-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RP1Fq1bj2ToTGKcQ02vxX6KtRYx26448kLqZ28C6VoQ+ucGWJqBnkIzVCT8i3qcD gG+kAfWLJ6MIuGofJTPQmg== 0000875357-02-000018.txt : 20021114 0000875357-02-000018.hdr.sgml : 20021114 20021114112909 ACCESSION NUMBER: 0000875357-02-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOK FINANCIAL CORP ET AL CENTRAL INDEX KEY: 0000875357 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 731373454 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19341 FILM NUMBER: 02822732 BUSINESS ADDRESS: STREET 1: BANK OF OKLAHOMA TOWER STREET 2: PO BOX 2300 CITY: TULSA STATE: OK ZIP: 74192 BUSINESS PHONE: 9185953025 MAIL ADDRESS: STREET 1: BANK OF OKLAHOMA TOWER STREET 2: P O BOX 2300 CITY: TULSA STATE: OK ZIP: 74192 10-Q 1 q10-93002.txt QUARTERLY REPORT FOR 9/30/02 As filed with the Securities and Exchange Commission on November 14, 2002 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 2002 Commission File No. 0-19341 BOK FINANCIAL CORPORATION Incorporated in the State of Oklahoma I.R.S. Employer Identification No. 73-1373454 Bank of Oklahoma Tower P.O. Box 2300 Tulsa, Oklahoma 74192 Registrant's Telephone Number, Including Area Code (918) 588-6000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: (NONE) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK ($.00006 Par Value) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: 55,243,707 shares of common stock ($.00006 par value) as of October 31, 2002. - ------------------------------------------------------------------------------- BOK Financial Corporation Form 10-Q Quarter Ended September 30, 2002 Index Part I. Financial Information Management's Discussion and Analysis 2 Report of Management on Consolidated Financial Statements 18 Unaudited Consolidated Statements of Earnings 19 Unaudited Consolidated Balance Sheets 21 Unaudited Consolidated Statements of Changes in Shareholders' Equity 22 Unaudited Consolidated Statements of Cash Flows 23 Unaudited Notes to Consolidated Financial Statements 24 Financial Summaries - Unaudited 27 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 30 Signature 30 CFO Certification 32 CEO Certification 33 MANAGEMENT'S ASSESSMENT OF OPERATIONS AND FINANCIAL CONDITION ASSESSMENT OF OPERATIONS SUMMARY OF PERFORMANCE BOK Financial Corporation ("BOK Financial") recorded net income of $44.1 million or $0.73 per diluted common share for the third quarter of 2002 compared to $29.8 million or $0.50 per diluted common share for the third quarter of 2001. Prior year's earnings per share have been restated for a 3% dividend paid in common shares in May 2002. The returns on average assets and equity were 1.55% and 18.44%, respectively for the quarter ended September 30, 2002 compared to 1.16% and 14.82% for the same period of 2001. Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (FAS 142) was implemented January 1, 2002 and Statement of Financial Accounting Standards No. 147, "Acquisitions of Certain Financial Institutions" (FAS 147) was implemented during the third quarter. The first and second quarters of 2002 have been restated to reflect the retroactive application of FAS 147 to January 1, 2002. These statements require that certain intangible assets are no longer amortized. If these rules had been applied retroactively to 2001 the proforma net income and earnings per diluted common share for the third quarter of 2001 would have been $31.5 million and $0.53. BOK Financial has completed its first required goodwill impairment test according to FAS 142, and no impairment was indicated. Net interest revenue for the third quarter of 2002 grew $7.5 million over same period 2001 due to increases in average earning assets, partially offset by the net effect of declining interest rates. Fees and commissions revenue grew $8.5 million during the third quarter of 2002 with increases in brokerage and trading, transaction card revenue and service charges on deposit accounts, offset slightly from declines in trust fees and commissions. Operating expense, excluding the provision for impairment of mortgage servicing rights of $29.0 million and pro forma impact of FAS 142 and FAS 147 on prior year increased $21.2 million or 8% due to personnel costs, data processing and communications and mortgage banking costs. The provision for loan loss decreased $3.0 million. Net gains on sales of securities totaled $34.3 million for the quarter ending September 30, 2002, which included net gains from sales of securities held as an economic hedge of the mortgage servicing rights portfolio of $27.5 million. The impact of the mortgage servicing rights hedge net gains and the provision for impairment of the mortgage servicing portfolio was a net loss of $1.6 million during the third quarter of 2002. Net gains on derivatives of $7.2 million for the quarter ending September 30, 2002 represented mark to market on derivatives used to manage interest rate risk. On October 25, 2002, BOK Financial acquired Bank of Tanglewood, National Association, located in Houston, Texas for 2,003,352 shares of stock valued at approximately $64.5 million. BOK Financial has a contingent obligation to issue additional shares over the next five years based on certain predetermined market valuations of its common stock. Based upon current market prices, a total of 189,237 shares of BOK Financial common stock would be issued to satisfy this contingent obligation and under no circumstances will BOK Financial be obligated to issue more than 10 million shares. The estimated fair value of this contingent price guarantee was $3.2 million, which will be included in the total purchase price. Bank of Tanglewood had total assets, deposits and equity of $248 million, $223 million and $16 million, respectively, at the acquisition date before push-down accounting is applied. Conversion and merger into Bank of Texas, N.A. is expected to be completed during the fourth quarter of 2002. Net income for the nine months ended September 30, 2002 totaled $111.6 million, an increase of 30% over the same period of 2001. Diluted earnings per share were $1.85 compared to $1.45 in 2001. Proforma results of FAS 142 and FAS 147 on the nine months ending September 30, 2001 were net income of $91.1 million and $1.53 per diluted share. The returns on average assets and equity were 1.34% and 16.64%, respectively, for the nine months ended September 30, 2002 compared to 1.14% and 15.16% for the same period of 2001. NET INTEREST REVENUE Net interest revenue on a tax-equivalent basis was $93.4 million for the third quarter of 2002 compared to $86.4 million for the third quarter of 2001. The growth in net interest revenue was primarily due to a $1.2 billion increase in average earning assets, offset by a $739 million increase in interest bearing liabilities. The growth in average earning assets included securities, which increased by $853 million, and loans, which increased by $379 million. Average transaction deposit accounts increased by $517 million and federal funds purchased and repurchase agreements increased by $175 million. Yields on average earning assets and rates paid on average interest bearing liabilities both continued to decline during the third quarter of 2002. This resulted in a net interest margin, the ratio of tax-equivalent net interest revenue to average earning assets, of 3.58% in the third quarter of 2002 compared to 3.75% in the third quarter of 2001 and 3.63% in the second quarter of 2002. Table 1 shows how net interest revenue was affected by changes in average balances and interest rates for the various types of earning assets and interest bearing liabilities. - ------------------------------------------------------------------------------------------------------------------- TABLE 1 - VOLUME/RATE ANALYSIS (In thousands) Three months ended Nine months ended September 30, 2002/2001 September 30, 2002/2001 ------------------------------------------------------------------------ Change Due To (1) Change Due To (1) ------------------------------------------------------------- Yield Yield Change Volume /Rate Change Volume /Rate ------------------------------------------------------------------------ Tax-equivalent interest revenue: Securities $ 549 $ 11,633 $ (11,084) $ (1,774) $ 29,743 $ (31,517) Trading securities (2) (47) 45 (292) (51) (241) Loans (18,434) 6,389 (24,823) (74,171) 19,111 (93,282) Funds sold (73) (21) (52) (545) (178) (367) - ------------------------------------------------------------------------------------------------------------------- Total (17,960) 17,954 (35,914) (76,782) 48,625 (125,407) - ------------------------------------------------------------------------------------------------------------------- Interest expense: Interest bearing transaction deposits (2,035) 2,266 (4,301) (10,336) 7,597 (17,933) Savings deposits (73) 30 (103) (306) 102 (408) Time deposits (11,614) 633 (12,247) (44,524) (257) (44,267) Federal funds purchased and repurchase agreements (6,341) 1,144 (7,485) (35,798) (1,828) (33,970) Other borrowings (4,748) (165) (4,583) (16,205) 3,216 (19,421) Subordinated debentures (146) (13) (133) 12 349 (337) - ------------------------------------------------------------------------------------------------------------------- Total (24,957) 3,895 (28,852) (107,157) 9,179 (116,336) - ------------------------------------------------------------------------------------------------------------------- Tax-equivalent net interest revenue 6,997 14,059 (7,062) 30,375 39,446 (9,071) Decrease in tax-equivalent adjustment 527 1,528 - ------------------------------------------------------------------------------------------------------------------- Net interest revenue $ 7,524 $ 31,903 - ------------------------------------------------------------------------------------------------------------------- (1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.
Since inception, BOK Financial has followed a strategy of fully utilizing its capital resources by borrowing funds in the capital markets to supplement deposit growth in order to fund increased investments in securities. The primary objective of this strategy is to reduce total interest rate risk. The interest rate on these borrowed funds, which generally reacts quickly to changes in market interest rates, tends to match the effect of changes in interest rates on the loan portfolio. Interest rates earned on the securities purchased with the proceeds of these borrowed funds are affected less quickly by changes in market interest rates. The timing of changes in interest rates earned on securities more closely matches the timing of changes in interest rates paid on deposit accounts. Although this strategy may result in a net interest margin that falls below those normally seen in the commercial banking industry, it provides positive net interest revenue. Management estimates that for the third quarter of 2002, this strategy enhanced net interest revenue $13.8 million. Year-to-date 2002 this strategy enhanced net interest revenue $42.7 million. Excluding this strategy, net interest margin for the third quarter of 2002 was 3.72% and 3.79% for the year ending September 30, 2002. Management employs various techniques to control, within established parameters, the interest rate and liquidity risk inherent in this strategy, the results of which are presented in the Market Risk section. OTHER OPERATING REVENUE Other operating revenue for the third quarter 2002 increased $9.0 million or 16%, excluding net gains on sales of securities and derivatives, over the same period in 2001. Service charges and fees on deposit accounts grew 42% or $5.4 million during the third quarter of 2002 compared to the third quarter of 2001, due mostly to increases in service charges from an overdraft privilege product initiated in 2002. Transaction card revenues have increased $2.0 million or 17% due to growth in merchant fees, ATM network fees (TransFund) and check card fees. Brokerage and trading increased $940 thousand or 19% during the third quarter compared to the same period of 2001 due to increased institutional sales offset by $1.1 million of trading losses and mark-to-market adjustments. Trust fees declined $606 thousand or 6% when compared to the same quarter 2001 due to declines in the asset values on which many fees are based. Net gain on sales of securities of $34.3 million included net gains from the general securities portfolio of $6.8 million and $27.5 million from the securities portfolio that management has designated as an economic hedge against the risk of loss on mortgage servicing rights. Net gain on derivatives represents the mark to market of the derivative portfolio used for interest rate risk management. Additional discussion about the mortgage servicing rights and related hedge portfolio and BOK Financial's use of derivative instruments is located in the Market Risk section of this report. - ---------------------------------------------------------------------------------------------------------- TABLE 2 - OTHER OPERATING REVENUE (In thousands) Three Months Ended --------------------------------------------------------------- Sept. 30, June 30, March 31, Dec.31, Sept. 30, 2002 2002 2002 2001 2001 --------------------------------------------------------------- Brokerage and trading revenue $ 5,878 $ 7,014 $ 7,092 $ 5,926 $ 4,938 Transaction card revenue 13,654 13,439 12,486 11,489 11,679 Trust fees and commissions 9,605 10,300 10,374 9,740 10,211 Service charges and fees on deposit accounts 18,395 16,391 13,855 13,741 12,961 Mortgage banking revenue, net 12,556 10,759 10,652 14,923 12,499 Leasing revenue 790 822 892 915 810 Other revenue 5,105 5,698 5,042 5,578 4,341 - ---------------------------------------------------------------------------------------------------------- Total fees and commissions 65,983 64,423 60,393 62,312 57,439 - ---------------------------------------------------------------------------------------------------------- Gain on sale of assets 444 7 676 18 11 Gain (loss) on sales of securities, net 34,341 21,602 (7,581) (3,770) 19,746 Gain (loss) on derivatives, net 7,218 (1,453) (536) (3,300) (1,105) - ---------------------------------------------------------------------------------------------------------- Total other operating revenue $ 107,986 $ 84,579 $ 52,952 $ 55,260 $ 76,091 - ----------------------------------------------------------------------------------------------------------
Year to date other operating revenue increased $21.6 million or 13%, excluding net gains on sales of securities and derivatives. Service charges on deposits increased $11.1 million or 30% during the first nine months of 2002 compared to the same period of 2001 due to increases in growth in overdraft privilege fees and growth of treasury services revenue. Transaction card revenue increased $6.6 million or 20% for the nine months ending September 30, 2002 as compared to the same period of 2001 due to increases in merchant fees, ATM network fees and check card fees. Brokerage and trading fees increased 26% or $4.1 million due mostly to institutional sales. These increases are offset slightly by declines in mortgage banking revenue of $1.3 million due to lower servicing fees; see additional discussion in the Lines of Business section of this report. Year to date net gains on sales of securities of $48.4 million included net gains from the general securities portfolio of $29.3 million and net gains of $19.1 million from the securities portfolio that management has designated as an economic hedge against the risk of loss on mortgage servicing rights. Net gains on sales of derivatives included $519 thousand realized gains from sale of options designated as an economic hedge against the risk of loss on mortgage servicing rights and $4.7 million net gains on interest rate risk management instruments. Management expects continued growth in other operating revenue. However, increased competition, market saturation and the level of economic activity could affect the future rate of increase. Additionally, BOK Financial's ability to generate fee revenue is affected by numerous market, economic and demographic factors such as equity market performance, consumer spending, and cash management preferences. OTHER OPERATING EXPENSE Operating expense for the third quarter of 2002 increased $9.9 million or 12% over the same period of 2001 to $94.5 million, excluding certain significant or nonrecurring items as presented in Table 4. Personnel costs increased $4.5 million or 11%, of which $2.9 million was salaries and benefits attributable to a 2% increase in full time equivalent employees (FTE) and a 6% increase in salaries and benefits per FTE plus a $1.6 million to increases in incentive bonuses tied directly to production. Data processing & communications increased 19% or $2.0 million from the same period 2001 due to transaction costs relating to transaction cards and external processing charges due both to increased volumes. Mortgage banking costs have increased $4.4 million due to an increase in amortization of capitalized mortgage servicing rights. An impairment of mortgage servicing rights of $29.0 million was also recognized due to market conditions existing at this time. These market conditions and impact on the mortgage banking business are more thoroughly discussed in the Lines of Business - - Mortgage Banking section of this report. During the third quarter of 2002, BOK Financial entered into a contract to change its primary data processing servicer. Expenses incurred to date on this project totaled $218 thousand and quarterly operating expenses are expected to increase by amounts ranging from $950 thousand to $1.6 million over the next year. Management anticipates this change to occur during the second half of 2003. - ---------------------------------------------------------------------------------------------- TABLE 3 - OTHER OPERATING EXPENSE (In thousands) Three Months Ended ----------------------------------------------------------- Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2002 2002 2002 2001 2001 --------------------------------------------------------- Personnel $ 44,963 $ 44,885 $ 43,332 $ 42,575 $ 40,491 Business promotion 2,483 3,208 2,878 2,798 2,560 Professional fees and services 2,816 3,732 2,908 4,189 2,983 Occupancy & equipment 10,578 10,299 10,340 10,637 11,017 Data processing & communications 12,138 11,216 10,438 10,486 10,173 FDIC and other insurance 468 483 439 388 443 Printing, postage and supplies 3,172 3,018 3,057 3,132 3,141 Net gains and operating expenses on repossessed assets 108 656 47 239 1,189 Amortization of intangible assets 1,867 1,882 1,887 5,014 5,015 Mortgage banking costs 11,635 7,791 8,357 9,512 7,191 Provision (recovery) for impairment of mortgage servicing rights 29,042 23,774 (5,278) (8,861) 15,224 Other expense 4,425 2,854 4,746 4,692 4,164 - -------------------------------------------------------------------------------------------- Total $ 123,695 $ 113,798 $ 83,151 $ 84,801 $ 103,591 - --------------------------------------------------------------------------------------------
Amortization of intangible assets decreased $3.1 million for the quarter ending September 30, 2002 and $9.5 million year to date. The implementation of FAS 142 and FAS 147 accounted for $2.6 million of the quarter ending September 30, 2002 change and $7.7 million of the year to date change. FAS 142 established new rules of accounting for intangible assets. FAS 147 applied FAS 142 to goodwill resulting from certain business combinations, such as branch acquisitions. Under these new rules, intangible assets with indefinite lives such as goodwill are no longer be amortized but are subject to impairment testing. Other intangible assets will continue to be amortized over their useful lives. FAS 142 was applied to periods after adoption on January 1, 2002. FAS 147 was adopted September 30, 2002, effective January 1, 2002, restating the first and second quarter of 2002; prior years are not restated for this change in accounting. If these rules had been applied retroactively to the prior year, operating expense would have decreased $2.6 million for the quarter ended September 30, 2001 and $7.7 million for the nine months ended September 30, 2001. - ------------------------------------------------------------------------------------------------------ TABLE 4 - OTHER OPERATING EXPENSE, EXCLUDING CERTAIN SIGNIFICANT OR NONRECURRING ITEMS (In thousands) Three Months Ended ---------------------------------------------------------------- Sept. 30, June 30, March 31, Dec.31, Sept. 30, 2002 2002 2002 2001 2001 ---------------------------------------------------------------- Total other operating expense $ 123,695 $ 113,798 $ 83,151 $ 84,801 $ 103,591 Net gains and operating costs from repossessed assets (108) (656) (47) (239) (1,189) Proforma effect of FAS 142 and 147 - - - (2,575) (2,575) (Provision) recovery for impairment of mortgage servicing rights (29,042) (23,774) 5,278 8,861 (15,224) - ------------------------------------------------------------------------------------------------------ Total $ 94,545 $ 89,368 $ 88,382 $ 90,848 $ 84,603 - ------------------------------------------------------------------------------------------------------
Year to date other operating expense increased $21.6 million or 9% over same period of 2001, excluding certain significant or nonrecurring items. Personnel costs increased $11.9 million or 10% due to increased full time equivalent employees and incentive compensation tied directly to production. Data processing and communications increased $4.3 million due to volume. Mortgage banking costs increased $7.0 million due to increased amortization of mortgage servicing rights, detailed discussion can be found in the Lines of Business - Mortgage Banking section of this report. LINES OF BUSINESS BOK Financial operates four principal lines of business under its Bank of Oklahoma ("BOk") franchise: corporate banking, consumer banking, mortgage banking and trust services. It also operates a fifth line of business, regional banks, which includes all banking functions for Bank of Albuquerque, N.A., Bank of Arkansas, N.A., and Bank of Texas, N.A. Other lines of business include the TransFund ATM network and BOSC, Inc., a securities broker-dealer. BOK Financial allocates resources and evaluates performance of its lines of business after the allocation of funds, certain indirect expenses, taxes and capital costs. The cost of funds provided from one segment to another is transfer-priced at rates that approximate market for funds with similar duration. Deposit accounts with indeterminate maturities are transfer-priced at a rolling average rate based on expected duration of the accounts. Over the past year, the average transfer-pricing rate for these deposit accounts decreased by approximately 250 basis points. The impact of this significant decline in transfer-pricing rates shifted net interest revenue from the providers of funds, primarily consumer banking, trust services and regional banks, to funds management. This is reflected in net interest revenue in the funds management department of $13.8 million for the quarter ended September 30, 2002 compared to $10.9 million for the third quarter of 2001. Corporate Banking The Corporate Banking Division provides loan and lease financing and treasury and cash management services to businesses throughout Oklahoma and seven surrounding states. In addition to serving the banking needs of small businesses, middle market and larger customers, the Corporate Banking Division has specialized groups that serve customers in the energy, agriculture, healthcare and banking/finance industries. The Corporate Banking Division contributed $12.7 million or 29% to consolidated net income for the third quarter of 2002 and $36.2 million or 32% for the nine months ending September 31, 2002. This compares to $11.8 million or 39% of consolidated net income for the third quarter of 2001 and $34.1 million or 40% for the nine months ended September 30, 2001. The decrease in net interest revenue from external sources was due to lower loan yields. The provision for loan loss represents net loans charged off or recovered for the Corporate Banking Division. Table 5 Corporate Banking (In thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ----------------------------- ------------------------------ 2002 2001 2002 2001 ------------ --------------- ------------------------------- NIR (expense) from external sources $ 39,424 $ 49,458 $ 117,568 $ 158,456 NIR (expense) from internal sources (11,948) (20,172) (36,077) (72,083) ------------ ------------- ------------- ------------- Total net interest revenue 27,476 29,286 81,491 86,373 Other operating revenue 8,030 7,150 24,629 21,768 Operating expense 14,271 14,212 43,154 42,606 Provision for loan loss 507 2,775 4,037 9,520 Net income 12,689 11,761 36,238 34,103 Average assets $3,957,383 $ 3,810,837 $ 3,981,424 $ 3,803,639 Average equity 446,537 436,475 448,619 437,638 Return on assets 1.27% 1.22% 1.22% 1.20% Return on equity 11.27% 10.69% 10.80% 10.42% Efficiency ratio 40.19% 39.01% 40.67% 39.40%
Consumer Banking The Consumer Banking Division, which provides a full line of deposit, loan and fee-based services to customers throughout Oklahoma, contributed $2.2 million or 5% to consolidated net income for the third quarter of 2002 and $5.9 million or 5% for the nine months ended September 30, 2002. This compares to $4.0 million or 13% of consolidated net income for the third quarter of 2001 and $13.2 million or 15% for the nine months ended September 30, 2001. Revenue from internal sources, primarily funds provided to other business lines, decreased $7.2 million due to lower transfer pricing rates. At the same time, expense from external sources decreased $2.9 million due to lower interest paid on deposit accounts. Other operating revenue increased $3.3 million or 44% over third quarter of 2001 due primarily to increases in service charges from an overdraft privilege product initiated during the second quarter of 2002. The increase in provision for loan loss, which represents actual net charge-offs, of $1.6 million during the third quarter compared to same quarter 2001, was due to $863 thousand of charge-offs from the overdraft privilege product and $696 thousand to indirect auto loans. Table 6 Consumer Banking (In thousands) Three months ended Sept. 30, Nine months ended Sept. 30, --------------------------------- ----------------------------------- 2002 2001 2002 2001 ------------- -- -------------- ---------------------- ------------- NIR (expense) from external sources $ (4,599) $ (7,514) $ (13,335) $ (28,886) NIR (expense) from internal sources 15,126 22,284 46,543 75,286 ------------- -------------- --------------- ------------- Total net interest revenue 10,527 14,770 33,208 46,400 Other operating revenue 10,784 7,496 27,953 22,166 Operating expense 15,315 14,835 46,606 44,203 Provision for loan loss 2,444 885 4,830 2,821 Net income 2,171 4,000 5,942 13,162 Average assets $ 2,311,550 $ 2,182,276 $ 2,322,765 $ 2,184,837 Average equity 72,929 67,755 72,964 68,301 Return on assets 0.37% 0.73% 0.34% 0.81% Return on equity 11.81% 23.42% 10.89% 25.77% Efficiency ratio 71.86% 66.63% 76.20% 64.47%
Mortgage Banking The Mortgage Banking Division contributed $4.9 million or 11% to consolidated net income for the third quarter of 2002 compared to $2.4 million or 8% for the third quarter of 2001. Year to date September 30, 2002 the Mortgage Banking Division contributed $13.1 million or 12% to consolidated net income compared to $7.2 million or 8% for the same period of 2001. Economic hedging activities contributed realized gains of $27.5 million that substantially offset a $29.0 million provision for impairment of mortgage servicing rights. Revenue from loan production activities was $11.8 million for the third quarter of 2002 compared to $8.1 million for the same period of 2001 due primarily to an increase in loan volumes. Mortgage loans originated totaled $347 million compared to $264 million for the third quarter of 2001. Pre-tax income from loan origination activities totaled $7.3 million in 2002 compared to $3.6 million in 2001. Approximately 66% of the loans originated during the third quarter of 2002 were in Oklahoma. Mortgage servicing fees totaled $6.9 million for the third quarter of 2002 compared to $7.3 million in 2001. The decrease in mortgage servicing revenue was due primarily to a lower outstanding principal balance of loans serviced. Amortization of mortgage servicing rights, which is included in operating expenses, totaled $10.2 million in the third quarter of 2002 compared to $5.5 million in 2001 due to an increase in loan prepayments. The valuation allowance from impairment of mortgage servicing rights totaled $29.0 million. Net realized gains from sales of securities designated as an economic hedge of the mortgage servicing portfolio totaled $27.5 million. These factors combined for pre-tax income on mortgage servicing activities of $342 thousand for the third quarter of 2002 compared to a pre-tax loss of $165 thousand for 2001. See the Market Risk section of this report for additional discussion of the prepayment risk of the mortgage servicing portfolio and related hedging strategies. Table 7 Mortgage Banking (In thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------- -------------------------- 2002 2001 2002 2001 ------------ -------------- --------------------------- NIR (expense) from external sources $ 8,508 $ 7,511 $ 24,291 $ 24,435 NIR (expense) from internal sources (3,258) (4,645) (11,222) (17,239) ------------ ------------ ----------- ---------- Total net interest revenue 5,250 2,866 13,069 7,196 Capitalized mortgage servicing rights 4,318 3,773 14,235 11,572 Other operating revenue 12,301 9,392 25,512 25,493 Operating expense 15,247 11,383 38,719 33,629 Provision (recovery) for impairment of mortgage servicing rights 29,042 15,224 47,538 24,412 Gains (losses) on sales of financial 27,490 13,165 19,587 23,847 instruments Net income (loss) 4,888 2,364 (6,719) 6,127 Average assets $ 666,978 $ 636,058 $ 672,565 $ 633,526 Average equity 53,249 41,975 60,251 42,592 Return on assets 2.91% 1.47% (1.34)% 1.29% Return on equity 36.42% 22.34% (14.91)% 19.23% Efficiency ratio 69.72% 71.01% 73.31% 75.98%
Trust Services Trust Services, which includes institutional, investment and retirement products and services to affluent individuals, businesses, not-for-profit organizations, and governmental agencies, contributed $1.2 million or 3% of consolidated net income for the third quarter of 2002 and $4.9 million or 4% for the nine months ending September 30, 2002. This compared to $2.5 million or 8% of consolidated net income for the third quarter of 2001 and $7.6 million or 9% for the nine months ending September 30, 2001. Other operating revenue declined $705 thousand compared to the third quarter of 2001 due to declines in the asset values on which many fees are based. At September 30, 2002, trust assets with an aggregate market value of $16.4 billion were subject to various fiduciary arrangements compared to $16.6 billion at September 30, 2001. Table 8 Trust Services (In thousands) Three months ended Sept. 30, Nine months ended Sept. 30, -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ------------- --------------------------- NIR (expense) from external sources $ 279 $ 42 $ 1,078 $ (391) NIR (expense) from internal sources 2,148 3,366 6,153 10,799 ----------- ------------ ------------ ----------- Total net interest revenue 2,427 3,408 7,231 10,408 Other operating revenue 9,554 10,259 30,162 31,065 Operating expense 9,691 9,640 29,044 29,024 Net income 1,208 2,460 4,879 7,606 Average assets $ 522,299 $ 468,457 $ 527,098 $ 471,569 Average equity 44,080 40,345 44,312 40,380 Return on assets 0.92% 2.08% 1.24% 2.16% Return on equity 10.88% 24.19% 14.72% 25.18% Efficiency ratio 80.89% 70.53% 77.67% 69.98%
Regional Banking Regional banks include Bank of Texas, Bank of Albuquerque, and Bank of Arkansas. Each of these banks provides a full range of corporate and consumer banking, trust services and retail investments in their respective markets. Small businesses and middle-market corporations are the regional banks' primary customer focus. Regional banks contributed $10.3 million or 23% to consolidated net income for the third quarter 2002 and $26.4 million or 24% for the nine months ended September 30, 2002. This compared to $7.8 million or 26% of consolidated net income for the third quarter of 2001 and $23.6 million or 27% for the nine months ended September 30, 2001. BOK Financial's operations in Texas, New Mexico and Arkansas contributed $6.8 million, $3.1 million, and $397 thousand, respectively, to consolidated net income for the third quarter of 2002. This compared to net income of $5.4 million, $2.0 million, and $428 thousand, respectively, for the third quarter 2001. Average equity assigned to regional banks included both an amount based on management's assessment of risk and an additional amount based on BOK Financial's investment in these entities. Management measures performance for regional banks based on tangible net income, return on assets and return on equity. Tangible net income is defined as net income excluding the after-tax effect of goodwill and core deposit intangible asset amortization. Table 9 Regional Banking (In thousands) Three months ended Sept. 30, Nine months ended Sept. 30, ---------------------------- ----------------------------- 2002 2001 2002 2001 ------------ -------------- ------------------------------ NIR (expense) from external sources $ 28,794 $ 35,076 $ 100,950 $ 101,744 NIR (expense) from internal sources 2,359 (3,164) (9,615) (8,055) ------------ ------------- ------------ ------------ Total net interest revenue 31,153 31,912 91,335 93,689 Other operating revenue 7,309 4,954 19,261 14,400 Operating expense 22,688 23,397 67,335 67,204 Provision for loan loss 1,583 1,357 5,119 3,542 Gains (losses) on sales of financial 519 279 3,480 (70) instruments Net income 10,317 7,836 26,423 23,587 Tangible net income 11,895 11,606 31,158 35,013 Average assets $3,763,527 $3,254,156 $ 3,787,722 $ 3,286,842 Average equity 441,080 397,677 443,454 402,729 Tangible return on assets 1.25% 1.41% 1.10% 1.42% Tangible return on equity 10.70% 11.58% 9.39% 11.62% Efficiency ratio 58.99% 63.46% 60.88% 62.17%
ASSESSMENT OF FINANCIAL CONDITION SECURITIES PORTFOLIO The securities portfolio totaled $4.3 billion at September 30, 2002 compared to $3.8 billion at June 30, 2002 and $3.7 billion at December 31, 2001. Mortgage-backed securities classified as available for sale were $4.0 billion at September 30, 2002, $3.5 billion at June 30, 2002 and $3.3 billion at December 31, 2001. Management's strategy during the third quarter was to sell securities that had limited potential for further appreciation and to replace them with lower-yielding securities with less prepayment risk. This strategy resulted in realized gains of $6.8 million, excluding net gains on sales of securities designated as an economic hedge of the mortgage servicing portfolio. The net growth in mortgage-backed securities since June 30, 2002 was intended to take advantage of a steeper yield curve for such securities and anticipated prepayments during the fourth quarter. Net unrealized gains in the securities portfolio increased from $55.3 million at June 30, 2002 to $71.5 million at September 30, 2002. LOANS The aggregate loan portfolio at September 30, 2002 totaled $6.6 billion compared to $6.3 billion at June 30, 2002. Total loans increased by $228 million or 4%, excluding a $54 million increase in residential mortgage loans held for sale. The increase in loans was due primarily to a $135 million increase in commercial loans. Commercial loan demand accelerated in the third quarter after being flat during the first half of 2002. - --------------------------------------------------------------------------------------------------------------------- TABLE 10 - LOANS (In thousands) Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2002 2002 2002 2001 2001 --------------------------------------------------------------------------------- Commercial: Energy $ 1,006,151 $ 936,381 $ 970,234 $ 987,556 $ 942,381 Manufacturing 507,798 513,019 499,870 467,260 490,839 Wholesale/retail 671,127 655,081 613,612 600,470 585,351 Agricultural 154,221 134,612 156,334 170,861 199,155 Services 1,166,193 1,118,239 1,075,852 1,084,480 1,087,329 Other commercial and industrial 286,972 300,239 339,355 364,123 313,801 - --------------------------------------------------------------------------------------------------------------------- Total commercial 3,792,462 3,657,571 3,655,257 3,674,750 3,618,856 - --------------------------------------------------------------------------------------------------------------------- Commercial real estate: Construction and land development 331,073 320,730 329,335 327,455 330,964 Multifamily 309,173 297,576 301,402 291,687 252,093 Other real estate loans 767,083 744,391 739,646 722,633 767,012 - --------------------------------------------------------------------------------------------------------------------- Total commercial real estate 1,407,329 1,362,697 1,370,383 1,341,775 1,350,069 - --------------------------------------------------------------------------------------------------------------------- Residential mortgage: Secured by 1-4 family residential properties 849,254 795,834 726,228 703,080 753,153 Residential mortgages held for 136,330 82,714 89,439 166,093 94,219 sale - --------------------------------------------------------------------------------------------------------------------- Total residential mortgage 985,584 878,548 815,667 869,173 847,372 - --------------------------------------------------------------------------------------------------------------------- Consumer 409,779 414,571 407,909 409,680 402,117 - --------------------------------------------------------------------------------------------------------------------- Total $ 6,595,154 $ 6,313,387 $ 6,249,216 $ 6,295,378 $ 6,218,414 - ---------------------------------------------------------------------------------------------------------------------
Outstanding loans to the services industry totaled $1.2 billion or 18% of total loans at September 30, 2002. Services included loans of $107 million to the healthcare industry, $214 million to nursing homes and $69 million to the hotel industry. Energy loans represent 15% of the total loan portfolio. This category included loans to oil and gas producers that totaled $819 million, an increase of $60 million during the quarter. Agriculture included $135 million of loans to the cattle industry, an increase of $16 million. Other notable loan concentrations by primary industry of the borrowers are presented in Table 10. Commercial real estate loans totaled $1.4 billion or 21% of total loans at September 30, 2002. Construction and land development loans included $269 million for single-family residential lots and premises. The major components of other commercial real estate loans were office buildings, $306 million and retail facilities, $189 million. Loans secured by office buildings increased $34 million during the quarter while loans secured by retail facilities decreased $11 million. Residential mortgage loans included $315 million of home equity loans, $316 million of mortgage loans held for business relationship and community investment purposes, and $200 million of adjustable rate mortgage loans. The increase in residential mortgage loans during the third quarter included $34 million of loans held for business relationship and community investment purposes and $23 million of adjustable rate mortgages. Consumer loans included $179 million of indirect automobile loans. Substantially all of these loans were purchased from dealers in Oklahoma. Approximately 25% of the indirect automobile loan portfolio was considered sub-prime. While BOK Financial continues to increase geographic diversification through expansion into Texas and New Mexico, geographic concentration subjects the loan portfolio to the general economic conditions in Oklahoma. Loan growth attributed to Oklahoma, excluding mortgage loans held for sale, totaled $207 million or 5% during the third quarter. This included $40 million of commercial loan growth in the Denver loan production office. Table 11 reflects the distribution of the major loan categories among BOK Financial's principal market areas. - --------------------------------------------------------------------------------------------------------------------- TABLE 11 - LOANS BY PRINCIPAL MARKET AREA (In thousands) Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2002 2002 2002 2001 2001 --------------------------------------------------------------------- Oklahoma: Commercial $2,663,752 $ 2,547,218 $ 2,594,237 $2,606,977 $ 2,610,357 Commercial real estate 790,638 752,757 743,728 739,419 741,978 Residential mortgage 750,293 642,080 588,329 642,116 613,565 Consumer 311,877 314,061 312,505 314,060 300,193 --------------------------------------------------------------------- Total Oklahoma $4,516,560 $ 4,256,116 $ 4,238,799 $4,302,572 $ 4,266,093 --------------------------------------------------------------------- Texas: Commercial $ 789,846 $ 773,649 $ 771,167 $ 775,788 $ 760,686 Commercial real estate 391,207 381,068 400,350 380,602 378,364 Residential mortgage 149,983 148,463 138,987 136,181 137,482 Consumer 85,651 88,783 83,985 85,347 91,513 --------------------------------------------------------------------- Total Texas $1,416,687 $ 1,391,963 $ 1,394,489 $1,377,918 $ 1,368,045 --------------------------------------------------------------------- Albuquerque: Commercial $ 276,222 $ 270,278 $ 222,960 $ 219,257 $ 195,054 Commercial real estate 141,298 142,829 139,044 136,425 146,512 Residential mortgage 80,298 82,926 83,310 85,309 90,864 Consumer 10,191 9,711 9,245 8,200 8,109 --------------------------------------------------------------------- Total Albuquerque $ 508,009 $ 505,744 $ 454,559 $ 449,191 $ 440,539 --------------------------------------------------------------------- Northwest Arkansas: Commercial $ 62,642 $ 66,426 $ 66,893 $ 72,728 $ 52,759 Commercial real estate 84,186 86,043 87,260 85,329 83,215 Residential mortgage 5,010 5,079 5,042 5,567 5,461 Consumer 2,060 2,016 2,174 2,073 2,302 --------------------------------------------------------------------- Total Northwest Arkansas $ 153,898 $ 159,564 $ 161,369 $ 165,697 $ 143,737 ---------------------------------------------------------------------
OTHER DERIVATIVES WITH CREDIT RISK During 2001, BOK Financial developed a program that permits its energy-producing customers to hedge against price fluctuations through energy option and swap contracts. These contracts are executed between BOk and its customers. Offsetting contracts are executed between BOk and selected energy dealers to minimize the risk of changes in energy prices. The dealer contracts are identical to the customer contracts, except for a fixed pricing spread paid to BOk as compensation for administrative costs, credit risk and profit. The fair values of energy derivative contracts included in other assets and other liabilities each totaled $40 million at September 30, 2002. The primary dealer counterparties on asset contracts were BankOne, $1.8 million; Coral Energy, $4.7 million; JP Morgan Chase, $5.6 million; Morgan Stanley, $1.7 million. A deterioration of the credit standing of one or more of the counterparties may result in BOK Financial recognizing a loss as the fair value of the affected contracts may no longer move in tandem with the offsetting contract. SUMMARY OF LOAN LOSS EXPERIENCE The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $111 million at September 30, 2002, compared to $108 million at June 30, 2002 and $96 million at September 30, 2001. This represented 1.72%, 1.73% and 1.57% of total loans, excluding loans held for sale, at September 30, 2002, June 30, 2002 and September 30, 2001, respectively. Losses on loans held for sale, principally residential mortgage loans, are charged to earnings through adjustments in carrying value to the lower of cost or market value in accordance with accounting standards applicable to mortgage banking. Consumer loans charged off increased to $3.2 million in the third quarter of 2002 compared to $2.3 million in the preceding quarter and $1.6 million in the third quarter of 2001. This reflected increased losses on indirect automobile loans and on a consumer overdraft privilege that was initiated earlier in 2002. Table 12 presents statistical information regarding the reserve for loan losses for the past five quarters. - ------------------------------------------------------------------------------------------------- TABLE 12 - SUMMARY OF LOAN LOSS EXPERIENCE (In thousands) Three Months Ended -------------------------------------------------------------- Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2002 2002 2002 2001 2001 -------------------------------------------------------------- Beginning balance $ 108,084 $ 105,900 $ 101,905 $ 96,051 $ 90,036 Loans charged-off: Commercial 2,873 3,378 3,525 3,803 4,241 Commercial real estate - - 123 62 - Residential mortgage 88 11 94 102 37 Consumer 3,164 2,258 2,514 1,993 1,561 - ------------------------------------------------------------------------------------------------- Total 6,125 5,647 6,256 5,960 5,839 - ------------------------------------------------------------------------------------------------- Recoveries of loans previously charged-off: Commercial 332 169 334 196 285 Commercial real estate 9 45 49 139 5 Residential mortgage 118 6 20 25 7 Consumer 779 777 982 937 534 - ------------------------------------------------------------------------------------------------- Total 1,238 997 1,385 1,297 831 - ------------------------------------------------------------------------------------------------- Net loans charged-off 4,887 4,650 4,871 4,663 5,008 Provision for loan losses 8,029 6,834 8,866 10,517 11,023 - ------------------------------------------------------------------------------------------------- Ending balance $ 111,226 $ 108,084 $ 105,900 $ 101,905 $ 96,051 - ------------------------------------------------------------------------------------------------- Reserve to loans outstanding at period-end (1) 1.72% 1.73% 1.72% 1.66% 1.57% Net loan losses (annualized) to average loans (1) .31 0.30 0.32 0.30 0.33 - ------------------------------------------------------------------------------------------------- (1) Excludes residential mortgage loans held for sale which are carried at the lower of aggregate cost or market value.
The reserve for loan losses is assessed by management based upon an ongoing evaluation of the probable estimated losses inherent in the portfolio, including probable losses on both outstanding loans and unused commitments to provide financing. A consistent, well-documented methodology has been developed that includes reserves assigned to specific criticized loans, general reserves that are based on statistical migration analysis and nonspecific reserves that are based on 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 BOK Financial's subsidiaries to ensure that the methodology is applied consistently. All significant criticized loans are reviewed quarterly. Specific reserves for impairment are determined through evaluation of future cash flow and collateral value in accordance with generally accepted accounting principles and regulatory standards. At September 30, 2002, specific impairment reserves totaled $3.4 million on total impaired loans of $48 million. The adequacy of the general loan loss reserve is determined primarily through an internally developed migration analysis model. The purpose of this model is to determine the probability that each loan in the portfolio has an inherent loss based on historic trends. Management uses an eight-quarter aggregate accumulation of net loan losses as the basis for this model. Greater emphasis is placed on loan losses in more recent periods. This model assigns a general allowance to commercial loans and leases, excluding loans that have a specific impairment reserve, residential mortgage loans and consumer loans. A nonspecific reserve for loan losses is maintained for risks beyond those factors specific to a particular loan or those identified by the migration analysis. These factors include trends in the general economic conditions in BOK Financial's primary lending areas, duration of the business cycle, specific conditions in industries where BOK Financial has a concentration of loans and overall growth in the loan portfolio. Additional factors considered are bank regulatory examination results, error potential in the migration analysis model or the underlying data and other relevant factors. A range of potential losses is determined for each factor identified. At September 30, 2002, the range of potential losses for the more significant factors were: General economic conditions - $4.5 million to $5.5 million Concentration of large loans - $1.2 million to $2.5 million Loan portfolio growth - $1.4 million to $2.8 million Evaluation of the loan loss reserve requires a significant level of assumptions by management including estimation of future cash flows, collateral values, relevance of historic loss trends to the loan portfolio and assessment of current economic conditions on the borrowers' ability to repay. The required loan loss reserve could be materially affected by changes in these assumptions. The loan loss reserve is adequate to absorb losses inherent in the loan portfolio based upon current conditions and information available to management. However, actual losses may differ significantly due to changing conditions or information that is currently not available. NONPERFORMING ASSETS Information regarding nonperforming assets, which totaled $60 million at September 30, 2002, $45 million at June 30, 2002 and $55 million at September 30, 2001, is presented in Table 13. Nonperforming assets included nonaccrual and renegotiated loans and excluded loans 90 days or more past due but still accruing interest. Newly identified nonaccruing loans totaled $22.8 million during the third quarter of 2002, including $14.7 million of loans related to the cattle industry and $4.6 million of loans related to the energy industry. Total nonaccruing loans decreased by $1.0 million from cash payments received and $1.0 million from losses charged against the loan loss reserve. Two loans with a combined outstanding balance of $5.5 million were returned to accruing status based on a satisfactory payment history and improved outlook. - --------------------------------------------------------------------------------------------------------------------- TABLE 13 - NONPERFORMING ASSETS (In thousands) Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2002 2002 2002 2001 2001 ---------------------------------------------------------------------- Nonperforming assets: Nonperforming loans: Nonaccrual loans: Commercial $ 41,093 $ 28,803 $ 33,784 $ 35,075 $ 39,377 Commercial real estate 5,788 4,388 3,360 3,856 4,338 Residential mortgage 6,025 4,486 4,182 4,140 4,060 Consumer 556 605 555 469 333 - --------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 53,462 38,282 41,881 43,540 48,108 Renegotiated loans - - - 27 618 - --------------------------------------------------------------------------------------------------------------------- Total nonperforming loans 53,462 38,282 41,881 43,567 48,726 Other nonperforming assets 6,427 6,630 7,655 7,141 6,522 - --------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 59,889 $ 44,912 $ 49,536 $ 50,708 $ 55,248 - --------------------------------------------------------------------------------------------------------------------- Ratios: Reserve for loan losses to nonperforming loans 208.05% 282.34% 252.86% 233.90% 197.12% Nonperforming loans to period-end loans (2) 0.83 0.72 0.68 0.71 0.80 - --------------------------------------------------------------------------------------------------------------------- Loans past due (90 days) (1) $ 10,274 $ 12,215 $ 13,023 $ 8,108 $ 16,143 - --------------------------------------------------------------------------------------------------------------------- (1) Includes residential mortgages guaranteed by agencies of the U.S. Government $ 6,640 $ 6,764 $ 6,314 $ 6,222 $ 6,200 Excludes residential mortgages guaranteed by agencies of the U.S. Government in foreclosure. 4,931 4,853 4,044 4,396 4,925 (2) Excludes residential mortgage loans held for sale - ---------------------------------------------------------------------------------------------------------------------
The loan review process also identifies loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrower or the value of the collateral. These loans are not included in nonperforming assets 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. However, known information causes management to have concerns as to the borrower's ability to comply with the current repayment terms. Potential problem loans totaled $71 million at September 30, 2002 compared to $68 million at June 30, 2002 and $38 million at September 30, 2001. At September 30, 2002, the composition of potential problem loans by primary industry categories included management of recreational properties, $16 million; manufacturing, $12 million; healthcare, $11 million and energy, $11 million. CAPITAL Shareholders' equity totaled $980 million at September 30, 2002 compared to $924 million at June 30, 2002. The increase in equity was due primarily to net income of $44 million and a $10 million increase in unrealized gains on available for sale securities. BOK Financial and its subsidiary banks are subject to various capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and additional discretionary actions by regulators that could have a material effect on operations. These capital requirements include quantitative measures of assets, liabilities and certain off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulatory agencies about components, risk weightings and other factors. Management has developed and the Board of Directors has approved an internal capital policy that is more restrictive than the regulatory capital standards. At September 30, 2002, BOK Financial and each of its subsidiary banks exceeded the regulatory definition of well capitalized. - -------------------------------------------------------------------------------- TABLE 14 - CAPITAL RATIOS Sept. 30 June 30, March 31, Dec. 31, Sept. 30, 2002 2002 2002 2001 2001 ----------------------------------------------------- Average shareholders' equity to average assets 8.38% 8.01% 7.93% 7.91% 7.86% Risk-based capital: Tier 1 capital 9.03 8.69 8.49 8.08 7.83 Total capital 12.43 12.11 11.99 11.56 11.35 Leverage 6.99 6.78 6.63 6.38 6.27 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 trading and held for purposes other than trading. The effects of other changes, such as foreign exchange rates, commodity prices or equity prices do not pose significant market risk to BOK Financial. 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 200 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 performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions, on net interest revenue, net income and economic value of equity. A simulation model is used to estimate the effect of changes in interest rates over the next twelve months based on three interest rate scenarios. These are a "most likely" rate scenario and two "shock test" scenarios, first assuming a sustained parallel 200 basis point increase and second assuming a sustained parallel 100 basis point decrease in interest rates. Management historically evaluated interest rate sensitivity for a sustained 200 basis point decrease in rates. However, these results are not meaningful in the current low-rate environment. An independent source is used to determine the most likely interest rate scenario. BOK Financial's primary interest rate exposures that can affect the simulation model are included the Federal Reserve Bank's discount rate, which affects short-term borrowings, and the prime lending rate and the London Interbank Offering Rate, which are the basis for much of the variable-rate loan pricing. Additionally, mortgage rates directly affect the prepayment speeds for mortgage-backed securities and mortgage servicing rights. Derivative financial instruments and other financial instruments used for purposes other than trading are included in this simulation. The model incorporates assumptions regarding the effects of changes in interest rates and account balances on indeterminable maturity deposits based on a combination of historical analysis and expected behavior. The impact of planned growth and new business activities is factored into the simulation model. The effects of changes in interest rates on the value of mortgage servicing rights are excluded from Table 15 due to the extreme volatility over such a large rate range. The effects of interest rate changes on the value of mortgage servicing rights and securities identified as economic hedges are shown in Table 16. Table 15 - INTEREST RATE SENSITIVITY (Dollars in Thousands) Increase Decrease -------------------------- ---------------------------------------------- 200 bp 100 bp 200 bp Most Likely ------------------------ ------------------------ -------------------- 2002 2001 2002 2001 2002 2001 ------------- ---------- ----------- ------------ ---------- --------- Anticipated impact over the next twelve months: Net interest revenue $10,380 $ 6,001 $ (4,928) $ (9,525) $3,769 $ 3,124 2.8% 1.7% (1.3)% (2.7)% 1.0% 0.9% - -------------------------------- --------------------------- ------------------------ --------------------- Net income $ 6,487 $ 3,751 $ (3,080) $ (5,953) $2,355 $ 1,953 4.7% 2.9% (2.3)% (4.6)% 1.7% 1.5% - -------------------------------- --------------------------- ------------------------ --------------------- Economic value of equity $12,919 $(27,563) $(40,374) $(118,993) $49,822 $10,258 1.0% (2.1)% (3.0)% (9.0)% 3.7% 0.8% - -------------------------------- --------------------------- ------------------------ ---------------------
BOK Financial has market risk associated with its portfolio of mortgage servicing rights. The primary risk is due to loan prepayments. Generally, the value of mortgage servicing rights declines when interest rates fall due to an increase in loan prepayments. The decrease in value of the servicing rights is recorded as an impairment allowance. Both the amortized cost and the fair value of the servicing rights are stratified by interest rate and loan type. An impairment provision is charged against earnings whenever the amortized cost exceeds the fair value of each stratum. Generally, the value of mortgage servicing rights increases when interest rates rise due to a decrease in loan prepayments. This increase in value can only be recognized up to the amortized cost. Any increase in fair value beyond amortized cost is not recognized. There is no active market for trading servicing rights. Fair value is determined by using projected prepayment speeds and assumed servicing costs, earnings on escrow deposits, ancillary income and discount rates. Management uses independent sources for many of these assumptions. However, actual fair values may differ significantly from computed fair values due to assumption changes or modeling error. BOK Financial designates a portion of its securities portfolio as an economic hedge against the risk of loss on its mortgage servicing rights. Mortgage-backed and principal only securities are acquired and held as available for sale when prepayment risk exceeds certain levels. The fair value of these securities is expected to vary inversely to the fair value of the mortgage servicing rights. Management may sell these securities and realize gains or losses when necessary to offset losses or gains on the mortgage servicing rights. However, this strategy presents certain risks. A well-developed market determines the fair value for securities. As previously noted, there is no comparable market for mortgage servicing rights. Therefore, the computed change in value of the servicing rights for a specified change in interest rates may not correlate to the change in value of the securities. At September 30, 2002, securities with a fair value of $175 million and an unrealized gain of $6.0 million were held for the hedge program. This unrealized gain, net of income taxes, is included in shareholders' equity as part of other comprehensive income. The interest rate sensitivity of the mortgage servicing rights and securities held as a hedge is modeled over a range of +/- 50 basis points. At September 30, 2002, the pre-tax results of this modeling on reported earnings were: TABLE 16 - Interest Rate Sensitivity - Mortgage Servicing (Dollars in Thousands) 50 bp increase 50 bp decrease Anticipated change in: -------------- --------------- Mortgage servicing rights $ 21,681 $(10,491) Hedging securities ( 341)(1) 6,283 ----------------- ---------------- Net $ 21,340 $ (4,208) ----------------- ---------------- (1) Anticipated decrease in value of hedging instruments totals $6.3 million, which would reduce the existing unrealized gain before any losses would be realized. 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. BOK Financial uses interest rate swaps, a derivative product, in managing its interest rate sensitivity. These products are generally used to more closely match interest paid on certain fixed rate loans with funding sources and long-term certificates of deposits with earning assets. Credit risk from these swaps is closely monitored and counterparties to these contracts are assigned swap limits based on a credit analysis of the counterparties. Derivative products are not used for speculative purposes. BOK Financial recorded net unrealized gains on interest rate swaps of $7.2 million during the third quarter of 2002. These gains are primarily attributable to the interest rate swaps associated with fixed-rate certificates of deposit. These swaps increased in value as interest rates declined. Concurrently, the fixed-rate certificates of deposit decreased in value. Because management did not designate these interest rate swaps as hedges for accounting purposes, the decreased value of the certificates of deposit is not currently recognized. These gains may be reversed in future periods either due to rising interest rates or through periodic settlements of the interest rate swaps over their remaining lives. - --------------------------------------------------------------------------------------------------- TABLE 17 - INTEREST RATE SWAPS (In Thousands) Notional Pay Receive Positive Negative Amount Rate Rate Fair Value Fair Value -------------------------------------------------------------------------------------- Expiration: 2004 $71,945 1.79%(1) - 4.22% 1.81%(1) - 7.36% $ 4,532 $ (437) 2006 220,739 1.79%(1) - 5.85% 1.81%(1) - 5.85% 5,368 (1,657) 2007 275,000 1.79%(1) 4.09% - 4.51% 5,488 - 2009 5,466 1.81%(1) - 4.75% 1.81%(1) - 4.75% 357 (357) 2011 45,033 5.21% - 5.51% 1.81% - (3,642) - ---------------------------------------------------------------------------------------------------- $ 15,745 $ (6,093) ----------------------------- (1) Rates are variable based on LIBOR and reset monthly, quarterly or semiannually.
TRADING ACTIVITIES BOK Financial enters into trading activities both as an intermediary for customers and for its own account. As an intermediary, BOK Financial will take positions in securities, generally mortgage-backed securities, government agency securities, and municipal bonds. These securities are purchased for resale to customers, which include individuals, corporations, foundations and financial institutions. BOK Financial will also take trading positions in U.S. Treasury securities, mortgage-backed securities, municipal bonds and financial futures for its own account. These positions are taken with the objective of generating trading profits. Both of these activities involve interest rate risk. A variety of methods are used to manage the interest rate risk of trading activities. These methods include daily marking of all positions to market value, independent verification of inventory pricing, and position limits for each trading activity. Hedges in either the futures or cash markets may be used to reduce the risk associated with some trading programs. The Risk Management Department monitors trading activity daily and reports to senior management and the Risk Oversight and Audit Committee of the BOK Financial Board of Directors any exceptions to trading position limits and risk management policy exceptions. BOK Financial uses a Value at Risk ("VAR") methodology to measure the market risk inherent in its trading activities. VAR is calculated based upon historical simulations over the past five years using a variance / covariance matrix of interest rate changes. It represents an amount of market loss that is likely to be exceeded only one out of every 100 two-week periods. Trading positions are managed within guidelines approved by the Board of Directors. These guidelines limit the nominal aggregate trading positions to $100 million and the VAR to $6.5 million. At September 30, 2002, the nominal aggregate trading positions was $16.9 million and the VAR was $418 thousand. The greatest value at risk during the third quarter of 2002 was $1.1 million. 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 future 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 which BOK Financial has not independently verified. These statements are not guarantees of future performance and involve 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 with 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. REPORT OF MANAGEMENT ON CONSOLIDATED FINANCIAL STATEMENTS Management is responsible for the consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. In management's opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial condition, results of operations and cash flows of BOK Financial and its subsidiaries at the dates and for the periods presented. As of September 30, 2002, an evaluation was performed under the supervision and with the participation of BOK Financial's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of BOK Financial's disclosure controls and procedures. Based on that evaluation, BOK Financial's management, including the CEO and CFO, concluded that BOK Financial's disclosure controls and procedures were effective as of September 30, 2002. There have been no significant changes in BOK Financial's internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2002. The financial information included in this interim report has been prepared by management without audit by independent public accountants and should be read in conjunction with BOK Financial's 2001 Form 10-K filed with the Securities and Exchange Commission which contains audited financial statements. - --------------------------------------------------- -- --------- --- ------------- -- ------------- --- ------------ Unaudited Consolidated Statement of Earnings (In Thousands Except Share Data) Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- -- ------------------------------ 2002 2001 2002 2001 ----------- --- ------------- -- ------------- --- ------------ Interest Revenue Loans $ 95,588 $ 113,936 $ 281,978 $ 355,875 Taxable securities 46,473 44,705 141,191 138,687 Tax-exempt securities 2,103 2,898 7,206 10,270 - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Total securities 48,576 47,603 148,397 148,957 - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Trading securities 209 194 583 835 Funds sold 57 130 199 744 - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Total interest revenue 144,430 161,863 431,157 506,411 - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Interest Expense Deposits 37,057 50,779 112,055 167,221 Other borrowings 12,598 23,687 39,273 91,276 Subordinated debenture 2,725 2,871 8,171 8,159 - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Total interest expense 52,380 77,337 159,499 266,656 - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Net Interest Revenue 92,050 84,526 271,658 239,755 Provision for Loan Losses 8,029 11,023 23,729 27,093 - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Net Interest Revenue After Provision for Loan Losses 84,021 73,503 247,929 212,662 - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Other Operating Revenue Brokerage and trading revenue 5,878 4,938 19,984 15,896 Transaction card revenue 13,654 11,679 39,579 32,992 Trust fees and commissions 9,605 10,211 30,279 30,827 Service charges and fees on deposit accounts 18,395 12,961 48,641 37,543 Mortgage banking revenue, net 12,556 12,499 33,967 35,232 Leasing revenue 790 810 2,504 2,830 Other revenue 5,105 4,341 15,845 14,509 - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Total fees and commissions revenue 65,983 57,439 190,799 169,829 - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Gain on sales of assets 444 11 1,127 539 Gain (loss) on sales of securities, net 34,341 19,746 48,362 34,409 Gain (loss) on derivatives 7,218 (1,105) 5,229 (761) - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Total other operating revenue 107,986 76,091 245,517 204,016 - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Other Operating Expense Personnel 44,963 40,491 133,180 121,260 Business promotion 2,483 2,560 8,569 7,860 Professional fees and services 2,816 2,983 9,456 9,202 Occupancy & equipment 10,578 11,017 31,217 32,127 Data processing & communications 12,138 10,173 33,792 29,527 FDIC and other insurance 468 443 1,390 1,329 Printing, postage and supplies 3,172 3,141 9,247 9,197 Net gains and operating expenses on repossessed assets 108 1,189 811 1,162 Amortization of intangible assets 1,867 5,015 5,636 15,099 Mortgage banking costs 11,635 7,191 27,783 20,749 Provision (recovery) for impairment of mortgage servicing rights 29,042 15,224 47,538 24,412 Other expense 4,425 4,164 12,025 12,037 - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Total other operating expense 123,695 103,591 320,644 283,961 - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Income Before Taxes 68,312 46,003 172,802 132,717 Federal and state income tax 24,183 16,216 61,172 46,783 - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Income before cumulative effect of a change in accounting principle, net of tax 44,129 29,787 111,630 85,934 Transition adjustment of adoption of FAS 133 - - - 236 - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Net Income $ 44,129 $ 29,787 111,630 $86,170 - ----------------------------------------------- ---- ----------- --- ------------- -- ------------- --- ------------ Earnings Per Share: Basic: Before cumulative effect of change in accounting principle $ 0.83 $ 0.56 $ 2.09 $ 1.62 Transition adjustment of adoption of FAS 133 - - - - - ---------------------------------------------- --- ------------- --- ------------- -- ------------- --- ------------ Net Income $ 0.83 $ 0.56 $ 2.09 $ 1.62 - ---------------------------------------------- --- ------------- --- ------------- -- ------------- --- ------------ Diluted: Before cumulative effect of change in accounting principle $ 0.73 $ 0.50 $ 1.85 $ 1.45 Transition adjustment of adoption of FAS 133 - - - - - ---------------------------------------------- --- ------------- --- ------------- -- ------------- --- ------------ Net Income $ 0.73 $ 0.50 $ 1.85 $ 1.45 - ---------------------------------------------- --- ------------- --- ------------- -- ------------- --- ------------ Average Shares Used in Computation: Basic 53,008,737 52,582,819 52,937,235 52,482,061 - -------------------------------------------- -- ----------------- ----------------- ---------------- ---------------- Diluted 60,240,222 59,875,805 60,198,389 59,622,109 - ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
- -------------------------------------------------------------------------------------------------------------------- UNAUDITED CONSOLIDATED BALANCE SHEETS (In Thousands Except Share Data) September 30, December 31, September 30, 2002 2001 2001 -------------------------------------------------- ASSETS Cash and due from banks $ 531,269 $ 643,938 $ 516,675 Funds sold 8,315 3,400 22,100 Trading securities 6,791 10,327 17,753 Securities: Available for sale 3,463,280 2,815,070 2,542,135 Available for sale securities pledged to creditors 657,655 634,479 435,725 Investment (fair value: September 30, 2002 - $199,739; December 31, 2001 -$242,628; September 30, 2001 - $245,368) 195,643 241,113 242,735 - -------------------------------------------------------------------------------------------------------------------- Total securities 4,316,578 3,690,662 3,220,595 - -------------------------------------------------------------------------------------------------------------------- Loans 6,595,154 6,295,378 6,218,414 Less reserve for loan losses (111,226) (101,905) (96,051) - -------------------------------------------------------------------------------------------------------------------- Net loans 6,483,928 6,193,473 6,122,363 - -------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 144,389 141,425 139,356 Accrued revenue receivable 65,935 68,728 70,984 Intangible assets, net 145,940 152,076 157,090 Mortgage servicing rights, net 42,252 98,796 91,338 Real estate and other repossessed assets 6,427 7,141 6,522 Bankers' acceptances 28,365 15,393 25,294 Other assets 125,221 116,243 134,338 - -------------------------------------------------------------------------------------------------------------------- Total assets $ 11,905,410 $ 11,141,602 $ 10,524,408 - -------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Noninterest-bearing demand deposits $ 1,359,893 $ 1,366,690 $ 1,206,858 Interest-bearing deposits: Transaction 2,821,579 2,559,714 2,317,882 Savings 164,188 158,234 157,158 Time 3,128,317 2,821,106 2,994,422 - -------------------------------------------------------------------------------------------------------------------- Total deposits 7,473,977 6,905,744 6,676,320 - -------------------------------------------------------------------------------------------------------------------- Funds purchased and repurchase agreements 1,730,894 1,601,989 1,634,355 Other borrowings 1,098,242 1,220,948 1,021,736 Subordinated debentures 185,640 186,302 186,523 Accrued interest, taxes and expense 78,187 67,014 79,031 Amount due on unsettled security transactions 242,148 231,660 - Bankers' acceptances 28,365 15,393 25,294 Other liabilities 87,945 84,069 80,510 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 10,925,398 10,313,119 9,703,769 - -------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock 25 25 25 Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding September 30, 2002 -53,690,698; December 31, 2001 - 51,737,154; September 30, 2001 - 51,563,050) 3 3 3 Capital surplus 382,489 323,860 317,643 Retained earnings 570,114 511,301 481,544 Treasury stock (shares at cost: September 30, 2002 - 654,217; December 31, 2001 - 541,240; September 30, 2001 - 498,502) (16,362) (12,498) (11,142) Accumulated other comprehensive income (loss) 43,743 5,792 32,566 - -------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 980,012 828,483 820,639 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 11,905,410 $ 11,141,602 $ 10,524,408 - -------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
- -------------------------------------------------------------------------------------------------------------- UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In Thousands) Accumulated Other Preferred Stock Common Stock Comprehensive Capital Retained Treasury Stock ------------------------------------ -------------------- Shares Amount Shares Amount Income(loss) Surplus Earnings Shares Amount Total ---------------------------------------------------------------------------------------------------- Balances at December 31, 2000 250,000 $ 25 49,706 $ 3 $ 3,320 $278,882 $431,390 488 $ (10,044) $703,576 Comprehensive income: Net income - - - - - - 86,170 - - 86,170 Other Comprehensive income, net of tax: Unrealized gains(loss) on securities available for sale (1) - - - - 29,246 - - - - 29,246 ---------- Comprehensive income 115,416 ---------- Exercise of stock - - 441 - - 5,185 - 142 (3,741) 1,444 options Director retainer - - 3 - - 97 - (7) 126 223 shares Preferred stock - - - - - - (1) - - (1) dividend Dividends paid in shares of common stock: Common stock - - 1,396 - - 32,740 (34,890) (103) 2,131 (19) Preferred stock - - 17 - - 739 (1,125) (21) 386 - - --------------------------------------------------------------------------------------------------------------------------- Balance at Sept. 30, 2001 250,000 $ 25 51,563 $ 3 $32,566 $317,643 $481,544 499 $(11,142) $820,639 - --------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2001 250,000 $ 25 51,737 $ 3 $ 5,792 $ 323,860 $511,301 541 $(12,498) $828,483 Comprehensive income: Net income - - - - - - 111,630 - - 111,630 Other Comprehensive income, net of tax: Unrealized gains(loss) on securities available for sale(1) - - - - 37,951 - - - - 37,951 ---------- Comprehensive income 149,581 ---------- Exercise of stock - - 369 - - 5,057 - 96 (3,284) 1,773 options Director retainer - - 6 - - 203 - - - 203 shares Dividends paid in shares of common stock: Common stock - - 1,542 - - 52,244 (51,692) 17 (580) (28) Preferred stock - - 37 - - 1,125 (1,125) - - - - --------------------------------------------------------------------------------------------------------------------------- Balance at Sept. 30, 2002 250,000 $ 25 53,691 $ 3 $43,743 $ 382,489 $ 570,114 654 $(16,362) $980,012 - ---------------------------------------------------------------------------------------------------------------------------
(1) Sept. 30, 2002 Sept. 30, 2001 -------------- -------------- Change in other comprehensive income: Unrealized gains (losses) on available for sale securities $ 107,110 $ 79,403 Tax (expense) benefit on unrealized gains (losses) on available for sale securities (37,917) (27,791) Reclassification adjustment for (gains) losses realized included in net income (48,362) (34,409) Reclassification adjustment for tax expense (benefit) on realized (gains) 17,120 12,043 losses --------------------------------- Net unrealized gains (losses) on securities $ 37,951 $ 29,246 --------------------------------- - --------------------------------------------------------------------------------------------------------------- UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Nine Months Ended September 30, --------------------------------- 2002 2001 --------------------------------- Cash Flow From Operating Activities: Net income $ 111,630 $ 86,170 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 23,729 27,093 Provision (recovery) for mortgage servicing rights 47,538 24,412 Transition adjustment of adoption of FAS 133 - (236) Unrealized (gains) losses from derivatives (4,688) 8,782 Depreciation and amortization 50,028 49,994 Net amortization of financial instrument discounts and premiums 4,024 (2,974) Net gain on sale of assets (64,044) (48,522) Mortgage loans originated for resale (657,926) (743,638) Proceeds from sale of mortgage loans held for resale 711,329 711,631 Change in trading securities 3,536 22,112 Change in accrued revenue receivable 2,793 3,997 Change in other assets (35,824) (5,453) Change in accrued interest, taxes and expense 4,932 (8,146) Change in other liabilities 16,292 (1,344) - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 213,349 123,878 - --------------------------------------------------------------------------------------------------------------- Cash Flow From Investing Activities: Proceeds from maturities of investment securities 74,762 49,852 Proceeds from maturities of available for sale securities 1,080,274 893,667 Purchases of investment securities (29,445) (73,456) Purchases of available for sale securities (7,267,804) (5,414,885) Proceeds from sales of available for sale securities 5,621,370 4,618,978 Proceeds from sales of investment securities - 14,040 Loans originated or acquired net of principal collected (407,936) (533,097) Proceeds from disposition of assets 57,940 66,067 Purchases of assets (37,763) (57,669) Cash and cash equivalents of branches & subsidiaries acquired and sold, net - (73,475) - --------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (908,602) (509,978) - --------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net change in demand deposits, transaction deposits, money market deposits, and savings accounts 261,022 (56,706) Net change in certificates of deposit 307,842 319,391 Net change in other borrowings 6,199 (120,186) Change in amount due on unsettled security transactions 10,488 - Issuance of subordinated debenture - 30,000 Issuance of preferred, common and treasury stock, net 1,976 1,667 Payment of dividends (28) (20) - --------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 587,499 174,146 - --------------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents (107,754) (211,954) Cash and cash equivalents at beginning of period 647,338 750,729 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 539,584 $ 538,775 - --------------------------------------------------------------------------------------------------------------- Cash paid for interest $ 165,958 $ 269,298 - --------------------------------------------------------------------------------------------------------------- Cash paid for taxes $ 38,898 $ 24,540 - --------------------------------------------------------------------------------------------------------------- Net loans transferred to repossessed real estate and other assets $ 2,761 $ 6,398 - --------------------------------------------------------------------------------------------------------------- Payment of dividends in common stock $ 52,789 $ 35,996 - ---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ACCOUNTING POLICIES Basis of Presentation The accounting and reporting policies of BOK Financial Corporation ("BOK Financial") conform to accounting principles generally accepted in the United States and generally accepted practices within the banking industry. The Consolidated Financial Statements of BOK Financial include the accounts of BOK Financial and its subsidiaries, primarily Bank of Oklahoma, N.A. ("BOk"), Bank of Arkansas N.A., Bank of Texas, N.A., Bank of Albuquerque, N.A., and BOSC, Inc. Certain prior period balances have been reclassified to conform with the current period presentation. Effect of Implementation of Recent Financial Accounting Standards Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (FAS 142) was implemented January 1, 2002. Under these new rules, intangible assets with indefinite lives such as goodwill are no longer amortized over their useful lives. FAS 142 did not apply to goodwill from certain business combinations, such as branch acquisitions. On October 3, 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 147, "Acquisitions of Certain Financial Institutions" (FAS 147). FAS 147 was implemented and applied retroactively to January 1, 2002, therefore restating the previously reported quarters of 2002. The below table discloses the impact on previously reported net income and earnings per share after application of FAS 147. Three months ended ------------------------------ March 31, 2002 June 30, 2002 -------------- ------------- Net income previously reported $ 32,416 $ 34,054 Restated net income 32,932 34,569 Diluted earnings per share as previously reported $ 0.54 $ 0.57 Restated diluted earnings per share 0.55 0.57 FAS 142 and FAS 147 are not applied retroactively to prior years, therefore we have provided the following proforma information on net income and fully diluted earnings per share in 2001 for comparability purposes. Three months ended ------------------------------------------------------------------ March 31, 2001 June 30, 2001 Sept. 30, 2001 Dec. 31, 2001 -------------- ------------- -------------- ------------- Net income previously reported $ 27,402 $ 28,981 $ 29,787 $ 30,132 Proforma net income 29,634 31,202 31,450 31,795 Diluted earnings per share as previously reported $ 0.46 $ 0.49 $ 0.50 $ 0.50 Proforma diluted earnings per share 0.50 0.52 0.53 0.53
(2) MORTGAGE BANKING ACTIVITIES At September 30, 2002, BOk owned the rights to service 81,162 mortgage loans with outstanding principal balances of $6.1 billion, including $324 million serviced for BOk. The weighted average interest rate and remaining term was 7.17% and 266 months, respectively. Activity in capitalized mortgage servicing rights and related valuation allowance during the nine months ending September 30, 2002 is as follows (in thousands): Capitalized Mortgage Servicing Rights ----------------------------------------------------------------------------------------- Valuation Hedging Purchased Originated Total Allowance (Gain)/Loss Net ---------------- ------------ --------------- -------------- ---------------- ----------- Balance at December 31, 2001 $ 55,056 $ 53,611 $ 108,667 $ (18,451) $ 8,580 $ 98,796 Additions, net (157) 14,235 14,078 - - 14,078 Write-off - (7,435) (7,435) 7,435 - - Amortization expense (11,117) (10,898) (22,015) - (1,069) (23,084) Provision for impairment - - - (47,538) - (47,538) - ------------------------------- ---------- -- ---------- -- ---------- -- -------------- -- ---------- -- ----------- Balance at Sept. 30, 2002 $ 43,782 $ 49,513 $ 93,295 $ (58,554) $ 7,511 $ 42,252 - ------------------------------- ---------- -- ---------- -- ---------- -- -------------- -- ---------- -- ----------- Estimated fair value of mortgage servicing rights(1)$ 21,601 $ 21,881 $ 43,482 - - $ 43,482 - ------------------------------- ---------- -- ---------- -- ---------- -- -------------- -- ---------- -- ----------- (1) Excludes approximately $2 million of loan servicing rights on mortgage loans originated prior to the adoption of FAS 122.
Stratification of the mortgage loan servicing portfolio, outstanding principal of loans serviced, and related hedging information by interest rate at September 30, 2002 follows (in thousands): < 6.50% 6.50% - 7.49% 7.50% - 8.49% => 8.50% Total ---------------- --------------- ---------------- ----------- ------------- Cost less accumulated amortization $ 14,934 $ 57,563 $ 19,601 $ 1,197 $ 93,295 Deferred hedge losses - 6,988 523 - 7,511 - ----------------------------------- ---------------- --------------- ---------------- ----------- ------------- Adjusted cost $ 14,934 $ 64,551 $ 20,124 $ 1,197 $ 100,806 - ----------------------------------- ---------------- --------------- ---------------- ----------- ------------- Fair value $ 9,111 $ 24,999 $ 7,806 $ 1,566 $ 43,482 - ----------------------------------- ---------------- --------------- ---------------- ----------- ------------- Impairment $ 6,236 $ 39,552 $ 12,429 $ 337 $ 58,554 - ----------------------------------- ---------------- --------------- ---------------- ----------- ------------- Outstanding principal of loans serviced (1) $ 922,500 $ 3,389,900 $ 1,062,900 $ 148,900 $ 5,524,200 - ----------------------------------- ---------------- --------------- ---------------- ----------- ------------- (1) Excludes outstanding principal of $248 million for loans serviced for which there is no capitalized mortgage servicing rights.
(3) DISPOSAL OF AVAILABLE FOR SALE SECURITIES Sales of available for sale securities resulted in gains and losses as follows (in thousands): Nine Months Ended Sept. 30, ---------------------------------- 2002 2001 -------------- --------------- Proceeds $ 5,621,370 $ 4,618,978 Gross realized gains 73,253 40,985 Gross realized losses 24,891 6,576 Related federal and state income tax expense (benefit) 17,120 12,043 (4) STOCKHOLDERS' EQUITY On October 25, 2002 BOK Financial acquired Bank of Tanglewood, N.A. for 2,003,352 shares of common stock valued at approximately $64.5 million. Additionally, BOK Financial agreed to provide benchmark price protection rights for 50% of the common shares issued in the transaction. These rights are non-transerable. One-fifth of the rights must be exercised within each defined period over teh next five years. The rights are non-cumulative. Under the benchmark price protection, BOK Financial will compensate shareholders for the difference between actual price and certain guaranteed prices of BOK Financial shares sold in a 60 day period after each anniversary date. The guaranteed prices range from $34.81 per share at the first anniversary date to $45.12 per share at the fifth anniversary date. This compensation may be paid in cash or in additional shares of common stock determined at BOK Financial's sole discretion. In no case will BOK Financial be required to issue more than 10 million common shares. The value of these benchmark price protection rights was determined to be $3.2 million at the date of acquisition, based on the Black-Scholes option-pricing model, bringing the total purchase price for Bank of Tanglewood to $67.7 million. (5) EARNINGS PER SHARE The following table presents the computation of basic and diluted earnings per share (dollars in thousands except share data): Three Months Ended Nine Months Ended ----------------------------------------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2002 2001 (2) 2002 2001 (2) ----------------------------------------------------- Numerator: Net income $ 44,129 $ 29,787 $ 111,630 $ 86,170 Preferred stock dividends 375 375 1,125 1,125 - --------------------------------------------------------------------------------------------------------------- Numerator for basic earnings per share - income available to common stockholders 43,754 29,412 110,505 85,045 - --------------------------------------------------------------------------------------------------------------- Effect of dilutive securities: Preferred stock dividends 375 375 1,125 1,125 - --------------------------------------------------------------------------------------------------------------- Numerator for diluted earnings per share - income available to common stockholders after assumed conversion $ 44,129 $ 29,787 $ 111,630 $ 86,170 - --------------------------------------------------------------------------------------------------------------- Denominator: Denominator for basic earnings per share -weighted average shares 53,008,737 52,582,819 52,937,235 52,482,061 Effect of dilutive securities: Employee stock options (1) 707,624 769,125 737,293 616,187 Convertible preferred stock 6,523,861 6,523,861 6,523,861 6,523,861 - --------------------------------------------------------------------------------------------------------------- Dilutive potential common shares 7,231,485 7,292,986 7,261,154 7,140,048 - --------------------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 60,240,222 59,875,805 60,198,389 59,622,109 - --------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 0.83 $ 0.56 $ 2.09 $ 1.62 - --------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 0.73 $ 0.50 $ 1.85 $ 1.45 - --------------------------------------------------------------------------------------------------------------- (1) Current market price was greater than exercise price on all employee stock options (2) Restated for 3% dividend paid in common shares in May 2002.
(6) REPORTABLE SEGMENTS Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2002 is as follows (in thousands): Net Other Other Interest Operating Operating Net Average Revenue Revenue(1) Expense Income Assets --------- ------------- ----------- ------------ -------------- Total reportable lines of business $ 226,334 $ 141,753 $ 272,396 $ 66,763 $ 11,291,574 Total non-reportable lines of 452 51,538 40,763 18,259 45,097 business Unallocated items: Tax-equivalent adjustment 4,715 - - 4,715 - Funds management 53,815 (1,450) 8,556 36,256 546,705 Eliminations and all others, net (13,658) 85 (1,071) (14,363) (754,230) --------- ------------- ----------- ------------ -------------- BOK Financial consolidated $ 271,658 $ 191,926 $ 320,644 $ 111,630 $ 11,129,146 ========= ============= =========== ============ ============== (1) Excludes securities and derivatives gains/losses.
Reportable segments reconciliation to the Consolidated Financial Statements for the nine months ended September 30, 2001 is as follows (in thousands): Net Other Other Interest Operating Operating Net Average Revenue Revenue(1) Expense Income Assets ---------- ------------ ----------- ------------- ------------- Total reportable lines of business $ 244,066 $ 126,464 $ 241,078 $ 84,896 $ 10,413,214 Total non-reportable lines of 491 44,089 32,343 18,587 29,108 business Unallocated items: Tax-equivalent adjustment 6,243 - - 6,243 - Funds management 6,628 (602) 5,703 (3,424) 245,113 Eliminations and all others, net (17,673) 417 4,837 (20,132) (582,960) ---------- ------------ ----------- ------------- ------------- BOK Financial consolidated $ 239,755 $ 170,368 $ 283,961 $ 86,170 $ 10,104,475 ========== ============ =========== ============= ============= (1) Excludes securities and derivatives gains/losses.
(7) CONTINGENT LIABILITIES In the ordinary course of business, BOK Financial and its subsidiaries are subject to legal actions and complaints. Management believes, based upon the opinion of counsel, that the actions and liability or loss, if any, resulting from the final outcomes of the proceedings, will not be material in the aggregate. - ----------------------------------------------------------------------------------------------------------------------------------- NINE MONTH FINANCIAL SUMMARY - UNAUDITED Consolidated Daily Average Balances, Average Yields and Rates (In Thousands Except Share Data) For Nine months ended ------------------------------------------------------------------------------------ September 30, 2002 September 30, 2001 ----------------------------------------- ----------------------------------- Average Revenue/ Yield Average Revenue/ Yield Balance Expense(1) /Rate Balance Expense(1) /Rate ------------------------------------------------------------------------------------ Assets Taxable securities $ 3,720,835 $ 141,191 5.07% $ 2,926,690 $ 138,687 6.34% Tax-exempt securities 213,192 11,383 7.14 290,343 15,661 7.21 - ------------------------------------------------------------------------------------------------------------------------------ Total securities 3,934,027 152,574 5.19 3,217,033 154,348 6.41 - ------------------------------------------------------------------------------------------------------------------------------ Trading securities 16,095 663 5.51 17,155 955 7.44 Funds sold 13,047 199 2.04 19,787 744 5.03 Loans(2) 6,280,195 282,436 6.01 5,917,006 356,607 8.06 Less reserve for loan losses 108,393 89,983 - ------------------------------------------------------------------------------------------------------------------------------ Loans, net of reserve 6,171,802 282,436 6.12 5,827,023 356,607 8.18 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets(2) 10,134,971 435,872 5.75 9,080,998 512,654 7.55 - ------------------------------------------------------------------------------------------------------------------------------ Cash and other assets 994,175 1,023,477 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 11,129,146 $ 10,104,475 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities And Shareholders' Equity Transaction deposits $ 2,734,492 29,624 1.45% $ 2,212,120 39,960 2.42% Savings deposits 163,528 1,486 1.21 153,887 1,792 1.56 Other time deposits 2,993,374 80,945 3.62 3,000,745 125,469 5.59 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 5,891,394 112,055 2.54 5,366,752 167,221 4.17 - ------------------------------------------------------------------------------------------------------------------------------ Federal funds purchased and repurchase agreements 1,557,479 19,747 1.70 1,635,891 55,545 4.54 Other borrowings 1,049,990 19,526 2.49 936,527 35,731 5.10 Subordinated debenture 185,967 8,171 5.87 178,122 8,159 6.12 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing 8,684,830 159,499 2.46 8,117,292 266,656 4.39 liabilities(2) - ------------------------------------------------------------------------------------------------------------------------------ Demand deposits 1,143,752 1,086,938 Other liabilities 403,762 140,421 Shareholders' equity 896,802 759,824 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' $ 11,129,146 $ 10,104,475 equity - ------------------------------------------------------------------------------------------------------------------------------ Tax-Equivalent Net Interest Revenue(1) 276,373 3.29% 245,998 3.16% Tax-Equivalent Net Interest Revenue (1)(3) To Earning Assets 3.65 3.62 Less tax-equivalent adjustment (1) 4,715 6,243 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Revenue 271,658 239,755 Provision for loan losses 23,729 27,093 Other operating revenue (3) 245,517 204,380 Other operating expense 320,644 283,961 - ------------------------------------------------------------------------------------------------------------------------------ Income Before Taxes 172,802 133,081 Federal and state income tax (3) 61,172 46,911 - ------------------------------------------------------------------------------------------------------------------------------ Net Income $ 111,630 $ 86,170 - ------------------------------------------------------------------------------------------------------------------------------ Earnings Per Share: Net Income Basic $ 2.09 $ 1.62 - ------------------------------------------------------------------------------------------------------------------------------ Diluted $ 1.85 $ 1.45 - ------------------------------------------------------------------------------------------------------------------------------
(1) Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments shown are forcomparative purposes. (2) The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned income. (3) Includes cumulative effect of transition adjustment in adopting FAS 133 in first quarter 2001. (3) Yield/Rate excludes $1,468 million of non-recurring collection of foregone interest in June 30, 1998. - ------------------------------------------------------------------------------------------------------------------------------ QUARTERLY FINANCIAL SUMMARY - UNAUDITED Consolidated Daily Average Balances, Average Yields and Rates (In Thousands Except Share Data) For Three months ended ------------------------------------------------------------------------------------- September 30, 2002 June 30, 2002 ------------------------------------------ ------------------------------------- Average Revenue/ Yield Average Revenue/ Yield Balance Expense(1) /Rate Balance Expense(1) /Rate ------------------------------------------------------------------------------------- Assets Taxable securities $ 3,794,732 46,473 4.86% $ 3,696,603 $ 46,564 5.05% Tax-exempt securities 193,645 3,335 6.83 218,747 3,948 7.24 - ------------------------------------------------------------------------------------------------------------------------------ Total securities 3,988,377 49,808 4.95 3,915,350 50,512 5.17 - ------------------------------------------------------------------------------------------------------------------------------ Trading securities 13,341 221 6.57 19,989 238 4.78 Funds sold 11,331 57 2.00 17,148 92 2.15 Loans(2) 6,444,933 95,731 5.89 6,225,134 93,787 6.04 Less reserve for loan losses 110,590 109,366 - ------------------------------------------------------------------------------------------------------------------------------ Loans, net of reserve 6,334,343 95,731 6.00 6,115,768 93,787 6.15 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets 10,347,392 145,817 5.59 10,068,255 144,629 5.76 - ------------------------------------------------------------------------------------------------------------------------------ Cash and other assets 981,246 1,005,122 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 11,328,638 $ 11,073,377 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities And Shareholders' Equity Transaction deposits $ 2,795,449 9,882 1.40% $ 2,740,454 9,841 1.44% Savings deposits 164,952 502 1.21 165,496 503 1.22 Other time deposits 3,090,272 26,673 3.42 2,969,488 27,529 3.72 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 6,050,673 37,057 2.43 5,875,438 37,873 2.59 - ------------------------------------------------------------------------------------------------------------------------------ Federal funds purchased and repurchase agreements 1,615,075 6,635 1.63 1,485,816 6,197 1.67 Other borrowings 999,140 5,963 2.37 1,032,685 6,637 2.58 Subordinated debenture 185,748 2,725 5.82 185,968 2,724 5.88 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 8,850,636 52,380 2.35 8,579,907 53,431 2.50 - ------------------------------------------------------------------------------------------------------------------------------ Demand deposits 1,188,441 1,129,412 Other liabilities 340,264 476,886 Shareholders' equity 949,297 887,172 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' $ 11,328,638 $ 11,073,377 Equity - ------------------------------------------------------------------------------------------------------------------------------ Tax-Equivalent Net Interest Revenue (1) 93,437 3.24% 91,198 3.26% Tax-Equivalent Net Interest Revenue (1) To Earning Assets 3.58 3.63 Less tax-equivalent adjustment (1) 1,387 1,632 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Revenue 92,050 89,566 Provision for loan losses 8,029 6,834 Other operating revenue (3) 107,986 84,579 Other operating expense 123,695 113,798 - ------------------------------------------------------------------------------------------------------------------------------ Income Before Taxes 68,312 53,513 Federal and state income tax (3) 24,183 18,944 - ------------------------------------------------------------------------------------------------------------------------------ Net Income $ 44,129 $ 34,569 - ------------------------------------------------------------------------------------------------------------------------------ Earnings Per Share: Net Income Basic $ 0.83 $ 0.65 - ------------------------------------------------------------------------------------------------------------------------------ Diluted $ 0.73 $ 0.57 - ------------------------------------------------------------------------------------------------------------------------------
(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 include loans on which the accrual of interest has been discontinued and are stated net of unearned income. (3) Includes cumulative effect of transition adjustment in adopting FAS 133 in first quarter 2001. (3) Yield/Rate excludes $1,468 million of non-recurring collection of foregone interest in June 30, 1998. - ------------------------------------------------------------------------------------------------------------------------- For Three months ended - ------------------------------------------------------------------------------------------------------------------------- March 31, 2002 December 31, 2001 September 30, 2001 - ------------------------------------------------------------------------------------------------------------------------- Average Revenue/ Yield Average Revenue/ Yield Average Revenue/ Yield Balance Expense(1) /Rate Balance Expense(1) /Rate Balance Expense(1) /Rate - ------------------------------------------------------------------------------------------------------------------------- $ 3,442,504 $ 48,153 5.67% $ 3,177,731 $ 45,777 5.72% $ 2,869,680 $ 44,705 6.18% 230,755 4,101 7.21 238,634 4,274 7.11 265,608 4,554 6.80 - ------------------------------------------------------------------------------------------------------------------------- 3,673,259 52,254 5.77 3,416,365 50,051 5.81 3,135,288 49,259 6.23 - ------------------------------------------------------------------------------------------------------------------------- 14,971 204 5.53 22,508 245 4.32 16,498 223 5.36 10,656 50 1.90 14,362 85 2.35 14,229 130 3.62 6,164,060 92,918 6.11 6,203,512 99,643 6.37 6,065,512 114,165 7.47 105,166 99,541 93,884 - ------------------------------------------------------------------------------------------------------------------------- 6,058,894 92,918 6.22 6,103,971 99,643 6.48 5,971,628 114,165 7.58 - ------------------------------------------------------------------------------------------------------------------------- 9,757,780 145,426 6.04 9,557,206 150,024 6.23 9,137,643 163,777 7.11 - ------------------------------------------------------------------------------------------------------------------------- 999,738 1,024,243 1,028,385 - ------------------------------------------------------------------------------------------------------------------------- $ 10,757,518 $ 10,581,449 $ 10,166,028 - ------------------------------------------------------------------------------------------------------------------------- $ 2,666,154 9,902 1.51% $ 2,429,978 9,933 1.62% $ 2,278,393 11,917 2.08% 160,082 481 1.22 158,040 489 1.23 155,908 575 1.46 2,918,473 26,743 3.72 2,839,770 30,744 4.30 3,030,759 38,287 5.01 - ------------------------------------------------------------------------------------------------------------------------- 5,744,709 37,126 2.62 5,427,788 41,166 3.01 5,465,060 50,779 3.69 - ------------------------------------------------------------------------------------------------------------------------- 1,571,063 6,915 1.79 1,701,655 8,813 2.05 1,440,556 12,976 3.57 1,119,466 6,925 2.51 1,088,792 8,460 3.08 1,019,123 10,711 4.17 186,189 2,722 5.92 186,409 2,764 5.88 186,631 2,871 6.10 - ------------------------------------------------------------------------------------------------------------------------- 8,621,427 53,688 2.53 8,404,644 61,203 2.89 8,111,370 77,337 3.78 - ------------------------------------------------------------------------------------------------------------------------- 1,112,571 1,150,498 1,093,442 170,643 191,023 163,999 852,877 835,284 797,217 - ------------------------------------------------------------------------------------------------------------------------- $ 10,757,518 $ 10,581,449 $ 10,166,028 - ------------------------------------------------------------------------------------------------------------------------- 91,738 3.52% 88,821 3.34% 86,440 3.33% 3.05 3.81 3.69 3.75 1,696 1,802 1,914 - ------------------------------------------------------------------------------------------------------------------------- 90,042 87,019 84,526 8,866 10,517 11,023 52,952 55,260 76,091 83,151 84,801 103,591 - ------------------------------------------------------------------------------------------------------------------------- 50,977 46,961 46,003 18,045 16,829 16,216 - ------------------------------------------------------------------------------------------------------------------------- $ 32,932 $ 30,132 $ 29,787 - ------------------------------------------------------------------------------------------------------------------------- $ 0.62 $ 0.56 $ 0.56 - ------------------------------------------------------------------------------------------------------------------------- $ 0.55 $ 0.50 $ 0.50 - -------------------------------------------------------------------------------------------------------------------------
PART II. Other Information (A) Item 6. Exhibits and Reports on Form 8-K Exhibits: Exhibit 10.30 - Remote Outsourcing Services Agreement between Bank of Oklahoma, N.A. and Alltel Information Services, Inc., dated September 1, 2002. (B) Reports on Form 8-K: No reports on Form 8-K were filed during the three months ended September 30, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BOK FINANCIAL CORPORATION (Registrant) Date: November 13, 2002 /s/ Steven E. Nell ----------------- ------------------ Steven E. Nell Executive Vice President and Chief Financial Officer /s/ John C. Morrow ------------------- John C. Morrow Senior Vice President and Director of Financial Accounting & Reporting CFO Certification I, Steven E. Nell, Executive Vice President and Chief Financial Officer of BOK Financial Corporation ("BOK Financial"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of BOK Financial; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Steven E. Nell ------------------- Steven E. Nell Executive Vice President Chief Financial Officer BOK Financial Corporation CEO Certification I, Stan A. Lybarger, President and Chief Executive Officer of BOK Financial Corporation ("BOK Financial"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of BOK Financial; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Stanley A. Lybarger ------------------------ Stanley A. Lybarger President Chief Executive Officer BOK Financial Corporation EX-10 4 alltel.txt REMOTE OUTSOURCING SERVICES AGREEMENT Exhibit 10.30 REMOTE OUTSOURCING SERVICES AGREEMENT BY AND BETWEEN ALLTEL INFORMATION SERVICES, INC. AND BANK OF OKLAHOMA, NA DATED AS OF: SEPTEMBER 2002 TABLE OF CONTENTS PAGE 1. Definitions...............................................................1 1.1 Definitions......................................................1 ----------- 1.2 Definition Cross-Reference Index.................................2 -------------------------------- 2. Services..............................................................3 2.1 Services.........................................................3 -------- 2.2 Exhibits.........................................................4 -------- 3. Fees and Payment Arrangements..............................................................4 3.1 Service Fees.....................................................4 ------------ 3.2 Payments by Client...............................................4 ------------------ 4. Term......................................................................5 5. Data Processing, Premises and Security..................................................................6 5.1 Data Processing..................................................6 --------------- 5.2 Office Space and Accommodations..................................6 ------------------------------- 5.3 Security Standards...............................................6 ------------------ 6. Client Resources.................................................................7 6.1 Client Resources.................................................7 ---------------- 6.2 Required Consents................................................7 ----------------- 7. Mergers and Acquisitions..............................................................7 8. Software..................................................................8 8.1 ALLTEL Software..................................................8 --------------- 8.2 User Manuals.....................................................9 ------------ 8.3 Client Software..................................................9 ---------------- 8.4 Third Party Software and Maintenance.............................9 ------------------------------------- 8.5 Installation of New Releases, Updates and Enhancements..........10 ------------------------------------------------------ 9. Personnel And Committees...............................................................11 9.1 ALLTEL Account Manager.........................................11 ----------------------- 9.2 Executive Liaison...............................................11 ----------------- 9.3 ALLTEL Base Staff...............................................11 ----------------- 9.4 ALLTEL Staff Personnel Changes..................................12 ------------------------------ 9.5 Periodic Communications.........................................13 ----------------------- 10. Files and Programs, Storage, and Disaster Recovery.................................................................14 10.1 Files and Programs...........................................14 ------------------ 10.2 Retention....................................................14 --------- 10.3 Disaster Recovery............................................15 ----------------- 11. Change Orders...................................................................16 12. Intellectual Property Rights...................................................................17 12.1 Ownership of Client Software.................................17 ---------------------------- 12.2 Modifications to Client Software.............................17 -------------------------------- 12.3 Ownership of ALLTEL Software.................................17 ---------------------------- 12.4 Modifications to ALLTEL Software.............................17 -------------------------------- 13. Audits...................................................................18 13.1 Client's Regulatory Audit....................................18 ------------------------- 13.2 General Audit...................................................18 ------------- 13.3 Independent Audit.............................................19 ----------------- 13.4 Excluded Materials...........................................19 ------------------ 14. Dispute Resolution...............................................................19 14.1 Dispute Resolution Procedures................................19 ----------------------------- 14.2 Claims Procedures............................................19 ----------------- 14.3 Escalation Procedures........................................20 --------------------- 15. Limitation of Liability................................................................21 16. Indemnification..........................................................21 16.1 Personal Injury and Property Damage..........................21 ----------------------------------- 16.2 Infringement of ALLTEL Software or ALLTEL Provided Third Party Software.........................................21 -------------------------------------------------- 16.3 Infringements of Client Software or Client Provided Third Party Software or Client Resources....................22 ----------------------------------------------------- 16.4 Employee Matters Indemnification.............................23 16.5 Violation of Law Indemnification................................23 -------------------------------- 17. Force Majeure, Time of Performance and Increased Costs and Error Correction...............................................24 ------------------------------------------------------ 17.1 Force Majeure................................................24 ------------- 17.2 Time of Performance and Increased Costs......................24 --------------------------------------- 17.3 Error Correction.............................................25 ---------------- 18. Notices..................................................................25 18.1 Notices......................................................25 ------- 18.2 Change of Address............................................26 ----------------- 19. Termination..............................................................26 19.1 Termination..................................................26 ----------- 19.2 Termination Upon ALLTEL's Material Breach....................26 ----------------------------------------- 19.3 Termination Upon Client's Material Breach....................27 ----------------------------------------- 19.4 Termination by Client for Convenience; Insolvency............27 ------------------------------------------------- 19.5 Termination by Client for Merger.............................28 --------------------------------- 19.6 Return of Material; Deconversion Assistance; In-House Transition Assistance..............................28 -------------------------------------------- 19.7 Equipment; Software..........................................29 ------------------- 19.8 Survival Upon Expiration or Termination......................30 ---------------------------------------- 19.9 Offer of Employment..........................................30 ------------------- 20. Confidentiality..........................................................30 20.1 Confidentiality Obligation...................................30 -------------------------- 20.2 Non-Disclosure Covenant......................................30 ----------------------- 20.3 Exceptions...................................................30 ---------- 20.4 Confidentiality of this Agreement; Protective Arrangements...31 --------------------------------------------------------- 20.5 Injunctive Relief............................................32 ----------------- 21. Other Representations, Warranties and Covenants................................................................32 21.1 Licenses and Permits and Compliance with Laws................32 ---------------------------------------------- 21.2 No Interference with Contractual Relationship................32 --------------------------------------------- 21.3 Covenant of Good Faith.......................................32 ---------------------- 21.4 Authorization and Effect.....................................32 ------------------------ 21.5 Business Practices...........................................33 ------------------ 21.6 ALLTEL Software..............................................33 --------------- 21.7 Client Software..............................................33 --------------- 21.8 Professional and Workmanlike.................................33 ---------------------------- 21.9 No Additional Representations or Warranties..................33 ------------------------------------------- 22. Miscellaneous............................................................34 22.1 Independent Contractor.......................................34 ---------------------- 22.2 Assignment...................................................34 ---------- 22.3 Severability.................................................35 ------------ 22.4 Third Party Beneficiaries....................................35 ------------------------ 22.5 Governing Law, Forum Selection; Consent of Jurisdiction......35 ------------------------------------------------------- 22.6 Executed in Counterparts.....................................35 ------------------------ 22.7 Construction.................................................35 ------------ 22.8 Entire Agreement.............................................36 ---------------- 22.9 Amendments and Waivers.......................................6 ---------------------- 22.10 Remedies Cumulative..........................................36 ------------------- 22.11 Education and Training.......................................36 ---------------------- 22.12 Taxes........................................................37 ----- 22.13 Attorney Fees..................................................37 ------------- 22.14. Insurance................................................................37 EXHIBITS Exhibit A Services Exhibit B Service Fees Exhibit C Software Exhibit D Service Level Agreements Exhibit E Acquisition Conversion Prerequisite Conditions and Restrictions Exhibit F Client Systems Isolation Exhibit G Form Software License Agreement Exhibit H ACBS and ALS Integration Exhibit I In-House Transition Assistance Exhibit J Deconversion Assistance REMOTE OUTSOURCING SERVICES AGREEMENT This is a Remote Outsourcing Services Agreement (the "Agreement"), dated as of the 1st day of September 2002 ("Effective Date"), by and between ALLTEL INFORMATION SERVICES, INC., an Arkansas corporation, 4001 Rodney Parham Road, Little Rock, Arkansas 72212 ("ALLTEL") and BANK OF OKLAHOMA, NA, a national association, Bank of Oklahoma Tower, Tulsa, Oklahoma 74192 (the "Client"). NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Definitions. As used in this Agreement: ----------- (a) "ALLTEL Affiliate" shall mean any wholly-owned direct or indirect subsidiary of ALLTEL Corporation, as from time to time constituted. (b) "ALLTEL Provided Third Party Software" shall mean any program or part of a program, which is licensed or sublicensed to ALLTEL by a third party that has the right to provide that license or sublicense, including, without limitation, those programs described in Exhibit C. (c) "ALLTEL Software" shall mean any program or part of a program as described in Exhibit C, or any program or part of a program which is otherwise developed for Client or a Client Affiliate or licensed to Client or a Client Affiliate by ALLTEL or an ALLTEL Affiliate, which is owned by ALLTEL or an ALLTEL Affiliate and all modifications, upgrades or enhancements to any such program prepared by ALLTEL or any ALLTEL Affiliate. (d) "ALLTEL Technology Center" shall mean as of the Effective Date, ALLTEL's data centers located in Little Rock, Arkansas, and San Diego, California, or such other or replacement locations as ALLTEL may designate. (e) "Client Affiliate" shall mean BOK Financial Corporation, Bank of Texas, NA, Bank of Albuquerque, NA, Bank of Arkansas, NA and BOSC, Inc. and those entities (i) added to the definition of "Client Affiliate" as provided in Section 7, Mergers and Acquisitions, herein and (ii) that are directly or indirectly, through one or more intermediaries, controlled by, or is under common control with, Client. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity through the majority ownership of voting securities. It is agreed by the parties that (i) such Client Affiliates shall be bound by the terms and conditions of this Agreement (ii) all of the systems and services provided under this Agreement may be made available to the Client Affiliates, and (iii) Client guarantees the performance of, and payment by, each Client Affiliate of any and all obligations and liabilities under this Agreement. (f) "Client Provided Third Party Software" shall mean any program or part of a program, which is licensed or sublicensed to Client by a Third Party that has the right to provide that license or sublicense, including, without limitation, those programs described in Exhibit C. (g) "Client Resources" shall mean those assets, services, personnel and rights, leased, contracted for, licensed, or owned by Client, Client Software, and Client Provided Third Party Software, if any, to be made available to ALLTEL by Client to enable ALLTEL to provide the Services. (h) "Client Software" shall mean any program or part of a program (or any modifications, updates or enhancements to such Client Software, if any, which is owned by Client which is made available by Client to ALLTEL and which is necessary for ALLTEL to provide the Services as well as any Client Provided Third Party Software described in Exhibit C. Under no circumstances shall the ALLTEL Software and ALLTEL Work constitute Client Software for purposes of the Agreement. (i) "Competitor" shall mean any person, firm or corporation engaged in the business of developing, marketing or licensing application software products, or engaged in the business of providing like technology services to financial services companies. (j) "Days" shall mean calendar days, unless otherwise specified. (k) "Expiration Date" shall mean the earliest of (i) the later to occur of August 31, 2010, or the date to which this Agreement is extended in accordance with Section 4, or (ii) the date this Agreement is terminated in accordance with Section 19 or Section 7. (l) "Pass Through Expenses" shall mean those designated costs or expenses incurred by ALLTEL under this Agreement that shall be passed through to Client by ALLTEL without mark up. (m) "Required Consents" shall mean the consents required (if any) to enable ALLTEL to use any Client Resources. (n) "Source Code" shall mean the human readable version of that ALLTEL Software described in Exhibit C that is indicated with a single asterisk, including comments and other explanatory documentation. 1.2 Definition Cross-Reference Index. As used in this Agreement, the following terms are defined in the following sections of the Agreement: Term Section ---- ------- Affected Performance 17.1 Agreement Preamble ALLTEL Preamble ALLTEL Account Manager 9.1 ALLTEL Damages 19.3(d) ALLTEL Staff 9.3 ALLTEL Staff Offeree 4.2 ALLTEL Work 12.4 ALLTEL Work Product 16.2 Assignment 22.2 Base Staff 9.3 Change Order 11.1 Client Preamble Client Damages 19.2(c) Client Work 12.2 Client Work 12.2 Confidential Information 20.1 Courts 22.5 Data Retention Standard 10.2 Delayed Invoice 3.2(a) Disaster Recovery Guidelines 10.3.4 Effective Date Preamble Escalation Procedures 14.3 Escrow 3.2(a) Executive Liaison 9.2 Extension Period 4.1 GLB Act 20.1 In-House Transition 4.2 Local Offices 5.2 Merger Early Termination Option 7.3 New Affiliate 7.1 Other Entity 7.4 Press Release 22.11 Confidential Information 20.1 Services 2.1 Service Fees 3.1 Software License Agreement 8.1 Temporary Staff 9.3 Term 4.1 Termination Date 19.1 Termination for Convenience 19.4 2. Services. 2.1 Services. This Agreement sets forth the terms and conditions for the provision by ALLTEL to Client and Client Affiliates of the consulting, implementation, conversion, data processing, network, disaster recovery, software maintenance, software customization and support services during the Term, as more fully described in Exhibit A attached hereto (individually and collectively the "Services"). ALLTEL will provide the Services on its own and/or through one or more ALLTEL Affiliates and/or subcontractors and shall be the sole and exclusive provider of the Services to Client and Client Affiliates except as provided in Section 7, Mergers and Acquisitions, herein. 2.2 Exhibits. Exhibits A-J form a part of this Agreement. All applicable terms, conditions, responsibilities and delivery schedules which apply to a particular Service (as opposed to those which apply generally to all Services and which are set forth elsewhere in this Agreement and in the other exhibits attached hereto) are identified in the Exhibits. The Service-specific terms, conditions, responsibilities and delivery schedules shall govern the provision of the relevant Service. Any new terms, conditions, responsibilities or delivery schedules which may be specifically applicable to any particular Service, as they are negotiated through the course of business, shall be set forth in writing and executed by the parties and added to this Agreement as a Change Order or an amendment. Such action shall not constitute a modification or change of any provision of this Agreement or of any other provision of any other Exhibit, unless expressly stated in such written agreement. Unless otherwise agreed to by the parties hereunder, the Services to be rendered by ALLTEL to Client are limited to those Services, which are described in this Agreement and the Exhibits. In the event of a conflict the Exhibits and any other part of this Agreements, the Exhibits shall control. 3. Fees and Payment Arrangements. 3.1 Service Fees. Client shall pay ALLTEL the fees set forth in Exhibit B in accordance with the terms described in Section 3.2 (the "Service Fees"). 3.2 Payments by Client. (a) Current Month Invoicing and Payment Requirements. Upon the Effective Date, Client shall pay the Service Fees for the first calendar month of the Term. ALLTEL shall invoice Client monthly between the first (1st) and the fifteenth (15th) day of each month for such fees for the upcoming calendar month, as well as for any known Pass Through Expenses and incremental processing fees and any other applicable charges for the preceding months. ALLTEL will make reasonable efforts to invoice all charges promptly. If Service Fees, Pass Through Expenses or other service fees are not invoiced by ALLTEL to Client within one-hundred and twenty (120) days of the date such services were rendered by ALLTEL or such expenses were incurred by ALLTEL (excluding taxes), the following terms shall apply ("Delayed Invoice"). The Delayed Invoice amount shall be payable in six (6) equal monthly installments beginning on the later of the first month of Client's next fiscal year immediately following the fiscal year in which the Delayed Invoice should have been received by Client or six (6) months after the Delayed Invoice is sent to Client. The account volumes used to calculate the applicable incremental processing fees shall be measured on the twentieth (20th) day of the preceding month. In accordance with Section 3.2(a), Client shall pay ALLTEL the monthly invoiced amount by the later of (i) the twenty-fifth (25th) day after receipt by Client of the applicable invoice or (ii) prior to the thirtieth (30th) day following the date of the applicable invoice. Should Client dispute in good faith all or any portion of the amount due, Client shall promptly notify ALLTEL in writing, prior to the due date of that invoice, of the nature and basis of the dispute. The parties shall make best efforts to resolve the dispute prior to the payment due date. In the event the parties are not able to resolve the dispute prior to the payment due date, Client shall pay ALLTEL the undisputed portion and shall pay the disputed amount into an interest-bearing account with a mutually agreeable independent financial institution pending resolution of such dispute ("Escrow"). Upon resolution of such dispute, any portion of the disputed amount determined to have been payable to ALLTEL, together with accrued interest thereon, if any, shall be disbursed to ALLTEL and all remaining amounts shall be disbursed to Client. All payments under this Section shall be made by Client to ALLTEL by wire transfer in readily available funds or at Client's option, by check or ACH payment. (b) Past Due Amounts. Any amount not received by the fifteenth (15th) day after the date that the payment was due (which has not otherwise been placed into Escrow as provided in Section 3.2(a) above), shall be subject to interest on the balance overdue at a rate equal to the lesser of: (i) the prime rate plus one and one half (1 1/2%) per annum published in the Wall Street Journal on the first Monday (or next bank business day) following the due date, or (ii) the highest rate permitted by law, in each case, for the number of days from the payment due date up to and including the date payment is actually made by Client (calculated on the basis of the actual days in the applicable calendar year). 4. Term. 4.1 The term of this Agreement shall begin on the Effective Date and end on the Expiration Date (the "Term"). Notwithstanding anything in this Agreement to the contrary, Client may elect by written notice received by ALLTEL at least six (6) months prior to the end of the Term (or thirty (30) days notice prior to the Termination Date if the Agreement is terminated by Client or ALLTEL for breach prior to the ninety-seventh (97th) month of the Term), in its sole discretion, regardless of the reason for the ending of the Term, to extend the term of this Agreement one time only for any period up to twelve (12) months beyond the Expiration Date subject to the payment of the then current prices being paid by Client to ALLTEL under the Agreement and the terms and conditions of this Agreement (the "Extension Period"). The foregoing notwithstanding, if the Agreement is terminated by ALLTEL for non-payment by Client, Client shall prepay to ALLTEL all amounts which would be payable during the Extension Period, such payment to be made prior to ALLTEL beginning any work during the Extension Period. At twelve (12) months prior to the Expiration Date, ALLTEL may submit to Client a written proposal for renewal of this Agreement for an additional term as specified in such proposal. Client shall accept or reject such proposal within three (3) months following receipt thereof. 4.2 ALLTEL further agrees that at the end of the Term (whether by expiration or termination as provided herein), Client shall have the option of transitioning the ALLTEL Services so that the same functions are completed by Client instead of ALLTEL (the "In-House Transition). The In-House Transition shall consist of perpetual licenses for the ALLTEL Software designated with a single asterisk in Exhibit C which is used to perform the Services at the end of the Term as well as reasonably necessary training, installation and other assistance to affect the In-House Transition at ALLTEL's professional service rates described on Exhibit B and as otherwise defined in Exhibit I. Such perpetual license is effective only so long as Client pays maintenance and support fees without interruption. ALLTEL further agrees that, notwithstanding Section 19.9, Client shall have the option to offer to any one of the ALLTEL Staff, excluding the ALLTEL Account Manager, positions with Client or Client Affiliates (an "ALLTEL Staff Offeree") and that, in such event, ALLTEL has the right to make a competitive offer to such ALLTEL Staff Offeree to cause the continued employment with ALLTEL of the ALLTEL Staff Offeree. ALLTEL further agrees that it shall offer its standard maintenance services for the ALLTEL Software at ALLTEL's then current maintenance services rates. 5. Data Processing, Premises and Security. 5.1 Data Processing. ALLTEL shall perform the production support component of the Services at Client's facility in accordance with Section 5.2. The systems operating environment and office accommodations for the Base Staff (as defined in Section 9.3) that perform these Services will be provided by Client. 5.2 Office Space and Accommodations. On the Effective Date, Client shall provide ALLTEL, without any charge or cost, adequate premises for ALLTEL Staff, in good repair, at Client's facility in Tulsa, Oklahoma, to perform the Services under this Agreement (the "Local Offices"). Without limiting the generality of the foregoing, Client shall supply water, sewer, heat, lights, telephone lines, local and long distance service, equipment, air conditioning, electricity (including, if desired by ALLTEL, an uninterruptable power system, battery backup and backup generator capacity), daily janitorial services, office equipment, personal computers, supplies and furniture, meals, and parking spaces, in each case, for ALLTEL employees under the same conditions as provided to employees of Client. ALLTEL shall provide annual estimates to Client of ALLTEL's Local Offices' requirements. ALLTEL is not responsible for any injury or damage to property or persons which occurs in or around the Local Offices unless it is caused by the negligent or intentional acts of ALLTEL, in which case ALLTEL shall indemnify Client as provided in Section 16.1 herein. In the event Client desires to move the Local Offices after the Effective Date, whether such move is internal within Client or external, Client shall provide ALLTEL notice of such move as soon as reasonably practicable and Client shall reimburse ALLTEL for any cost incurred by ALLTEL resulting from such move. 5.3 Security Standards. Client shall provide ALLTEL with a copy of its safety, security, and facilities polices that are applicable to all of its employees in the Local Offices, and ALLTEL shall abide by such communicated policies. Client will reimburse ALLTEL for its actual costs incurred as a Pass-Through Expense if adherence to such policies requested or required by Client increases ALLTEL's costs of operation. The parties agree that ALLTEL shall conduct background checks and drug testing of the ALLTEL Staff in accordance with ALLTEL's standard policies. ALLTEL agrees that any ALLTEL Staff member, or potential ALLTEL Staff member, may be removed from Client's facilities based upon ALLTEL's discoveries pursuant to the background checks or drug tests which ALLTEL reasonably believes causes a security risk or employment issue. ALLTEL shall provide Client a copy of ALLTEL's policies regarding background checks and drug tests. 6. Client Resources. 6.1 Client Resources. During the Term, Client will provide the Client Resources reasonably requested by ALLTEL for ALLTEL's use in providing the Services. Client will provide, at no cost to ALLTEL, all input and output forms, audit and control forms, stock paper, envelopes, inserts, boxes, and any forms necessary for ALLTEL to meet the processing requirements of Client, as well as adequate transportation and storage therefor. 6.2 Required Consents. (a) Cooperation. Client shall obtain all Required Consents. Upon Client's request, ALLTEL shall assist Client in obtaining the Required Consents. Once each such Required Consent has been obtained, Client shall provide a copy of it to ALLTEL. Until such time as the Required Consent has been obtained by Client, any right to use the affected Client Resource shall not be deemed to have been transferred to ALLTEL, and the parties shall cooperate with each other in achieving a reasonable alternative arrangement for the use of the affected Client Resources. ALLTEL will assist Client in obtaining any Required Consents at the lowest price reasonably available under the circumstances. (b) Costs. Any cost incurred by ALLTEL at Client's request in obtaining a Required Consent shall be separately charged by ALLTEL to Client as a Pass-Through Expense. 7. Mergers and Acquisitions. 7.1 Upon written request by Client, ALLTEL will process additional data of the type processed for Client hereunder and perform additional Services (in whole or in part) for any chartered bank entity acquired by Client or a Client Affiliate by way of merger, acquisition or restructuring which results in the Control by BOK Financial Corporation of such new affiliate (a "New Affiliate"). Client shall have no obligation to include a New Affiliate as a "Client Affiliate" under this Agreement unless Client gives ALLTEL written notice of its request to have such New Affiliate receive the Services and become a "Client Affiliate". In the event Client elects to have a New Affiliate become an additional "Client Affiliate" as defined in Section 1.1(e), Client shall pay all costs, including, but not necessarily limited to, increased personnel, additional license fees to third parties, if any, and additional royalties on software provided through ALLTEL (at a rate and fee structure described in Exhibit B as adjusted by the provisions of this Agreement) required to process the additional data and perform the additional Services for the additional Client Affiliate. Client will notify ALLTEL of any such proposed merger or acquisition as soon as reasonably practicable. 7.2 In the event Client elects to have a New Affiliate become a "Client Affiliate," ALLTEL agrees to provide a proposal to Client for the services, time and materials necessary to perform such conversion (including testing services) subject to all of the prerequisite conditions and restrictions as outlined in Exhibit E hereto. In the event Client does not elect to have a New Affiliate become a "Client Affiliate" ALLTEL agrees to provide support and technical access necessary to allow Client to support the New Affiliate on a system which resides outside the ALLTEL Technology Center, and which may be supported by 1) a vendor other than ALLTEL provided that the New Affiliate is not utilizing ALLTEL Software or 2) the New Affiliate, Client or a Client Affiliate themselves using either Alltel Software or another vendor(s) software, at a reasonable cost to Client. In no event shall any third party vendor have access to or the right to operate or support the ALLTEL Software or ALLTEL Provided Third Party Software. 7.3 In the event Client, or a Client Affiliate, acquires (or is acquired by) an entity (by way of merger or acquisition or otherwise), ALLTEL will, at Client's option, agree to an early termination of this Agreement upon the terms and conditions described in Section 19.5 ("Merger Early Termination Option"). 7.4 In the event that Client, or a Client Affiliate, acquires (or is acquired by) an entity (the "Other Entity") (by way of merger or acquisition or otherwise), and the Other Entity, at such time, receives substantially the same services from ALLTEL as the Services provided hereunder, or such services are performed in house by the Other Entity using an ALLTEL based system, then any of the fees to be paid by Client pursuant to Section 19.5(i), (ii) or (iii) shall be decreased by seventy-five percent (75%) of any amounts by which the monthly payments to ALLTEL by the Other Entity are increased as a direct result of the transaction (merger or otherwise) with Client or a Client Affiliate times the number of months remaining in the Term excluding conversion fees and any other one-time fees. In no event shall this Section 7.4 reduce the early termination fees payable pursuant to Section 19.5 to less than thirty percent (30%) of the fees due for the remaining months of the Term. 8. Software. 8.1 ALLTEL Software. (a) Upon the earlier to occur of the expiration of the Term or the termination of the Agreement by Client in accordance with Section 19.2 hereof, ALLTEL will grant to Client and for the benefit of Client Affiliates a nonexclusive, nontransferable (except for that assignment described in Section 22.2) perpetual license (subject to payment of annual maintenance and support fees as provided herein) to use only that ALLTEL Software that is specified in Exhibit C (except the ACBS Software and Service Delivery Software shall be subject to the additional terms described in Exhibit C), subject to a license at terms and conditions to be mutually agreed to by the parties but substantially in the form of Software License Agreement attached as Exhibit G hereto. The parties acknowledge that the license terms for the Service Delivery Software and ACBS Software may vary in some material respects from the form attached as Exhibit G. Such perpetual license is effective only so long as Client pays maintenance and support fees without interruption at ALLTEL's then current maintenance rates. The parties acknowledge that upon entering such Software License Agreement, Client shall not be required to remit to ALLTEL any license fees for the ALLTEL Software (except the ACBS Software and Service Delivery Software). (b) As part of the Base Fee, during the Term of this Agreement, ALLTEL grants to Client a nonexclusive, nontransferable (except as provided in Section 22.2) term license to use the object code version of the ALLTEL Service Delivery Software and the ACBS Software solely for use by Client and Client Affiliates, such Base Fee to also include ALLTEL's standard maintenance and support services. Client shall not process any other third party data for a fee or receipt of value, nor sublicense, lease, rent, transfer or assign (except for that assignment described in Section 22.2) the Service Delivery Software or the ACBS Software without ALLTEL's prior written consent. Client agrees not to disclose, decompile, disassemble, reverse engineer, or copy (except for backup purposes) the Service Delivery Software. Client is licensed to use the Service Delivery Software as provided in Exhibit B(2) and the ACBS Software as provided in Section 3 of Exhibit A. The Service Delivery Software and all documentation and materials related thereto may be used at any location or facility provided ALLTEL has written notice of such location or facility. (c) ALLTEL will furnish at any time upon Client request, a current list of all other ALLTEL software products made generally available to customers of ALLTEL which may be licensed at a mutually agreed upon price for maintenance and usage fees. License fees for such ALLTEL Software products shall be at ALLTEL's then current list price for the license fees for such products and maintenance and support fees related to such ALLTEL Software shall be at ALLTEL's then current maintenance and support rates. 8.2 User Manuals. Prior to the installation of any ALLTEL Software, ALLTEL will deliver or cause to be delivered to Client three (3) copies of the ALLTEL Software user manuals (as well as any updated user manuals) by hard copy or on CD ROM as determined by ALLTEL. ALLTEL consents to the reproduction of such user manuals by Client in accordance with this Agreement. Client may order additional copies of the ALLTEL Software user manuals at ALLTEL's then current prices. 8.3 Client Software. ALLTEL will use all Client Software for the exclusive use by Client and Client Affiliates in connection with providing the Services to Client and Client Affiliates. Additional use of Client Software by ALLTEL shall require the written consent of Client. ALLTEL reserves the right in advance of any processing or use of Client Software to assure compatibility with equipment and consistency with other processing requirements, techniques and standards. If any use of such Client Software increases or decreases ALLTEL's operating costs, ALLTEL will so advise Client and both Client and ALLTEL will negotiate to agree upon the appropriate changes to the Base Fees. 8.4 Third Party Software and Maintenance. (a) Third Party Software. Exhibit C sets forth a list of all Client Provided Third Party Software and ALLTEL Provided Third Party Software that as of the Effective Date are included within the Base Fees. ALLTEL will use all Client Provided Third Party Software for the exclusive use by Client and Client Affiliates in connection with the Services to Client and Client Affiliates. Additional use of Client Provided Third Party Software by ALLTEL shall require the prior written consent of Client. For any Client Provided Third Party Software that is not listed on Exhibit C, ALLTEL reserves the right in advance of any processing or use of any Client Provided Third Party Software to assure compatibility with equipment and consistency with other processing requirement, techniques, and standards. If any use of such Client Provided Third Party Software increases or decreases ALLTEL's operating costs, ALLTEL will so advise Client and both Client and ALLTEL will negotiate to agree upon the appropriate changes to the Base Fees. Client will procure all consents and pay any expenses necessary to allow ALLTEL to use any Client Provided Third Party Software. If a defect occurs in the Client Provided Third Party Software or ALLTEL Provided Third Party Software or if such Client Provided Third Party Software or ALLTEL Provided Third Party Software does not function in accordance with its specifications during the Term, ALLTEL and Client shall cooperate fully with each other to cause such third party to promptly correct such defect to the extent required under the applicable agreement. To the extent that any Client Provided Third Party Software or ALLTEL Provided Third Party Software or necessary part thereof is not made available to ALLTEL or if a defect in any Client Provided Third Party Software or ALLTEL Provided Third Party Software or necessary part thereof inhibits ALLTEL's provision of the Services, and despite ALLTEL's reasonable efforts to avoid and minimize such occurrence, ALLTEL shall be excused from providing such Services until at least the Client Provided Third Party Software or ALLTEL Provided Third Party Software is made available or the defect remedied plus a reasonable time thereafter. ALLTEL shall use its reasonable best efforts to propose interim "work around" solutions and to contact and negotiate with such third party software vendors in an effort to accomplish the prompt elimination of any problems, and Client shall reimburse ALLTEL on a Pass-Through Expense basis for any costs incurred by ALLTEL outside of the Base Staff in providing such interim "work around" solutions. ALLTEL will make reasonable efforts to provide application support services for the Client-Provided Third Party Software. (b) Third Party Software Maintenance. During the Term, Client will provide and pay for all software maintenance for the Client Provided Third Party Software listed in Exhibit C. During the Term, ALLTEL will provide as part of the Base Fees all third party software maintenance for the ALLTEL Provided Third Party Software listed in Exhibit C. 8.5 Installation of New Releases, Updates and Enhancements. All changes to the ALLTEL Software and ALLTEL Provided Third Party Software being provided to Client and Client Affiliates including the installation of enhancements, updates and new releases of the ALLTEL Software and ALLTEL Provided Third Party Software, shall be made only with the prior approval of Client, which shall not be unreasonably withheld. Client shall provide all necessary approvals in order to ensure that the version of the ALLTEL Software (exclusive of the Service Delivery Software) and ALLTEL Provided Third Party Software in production with Client shall not be more than two (2) major releases behind that version of the ALLTEL Software and ALLTEL Provided Third Party Software then generally available to the public. Similarly, for all Client Software, Client shall, upon notification by ALLTEL, and unless mutually agreed otherwise, take all necessary steps in order to ensure that the version of the Client Software in production with Client shall not be more than two (2) major releases behind the version of the Client Software then generally available to the public. Client and ALLTEL will mutually agree upon the installation of enhancements, updates and new releases to the Service Delivery Software and any Client Provided Third Party Software. Client acknowledges with respect to the ACBS products, new releases, updates, and enhancements will be implemented with Client's cooperation, and that the ACBS ASP model requires timely implementation of such changes in order that the ACBS Software will be no more than one (1) update/release behind the then current release. 9. Personnel and Committees. 9.1 ALLTEL Account Manager. ALLTEL will assign an individual who will, on a full time basis, oversee and manage the Services under this Agreement (the "ALLTEL Account Manager"). Prior to the selection of any replacement ALLTEL Account Manager, ALLTEL shall give notice to Client of such change, provide Client with a resume of the proposed ALLTEL Account Manager and give Client an opportunity of interview such proposed ALLTEL Account Manager. In the event Client does not reasonably approve the proposed ALLTEL Account Manager, ALLTEL shall promptly provide an alternative candidate for which Client shall again have the opportunity to review the resume of and interview the alternative candidate, such process to continue until Client and ALLTEL mutually agree on an ALLTEL Account Manager. Such approval by Client shall not be unreasonably withheld or delayed. 9.2 Executive Liaison. Client will assign a mutually agreeable executive who will serve as Client's primary point of contact for all communications with ALLTEL with respect to this Agreement (the "Executive Liaison"). Prior to the selection of the initial or any replacement Executive Liaison, Client shall give notice to ALLTEL of such selection or change, will provide ALLTEL a resume of the proposed Executive Liaison and shall give ALLTEL an opportunity to interview such proposed Executive Liaison. 9.3 ALLTEL Base Staff. ALLTEL shall provide fifteen (15) Full Time Equivalent (FTE) resources, which shall consist of an individual or combination of individuals as determined by ALLTEL to perform the Services (the "Base Staff"). ALLTEL will provide the FTE resources by job classification as shown in the following table. Such resources shall be located at Client's site. - --------------------------------------------- ------------------------ Base Staff Function Base Staff Level - --------------------------------------------- ------------------------ Account Manager 1 - --------------------------------------------- ------------------------ Programming Manager 1 - --------------------------------------------- ------------------------ Programmer Analyst 10 - --------------------------------------------- ------------------------ Business Analyst 1 - --------------------------------------------- ------------------------ Operations Analyst 1 - --------------------------------------------- ------------------------ Administrative 1 - --------------------------------------------- ------------------------ Client and ALLTEL shall jointly establish project priorities for the Base Staff. Client acknowledges that any changes in Client priorities that require reassignment of the Base Staff to other responsibilities may result in an enlargement of ALLTEL's time to complete certain tasks assigned hereunder. In the event this Agreement provides for Services to be provided by the Base Staff and, based upon project priorities established pursuant to this Section 9.3, the Base Staff are not sufficient to provide such Services, at the request of Client, ALLTEL may provide additional resources (hereinafter referred to as the "Temporary Staff") as defined in Section 9.4 below. The ALLTEL Base Staff , the ALLTEL Temporary Staff and the Additional Base Staff (as defined in Section 9.4 (d)) are collectively known as the "ALLTEL Staff." If ALLTEL removes or temporarily reassigns a member of the Base Staff, ALLTEL shall use best efforts to replace such removed personnel promptly with someone who is of similar experience. Beginning on the second anniversary of the Effective Date, ALLTEL agrees not to reassign more than twenty percent (20%) of the Base Staff personnel per year. Reassignment does not include resignations or terminations, illness or disability. 9.4 ALLTEL Staff Personnel Changes. At any time during the Term, Client may request and ALLTEL will use its reasonable efforts to provide increases and decreases to the ALLTEL Staff, on either a short or long term basis, but in no event shall the Base Staff be less than fifteen (15) FTEs in addition to the Additional Base Staff added pursuant to Section 9.4 (d)during the Term with the same Base Staff functions described in Section 9.3 above. (a) Increases in the Base Staff will be in minimum increments of one (1) person for a minimum term of one (1) year. Client shall be obligated to pay for reasonable relocation costs as a Pass-Through Expense consistent with ALLTEL's Relocation Policy and Guide in effect at the time of the relevant relocation; provided however, that when ALLTEL's Relocation Policy allows relocation benefits to be made at ALLTEL's discretion or option, allowing such relocation benefits shall instead be at Client's discretion or option. Client will not unreasonably withhold approval of relocation benefits. A copy of ALLTEL's Relocation Policy and Guide has been supplied to Client prior to the Effective Date of this Agreement. If Client elects to decrease the Base Staff, Client shall be obligated to pay for any associated severance expenses pursuant to ALLTEL's standard severance policy. (b) For short term (less than one (1) year) changes, ALLTEL will provide a proposal to Client identifying the change that such request will have on the scope and quality of the Services, as well as the applicable hourly/monthly rate(s) (plus expenses) for such personnel, such charges to be in accordance with Exhibit B hereto. For long term (one (1) year or more) changes, ALLTEL will provide a proposal to Client identifying the change that such request will have on the scope and quality of the Services, as well as the applicable increases or decreases to the Base Fees which shall be in accordance with the ALLTEL Resource Rate Chart described in paragraph 5 of Exhibit B hereto. Client may request increases to the Base Staff and Temporary Staff in order to redirect their priorities or to ask ALLTEL to undertake out-of-scope of Services under this Agreement. (c) In the case of either an increase in the ALLTEL Staff or a decrease, each party agrees to negotiate an appropriate amendment to this Agreement setting forth all relevant personnel, price and Service changes. All such rates shall be subject to increase or decrease in accordance with the terms defined in Section 5 of Exhibit B. (d) Client will increase the Base Staff at a minimum of five (5) FTEs during the calendar years 2004 through 2008, at a minimum increase of one (1) FTE per year during such five (5)-year period ("Additional Base Staff") (with at least one of the five Additional Base Staff being a Program Manager) at the Additional Base Staff rate described in Section 5 of Exhibit B. Each Additional Base Staff shall provide the Services through the end of the Term. 9.5 Periodic Communications. (a) Monthly Meetings. ALLTEL and Client agree that effective planning and communication are necessary to provide overall direction for the Services and that each will work to promote a free and open exchange of information between ALLTEL personnel, Client management, and Client user departments. For the duration of the Term, one or more senior representatives of ALLTEL and Client agree to meet on at least a monthly basis to: (i) review Client's priorities and long term objectives to determine if the scope of Services is on schedule; (ii) discuss and establish the short-term and long-term business strategy involving the relationship between Client and ALLTEL; (iii) review Client's automation system plan and monitor such automation system plan on a periodic basis; (iv) review all requests for major system modifications and enhancements; (v) discuss systems design, development and implementation project recommendations of ALLTEL concerning the Services, including, without limitation, providing human resources, procuring third party software, allocating ALLTEL Staff, providing equipment, increasing or decreasing ALLTEL supplied processing to support the Services; (vi) review ALLTEL's performance of the Services during the previous three (3) months, including, without limitation, the milestones that have been completed; (vii) review the status of the current Services that ALLTEL is performing; (viii) identify any problems relating to the Services and suggest corrective actions to solve such problems, including, without limitation, the cost to Client to correct such problems; (ix) review the Services that are scheduled to be provided by ALLTEL for the upcoming calendar quarter(s), including, without limitation, the scope of the Services and of any applicable performance standards and deliverables; (x) review any ALLTEL's bids and related scope of Services and deliverables for new work; (xi) review ALLTEL requests for ALLTEL Staff resources and changes; (xii) periodically review information provided by ALLTEL on new products and services available from ALLTEL and other key third party providers; (xiii) review at least annually the composition of the Base Staff and any planned or suggested changes; and (xiv) review any other aspect of the information processing and technology requirements or desires of Client. Either party may request that this meeting be held more or less frequently than monthly. The ALLTEL Account Manager or his or her designee shall be the Chairman of this meeting. All meetings shall have a published agenda issued by the ALLTEL Account Manager at least seven (7) days in advance of the meeting to allow Client members a reasonable opportunity to prepare for the meeting. Meeting minutes will be issued by the ALLTEL Account Manager to Client who attended the meeting within five (5) business days after the meeting. Following review by such members, the ALLTEL Account Manager will incorporate into final meeting minutes the members' accurate and reasonable comments and revisions, which shall constitute the final meeting minutes. 10. Files and Programs, Retention, and Disaster Recovery. 10.1 Files and Programs. After such time as the ALLTEL employees receive and operate Client's data on appropriate media in electronic format, ALLTEL will provide and maintain reasonable backup files on appropriate media for such Client data. ALLTEL will also reasonably backup all programs utilized to process Client's data in accordance with any federal rules or regulations applicable to Client or ALLTEL with regard to such data. Client will make ALLTEL aware of any applicable local or state rules or regulatory requirements that have requirements different than those of federal rules or regulations. ALLTEL agrees to make any changes required by such state or local requirements provided that Client pays any reasonable incremental costs associated with ALLTEL's increased compliance effort. 10.2 Retention. Client shall maintain copies of all Client's input data submitted to ALLTEL for processing hereunder pursuant to its standard input data retention policy, whether submitted to ALLTEL directly or through third parties, to permit reconstruction of such input data if required. ALLTEL shall use industry standard practices to maintain copies of all input data for processing hereunder to permit reconstruction of such input data if required in accordance with ALLTEL's data retention policy, but in no event shall such "industry standard practices" be less than required by any federal rules or regulations governing the process and retention of Client's data (the "Data Retention Standard"). Client will make ALLTEL aware of any applicable local or state rules or regulatory requirements that have requirements different than those of federal rules or regulations. ALLTEL agrees to make any changes required by such state or local requirements provided that Client pays any reasonable incremental costs associated with ALLTEL's increased compliance effort. Client assumes all risks of loss and expenses of reconstruction of such input data, except for loss caused by ALLTEL's failure to conform to the Data Retention Standard. In the event reconstruction of such data is required, the parties shall mutually agree on the schedule for such reproduction based on the needs of the parties at that time . For purposes of this Section 10.2, "Industry Standard Practices" means that ALLTEL will (i) produce and capture images to direct access storage devices; (ii) subsequently back up such images to industry standard tape cartridges using commercially available data transfer software with appropriate offsite rotation for purposes of disaster recovery; and (iii) provide daily backups on a rolling seven (7)) day basis, inputs and outputs sufficient to recreate the thirteen (13) prior month end reports, the thirteen (13) prior quarter end reports, and the seven (7) prior year end reports. Such industry standard practices do not include non-repetitive services or interface transmission. 10.3 Disaster Recovery; Data Security. 10.3.1 ALLTEL shall provide disaster recovery services for its batch and on-line processing obligations to Client at a dedicated facility which is equipped to handle the ALLTEL Technology Center processing in the event disaster recovery is needed. Client agrees to pay for, and ALLTEL agrees to arrange for, a dial-up telephone line for data communications access to a backup network in the case of a disaster. ALLTEL shall provide and pay for the necessary communications devices (including, but not limited to multiplexors, modems, channel extenders, etc.) to facilitate such communication. ALLTEL shall designate and design such backup network for Client. Throughout the Term of this Agreement, ALLTEL will maintain in effect contracts and/or arrangements for disaster recovery, which are substantially equivalent to those currently in effect. This Section 10.3 does not apply to the ALLTEL Service Delivery hardware located at Client's site in Tulsa, Oklahoma (as described in Exhibit A). The disaster recovery services provided by ALLTEL identified in this Section 10.3, including the declaration of a disaster for which the disaster recovery services must be employed, shall be included as part of the Base Fee and shall be at no additional cost to Client. Client shall be responsible for any costs or expenses incurred by its own employees and agents related to this Section 10.3. 10.3.2 Client acknowledges that disaster recovery arrangements are designed to deal with circumstances that are expected to cause a substantial portion of the capabilities at the ALLTEL Technology Center to be unavailable for a period exceeding seventy-two (72) consecutive hours. 10.3.3 ALLTEL will test its disaster recovery capabilities at least once per calendar year, including obtaining an SAS 70 Type II audit. Client shall participate in the disaster recovery test to the extent required to verify the effectiveness of Client and ALLTEL's disaster recovery plans. ALLTEL will provide a report of the test, including the SAS 70 Type II report, and its results to Client by January 31 of each year for the test conducted during the immediately preceding calendar year. In the event the Client discovers, or the ALLTEL report or the SAS 70 Type II audit discloses a material inadequacy in ALLTEL's disaster recovery capabilities, ALLTEL shall promptly remedy such inadequacy at ALLTEL's cost and expense. ALLTEL agrees Client may provide ALLTEL's disaster recovery report to federal regulatory agencies requesting such information and that ALLTEL shall cooperate at Client's expense, in providing such additional information requested by federal regulatory agencies. 10.3.4 Guidelines to assist the parties in understanding their respective general responsibilities and areas of cooperation are set forth in Attachment 2 to Exhibit A attached hereto (the "Disaster Recovery Guidelines"). ALLTEL will assist Client in establishing procedures and practices that will enable Client to satisfy its responsibilities under the Disaster Recovery Guidelines. 10.3.5 Upon request, ALLTEL will review and comment upon those portions of Client's overall business resumption plan, when finalized, related to the Services provided under this Agreement and will provide a written report setting forth any discrepancies between Client's overall business resumption plan and the Disaster Recovery Guidelines, subject to the mutual agreement of the parties on the additional charges therefor. 10.3.6 ALLTEL agrees it shall provide data security which is in accordance with industry standards and in compliance with all federal data security regulations and guidelines applicable to Client and/or ALLTEL. Client will make ALLTEL aware of any applicable local or state rules or regulatory requirements that have requirements different than those of federal rules or regulations. ALLTEL agrees to make any changes required by such state or local requirements provided that Client pays any reasonable incremental costs associated with ALLTEL's increased compliance effort. 11. Change Orders and Client Request for Enhancements. 11.1 Client may, at any time by written order to ALLTEL, request changes to the Services ("Change Order"). The parties agree and acknowledge that Client shall not request a Change Order that has the effect of terminating one or more of the Services. If any Change Order results in an increase or decrease in the cost or time required for ALLTEL's performance of any of the Services, an equitable adjustment to the cost or delivery schedule or both shall be negotiated by the parties, and the Agreement and appropriate Exhibits shall be amended to reflect such approved Change Order. ALLTEL may, but is not obligated to, begin work on the Change Order until such time as Client and ALLTEL shall have reached an equitable adjustment to the cost and delivery schedule. 11.2 Upon Client's written request, ALLTEL will make reasonable efforts to deliver an enhancement estimate within ten (10) business days after ALLTEL has received such request. 12. Intellectual Property Rights. 12.1 Ownership of Client Software. As of the Effective Date, and at all times thereafter, Client shall be the sole and exclusive owner of all rights, title, and interest in and to the Client Software, including, without limitation, all intellectual property and other rights with respect to the Client Software. 12.2 Modifications to Client Software. Any writing or work of authorship, regardless of medium, created or developed by ALLTEL at Client's request in the course of performing the Services under this Agreement and relating to the Client Software or Client Provided Third Party Software including, but not limited to, software, source code, blueprints, diagrams, flow charts, specifications or functional descriptions, and specifically including any modifications, enhancements, interfaces (other than interfaces to the ALLTEL Software) (individually, a "Client Work") shall be deemed a "work for hire", and the sole and exclusive property of Client (except that no such writing or work of authorship relating to the Client Provided Third Party Software shall be a Client Work if the license agreement governing the Third Party Software prohibits the granting of such right). The term "Client Work" shall not include the ALLTEL Software, as well as any writing or work of authorship, regardless of medium, relating to or evidencing the ALLTEL Software. To the extent any Client Work is not deemed a "work for hire" under applicable law, ALLTEL hereby irrevocably assigns, transfers and conveys to Client all of its right, title and interest in such Client Work, including but not limited to, all rights of patent, copyright, trade secret, know-how and other proprietary and associated rights in such Client Work. ALLTEL agrees to execute such other documents or take such other actions as Client may reasonably request to perfect Client's ownership of any Client Work of which Client is granted ownership under this Section 12.2. Subject to ALLTEL's obligations to Client under Section 20 hereof, the parties acknowledge that Client's ownership of any such Client Work shall not preclude ALLTEL from developing for other ALLTEL customers any work or works which are the same or substantially similar to a Client Work or Client Works. 12.3 Ownership of ALLTEL Software. As of the Effective Date, and at all times hereafter, ALLTEL shall be the sole and exclusive owner of all right, title, and interest in and to the ALLTEL Software, including, without limitation, all intellectual property and other rights with respect to the ALLTEL Software and the accompanying ALLTEL Software user manuals and documentation. The parties acknowledge that this Agreement in no way limits or restricts ALLTEL and the ALLTEL Affiliates from developing or marketing on their own or for any third party in the United States or any other country the ALLTEL Software, as from time to time constituted (including, but not limited to, any modification, enhancement, interface, upgrade, change and all software, source code, blueprints, diagrams, flow charts, specifications, functional descriptions or training materials relating thereto) without payment of any compensation to Client, or any notice to Client. 12.4 Modifications to ALLTEL Software. Any writing or work of authorship, regardless of medium, created or developed by ALLTEL, Client, or any third party in the course of performing the Services under this Agreement and relating to the ALLTEL Software or ALLTEL Provided Third Party Software, including, but not limited to, any software, source code, blueprints, diagrams, flow charts, specifications or functional descriptions, and any modifications, enhancements, and interfaces (individually an "ALLTEL Work") shall not be deemed a "work for hire", but shall be owned solely and exclusively by ALLTEL (except that no such writing or work of authorship relating to the ALLTEL Provided Third Party Software shall be an ALLTEL Work if the license agreement governing the ALLTEL Provided Third Party Software prohibits the granting of such right). To the extent any ALLTEL Work for any reason is determined not to be owned by ALLTEL, Client hereby irrevocably assigns, transfers and conveys to ALLTEL all of Client's right, title, and interest in such ALLTEL Work, including, but not limited to, all rights of patent, copyright, trade secret, know-how, and or other proprietary and associated rights in such ALLTEL Work. Client shall execute such documents and take such other actions as ALLTEL may reasonably request to perfect ALLTEL's ownership of any such ALLTEL Work. Client agrees and acknowledges that ALLTEL and the ALLTEL Affiliates shall have the right to undertake parallel efforts to develop, market and make available for itself or any third party, without the consent of or compensation to Client, any interfaces, modifications, upgrades, enhancements or changes to the ALLTEL Software or any ALLTEL Provided Third Party Software without regard to whether such interfaces, modifications, upgrades, enhancements or changes may be the same as, substantially similar to, or different from ALLTEL Work, as long as such efforts are performed in accordance with ALLTEL's obligations to Client under Section 20 hereof. 13. Audits. 13.1 Client's Regulatory Audit. As reasonably requested by Client, ALLTEL shall cooperate with Client and its internal or external auditors for the purpose of Client's regulatory compliance at Client's facilities. Promptly following any such regulatory audit, whether conducted by Client's internal or external auditors, Client will instruct its auditors to conduct an exit conference with ALLTEL and to provide ALLTEL as soon thereafter as reasonably possible a copy of each report prepared as a result of such audit examination relating to data processing whether in draft or final form. In addition, Client will provide and instruct its external auditors to provide ALLTEL with a copy of that portion of each written report containing comments concerning ALLTEL or the Services performed by ALLTEL pursuant to this Agreement. Client shall reimburse ALLTEL as a Pass-Through Expense for any costs incurred by ALLTEL in cooperating with Client in connection with Client's audit (excluding services provided by the Base Staff). 13.2 General Audit. ALLTEL agrees to keep such books and records (which books and records shall be maintained on a consistent basis and substantially in accordance with generally accepted accounting principles) and shall readily disclose Pass Through Expenses or hours related to Services performed on a time and materials basis billed or due under this Agreement and shall make them available for examination and audit by Client and its agents. When requested by Client, ALLTEL shall provide Client's personnel or agents with access during normal working hours (with reasonable notice and subject to ALLTEL's security and confidentiality processes and procedures) to ALLTEL's records necessary to effectuate Client's audit. 13.3 Independent Audit. ALLTEL agrees that it shall, on an annual basis, procure an SAS 70 Type II audit from a reputable auditor of the controls placed on ALLTEL operations regarding all of the Services hereunder (excluding disaster recovery) and shall promptly provide a copy of the results of such audit to Client at no additional cost to Client. In the event such ALLTEL audit discloses that ALLTEL's controls or operations do not meet industry standards, ALLTEL shall promptly remedy any material inadequacy at ALLTEL's cost and expense. Subject to the confidentiality restrictions herein this Agreement, ALLTEL agrees Client may provide ALLTEL's audit report to federal regulatory agencies requesting such information and that ALLTEL shall cooperate, at Client's expense, in providing such additional information requested by federal regulatory agencies. 13.4 Excluded Materials. Nothing in this Section 13 shall be construed to require ALLTEL to provide Client with access to any records of whatever kind which contain information pertaining to any person or entity other than Client. In the event that the records contain commingled information relating to Client and a person or entity other than Client, ALLTEL shall mask or take other appropriate steps to maintain the confidentiality of the information relating to such other person or entity. 14. Dispute Resolution. 14.1 Dispute Resolution Procedures. In the event a dispute arises between ALLTEL and Client with respect to the terms and conditions of this Agreement, or any subject matter governed by this Agreement, other than disputes regarding a party's compliance with the provisions of Section 20, such dispute shall be subject to the escalation procedures as set forth in this Section 14. If either party exercises its right to initiate the dispute resolution procedures under this Section 14, then during such procedure any time periods providing for termination of the Agreement or curing any material breach under Section 19 shall be automatically suspended. At such time as the dispute is resolved, interest at a rate equal to the lesser of: (i) the prime rate plus one and one half (1 1/2%) per annum published in the Wall Street Journal on the first Monday (or next bank business day) following the due date, or (ii) the highest rate permitted by law, in each case, for the period of dispute shall be paid to the party entitled to receive the disputed monies to compensate for the lapsed time between the date such disputed amount originally was to have been paid (or was paid) through the date monies are paid (or credited) in settlement of the dispute. 14.2 Claims Procedures. If any party shall have any dispute with respect to the terms and conditions of this Agreement, or any subject matter referred to in or governed by this Agreement, that party (through the ALLTEL Account Manager or the Executive Liaison, as the case may be) shall provide written notification to the other party (through the ALLTEL Account Manager or the Executive Liaison, as the case may be) in the form of a claim identifying the issue or amount disputed and including a detailed reason for the claim. The party against whom the claim is made shall respond in writing to the claim within fourteen (14) Days from the date of receipt of the claim document. The party filing the claim shall have an additional fourteen (14) Days after the receipt of the response to either accept the resolution offered by the other party or request implementation of the procedures set forth in Section 14.3 (the "Escalation Procedures"). Failure to meet the time limitations set forth in this Section shall result in the implementation of the Escalation Procedures. 14.3 Escalation Procedures. (a) Each of the parties agrees to negotiate, in good faith, any claim or dispute that has not been satisfactorily resolved following the claim resolution procedures described in Section 14.2. To this end, each party agrees to escalate any and all unresolved disputes or claims in accordance with Section 14.3(b) before taking further action. (b) If the negotiations conducted pursuant to Section 14.2 do not lead to resolution of the underlying dispute or claim to the satisfaction of a party involved in such negotiations, then either party may notify the other in writing that he/she desires to elevate the dispute or claim to the President, Financial Services division of ALLTEL and a an executive officer of Client who is a direct report to the president of Client for resolution. Upon receipt by the other party of such written notice, the dispute or claim shall be so elevated and the President, Financial Services division of ALLTEL and a an executive officer of Client who is a direct report to the President of Client shall negotiate in good faith and each use its reasonable best efforts to resolve such dispute or claim. The location, format, frequency, duration and conclusion of these elevated discussions shall be left to the discretion of the representatives involved. Upon agreement, the representatives may utilize other alternative dispute resolution procedures to assist in the negotiations. Discussions and correspondence among the representatives for purposes of these negotiations shall be treated as confidential information developed for purposes of settlement, exempt from discovery and production, which shall not be admissible in any subsequent proceedings between the parties. Documents identified in or provided with such communications, which are not prepared for purposes of the negotiations, are not so exempted and may, if otherwise admissible, be admitted in evidence in such subsequent proceeding. 14.4 No claims to be resolved under this Section 14 may be made more than two (2) years after the date by which the fault or failure was or should reasonably have been discovered; failure to make such a claim within the two (2) year period shall forever bar the claim. 14.5 If the negotiations conducted pursuant to Section 14.2 and 14.3 do not lead to resolution of the underlying dispute or claim to the satisfaction of a party involved in such negotiations, then either party may bring an action in a court of competent jurisdiction in the jurisdiction described in Section 22.5 herein. 14.6 Unless ALLTEL is bringing an action for Client's failure to make timely and complete payments to ALLTEL for Services not otherwise in dispute under Section 14, ALLTEL will continue to provide Services under this Agreement, and Client will continue to make payments to ALLTEL in accordance with this Agreement, during the dispute resolution procedures described in this Section 14. 15. Limitation of Liability. (a) ALLTEL's liability for any breach of any claim or cause of action whether based in contract, tort or otherwise which arises under or is related to this Agreement shall be limited to Client's direct damages (other than the Adverse Conversion Event Credit pursuant to Section 7 of Exhibit B hereto), which under no circumstances shall exceed eleven million dollars ($11,000,000.00). In no event, other than the Adverse Conversion Event Credit pursuant to Section 7 of Exhibit B hereto, shall either party be liable for indirect, special, punitive, incidental or consequential damages, including, without limitation, loss of profits or business, of any kind whatsoever whether or not such party has been advised of the possibility of such damages. The limitation in this Section 15(a) shall not apply to Section 12.13 (Attorneys Fees) or to any amounts payable by Client to a third party which are indemnified by ALLTEL pursuant to Section 16.2 herein. (b) ALLTEL shall have no liability, express or implied, whether arising under contract, tort or otherwise which results directly or indirectly from the internal operations and performance of any Client Software and/or Client Provided Third Party Software or hardware or any enhancement, development or maintenance of any such Client Software and/or Client Provided Third Party Software. ALLTEL will continue to perform the Services, except to the extent that the internal operations and performance of such Client Software and/or Client Provided Third Party Software prevents such performance of the Services. In such event, ALLTEL will use its reasonable best efforts to implement an appropriate "work around" so as to minimize any material adverse effect to Client. 16. Indemnification. 16.1 Personal Injury and Property Damage. Each party shall indemnify, defend and hold harmless the other and its officers, directors, employees, affiliates (including, where applicable, the ALLTEL Affiliates and Client Affiliates), and agents from any and all liabilities, losses, costs, damages and expenses (including reasonable attorneys' fees) arising from or in connection with the damage, loss (including theft) or destruction of any real property or tangible personal property of the indemnified party or on account of personal injury or death resulting from the actions or inactions of any employee, agent or subcontractor of the indemnifying party insofar as such damage arises out of or in the course of fulfilling its obligations under this Agreement and to the extent such damage is due to any negligence, breach of statutory duty, omission or default of the indemnifying party, its employees, agents or subcontractors. ALLTEL agrees that regardless of a determination that the ALLTEL Staff are employees or agents of Client under any legal theory, ALLTEL Staff shall be employees of ALLTEL for purposes of indemnification of Client under this Section 16. 16.2 Infringement of ALLTEL Software, ALLTEL Provided Third Party Software or the Services. ALLTEL shall defend at its own expense, any claim or action brought by any third party against Client or against its officers, directors, employees, Client Affiliates, and agents for actual or alleged infringement of any patent, copyright or other intellectual property right (including, but not limited to, misappropriation of trade secrets) based upon the ALLTEL Software, ALLTEL Provided Third Party Software or the Services furnished hereunder by ALLTEL. ALLTEL further agrees to indemnify and hold Client and the Client affiliates harmless from and against any and all liabilities, losses, costs, damages, and expenses (including reasonable attorneys' fees) associated with any such claim or action incurred by Client and the Client Affiliates. ALLTEL shall have the sole right to conduct and control the defense of any such claim or action and all negotiations for its settlement or compromise, unless otherwise mutually agreed to in writing between the parties hereto. ALLTEL shall give Client, and Client shall give ALLTEL, as appropriate, prompt written notice of any written threat, warning or notice of any such claim or action against ALLTEL or Client, as appropriate, or any other user or any supplier of components of the ALLTEL Software or ALLTEL Provided Third Party Software covered hereunder, which could have an adverse impact on Client's use of same, provided ALLTEL or Client, as appropriate, knows of such claim or action. If in any such suit so defended, all or any part of the ALLTEL Software (or any component thereof), the ALLTEL Provided Third Party Software (or any component thereof) or work product resulting from the Services ("ALLTEL Work Product") is held to constitute an infringement or violation of any other party's intellectual property rights and is enjoined, or if in respect of any claim of infringement, ALLTEL deems it advisable to do so, ALLTEL shall at its sole option take one or more of the following actions at no additional cost to Client: (a) procure the right to continue the use of the same without material interruption for Client; (b) replace the same with non-infringing software that meets the specifications identified in the Service Attachment; (c) modify said ALLTEL Software, ALLTEL Provided Third Party Software, or ALLTEL Work Product (to the extent permitted by such third party) so as to be non-infringing, provided that the ALLTEL Software, ALLTEL Provided Third Party Software, or ALLTEL Work Product as modified meets all of the specifications, or (d) take back the infringing ALLTEL Software or ALLTEL Provided Third Party Software and credit Client with an amount equal to ALLTEL's then current list price less straight line depreciation for the amount of time used by Client over a five (5) year depreciation time schedule. The parties agree that regardless of a determination that (i) the ALLTEL Staff are employees or agents of Client under any legal theory, ALLTEL Staff shall be employees of ALLTEL for purposes of indemnification of Client under this Section 16 and (ii) the personnel of Client are employees or agents of ALLTEL under any legal theory, the Client personnel shall be employees of Client for purposes of indemnification of ALLTEL under this Section 16. The foregoing represents the sole and exclusive remedy of Client with regard to any of the above infringements or alleged infringements. 16.3 Infringements of Client Software, Client Provided Third Party Software, or Client Resources. Client shall defend at its own expense, any claim or action brought by any third party against ALLTEL or against its officers, directors, employees, ALLTEL Affiliates, and agents for actual or alleged infringement of any patent, copyright or other intellectual property right (including, but not limited to, misappropriation of trade secrets) based upon the Client Software, Client Provided Third Party Software, or Client Resources furnished hereunder by Client. Client further agrees to indemnify and hold ALLTEL and the ALLTEL Affiliates harmless from and against any and all liabilities, losses, costs, damages, and expenses (including reasonable attorneys' fees) associated with any such claim or action incurred by ALLTEL and the ALLTEL Affiliates. Client shall have the sole right to conduct the defense of any such claim or action and all negotiations for its settlement or compromise, unless otherwise mutually agreed to in writing between the parties hereto. Client shall give ALLTEL, and ALLTEL shall give Client, as appropriate, prompt written notice of any written threat, warning or notice of any such claim or action against ALLTEL or Client, as appropriate, or any other user or any supplier of components of Client Software, Client Provided Third Party Software, or Client Resources covered hereunder, which could have an adverse impact on ALLTEL's use of same, provided ALLTEL or Client, as appropriate, knows of such claim or action. If in any such suit so defended, all or any part of Client Software (or any component thereof), or the Client Provided Third Party Software (or any component thereof), or Client Resources (or any component thereof) is held to constitute an infringement or violation of any other party's intellectual property rights and is enjoined, or if in respect of any claim of infringement, Client deems it advisable to do so, Client shall at is sole option take one or more of the following actions at no additional cost to ALLTEL: (a) procure the right to continue the use of the same without material interruption for ALLTEL; (b) replace the same with non-infringing software or Client Resource that meets the specifications identified in the Service Attachment; (c) modify said Client Software, Client Provided Third Party Software, or Client Resource (to the extent permitted by such third party) so as to be non-infringing, provided that Client Software, Client Provided Third Party Software, or Client Resource as modified meets all of the specifications; or (d) relieve ALLTEL of its obligation to use such Client Software, Client Provided Third Party Software, or Client Resource to perform the applicable Services hereunder. The foregoing represents the sole and exclusive remedy of ALLTEL with regard to any of the above infringements or alleged infringements. 16.4 Employee Matters Indemnification. Client and ALLTEL shall indemnify, defend and hold harmless the other and its officers, directors, employees, affiliates (including, Client Affiliates and ALLTEL Affiliates), and agents from any and all liabilities, losses, costs, damages and expenses (including reasonable attorneys' fees) arising from or in connection with (i) ALLTEL's breach of Section 22.1(b) and Client's breach of Section 22.1(b) (ii) as a result of ALLTEL Staff or Client personnel claims or demands regarding any of the employee compensation matters identified in Section 22.1(b), (iii) on account of ALLTEL Staff or Client personnel claims under any federal, state or local employment laws, including, but not limited to, workers compensation and employment discrimination or (iv) ALLTEL's Staffs' or Client personnel's negligence, gross negligence, intentional conduct or breach of statutory duty. The parties agree that regardless of a determination that the ALLTEL Staff are employees or agents of Client or that the Client personnel are employees of ALLTEL under any legal theory, the ALLTEL Staff shall be employees of ALLTEL and the Client personnel shall be employees of Client for purposes of indemnification by each party of the other under this Section 16. 16.5 Violation of Law Indemnification. Each party shall indemnify, defend and hold harmless the other and its officers, directors, employees, affiliates (including, where applicable, the ALLTEL Affiliates and Client Affiliates), and agents from any and all liabilities, losses, costs, damages and expenses (including reasonable attorneys' fees) arising from or in connection with the indemnifying party, or its employees or agents, breach of any applicable federal, state or local law, and in the case of ALLTEL, a violation of its warranty under Section 21.1 herein. 17. Force Majeure, Time of Performance and Increased Costs and Error Correction. 17.1 Force Majeure. Neither party shall be held liable for any delay or failure in performance of all or a portion of the Services of any part of this Agreement from any cause beyond its reasonable control and without its fault or negligence, including, but not limited to, acts of God, acts of civil or military authority, government regulations, government agencies, delay or failure to receive any required government approvals, embargoes, epidemics, war, terrorist acts, riots, insurrections, fires, explosions, earthquakes, nuclear accidents, floods, power blackouts affecting facilities unusually severe weather conditions, or transportation facilities, or acts or omissions of transportation carriers, or delays associated with visa, immigration and/or custom problems (the "Affected Performance"). Upon the occurrence of a condition described in this Section 17.1, the party whose performance is affected shall give written notice to the other party describing the Affected Performance, and the parties shall promptly confer, in good faith, to agree upon equitable, reasonable action to minimize the impact, on both parties, of such condition, including, without limitation, implementing the disaster recovery services. The parties agree that the party whose performance is affected shall use commercially reasonable efforts to minimize the delay caused by the force majeure events and recommence the Affected Performance. In the event the delay caused by the force majeure event lasts for a period of more than thirty (30) days, the parties shall negotiate an equitable modification to this Agreement with respect to the Affected Performance. If the parties are unable to agree upon an equitable modification within fifteen (15) days after such thirty (30) day period has expired, then either party shall be entitled to serve thirty (30) days' notice of termination on the other party with respect to only such Affected Performance. If the Affected Performance is continuing upon the expiration of such thirty (30) day notice period the portion of this Agreement relating to the Affected Performance shall automatically terminate. The remaining portion of the Agreement that does not involve the Affected Performance shall continue in full force and effect. In such event ALLTEL shall be entitled to be paid for that portion of the Affected Performance for which it has completed or in the process of completing through the termination date. 17.2 Time of Performance and Increased Costs. ALLTEL's time of performance with respect to Services performed under this Agreement shall be adjusted, if and to the extent reasonably necessary, in the event that the following events materially affect ALLTEL's ability to perform hereunder (a) Client fails to timely submit data or materials in the prescribed form or in accordance with the requirements of this Agreement, (b) Client fails to perform on a timely basis, the functions or other responsibilities of Client described in this Agreement, (c) there occurs an Affected Performance condition which prevents timely performance, (d) Client or any governmental agency authorized to regulate or supervise Client makes any special request which affects ALLTEL's normal performance schedule, (e) Client fails to provide any Client Resources called for by this Agreement, (f) Client materially changes the priorities of the ALLTEL Staff, or (g) any Client Provided Third Party Software, Client Software or Client Resource does not materially perform in accordance with its specifications and, in each case, the same is necessary for ALLTEL's performance hereunder. In addition, if any of the above events occur, and such event will result in an increased cost to ALLTEL for providing the affected Service, ALLTEL shall so advise Client and Client may either pay any and all of such increased costs to ALLTEL or relieve ALLTEL of its responsibilities hereunder. ALLTEL agrees that in the event it fails to meet the performance standard identified in Exhibit D that Client shall receive such relief as provided therein. 17.3 Error Correction. Client will carefully review and inspect all reports prepared by ALLTEL, to balance promptly to the appropriate control totals. Client shall to promptly notify ALLTEL of any erroneous control totals. If Client fails to so notify ALLTEL (a) within five (5) days after Client's receipt of daily reports, (b) within fifteen (15) days after Client's receipt of monthly reports, and (c) within sixty (60) days after Client's receipt of yearly reports, in each case, of such erroneous control totals, Client shall have waived its rights in respect of such error and assumed all risks in respect thereof, provided however, that ALLTEL shall not be relieved of its obligations to correct such error, once notified, for on-going processing. In the event of any erroneous control totals caused by ALLTEL, ALLTEL shall correct such error and , upon request by Client and after exhausting other reasonably available techniques for correction, re-run any affected billing cycle at no additional cost to Client. 18. Notices. 18.1 Notices. Except as otherwise provided under this Agreement or in the Exhibits, all notices, demands or requests which may be given by any party to the other party shall be in writing and shall be deemed to have been duly given when received, written notice may be delivered in person, or sent via telefax, United States mail or internationally recognized courier service, and addressed as set forth below: If to ALLTEL: ALLTEL Information Services, Inc. 4001 Rodney Parham Rd Little Rock, AR 72212 Attn: President, Financial Services Division With a copy to: Attn: General Counsel If to Client: Bank of Oklahoma, NA Bank of Oklahoma Tower P.O. Box 2300 Tulsa, Oklahoma 74192 Attn: Chief Information Officer With a copy to: Frederic Dorwart, Lawyers 124 E. 4th Street Tulsa, Oklahoma 74103 Attn: BOKF General Counsel 18.2 Change of Address. The address to which such notices, demands, requests, elections or other communications are to be given by either party may be changed by written notice given by such party to the other party pursuant to this Section. 19. Termination. 19.1 Termination. This Agreement, except as otherwise provided in this Agreement, will continue in effect until the Expiration Date (unless otherwise extended for the Extension Period). This Agreement, including all Exhibits, may be terminated by the permitted party giving written notice to the other party in accordance with Section 18.1 and the applicable provisions of this Section. The effective date of any such termination, pursuant to this Section 19 (Termination) or Section 7 (Mergers or Acquisitions), shall be the Termination Date ("Termination Date") and such date shall be the Expiration Date in the event this Agreement is so terminated. Nothing in this Section 19.1 shall prohibit Client from entering into an Extension Period in accordance with Section 4, Term. 19.2 Termination Upon ALLTEL's Material Breach. In the event of the material breach by ALLTEL of any provision of this Agreement, Client shall give ALLTEL written notice, and: (a) If such breach is for ALLTEL's breach of its obligations under Section 20 with respect to Client's Confidential Information, which, in the reasonable judgment of Client, materially and adversely affects Client, ALLTEL shall cure the breach within fifteen (15) days after such notice. If ALLTEL does not cure such breach by such date, or is not working diligently in good faith to cure such breach in cases where a breach cannot reasonably be expected to be cured within fifteen (15) days, Client may, at its sole option, elect to terminate this Agreement by giving written notice of such election to ALLTEL and seek any damages allowed by law or in equity except to the extent specifically limited herein. (b) If such breach is for any other failure by ALLTEL to perform in accordance with this Agreement which, in the reasonable judgment of Client, materially and adversely affects Client, ALLTEL shall cure such breach within thirty (30) days after the date of such notice. If ALLTEL does not cure such breach within such period, or is not working diligently in good faith to cure such breach in cases where a breach cannot reasonably be expected to be cured within thirty (30) days, then Client may, at its sole option, elect to terminate this Agreement by giving written notice of such election to ALLTEL which date shall constitute the Termination Date and seek any damages allowed by law or in equity except to the extent specifically limited herein. (c) The failure of Client to exercise any right to elect to terminate this Agreement shall not constitute a waiver of the rights granted herein with respect to any subsequent default. 19.3 Termination Upon Client's Material Breach. In the event of the material breach by Client of any provision of this Agreement, ALLTEL shall give Client written notice, and: (a) If such breach is for Client's breach of its obligations under Section 20 with respect to ALLTEL's Confidential Information, which, in the reasonable judgment of ALLTEL, materially and adversely affects ALLTEL, Client shall cure the breach within fifteen (15) days after such notice. If Client does not cure such breach by such date, or is not working diligently in good faith to cure such breach in cases where a breach cannot reasonably be expected to be cured within fifteen (15) days, ALLTEL may, at its sole option, elect to terminate this Agreement by giving written notice of such election to Client and seek any damages allowed by law or in equity. (b) If such breach is for Client's non-payment of amounts (except for those held in escrow pursuant to Section 3 herein) due ALLTEL under this Agreement, Client shall cure the breach within thirty (30) days after such notice. If Client does not cure such breach by such date, ALLTEL may, at its sole option, elect to terminate this Agreement by giving written notice of such election to Client, which shall constitute the Termination Date and seek any damages allowed by law or in equity. Client's payment of or agreement to pay interest on any amount past due shall in no way limit or prohibit ALLTEL's right to terminate this Agreement in accordance with this Section. (c) If such breach is for any other failure by Client to perform in accordance with this Agreement which, in the reasonable judgment of ALLTEL, materially and adversely affects ALLTEL, ALLTEL may give notice of the breach and Client shall cure such breach within ninety (90) days after the date of such notice. If Client does not cure such breach within such period or is not working diligently in good faith to cure such breach in cases where a breach cannot reasonably be expected to be cured within ninety (90) days, then ALLTEL may, at its sole option, elect to terminate this Agreement by giving written notice of such election to Client which date shall constitute the Termination Date and seek any damages allowed by law or in equity. (d) The failure of ALLTEL to exercise any right to elect to terminate this Agreement shall not constitute a waiver of the rights granted herein with respect to any subsequent default. 19.4 Termination by Client for Convenience; Insolvency. (a) Client may, at any time during the Term, terminate this Agreement for any reason, or no reason, by providing ALLTEL written notice of termination, such termination (a "Termination for Convenience"). The Termination for Convenience shall be effective at the date specified by Client in the Termination for Convenience notice, but in no event sooner than one-hundred and eighty (180) days after to the date of such Termination for Convenience Notice. In the event Client exercises it right to Termination for Convenience, Client agrees to pay ALLTEL a termination fee based on the remaining unused Term of this Agreement, the amount to be determined by multiplying the Monthly Base Fees by fifty percent (50%) times the remaining months of the Term, plus any of the Pass Through Expenses which have been incurred up to the date of termination and any unavoidable third party expenses existing on ALLTEL's books at the date of ALLTEL's receipt of Client's written notice of termination (b) Client has the right to terminate this Agreement, with no cost or penalty other than payment for services rendered, in the event ALLTEL or any ALLTEL Affiliate which performs a significant part of the Services, (i) terminates or suspends its business, (ii) becomes subject to any bankruptcy or insolvency proceedings under Federal or state statute, (iii) becomes insolvent or becomes subject to direct control by a trustee, receiver or similar authority or (iv) has liquidated, voluntarily or otherwise. 19.5 Termination by Client for Merger. (i) If ALLTEL receives one-hundred and eighty (180) days prior written notice of Client's exercise of the Merger Early Termination Option (as defined in Section 7.3) in the first thirteen (13) months following the Effective Date of this Agreement, ALLTEL may charge Client a termination fee based on the remaining unused Term of this Agreement, the amount to be determined by multiplying the Monthly Base Fees by twenty five percent (25%) times the remaining months of the Term, plus any of the Pass Through Expenses which have been incurred up to the date of deconversion and any unavoidable third party expenses existing on ALLTEL's books at the date of ALLTEL's receipt of Client's written notice of termination. (ii) If ALLTEL receives written notice of Client's exercise of the Merger Early Termination Option in the fourteenth (14th) through the eighty-fourth (84th) month following the Effective Date of this Agreement, ALLTEL may charge Client a termination fee based on the remaining unused Term of this Agreement, the amount to be determined by multiplying the Monthly Base Fees by fifty percent (50%) times the remaining months of the Term, plus any of the Pass Through Expenses which have been incurred up to the date of deconversion and any unavoidable third party expenses existing on ALLTEL's books at the date of ALLTEL's receipt of Client's written notice of termination. (iii) If ALLTEL receives written notice of Client's exercise of the Merger Early Termination Option in the eighty-fifth (85th) through the ninety-seventh (97th) month following the Effective Date of this Agreement, ALLTEL may charge Client a termination fee based on the remaining unused Term of this Agreement, the amount to be determined by multiplying the Monthly Base Fees by twenty five (25%) times the remaining months of the Term, plus any of the Pass Through Expenses which have been incurred up to the date of deconversion and any unavoidable third party expenses existing on ALLTEL's books at the date of ALLTEL's receipt of Client's written notice of termination. The Merger Early Termination Option must be exercised within six (6) months after the merger occurs. 19.6 Return of Material; Deconversion Assistance. Within thirty (30) days after the Termination Date, ALLTEL, at ALLTEL's sole cost and expense, will return all material and property owned by Client and the Client Affiliates, as well as all material and property of a proprietary nature involving Client and the Client Affiliates. In addition, upon Client's request, ALLTEL shall provide to Client copies of Client's customer data files (includes customer information files, account master files and transaction history files) and associated documentation, including file layouts and field descriptions, records and programs on magnetic media, or to destroy Client's data files, records and programs in its possession and to certify promptly to Client as to the completed destruction of these materials. In addition, ALLTEL will provide the deconversion assistance in accordance with Exhibit K herein. Unless Client has exercised the In-House Option in Section 4, within thirty (30) days after the earlier of (i) the Termination Date or (ii) expiration of the Term (unless either (i) or (ii) are extended by the Extension Period, in which case at the end of the Extension Period), Client will return all ALLTEL Software, including without limitation the Service Delivery Software and ACBS Software, documentation and other ALLTEL Confidential Information to ALLTEL or destroy all of such ALLTEL Software, documentation and ALLTEL Confidential Information and provide written certification of such destruction to ALLTEL. 19.7 Equipment; Software. In the event that there occurs a termination of this Agreement in accordance with Section 19.2, Client has the right, but not the obligation, to purchase any or all of the ALLTEL-owned Client-dedicated equipment or stand alone Third Party Software which is located in the Local Offices that ALLTEL uses in order to perform the Services at a price equal to ALLTEL's book value for such equipment which shall be payable by Client to ALLTEL on the Termination Date. In the event that there occurs a termination of this Agreement in accordance with Sections 19.3, ALLTEL has the right, but not the obligation, to require Client to purchase any or all of the ALLTEL-owned Client-dedicated equipment which is located in the Local Offices that ALLTEL uses in order to perform the Services at a price equal to ALLTEL's book value for such equipment which shall be payable by Client to ALLTEL on the Termination Date. In the event there occurs the expiration of the Term, Client has the right, but not the obligation, to purchase some (but not all) of ALLTEL's owned dedicated equipment which is located in the Local Offices that ALLTEL uses in order to perform the Services at a price equal to ALLTEL's book value for such equipment, or to purchase all (but not some) of ALLTEL's owned dedicated equipment which is located in the Local Offices that ALLTEL uses in order to perform the Services at a price equal to ALLTEL's book value for such equipment, in each case, payable by Client to ALLTEL on the Termination Date. Any sales by ALLTEL of equipment under this Section shall be made only in those situations where ALLTEL is permitted to do so by the relevant third party agreements and only on a "where is as is" basis without any warranty by ALLTEL to Client whatsoever, except that ALLTEL shall make available to Client the benefit of any warranties from the applicable equipment manufacturers to the extent ALLTEL is contractually permitted to do so by such equipment manufacturer. ALLTEL agrees that any ALLTEL Provided Third Party Software licenses which are purchased solely for the benefit of Client hereunder shall either be (i) licensed in the name of Client and fully usable or transferable to Client upon termination of this Agreement or (ii) licensed in the name of ALLTEL and fully transferable to Client upon termination. ALLTEL agrees that in the event of termination ALLTEL shall promptly assign any such licenses to Client upon termination. ALLTEL will make reasonable efforts to negotiate licenses which can be assigned or otherwise transferred to Client at no charge. Client acknowledges that third party software vendors may require additional payments from Client as a result of differences in the use of the third party software by Client. 19.8 Survival Upon Expiration or Termination. The provisions of Sections 4 (Term), 14 (Dispute Resolution), 15 (Limitation of Liability), 16 (Indemnification), 18 (Notices), 19 (Termination), 20 (Confidentiality), 22.5 (Governing Law; Forum Selection; Consent to Jurisdiction), and 22.12 (Taxes), and any other provisions which by their terms should reasonably survive termination, shall survive the Termination Date of this Agreement, unless otherwise agreed to in writing by both parties. 19.9 Offer of Employment. For three (3) months prior to the Termination Date, Client may offer employment to the employees of ALLTEL, excluding the ALLTEL Account Manager. Except as specifically set forth in this Section 19 and Section 4.2, Client and ALLTEL agree not to solicit or offer employment, directly or indirectly (including, without limitation, through the use of any third party) to any employee of the other without the prior written consent of the other. 20. Confidentiality. 20.1 Confidentiality Obligation. All information disclosed by Client or ALLTEL to the other during the negotiations and the Term (as well as any Extension Period) ("Confidential Information") (a) shall be deemed the property of the disclosing party, (b) shall be used solely for the purposes of administering and otherwise implementing the terms of this Agreement and (c) shall be protected by the receiving party in accordance with the terms of this Section 20. "Confidential Information" shall also include all "non-public personal information" as defined in Title V of the Gramm-Leach-Bliley Act (15 U.S.C. Section 6801, et seq.) and the implementing regulations thereunder (collectively, the "GLB Act"), as the same may be amended from time to time, that ALLTEL receives from or at the direction of Client and that concerns any of Client's "customers" and/or "consumers" (as defined in the GLB Act). 20.2 Non-Disclosure Covenant. Except as set forth in this Section, the parties agree that they shall not disclose any Confidential Information of the other party, in whole or in part, including derivations, to any third party. If the parties agree to a specific nondisclosure period for a specific document, the disclosing party shall mark the document with that nondisclosure period. Confidential Information shall be held in confidence by the receiving party and its employees, contractors, subcontractors, Affiliates, or agents and shall be disclosed to only those of the receiving party's employees, contractors, subcontractors, Affiliates or agents who have a need for it in connection with the administration and implementation of this Agreement. The receiving party shall cause such contractors, subcontractors, Affiliates, or agents to execute confidentiality agreements that contain terms which are consistent with this Section 20. 20.3 Exceptions. Confidential Information shall not be deemed proprietary and the receiving party shall have no obligation with respect to any such information which: (a) is or becomes publicly known through no wrongful act, fault or negligence of the receiving party; (b) was rightfully known by the receiving party prior to disclosure and the receiving party was not under a duty of non-disclosure; (c) was disclosed to the receiving party by a third party who was free of obligations of confidentiality to the party providing the information; (d) is approved for release by written authorization of the disclosing party; (e) is publicly disclosed pursuant to a requirement or request of a governmental agency or disclosure is required by operation of law; or (f) is furnished to a third party by the disclosing party owning the Confidential Information without a similar restriction on the third party's rights. The parties acknowledge that without in any way lessening the proprietary nature of a party's Confidential Information, either party in accordance with the terms and conditions of this Agreement shall be free at any time to develop the same or similar Confidential Information independently of disclosure by the transmitting party. 20.4 Confidentiality of this Agreement; Protective Arrangements. (a) The parties acknowledge that this Agreement contains confidential information that may be considered proprietary by one or both of the parties, and agree to limit distribution of this Agreement to those individuals with a need to know the contents of this Agreement. In no event may this Agreement be reproduced or copies shown to any third parties (exclusive of contractors, subcontractors and agents who have a need for it) without the prior written consent of the other party, except as may be necessary by reason of legal, accounting, tax or regulatory requirements, in which event Client and ALLTEL agree to exercise reasonable diligence in limiting such disclosure to the minimum necessary under the particular circumstances. The parties further agree to seek commercial confidential status for this Agreement with any regulatory commission with which this Agreement must be filed, to the extent such a designation can be secured. (b) In addition, each party agrees to give notice to the other parties of any demands to disclose or provide Confidential Information received from the other or any third party under lawful process prior to disclosing or furnishing Confidential Information, and agrees to cooperate in seeking reasonable protective arrangements requested by the other party. In addition, any party may disclose or provide Confidential Information of the other party requested by a government agency having jurisdiction over the party; provided that the party uses its reasonable best efforts to obtain protective arrangements satisfactory to the party owning the Confidential Information. The party owning the Confidential Information may not unreasonably withhold approval of protective arrangements. (c) The parties shall consult with each other in preparing any press release, public announcement, news media response or other form of release of information concerning this Agreement or the transactions contemplated hereby that is intended to provide such information to the news media or the public and will obtain prior written approval of the other party before such release is made. 20.5 Injunctive Relief. The parties recognize and acknowledge that the ascertainment of damages in the event of its breach of any provision of this Section 20 would be difficult, and the parties agree that, in addition to all other remedies they may have, the non-breaching party shall have the right to injunctive relief if there is such a breach. 21. Other Representations, Warranties and Covenants. 21.1 Licenses and Permits and Compliance with Laws. ALLTEL and Client represent and warrant that they shall each secure and maintain in force all licenses and permits required of it and its employees in the performance of its respective obligations under this Agreement, and each party shall conduct its business and otherwise be in full compliance with all federal laws, ordinances and regulations applicable to its business. ALLTEL further agrees that it shall provide the Services in full compliance with all federal laws, ordinances and regulations applicable to the Customer's business including, but not limited to, those of the Officer of the Comptroller of the Currency and the FDIC, at no additional cost. Client will make ALLTEL aware of any applicable local or state rules or regulatory requirements that have requirements different than those of federal rules or regulations. ALLTEL agrees to make any changes required by such state or local requirements provided that Client pays any reasonable incremental costs associated with ALLTEL's increased compliance effort. 21.2 No Interference with Contractual Relationship. Each party warrants that, as of the date hereof, it is not subject to any contractual obligation that would prevent it from entering into this Agreement. Client and ALLTEL each further warrant to the other that entering into this Agreement shall not cause or induce it to breach any of its other contractual obligations. 21.3 Covenant of Good Faith. Each of the parties agree that, in its respective dealings with each other party arising out of or related to this Agreement, it shall act fairly and in good faith. 21.4 Authorization and Effect. (a) The execution and delivery by ALLTEL of its obligations under this Agreement have been duly authorized by all necessary corporate action on the part of ALLTEL. This Agreement has been duly executed and delivered by ALLTEL and, assuming the due execution and delivery of this Agreement by Client, constitutes a valid and binding obligation of ALLTEL, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditor's rights generally, and subject to the qualification that general equitable principles may limit the enforcement of certain remedies, including the remedy of specific performance. (b) The execution and delivery by Client of this Agreement and the fulfillment of its obligations under this Agreement have been duly authorized by all necessary corporate action on the part of Client. This Agreement has been duly executed and delivered by Client and, assuming the due execution and delivery of this Agreement by ALLTEL, constitutes a valid and binding obligation of Client, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditor's rights generally, and subject to the qualification that general equitable principles may limit the enforcement of certain remedies, including the remedy of specific performance. 21.5 Business Practices. Neither Client or any of Client's directors, officers, agents, employees or other persons associated with or acting on behalf of Client has made or give any payments or inducements, directly or indirectly, to any Government officials in the jurisdictions in which Client conducts business in connection with any opportunity, agreement, license, permit, certificate, consent, order, approval, waiver or other authorization relating to the business of Client, except for such payments or inducements as were lawful under the written laws, rules and regulations of such jurisdictions. Neither Client nor any of Client's directors, officers, agents, employees or other persons associated with or acting on behalf of Client: (a) has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (b) made any direct or indirect unlawful payment to any Government official or employee from corporate funds; (c) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977; or (d) made any bribe, unlawful rebate, pay off, influence payment, kickback or other unlawful payment in connection with the business of Client. 21.6 ALLTEL Software. ALLTEL represents and warrants to Client that the ALLTEL Software shall perform in all material respects with its documentation and specifications and that the ALLTEL Software shall not contain or receive from ALLTEL's data transmission via modem or any other ALLTEL medium any virus, worm, trap door, back door, timer, clock, counter or other limiting routine, instruction or design that would erase data or programming or cause the ALLTEL Software to become inoperable or incapable of being used in the full manner for which is was designed or created and for which it is licensed under this Agreement. 21.7 Client Software. Client represents and warrants to ALLTEL that the Client Software shall perform in all material respects with its documentation and specifications. 21.8 Professional and Workmanlike. Each party represents and warrants to the other that they shall perform their respective personnel obligations under this Agreement, including Exhibits, in a professional and workmanlike manner. 21.9 No Additional Representations or Warranties. Except as provided in this Agreement, ALLTEL IS MAKING NO representation or warranty of any kind, express, implied or statutory, including but not limited to the implied warranties of merchantability and fitness for a particular purpose, and CLIENT AGREES THAT all such other representations and warranties that are not provided in this agreement are hereby excluded and disclaimed. 22. Miscellaneous. 22.1 Independent Contractor. It is agreed that ALLTEL is an independent contractor and that: (a) Client Supervisory Powers. Client has no power to supervise, give directions or otherwise regulate ALLTEL's operations or its employees. (b) Employees of the Parties. ALLTEL and Client shall be solely responsible for the payment of their respective employees' compensation and benefits including employment taxes, any similar taxes associated with employment, withholding of federal, state or local taxes imposed on wages (including income tax, FICA and FUTA), deductions for social security, contributions for unemployment compensation funds, and all other regulations governing such matters. ALLTEL and Client each warrant that it will comply with all other applicable federal, state or local laws or regulations applicable to an employer regarding compensation, hours of work or other conditions of employment, including those applicable to minimum wage and overtime wages. Neither parties' employees shall not be entitled to participate in or receive benefits under any programs which are maintained for their respective employees, including, without limitation, life, medical and disability benefits, pension, profit sharing or other retirement plans or other fringe benefits. (c) Relationship. The parties declare and agree that each party is engaged in a business which is independent from that of the other party and each party shall perform its obligations as an independent contractor. Neither party is an agent of the other party and has no authority to represent the other party as to any matters, except as authorized herein. 22.2 Assignment. Neither party shall assign, delegate, or otherwise convey or transfer (by operation of law or otherwise) (the "Assignment") its rights, interests or obligations under this Agreement to any person or entity without the prior written consent of the other party, except (a) that Client may assign, delegate, or otherwise convey or transfer its rights, interests or obligations under this Agreement to any entity other than a Competitor of ALLTEL which succeeds to all, or substantially all the stock or assets of Client or BOK Financial Corporation whether by way of merger, acquisition or otherwise or to a Client Affiliate upon notice to, but not upon prior written consent of, (and at no additional charge) ALLTEL, and (b)ALLTEL may assign, delegate, or otherwise convey or transfer its rights, interests or obligations under this Agreement to any ALLTEL Affiliate existing upon the Effective Date of this Agreement (notwithstanding Section 1.1(a)) and not otherwise the party to an acquisition or merger, the result of which is to effect the Assignment of this Agreement by ALLTEL to a third party) upon notice to, but not upon prior written consent of, Client. All obligations and duties of any party under this Agreement shall be binding on all successors in interest and permitted assigns of such party. ALLTEL may subcontract performance of this Agreement so long as it remains primarily responsible for performance of the duties and obligations hereunder and so long as such subcontracting effort is not in an effort to circumvent Client's right to approve assignment of this Agreement as provided above. If the other party consents to the Assignment, the proposed assignee or transferee shall, upon completion of the Assignment, automatically succeed to the corresponding rights, interests, and obligations of the assigning and transferring party and shall be a successor of such party for purposes of this Agreement. 22.3 Severability. In the event that any one or more of the provisions contained herein shall for any reason be held to be unenforceable in any respect under law, such unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such unenforceable provision or provisions had never been contained herein, provided that the removal of such offending term or provision does not materially alter the burdens or benefits of either of the parties under this Agreement or any Exhibit. 22.4 Third Party Beneficiaries. Except with regard to Client Affiliates who receive Services pursuant to this Agreement who are hereby deemed third party beneficiaries, the provisions of this Agreement are for the benefit of the parties and not for any other person. Should any third party institute proceedings, this Agreement shall not provide any such person with any remedy, claim, liability, reimbursement, cause of action, or other right. 22.5 Governing Law; Forum Selection; Consent of Jurisdiction. This Agreement will be governed by and construed under the laws of the State of Oklahoma, USA, without regard to principles of conflict of laws. All such judicial proceedings shall be litigated, if at all, exclusively in a United States District Court in the State of Nebraska and, if necessary, the corresponding appellate courts. Each of the parties submits to the jurisdiction of any state or federal court sitting in the State of Nebraska, with respect to such judicial proceedings. Each party also agrees not to bring any action or proceeding arising out of or relating to such judicial proceeding in any other court. Each of the parties waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or to other security that might be required of any party with respect thereto. Any party may make service on the other party by sending or delivering a copy of the process to the party to be served in care of the process agent at the address set forth in Section 18 above. Nothing in this Section, however, shall affect the right of any party to serve legal process in any other manner permitted by law or in equity. Each party agrees that a final judgment in any action or proceeding so brought shall be conclusive and may be enforced by suit on the judgment or in any other manner provided by law or in equity. 22.6 Executed in Counterparts. This Agreement may be executed in counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same document. 22.7 Construction. The headings and numbering of sections in this Agreement are for convenience only and shall not be construed to define or limit any of the terms or affect the scope, meaning or interpretation of this Agreement or the particular section to which they relate. This Agreement and the provisions contained herein shall not be construed or interpreted for or against any party because that party drafted or caused its legal representative to draft any of its provisions. 22.8 Entire Agreement. This Agreement, including the Exhibits attached hereto and the agreements referenced herein constitute the entire Agreement between the parties, and supersedes all prior oral or written agreements, representations, statements, negotiations, understandings, proposals and undertakings related thereto. 22.9 Amendments and Waivers. This Agreement may be amended only by written agreement signed by duly authorized representatives of each party. No waiver of any provisions of this Agreement and no consent to any default under this Agreement shall be effective unless the same shall be in writing and signed by or on behalf of the party against whom such waiver or consent is claimed. No course of dealing or failure of any party to strictly enforce any term, right or condition of this Agreement shall be construed as a waiver of such term, right or condition. Waiver by either party of any default by the other party shall not be deemed a waiver of any other default. No course of dealing shall be deemed to amend the Agreement in the absence of any writing signed by duly authorized representatives of each party. 22.10 Remedies Cumulative. Unless otherwise provided for under this Agreement, all rights of termination or cancellation, or other remedies set forth in this Agreement, are cumulative and are not intended to be exclusive of other remedies to which the injured party may be entitled by law or equity in case of any breach or threatened breach by the other party of any provision in this Agreement. Use of one or more remedies shall not bar use of any other remedy for the purpose of enforcing any provision of this Agreement. 22.11 Education and Training. ALLTEL will make available to Client and its personnel, its standard application software training courses which are generally held in Little Rock, Arkansas, in accordance with ALLTEL's education and training department schedule, a current copy of which will be provided to Client upon request. During the Term of the Agreement, Client shall have up to twenty (20) seats of one (1)-week duration during the first year of the Term and commencing upon the second year of the Term and thereafter, on an annual basis, Client shall have up to five (5) seats of one (1)-week duration each, included as part of the Base Fee. Client may not carry forward any unused seats from one year to the next. For any additional training courses, Client personnel may attend such courses that are generally offered by ALLTEL to its customers upon payment of ALLTEL's then current standard published course fee in advance. Client acknowledges that Client shall be bound by the then current cancellation policies, procedures, deadlines, and fees in the event of a cancellation if applicable. Client shall be responsible for all travel, lodging, and other out-of-pocket expenses for Client personnel attending such courses. Client acknowledges that enrollment of Client personnel in any courses offered by ALLTEL shall be subject to normal space availability requirements and compliance with ALLTEL's standard registration and enrollment deadlines and procedures. Client also will complete any and all class prerequisites prior to attending class. 22.12 Taxes. All charges and fees to be paid by Client under this Agreement are exclusive of any applicable withholding, sales, use, value added, excise, services or other United States or foreign tax which may be assessed on the provision of the Services. In the event that a withholding, sales, use, value added, excise, services or other United States or foreign tax is assessed on the provision of any of the Services provided to Client under this Agreement, Client will pay directly, reimburse or indemnify ALLTEL for such taxes, as well as any applicable interest, penalties and other ALLTEL fees and expenses. The parties will cooperate with each other in determining the extent to which any tax is due and owing under the circumstances, and shall provide and make available to each other any resale certificates, information regarding out-of-state or country use of materials, services or sale, and other exemption certificates or information reasonably requested by either party. 22.13 Attorney Fees. In any action brought by a party hereto to enforce the obligations of any other party hereto, the prevailing party shall be entitled to collect from the opposing party to such action such party's reasonable litigation costs and attorneys fees and expenses (including court costs, reasonable fees of accountants and experts, and other expenses incidental to the litigation). 22.14. Insurance. During the Term, ALLTEL shall obtain and maintain, and require any subcontractors performing Services pursuant to the terms of this Agreement to obtain and maintain, at ALLTEL' or its subcontractor's expense, until the end of the Term, insurance of the types and in the amounts set forth below: (a) statutory workers' compensation in accordance with all international, foreign, federal, state and local requirements; (b) employer's liability insurance in an amount not less than $500,000 per occurrence, covering bodily injury by accident or disease, including death; (c) commercial general liability in an amount not less than $1,000,000; (d) comprehensive automobile liability covering all vehicles that ALLTEL owns, hires or leases in an amount not less than $1,000,000 (combined single limit for bodily injury and property damage); and (e) professional errors and omissions liability insurance in an amount of not less than $3,000,000 per occurrence for liability arising out of any negligent act, error, mistake or omission of ALLTEL or any subcontractors performing Services pursuant to the terms of this Agreement. IN WITNESS WHEREOF, the parties, acting through their authorized officers, have caused this Agreement to be duly executed and delivered as of the date first above written. ALLTEL INFORMATION SERVICES, INC. By: ________________________ Name: ___________________________ Title: _________________________ BANK OF OKLAHOMA, NA By: /s/ Roger W. Foote ----------------------- Title: Senior Vice President Bank of Oklahoma, N.A. -----END PRIVACY-ENHANCED MESSAGE-----