statements of
Earnings include the results of operations from the dates of acquisition.
INTANGIBLE ASSETS
Intangible assets, which generally result from business combinations, are
accounted for under the provisions of 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.
Core deposit intangible assets are amortized using accelerated methods over the
estimated lives of the acquired deposits. These assets generally have a weighted
average life of 5 years. Other intangible assets are amortized using accelerated
or straight-line methods, as appropriate, over the estimated benefit periods.
These periods range from 5 years to 20 years. The net book values of core
deposit intangible assets are evaluated for impairment when economic conditions
indicate impairment may exist.
45
CASH EQUIVALENTS
Due from banks, funds sold (generally federal funds sold for one-day periods)
and resell agreements (which generally mature within one to 30 days) are
considered cash equivalents.
SECURITIES
Securities are identified as trading, investment (held to maturity) or available
for sale at the time of purchase based upon the intent of management, liquidity
and capital requirements, regulatory limitations and other relevant factors.
Trading securities, which are acquired for profit through resale, are carried at
market value with unrealized gains and losses included in current period
earnings. Investment securities are carried at amortized cost. Amortization is
computed by methods that approximate level yield and is adjusted for changes in
prepayment estimates. Investment securities may be sold or transferred to
trading or available for sale classification in certain limited circumstances
specified in generally accepted accounting principles. Securities identified as
available for sale are carried at fair value. Unrealized gains and losses are
recorded, net of deferred income taxes, as accumulated other comprehensive
income (loss) in shareholders' equity. Unrealized losses on securities are
evaluated to determine if the losses are temporary based on various factors,
including the cause of the loss, prospects for recovery 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 mortgage-backed
securities. These commitments are carried at fair value if they are considered
derivative contracts. These commitments are not reflected in BOK Financial's
balance sheet until settlement date if they meet specific criteria exempting
them from the definition of derivative contracts.
DERIVATIVE INSTRUMENTS
Derivative instruments may be used by the Company as part of its interest rate
risk management programs or may be offered to customers. All derivative
instruments are carried at fair value. The determination of fair value of
derivative instruments considers changes in interest rates, commodity prices,
foreign exchange rates and counterparty credit ratings, when appropriate.
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
46
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.
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 - mortgage banking revenue.
RESERVE FOR LOAN LOSSES AND OFF-BALANCE SHEET CREDIT LOSSES
Reserves for loan losses and off-balance sheet credit losses are assessed by
management, based upon an ongoing quarterly evaluation of the probable estimated
losses inherent in the portfolio, and 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 gen-
47
erally accepted accounting principles and standards established by the banking
regulatory authorities and adopted as policy by BOK Financial.
A provision for credit losses is charged against earnings in amounts necessary
to maintain adequate reserves for loan and off-balance sheet credit losses.
Loans are charged off when the loan balance or a portion of the loan balance is
no longer covered by the paying capacity of the borrower based on an evaluation
of available cash resources and collateral value. Loans are evaluated quarterly
and charge-offs are taken in the quarter in which the loss is identified.
Additionally, all unsecured or under-secured loans that are past due by 180 days
or more are charged off within 30 days. Recoveries of loans previously charged
off are added to the reserve.
TRANSFERS OF FINANCIAL ASSETS
BOK Financial transfers pools of financial assets as part of its mortgage
banking activities and periodically may transfer other financial assets. These
transfers 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 and may incur a recourse obligation. The carrying value of the assets
sold is allocated between the financial components sold and retained based on
relative fair values. The fair value of the 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. Useful lives range from 5 years
to 40 years for buildings and improvements, 3 years to 7 years for software and
3 years to 10 years for furniture and equipment. Repair and maintenance costs
are charged to expense as incurred.
Rent expense for leased premises is recognized as incurred over the lease term.
The effects of rent holidays, significant rent escalations and other adjustments
to rent payments are recognized over the lease term.
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. A cash flow
model is used to determine fair value. Key assumptions and estimates including
projected prepayment speeds and assumed servicing costs, earnings on escrow
deposits, ancillary income and discount rates used by this model are based on
current market sources. 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.
48
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 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.
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.
BOK Financial has a tax contingency reserve, which is included in accrued
current income taxes payable, for the uncertain portion of recorded tax benefits
and related interest. These uncertainties result from the application of complex
tax laws, rules, regulations and interpretations, primarily in state taxing
jurisdictions. The adequacy of this reserve is assessed quarterly and may be
adjusted through current income tax expense in future periods based on changing
facts and circumstances, completion of examinations by taxing authorities or
expiration of a statute of limitations.
Deferred tax assets and liabilities are determined based upon the difference
between the values of the assets and liabilities as reflected in the financial
statements and their related tax basis using enacted tax rates in effect for the
year in which the differences are expected to be recovered or settled. As
changes in tax law or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes. A valuation allowance is
provided when it is more likely than not that some portion or the entire
deferred tax asset will not be realized.
EMPLOYEE BENEFIT PLANS
BOK Financial sponsors a defined benefit cash balance pension plan ("Pension
Plan"), qualified profit sharing plans ("Thrift Plans") and employee healthcare
plans. Pension Plan costs, which are based upon actuarial computations of
current costs, are expensed annually. Unrecognized prior service cost and net
gains or losses are amortized on a straight-line basis over the lesser of the
average remaining service periods of the participants or 10 years. Employer
contributions to the Pension Plan are in accordance with Federal income tax
regulations.
Employer contributions to the Thrift Plans, which match employee contributions
subject to percentage and years of service limits, are expensed when incurred.
BOK Financial recognizes the expense of health care benefits on the accrual
method.
STOCK COMPENSATION PLANS
BOK Financial has 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").
Grant date fair value of stock options is based on the Black-Scholes option
pricing model. Stock options generally have graded vesting over 7 years. Each
tranche is considered a separate award for valuation and compensation cost
recognition. Grant date fair value of non-vested shares is based on the current
market value of BOK Financial common stock. Non-vested shares cliff vest in 5
years.
Compensation cost is recognized as expense over the vesting period. Expense is
adjusted for forfeitures as they occur. Stock-based compensation awarded to
certain officers has performance conditions that affect the number of awards
granted. Compensation cost is adjusted based on the probable outcome of the
performance conditions.
Certain executive officers may defer the recognition of income from stock-based
compensation for income tax purposes and to diversify the deferred income into
alternative investments. Stock-based compensation granted to these officers is
considered liability awards. Changes in the fair value of liability awards are
recognized as compensation expense in the period of the change.
OTHER OPERATING REVENUE
Fees and 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.
49
EFFECT OF PENDING STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
FINANCIAL ACCOUNTING STANDARDS BOARD
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS 123R,
"SHARE-BASED PAYMENTS" ("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 also
requires that share-based payments that meet specified criteria be classified as
liability awards and carried at current fair value. Fair value is determined at
each balance sheet date until the award is settled. Share-payments that will be
settled in equity instruments are measured at grant-date fair value and not
re-measured for subsequent changes in fair value. FAS 123R was effective for
annual periods beginning on or after June 15, 2005.
We 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.
FSP FAS 115-1 AND FAS 124-1 THE MEANING OF OTHER-THAN-TEMPORARY
IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS ("FSP 115-1")
FSP 115-1 addressed the determination as to when an investment is considered
impaired, whether that impairment is other-than-temporary and the measurement of
an impairment loss. It also addressed accounting considerations subsequent to
the recognition of an other-than-temporary impairment and disclosures about
unrealized losses that have not been recognized.
An investment is considered impaired when its fair value is less than cost.
Determination of when an unrealized loss must be recognized as an
other-than-temporary impairment is based on an assessment of factors, including
the nature of the asset, the financial condition and near-term prospects of the
issuer, 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.
FSP 115-1 was effective for reporting periods beginning after December 15, 2005.
Guidance provided by FSP 115-1 had previously been issued in other authoritative
literature, including SEC Staff Accounting Bulletin No. 59, and we do not expect
a significant impact on future financial statements.
(2) ACQUISITIONS
Effective April 6, 2005, BOK Financial acquired all of the outstanding common
stock of Valley Commerce Bancorp, Ltd. ("VCB") for $32.0 million in cash. VCB
and its wholly-owned subsidiary, Valley Commerce Bank, had total assets of $143
million, including loans of $93 million, total deposits of $110 million and
total shareholders' equity of $12.7 million. As of August 15, 2005, Valley
Commerce Bank was renamed Bank of Arizona, N.A. The VCB acquisition is
consistent with the Company's strategy to expand into high-growth markets.
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.
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):
2005 2003
------------ -------------
Cash and cash equivalents $ 2,921 $ 80,051
Securities 35,355 14,507
Loans 92,821 222,530
Less reserve for loan losses 1,072 2,282
------------ -------------
Loans, net 91,749 220,248
Identifiable intangible assets 4,380 18,770
Other assets 11,334 20,809
------------ -------------
Total assets acquired 145,739 354,385
Deposits 110,217 301,439
Other borrowings 18,155 5,098
Other liabilities 2,003 11,951
------------ -------------
Net assets acquired 15,364 35,897
Less purchase price 32,014 77,928
------------ -------------
Goodwill $ 16,650 $ 42,031
------------ -------------
The results of operations of these acquisitions would not have been significant
to the Company's consolidated results during the pre-acquisition periods of
2005, 2004 and 2003. None of the intangible assets acquired are deductible for
tax purposes.
50
(3) SECURITIES
INVESTMENT SECURITIES
The amortized cost and fair values of investment securities are as follows (in
thousands):
December 31,
----------------------------------------------------------------------------------------------
2005 2004
----------------------------------------------- ----------------------------------------------
Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized
------------------------ -----------------------
Cost Value Gain Loss Cost Value Gain Loss
----------------------------------------------------------------------------------------------
U.S. Treasury $ 1,994 $ 1,976 $ - $ (18) $ - $ - $ - $ -
Municipal and other tax-exempt 240,359 238,649 903 (2,613) 216,986 218,465 2,501 (1,022)
Mortgage-backed U.S. agency
securities - - - - 1,287 1,336 49 -
Other debt securities 2,772 2,781 9 - 2,821 2,835 14 -
----------------------------------------------------------------------------------------------------------------------------
Total $245,125 $243,406 $ 912 $(2,631) $221,094 $222,636 $2,564 $(1,022)
----------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of investment securities at December 31,
2005, 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(2)
-----------------------------------------------------------------------------------
U.S. Treasury:
Amortized cost $ - $ 1,994 $ - $ - $ 1,994 1.17
Fair value - 1,976 - - 1,976
Nominal yield - 3.64 - - 3.64
Municipal and other tax-exempt:
Amortized cost $ 57,284 $ 146,544 $26,900 $9,631 $ 240,359 3.07
Fair value 57,223 145,303 26,647 9,476 238,649
Nominal yield(1) 4.79 5.03 5.61 6.26 5.11
Other debt securities:
Amortized cost $ 1,985 $ 99 $ 675 $ 13 $ 2,772 2.34
Fair value 1,985 103 680 13 2,781
Nominal yield 4.15 7.00 5.31 - 4.51
-----------------------------------------------------------------------------------
Total fixed maturity securities:
Amortized cost $ 56,269 $ 148,637 $ 27,575 $ 9,644 $ 245,125 3.05
Fair value 59,208 147,382 27,327 9,489 243,406
Nominal yield 4.77 5.01 5.60 6.26 5.09
-------------------------------------------------------
Total investment securities:
Amortized cost $ 245,125
Fair value 243,406
Nominal yield 5.09
-------------
(1) Calculated on a taxable equivalent basis using a 39% effective tax rate.
(2) Expected maturities may differ from contractual maturities, because
borrowers may have the right to call or prepay obligations with or without
penalty.
51
AVAILABLE FOR SALE SECURITIES
The amortized cost and fair value of available for sale securities are as
follows (in thousands):
December 31,
----------------------------------------------------------------------------------------------
2005 2004
---------------------------------------------- -----------------------------------------------
Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized
---------------------- ----------------------
Cost Value Gain Loss Cost Value Gain Loss
----------------------------------------------------------------------------------------------
U.S. Treasury $ 16,037 $ 15,827 $ - $ (210) $ 27,119 $ 27,062 $ 31 $ (88)
Municipal and other tax-exempt 17,153 17,078 3 (78) 414 404 1 (11)
Mortgage-backed securities:
U. S. agencies 3,507,047 3,424,356 1,416 (84,107) 3,067,611 3,052,375 8,079 (23,315)
Other 1,277,161 1,250,701 201 (26,661) 1,423,613 1,418,770 2,378 (7,221)
- ------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 4,784,208 4,675,057 1,617 (110,768) 4,491,224 4,471,145 10,457 (30,536)
- ------------------------------------------------------------------------------ -----------------------------------------------
Other debt securities 124 124 1 (1) 515 528 13 -
Equity securities and mutual funds 108,914 113,489 4,575 - 90,343 94,051 3,708 -
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 4,926,436 $4,821,575 $ 6,196 $(111,057) $ 4,609,615 $4,593,190 $ 14,210 $(30,635)
- ------------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of available for sale securities at December
31, 2005, 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 $ 9,987 $ 6,050 $ - $ - $ 16,037 1.08
Fair value 9,847 5,980 - - 15,827
Nominal yield 2.78 3.50 - - 3.05
Municipal and other tax-exempt:
Amortized cost $ 100 $ - $ 12,005 $ 5,048 $ 17,153 9.40
Fair value 100 - 11,960 5,018 17,078
Nominal yield(1) 4.67 - 3.80 3.17 3.80
Other debt securities:
Amortized cost $ 65 $ 26 $ 33 $ - $ 124 2.91
Fair value 66 25 33 - 124
Nominal yield(1) 6.26 6.18 7.60 - 6.60
------------------------------------------------------------------------------------
Total fixed maturity securities:
Amortized cost $ 10,152 $ 6,076 $ 12,038 $ 5,048 $ 33,314 5.37
Fair value 10,013 6,005 11,993 5,018 33,029
Nominal yield 2.80 3.51 3.81 3.17 3.45
-------------------------------------------------------
Mortgage-backed securities:
Amortized cost $ 4,784,208 (2)
Fair value 4,675,057
Nominal yield (4) 4.45
---------------
Equity securities and mutual funds:
Amortized cost $ 108,914 (3)
Fair value 113,489
Nominal yield 2.99
---------------
Total available-for-sale securities:
Amortized cost $ 4,926,436
Fair value 4,821,575
Nominal yield 4.41
---------------
(1) Calculated on a taxable equivalent basis using a 39% effective tax rate.
(2) The average expected lives of mortgage-backed securities were 3.4 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.
52
Sales of available for sale securities resulted in gains and losses as follows
(in thousands):
2005 2004 2003
---------------------------------
Proceeds $1,537,628 $2,652,554 $5,089,734
Gross realized gains 5,145 10,452 30,373
Gross realized losses 12,040 13,540 23,185
Related federal and state
income tax expense
(benefit) (2,480) (1,044) 2,585
In addition to securities that have been reclassified as pledged to creditors,
securities with an amortized cost of $2.7 billion and $2.6 billion at December
31, 2005 and 2004, 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 $107 million at December 31, 2005
compared with net unrealized losses of $15 million at December 31, 2004 due
primarily to rising interest rates. The aggregate gross amount of unrealized
losses at December 31, 2005 totaled $114 million. Unrealized losses were due
primarily to rising interest rates. None of the unrealized losses resulted from
credit quality concerns. 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.
The Company also considered the 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:
U.S. Treasury $ 1,976 $ 18 $ - $ - $ 1,976 $ 18
Municipal and other tax exempt 110,872 1,464 47,765 1,149 158,637 2,613
Available for sale:
U. S. Treasury 4,950 45 10,877 165 15,827 210
Other debt securities - - 34 1 34 1
Municipal and other tax-exempt 8,093 59 296 19 8,389 78
Mortgage-backed securities:
U. S. agencies 1,188,731 20,262 2,027,695 63,845 3,216,426 84,107
Other 299,168 4,399 901,533 22,262 1,200,701 26,661
- -------------------------------------------------------------------------------------------------------------------------
Total $1,613,790 $26,247 $2,988,200 $ 87,441 $4,601,990 $113,688
- -------------------------------------------------------------------------------------------------------------------------
53
(4) DERIVATIVES
The fair values of derivative contracts at December 31, 2005 were (in
thousands):
Assets Liabilities
-----------------------------
Customer Risk Management Programs:
Interest rate contracts $ 18,741 $ 20,309
Energy contracts 418,494 416,106
Cattle contracts 1,014 970
Foreign exchange contracts 14,629 14,629
- -----------------------------------------------------------------------
Total Customer Derivatives 452,878 452,014
Interest Rate Risk Management Programs - 14,655
- -----------------------------------------------------------------------
Total Derivative Contracts $452,878 $466,669
- -----------------------------------------------------------------------
CUSTOMER RISK MANAGEMENT PROGRAMS
BOK Financial offers programs that permit its customers to manage various risks,
including fluctuations in energy and cattle prices, interest rates and foreign
exchange rates. 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 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, 2005 (dollars in
thousands):
Hedged Asset / Liability Interest Rate Swap
--------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average
--------------------------- ---------------------------
Fixed Rate Floating Rate Notional Fixed Rate Floating Positive Negative
Rate
Maturity Description Amount (Paid) Received(2) Amount Received (Paid) Received (Paid)(1) Fair Value Fair Value
---------------------------------------------------------------------------------------------------------------------------------
Fair value hedges:
2006 Certificates of $186,937 (3.590)% - % $187,000 3.818% (4.390)% $ - $ 847
deposit
2007 Certificates of 139,875 (3.634) - 140,000 3.795 (4.390) - 1,995
deposit
2007 Subordinated 150,000 (7.125) - 150,000 3.165 (4.390) - 3,947
debt
2008 Certificates of 21,920 (3.000) - 22,000 3.093 (4.390) - 811
deposit
2009 Certificates of 54,544 (3.945) - 55,000 4.052 (4.390) - 1,293
deposit
2010 Certificates of 9,564 (3.626) - 10,000 3.657 (4.390) - 456
deposit
2011 Certificates of 29,435 (3.983) - 30,000 4.013 (4.390) - 1,128
deposit
---------------------------------------------------------------------------------------------------------------------------------
Total fair value hedges 592,275 594,000 - 10,477
---------------------------------------------------------------------------------------------------------------------------------
Cash flow hedges:
2008 Prime rate loans 100,000 - 7.250 100,000 5.926 (7.250)(2) - 3,441
---------------------------------------------------------------------------------------------------------------------------------
Total cash flow hedges 100,000 100,000 - 3,441
---------------------------------------------------------------------------------------------------------------------------------
Not designated as hedges:
2006 - - - 12,497 (5.425) 4.390 - 48
2006 - - - 33,000 2.699 (4.390) - 255
2009 - - - 15,000 4.432 (4.390) - 175
2011 - - - 29,311 (5.358) 4.390 - 259
----------- ------------ -----------------------------
Total $692,275 $783,808 $ - $14,655
----------- ------------ -----------------------------
(1) Floating rates are based on 30-day LIBOR, unless otherwise noted.
(2) Floating rate based on prime.
During 2005 and 2004, net interest revenue was decreased by $1.4 million and
increased by $9.9 million, respectively, from the settlement of amounts
receivable or payable on interest rate swaps.
54
(5) LOANS
Significant components of the loan portfolio are as follows (in thousands):
December 31,
---------------------------------------------------------------------------------------------
2005 2004
------------------------------------------------ --------------------------------------------
Fixed Variable Non- Fixed Variable Non-
Rate Rate accrual Total Rate Rate accrual Total
------------------------------------------------ --------------------------------------------
Commercial $2,040,799 $3,247,463 $11,673 $5,299,935 $1,580,239 $2,962,402 $33,195 $4,575,836
Commercial real estate 588,128 1,396,404 5,370 1,989,902 376,290 1,234,676 10,144 1,621,110
Residential mortgage 624,685 537,299 7,347 1,169,331 687,574 502,732 8,612 1,198,918
Residential mortgage held for sale 51,666 - - 51,666 40,262 - - 40,262
Consumer 422,799 205,573 772 629,144 309,461 182,671 709 492,841
-----------------------------------------------------------------------------------------------------------------------------
Total $3,728,077 $5,386,739 $25,162 $9,139,978 $2,993,826 $4,882,481 $52,660 $7,928,967
-----------------------------------------------------------------------------------------------------------------------------
Loans past due (90 days) $ 8,708 $ 7,649
-----------------------------------------------------------------------------------------------------------------------------
Foregone interest on nonaccrual loans $ 2,515 $ 4,617
-----------------------------------------------------------------------------------------------------------------------------
Approximately 57% of the commercial and consumer loan portfolios and
approximately 72% 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
totaled $1.4 billion or 15% of total loans as of December 31, 2005. Other
notable segments include wholesale/retail, $793 million; healthcare, $520
million; manufacturing, $515 million; agriculture, $292 million, which includes
$228 million of loans to the cattle industry; and services, $1.4 billion.
Approximately $1.1 billion of the services category is made up of loans with
outstanding balances of less than $10 million.
Approximately 33% of commercial real estate loans are secured by properties
located in Oklahoma, primarily in the Tulsa and Oklahoma City metropolitan
areas. An additional 30% of commercial real estate loans are secured by property
located in Texas. The major components of these properties are multifamily
residences, $205 million; construction and land development, $638 million;
retail facilities, $305 million; and office buildings, $499 million.
During 2004, interest rate swaps with $100 million notional amounts were
designated cash flow hedges of prime-based loans and they remained outstanding
through 2005. 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. As of
December 31, 2005, a net loss of approximately $2.1 million related to these
swaps was included in accumulated other comprehensive income and expected to be
reclassified into earnings based on the current interest rate environment.
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, 2005, outstanding commitments totaled
$4.3 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, 2005, outstanding standby letters of
credit totaled $559 million.
55
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, 2005, outstanding commercial letters of credit totaled $6 million.
RESERVES FOR CREDIT LOSSES
The activity in the reserve for loan losses is summarized as follows (in
thousands):
2005 2004 2003
----------------------------------
Beginning balance $ 108,618 $ 114,784 $ 103,851
Provision for loan losses 10,401 15,792 34,000
Loans charged off (25,758) (29,685) (31,475)
Recoveries 9,544 7,727 6,125
Addition due to acquisitions 1,071 - 2,283
-------------------------------------------------------------
Ending balance $ 103,876 $ 108,618 $ 114,784
-------------------------------------------------------------
The activity in the reserve for off-balance sheet credit losses is summarized as
follows (in thousands):
2005 2004 2003
--------------------------------
Beginning balance $ 18,502 $ 13,855 $ 12,219
Provision for off-balance
sheet credit losses 2,040 4,647 1,636
Additions due to acquisitions 32 - -
-----------------------------------------------------------
Ending balance $ 20,574 $ 18,502 $ 13,855
-----------------------------------------------------------
Provision for credit losses $ 12,441 $ 20,439 $ 35,636
-----------------------------------------------------------
IMPAIRED LOANS
Investments in loans considered to be impaired under FAS 114 were as follows (in
thousands):
December 31,
--------------------------------
2005 2004 2003
--------------------------------
Investment in loans impaired
under FAS 114 (all of
which were on a
nonaccrual basis) $19,857 $45,424 $46,990
Loans with specific reserves
for loss 5,686 14,881 18,947
Specific reserve balance 2,632 6,994 6,377
No specific related reserve
for loss 14,171 30,543 28,043
Average recorded investment
in impaired loans 32,722 46,386 47,415
Interest income recognized on impaired loans during 2005, 2004 and 2003 was not
significant.
(6) PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows (in thousands):
December 31,
------------------------
2005 2004
------------------------
Land $ 43,875 $ 40,479
Buildings and improvements 143,051 135,932
Software 31,250 27,515
Furniture and equipment 107,675 100,447
- -------------------------------------------------------------
Subtotal 325,851 304,373
Less accumulated depreciation 146,224 131,730
- -------------------------------------------------------------
Total $ 179,627 $ 172,643
- -------------------------------------------------------------
Depreciation expense of premises and equipment was $24.0 million, $23.4 million
and $22.4 million for the years ended December 31, 2005, 2004 and 2003,
respectively.
(7) INTANGIBLE ASSETS
The following table presents the original cost and accumulated amortization of
intangible assets (in thousands):
December 31,
-----------------------
2005 2004
-----------------------
Core deposit premiums $ 90,637 $ 86,257
Less accumulated amortization 77,111 71,158
- -------------------------------------------------------------
Net core deposit premiums 13,526 15,099
Other identifiable intangible assets 17,866 11,526
Less accumulated amortization 5,238 4,249
- -------------------------------------------------------------
Net other identifiable intangible
assets 12,628 7,277
Goodwill 290,003 273,353
Less accumulated amortization 53,135 53,135
- -------------------------------------------------------------
Net goodwill 236,868 220,218
- -------------------------------------------------------------
Total intangible assets, net $263,022 $242,594
- -------------------------------------------------------------
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
----------------------------------------------
2006 $ 4,563 $ 769 $ 5,332
2007 3,777 763 4,540
2008 2,314 780 3,094
2009 1,871 1,137 3,008
2010 846 1,163 2,009
Thereafter 155 8,016 8,171
- ---------------------------------------------------------------
$13,526 $12,628 $26,154
- ---------------------------------------------------------------
56
The net amortized cost of intangible assets at December 31, 2005 is assigned to
reporting units as follows (in thousands):
Core deposit premiums:
Bank of Texas $ 4,143
Colorado State Bank and Trust 5,781
Bank of Arizona 3,602
-----------------------------------------------
$ 13,526
-----------------------------------------------
Other identifiable intangible assets:
Bank of Oklahoma $ 6,341
Colorado State Bank and Trust 6,287
-----------------------------------------------
$ 12,628
-----------------------------------------------
Goodwill:
Bank of Oklahoma $ 8,173
Bank of Texas 154,741
Bank of Albuquerque 15,273
Colorado State Bank and Trust 42,031
Bank of Arizona 16,650
-----------------------------------------------
$236,868
-----------------------------------------------
During 2005, the Company acquired the naming rights to the BOk Center, a new
arena to be built in Tulsa, Oklahoma, and other related intangible rights. Under
an agreement with the City of Tulsa, the Company will pay $11.0 million over 20
years. One or more installment payments may be accelerated by paying a
discounted amount based on the average yield of 20-year U.S. Treasury bonds. The
Company recognized a $6.3 million intangible asset and an interest-bearing
liability from this transaction. The intangible asset will be amortized over the
life of the agreement.
(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 $52 million
and $40 million, and outstanding mortgage loan commitments totaled $233 million
and $189 million at December 31, 2005 and 2004, 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 forward sales of mortgage-backed securities and
forward sales contracts. These latter contracts set the price for loans that
will be delivered in the next 60 to 90 days. As of December 31, 2005, the
unrealized loss on forward sales contracts used to hedge the mortgage pipeline
was approximately $217 thousand. Gains on mortgage loans sold, including
capitalized mortgage servicing rights, totaled $16.0 million in 2005, $10.4
million in 2004 and $30.5 million in 2003.
At December 31, 2005, BOK Financial owned the rights to service 53,897 mortgage
loans with outstanding principal balances of $4.5 billion, including $462
million serviced for affiliates, and held related funds of $56 million for
investors and borrowers. The weighted average interest rate and remaining term
was 6.13% and 275 months, respectively. Mortgage loans sold with recourse
totaled $248 million at December 31, 2005. 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.
The portfolio of mortgage servicing rights exposes BOK Financial to interest
rate risk. During periods of falling interest rates, mortgage loan prepayments
increase, reducing the value of the mortgage servicing rights. See Note 1 for
specific accounting policies for mortgage servicing rights.
Activity in capitalized mortgage servicing rights and related valuation
allowance during 2003, 2004 and 2005 are as follows (in thousands):
57
Capitalized Mortgage Servicing Rights Valuation Hedging
-------------------------------------
Purchased Originated Total Allowance Loss(2) Net
----------------------------------------------------------------------------------------------------------------------------
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
Additions, net - 17,402 17,402 - - 17,402
Amortization expense (2,788) (10,110) (12,898) - - (12,898)
Write-off - (2,443) (2,443) 2,443 - -
Recovery of impairment - - - 3,915 - 3,915
----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 $ 8,606 $ 52,905 $ 61,511 $ (7,414) $ - $ 54,097
----------------------------------------------------------------------------------------------------------------------------
Estimated fair value of mortgage servicing rights at:
December 31, 2003 (1) $12,625 $ 36,564 $ 49,189 $ 49,189
December 31, 2004 (1) $ 9,338 $ 36,985 $ 46,323 $ 46,323
December 31, 2005 (1),(3) $ 8,489 $ 46,158 $ 54,647 $ 54,647
----------------------------------------------------------------------------------------------------------------------------
(1) Excludes approximately $1.0 million, $1.1 million and $1.4 million at
December 31, 2005, 2004 and 2003, 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, 2005,
management estimates that a 50 basis point increase in mortgage interest
rates will increase the fair value of mortgage servicing rights by $3.1
million and a 50 basis point decrease in mortgage interest rates will
reduce the fair value of mortgage servicing rights by $4.8 million.
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, 2005 was 10.85%.
Prepayment rate - Annual prepayment estimates ranging from 10.42% to 20.38%
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, 2005 was
5.21%.
Stratification of the mortgage loan-servicing portfolio, outstanding principal
of loans serviced, and related hedging information by interest rate at December
31, 2005 follows (in thousands):
< 5.51% 5.51% - 6.50% 6.51% - 7.50% => 7.51% Total
-----------------------------------------------------------------------------
Cost less accumulated amortization $ 14,506 $ 29,294 $ 13,715 $ 3,996 $ 61,511
---------------------------------------------------------------------------------------------------------------------------
Fair value $ 13,366 $ 25,337 $ 11,958 $ 3,986 $ 54,647
---------------------------------------------------------------------------------------------------------------------------
Impairment (2) $ 1,267 $ 3,959 $ 1,759 $ 429 $ 7,414
---------------------------------------------------------------------------------------------------------------------------
Outstanding principal of loans serviced (1) $ 998,200 $1,864,300 $ 835,500 $ 267,000 $3,965,000
---------------------------------------------------------------------------------------------------------------------------
(1) Excludes outstanding principal of $462 million for loans serviced for
affiliates and $66 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.
58
(9) DEPOSITS
Interest expense on deposits is summarized as follows (in thousands):
2005 2004 2003
--------------------------------
Transaction deposits $ 72,721 $ 35,517 $ 31,346
Savings 1,106 975 944
Time:
Certificates of
deposits under $100,000 50,129 41,978 39,098
Certificates of deposits
$100,000 and over 73,248 53,918 48,181
Other time deposits 13,196 12,045 12,360
------------------------------------------------------------
Total time 136,573 107,941 99,639
------------------------------------------------------------
Total $210,400 $144,433 $131,929
------------------------------------------------------------
The aggregate amounts of time deposits in denominations of $100,000 or more at
December 31, 2005 and 2004 were $2.5 billion and $2.2 billion, respectively.
Time deposit maturities are as follows: 2006 - $1.9 billion, 2007 - $1.0
billion, 2008 - $232 million, 2009 - $303 million, 2010 - $298 million, and $374
million thereafter.
At December 31, 2005, the Company had $442 million in fixed rate, brokered
certificates of deposits. The weighted-average interest rate paid on these
certificates is 3.64%. 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 3.81% on these swaps and currently pay
a floating rate of 4.39%.
Interest expense on time deposits during 2005 and 2004 was reduced by the net
accrued settlement from interest rate swaps of $700 thousand and $7.9 million,
respectively.
(10) OTHER BORROWINGS
Information relating to other borrowings is summarized as follows (dollars in
thousands):
December 31
--------------------------------------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------------------------------
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 $ 95,000 2.91% $ 95,000 $ 95,000 1.75% $ 95,000
Subsidiary Banks:
Funds purchased and
repurchase agreements 1,337,911 4.53 2,291,509 1,555,507 2.18 1,900,810 1,609,668 1.37 1,904,269
Federal Home Loan Bank
advances 1,020,871 4.26 1,031,821 894,354 2.31 899,350 899,426 1.21 974,729
Subordinated debentures 295,964 6.30 297,980 151,594 5.18 154,230 154,332 6.02 155,345
Other 33,427 3.13 33,427 25,646 0.98 28,748 22,224 1.58 29,116
------------- ------------- -------------
Total subsidiary banks 2,688,173 4.61 2,627,101 2.39 2,685,650 1.58
------------- ------------- -------------
Total other borrowings $2,688,173 4.61 $2,722,101 2.41 $2,780,650 1.74
------------- ------------- -------------
Aggregate annual principal repayments of long-term debt at December 31, 2005 are
as follows (in thousands):
Parent Subsidiary
Company Banks
---------------------------
2006 $ - $2,364,738
2007 - 152,779
2008 - 1,824
2009 - 8,524
2010 - 475
Thereafter - 159,833
---------------------------
Total $ - $2,688,173
---------------------------
59
Funds purchased generally mature within one to ninety days from the transaction
date. At December 31, 2005, securities sold under agreements to repurchase
totaled $661 million with related accrued interest payable of $75 thousand.
Additional information relating to repurchase agreements at December 31, 2005 is
as follows (dollars in thousands):
Amortized Market Repurchase Average
Security Sold/Maturity Cost Value Liability(1) Rate
-------------------------------------------------------------------------------------------------------------
Overnight U.S. Agency Securities $ 806,679 $ 781,589 $ 661,192 4.14%
-------------------------------------------------------------------------------------------------------------
(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.
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 Federal Home Loan Bank has issued letters
of credit totaling $308 million to secure BOK Financial's obligations to
depositors of public funds. The unused credit available to BOK Financial at
December 31, 2005 pursuant to the Federal Home Loan Bank's collateral policies
is $314 million.
BOK Financial has a $100 million unsecured revolving line of credit with certain
commercial banks that expires in December 2010. There was no outstanding
principal balance of this credit agreement at December 31, 2005. Interest is
based upon a base rate or LIBOR plus a defined margin that is determined by the
Company's credit rating. This margin ranges from 0.375% to 1.125%. The margin
currently applicable to borrowings against this line is 0.500%. The base rate is
defined as the greater of the daily federal funds rate plus 0.5% or the SunTrust
Bank prime rate. Interest is generally paid monthly. Facility fees are paid
quarterly on the unused portion of the commitment at rates that range from
0.100% to 0.250% based on the Company's credit rating. This credit agreement
includes certain restrictive covenants that limit the Company's ability to
borrow additional funds, to make investments and to pay cash dividends on common
stock. These covenants also require BOK Financial and subsidiary banks to
maintain minimum capital levels. BOK Financial met all of the restrictive
covenants at December 31, 2005.
In 2005, BOk issued $150 million of 10-year, fixed rate subordinated debt. The
cost of this subordinated debt, including issuance discounts and hedge loss is
5.43%. The proceeds of this debt were used to repay $95 million of BOK
Financial's unsecured revolving line of credit and to provide additional capital
to support asset growth.
In 1997, BOk issued a $150 million 7.125% fixed rate subordinated debenture that
matures in 2007. 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 4.39% at December 31, 2005.
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.
(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,
----------------------
2005 2004
----------------------
Deferred tax liabilities:
Pension contributions in excess
of book expense $ 9,900 $ 9,400
Valuation adjustments 27,600 29,300
Mortgage servicing rights 22,000 20,200
Lease financing 15,500 15,800
Other 3,300 4,500
------------------------------------------------------------
Total deferred tax liabilities 78,300 79,200
------------------------------------------------------------
Deferred tax assets:
Available for sale securities
mark-to-market 40,700 6,400
Stock-based compensation 4,700 3,900
Credit loss reserves 48,000 48,500
Valuation adjustments 7,700 13,200
Deferred book income 26,000 22,400
Deferred compensation 6,900 8,300
Other 12,500 12,100
------------------------------------------------------------
Total deferred tax assets 146,500 114,800
------------------------------------------------------------
Deferred tax assets in excess of
deferred tax liabilities $ 68,200 $ 35,600
------------------------------------------------------------
60
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,
-----------------------------------
2005 2004 2003
-----------------------------------
Current:
Federal $ 105,403 $84,514 $77,015
State 7,341 6,743 5,551
-----------------------------------------------------------
Total current 112,744 91,257 82,566
-----------------------------------------------------------
Deferred:
Federal 415 161 5,369
State 76 29 979
-----------------------------------------------------------
Total deferred 491 190 6,348
-----------------------------------------------------------
Total income tax $ 113,235 $91,447 $88,914
-----------------------------------------------------------
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,
-------------------------------
2005 2004 2003
-------------------------------
Amount:
Federal statutory tax $110,158 $94,671 $86,538
Tax exempt revenue (2,592) (2,705) (2,815)
Effect of state income taxes,
net of federal benefit 4,729 4,220 4,110
Intangible amortization 216 397 763
Charitable contribution - (2,446) -
Utilization of tax credits (929) (784) (794)
Reduction of tax accrual - (3,000) -
Other, net 1,653 1,094 1,112
------------------------------------------------------------
Total $113,235 $91,447 $88,914
------------------------------------------------------------
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,
-------------------------------
2005 2004 2003
-------------------------------
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 1 2 2
Intangible amortization - - -
Charitable contribution - (1) -
Utilization of tax credits - - -
Reduction of tax accrual - (1) -
Other, net 1 - -
-------------------------------------------------------------
Total 36% 34% 36%
-------------------------------------------------------------
61
(12) EMPLOYEE BENEFITS
BOK Financial sponsors a defined benefit cash balance 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,
--------------------------
2005 2004
---------------------------
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $ 44,688 $ 37,773
Service cost 6,766 6,096
Interest cost 2,488 2,314
Actuarial loss 6,599 2,262
Benefits paid (2,884) (3,757)
-----------------------------------------------------------------------------------------------------
Projected benefit obligation at end of year (1),(2) $ 57,657 $ 44,688
-----------------------------------------------------------------------------------------------------
Change in plan assets:
Plan assets at fair value at beginning of year $ 52,246 $ 43,275
Actual return on plan assets 3,298 4,002
Company contributions 6,329 8,726
Benefits paid (2,884) (3,757)
-----------------------------------------------------------------------------------------------------
Plan assets at fair value at end of year $ 58,989 $ 52,246
-----------------------------------------------------------------------------------------------------
Reconciliation of prepaid (accrued) and total amount recognized:
Benefit obligation $(57,657) $(44,688)
Fair value of assets 58,989 52,246
-----------------------------------------------------------------------------------------------------
Funded status of the plan 1,332 7,558
Unrecognized net loss 20,555 14,226
Unrecognized prior service cost - 443
-----------------------------------------------------------------------------------------------------
Prepaid pension costs $ 21,887 $ 22,227
-----------------------------------------------------------------------------------------------------
Components of net periodic benefit costs:
Service cost $ 6,766 $ 6,096
Interest cost 2,488 2,314
Expected return on plan assets (4,122) (3,639)
Amortization of unrecognized amounts:
Net loss 1,094 1,060
Prior service cost 60 60
-----------------------------------------------------------------------------------------------------
Net periodic pension cost $ 6,286 $ 5,891
-----------------------------------------------------------------------------------------------------
(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 5.50% 5.75%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 5.25% 5.25%
As of December 31, 2005, expected future benefit payments related to the Pension
Plan were as follows (in thousands):
2006 $ 2,734
2007 3,307
2008 3,038
2009 3,310
2010 3,297
2011 through 2015 18,272
-------------
$ 33,958
-------------
62
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
inception-to-date return on the fund, which is used as an indicator when setting
the expected return on plan assets, was 8.40%. The maximum allowed and minimum
required Pension Plan contributions for 2005 were $7.5 million and $0,
respectively. Amounts contributed to the Pension Plan during 2005 included $5.0
million attributable to the current year and $1.3 million attributable to 2004.
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 a BOK Financial
Common Stock fund. Employer contributions vest over five years. Expenses
incurred by BOK Financial for the Thrift Plans totaled $4.6 million, $3.9
million and $3.6 million for 2005, 2004 and 2003, 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, 2005. A 1% change in
medical expense trends would not significantly affect the net obligation or cost
of this plan.
During the fourth quarter of 2005, modifications to both the thrift and pension
plans were approved. These modifications will become effective April 1, 2006 and
consist primarily of enhanced Company contributions to the thrift plans and
curtailed benefit accruals to the pension plan.
Employee contributions to the thrift plans eligible for Company matching will
increase from 5% of base compensation to 6% of base compensation, as defined in
the plans. The Company-provided matching contribution rates will range from 50%
for employees with less than four years of service to 200% for employees with 15
or more years of service. Additionally, a maximum Company-provided, non-elective
annual contribution of $750 will be made for employees whose annual base
compensation is less than $30,000.
Accruals for future service under the pension plan will be curtailed. Interest
will continue to accrue on employees' account balances at 5.25%. A charge of
$384 thousand was recognized in 2005 for the curtailment of the pension plan.
The combined effects of these modifications are not expected to have a
significant impact on future earnings or liquidity. The Company will continue to
have a funding obligation to the pension plan and will continue to recognize
pension expense based on plan asset performance, discount rates and other
factors. At December 31, 2005, prepaid pension expense totaled $21.9 million,
consisting of $1.3 million of net plan assets in excess of liabilities and $20.6
million of unrecognized actuarial losses. These losses will be recognized in
future years. These unrecognized losses may also be increased or reduced by plan
asset performance and discount rate changes.
BOK Financial offers numerous incentive compensation plans that are aligned with
the Company's growth strategy. Cash settlements paid under these plans may be
based on defined formulas, other performance criteria or discretionary.
Incentive compensation is designed to motivate and reinforce sales and customer
service behavior in all markets. Earnings were charged $48.7 million in 2005,
$46.4 million in 2004 and $46.2 million in 2003 for incentive compensation
plans.
(13) STOCK COMPENSATION PLANS
The shareholders and Board of Directors of BOK Financial have approved various
stock-based compensation plans. An independent compensation committee of the
Board of Directors determines the number of awards granted to the Chief
Executive Officer and other senior executives. Stock-based compensation granted
to other officers and employees is approved by the independent compensation
committee upon recommendation of the Chairman of the Board and the Chief
Executive Officer.
These awards consist primarily of stock options that are subject to vesting
requirements. Generally, one-seventh of the options awarded vest annually and
expire three years after vesting. Additionally, stock options that vest in two
years and expire 45 days after vesting have been awarded. Non-vested shares may
be granted to the Chief Executive Officer and other senior executives of the
Company. These shares vest five years after the grant date. The holders of these
shares may be required to retain the shares for a three-year period after
vesting.
63
The Chief Executive Officer and other senior executives participate in an
Executive Incentive Plan. The number of options and non-vested shares may
increase or decrease based upon the Company's growth in earnings per share over
a three-year period compared to the median growth in earnings per share for a
designated peer group of financial institutions and other individual performance
factors.
The following table presents options outstanding during 2003, 2004 and 2005
under these plans:
Weighted-
Average
Exercise
Number Price
--------------------------
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 awarded 900,126 47.02
Options exercised (668,990) 24.10
Options forfeited (82,505) 33.67
Options expired (616) 30.11
------------------------------------------------------------
Options outstanding at
December 31, 2005 3,486,063 $34.03
------------------------------------------------------------
Options vested at
December 31, 2005 1,004,508 $24.12
------------------------------------------------------------
The following table summarizes information concerning currently outstanding and
vested stock options:
Options Outstanding Options Vested
-------------------------------------------- -------------------
Weighted Weighted
Average Average Weighted
Range of Remaining Exercise Average
Exercise Number Contractual Price Number Exercise
Prices Outstanding Life Vested Price
(years)
$ 9.69 20,100 0.83 $ 9.69 20,100 $ 9.69
16.17 80,911 1.42 16.17 80,911 16.17
17.37 - 19.02 694,430 2.61 18.00 460,356 18.18
28.27 - 30.87 914,335 3.80 29.74 279,537 29.34
37.43 - 37.65 92,490 0.12 37.53 92,490 37.53
37.74 577,442 5.00 37.74 71,114 37.74
45.43 - 49.09 218,204 1.00 47.79 - -
45.15 - 47.34 674,467 6.00 47.32 - -
44.00 - 47.99 213,684 2.00 46.04 - -
---------------------------------------------------------------
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:
2005 2004 2003
---------- --------- ---------
Average risk-free interest rate 3.69% 3.27% 2.57%
Dividend yield 0.90% None None
Volatility factors .161 .168 .178
Weighted-average
expected life 4.9 years 4.9 years 7 years
Weighted-average fair value $10.01 $8.53 $6.66
Compensation cost of stock options granted that may be recognized as
compensation expense in future years totaled $10.5 million at December 31, 2005.
Subject to adjustments for forfeitures, we expect to recognize compensation
expense for current outstanding options of $4.5 million in 2006, $2.9 million in
2007, $1.5 million in 2008, $930 thousand in 2009 and $661 thousand thereafter.
Stock option expense for the years ended December 31, 2005, 2004 and 2003 was
$5.5 million, $3.7 million and $3.6 million, respectively.
BOK Financial also issues non-vested common shares under the various stock-based
compensation plans. At December 31, 2005, a total of 57,706 non-vested common
shares have been awarded, including 15,028 awarded in 2005. The weighted average
grant date fair value of non-vested shares awarded in 2005 was $46.76 per share.
Unrecognized compensation cost of non-vested shares totaled $904 thousand at
December 31, 2005. Subject to adjustment for forfeitures, we expect to recognize
compensation expense of $250 thousand in 2006 and 2007, $246 thousand in 2008
and $158 thousand thereafter.
BOK Financial permits certain executive officers to defer recognition of taxable
income from their stock-based compensation. Deferred compensation may also be
diversified into investments other than BOK Financial common stock.
Stock-based compensation subject to these deferral plans is recognized as a
liability award rather than as an equity award. Compensation expense is based on
the fair value of the award recognized over the vesting period. At December 31,
2005, the recorded obligation for liability awards was $4.0 million.
Compensation expense for liability awards was a credit of $632 thousand in 2005
and an expense of $7.6 million in 2004 and $2.2 million in 2003. The reduction
in
64
2005 expense resulted from the termination of future deferral rights for all
executive officers except the President and Chief Executive Officer and a
decrease in the period end market value of BOK Financial common stock.
During January 2006, BOK Financial awarded the following stock-based
compensation:
Exercise Fair Value /
Number Price Award
---------------------------------
Equity awards:
Stock options 632,776 $47.05 $ 9.86
Nonvested stock 20,495 - 47.05
----------
Total Equity awards 653,271
Liability awards:
Stock options 52,246 47.05 9.86
Nonvested stock 12,803 - 47.05
----------
Total Liability awards 65,049
----------
Total stock-based awards 718,320
------------------------------------------------------------
The aggregate compensation cost of these awards totaled approximately $8.5
million. This cost will be recognized over the vesting periods, subject to
adjustments for forfeitures and changes in the fair value of liability awards.
(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, 2005 or 2004.
Activity in loans to related parties is summarized as follows (in thousands):
2005 2004
------------ ------------
Beginning balance $104,845 $119,873
Advances 691,848 434,242
Payments (678,098) (442,834)
Adjustments(1) 11,769 (6,436)
------------------------------- ------------ ------------
Ending balance $130,364 $104,845
------------------------------- ------------ ------------
(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 regulations. 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 $213 thousand
in years 2006 through 2009 and $195 thousand in 2010. Net rent expense on this
lease was $2.9 million in years 2005, 2004 and 2003. Total rent expense for BOK
Financial was $15.3 million in 2005, $14.3 million in 2004 and $13 million in
2003.
At December 31, 2005, future minimum lease payments for equipment and premises
under operating leases were as follows: $14.9 million in 2006, $13.6 million in
2007, $12.5 million in 2008, $11.5 million in 2009, $10.6 million in 2010, and a
total of $94.4 million thereafter. Premises leases may include options to renew
at then current market rates and may include escalation provisions based upon
changes in the consumer price index or similar benchmarks.
The Federal Reserve Bank requires member banks to maintain certain minimum
average cash balances. These balances were approximately $316 million and $334
million at December 31, 2005 and 2004, respectively.
65
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 $1.5 million at December 31, 2005.
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 $16.4
million as of December 31, 2005.
(16) SHAREHOLDERS' EQUITY
PREFERRED STOCK
One billion shares of preferred stock with a par value of $0.00005 per share are
authorized. The Series A Preferred Stock has no voting rights except as
otherwise provided by Oklahoma corporate law and may be converted into one share
of Common Stock for each 36 shares of Series A Preferred Stock at the option of
the holder. Dividends are cumulative at an annual rate of ten percent of the
$0.06 per share liquidation preference value when declared and are payable in
cash. Aggregate liquidation preference is $15 million. During the second quarter
of 2005, holders of the Company's convertible preferred stock exercised their
conversion rights. All of the Series A Preferred Stock was converted into
6,920,666 common shares. In 2004 and 2003, cash dividends declared on preferred
stock totaled $1.9 million and $750 thousand, respectively. During 2003, 23,214
shares 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 based on average market price, as defined, for a 65 business day period
preceding declaration. George B. Kaiser owned 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 the second quarter of 2005, the Board of Directors approved the Company's
first quarterly cash dividend of $0.10 per common share. The quarterly cash
dividend replaced the annual dividend historically paid in shares of common
stock. Cash dividends paid on common stock totaled $20 million. During 2004 and
2003, 3% dividends payable in shares of BOK Financial common stock were declared
and paid. The shares issued were valued at $66 million and $58 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.
During 2002, BOK Financial agreed to a limited price guarantee on a portion of
the shares issued to purchase Bank of Tanglewood. 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. 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 $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.
66
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, 2005, BOK
Financial's subsidiary banks could declare dividends up to $158 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, 2005, the subsidiary banks
could declare dividends of up to $86 million under this policy. The subsidiary
banks declared and paid dividends of $151 million in 2005 and $66 million in
2003. During 2004, the subsidiary banks did not declare any dividends.
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, 2005 and 2004,
these loans had no outstanding balance. Total loan commitments to affiliates at
December 31, 2005 were $128 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 $16 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,
------------------------------------------------------------
2005 2004
------------------------------ -----------------------------
Amount Ratio Amount Ratio
------------------------------ -----------------------------
(Dollars in thousands)
Total Capital (to Risk Weighted Assets):
Consolidated $ 1,625,832 12.10% $ 1,329,431 11.67%
BOk 1,162,091 10.91 1,016,351 11.13
Bank of Texas 275,507 11.29 235,921 11.41
Bank of Albuquerque 95,134 16.47 103,573 15.34
Bank of Arkansas 18,372 19.53 16,162 20.37
Colorado State Bank and Trust 40,249 13.17 36,015 14.50
Bank of Arizona 18,194 18.44 N/A N/A
Tier I Capital (to Risk Weighted Assets):
Consolidated $ 1,322,570 9.84% $ 1,140,654 10.02%
BOk 895,653 8.41 867,335 9.50
Bank of Texas 252,316 10.34 211,641 10.24
Bank of Albuquerque 88,439 15.31 95,443 14.14
Bank of Arkansas 17,194 18.27 15,164 19.11
Colorado State Bank and Trust 36,935 12.09 32,891 13.24
Bank of Arizona 17,113 17.35 N/A N/A
Tier I Capital (to Average Assets):
Consolidated $ 1,322,570 8.30% $ 1,140,654 7.94%
BOk 895,653 6.88 867,335 7.29
Bank of Texas 252,316 8.09 211,641 7.62
Bank of Albuquerque 88,439 6.76 95,443 6.69
Bank of Arkansas 17,194 10.98 15,164 8.97
Colorado State Bank and Trust 36,935 6.10 32,891 8.73
Bank of Arizona 17,113 11.67 N/A N/A
67
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) ("AOCI") includes unrealized gains
and losses on available for sale securities and accumulated gains or losses on
effective cash flow hedges, including hedges of anticipated transactions. Gains
and losses in AOCI are net of deferred income taxes. Accumulated losses on cash
flow hedges of prime-based loans of $2.1 million will be reclassified into
income over two years. Accumulated losses on the rate lock hedge of the 2005
subordinated debenture issuance will be reclassified into income over the
ten-year life of the debt.
Unrealized Accumulated
Gain (Loss) Loss on
On Available Effective
For Sale Cash Flow
Securities Hedges Total
---------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 43,088 $ - $ 43,088
Unrealized losses on securities (46,884) - (46,884)
Tax benefit on unrealized losses 16,858 - 16,858
Reclassification adjustment for gains
realized and included in net income (7,188) - (7,188)
Reclassification adjustment for tax expense
on realized gains 2,585 - 2,585
---------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 8,459 - 8,459
Unrealized losses on securities (31,806) - (31,806)
Unrealized losses on cash flow hedges - (2,664) (2,664)
Tax benefit on unrealized losses 11,303 1,039 12,342
Reclassification adjustment for losses
realized and included in net income 3,088 - 3,088
Reclassification adjustment for tax benefit
on realized losses (1,044) - (1,044)
---------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 (10,000) (1,625) (11,625)
Unrealized losses on securities (92,551) - (92,551)
Unrealized gains on cash flow hedges - 684 684
Loss on rate lock hedge of subordinated debt issuance - (2,788) (2,788)
Tax benefit (expense) on unrealized gains (losses) 34,129 (75) 34,054
Reclassification adjustment for losses
realized and included in net income 6,772 123 6,895
Reclassification adjustment for tax benefit
on realized losses (2,432) (48) (2,480)
---------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 $ (64,082) $ (3,729) $ (67,811)
---------------------------------------------------------------------------------------------------------
(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,
--------------------------------------------
2005 2004 2003
--------------------------------------------
Numerator:
Net income $ 201,505 $ 179,023 $ 158,360
Preferred stock dividends (375) (1,875) (1,500)
---------------------------------------------------------------------------------------------------------------------
Numerator for basic earnings per share - income
available to common stockholders 201,130 177,148 156,860
---------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock dividends 375 1,875 1,500
---------------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share - income available
to common stockholders after assumed conversion $ 201,505 $ 179,023 $ 158,360
---------------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share - weighted average shares 64,067,873 59,128,395 58,699,951
Effect of dilutive securities:
Employee stock compensation plans (1) 628,060 669,857 776,891
Convertible preferred stock 2,351,131 6,921,083 6,921,164
Tanglewood market value guarantee (see Note 16) - 13,161 111,115
---------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 2,979,191 7,604,101 7,809,170
---------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 67,047,064 66,732,496 66,509,121
---------------------------------------------------------------------------------------------------------------------
Basic earnings per share $3.14 $3.00 $2.67
---------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $3.01 $2.68 $2.38
---------------------------------------------------------------------------------------------------------------------
(1) Excludes employee stock options with exercise prices 855,326 31,970 26,943
greater than the current market price.
68
(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
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.
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 the Internet. The Mortgage Banking segment consists
of two operating sectors that originate a full range of mortgage products from
federally sponsored programs to "jumbo loans" on higher priced homes in BOK
Financial's primary market areas. The Mortgage Banking segment also services
mortgage loans acquired from throughout the United States. The Wealth Management
segment provides a wide range of 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 and New Mexico. Regional
banking includes Bank of Texas, Bank of Albuquerque, Bank of Arkansas, Colorado
State Bank and Trust and Bank of Arizona. Each of these banks provides a full
range of corporate and consumer banking services in their respective markets.
Fiduciary 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 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 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.
69
Oklahoma Oklahoma All
Corporate Consumer Mortgage Wealth Regional Other/
(In Thousands) Banking Banking Banking Management Banking Eliminations Total
------------------------------------------------------------------------------------------------
Year ended December 31, 2005
Net interest revenue/(expense)
from external sources $ 191,040 $ (25,140) $ 20,392 $ 5,651 $ 264,273 $ (6,875) $ 449,341
Net interest revenue/(expense)
from internal sources (60,735) 87,421 (14,979) 11,208 (41,338) 18,423 -
----------------------------------------------------------------------------------------------------------------------------
Total net interest revenue 130,305 62,281 5,413 16,859 222,935 11,548 449,341
Provision for credit losses 4,757 4,632 416 218 6,195 (3,777) 12,441
Other operating revenue 92,707 66,266 16,427 100,647 54,719 (1,496) 329,270
Gain on sales of assets 4,758 - 1,232 - - - 5,990
Capitalized mortgage
servicing rights - - 17,402 - - - 17,402
Financial instruments
gains (losses) - - (5,087) - 503 (1,132) (5,716)
Operating expense 102,513 84,336 35,315 88,001 150,409 12,447 473,021
Recovery for impairment of
mortgage servicing rights - - (3,915) - - - (3,915)
Income taxes 46,875 15,396 1,389 11,397 44,209 (6,031) 113,235
----------------------------------------------------------------------------------------------------------------------------
Net income $ 73,625 $ 24,183 $ 2,182 $ 17,890 $ 77,344 $ 6,281 $ 201,505
----------------------------------------------------------------------------------------------------------------------------
Average assets $4,629,400 $2,988,218 $526,224 $1,503,886 $ 6,420,498 $(499,371) $15,568,855
Average economic capital 322,440 69,810 24,210 106,040 325,000 614,346 1,461,846
Average invested capital - - - - 569,800 - -
Performance measurements:
Return on assets 1.59% 0.81% 0.41% 1.19% 1.20% - 1.29%
Return on economic capital 22.83 34.64 9.01 16.87 23.80 - 13.78
Return on invested capital - - - - 13.57 - -
Efficiency ratio 45.01 65.61 87.25 74.89 54.17 - 58.98
Reconciliation to Consolidated Financial Statements
Other Other
Net Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
---------------------------------------------------------------------
Total reportable segments $437,793 $354,158 $456,659 $195,224 $16,068,226
Unallocated items:
Tax-equivalent adjustment 5,182 - - 5,182 -
Funds management 18,543 (709) 7,778 (1,789) 1,688,973
All others (including
eliminations), net (12,177) (787) 4,669 2,888 (2,188,344)
--------------------------------------------------------------------------------------------------
BOK Financial consolidated $449,341 $352,662 $469,106 $201,505 $15,568,855
--------------------------------------------------------------------------------------------------
(1)Excluding financial instrument gains/(losses)
70
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 $ 148,919 $ (19,061) $ 21,647 $ 4,001 $ 200,781 $ 66,956 $ 423,243
Net interest revenue/(expense)
from internal sources (26,049) 64,873 (11,423) 8,888 (19,753) (16,536) -
----------------------------------------------------------------------------------------------------------------------------
Total net interest revenue 122,870 45,812 10,224 12,889 181,028 50,420 423,243
Provision for credit losses 8,956 6,964 340 23 5,507 (1,351) 20,439
Other operating revenue 86,493 56,611 22,055 93,193 47,017 (3,282) 302,087
Capitalized mortgage
servicing rights - - 11,365 - - - 11,365
Financial instruments
gains/(losses) - - (5,068) - - 506 (4,562)
Operating expense 99,007 76,057 35,415 83,784 132,022 16,506 442,791
Recovery for impairment of
mortgage servicing rights - - (1,567) - - - (1,567)
Income taxes 39,444 7,548 1,707 8,688 32,810 1,250 91,447
----------------------------------------------------------------------------------------------------------------------------
Net income $ 61,956 $ 11,854 $ 2,681 $ 13,587 $ 57,706 $ 31,239 $ 179,023
----------------------------------------------------------------------------------------------------------------------------
Average assets $4,380,491 $2,746,279 $ 559,034 $1,122,147 $5,754,211 $(535,275) $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 1.41% 0.43% 0.48% 1.21% 1.00% - 1.28%
Return on economic capital 19.82 18.41 9.83 16.02 20.56 - 13.80
Return on invested capital - - - - 11.34 - -
Efficiency ratio 47.29 74.26 81.15 78.98 57.89 - 60.11
Reconciliation to Consolidated Financial Statements
Other Other
Net Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
---------------------------------------------------------------------
Total reportable segments $372,823 $ 316,734 $424,718 $147,784 $14,562,162
Unallocated items:
Tax-equivalent adjustment 5,039 - - 5,039 -
Funds management 56,432 (3,465) 12,073 19,066 1,590,820
All others (including
eliminations), net (11,051) 183 4,433 7,134 (2,126,095)
--------------------------------------------------------------------------------------------------
BOK Financial consolidated $423,243 $ 313,452 $441,224 $179,023 $14,026,887
--------------------------------------------------------------------------------------------------
(1)Excluding financial instrument gains/(losses)
71
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 $ 140,818 $ (17,188) $ 27,770 $ 1,966 $ 168,995 $ 69,134 $ 391,495
Net interest revenue/(expense)
from internal sources (25,924) 58,261 (9,415) 8,939 (14,801) (17,060) -
----------------------------------------------------------------------------------------------------------------------------
Total net interest revenue 114,894 41,073 18,355 10,905 154,194 52,074 391,495
Provision for credit losses 10,318 6,892 917 390 6,425 10,694 35,636
Other operating revenue 77,332 47,229 36,379 93,757 37,106 (8,685) 283,118
Capitalized mortgage
servicing rights - - 23,922 - - - 23,922
Financial instruments
gains/(losses) - - 4,025 - 339 (6,551) (2,187)
Operating expense 87,585 66,798 58,204 80,512 119,567 23,695 436,361
Recovery for impairment of
mortgage servicing rights - - (22,923) - - - (22,923)
Income taxes 36,692 5,684 18,082 9,243 23,974 (4,761) 88,914
----------------------------------------------------------------------------------------------------------------------------
Net income $ 57,631 $ 8,928 $ 28,401 $ 14,517 $ 41,673 $ 7,210 $ 158,360
----------------------------------------------------------------------------------------------------------------------------
Average assets $4,106,441 $2,525,060 $ 623,823 $875,661 $ 5,000,039 $(351,608) $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% 0.35% 4.55% 1.66% 0.83% - 1.24%
Return on economic capital 18.52 15.39 83.24 20.83 15.23 - 13.66
Return on invested capital - - - - 9.06 - -
Efficiency ratio 45.56 75.65 74.00 76.93 62.50 - 62.47
Reconciliation to Consolidated Financial Statements
Other Other
Net Interest Operating Operating Net Average
Revenue Revenue(1) Expense Income Assets
---------------------------------------------------------------------
Total reportable segments $339,421 $ 315,725 $389,743 $151,150 $13,131,024
Unallocated items:
Tax-equivalent adjustment 5,170 - - 5,170 -
Funds management 59,519 (6,520) 13,946 4,959 1,379,342
All others (including
eliminations), net (12,615) (2,165) 9,749 (2,919) (1,730,950)
--------------------------------------------------------------------------------------------------
BOK Financial consolidated $391,495 $ 307,040 $413,438 $158,360 $12,779,416
--------------------------------------------------------------------------------------------------
(1)Excluding financial instrument gains/(losses)
72
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying values and estimated fair values of
financial instruments as of December 31, 2005 and 2004 (dollars in thousands):
Range of Average Estimated
Carrying Contractual Repricing Discount Fair
Value Yields (in years) Rate Value
---------------------------------------------------------------------
2005:
Cash and cash equivalents $ 699,322 $ 699,322
Securities 5,085,333 5,083,614
Loans:
Commercial 5,299,935 2.75 -18.00% 0.33 4.61 - 7.25% 5,411,035
Commercial real estate 1,989,902 4.00 -12.00 1.21 7.25 1,977,936
Residential mortgage 1,169,331 2.82 -12.13 3.29 4.60 - 6.17 1,146,072
Residential mortgage - held for sale 51,666 - - - 51,666
Consumer 629,144 3.04 -18.90 2.38 7.25 623,265
---------------------------------------------------------------------------------------------------------------------
Total loans 9,139,978 9,209,974
Reserve for loan losses (103,876) -
---------------------------------------------------------------------------------------------------------------------
Net loans 9,036,102 9,209,974
Derivative instruments with positive
fair value 452,878 452,878
Deposits with no stated maturity 7,277,258 7,277,258
Time deposits 4,098,060 0.70 - 7.25 1.70 4.25 - 4.90 4,056,480
Other borrowings 2,392,209 2.01 - 4.48 1.54 4.37 - 4.61 2,392,255
Subordinated debentures 295,964 6.71 8.09 4.48 317,779
Derivative instruments with negative
fair value 466,669 466,669
---------------------------------------------------------------------------------------------------------------------
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% 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 130,297 130,297
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 debentures 151,594 5.25 2.60 5.14 153,565
Derivative instruments with negative
fair value 137,538 137,538
---------------------------------------------------------------------------------------------------------------------
The preceding table presents the estimated fair values of financial instruments.
The fair values of certain of these instruments were calculated by discounting
expected cash flows, which involved significant judgments by management. Fair
value is the estimated amount at which financial assets or liabilities could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. Because no market exists for certain of these
financial instruments and management does not intend to sell these financial
instruments, BOK Financial does not know whether the fair values shown above
represent values at which the respective financial instruments could be sold
individually or in the aggregate.
73
The following methods and assumptions were used in estimating the fair value of
these financial instruments:
CASH AND CASH EQUIVALENTS
The book value reported in the consolidated balance sheet for cash and
short-term instruments approximates those assets' fair values.
SECURITIES
The fair values of securities are based on quoted market prices or dealer
quotes, when available. If quotes are not available, fair values are based on
quoted prices of comparable instruments.
DERIVATIVES
All derivative instruments are carried on the balance sheet at fair value. Fair
values for exchange-traded contracts are based on quoted prices. Fair values for
over-the-counter interest rate, 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 $15 million and $28 million at December 31, 2005 and 2004,
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 DEBENTURES
The fair values of these instruments are based upon discounted cash flow
analyses using interest rates currently being offered on similar instruments.
OFF-BALANCE SHEET INSTRUMENTS
The fair values of commercial loan commitments are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements. The fair values of these off-balance sheet instruments
were not significant at December 31, 2005 and 2004.
74
(20) PARENT COMPANY ONLY FINANCIAL STATEMENTS
Summarized financial information for BOK Financial - Parent Company Only
follows:
BALANCE SHEETS
(In Thousands) December 31,
----------------------------
2005 2004
----------------------------
ASSETS
Cash and cash equivalents $ 11,074 $ 13,230
Securities - available for sale 11,910 11,170
Investment in subsidiaries 1,517,047 1,470,405
Other assets 1,729 2,184
--------------------------------------------------------------------------
Total assets $1,541,760 $1,496,989
--------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other borrowings $ - $ 95,000
Other liabilities 2,606 3,495
--------------------------------------------------------------------------
Total liabilities 2,606 98,495
--------------------------------------------------------------------------
Preferred stock - 12
Common stock 4 4
Capital surplus 656,579 631,747
Retained earnings 990,422 809,261
Treasury stock (40,040) (30,905)
Accumulated other comprehensive loss (67,811) (11,625)
--------------------------------------------------------------------------
Total shareholders' equity 1,539,154 1,398,494
--------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,541,760 $1,496,989
--------------------------------------------------------------------------
STATEMENTS OF EARNINGS
(In Thousands)
2005 2004 2003
-------------------------------------------
Dividends, interest and fees received from subsidiaries $153,462 $ 127 $ 66,165
Other operating revenue 468 35 431
------------------------------------------------------------------------------------------------
Total revenue 153,930 162 66,596
------------------------------------------------------------------------------------------------
Interest expense 1,500 2,185 1,771
Professional fees and services 589 486 545
Contribution of stock to BOK Charitable Foundation - 4,125 -
Other operating expense 22 2 (4)
------------------------------------------------------------------------------------------------
Total expense 2,111 6,798 2,312
------------------------------------------------------------------------------------------------
Income (loss) before taxes and equity in undistributed
income of subsidiaries 151,819 (6,636) 64,284
Federal and state income tax credit (682) (3,953) (678)
------------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed income of
subsidiaries 152,501 (2,683) 64,962
Equity in undistributed income of subsidiaries 49,004 181,706 93,398
------------------------------------------------------------------------------------------------
Net income $201,505 $179,023 $158,360
------------------------------------------------------------------------------------------------
75
STATEMENTS OF CASH FLOWS
(In Thousands)
2005 2004 2003
----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $201,505 $179,023 $158,360
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries (49,004) (181,706) (93,398)
Tax benefit on exercise of stock options 3,583 4,609 1,325
Contribution of stock to BOK Charitable Foundation - 4,125 -
Write down of equity securities - 410 -
Change in other assets (12,337) (5,138) (944)
Change in other liabilities (889) 713 272
------------------------------------------------------------------------------------------------
Net cash provided by operating activities 142,858 2,036 65,615
------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities - (53) (27)
Investment in subsidiaries (34,264) (5,250) (85,015)
------------------------------------------------------------------------------------------------
Net cash used by investing activities (34,264) (5,303) (85,042)
------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in other borrowings - - 105,000
Pay down of other borrowings (95,000) - (95,000)
Issuance of preferred, common and treasury stock, net 7,032 7,132 4,627
Cash dividends (20,343) (1,540) (785)
Other (2,439) 24 -
------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (110,750) 5,616 13,842
------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (2,156) 2,349 (5,585)
Cash and cash equivalents at beginning of period 13,230 10,881 16,466
------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,074 $ 13,230 $ 10,881
------------------------------------------------------------------------------------------------
PAYMENT OF DIVIDENDS IN COMMON STOCK $ - $ 65,899 $ 58,300
------------------------------------------------------------------------------------------------
CASH PAID FOR INTEREST 1,698 1,882 1,947
------------------------------------------------------------------------------------------------
76
ANNUAL FINANCIAL SUMMARY - UNAUDITED
CONSOLIDATED DAILY AVERAGE BALANCES,
AVERAGE YIELDS AND RATES
(Dollars in Thousands) 2005
-----------------------------------------------
Average Revenue/ Yield/
Balance Expense (1) Rate
-----------------------------------------------
ASSETS
Taxable securities (3) $ 4,769,666 $205,952 4.34%
Tax-exempt securities (3) 226,961 11,587 5.13
------------------------------------------------------------------------------------------------------------------------------
Total securities (3) 4,996,627 217,539 4.38
------------------------------------------------------------------------------------------------------------------------------
Trading securities 15,892 770 4.85
Funds sold and resell agreements 38,521 1,287 3.34
Loans (2) 8,489,751 555,520 6.54
Less reserve for loan losses 110,158 - -
------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 8,379,593 555,520 6.63
------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 13,430,633 775,116 5.78
------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 2,138,222
------------------------------------------------------------------------------------------------------------------------------
Total assets $15,568,855
------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Transaction deposits $ 4,402,810 $ 72,721 1.65%
Savings deposits 159,429 1,106 0.69
Time deposits 3,894,429 136,573 3.51
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 8,456,668 210,400 2.49
------------------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase agreements 1,936,792 61,606 3.18
Other borrowings 996,266 34,220 3.43
Subordinated debenture 236,589 14,367 6.07
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 11,626,315 320,593 2.76
------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,607,702
Other liabilities 872,992
Shareholders' equity 1,461,846
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $15,568,855
------------------------------------------------------------------------------------------------------------------------------
TAX-EQUIVALENT NET INTEREST REVENUE (3) $454,523 3.02%
TAX-EQUIVALENT NET INTEREST REVENUE TO EARNING ASSETS (3) 3.39
Less tax-equivalent adjustment (1) 5,182
------------------------------------------------------------------------------------------------------------------------------
NET INTEREST REVENUE 449,341
Provision for credit losses 12,441
Other operating revenue 346,946
Other operating expense 469,106
------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES 314,740
Federal and state income tax 113,235
------------------------------------------------------------------------------------------------------------------------------
NET INCOME $201,505
------------------------------------------------------------------------------------------------------------------------------
(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.
77
2004 2003
------------------------------------------------------------------------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense1 Rate Balance Expense1 Rate
----------------------------------------------- ------------------------------------------------
$ 4,656,108 $197,884 4.26% $ 4,316,303 $180,581 4.22%
207,376 11,672 5.64 191,982 12,527 6.59
------------------------------------------------------------------------------------------------------
4,863,484 209,556 4.32 4,508,285 193,108 4.32
------------------------------------------------------------------------------------------------------
16,025 629 3.93 16,975 694 4.09
19,944 353 1.77 26,330 281 1.07
7,644,049 408,785 5.35 7,101,543 376,260 5.30
116,076 - - 110,791 - -
------------------------------------------------------------------------------------------------------
7,527,973 408,785 5.43 6,990,752 376,260 5.38
------------------------------------------------------------------------------------------------------
12,427,426 619,323 4.99 11,542,342 570,343 4.96
------------------------------------------------------------------------------------------------------
1,599,461 1,237,074
------------------------------------------------------------------------------------------------------
$14,026,887 $12,779,416
------------------------------------------------------------------------------------------------------
$ 3,863,276 $ 35,517 0.92% $ 3,605,539 $ 31,346 0.87%
169,556 975 0.58 172,938 944 0.55
3,584,496 107,941 3.01 3,439,361 99,639 2.90
------------------------------------------------------------------------------------------------------
7,617,328 144,433 1.90 7,217,838 131,929 1.83
------------------------------------------------------------------------------------------------------
1,611,771 21,140 1.31 1,537,100 15,590 1.01
1,007,237 17,707 1.76 1,051,685 16,682 1.59
152,983 7,761 5.07 154,940 9,477 6.12
------------------------------------------------------------------------------------------------------
10,389,319 191,041 1.84 9,961,563 173,678 1.74
------------------------------------------------------------------------------------------------------
1,805,558 1,309,744
534,453 348,553
1,297,557 1,159,556
------------------------------------------------------------------------------------------------------
$14,026,887 $12,779,416
------------------------------------------------------------------------------------------------------
$428,282 3.15% $396,665 3.22%
3.45 3.44
5,039 5,170
------------------------------------------------------------------------------------------------------
423,243 391,495
20,439 35,636
308,890 304,853
441,224 413,438
------------------------------------------------------------------------------------------------------
270,470 247,274
91,447 88,914
------------------------------------------------------------------------------------------------------
$179,023 $158,360
------------------------------------------------------------------------------------------------------
78
QUARTERLY FINANCIAL SUMMARY - UNAUDITED
CONSOLIDATED DAILY AVERAGE BALANCES,
AVERAGE YIELDS AND RATES
(Dollars in Thousands Except Per Share Data)
Three Months Ended
-------------------------------------------------------------------------
December 31, 2005 September 30, 2005
---------------------------------- ----------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
---------------------------------- ----------------------------------
ASSETS
Taxable securities (3) $ 4,816,263 $ 53,375 4.44% $ 4,800,698 $ 51,946 4.28%
Tax-exempt securities (3) 243,521 3,046 5.05 231,097 2,888 4.96
-------------------------------------------------------------------------------------- ----------------------------------
Total securities (3) 5,059,784 56,421 4.47 5,031,795 54,834 4.31
-------------------------------------------------------------------------------------- ----------------------------------
Trading securities 20,595 243 4.68 14,560 171 4.66
Funds sold and resell agreements 57,656 581 4.00 44,882 386 3.41
Loans (2) 9,005,546 158,387 6.98 8,635,732 144,954 6.66
Less reserve for loan losses 108,998 - - 109,840 - -
-------------------------------------------------------------------------------------- ----------------------------------
Loans, net of reserve 8,896,548 158,387 7.06 8,525,892 144,954 6.75
-------------------------------------------------------------------------------------- ----------------------------------
Total earning assets (3) 14,034,583 215,632 6.12 13,617,129 200,345 5.83
-------------------------------------------------------------------------------------- ----------------------------------
Cash and other assets 2,131,047 1,970,746
-------------------------------------------------------------------------------------- ----------------------------------
Total assets $16,165,630 $15,587,875
-------------------------------------------------------------------------------------- ----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Transaction deposits $ 4,821,627 $ 24,075 1.98% $ 4,533,912 $ 18,968 1.66%
Savings deposits 154,316 292 0.75 157,772 280 0.70
Time deposits 4,216,625 40,083 3.77 3,958,948 35,255 3.53
-------------------------------------------------------------------------------------- ----------------------------------
Total interest-bearing deposits 9,192,568 64,450 2.78 8,650,632 54,503 2.50
-------------------------------------------------------------------------------------- ----------------------------------
Funds purchased and repurchase agreements 1,812,752 17,914 3.92 2,067,432 17,738 3.40
Other borrowings 1,049,635 10,807 4.08 1,047,423 9,510 3.60
Subordinated debenture 296,021 4,683 6.28 297,284 4,477 5.97
-------------------------------------------------------------------------------------- ----------------------------------
Total interest-bearing liabilities 12,350,976 97,854 3.14 12,062,771 86,228 2.84
-------------------------------------------------------------------------------------- ----------------------------------
Demand deposits 1,530,504 1,424,102
Other liabilities 777,111 613,667
Shareholders' equity 1,507,039 1,487,335
-------------------------------------------------------------------------------------- ----------------------------------
Total liabilities and shareholders' equity $16,165,630 $15,587,875
-------------------------------------------------------------------------------------- ----------------------------------
TAX-EQUIVALENT NET INTEREST REVENUE (3) $117,778 2.98% $114,117 2.99%
TAX-EQUIVALENT NET INTEREST REVENUE TO EARNING ASSETS (3) 3.34 3.32
Less tax-equivalent adjustment (1) 1,392 1,289
-------------------------------------------------------------------------------------- ----------------------------------
NET INTEREST REVENUE 116,386 112,828
Provision for credit losses 4,450 3,976
Other operating revenue 87,344 86,855
Other operating expense 123,903 117,034
-------------------------------------------------------------------------------------- ----------------------------------
INCOME BEFORE TAXES 75,377 78,673
Federal and state income tax 27,219 27,846
-------------------------------------------------------------------------------------- ----------------------------------
NET INCOME $ 48,158 $ 50,827
-------------------------------------------------------------------------------------- ----------------------------------
EARNINGS PER AVERAGE COMMON SHARE EQUIVALENT:
Net income:
Basic $0.72 $0.77
-------------------------------------------------------------------------------------- ----------------------------------
Diluted $0.72 $0.76
-------------------------------------------------------------------------------------- ----------------------------------
(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.
79
Three Months Ended
--------------------------------------------------------------------------------------------------------------
June 30, 2005 March 31, 2005 December 31, 2004
---------------------------------- ----------------------------------- -----------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate Balance Expense(1) Rate
---------------------------------- ----------------------------------- -----------------------------------
$ 4,831,186 $ 51,275 4.32% $ 4,628,233 $ 49,356 4.32% $ 4,709,193 $ 50,200 4.25%
215,360 2,810 5.23 217,571 2,843 5.30 219,873 2,951 5.37
---------------------------------- ----------------------------------- -----------------------------------
5,046,546 54,085 4.36 4,845,804 52,199 4.36 4,929,066 53,151 4.30
---------------------------------- ----------------------------------- -----------------------------------
11,639 165 5.69 17,205 191 4.50 10,208 107 4.17
21,170 156 2.96 30,003 164 2.22 31,994 170 2.11
8,341,490 133,173 6.40 7,963,177 119,006 6.06 7,873,974 111,292 5.62
111,056 - - 111,955 - - 114,106 - -
---------------------------------- ----------------------------------- -----------------------------------
8,230,434 133,173 6.49 7,851,222 119,006 6.15 7,759,868 111,292 5.71
---------------------------------- ----------------------------------- -----------------------------------
13,309,789 187,579 5.68 12,744,234 171,560 5.46 12,731,136 164,720 5.15
---------------------------------- ----------------------------------- -----------------------------------
1,750,686 1,474,621 1,598,935
---------------------------------- ----------------------------------- -----------------------------------
$ 15,060,475 $ 14,218,855 $ 14,330,071
---------------------------------- ----------------------------------- -----------------------------------
$ 4,323,513 $ 16,049 1.49% $ 3,920,844$ 13,629 1.41% $ 3,841,742$ 10,779 1.12%
166,426 285 0.69 159,276 249 0.63 160,404 231 0.57
3,710,338 31,499 3.41 3,685,257 29,736 3.27 3,662,455 29,586 3.21
---------------------------------- ----------------------------------- -----------------------------------
8,200,277 47,833 2.34 7,765,377 43,614 2.28 7,664,601 40,596 2.11
---------------------------------- ----------------------------------- -----------------------------------
2,160,031 15,764 2.93 1,704,327 10,190 2.42 1,747,391 8,397 1.91
914,968 7,224 3.17 971,616 6,679 2.79 1,005,679 5,703 2.26
200,038 2,980 5.98 150,752 2,227 5.99 152,634 1,929 5.03
---------------------------------- ----------------------------------- -----------------------------------
11,475,314 73,801 2.58 10,592,072 62,710 2.40 10,570,305 56,625 2.13
---------------------------------- ----------------------------------- -----------------------------------
1,586,248 1,895,989 1,938,205
558,655 319,375 453,571
1,440,258 1,411,419 1,367,990
---------------------------------- ----------------------------------- -----------------------------------
$ 15,060,475 $ 14,218,855 $ 14,330,071
---------------------------------- ----------------------------------- -----------------------------------
$ 113,778 3.10% $ 108,850 3.06% $ 108,095 3.02%
3.45 3.46 3.38
1,245 1,256 1,633
---------------------------------- ----------------------------------- -----------------------------------
112,533 107,594 106,462
2,015 2,000 4,439
94,591 78,156 78,714
126,010 102,159 111,582
---------------------------------- ----------------------------------- -----------------------------------
79,099 81,591 69,155
28,634 29,536 22,599
---------------------------------- ----------------------------------- -----------------------------------
$ 50,465 $ 52,055 $ 46,556
---------------------------------- ----------------------------------- -----------------------------------
$0.79 $0.87 $0.78
---------------------------------- ----------------------------------- -----------------------------------
$0.75 ` $0.78 $0.70
---------------------------------- ----------------------------------- -----------------------------------
BOK Financial Corporation Board of Directors
Gregory S. Allen (1)
President & CEO
Advance Food Co., Inc.
Photo of Gregory S. Allen shown here.
C. Fred Ball, Jr. (2)
Chairman & CEO
Bank of Texas, N.A.
Photo of C. Fred Ball, Jr. shown here.
Sharon J. Bell (1)
Managing Partner
Rogers & Bell
Photo of Sharon J. Bell shown here.
Peter C. Boylan, III (1)
CEO
Boylan Partners, LLC
Photo of Peter C. Boylan, III shown here.
Chester Cadieux, III (1)
President & CEO
QuikTrip Corporation
Photo of Chester Cadieux, III shown here.
Joseph E. Cappy (1)
Retired Chairman & CEO
Dollar Thrifty Automotive Group
Photo of Joseph E. Cappy shown here.
William E. Durrett
Senior Chairman
American Fidelity Corp.
Photo of William E. Durrett shown here.
Robert G. Greer (2)
Vice Chairman
Bank of Texas, N.A.
Photo of Robert G. Greer shown here.
David F. Griffin (1)
President & General Manager
Griffin Communications, L.L.C.
Photo of David F. Griffin shown here.
V. Burns Hargis (1)
Vice Chairman
BOK Financial Corporation and
Bank of Oklahoma, N.A.
Photo of V. Burns Hargis shown here.
E. Carey Joullian, IV (1)
President & CEO
Mustang Fuel Corporation
Photo of E. Carey Joullian, IV shown here.
George B. Kaiser (1)
Chairman
BOK Financial Corporation and
Bank of Oklahoma, N.A.
Photo of George B. Kaiser shown here.
Judith Z. Kishner (1)
Manager
Zarrow Family Office, L.L.C.
Photo of Judith Z. Kishner shown here.
David L. Kyle (1)
Chairman, President & CEO
ONEOK, Inc.
Photo of David L. Kyle shown here.
Robert J. LaFortune
Personal Investments
Photo of Robert J. LaFortune shown here.
Stanley A. Lybarger (1),(2)
President & CEO
BOK Financial Corporation and
Bank of Oklahoma, N.A.
Photo of Stanley A. Lybarger shown here.
Steven J. Malcolm (1)
Chairman, President & CEO
The Williams Companies, Inc.
Photo of Steven J. Malcolm shown here.
Paula Marshall-Chapman (1)
CEO
Bama Companies
Photo of Paula Marshall-Chapman shown here.
James A. Robinson
Personal Investments
Photo of James A. Robinson shown here.
(1) Director of BOK Financial Corporation and Bank of Oklahoma, N.A.
(2) Director of BOK Financial Corporation and Bank of Texas, N.A.
Bank of Albuquerque, N.A. Board of Directors
Adelmo Archuleta
Owner, Professional Engineer
Molzen-Corbin & Associates
Suzanne Barker-Kalangis, Esq.
Partner, Modrall, Sperling, Roehl,
Harris and Sisk P.A.
Steven G. Bradshaw
Sr. Executive Vice President
BOK Financial Corporation
Charles E. Cotter
Executive Vice President
BOK Financial Corporation
Rudy A. Davalos
Athletic Director
University of New Mexico
William E. Garcia
Retired Sr. Manager, Public Affairs
Intel Corporation
Robert M. Goodman
Vice Chairman
Bank of Albuquerque, N.A.
Thomas D. Growney
President
Tom Growney Equipment, Inc.
Larry F. Levy
Senior Vice President
Bank of Albuquerque, N.A.
W. Jeffrey Pickryl
Sr. Executive Vice President
BOK Financial Corporation
Mark E. Sauters
Senior Vice President
Bank of Albuquerque, N.A.
Michael D. Sivage
Chief Executive Officer
STH Investments, Inc.
Paul A. Sowards
President
Bank of Albuquerque, N.A.
Jennifer S. Thomas
Executive Vice President
Bank of Albuquerque, N.A.
James F. Ulrich
Chairman & CEO
Bank of Albuquerque, N.A.
Bank of Arkansas, N.A. Board of Directors
John W. Anderson
Senior Vice President
Bank of Oklahoma, N.A.
Jett C. Cato
Executive Vice President
Bank of Arkansas, N.A.
Jeff D. Cude
Senior Vice President
Bank of Arkansas, N.A.
Jeffrey R. Dunn
Chairman, President & CEO
Bank of Arkansas, N.A.
Mark W. Funke
President
Bank of Oklahoma, N.A.
Oklahoma City
Ronald E. Leffler
Senior Vice President
Bank of Oklahoma, N.A.
Bank of Arizona, N.A. Board of Directors
Gregory S. Anderson
Vice Chairman
Bank of Arizona, N.A.
Charles E. Cotter
Executive Vice President
BOK Financial Corporation
Scott D. LeMarr
President
Polo Cristi Companies
Steven E. Nell
EVP, Chief Financial Officer
BOK Financial Corporation
W. Jeffrey Pickryl
Sr. Executive Vice President
BOK Financial Corporation
David Ralston
Chairman
Bank of Arizona, N.A.
Dr. David Righi
Physician
Valley Anesthesiology Consultants
James A. Sharp, Jr.
Owner
Oval Transportation Services
Dr. Anthony T. Yeung
Surgeon
Arizona Institute for
Minimally Invasive Spine Care
Bank of Texas, N.A. Board of Directors
C. Thomas Abbott
Vice Chairman
Bank of Texas, N.A. - Dallas
C. Fred Ball, Jr.
Chairman & CEO
Bank of Texas, N.A. - Dallas
C. Huston Bell
Retired President
The Vantage Companies
Edward O. Boshell, Jr.
Retired, Columbia General
Investments, LP
Steven G. Bradshaw
Sr. Executive Vice President
BOK Financial Corporation
R. Neal Bright
Managing Partner
Bright & Bright, LLP
H. Lynn Craft
President & CEO
Baptist Foundation of Texas
Charles W. Eisemann
Personal Investments
James J. Ellis
Managing Partner
Ellis/Roiser Associates
Robert G. Greer
Vice Chairman
Bank of Texas, N.A. - Houston
R. William Gribble, Jr.
President
Gribble Oil Company
J. T. Hairston, Jr.
Personal Investments
Douglas D. Hawthorne
President & CEO
Texas Health Resources
Bill D. Henry
Chairman & CEO
McQuery Henry Bowles Troy, LLP
Richard W. Jochetz
President
Bank of Texas, N.A. - Houston
Stanley A. Lybarger
President & CEO
BOK Financial Corporation
Albert W. Niemi, Jr.
Dean, Cox School of Business
Southern Methodist University
W. Jeffrey Pickryl
Sr. Executive Vice President
BOK Financial Corporation
Thomas S. Swiley
President & COO
Bank of Texas, N.A. - Dallas
Mrs. Jere W. Thompson
Community Leader
Tom E. Turner
Retired Chairman
Bank of Texas, N.A. - Dallas
John C. Vogt
Personal Investments
Randall Walker
Chairman
Bank of Texas, N.A. - Houston
Colorado State Bank and Trust, N.A. Board of Directors (CSBT)
Aaron K. Azari
Executive Vice President
CSBT
Steven Caulkins, III
Principal
Greendeck Capital
Joel H. Farkas
Chairman
JF Companies
Thomas M. Foncannon
Senior Vice President
CSBT
H. James Holloman
Executive Vice President
Bank of Oklahoma, N.A.
Richard H. Lewis
Personal Investments
Kirk McDonald
CEO, President
Denver Newspaper Corp.
W. Jeffrey Pickryl
Sr. Executive Vice President
BOK Financial Corporation
Gregory K. Symons
Chairman & CEO
CSBT
Shareholder Information
Corporate Headquarters:
Bank of Oklahoma Tower
P.O. Box 2300
Tulsa, Oklahoma 74192
(918) 588-6000
Independent Auditors:
Ernst & Young LLP
1700 One Williams Center
Tulsa, Oklahoma 74172
(918) 560-3600
Legal Counsel:
Frederic Dorwart Lawyers
Old City Hall
124 E. Fourth St.
Tulsa, Oklahoma 74103-5010
(918) 583-9922
Common Shares:
Traded NASDAQ National Market
NASDAQ Symbol: BOKF
Number of common shareholders of record at
December 31, 2005: 1,199
Market Makers:
Archipelago Exchange (The)
Boston Stock Exchange
Citadel Derivatives Group LLC
Citigroup Global Markets Inc.
Credit Research & Trading
Credit Suisse First Boston
Friedman Billings Ramsey & Co
Goldman, Sachs & Co.
GVR Company LLC
Harris Nesbitt Corp.
Howe Barnes Investments, Inc.
Jefferies & Company, Inc.
Keefe, Bruyette & Woods, Inc.
Knight Equity Markets, L.P.
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner
Morgan Stanley & Co., Inc.
National Stock Exchange
Piper Jaffray Companies Inc.
Sandler O'Neill & Partners
Schwab Capital Markets
Stephens Inc.
SunTrust Robinson Humphrey Capital Markets
Susquehanna Capital Group
The Robinson Humphrey Co.
UBS Securities LLC
Transfer Agent and Registrar
SunTrust Bank (800) 568-3476
Address Shareholder Inquiries
Send certificates for transfer and address
changes to:
BY MAIL:
SunTrust Bank
P.O. Box 4625
Atlanta, GA 30303
BY HAND OR OVERNIGHT COURIER:
SunTrust Bank
Stock Transfer Department
58 Edgewood Avenue, Room 225
Atlanta, GA 30303
Copies of BOK Financial Corporation's Annual Report to Shareholders, Quarterly
Reports and Form 10-K to the Securities and Exchange Commission are available
without charge upon written request. Analysts, shareholders and other investors
seeking financial information about BOK Financial Corporation are invited to
contact Stacy C. Kymes, Senior Vice President, (918) 588-6752.
Information about BOK Financial is also readily available at our website:
www.bokf.com